[A Manual of Price Control]
[From the U.S. Government Publishing Office, www.gpo.gov]

AgMANUAL OF
PRICE CONTROL
Lecture Series Delivered at the
TRAINING PROGRAM FOR PRICE of the OFFICE OF PRICE ADMINISTRATION
(December 1942-Marcb 1943)
UNITED STATES OF AMERICA
OFFICE OF PRICE ADMINISTRATION

UNITED STATES OF AMERICA
OFFICE OF PRICE ADMINISTRATION
A Manual of Price Control
Lecture Series Delivered at the
TRAINING PROGRAM FOR PRICE of the
OFFICE OF PRICE ADMINISTRATION
(December 1942—March 1943)
UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON : 1943
OFFICE OF PRICE ADMINISTRATION
WASHINGTON, D. C.
A MANUAL OF PRICE CONTROL
This volume is for internal use only. It is presented as a guide to policy for professional employees of the Price Department, and is intended for their use alone. No part of it should be published or made public. In the rapidly changing war picture,, with its incessant flow of legislative and executive orders, policy is in a constant state of flux. Nevertheless, this volume offers the most complete source book of OPA policy and techniques yet made available.
SEYMOUR E. HARRIS, Chairman of Training Committee of Price Department.
m
TABLE OF CONTENTS
Page
Preface________________________________________________________________ Ix
I.	Introduction to Principles of Price Control: Henderson, Leon, Opening Remarks-------------------------------	1
Clark, John M., Contribution of Price Theory to Price Control..	4
II.	Price Control in the Anti-Inflation Fight:
Harris, Seymour E., Price Control and the War Economy-----	13
Gilbert, Richard V., Price Control and Fiscal Policy-------	25
O’Leary, Paul M., Rowe, Harold B.; and Neisser, Hans, Price
Control and Rationing---------------------------------- 32
III.	General Principles of Price Control:
Galbraith, J. K., General Principles of Price Control----- 43
Wallace, Donald H., and Coppock, Joseph D., Some General Principles of Price Control_________________________________ 50
Taggart, Herbert F., Costs and Price Control-------------- 60
IV.	Wage Policy and Price Control:
Brooks, Robert R. R., Wage Policy and Price Control-------	78
V.	Surveys and Data Collection:
Haley, Bernard F., Surveys and Data Collection------------ 85
VI.	Price Control for the Armed Services:
Wernette, J. Philip, Price Control for the Armed Services-	90
VII.	Techniques of Price Control:
Staebler, Neil, The Price Freeze.------------------------- 100
Perkins, James A., Formula and New Goods Pricing---------- 111
Whitman, Roswell, Formula Pricing------------------------- 120
Kennedy, Donald D., Dollars-and-Cents Pricing------------- 135
Wilcox, Clair, Differential Pricing.---------------------- 159
Sumner, John D., Differential Pricing in Nonferrous Metals. _	171
Anderson, Karl L., Geographical Problems------------------ 179
VIII.	Retail and Services Pricing:
Fainsod, Merle, and Auerbach, Alfred/ Retail Price Control Policy..-----------------------—----7---------------------- 139
Coombs, Philip, Techniques of Retail Price Control-------- 199
Villard, Henry, Price Control in the Service Trades.------ 211
Bryant, George T., Trade Relations---------------------—	219
IX.	Special PAoblems:
Harris, Seymour E., Export Price Control------------------ 221
Harris, Seymour E., Import Price Control------------------- 233
Salant, Walter; Harris, Seymour E.; Earley, James S.; and
Cavin, James P., Subsidies—,----------;----------------	^42
Neiswanger, William A.; Coonley, Howard; and Piper, Col, Charles M., Concentration----------------------------------	255
Keezer, Dexter M.; Ehrlich, Melville; Saltzman, Arnold A,j
Reck, Dickson; and MacLeod, Willis S., Standardization and Simplification______________________________________ 265
X.	Legal Aspects:	.	.
Leventhal, Harold, Function of the Price Lawyer tn OP A---	280
Emerson, Thomas I., Enforcement----------------------,----	292
XI.	Effectiveness of Price Control:
Humphrey, Don D., Effectiveness of Price Control---------- 301
XII.	Regional Aspects:
Hamm, John E., Field Organization---------------------------	313
Taylor, George R.; Lewis, Ben W.; and Miller, J. Howard, Price Control in the Regions------------------------------- 315
XIII.	Price Control Lessons From Abroad:
Plumptre, A. F. W.; Earley, James S.; Keezer, Dexter M.;
and Lacy, William S. B., Price Control Lessons from Abroad. 327 v
FOREWORD
In a large organization like the Office of Price Administration, with its complicated and varied problems, it is obviously extremely difficult for every professional employee to keep abreast of what the entire agency is doing. Yet it is of the utmost importance that each part of the organization should be in a position to profit from the experiences and avoid the mistakes of other parts of the organization. This is a problem which every large governmental agency faces, but it is particularly difficult for a war agency which must continually adapt its policies to the rapidly changmg developments of a highly dynamic situation.
The Price Department, through its training program, has recognized the importance of this problem. It has also recognized the need for providing training in the specific problems of price control for employees who, however adequate their business or professional backgrounds, have inevitably had little previous experience in price control as such.
The present volume brings together a series of lectures delivered to the professional employees of the Price Department during the winter and spring of 1942-43. It is intended solely for internal circulation. Each of the speakers has dealt with the particular phases of the program with which his own work has brought him into most direct contact. In a few cases, what is said reflects the state of thinking within the organization at the time the lecture was delivered but does not necessarily represent a definite statement of the policy that was ultimately adopted.
A study of this material will give every employee in the Price Department a better Understanding of the problems of the Office and a broader perspective on his own work.
Prentiss Brown, Administrator.
vn
PREFACE
The materials for this Manual of Price Control were drawn for the most part from presentations made in a series of 30 meetings of the Professional Staff of the Price Department conducted by the Training Committee of the Department. The Training Committee was appointed by Mr. J. Kenneth Galbraith, Deputy Administrator in Charge of the Price Department, to devise appropriate methods to assist in the solution of three operating problems, namely: (1) to communicate to members of the present staff the thinking of members of the top staff of the Department on basic policy considerations which had developed as a result of a very intensive period of experience; (2) to develop methods for the in-service training of price analysts and business specialists in statistical and accounting techniques which are vital in making price analyses basic to the formulation of price schedules, amendments, and adjustments; (3) to devise comprehensive plans for the training of new employees who would replace the large number of employees called to military duty. The other members of the committee were Martin L. Black, Chief Accountant, and Kermit Gordon of the Chemicals and Drugs Branch of the Industrial Manufacturing Division (the latter now in the Army). Messrs. George Al Shipman and Richard O. Niehoff of the Training Branch materially assisted the Committee in the formulation of plans and in the administration of the program.
To meet the first assignment made by Mr. Galbraith, the Committee arranged a series of lecture-discussions on the place of the price control program in the economy, the principles of price-fixing and the techniques used. Stenotype reports of these meetings were first mimeographed for immediate use of the staff and then assembled in this publication as a Manual of Price Control.
The present volume is the result of the cooperation of many members of the Price Department, and a few others from outside the Price Department and from other agencies. These men, impressed by the need of oral and written instructions to out everchanging staff, took enough time from their daily tasks to prepare carefully the subject assigned them for lecture and to revise the material for this volume.
These essays have in many cases not been brought up to date. To some extent, because of the passage of time, they are not thoroughly accurate guides to present policy. For the most part, however, principles of price control valid in December 1942-March 1943 are still applicable. (In a few instances, we have incorporated papers that were not presented before the Price School.)
A price employee who studies the current volume will learn much about the place of price control in the fight against inflation, the general principles of price control, techniques of price control, and numerous other problems. If he wishes to learn more about the freeze technique, if he wishes to become acquainted with differential pricing
X
PREFACE
as a means of saving the Government and consumers money, if he is interested in the relative merits of various types of price control, if he wants to avoid writing the type of price regulation that is not enforceable, if he wants instruction on how to collect data, and if he wants help on numerous other problems, I know of no better source than this volume.1	.
I wish to acknowledge the help of many who have made this enterprise, possible., In addition to the, contributors, we have had the -full cooperation of other members of the Committee, and Messrs. Richard Niehoff and Edward Tisdale of the Training Branch have aided us greatly. Miss Irene Farrell of this Office and Miss Dorothy Warren of the Training Office did much of ther secretarial work involved. The greatest debt is due Mrs. Margaret S. Gordon, Chief of the Research Unit of the Office of Export-Import Price Control, who went over the whole manuscript with care, and Mrs. Mary D. Rackliffe of my office, who has been over thé manuscript several times and helped greatly in the various tasks required to get this volume out. Mr. James R. Nelson, of my office, took much bf the responsibility for reading the proofs.
Seymour E. Harris, Chairman of Training Committee of the Price Department.
• * He will also profit greatly from another volume put out by the Training Committee, namely, a study of statistical techniques used in the Price Department. This volume has been .prepared under the able supervision of William Neiswanger.
L INTRODUCTION TO PRINCIPLES OF PRICE CONTROL
1.	OPENING REMARKS1
i	Leon Henderson, Administrator
I am not planning to talk about politics^ This School proposes to help make a good price-fixer, and I do not think too much politics would make a good price-fixer. T received a letter the other day from a lady who wanted to work for us. She said, “Here are the reasons I will make a good shopper. I look well off. Am careless about money, not too smart, naive, and I am free to go any-place at any time in my red sport Packard coupe. I have never worked and have just the right social background.”	;
That would hot do at all for a price-fixer. There were some people who said that what was required—and I have often thought that the Administrator’s job was perhaps put ih this category—was a strong back and a weak mind. I have come to one conclusion: That you need a strong digestion and a loud voice, and, to be really successful, noth-ing should disturb you.
If I were choosing the background for someone to fill an executive position in the Price Department in the OP A, I would select somebody who pretty much believed in free competition. I would flavor him with a little bit of NR A. It would not be bad if he had been consulted by the Public Works Administration, perhaps had written a famous thesis on it. It inight not be bad if he had a little bit of WPA—certainly some participation in the monopoly study—and a little financial experience and perhaps training for the ministry.
There are of course only a few of us who really meet all those qualifications. But I think there is something in the temper and in the background of the first group that was selected for the OPA which also set the tone and temper of OPA. Those people had participated in the history of the relationship of price to business activity, and it sfeems to me that, if you were picking the perfect background, you would need to draw from the group that had some understanding, either by way of study or by way of participation, of the bewildering changes that have taken place in prices and in prices in their relationship to business and production.
It is curious that most of the things you discover in your theoretical work appear in the work of the Price Administrator. Questions of joint cost, questions of imperfect competition—whether it is monopoly or oligopoly or monopsony—are bound to appear. Questions of fair trade laws, the question of the small businessman, the marginal pro
1 Delivered December 1, 1942.
ducer, all of the discussions that are to be found in any study of economic activity become the daily bread of a person in OPA.
In addition to this question of background—perfect background or substitutable background—there are certain requirements for a man who is a. Price Executive with OPA. Above all, he has to have the feeling that he is a public servant. I think he has to know first and above everything else that he is the repository of a public trust. He has to feel that, as he sits in judgment, he is sitting in the main for people who will never be before him, for people who have no spokesman, for people who are more vitally affected by what his decisions will be than the person who stands before him in the presentation of a case or presents him with a brief. Anybody can listen and yield to the pleadings of someone who is present in the flesh making the plea of an interested party. The person who serves best is one who is able to say, “This comes to me in perhaps a more attractive, a more, urgent form, but there are other sides. There are questions of principle. There are questions of other groups.”
Another quality which a Price Executive must have is some sense of organization, because administrative law, a relatively new subject as far as economic administration is concerned, is made up of transactions. There are literally hundreds and hundreds of transactions that must be somehow coded, somehow organized, somehow related, and in doing this there must be some knowledge of how a government'does its business. There must be a sense of record-keeping, a sense of relationship to other activities, some mysterious sense of organization.
And then there is that other mysterious component—the ability to get along. If I were setting up a new division or a new branch to handle a price area, I would want to have in that group or attached to it, first of all, somebody with a sense of price relationships—price theory, if you want to call it that. Seriously, I mean that no part of his economic or theoretical training is ever a disadvantage to a pricefixer, and so I say that above all in a group there should be somebody who is au courant, at least, with our economic theory and what the conflicts are. Second, I would like to have in the ideal organization a man who has been in the business being dealt with and has made a reputation—not necessarily as a money-maker, certainly as a success—but more than anything else who has acquired the respect of the people with whom he is associated. If you can get in a unit a man of that capacity who has chosen to make his public Contribution in OPA, he is a great addition.
Then I would like to have in that unit a young lawyer. I want a knowledge of what the law has undertaken to be in recent years— not an instrumentality by which people are pushed down or prevented from making the gains that an individual is entitled to, but the exercise of the entire society’s expression of what it wants to do, through the medium of its elected representatives in the laws and its administration—the ways by which the complex problems of this civilization shall be met. In my experience I have never found any more instinctive knowledge of that than in a young lawyer who has been well trained.
Also I would like to have in that organization a good accountant. He would have a proper command of statistics. Accounting is a tool,
an instrument for understanding, an instrument for measuring. An accountant who understands that will also be a good flywheel for people who are likely to fly off the handle. I would like to have a commodity specialist, preferably from one of the big Wall Street firms or one of the banks, who would be able accurately and coldly to analyze what the commodity markets were doing.
Now, if I could get that kind of an organization, I would not have any troubles. But in lieu of that we have this School. We hope that we will find these ideal men in our School. For that reason 1 am interested in what is being done here. I am interested because we believe deeply in what we are doing in OPA. We believe we have a function to perform. We believe that we should not allow a society to commit hara-kiri. We believe in stability and balance. We believe there is a relationship between costs and prices and distribution. If a man doesn’t believe that, he will not make a good. Price Executive.	_ __	...
We want the strongest and most human held organization this country has ever known. We want a central organization that can make the general policy, one that can take what the economist finds in the various Divisions or Branches and translate it into something which the people themselves will undertake to administer with the guidance of our organization.
2.	CONTRIBUTION OF PRICE THEORY TO PRICE CONTROL1
■ J. M. Clark, Consultant
1.	Introduction.
I have been asked to talk about the contribution of price theory to price control. Frankly, I am more interested in the problems of price control than in claiming or disclaiming credit for some ill-defined thing called “theory” as an aid toward their solution. Some might doubt whether it can make any contribution; and it would certainly hot be difficult to build up talking points for the negative side of that debate. But it would hardly be profitable. It seems better to accept at the start the idea that theory may be useful, or worse than useless, according as it is used with or without intelligent discrimination. :	.
It is also well to keep distinct, the different kinds of questions we may ask of theory. We may ask why price control is needed and for what purposes ; we may ask what général kind of price structure best serves these purposes in time of war ; and we may ask guidance as to how particular conditions and measures may be expected to work in particular situations. As th the first, we can get an unequivocal answer ; as to the second, we can get some general guidance ; as to the third, we do not get ready-made answers which would be safe to apply implicitly and uncritically, but we do get a method of inquiry which has its uses and which, while it may not guarantee correct answers, at least can serve to warn of errors to be avoided.
The available theoretical material includes textbook theories of “normal” competitive equilibrium, of monopoly, and of intermediate conditions. These include some rather embryonic implications as to the processes of (moderate) change in particular prices and outputs; and more definite analysis of the effects of general changes in price-levels. They may also deal with the typical run of business cycles. Then there is a growing body of theory of war economics, dealing with that particular species of violent disturbance, and developing its own special theories, or its own variants of the more regular theories.
2.	Why and for What Purposes Is Price Control Needed in War?
On this question the basic contribution of theory is its habit of looking at what happens to the economic system in the large. (I was going to say: “as a whole,” but no theory has yet succeeded in drawing into one picture the whole of the economic system.) • Particular cases must take their place in this over-all picture, which includes the effects on groups who are not parties to the transactions. If there is one thing OP A is founded on more than another, it is this comprehensive view, expressed, for example, in the understanding
1 Delivered December 1, 1942.
4
that it is one thing tp increase the, price of a single commodity with a view to ihcreasing its supply and quite another thing to increase the prices of goods in general.
Another theory upon which OP A is founded is the understanding that economic mobilization for total war goes so, far beyond the conditions contemplated in our textbook ideas on economic movements under the “law of supply and demand” in ordinary times,, that these theories , as they stand are very largely inapplicable. Ihey need pretty complete reexamination and overhauling, this affords tne basis for the answer to the theory that any control of prices, other than monopoly prices, is harmful.	, . „ . e
This theory argues that, when there is a shifting of economic resources to be brought about, the most effective way to do it is to let prices rise in those sectors of the economy that need to expand, and to let them fall or fail to rise in those sectors that heed to contract, and thus bring about the necessary shift. _ In the case of war, this requires that purchasing-power should be shifted to the Govern-ment, by taxes or compulsory savings, until the amount left in private hands corresponds to the amount of goods available for private use. Then “supply and demand”, is supposed tp do the rest.
Total war makes this theory inapplicable. The Government needs to expand far beyond any amount that may be raised by taxes and compulsory savings. Even if such financing were possible, it would still be true that, under the urgent and unlimited demand of Government, prices in the expanding sectors of the economy would rise far beyond what is necessary to induce the greatest possible expansion of supply, while the scramble for scarce supplies would mean that early comers would lock up all they could lay hands on, and later comers would go without, even though some of the latter represented still more essential war work. This would hamstring the war effort, not promote it. Actually under the inevitable deficit financing, swollen private incomes bid against the Government for the materials and manpower the Government must have, and bid for increased amounts of consumers’ goods, of which the supplies must decrease, resulting in general inflation.
Advocates of this form of “supply and demand theory of war mobilization simply do not realize how it would work in a total war to which, if we are to win, we must devote well over half of our total resources, and do it in a hurry.	. nd £	.
This theory applies to mobilizations which are moderate m amount and take place at a moderate rate pf speed, with the result that a moderate incentive in the way of profit or loss is sufficient to accomplish all the movement of resources that is needed, without, throwing the whole scheme of prices and incomes into chaos. The theory also applies to a shift of resources rather than a tremendous increase in the total output or in the total flow of dollar income and dollar expenditure.	,	#	. mp'rA
There is little danger that OPA administrators will accept the theory that our war mobilization should be left to the free play of supply and demand., But it may be worth-while for them to pay enough attention to that theory to understand its , limitations^ so as to be able to explain to others just why it. is not applicable when a nation goes all out to produce things its citizens cannot consume. ;
It is sometimes said that the “law of supply and demand” has been repealed. This is true or false,' depending on what we mean by it. Prices must be set which are sufficient to bring out the needed supply, but that is not the same thing as saying that they must be fixed at the point at which supply and demand are equal. If we fix a price which does not equate supply and demand, something must be done to take care of the discrepancy, and some evasion and “black market” trading is to be expected. In that sense the law of supply and demand still holds. Professor Taussig years ago endowed it with a “penumbra” which would afford some latitude before burdensome measures like rationing would be necessary; but if there is a substantial shortage, relative to demand at the existing price, dealers will have to ration their customers informally, if the Government does not do it formally.
But if the “law of supply and demand” is taken to mean that prices must in all cases be set precisely where uncontrolled supply and demand would set them, then we might be said to have repealed it. In fact, it may have repealed itself, in the sense that it is doubtful whether there is any set of prices that would make supply and demand equal for more than a few moments, when the discrepancy comes from a general excess of money demand for things of all sorts. This is because, if prices in general rise, incomes rise along with them, and therefore demand is practically certain to keep ahead of supply, no matter how high prices go. When the disease is general inflation, “supply and demand” affords no remedy. This means that, unless we want an unlimited inflation, price control must step in some time. The job will be easier if it steps in before inflation has gone very far, for reasons that will appear in the next section.
Such price control needs to be at the service of the paramount need-—the need to produce the goods to win the war. If uncontrolled inflation would do this better, it might be the lesser evil. But we have seen that uncontrolled general inflation does not promote war production, but puts obstacles in its way. The natural conclusion is that price control which serves to prevent violent inflation is consistent with getting the largest possible amount of war material and putting it where it can be most useful to the cause we are defending. Particular price-control policies need to be squared with this yardstick.
Aside from helping or hurting war production,. we have long known that general and violent price inflation is a national calamity. It strikes at the roots of thrift, at just the time when thrift has been rehabilitated as a national virtue of the highest importance. It causes the debtor to rob the creditor. It systematically plunders all those dependent on fixed incomes, for the benefit of those whose bargaining power or strategic position enables them to capture the income of which the others are deprived. The most serious form of this plundering occurs when people with small fixed incomes find the necessities of life suddenly priced beyond their means.
This brings into play a very simple principle on which civilized communities have long acted, but which economists have seldom troubled to formulate; namely, that when the standard of living of a community is threatened by disaster, so that it can afford only the necessities and large groups are in danger of losing those, the com
munitv does not leave these things to the free play of the market, but steps in to assure the necessities to all, no matter what the market might do. In such an emergency situation the distortion of dollar demand by unequal purchasing power—always an evil in economists’ reckonings—becomes an evil too serious to be tolerated in the matter of the necessities of life, health, and strength, to which the civilian economy may be largely reduced.
3.	General Price Structure for a War Economy.
In time of war it is not necessary to rely on increased prices and profits as the sole or principal motive power to induce industries to convert to war production. In addition, other more direct incentives are available. Many prices will have to rise on account of unavoidable increases in costs, but in most cases a moderate increase should be sufficient. Accordingly, the best wartime price structure would seem to be one showing a moderate average increase, with price acting as an enabling factor in the increase of war output rather than as thé main active motive force.
The motive-force theory is the more conventional one. It would claim that, in order to stimulate a large and rapid change-over, the industries which are due to expand should receive large differential awards above those which are due to contract. We have seen somé of the difficulties this leads to, including chaotic distribution of supplies of essential materials. We are within sight of a later stage in which further movement of resources out of the “less essential” uses has to stop, because those that remain are equally essential where they are. Or if some peacetime activities have been stripped down too far, and the shortage cannot be made good out of new additions to the country’s working force, some workers may have to be pulled back again out of war work. Does this mean that the differential rewards must be abolished or even reversed? Obviously, if the differentials have grown inordinately large, this next stage is going to make trouble. Signs of this kind of trouble are evident in the wage structure at present. We are attempting to stabilize a structure full of dynamic differentials.
The wartime price structure should aim at the smallest possible departure from a static scheme of “fair returns” (one that would give resources no incentive to move from where they are). “Smallest possible” includes differential incentives which, in connection with vigorous use of the more direct pressures, such as allocation of materials, will produce a combined set of forces sufficient to bring about the necessary movement.
In most cases, a “normal” or “fair” return is a good standard to aim at; but it must be thought of in different terms from the concept used in public utility regulation, mainly because we are dealing with competitive industries, in which no scheme of prices can give every producer 6 percent, or any given percent, on his investment.. The normal adjustment includes a perpetual fringe of producers who are losing money; and “fair price” in this setting hinges largely on the character of this group, and how the price affects them. For this purpose, accurate valuation of capital investment is riot heeded. It would in any case be impossible.
536932—43--------2
•4i Foretasting Results in * Partitular Cases.	.1 ; ':.:■; h v J i n:j ::
If an OPA administrator ever descends to “applying a theory,” he is using a generalization to help him figure out what he may expect to find in a particular case, or what he ought to aim at doing, or how he may expect some propbsed measure to work. Particular cases are likely to prove obstreperous, especially toward the textbook variety of theory. For textbook theories deal with the “normal”; and there is no “normal” industry, any more than there is an average man. The more careful type of generalization usually says that certain kinds of conditions tend to produce certain kinds of results. But it never describes all the conditions that may make a difference to the result; therefore it will never tell you everything you are going to find in a particular case. What it does, if it is a good theory, is to familiarize you with some of the most important conditions you will have to deal with and give you promising hypotheses as to how you may expect them to work. Thus it reduces the number of things you will have to figure out for yourself, starting from scratch;
It is a pretty good rule that you don’t understand a theory well enough to use it safely unless you (a) understand why the conclusions follow, (ft) understand what conditions are required to make these conclusions follow (and you can’t always trust the framer of the theory to tell you, partly because he is likely to have taken some of the conditions for granted unconsciously, so that he is not aware of them himself), (c) can pick out the elements of your particular problem that are different, and that make a difference to the, result, and ( 1. PRICE CONTROL AND THE WAR ECONOMY1
Seymour E. Harris
( Director, Office of Export-Import Price Control
My task is to give an over-all picture of the war economy as it relatés specifically to the problem of price control In order to do this j bb it is necessary to consider the following problems :
1.	Where do war resources come from?
2.	The rise of income.	'	\ Z
3.	The inflationary gap.
4.	Monetary aspects of the problem of inflation..........
5.	Some real aspects.
&	The job of price-fixing and rationing.
7.	Recent price history.
Conclusion: The task ahead.
1.	War Resources.
It is the ABC of war economics that war resources come from additional output, a reduction of consumption, the using up of capital resources and, finally, at the expense of foreign nations, through a rise of imports and a reduction of exports. It is evident at first inspection that the major resources will come from additional output; a reduction of consumption and capital for nonessential purposes will contribute an important, but not the largest part of the supplies needed. Under the distribution of functions among the United Nations in the present war, the United States must clearly increase its exports and reduce its imports and, therefore, instead of gains at the expense of foreign nations, we will suffer losses.
A brief discussion of the British international economic position will help us understand the need of increasing American exports rather than imports. It is anticipated that the British will have çonsuméd approximately £2% billion of foreign capital by March 1943.2 They have sold gold and securities and borrowed balances belonging to foreigners. In addition, they have obtained aid—approximately £1,100 million of Lend-Lease aid by March 1943.3 Total resources obtained abroad may then attain an amount in excess of £3^ billion by the end of March 1943. The sale of these resources and new borrowings have made it possible for the British to cut their exports and increase their imports of war materials. The United
1	Delivered December 3, 1942.
1 An Analysis of Sources of War Finance, etc., in 1938, 1940, 1941, table A, p. 17.
8 Sixth Report on Lend-Lease, p. 9.
States provides a large part of the additional British imports. At the present time, the direct allocations to Lend-Lease have attained $18 billion, and possible Lend-Lease expenditures in terms of present appropriations are roughly $60 billion. Total Lend-Lease aid to all countries may well rise to $20 billion yearly. This is not a prediction. By the early part of 1943 Lend-Lease aid had reached an amount in excess of $800 million monthly. Total Lend-Lease aid for the first 25 months of operations has attained $11 billion.4 Our total exports have now attained a record annual rate of over $10 billion. This amount would, of course, be much higher if we included as exports the commodities sent abroad by the Army and Navy. Obviously, if we are to spend $100 billion per year for military purposes and if the war is to be fought abroad, it is necessary that the largest part of these $100 billion be sent abroad. Part of these exports will not be included in trade figures, but they are exports nevertheless. These exports will come out of additional output for the most part. American soldiers will consume supplies that they otherwise would have consumed at home; and munitions of war will obviously constitute a large part of these exports. It is hoped that adequate shipping will be available to make it possible to export the major part of our output of war goods and supplies once we have reached the peak of military outlays.
In order to give specific meaning to these general statements, allow me to indicate what has happened so far and what may well happen in thé future. War expenditures in the calendar year 1942 are estimated at $50 billion, consumption expenditures at $80 billion, and national income in excess of $115 billion. The difference between national income and consumption is, therefore, $35 billion or more. How is it possible, then, to spend $50 billion for war purposes when actually only $35 billion seems to be available ? The answer may well be that we are consuming about $15 billion worth of capital per year in the nonessential area. The sum of $35 and $15 billions would then make up the total of $50 billion. Another interpretation is the following: It is conceivable that the national income may be underestimated, or the output of war goods may be less than is indicated by the war expenditures, or consumption may be less than $80 billion. Any of these changes or a combination of them might well account for the $15 billion by which the $50 billion of war expenditures exceeds the difference between national income and expenditures on consumption.
Let us consider the problem in terms of the future situation. An official pronouncement has been made that we contemplate a war program of $100 billion for the fiscal year 1943—44. Let us assume that we can achieve a war program of $100 billion, and whether we do or not will depend partly on the course of prices. A rise of prices of 10 percent per year will certainly make it possible to achieve a $100 billion program by the calendar year 1944. What the Government proposes, though, I presume, is a $100 billion program sooner and with a smaller rise in prices. Current estimates of national income in 1943 seem to run around $140 billion. If we attain a $100 billion war program we can reasonablv estimate our national income net at $140 billion as a minimum figure. We may also estimate consumption expenditures at the peak of the war at $80 billion.5 In view of new
4 Eighth Quarterly Report to Congress on Lend Lease Operations, p. 10.
6 In the first quarter of 1943, they were running at the record annual rate of $90 Wlîôn.1
allocations of economic resources being made, this does not seem to be a low figure. We have been able to maintain our consumption at 1941 levels in 1942 because1 there have been delays in shifting of resources to war industries, and large inventories have been available. The American consumer may not expect such good fortune in the future. The $80 billion worth of consumption goods will correspond perhaps to about $60 billion at prewar prices. This is equal to our consumption standard of $60 billion in the late prewar period in spite of the fact that money income will have doubled and real incomes will have risen 40 to 50 percent. Thus consumption has been held down in relation to income levels, although not as much as these figures suggest—partly because there may be 9 or 10 million in the armed forces whose consumption will come out of military expenditures and partly because consumers hold large inventories of durable and semidurable goods. We may estimate roughly that $5 billion of consumption will come out of military expenditures. This is a net gain only on the assumption that $60 billion of consumption goods are made available to the civilian economy and $5 billion to the military economy. That dollar consumption at the peak of the war effort will be only 33 percent higher than the 1939-40 level, despite an increase of prices of the same proportions, a doubling of money incomes and significant in-crea'ses in employment and man-hours of work, suggests great sacrifices on the part of the public.
What in a general way can be said of the distribution of the net national product along the lines assumed above? If the national income rises to $140 billion, about half of this amount will represent a rise in the dollar value of output. Since the dollar value of consumption will not be reduced from the 1939-40 level, no contribution to the war output is made by a reduction of consumption. In fact, $10 billion for consumption will come out of additional output (in dollar terms). The $100 billion war program will then be accounted for as follows:
1.	A rise in the dollar value of output will account for $70 billion.
2.	Of this increase in output, $20 billion will represent an increase in the dollar value of consumption. Thus the net gain for the war economy will be $50 billion.
3.	Where will the additional $50 billion come from ? Perhaps $10 billion will come out of funds that normally would have been used for capital expansion. That leaves $40 billion to be explained by the using up of capital resources.
This is an excessive amount of capital consumption. If we assume that $20 billion of capital consumption is the maximum that is likely to take place, we are faced with the need of accounting for $20 billion additional. Either consumption must be reduced to $60 or $70 billion, or output (national income) must rise in excess of $140 billion. Otherwise, the goal of $100 billion will not be reached. Possibly, consumption might be cut to $70 billion, and incomes might rise to $150 billion. If incomes do rise to $150 billion, a substantial degree of inflation will be concealed, and the goal of $100 billion of military outlays in stable dollars will not be achieved.
2.	The Rise of Income.
It is obvious that an increase in money rewards per unit of contribution by no means accounts for the total increase in income, Incomes rise as output rises and as the dollar reward for a unit of output, an hour of work, or a given quantity of raw material rises. An increase ill total man-hours of employment will also have a bearing on the result. Output, in tdrn, rises because more resources are used^ and also because they are used with increasing effectiveness. There has been a significant increase in output per man-hour since 1939.
What has been the relative importance of the various factors contributing to the increase in income since 1939? Undoubtedly, the increase in output accounts for a substantial part of the rise in inconie. Let Us examine the figures for industrial production.
Industrial production
(1935-39 = 100)
Annual, 1941---.-----;—.156 Annual, 1942 (estimated)
November, 1942—,—----_____ 192 Annual, 1943 (estimated)215
The rise of industrial production since September 1939, Has been 61 percent. The increase at the peak of the war effort will probably be in excess of 100 percent., Total war output has, of course, shown a spectacular increase since we entered the war. Cumulative war expenditures amounted to $6.7 billion at the end of the fiscal year 1941; $34.9 billion at the end of fiscal 1942; and $87.7 billion by March 31 1943. . ■ ,	/■	.
In large part, then, the rise of income is associated with an increase in real output, although the index of industrial production: gives an exaggerated view of the over-all rise in the output of goods and services.
Another important factor is, of course, the rise of prices.
Percentage rise over 1939
March, 1941 i 1943
Wholesale prices      _________________________________13	34
Cost of living_________________________________________ 6	22
This rise of prices is induced in part by the increase in inconies paid to labor, farmers, contractors, etc., and the resulting pressure on commodity markets. In turn, the rise in the cost of living results in further increases in incomes paid to these groups.
The relative importance of the various factors contributing to the increase in income differed considerably as between agriculture and industry. In farming, the larger part of the increase in income is explained by a rise of prices; in industry by a rise of output.
Farm output, prices, and income
1«	Production in 1942 has been estimated at 17 percent in excess of 1939;
2.	Prices received by farmers in March 1943, were 96 percent in excess of their 1939 level;
3.	Prices paid by farmers in March 1943, were 29 percent in excess of their 1939 level;
4.	Parity: the ratio of prices received oyer prices paid was 113 in March 1943, as compared with 74 in 1939;
5.	Gross farm income in 1912 has been estimated at 70 percent in excess of its 1939 level;
6.	Net farm income in 1942 has been estimated to be 120 percent higher than in 1939.: z !
Corporate profits and wages snow a very large percenta'ge'increase, though the rise is tempered by a significant increase in industrial output.
Corporate profits				
	(Billions of dollars) 1936-39	19W	19M	(estimate}
Before taxes		4.5	8.0	13.8	18,8
After taxes					^3.3	5.5	7.2	6.8
Wages
1.	Hourly manufacturing earnings February 1943=46 percent in excess of August 1939;
2.	Real hourlymanufacturing earnings February 1943=19 percent in excess of August 1939; a
3.	Weekly manufacturing earnings February 1943 = 82 percent in excess of August 1939 ; ;	1
4.	Real weekly manufacturing earnings February 1943= 48 percent in excess of August 1939;
5.	Total wages and salaries in 1942=$76 billion, or 74 percent in excess of 1939.
This statistical summary indicates the extent; of the rise of income. It suggests that sb long as money incomes of labor, farmers, and entrepreneurs continua to rise, the pressure of excess purchasing power pn existing supplies will cpptinüè to grow. Prices will then tend upward, and the task of the QPA will become increasingly difficult. The task is difficult enough even if rates of reward are stabilized. Thé summary of statistical changes is ample evidence that industrial incomes rise not only because labor pay-rises for a given task, but also because more is being turned büt,; Stabilization of the hourly rate of pay, for example, will not prevent a large rise of labor income ; and stabilization of the “goods” rate of pay (i. e. adjustment of money rewards to a rising cost of living) a fortiori will induce inflation. It is necessary to stop the rise of money incomes, and if it were at all politically possible, which it is not, it would be highly desirable to reduce total money incomes. That these money income payments continue to rise from $71 billion in 1939 to $76 billion in 1940, $90 billion in 1941, $117 billion in 1942, $140 billion (estimated) in 1943, and $150 billion (estimated) in 1944, increases the responsibilities and difficulties of the OPA. Our task becomes one then of sterilizing the increasing excesses of purchasing power over the amount required to buy current supplies of goods and services at present prices. The first step is to keep prices down. In so far as automatic or induced increases of savings and taxes do absorb excesses^ our task, is made easier.
A really superb fiscal job would still leave much to be done by price control. No conceivable fiscal program will reduce incomes in such a manner as to leave each group and individual in command of that amount of purchasing power which will yield the group or individual his fair share of the limited supply of goods available. A severe tax and loan program would leave the well-to-do with excessive purchasing power and the poor with inadequate amounts.
3.	The Inflationary Gap.
An inflationary gap of $15-$25 billion has been estimated in recent months. What is the inflationary gap, and why does it exist? The gap may be defined as the excess of income likely to be spent on consumers’ goods in a given period and at current prices over the supply of these goods available. In a speech on November 16, 1942, Mr. Byrnes estimated, for example, that after payment of about $15 billion of taxes by individuals and $25 billion of personal savings, there would remain $85 billion out of an income to individuals of $125 billion in 1943. The supply of consumer goods would be $70 billion. The gap would then be $15 billion. As war production rises, incomes rise pari passu. Incomes may rise $70 billion, but since the additional income is earned largely in producing war goods and since a large part of the income may be used in the absence of new controls to buy civilian goods, an inflationary danger arises in the civilian goods sector of the economy. As incomes rise, less and less goods are made available in a war economy for the civilian consumer. The OPA in a recent period estimated that incomes were rising at the rate of $2 billion monthly whereas supplies for the civilian economy were being curtailed at the rate of $1 billion monthly. Not only do wage rates rise, but many more people are at work, and profits and farmers’ incomes also rise. There is a scramble on the part of the consumer who has many more dollars to buy a reduced supply of goods. The inflationary problem arises, therefore, unless measures are taken either to increase- civilian output, which is not appropriate in a war economy, to prevent increases of money income through appropriate wage, farm, and war control policies' and to intercept and siphon off the excess purchasing power. If this excess purchasing power is not siphoned off, then the competition for the limited supply of goods results in an inflationary spiral. Surplus purchasing power may be drained off by an increase of taxes, or of savings, repayment of debts (which is a form of savings), and similar measures.
It may be recalled that early in 1942, official estimates put the inflationary gap at around $20 billion. More recent estimates for 1942 have put this gap at about $10 billion, and I have just given you an estimate of $15 billion for 1943. Were the OPA officials in the spring of 1942—who have done more than anybody else to make the inflationary gap a household word—too pessimistic ? Perhaps they were. The gap has been cut, however, in part because prices have risen to some extent since these estimates were made; and the higher the price level the more excess purchasing power is absorbed. A reduction in the gap associated with a rise of prices is, however, an admission of failure. An unexpected windfall which has contributed toward the reduction in the gap has been a reduction of installment debt out
standing. Another unexpected windfall has been a large rise of savings. According to an estimate by the Securities Exchange Commission (Statistical Series Release No. 729, October 19, 1942) gross savings were $16.4 billion in 1940, $25.5 billion in 1941 and at the rate of $36.5 billion by the second quarter of 1942. Net savings of individuals are estimated at $7.4, $12.9, and $26 billion in the years 1940, 1941, and 1942.
The President commented as follows in his budget message of Janu-ary 6,1943 :
Financing expenditures which will exceed $100 billion is a task of tremendous magnitude. By meeting this task squarely we will contribute substantially to the war effort and clear the ground for successful reconstruction after the war. An adequate financial program is essential both for winning the war and for winning the peace.
Financing total war involves two main fiscal problems. One problem is to supply the funds currently required to pay for the war and to keep the increase in Federal debt within bounds. The second problem is caused by the disbursement of $100 billion a. year to contractors, war workers, farmers, soldiers, and their families, thus adding many billions to the people’s buying power, at a time when the amount of goods to be bought is declining steadily. A large portion of this excess buying power must be recovered into the Treasury to prevent the excess from being used to bid up the price of scarce goods and thus undermine thé stabilization program by breaking price ceilings, creating black markets, and increasing the cost of living.
We cannot hope to increase tax collections as fast as we step up war expenditures or to absorb by fiscal measures alone all excess purchasing power created by these expenditures. We must, therefore, provide a substantial portion of the needed funds by additional borrowing, and we must also use direct controls, such as price ceilings and rationing, for the protection of the consumer. Nevertheless, the more nearly increases in tax receipts follow increases in expenditures, the better we safeguard our financial integrity and the easier the administration of price control and rationing. All of these measures are interrelated. Each increase in taxes and each increase in savings will lessen the upward pressure on prices and reduce the amount of rationing and other direct controls we shall need.
The rise of savings is explained in no small part by the reduction of short-term consumers debts which decreased by $3.5 billion in 1942. There has, furthermore, been a large rise of cash balances held. (The rise is from $10.5 billion to $14.5 billion between November 1941 and November 1942.) According to a study by the Department of Labor, the median family in 1935-36 spent $9 more than its income, whereas in 1941 the median family saved $87, and in 1942 (on the basis of the first quarter of 1942) the saving was $128.6 An important explanation of the rise of savings (aside from the rise of income) has been the savings campaign on the part of the Treasury as well as the limitation of the supply of goods available for purchase.
In fact, with their 1942 disposable incomes, consumers would purchase about $59 billion worth of goods (exclusive of services) if they followed the usual saving-expenditure pattern. Actually expenditures for goods this year will amount to about $52 billion. The difference of $7 billion is accounted for by the fact that consumers this year will save about 7 percent more of their incoipes than might be expected out of an income of $115 billion. These additional savings will take the form of caSh balances, War Bonds, and reduction of outstanding debts. Expenditures for consumers’ goods and services despite the large ratio
6 “Income and Spending and Saving of Nation’s Families in War-Time,” Monthly Labor Review, September 1942, pp. 706-709.
of savings to income, rose to $82 billion in 1942 as compared with $66 billion and $76 billion in 1940 and 1941, respectively.
Finally, we should not leave out of account the availability of larger supplies of consumer goods than were anticipated. Conversion had not proceeded as rapidly as had been anticipated. The prevalent view late in 1941 was that but $70 billion of consumers’ goods and services would be purchased in 1942. Actually, the figure was more than $80 billion. The difference between the anticipated and actual amount is explained in part by a rise in prices.
Dr. Gilbert is going to deal more fully with the fiscal problems involved. I may say at this point that the rise of tax receipts from $5 billion in the pre-war period to $25 billion, or even $30 billion, in 1943 or 1944 is inadequate to absorb the excess of purchasing power. A more vigorous tax and loan policy is required. Dependence on voluntary savings and the present tax program will not do the job. In his budget message of January 6, 1943, . the President estimated tax receipts for the fiscal year ending June 30, 1944, at $35 billion. He proposed additional taxes of $16 billion.
4.	Monetary Aspects.
We may look at the problem in a somewhat more narrow but enlightening manner. It is now estimated that in the fiscal year ending in June 1913, the Government will spend approximately $80 billion. Taxes will account for roughly $23 billion; and borrowing for roughly $57 billion, of which bond purchases by the banks may well attain .$30 billion and possibly even more' If our expenditures should rise to $100 billion, taxes to $40 billion, borrowings to $60 billion, and bond purchases by banks in the fiscal year 1943-44 to $30 billion, the inflationary danger is clear. Unless! the banks liquidate nonwar assets in large quantities, the net effect may very well be an annual rise of deposits of from $25 billion to $35 billion. In 1929 the total volume of deposits was $54 billion; in 1933, $38 billion; in June 1940, $61 billion; in December 1941, $71 billion; and at the end of 1942 at $88 billion. An annual rise of even $25 billion is a very serious matter. Undoubtedly private bank loans will be reduced as the civilian economy is pressed, but even bn this assumption, the net annual rise of deposits is going to continue at an alarming rate. It is understood, of course, that as deposits and income rise, savings and savings deposits may rise, and to thatextent the danger is reduced.
5.	Real Aspects: Manpower.
This very setious increase in the total amount of purchasing power available will undoubtedly bring about a dangerous rise of prices unless strong measures are taken to sterilize the cash outstanding. That our economic resources more arid more will be put at the disposal of the Army and Navy will not reduce this danger. The extent of this particular, problem is best illustrated by the following summary of changes in manpower since April 1940, inclusive of anticipated changes. Total manpower available for the armed forces and the labor market is expected to rise frqm 48 million in the-middle of 1940 to from 62 to 65 million in 1914. u By the end of 1944, Jhe armed forces will absorb roughly 10 million nien. Six million additional will be required for war production and the military services. It is anticipated that the numbers in War industries will have risen by at
least 20 million from the middle of 1940 to the end of 1943. In the year ending December 1942, the rise was from 6.9 to 17.5 million. In order to attain these large increases in war output, it is necessary over the course of this period to reduce employment in nonwar industries from about 28 million to 18 million, or possibly even to a lower figure. The main contribution to the additional numbers actually employed in war industries and inducted into the armed services has been accounted for by the reduction in unemployment of perhaps 5 to 6 million; by a natural rise in the numbers on the labor market, and especially by the diversion from nonwar to war industries, thé raiding of schools and homes, and withdrawals from retirement. If we are to attain a total working population, inclusive of the armed forces, of 65 million, it will be necessary to increase the number of women on the labor market by many millions. It is to be observed that in the middle of 1940 there were 9 million people in the schools and 29 million working in homes. These two sources, inclusive of those who have retired, now form the main reservoir to provide the additional men and women required for the armed services and the additional workers required for war industries.
The net results for the years 1941-42 are given by the following: (Millions)
	Civilian labor force	Employment	TJnemploy- Armed ment forces
December 1940			;		 53. 4	37.6	7.1	—
Average 1941_		 _	__ 54.4	39.4	5. 6	1. 7
Average 1942 			54. 5	42.0	2. 6	4.2
The following figures give some indication of what is expected in the 18 months ending December 1943:7
Approximate increase in manpouier requirements
Increase in armed forces— Increase in civilian war ment		Millions 	4.8 employ- 	4.9
	9.7
	Millions
Decreases in civilian nonessential	
employment		3.0
Reduction in unemployment _ _	1.8
Normal labor force increment	__	1.0
Extraordinary accessions to labor	
force		3.9
	9.7
It will be observed that in these 18 months the additional manpower required for war will come in roughly equal proportions from (1) civilian employment, (2) extraordinary accessions, and (3) the ranks of the unemployed and normal labor force increment.
6.	The Job of Price Fixing and Rationing.
Our task then is to sterilize this vast excess of purchasing power. Where the amount of purchasing power is in excess relative to the supply of goods available at existing prices, prices tend to rise. The Government may by edict, however, or by the issuance of various price orders, fix prices at a point which is lower than would have been attained in a free economy. At these lower prices there is, then, an excess of money. The excess may tend to push prices up despite official
T Before the House Military Affairs Committee, Mr. McNutt testified on May 7,1943, that 4.3 million would be added, to the armed forces in the calendar year 1943 and that 2.7 million additional workers were required in the more essential industries.
measures unless price-fixing is implemented by further controls. Where commodities are scarce, the purchaser, finding himself with large amounts of money, is tempted to pay higher-than-legal prices. The seller also is tempted to evade the law. Part of the surplus money will go into areas where supplies are relatively elastic. Such areas are, for example, recreational facilities, education, and so on. But even these areas are gradually closed as the manpower problem becomes more and more serious. The ultimate cure for the disparity between supply and demand lies in a further control of the distribution of supplies. Rationing is one way out. Wherever a significant scarcity exists, irrespective of the excess purchasing power, rationing is required in order to assure an equitable distribution of goods. Where, in addition, there is an excess of purchasing power, rationing is required in a, larger and larger number of fields because at the existing price level the supply of money is excessive. The area of rationing is, therefore, a function of the amount of purchasing power as well as of specific scarcities.
What advantage does price stability bring to the economic situation ? First, price stability prevents the chaotic production conditions which inevitably accompany large price disturbances, and the collapse which follows this rise. Price stability gives also a better distribution of goods than we would have in its absence. The low-income group, which is unable to purchase supplies at rising prices, is protected against the better bargaining power of the high-income group. Price-fixing alone is not enough to assure the protection of the poor. Not only must you allow them to buy a sufficient supply of goods— given the supplies available—by keeping prices down, but you must also assure them that the suppliers will not favor the high-income groups through evasion of price regulations, or favor those who have time to shop early and often, or those who hoard. The most effective means of implementing price control is through a comprehensive rationing program.
One must not, however, get too smug about the total effects of pricefixing. The effect that price-fixing tends to have is that it maintains the purchasing power of the dollars actually spent; but the dollars that you cannot spend, or cannot spend in the way that you would like to spend, lose in purchasing power. We hope that in the future these dollars will have increased purchasing power when more goods become available. In any case, the goods are not available in wartimes, and no measure of price control or rationing can increase the supply of goods in excess of $65 to $75 billion if the available resources cannot yield more. Price-fixing is an important step in the direction of getting the best possible distribution of these goods, and the accompanying stabilization prevents the dissipation of resources and attendant dislocation of production which follows price spiraling.
Conclusions—The Task Ahead.
The more incomes rise, and the larger the proportion of our resources that go into war industries, and the less courageous our tax and loan policy, the more difficult is the task of the OP A in controlling prices. As more progress is made in the field of rationing, price control will also probably become less difficult. As we ration coffee and indicate to the consumer what he is allowed to pay for
coffee, and as he claims his coffee with his ration coupon, the possibility of effective price control is considerably enhanced.
But no matter how effective our income policy and our fiscal policy become in the near future, there is likely to be a serious excess of purchasing power at existing prices and with existing supplies of civilian goods. The problem of enforcement and compliance is more difficult, the larger this excess of purchasing power. Under these circumstances, the need for price control which is precise, simple, and enforceable, grows. Wherever strong reasons for differential pricing are not to be found, price freezes should give way to dollars-and-cents ceilings, and where specific dollars-and-cents ceilings are not possible, margin control will contribute toward effective price control.
The rise of prices as indicated by index numbers is serious, although the OP A may well be proud of the much better record that has been made in this war than in the last war. A rise in the cost of living of only 20 percent after 3 years of war is a notable achievement, especially since we are already devoting 60 percent of our national income to the war, whereas in the last war the peak percentage of resources seems to have been about 30 percent. Despite our record, of which we may be proud, it is well to point out that just as in the last war, the increase in prices is not indicated merely by the increase as given by a cost-of-living index number. There has been deterioration of quality to some extent not accounted for by index numbers, a reduction of services that go with every sale, a large number of evasions, a reduction in the number of sizes, colors, brands, etc. All of these considerations suggest that in addition to the statistical rise in the cost of living, there has been an additional rise which is not revealed by index numbers. Not only have prices risen, but the commodities we obtain are less satisfactory than those we had in the prewar period, and furthermore, we do not get the same satisfaction out of a dollar as we did then because the area of choice has been whittled down considerably.
Price control, if it is to be effective and if the necessary commodities are to be obtained by low-income groups, must be implemented by standardization, which makes possible lower costs, by concentration, which puts the responsibility for production on low-cost units, and by an increase in various economies; e. g., reduction of selling costs. Finally, we have only made a beginning in the field of subsidies. The British today, according to a study in the Monthly Labor Review for October 1942, are spending roughly $400 million a year on subsidies on food. These subsidies are being spent largely for commodities consumed by the masses: flour, bread, meat, milk, tea, eggs, and potatoes. If the United States should embark on a program of subsidies on a corresponding level, the cost would probably be from $1% to $2 billion a year. The advantage of a subsidy system is of course that at a relatively small cost to the taxpayer, large savings are made by low-income groups. The Government may spend $1 billion; the consumer may be saved $5 billion.
536932—43-----------3
APPENDIX1
War output—1942
Airplanes------------------------------------------------------------- 49, 000
Tanks and self-propelled artillery____________________________________.	32,050
Antiaircraft guns (20-mm. and over)______________________________________ 17,000
Merchant ships (deadweight tons)______________________________________ 8,200,000
Figures announced December 7 by the Office of War Information.
War finance
(Cumulations are from June 1940)
Authorized war program as of Nov. 30,1941_I----------------$64,000,000, 000
Authorized war program as of Nov. 30,1942-.---------------- 238, 000,000,000
Expenditures as of Nov. 30, 1941___________________________ 13, 8C0,000, COO
Expenditures as of Nov. 30, 1942__------------------------- 61, 800,000,000
Daily raté of expenditure in November 1941_________________ 67,000,000
Daily rate of expenditure in November 1942----------------- 244, 500, 000
Manpower
War workers December 1941_______________________________________ 6,900,000
War workers December 1942_______________________________________17, 500, vUO
1 This table is taken from the War Production Board’s War Production in 1942, issued by the Office of War Information.
2.	PRICE CONTROL AND FISCAL POLICY 1
Richard V. Gilbert
Economic Advisor to the Administrator
As you are well aware, Mr. Henderson and a good part of the group around him have been known for years as wild-eyed spenders. It goes back of course to the days before the war. Mr. Henderson was, in fact, one of the leaders of that school of economics which insisted that an appropriate fiscal policy could increase the national income, could increase employment, could increase production, could increase consumption—in fact would be good for all manner of diseases.
It is ironic that a number of people in Congress and outside, who all through the bitter thirties insisted, first, that inflation was just around the corner and, second, that it was such people as Mr. Henderson who would produce it, should at this time, when inflation is no longer a figment in the imagination but a daily threat, be unwilling to take the kind of measures which Mr. Henderson and the rest of us propose, measures which would throw or would attempt to throw the spending mechanism into reverse and replace the policies which we advocated in the thirties by a restrictive fiscal policy designed at least to cut into the danger of inflation.
I can’t miss this opportunity of pointing out that the things we insisted were true in the thirties have been proved up to the hilt and beyond. We stand today with a level of industrial production which is just twice the average level of industrial production from 1930 to 1940. We stand today, in spite of the huge volume of output for war, at a level of consumption which is some 25 to 30 percent higher than the highest level hitherto attained in our history. I think it is so clear now that for 10 years we were content to struggle along producing only about 40 to 45 percent of the total of goods we could produce, that, to quote from Walter Lippman, “It is very unlikely that, this lesson having been driven home to the American people, we shall go through an experience as bitter as that which we went through in the thirties again.”
However, we now unquestionably stand on the brink of disaster. The inflationary forces are today so powerful, and their pressure so enormous, that unless we use effectively every instrument of control ever suggested by Congress and others, it is open to the most serious doubts whether we can prevent an inflation which would destroy our economic fabric and leave our economic system a shambles. On this question there has been, of course, very considerable difference of opinion amongst the economists, not to speak of the differences in the field of politics.
I think it fair to say that many of the economists trained at the University of Chicago take the position that an adequate tax pro
1 Delivered December 8, 1942.
gram would largely eliminate the need for price control, and we at OPA argue and have argued consistently since the early days of the Defense Program that through the fiscal device, that is to say, through an appropriate, sufficiently vigorous tax policy, it would be possible to keep the total volume of spending power in reasonable balance with the supply of goods available for consumption and that, if that device were used effectively and adequately, a general pressure upon the price structure could be prevented. In that event, it would be entirely unnecessary to develop the very complex series of regulations with which we are all too familiar. It would be unnecessary to control every price in the price structure, to put the hand of Government heavily upon every firm in the land. Here was a mechanism, in other words, by which it would be possible to prevent the kind of regimentation you find mentioned in the press every day.
The question is, Why, if such an instrument is available to us, should we in fact, embark upon general price control?, Alvin Hansen, I remember, in a discussion in 1940 in which- this, together with other issues was debated, made the general proposition that, if we should use every instrument that anybody could think of and a lot of others not thought of yet, the odds would still be very heavy against our ability to prevent inflation. I think that is profoundly true. I will not only elaborate it but set forth the logic that underlies the use of the other instruments as well as the fiscal instrument.
To begin with, in this field as in all others, there is no one set of principles—no precise guide to policy which would be right under all circumstances and at all times. .The policy must grow with changing circumstances. I think that the policy of both OPA and the Government generally has grown and adapted itself to the changing economic circumstances.
Let me start back with mid-1940, when the Defense Program was launched. At that time, as I already pointed out, the Federal, Reserve index of production was running at around 100. It is perfectly clear today, with the index running at 190, how large the margin of expansion of output was or, to put it otherwise, how large was the degree of slack in the economy at that time. It seemed to us clear at that time that the fiscal policy ought to be geared to expansion. That is to say, the Government should enter the market for goods and buy the things required for the defense effort, creating new money or borrowing idle money to finance that expenditure and not coupling the increase of expenditure with an increase of taxes. That was a method designed to increase the flow of demand, thereby increasing the stream of income which, in a competitive profit economy, meant increasing the volume of employment and the volume of output.
To be sure, even towards the end of 1940, it was already clear that, ¡while there was still a large volume of slack in the economy, in key areas demand was already pressing upon productive capacity. Those were the bottlenecks of which you have heard again and again. In the first quarterly report, you will find an extremely interesting table which is a kind of chronology of the bottlenecks. We chose for various periods of time the percent of capacity operations in the key industries of the country. You will find month after month an increasing number of industries came to operate at capacity. The reason for that is of course obvious; the requirements for war are totally
different from the requirements for peace. The kinds of goods wanted and the quantities of goods wanted differ radically under the two sets of circumstances.
The result was that, even while there was ample productive capacity in many fields—particularly in the nondurable field—already before the end of 1940 there was acute scarcity in steel and increasing scarcity in nonferrous metals; in fact, there was pressure upon durable goods generally. ' At that time, therefore, we argued for an expansionist policy on the fiscal front designed to create the pressure of demand which we felt would evoke an increase of production and employment. At the same time it was clear that it was already necessary through price control to prevent an acute rise of prices in the shortage areas.
Hence, our policy was expansion on the fiscal front and selective control on the price front. If we had followed the course suggested by those who would have placed their primary emphasis on fiscal policy, we should have extracted in taxes in 1940 enough purchasing power to relieve the pressure upon the price structure. Now obviously, to relieve the. pressure upon the key shortage areas would have necessitated cutting the purchasing power sufficiently to diminish significantly the pressure of the nonshortage areas; in other words decreasing the demand for goods which were still abundant. I think by and large, the fiscal group accepted, after argument, the position we took at that time.
On the other hand, I think they have never quite accepted the position we came to take this spring when we put through the over-all control of price structure. That is worth some comment. Even if we recognized that an expansive fiscal policy is desirable, so long as there is slack in the economy, the question which rises is this: Once you get to the point at which the pressure reaches into practically every market in every county and affects every price in the entire price structure, why should you not at that time bring the total volume of purchasing power down to reasonable balance with the supply of goods through taxes and operate on prices individually ana selectively as we did, let us say, in the year before last spring ?
The answer to that is twofold. In the first place the index of production has moved up quite sharply between last spring and this month. The increase must be about 30 points. More important still at this time, in spite of the fact that we have broken every production record in our history, in my judgment we can expect before the end of the war to see production increase by another 50 percent above the present fabulous level. Were we, let us say, by a year and a half hence to reach the degree of utilization of our manpower that the British reached last May, that would make possible an increase of our total production to something like 50 percent from present levels.
At a time when the need for output is as urgent as it is today and will be during the coming year, it would seem folly to eliminate entirely the pressure of demand which is the basic driving force of a competitive economy. For that reason, while I should argue strongly for a more vigorous tax policy than that which we have at this time, I should still insist that a balanced budget or anything approaching it at this time would be economic nonsense. On the other hand the pressures are already so general that we can no longer
afford to deal with prices one at a time. It follows that fiscal policy, still essentially expansionist, must-be coupled with an over-all control of prices.
My next proposition is that there is just no chance of getting a fiscal policy tough enough to bring the total of consumer purchasing power down to the volume of goods which are presently available for consumers. Not only isn’t there a chance that we can do it, but there isn’t a chance that any Government can do it. The fact is that no Government has done it. It is just as true of the Fascist Governments as it is of the Democratic Governments. In no country has a fiscal policy been pushed to the point at which it would eliminate the excess of purchasing power above available supply and thereby eliminate the inflationary gap.
To give you some idea of what would be involved if we were to use the fiscal device to the bitter end, the total volume of income payments to individuals is increasing at about two percent per month. That is at an annual rate of something over 2 billions of dollars. The supply of consumers’ goods is diminishing at about the rate of $1 billion per month. The excess of buying power over available supply is therefore increasing at an annual rate of $3 billion per month. The tax bill on which the Congress has labored for 8 monthsis expected to yield some 8 billions of dollars. It is just about enough to offset the increase in the inflationary gap during a period of 3 months.
Take a few other cases. A 5-percent sales tax applied across the board without exemption for anything would yield in the full year about $2^ billion—just enough to offset the increase in the inflationary gap in a single month. The decrease in personal exemptions put through in the recent tax bill to $500 for the single individual and $1,200 for the married couple without dependents, a very savage cut with very savage effects, is expected to yield $1,100 million per annum. Just sit down sometime with a paper and pencil and the schedules you can get from the Treasury any time you like and try to figure out a tax program that would increase the revenues of Government at the rate of $36 billion per annum, which is what would today be required to offset the increase in the gap, the increase in the purchasing power over available supplies which we expect will take place between this quarter and the last quarter of next year.
As a matter of fact it was the inability to get a tax program that could more than scratch the surface of this problem that led this Office to take the very unpalatable position which it took in April and May and during the summer, when we advocated not merely the over-all control of prices but when we emphasized the necessity to extend the direct controls by bringing wages and other incomes under the direct cbntrol of Government. The reasoning on this point is of a piece with that which I just laid before you.
If you look at the growth of wages and salaries at the beginning of the defense effort, you find that the rate of increase in the annual wage and salary bill stepped up from a monthly rate of increase of about one-half of 1 percent to 1 percent, to 1%, to 2, and in the months before April when the President announced his program, to a rate of 2.7 percent per month, the total wage and salary bill increasing over a period of 3 years from something like $40 billion per annum to $76 billion
per annum this year. It seemed perfectly obvious to us that unless direct measures were taken at least to slow up the rate of increase of individual income, no combination of tax policy, of price control, of rationing, or any other measure could prevent a price explosion.
This mounting pressure upon the price structure is going to force this Office to take, I think, some fairly bold moves on the rationing front before long—it is not a matter of weeks but, I should say, in the course of 1943—and we shall, practically speaking, ration everything in sight. The reason for that is quite clear. With a mounting increase in buying power of something like $2 billion per month annual rate, with a supply of goods being cut something like one and a half percent per month and with prices fixed, obviously pressure upon the dwindling supplies mounts month by month. Inventories in the hands of both retailers and wholesalers are being cut at a very rapid rate. Already the scramble for goods is such that in many areas of the country it is impossible to get access to meats. It was impossible to get access to coffee and we must expect that month by month an increasing number of civilian items will simply disappear from the shelves, going to those who get to the store first.
Reasonable equity in the distribution of goods is going to compel the Office to secure that equity in the distribution of goods through direct rationing.
The question in which you are of course primarily interested at this time is the magnitude and character of the tax bill which the Congress is going to be asked to consider some time shortly after the turn of the year. I think it perfectly fair to say that it is going to be a vigorous bill. I think it equally fair to say that it is not going to come anywhere within striking distance of the gap, the excess of purchasing power over available supplies which we can foresee. Just as on the one hand there has been the school of thought that primary reliance upon the fiscal instrument was really all that was required and that if full use of the fiscal powers should be made, it would be possible to avoid the unpleasantness of price control and rationing, so there is another school of thought that given firm price control and given an adequate rationing program, inflationary forces are vanquished and you don’t need to cut people’s disposable income down through an increase of taxes or through compulsory savings or one of several other devices.
That school of thought points out that perhaps because of price control and rationing the volume of individual savings has reached fantastic heights. The savings of individuals, including unincorporated business, is estimated by SEC to have run to $4.8 billion in 1940, to have increased to $10.8 billion in 1941, and to have run at an annual rate of $16 billion in the first quarter, $25.8 billion in the second quarter, and $36.6 billion in the third quarter. On the basis of these figures it is argued that in fact there is no inflationary pressure. While there is an enormous excess of income in the hands of people over the goods they can buy, nonetheless these figures reveal that people are saving their income and therefore it does not constitute a demand for the dwindling supply of goods and does not exercise any real pressure upon prices or supplies.
I should point out that other figures—say those of the Department of Commerce which run very close to these—are estimated on the
basis of the difference between output taken at ceiling prices and income payments less taxes; on the other hand they do not of course attempt to measure the increase of prices that takes place by way of violation of our ceilings and they do not measure the volume of goods that flow through black markets.
I will not argue that an excess of purchasing power over consumers’ supplies of some $40 to $45 billion means that it is necessary to sop up 40 billions of dollars through taxes or through savings programs. I do not mean that people are not saving a good deal more than they ordinarily would. I do mean, how.ever, that with so huge a volume of excess and with that excess growing at so rapid a rate, unless we get some help from Congress in sopping up some of this purchasing power, the pressure to violate our ceilings and to get goods on the black market is going to destroy any effective administration of price controls and rationing controls. We must, on the other hand, continuously emphasize the need for the biggest program that can be obtained.
Before turning to that subject, a word on compulsory savings. Mr. Keynes developed the notion of a program of “deferred spending” or “compulsory savings” by which the individual would be asked to set aside a given proportion of his income until some period after the war, at which time he would again be free to spend it. Keynes suggested that that was a far more palatable program than a tax program and for that reason a good deal more could be obtained by it than could be obtained in the form of taxes.
Our Congress has made a beginning in that direction in the last tax bill. In my judgment a large compulsory savings or deferred spending program would be extremely popular. It wouldn’t really make a serious dent in the aggregate consumption patterns of the community, because of course those consumption patterns are already determined by the volume of production and the Volume of goods which will be available for consumption.
I want to say a word now about the character of the tax program. During this session of the Congress, as you are undoubtedly aware, the Administration—and Mr. Henderson in particular—favored an increase in the excess profits taxes, the elimination of a large number of loopholes in our existing tax structure, an increase in the taxes of the middle income brackets, and a decrease in the exemptions, which was put through. Mr. Henderson opposed a sales tax. During the next year you are going to hear a good deal about a sales tax. The Office is opposed to it, and I want to stake out the reasons for that opposition.
A sales tax can be imposed at the retail level or prior to the retail level. If it is imposed at the retail level, the Treasury raises the objection that it is extremely difficult to collect. If there is to be a sales tax, they would prefer to have it levied at some stage prior to retail. The closer you get to the manufacturing level the easier it is for the Treasury to collect and the more unlikely it is that the tax will be assailed.
On the other hand, from our point of view if there is to be a sales tax we would prefer to have it at the retail level rather than prior to retail level for the reason, of course, that if it were imposed at the manufacturing stage we would have to reexamine and retab prices all up and down the line, or we would have to require absorption
of the tax, in which case it would not in fact be a sales tax but would be a tax on profits. I do not believe that it would be administratively feasible for the Office to reexamine each of the price schedules to adjust for a tax of this type imposed at the manufacturer’s level.
On the other hand if the tax were applied at the retail level, assuming the Treasury could be brought to accept it, the major question is whether in the light of that tax it would be possible to hold the line on the stabilization program generally. We have after a very difficult 5 or 6 months finally succeeded in getting the country to accept a stabilization program which includes not merely the stabilization of prices but the stabilization of wages and of salaries generally. It was possible to get acceptance of that stabilization program only upon the basis of the assurance that the cost of living had finally been stabilized and would be held firmly.
While it is true that a tax imposed at retail increases the cost of living it is not “inflationary” in the usual sense in which that term is used, since it involves a diversion of income to the Government. As a practical matter, however, in the light of the pressure for wage increases which we are still getting day after day, and m the light of the actual increase of wages which is being ordered by the War Labor Board day after day, there isn’t the slightest doubt m my own mind but that a sales tax would merely give rise to wage demands which in fact would have to be satisfied. We would simply have wound up with the whole structure of prices and of income increased in proportion.	' .
More important than that, the stabilization progfam as developed by the President rests upon an extremely important foundation— what the President has called “equality of sacrifice.” The point that has to be driven home is this: A sales tax is a tax on every dollar of consumption, whether it is the dollar of the domestic servant who earns $10 per week or the dollar of the middle income group that earns $3,000 to $25,000 per annum or the dollar of the millionaire. In time of war it just doesn’t seem to me to be realistic to expect that it is possible to impose a flat tax upon everyone irrespective of the capacity to pay that tax.
Let me conclude by reiterating what I pointed out earlier, that we cannot expect to get a tax program large enough to eliminate the inflationary gap altogether but that we can hope for a tax program large enough to give us assistance in doing the job of controlling prices and rationing scarce goods. Therefore, it would seem to me fair to say that the basic job of preventing inflation is a job which is in our hands.
3.	PRICE CONTROL AND RATIONING1
(i)	GENERAL PRINCIPLES
Paul M. O’Leary
Deputy Administrator in Charge of Rationing
I think we all recognize that rationing is a form of positive consumer control used where price fluctuations will not serve as a control and where mere exhortations, appeals, and voluntary cooperation are known not to be workable. It is, of course, obvious to every economist that where there are controlled prices and increasing demand, and at the same time supplies are relatively decreasing, consumption controlled solely by price would be controlled by chance, since those people possessed of leisure time would have the opportunity to get there first and get the goods before the exhaustion of the supply. In general, the consequences of having the distribution of relatively scarce commodities controlled by chance and by the possession of leisure time would be socially destructive and very dangerous to morale in times, of war. Gross inequities would result. Rationing is a positive kind of control that is intended to obviate the disadvantages of that kind of system.
It seems to me that we can distinguish between defensive and offensive rationing, if I may use those terms, and I think that to date in this country we have engaged principally in defensive rationing. The change to offensive rationing is one of the significant developments lying ahead of us. In other words, in this country we did not initiate a rationing program as a result of foresight and planning and careful attention to the necessity for it. In Germany, most of the rationing program was worked out years before the war started, and most of their forms were printed and stored in vaults as early as 1935 and 1936. They were completely prepared for a very extensive rationing program. To them it was an implement of war which they had prepared in advance, like other weapons.
Contrast that with the development of a rationing program in this country. We suddenly realized that we were going to have tremendous shortages of materials after Pearl Harbor, and our rationing program has grown step by step only as additional commodities have become scarce enough to require such action.
I want to distinguish, however, between that type and the other type, of which the sugar program is a good example. We must not make the mistake of assuming that rationing is a device resorted to only when some particular commodity becomes very scarce. It should not be thought of only as a system for parceling out to the people what is left of a very small supply. It must be considered as a
1 Delivered December 10, 1942.
32
positive means of control by which to insure fair distribution of a com-modify deliberately made scarce in order that existing resources may be used to produce something important to the war effort, or in order to make it possible to use shipping resources for important war purposes instead of maintaining a completely adequate supply of Cuban sugar or Brazilian coffee or Gulf coast oil.
If rationing is considered as a deliberate and positive plan formed in order that resources may be diverted to the production of war goods while a reasonably equitable distribution of the remaining supply of the curtailed commodity is maintained, then rationing is revealed as a positive, offensive weapon, which it has not previously been considered in this country.
Let me stress again that rationing was not really planned for in the United States, and OPA took it on as a kind of side-line. There was a shortage of tires; we had a national and a field organization that could handle a rationing system for them, and did. Then we got the same assignment for a great many other commodities, but we initiated such programs only when it was recognized, by even the most obtuse supply authority, that supplies were getting extremely short and that something had to be done about it.
Supply authorities in this country have been chronically over-optimistic. They have had a tendency to overestimate the expected supply and underestimate the requirements. They have, until quite recently, placed undue reliance on the use of the limitation order, which is a technique for controlling distribution when supplies begin to get short. They hoped that the dealers would parcel supplies out to the trade and distribute them equitably, and that the situation would level out after the limitation order had taken its effect.
That sort of device worked quite well in economizing on many of the metals and on many consumers’ durable goods. Production was curtailed; the amount of metals that went into such goods was limited, and no disastrous results followed. When, on the other hand, it was tried with a frequently-bought commodity—a consumer item like gasoline, for instance—it was a hopeless and flat failure, a very destructive failure, with which unfortunately the name of OPA was connected. This was. because OPA attempted to protect the public to some extent against the inequity of limitation order techniques in gasoline by printing the tickets that were supposed to give people some kind of claim to a certain amount of gasoline, in a state of affairs where the filling stations had an amount of gasoline that bore no relation to the tickets issued by OPA.
We have, I think, come to appreciate fully that the limitation order technique is not satisfactory. It must be replaced by some kind of positive program for distributing equitably among all persons the limited supplies—supplies deliberately limited in order to release resources from producing the commodity in question so that they could be used to produce implements of war. Such a positive program calls for the creation of a second monetary system. What we must do when we plan a rationing program is to devise a second monetary system which will function side by side with the real monetary system, and will require the use of a second kind of money to move goods through all the channels of trade. It is necessary to create a coupon or certificate or point monetary system to supplement regular money
before goods can move. This system must control closely the distribution of the coupon money to the populace in accordance with some set of equitable principles and within the limits of the available supply.
I am not going to discuss the different types of monetary systems used for rationing purposes—the permit to buy, the simple coupon giving a person the right to a certain quantity, the tailored coupon giving different persons different amounts of rights, or the point system, because Mr. Rowe will cover that. I do want to reiterate what I have said before: We are at a turning point in the rationing program insofar as the kind of rationing we do is concerned. Heretofore we have been concerned for the most part with commodities which became relatively very scarce because of war events. Rubber— you know the story there. Gasoline—you know the story there. Gasoline on the east coast—I think you know the story there. Interestingly enough, our first two major programs were two of our most difficult programs insofar as impact on the public is concerned. They were not necessarily the most difficult to design in OPA, but I doubt that there could have been programs with more impact on the consumer than some of the early ones—the tremendously deep cut in tires, cutting 80 percent of the people off from their right to get tires for a long period of time, and the 40- to 50-percent cut in gasoline. These programs really struck at the possibility of obtaining the things on which Americans rely to get around. Finally, there was the fuel oil program which, I will argue at great length, is probably the most difficult rationing program that any country ever undertook.
Those programs all involve deep cuts in peculiar commodities, and differential cuts. Some of the programs we face in the future will be less severe in their impact on people. They may not be so easy from our point of view. Most of the food programs will be very difficult to organize and devise, but we hope that they will be very well received. In most cases they will not impose cuts dangerously near to the nutrition level. They will, on the other hand, come as a great relief to those people who have had the most difficulty in getting supplies. In some cases there will be no great change in the amount of the commodity that Americans have gotten along with in at least some previous years.
As distinct from the transportation commodities/ our next programs are concerned with cost of living items, in which food and—we might as well face it—perhaps some apparel items, certainly will be involved. I do not speak with any certainty about apparel, but I know we shall try to be prepared to handle such a program if it has to be done. Apparel certificates may not have to be as extensive as food certificates. We will, however, be going into a new type of program in which the difficulty of working the program out is very great, but the impact on the people will not be nearly as great as has been the case in past programs.
It is very unfortunate that the order of events had to be this way, because I think that public relations got off to a bad start after the tire program, simply because of the nature of our first programs. The programs had to be severe, and they seemed to do things to people and not for people. The result was that rationing has unfortunately sometimes appeared to be a sort of depredation of the provisions that people feel they should have.
I should like to make just two additional points. First, in the programs that lie ahead there will have to be very extensive public education; also there will be people who will find the programs somewhat more difficult to understand and operate under for a while.
Second, it is unfortunate that we have not yet been able to develop any means of assuring people that along with their right to buy the commodities that are rationed, especially the foods, there will go any certainty that they will be able to buy them. It is unfortunate that for at least some sections of the population we may be able to give only the promise of rights, to issue coupons without, as yet, haying successfully arranged to assure every person that he will be able to exercise his coupons and get the goods to which he is entitled.
That, of course, is a matter of welfare. I thing that in rationing foods more attention needs to be paid not only to giving the people the right to buy food but to making sure everybody in time of war is able to use his ration coupon. That is something the Government must give a great deal more attention to than it has given heretofore in this country.
Mr. Rowe will discuss one particular program which will serve very well to bring out some of the economic and administrative problems involved in working out a rationing program. I want to close by expressing my envy of the Price Department because it operates under a clear, definite statute. You are fortunate to operate under your own statutory powers and not under powers which you are continually having to fight for.
(ii)	RATIONING OF MEAT
Harold B. Rowe
Director, Food Rationing Division
The first thing that anyone should recognize before he begins talking about the problems involved in developing a specific commodity rationing program is the set of conditions under which it has to develop— such circumstances as those mentioned in the previous talk: the overoptimism about supplies, and the lateness of the start. We have undertaken to do in a very short time jobs that our friends in Britain and our enemies in the Axis countries have taken several years to prepare for.
The commodity rationing program that would be most interesting to you, I believe, is that for meats. The meat scarcity appeared to develop with great rapidity; actually, it was in the making for some time.
We have a record production of meat in this country at the present time, but along with that, we have a record civilian demand for meat and, of course, extremely large meat requirements for our own armed forces and for Lease-Lend commitments.
In a situation of that type, it has been my experience that the producers and primary distributors of the commodity would very much prefer to keep their commodities flowing through accustomed channels—in other words, to civilian consumers. In the case of meats, producers and distributors were suddenly faced with a market in
which they had a large volume of products to sell and an extremely strong demand for the products. The result of this situation was that first the Army, then the Navy, and then Lend-Lease encountered difficulty in obtaining their requirements. The major packers were finally persuaded to offer a larger part of their supplies to the Government, which meant that deliveries were withdrawn from outlying areas. That withdrawal resulted in some unsatisfied demand in these areas, which was partially answered by the local packers who, after all, do have some advantage over central packers. They have an opportunity to buy livestock in the country somewhat more advantageously than do the operators on the central market.
That sort of continuous spiral developed until it reached the point where, whén the representatives of the Army and Lend-Lease came to ask for more meat from the Big Four, they were told it couldn’t be had. I happened to be in the office of one of the Big Four in Chicago on the day when Army representatives came in and asked for ‘¡more hams than that company had. Obviously, the meat supply problem had reached the impossible state. A review of the problem by the Food Requirements Committee took place and we suddenly realized that supplies in this country were 25 percent short of demand, despite the very large production. The meat problem then became one of procurement—of getting the supply to the Government. To this end, the restriction order, paralleling the limitation order used on other commodities by the War Production Board, was issued by the OPA. It restricted deliveries that could be made into civilian channels to a percentage of what they used last year. There was no other purpose in back of the order. There was no provision for distribution of products among the different parts of the country.
Naturally, the immediate effect of that order was a shortage, a Nation-wide shortage because the total quota available for distribution to civilians was far short of what civilians would have taken at these prices; second, the shortage was not at all uniform. Meats are nationally distributed. The distribution, like that of any other commodity, does not adjust itself immediately to changed situations within particular localities and, even if it might do so in normal times, it certainly would not do it under a price ceiling which imposed a rigid structure of prices. I could add up a very long list of problems arising from and illustrating this direct relationship between price control and rationing.
Let me mention just one point in this connection. We have introduced a rationing program that makes a supply of meat available in the community so that the consumers can obtain the ration allotment, providing they have the money to cover. There is in back of the rationing program a very comprehensive distribution program by which we insure that those meats will be there, but, at the present time, there is considerable distortion in the movements of meat. When we ship meat to Russia, for instance, we must not ship any more bone than we have to, because bone takes just as much shipping space as meat and is far less useful. So we are shipping canned meats and cured meats which, in the case of pork, means ham and bacon. Unfortunately hogs produce hams, bacon, and shoulders (which go into canned meat) in a rather uniform proportion to spare ribs, pigs’ feet, and the various other items. When those cured
products are taken out for Lend-Lease, it results in a different composition of the supply that is left.
Another factor is the freight rates over the Rocky Mountains, which make it profitable to ship only certain products to the Pacific Coast States. If 100 pounds go into a can it can be sent over for 88 cents; but if 100 pounds are sent in the form of bacon, it is $3.25. In the face of those circumstances and the acute shortage in Portland, Oreg., it would seem logical to send it over in cans, but the limitation of the use of tin almost lets that out. That is one of the very, very many problems involved in a distribution program.
Let me go on to rationing. We felt from the outset that it was highly desirable to introduce maximum flexibility into any system of food rationing in this country, particularly flexibility in the sense that consumers would be free to buy their ration allowance at any store. If we could sacrifice just that one thing and tie a consumer to a particular store, as Britain does on most of its products, including fresh meats, we could very greatly simplify the development of a rationing system. Actually, in many sections of the country, because of the added population and the lack of transportation at the present time, the necessity of getting meat is incidental to other tasks on a particular trip. It is, therefore, quite impossible to tie the consumer to a certain store.
I had dinner last night with the head of the British meat rationing system. Incidentally, we work very closely with the British on this program. It has been interesting to me that their advice to us has taken the form of what we should avoid. The head of their meat rationing program summed up in this way his experience in tying the customer to a particular retail store. He said that before the war a housewife would come into a shop and say, “Butcher,. I want so and so.” When rationing started and she registered with her favorite butcher, she would come in and say, “Butcher, have you got any bacon for me today?” or whatever she might have in mind. Very quickly, however, after the full significance of this registration had taken effect, she adopted what is now the standard question: “Butcher, what do you have for me today?” It is really quite an important point. It illustrates the reason for the insistence upon using the transferable coupon for poundage units, or for points as a basis.
Second, in order to impose such a system, there are really two requirements that are quite fundamental in making the thing work. One is you must issue the currency—the coupons which represent the power to buy:—among all consumers, avoiding duplication and so on. Everyone knows the difficulties of the task of registering the. consumers and distributing the books. The other is that back at the point of primary distribution you must tighten the control to the point where you can be reasonably sure all of the product flows into the distribution system, and that it will be delivered only in exchange for these points and coupons. The difficulty in doing this is in proportion to the number of primary distributors. In sugar it is easy. In meat it is extraordinarily difficult because meat is produced by a large number of small slaughterers, including some who operate on the edge of the woods. So the first problem is: How to get control of distribution at the primary stage.
The third special type of problem presented with a commodity such as meat is lack of uniformity. In the case of sugar, though some people think there is a preference between cane and beet, the commodity is basically uniform. But there is a very great difference as to the edible proportions in the various cuts and types of meat. Therefore, a ration allowance of so much poundage per person would not solve the ration problem. There are several possible solutions. The British have issued meat rations in terms of money. Value unit rationing of this sort does solve this one problem but it brings up a whole score of others, not the least of which is that the prevailing price before rationing, since it was the product of all the forces which went into the determination of price, is quite inappropriate. It is necessary for a ration system to direct the demand among the different types of the commodity. So the effective use of a value unit system would involve an overhaul of the structure of prices. It is less difficult to establish a new structure using new money representing points.
To sum up, our final decision was that the greatest probability of developing a really workable program lay in an adaptation of the point system. We are in effect issuing the consumer some “funny money” covering a new type of unit, namely, points; and we give each consumer a uniform amount of this money. Then we establish on each of the products to be covered by that particular rationing program, a system of prices in terms of these points. When the consumer buys, he not only pays in dollars and cents but also in the “funny money” of the point prices. By our ability to change those point prices to make the price of a pound of bacon, let us say, three times as high as the price on a fatback or on liver, we are able to do more than merely equate those amounts. We have in our hands a positive method of directing consumer demand toward whatever items we wish. Much of the demand will be directed to the spare ribs and pig’s feet because they are going to make up a large part of the supply.
(iii)	SOME THEORETICAL CONSIDERATIONS
Hans P. Neisser, Research Division
The problems which I will discuss are problems of administration: How to control supply, how to direct and supervise distribution, how to make sure that every consumer will get his ration, and that no bootlegging black markets will arise. Some of these problems are solved. You have heard from Mr. O’Learv and Mr. Bowe how to approach them, and how to solve them. Wliat, then, is left for the economic theorist ?
There are a number of excellent releases issued by OPA from which you certainly have learned what rationing means and what it does not mean. They point out that rationing does not imply reducing consumption to starvation levels. Let us first discuss this question more in detail. Rationing is not a consequence of absolute scarcity. It is a consequence of relative scarcity, where demand runs ahead of supply, at the level of prices which we consider appropriate. Rationing does not necessarily imply that there is a smaller supply for civilians than in peacetime, but only that consumers would like to buy more, at fair and equitable prices, than is available.
When demand exceeds supply, prices will rise until a sufficient number of consumers are excluded, partly or wholly from the market. If price control is imposed this may stifle the price increase, but it does not remove the fundamental discrepancy between supply and demand. At the controlled prices, people will still try to consume more than is currently produced; thus inventories are depleted; the retailer starts favoring some customers over others, and eventually price control may break down. Thus, rationing becomes necessary when the ordinary price fnechanism, which equalizes supply and demand, is put out of action.	.
This conclusion needs qualification; otherwise, why do we not need rationing in every field where we have price control? One reason is that demand does not increase to the same extent in all fields. If purchasing power in the hands of people is increased, they may buy more meat. They may also buy more clothing, but not more salt nor, under present circumstances, more bread. I he second reason is that people subject themselves to a kind of voluntary rationing in fields like durable goods. We still do not ration radios. We do not make any more. We leave the distribution of the stock in existence more or less to chance. We /trust that a lot of people who otherwise would have bought radids wil not buy them, not even at controlled prices. We trust that a lot of people who would like to buy radios will not, because they do not like the idea of running around to find radios. That leaves the distribution of the existing unsold radios to chance. In other words, we are convinced that it is enough to ration the necessities of life. In addition to that, we have introduced a kind of rationing which is not called rationing. As much as a year ago, rationing through allocation was being used— that is, assigning and allocating the restricted output of certain goods to the people who can prove that they have urgent need of them tor the-war effort.	e	.	. .
The administrative complications of price control and rationing have caused some economists to suggest a different way of handling the problems of a war economy. It has been maintained that, it we could take away by taxation and compulsory saving the surplus ot purchasing power created during wartime, we would need neither rationing nor price-fixing. Under pressure of taxation and compu -sory savings people would reduce their outlay to such an extent that demand would not be larger than supply at the old pre-emergency prices, which are considered as a kind of ideal standard. The error in this argument lies in the assumption that people always promptly adjust their consumption to their current income, so that we only have to reduce current income in .order to reduce expenditure. That is not true; otherwise the unemployed, who have no income at all, would quickly starve. In fact, consumption levels adjust themselves only slowly and sluggishly to change in income. This is particularly true for the middle and higher income brackets, which presumably would be subjected to the most Severe taxation. Consumers in these brackets can .maintain for one, two, or three years the level of their consumption by drawing on their capital reserves even if their income declines. Many of them will do that simply to keep up with the Jpnses, particularly if they feel that what they consume at the expense of their capital is accruing through their purchases of war 536932—43--------4
bonds. If we want, therefore, to reduce consumption quickly— average consumption—in the middle and higher incomes brackets, especially consumption of the type which indicates the social standing of the consumer, we need rationing. It is the only way to prevent excessive spending; it is the only way to keep inflation away. Rationing makes it easy to reduce this type of conspicuous consumption because everybody will have to forego it, and therefore nobody will be stigmatized as a pauper.
This is the fundamental difference between the present World War and the last World War on the one hand, and of the wars of the nineteenth century on the other. The nineteenth century wars were on a scale which allowed them to be conducted without an appreciable reduction of average consumption? indeed without any reduction of consumption in the middle and higher income brackets except in a besieged town. Thus, the costs of war could be covered by war loans and higher taxation. The present war is different. We have to reduce per capita consumption in many fields, not to the starvation level but below the level people like to maintain. Rationing is the only way to achieve this. In fact, if people spend less for meat, less for clothing, and less for gasqline because these items are rationed, they accumulate in this way the necessary cash funds to subscribe to more and more war loans. We achieve by the same means, reduction of consumption and financing the war in a sound fashion.
The second question I want to deal with briefly here is the size of the ration. We ration goods of which everybody should have some share, and allow for differentiation only with respect to age and may be in the future with respect to occupation. Here in the field of rationing proper one error must be avoided. The size of the ration is not primarily adjusted to the stock of goods available. People are too frequently inclined to doubt the necessity of rationing because stocks are ample, or inventories have increased. On the other hand, they sometimes think rationing impracticable if these stocks have dwindled too fast.
Fundamentally, we do not live on stocks but we live on current production or output. Stocks have a bolstering function. They permit the satisfaction of sudden temporary increases in demand; they give the consumers a choice between different kinds and qualities; they bridge the gap between the moment at which the commodity is produced and the moment at which it is available on the retailer’s shelves. But they are of little or no significance for the size of the ration. Ordinarily, the size of the ration will be determined by the current output available and the number of consumer units.
It would seem that we can obtain the size of the ration by dividing the current supply available in a region by the number of consumers. But here a curious problem arises. If we proceed in this way, retailers frequently will not be able to dispose of the whole supply at hand and stocks will increase. If we should establish, for example, the meat ration at 2 pounds we would find that a number of people would not have the dollar income to buy 2 pounds per week. . The figure we obtain for meat consumption in peacetime is an average—some people ate more, some people less. Now we prevent the former type, the people who ate more, from doing so. But rationing, by itself, does not enable the people who ate less to buy more than their former
portion. From this point of view, it is permissible to set the ration a little higher than average consumption is likely to be. In fact, the 2-pound meat ration, if everyone bought that much, would exceed average consumption of the 1939 level. But an excess of aggregate consumption over current output would not necessarily materialize unless a means, not yet in the powers of OPA, were devised to enable persons of the lowest income brackets to buy their full ration.
I come now to point rationing. As has been said, sugar is sugar, but a pound of meat of one cut is not equivalent to a pound of another cut. For such commodities as meat or clothing, the ration could be expressed in terms of dollar value. We could allow everybody to buy a dollar’s worth of meat per week or ten dollars’ worth of clothing per month or something like that. But this has one great disadvantage. Since everybody, whether rich or poor, could spend only the same amount, the purchasers of high-priced meats would receive a smaller quantity and in many cases less nutritional value. Hence, the prices of the better cuts would decline and, since everybody would try to buy the cheaper kind of meat, the ceiling on the cheaper grades would be very difficult to maintain. If the ceiling price for the cheaper grades were to be raised, then the number of people would be increased who for lack of means were not able to buy their ration in full. That is why the point system is preferred.
Every consumer gets the same number of points per week for meat but, instead of everybody trying to buy as many pounds of hamburger as he can get for the dollar ration, some people will buy a round steak, spending more dollars than the people who buy the nutritional equivalent in the form of hamburger. The different kinds of meat have, so to speak, two prices, a dollar price and a price in terms of points. The dollar price of a pound of hamburger.would still be lower than the dollar price for a pound of round steak, but the point prices would be closer together. This means that all the people who use their ration in frill will acquire about the same nutritional value in meat, but the well-to-do will pay a higher dollar amount for it than those in lower income brackets. This has not only the advantage that the different cuts of meat can be sold without a revolutionary change in dollar prices, but also the further advantage that people retain the choice between the different-cuts according to their tastes and according to their incomes. We can keep the dollar prices pretty constant at the traditional level in such a way that we cover the butchers’ and the producers’ costs and give them a fair profit and adjust the point prices according to the state-of supply and demand. If the supply of one kind of meat declines, either because less is produced or because more is diverted to Lend-Lease or to the military forces, we can easily induce people to buy less of this particular kind without imposing the penalty of higher dollar prices. We simply raise the point price of this kind of meat and reduce the point price of some type of which there is a more ample supply.
We can do the same if there is too little demand for a certain type of rationed goods. The British, for example, did not at first buy the American canned sausage which was imported under Lend-Lease, primarily because they had never eaten it before. One way to make them buy it would have been to reduce the sterling price of sausage, but that would have involved losses to the British Government. A
simpler way was to reduce the point price of this type of meat and to increase the point price of other types which were bought more freely. By this means, the whole supply of canned sausage was sold out immediately.
Under point rationing, therefore, different qualities of a commodity can be kept in production. If a higher quality is more expensive, a higher dollar price would be put on it but not necessarily a higher point price. However, it may be undesirable to continue the production of better qualities if these better qualities use up more resources than the lower ones and if the resources used up would preferably be used at other places for furthering the war effort. Thus in contrast to dollar-value rationing, point rationing seems to perpetuate the production of goods which better would not be produced in wartime. However the disadvantage is not serious.
First of all, there are many cases in which it is not possible to discontinue the production of the better qualities without also discontinuing that of the lower qualities, as in the case of meat. Second, if it is desirable and feasible to discontinue the production of better qualities and to divert resources to the war effort, this can most simply be achieved by direct limitation, allocation orders, and other measures of the War Production Board. Such direct control is much more reliable than the indirect control through dollar-value rationing, because we, after all, do not know exactly how far the prices of the better qualities would decline under dollar-value rationing and how production would respond to such a decline. On the other hand, if the supply of such better qualities is reduced by direct measures, under the point-rationing system we would simply raise their point price and in this way equalize demand and supply again.
It has been suggested that, as a system of point pricing is extended more and more to other groups of goods, it will be used eventually for what has been called general expenditure rationing, limiting the amount of dollars every consumer would be allowed to spend. However, there is not the .slightest intention of establishing so rigorous a limitation and, therefore, I think I am excused from discussing in detail what is largely still an academic question.
in. GENERAL PRINCIPLES OF PRICE CONTROL
1.	GENERAL PRINCIPLES OF PRICE CONTROL1
J. Kenneth Galbraith
Deputy Administrator in Charge of Price
We have had nearly 2 years’ experience with price control. I have had some opportunity to reflect on that experience, and I believe it is possible to point out certain over-all considerations which should help us in the way we approach the job ahead, and should give us something in the way of a framework to help us understand the job we are doing. I have deliberately made my talk this afternoon general rather than particular. I have tried, in working over the material, to uncover some generally dependable principles underlying our operations. As a first step, it seems important to recognize that the period of price control in the United States has involved definite stages; that is, the essential nature of the problem has changed and the reasons for controlling prices have changed.
I think it is possible with some degree of accuracy to identify three stages in the operations of price control, and I have given names to these stages. We have come through a period which we might term preinflation price control—a period of price control before it could be said there was a genuine problem of inflation. We are going through at the present time a period of what might be termed pure inflation control—a period when we are controlling prices in a situation which is purely inflationary. I think we face, some time in the not too distant future, a modified form of the present situation which we might term the black-market-control period. These three periods, which I shall call preinflation control, pure inflation control, and black-market control, provide general headings for a further examination of the problem.
The problem of preinflation control is the problem of our price operations up to about a year or eleven months ago. The problem then was one of controlling prices in a period when the supply of purchasing power—the supply of money available for expenditure in the hands of consumers, including the Government—was in approximate balance with the supply of goods. That balance was maintained partly because of the increase in the supply of consumers’ goods. There was no tremendous excess of consumers’ expenditure over supplies. But, because of the distortions which characterize a wartime or defense-time economy as compared with a peacetime economy, the demand, even before a year ago, had increasingly been finding its way into channels other than those of regular consumer use.
* Delivered December 15, 1942.
While demand and supply, generally speaking, were not badly out of balance, demand for the particular commodities necessary for military requirements was badly out of balance with the supply of those commodities ; in other words, while there was no over-all shortage of goods, there had developed marked shortages of steel, nonferrous metals, hides, certain classes of textiles much needed for the Army, etc. That sort of situation I think is ideal for price control. The job, under those circumstances, is really not a difficult one, at least not in retrospect.
The problem of price control in that situation is one of controlling the areas of excessive demand and of sitting quietly by and watching the rest. Actually, price control in the grave shortage areas like steel and copper afforded a quick, effective instrument which Could be used in advance of rigorous application of the priorities arid allocations power and rigorous curtailment of competing consumer uses. In general, it has been the experience of the United States in mobilizing for war that direct measures, like priorities and rationing, are administratively difficult to establish, and price control oh copper, Osteel, etc., was an effective short-run expedient during a périôd when we were marking time, waiting for the allocations power and restriction of consumer uses to take material out of the markets to the point where it would not be worth while raising prices.
But a price control agency is even more than that, under those circumstances. It has its eye on production, to be sure, but it also has its eye on the question of economy—looking at the demands to see whether they are justified and the supply adequate. I hatf& often said that the OP A function during that period was not iiiflation control. Primarily it was an agency to keep the war as cheap as possible. Our actions had relatively little to do with the general over-all job of preventing increases in the cost of living, because what was keeping down the cost of living was the fact that the supply of goods was in approximate balance with demand. Both jobs of course still remain with us.
It was during the period when keeping down the cost of the war was our sole job that we learned most of the lessons we subsequently made use. of. I suppose the most important lesson that we learned during that period and made subsequent use of was the theorem : It is easiest to control what is already controlled,. It is comparatively easy to control prices in areas of quasi-monopoly. We learned that in commodities like steel, copper, and aluminum, where there is extensive control by industry itself and there are relatively few units, the technical problem of price control is relatively easy.
In contrast to that is the problem which one encounters in those same industries with respect to secondary metals, where the market is highly competitive. When I first joined OPA nearly 2 years ago our entire staff was working on nonferrous metals^ . If has certainly been our experience since then that price control is simplest where we have the fewest concerns and where the greatest degree of market control already exists. It ^rows more complex as the number of firms increases. The same principles hold as far as allocations and priorities administration is concerned.
That raises an interesting problem. Under those circumstances, " why isn’t it desirable to do a little remaking? Why isn’t it desirable
to effect some measure of concentration of control, either by working through trade associations or, as the Germans did in the World War,, by still more direct measures such as forcing consolidation and eliminating some of the competition which is so troublesome? That, I suppose, has been one of the most difficult policy questions always confronting the OPA. It has been under the table in almost every conference I have attended. I think our policy on that has been clear. It has been essentially a policy of attempting to maintain the same structure of. competition that we found—of not altering through price control the structure of competition.
I think I state the matter correctly when I say the Administrator would insist on the point with considerable vehemence. Obviously, however, we have complicated our job in taking that position, just as the War Production Board, which has taken a similar position, has undoubtedly complicated its job. I think it is an interesting point for speculation.
Have we complicated the job sufficiently to threaten effective war mobilization on the one hand and effective price control on the other? Could we have been guilty of looking too much beyond the war to the postwar ? Or am I right in asserting that while monopolies are easy to deal with in a formalistic sense, a lack of productivity characterizes their operations which makes encouragement of monopoly a short-run instrument indeed. After I have finished these few remarks, this is one point to which I would like to return. I would like to have your views on this.
My own judgment is that while we have perhaps complicated our job somewhat, we have on the whole achieved a reasonably good compromise and that perhaps it has made little difference when we consider the relatively small amount of concentration that could have been effected in the short-run period of the war. Of course there is also the consideration that, to some extent, concentration organizes opposition-opposition which may not always be in strict accordance with the objective of effective prosecution of the war. However, I want to go on with my main theme.
It seems to me that some 11 months ago, we passed out of the pre-inflatiori stage which I have been describing into the early stages of pure inflation—into the stage when purchasing power in general was sufficiently outrunning the supply of goods so as to shift the balance of the market. This is a very important point—to shift the balance in the market sufficiently to the side of the seller so that effective restraints on the marking up of prices were removed.
The price increases that we had a year ago last January, February, and March were certainly of that character. They reflected a shift in the balance of demand and supply to the point where there were no longer any effective restraints, against the almost unlimited price increases. There were a few cases where this was not true, but the progressive spiral had clearly taken effect; and henceforth I expect for the duration of the war, the OPA is in a position of controlling prices where purchasing power is clearly outrunning the supply of goods. In other words, when we issued the General Maximum Price Regulation in April of this year we were arriving at the situation of attempting to hold the line with price control while the underlying supply and demand was such that the equilibrium price was substantially above the price being set.
We have made the important discovery, however, that this situation, because of the enormous stocks which a country like the United States carries at any given time, comes by stages. The effect of our price controls was not to create immediate shortages but to create an accelerated liquidation of goods rather than the higher prices which would have occurred in the absence of the General Maximum Price Regulation.
Through most of the summer, shortages had not appeared except in a very few commodities. The decision that we made when we put on the General Max, and the decision which still holds, is to accept that accelerated liquidation of inventory, except to the extent it is restrained by rationing, and to accept shortages, as the alternative to higher prices. We must think through what that means and not dismiss it in terms of some blanket phrase like “prevent inflation.”
We made a decision to present the effect of the war on the civilian in the form of goods that he could not buy instead of goods that were too expensive for him to buy. That is the decision implicit in what I term “pure” inflation control. It is a decision to bring home to every individual—to you and me and to the man in the street—the effect of the war in terms of the nonexistence of goods, or alternatively, in the form of rationed goods, rather than in the form of goods that are out of his reach. A great many economists here and elsewhere have deplored a step of that sort as naive. I think it was actually an extremely sound step.
When a man cannot buy goods or when he gets them on a ration coupon, he is forced to see the problem of wartime mobilization— the gouging of war requirements out of civilian economy—in exactly the form in which it should be presented. If he is a worker faced with ration coupons or with empty shelves, he can see directly that the goods he is not getting are going to the war machine. He can see directly also the consequences of too much income available to buy a restricted quantity of goods. If that is presented to him in the form of higher prices and in the form of stores well stocked with goods at prices which he cannot pay, he will do something about it, or try to. He will try to get his own income up to the point where he can do something about it.
This brings into the market the additional purchasing power, the additionakspending, which starts the process going still further. So I want to come down hard—and I hope you will all join me in the future—on the notion that there is something naive about reliance on price control as an anti-inflation device. I believe that price control is the core of anti-inflation. The decision that there should not be inflation in the United States, that the impact of the war would make itself felt through rationing and through shortages and through control of the other elements of cost, was made by the OPA when it issued the General Maximum Price Regulation. I think it is a decision which as an agency we can be very proud of. It is important in this stage of pure inflation control, however, that we have the support of the other measures which will keep the inflationary gap from widening into a chasm.
Let’s not fool ourselves. We are going to have the inflationary gap with us, right through to the end of the war. It becomes equally important, however, to recognize that it must be kept within managea-
ble limits. The more unmanageable it is, the more quickly we come into what I believe to be the stage now threatening, the stage of black market control. Since March, price control has not had to deal with the absolute absence of goods, but with the accelerated liquidation of stocks. In the stage ahead, however, there will be an increasing number of areas where goods will simply not be available. For many items, perhaps the most perishable, that means that the commodity is no longer available at the fixed price. The supply disappears and that is the end of it. There are many other commodities, however, for which there is a larger or smaller demand on the part of the consumer. When we get to the point where, for any given commodity, the customer has no alternate legitimate source, we find that, as in prohibition days, there is only one source to turn to—the bootlegging vendors. Then we have entered into the stage of what may be called black market control.
We have already encountered it in a number of cases. A typical situation is that existing with regard to nylon hose. We are entering a period when there will be many more such situations. Here, to some extent, the problem of price control passes out of the hands of the Price Department and into the hands of the Rationing Department.
Our weapons as price-makers are in many ways limited. We can have, and we must have, definite, clear-cut, and easily enforceable regulations; we can have, and we undoubtedly must have, satisfactory enforcement measures. Even if we have all these, however, a consumer who has no butter and knows a store where she can get it for 10 cents over the legal price, will go and get it unless she has the alternative of another store selling at the legal price. That is the situation which destroyed Hammurabi and undermined Diocletian. If it develops in full flower, it will have a very bad effect on all the rest of us. We won’t be any better off than Hammurabi. The important thing is that we be ready to.meet this third stage when it creeps up on us.
The first requirement is an effective general rationing system. In many areas where demand has liquidated stocks and where there is a really urgent desire on the part of the consumers for the products, we cannot hope to hold the line by price control. No part of OPA is more aggressive than the Price Department in urging and aiding the very difficult job of rationing. Our reputation, our future, as well as that of the Rationing Department, depends on rationing. I need not repeat what has already been said about the companion importance of fiscal measures, measures which in a sense keep the inflationary gap within bounds; but there aré some other things which need to be doné in this new and extremely difficult period, when we have not only producers on the side of higher prices but have some defection in the ranks of consumers.
Perhaps most important after rationing is standardization, or rather, production control, which is more than standardization. Let me illustrate the point. At present our situation is very favorable as far as apparel is concerned. We are in the greatest cotton-producing country in the world, and supplies of wool, which have been the by-product of our campaigns in the South Pacific, leave us with a very favorable stock position. That position, however, could be made infinitely more favorable if, instead of dispersing the stock over a large variety of fabrics, designs and styles, many of them wasteful,
we should concentrate our available production, capacity, and manpower into the greatest possible production of a limited number of utility garments. That would result in getting a great deal more out of what we have and, incidentally, getting it in standardized form so that it could be ticketed and priced. We could then really give the consumer an assurance of just what he is getting plus the assurance that his Government is doing everything that circumstances permit to get the most out of the supply available. Next to rationing, I should say that the increasing supply which would come from large-scale standardization would accomplish much to brush away a lot of nonsense about business as usual. That is the second major requisite for price control as we move into the black market stage.
My third point comes closer to home and is perhaps somewhat less important. If I were levying a charge against the OPA more serious than any other, it would be that we have as an organization relied excessively on price control. I have just pointed out how important are standardization, simplification, and production of utility commodities. There are a great many other fields Where we have not fully explored the alternatives to simple pricing. I sometimes wonder if we have become an agency devoted simply to the grinding out of price schedules, and have lost sight of some very important alternative possibilities.
Other countries, for instance, have found extensive possibilities in pooling devices of one sort or another. We have not. I have never had a suggestion from any of the branches—which are closer to the problem than I am—as to the possibility of doing something of that sort. I have never had a request to tackle the Antitrust Division of the Department of Justice on any such proposal. Out in the Northwest we have this sort of situation with regard to solid fuels in Seattle: The Washington mines are unloading coal there at about $6.00 a ton, and selling to retailers who have a price ceiling of around $6.50 or $7.00. But the nearby supply is not sufficient to meet the needs of a greatly increased population, and coal is being brought into Seattle from Oklahoma and Iowa, and even to some extent from Illinois. That coal is coming in at around $15.00 a ton and is being sold by dealers at $15.50. The two qualities of coal are the same. We have a price ceiling on both. Now, does anyone in this room suppose that those dealers keep those coals separate and sell John Jones a ton at $15.00 and John Smith a ton at $7.00? And if they do, how do they decide between John Jones and John Smith? We have a price schedule in effect and probably we have some inspectors looking into the situation. Is that the only weapon we have? The Solid Fuels Price Branch has certainly been looking for some other method of handling the situation. Is it possible, for instance, to get those dealers together into a pool and have them equalize the cost of shipping that coal? Could we implement the buying and selling powers of the Emergency Price Control Act, if necessary, and pool the cost of that higher-priced coal and sell it all for $9.00 or $8.25? I think we could. I think that we should be aggressively looking for techniques of that sort which would clearly be improvements over price ceilings alone.
Oiie other thing we need ill the difficult period ahead is much more effective control at retail levels than we have now. My second criticism
of OPA is that we have as an organization sometimes shown a tendency to look at the problems of a commodity too much in terms of rhe commodity in general and too little in terms of business in that commodity at a given level. We may in some instances have carried our commodity controls through to the retail level where they may not fit. I have in mind certain food problems at the retail level.
The effects of increasing cost on essential food commodities in general forced us during the summer to make adjustments. During the early autumn our position had been sufficiently weakened so that we had to generalize the adjustments. We had a new series of regulations under Temporary Maximum Price Regulation No. 22 following the amended Price Control Act, October 3d. A number of those had to be repriced quickly, with the result that we came out with an accumulation of regulations affecting the little store operator. I will not undertake to defend the role of the OPA in the circumstances that produced them. The situation is much less serious in other fields, but we have in the near future to address ourselves much more aggressively to getting a structure of regulations for the business unit in commerce and distribution trades and in wholesale and retail outlets that is as good in its own way as the regulations which apply to the steel mills or to the pork packers. Unless we do that, I very much fear that, as the pressure on our regulations increases, we will have not only increasing irritation on the part of those being regulated but also increasing difficulty oh our own part in enforcement.
2.	SOME GENERAL PRINCIPLES OF PRICE CONTROL1
Donald H. Wallace
Director, Industrial Manufacturing Price Division
Joseph D. Coppock
Price Executive, Chemical and Drugs Price Branch
Everything that has been said on the subject and everything that goes on in our day-to-day work in the Office of Price Administration make it abundantly clear that the task of effective war price administration is an enormous and a highly difficult one. For this task of price administration or control we must set up general principles to use as guides, as criteria. These principles must be sound; and they must be as definite as we can make them. “General principles” do not mean anything esoteric or mysterious. They are plain: common-sense rules, which spring from our thinking about and experience with concrete problems, and which implement the objectives of war price administration.
First, in the light of the war price situation, we must identify these objectives. Second, we must look at the Emergency Price Control Act to gauge the adequacy of the legislative basis on which we do our job. We will then be ready to indicate what seem to be the general operating principles of price control.
I
War price administration has four broad objectives:
1.	To prevent an inequitable distribution of the war burden ;
2.	To prevent unnecessary increases in the cost of the war;
3.	To minimize postwar maladjustments in price relations; and . 4. To prevent the dislocation of the war programs for production, procurement, allocation; and, positively, to facilitate the effective use of the direct controls over materials, equipment, and manpower.
The order in which these objectives are stated does not imply that any one is more important than any other. It should be noted furthermore, that the Office of Price Administration cannot accomplish these ends unaided. In particular, price control must be accompanied by wage controls and by vigorous fiscal measures.
The first of our objectives is to prevent the inequitable distribution of the war burden. Scarcely anything is more damaging to morale, and hence to war production, than the reaping of windfall profits by
1 Delivered December 17, 1942, by Mr. Wallace ; subsequently edited and revised for this Manual by Mr. Wallace and Mr. Coppock.
the few, while the many shoulder more than their fair share of the war burden. It is perfectly clear, both from analysis and on the basis of past experience, that in a war inflation, different prices and different incomes rise at very different rates. The effect is an unjust redistribution of the real income of the community. Groups with fixed incomes and groups with little bargaining strength—in general, poor people and small businesses—suffer the most. ■ Only by keeping prices and incomes relatively stable can we prevent inequities in the sharing of the war burden.
Our second objective is to prevent unnecessary increases in the cost of the war. Since it is almost impossible to finance a major war without considerable public borrowing, it follows that the larger the cost of the war, the larger the public debt. In practice, then, Our second objective is simply keeping down the Government debt by keeping down the prices of things the Government buys.
The third objective is to minimize post-war maladjustments. In general, the greater the dislocation in price relations and in priceincome relations during the war, the more serious will be the economic problems which will have to be handled by business and Government in the postwar period. To the extent that we can minimize the dislocation of normal peacetime price relations and price-income relations, to that extent can we make easier the postwar readjustment to an orderly society with high productivity and fair distribution.
The fourth objective—and this one we want to treat in more detail— is to prevent the dislocation of the war programs for procurement, production, allocation, and related operations; and, positively, to facilitate the effective operation of the direct controls over the uses of materials, equipment, and manpower.
We are all accustomed to thinking of price as the prime directing force of the peacetime economy. Price increases stimulate the production of those commodities and services which buyers, whether final or intermediate consumers, most want. Prices and output go down for goods which are of declining significance to buyers. These changes—modified, to be sure, by the many imperfections of the mar-¡ket—are gradual, but they are insistent. Price is a major force in accomplishing the allocation of human and material economic resources among competing uses.
But the price mechanism is slow, ponderous, and uneven in its operation. It would be foolhardy to rely entirely, or even mainly, on price to guide production and distribution in a war economy. A war economy requires swift, drastic, and precise shifts in the quantities of manpower, materials, and equipment made available to particular industries; these allocations must be continually revised and adjusted if production is to keep up with changing military needs.
Furthermore, under conditions of full employment and deficit financing, if. we tried to encourage increased production or a change in the distribution pattern by increasing prices wherever a larger supply was needed, the only result would be a whirlwind inflation ; we would have to raise the prices of practically all goods and services unendingly.. Hence we must be extremely cautious in using price to encourage changes in output. There are, however, certain situations where price can be used successfully, if used carefully and in
conjunction with other controls. We shall discuss these situations presently.
Incidentally, if direct controls could do the whole job of determining the uses of manpower, equipment, and materials—in military fashion—we would not have to concern ourselves with our fourth objective of war price administration. But regardless of the appealing simplicity of the direct-control approach, the American economy is not organized on a military basis; our frozen price-wage structure is a potent force in keeping men, materials, and equipment in the present pattern of uses, and a drag on the rapid and exact transfers of these resources from use to use. As demands and costs shift— which they will-—we must adjust prices here and there, even though we rely primarily upon direct controls to achieve the proper disposition of resources.
We should like to take up now the more specific implications of this objective of contributing to the effectiveness of the procurement, production, and allocation programs.
As noted earlier, inflation does not bring equal proportionate increases in prices and incomes throughout the whole economy. It produces great uncertainties, which gravely hamper the planning of production and the efficient utilization of materials, land, equipment, and manpower. It demoralizes workers, investors, management. Price instability can seriously disrupt the Nation’s vital production and procurement programs. The direct controls themselves—limitation orders, allocation orders, etc.—will not be effective if prices and incomes fluctuate wildly. In order to prevent the disruption or impairment of these programs and of the direct controls over the use of materials, manpower, and equipment, prices must be as neutral as possible with respect to these programs.
By “neutral” we mean that the relations between prices of different commodities and between prices of different kinds and grades of the same commodity should be such that it is not, in the main, more profitable to produce more of the things that are less needed in the war economy, and less of the things that are more needed.
The use of direct controls, after all, involves saying to producers, “You shall produce this, not that,” and to workers, “Work here, not there.” These directives cannot be effective if compliance with them requires producers to shift from higher-profit to., distinctly lower-profit production, or if compliance requires workers to transfer from higher-wage to significantly lower-wage jobs. Along with other Government agencies, the Office of Price Administration must help to see that price differentials do not pull against the pattern of production and distribution envisaged by our wartime controls. Price control must play its part, along with conservation and limitation orders and related devices, in keeping less important users of resources from out-bidding more important users. To the extent that price administration can be thus neutral, the direct controls over materials, equipment, and manpower will work with greater effectiveness.
But price administration cannot possibly take the place of direct controls. While price may sometimes extend a beckoning hand to suppliers, we must rely on direct controls to induce production of just the right amounts of just the right things at just the. right time.
The point can be illustrated by reference to pulpwood, the output of which threatened recently to decline. The War Production Board certified to the need for pulpwood. Some members of the paper industry suggested to OP A that we permit an increase in the prices of the firms that cut the pulpwood in order to hold labor in the woods and perhaps lure back some of that labor which had moved into other pursuits. Now if we did this on our own initiative, we might seriously interfere with the planned use of manpower. It is the job of the War Manpower Commission to decide where the Nation’s manpower should be used and to superintend, in a general way, the movement of the country’s working force from one occupation to another. Hence we must be careful in fixing maximum prices not to fix them in such a way that through indirect repercussions on wages they do in effect shift labor inappropriately. We don’t know, we can’t know, we haven’t time to know, and it is not our job to know where labor should be used. If we change prices in order to change wages and production, we should do it only as a part of an integrated program worked out together with the War Production Board, the War Manpower Commission, and the War Labor Board.
At times, within a framework of generally stable prices, the prices of some commodities can properly be raised in order to assist in bringing about production of thè full needed output, where the existing maximum price is an actual barrier to needed output. Prices have not been lowered deliberately to discourage production, although we have refused to grant increases where the responsible Government supply agencies have assured us of the unessentiality of the output in question. Moreover, the prices of different grades or forms of a given commodity should in some cases be so related to each other as to encourage larger output of some grades or forms and smaller output of others—in other words, to encourage output in the proportions needed for the war program. About a year ago we overhauled the scrap aluminum and secondary aluminum schedule and readjusted the differentials between different types of scrap and different types of alloyed aluminum. The effect of the readjustment was to encourage a bit the production of types which were important to the war program, and to discourage a bit the production of types which were not so important.
However, the use of price to encourage larger production or better distribution requires the greatest of care. There is a real danger that if price differentials as between different commodities, or as between different grades or types of a commodity, are too great, the effect will be unnecessary inflation, and disruption rather than advancement of the war program.
One more point on this fourth objective. Before we entered the war, and in the earlier stages of the defense program when there were many industries with excess capacity and many people unemployed, OPA and its predecessor agencies often took the lead in initiating programs for expansion of the supply of various commodities. We endeavored to get expansion of supply of most of the basic materials and of some manufactures. Even as price control measures, these efforts were entirely proper; when there were no important rival uses for resources, increased supply was one of the very best devices to prevent inflation. Now, however, and for some time past, shortages
of equipment, materials, and labor have made the situation very different in most areas of the economy. OPA no longer initiates actions looking toward increases in supply. Shortage problems—the problems of allocation of manpower, materials, and equipment to get production in the right proportions—are now handled by the Government authorities having specific responsibility for those matters.
II
Now let us turn to the Emergency Price Control Act of 1942 and see whether the purposes set forth there measure up satisfactorily to the objectives just discussed and whether the powers granted by the act are adequate to the task of attaining these objectives. The main purposes of the Act are :
* * * to stabilize prices and to prevent speculative, unwarranted, and abnormal increases in prices and rents; to eliminate and prevent profiteering, hoarding, manipulation, speculation, and other disruptive practices resulting from abnormal market conditions or scarcities caused by or contributing to the national emergency ; to assure that defense appropriations are not dissipated by excessive prices ; to protect persons with relatively fixed and limited incomes, consumers, wage earners, investors, and persons dependent on life insurance, annuities, and pensions, from undue impairment to their standard of living; to prevent hardships to persons engaged in business, to schools, universities, and other institutions, and to the Federal, State, and local governments which would result from abnormal increases in prices ; to assist in securing adequate production of commodities and facilities ; to prevent a post emergency collapse of values; * * *
Most of these provisions are concerned with preventing an inequitable distribution of the war burden. Prevention of unnecessary increases in the cost of the war is covered by the injunction “♦ * * that defense appropriations are not fto be] dissipated by excessive prices.” Minimization of post-war maladjustments in price relations is covered explicitly; so is the fourth of our objectives, “* * * to assist in securing adequate production of commodities and facilities.” Clearly, then, the stated purposes of the Emergency Price Control Act are broad enough to include our four major objectives of war price administration.
The principal powers granted by the Act are as follows :
Whenever in the judgment of the Price Administrator * * * the price or prices of a commodity or commodities have risen or threaten to rise to an extent or in a manner inconsistent with the purposes of this Act, he may by regulation or order establish such maximum price or maximum prices as in his judgment will be generally fair and equitable and will effectuate the purposes of this act. So far as practicable, in establishing any maximum price, the Administrator shall ascertain and give due consideration to the prices prevailing between October 1 and October 15, 1941 (or if, in the case of any commodity, there are no prevailing prices between such dates, or the prevailing prices between such dates are not generally representative because of abnormal or seasonal market conditions or other cause, then to the prices prevailing during the nearest 2-week period in which, in the judgment of the Administrator, the prices for such commodity are generally representative), for the commodity or commodities included under such regulation or order, and shall make adjustments for such relevant factors as he may determine and deem to be of general applicability, including the following: Speculative fluctuations, general increases or decreases in costs of production, distribution, and transportation, and general increases or decreases in profits earned by sellers of the commodity or .commodities, during and subsequent to the year ended October 1, 1941.	v
The amendment of October 2, 1942 (the “Second Price Control Act”) states that “the President is authorized and directed, on or before November 1, 1942, to issue a general order stabilizing prices, wages, and salaries, affecting the cost of living ; and, except as otherwise provided for in t’his act, such stabilization shall so far as practicable be on the basis of prices which existed on September 15, 1942.”
The Price Control Act (as amended) provides special treatment for agricultural commodities, but in general it grants the Price Administrator broad powers. The Executive Orders of October 3, 1942, and April 8,1943, spell out further directions.
Price actions must measure up to certain statutory standards, Maximum prices must be such as “will be generally fair and equitable and will effectuate the purposes of this Act.” “Generally fair and equitable” means that particular groups of people must not be singled out for favored or discriminatory treatment. This'test necessarily runs mainly in terms of profits, insofar as fairness to sellers is concerned. In essence it is a question of what constitutes fair profits. •One criterion which is often put forward is the familiar notion of a fair return on a fair value of the investment or the property used in production. As a practical matter we could not fix any prices during the war if we had to use this criterion ; the task of determining “fair value” and of defining “fair return” is too difficult and too long.
Another suggested criterion is a flat percentage return—the same for all industries—on sales, or a flat percentage return on book investment. Variations in turnover, among other things, rule out the use of a standard profits-to-sales ratio, and the varying accounting practices of business enterprises make doubtful the existence of any normal or typical percent return on book investment.
The criterion which seems to fit best the objectives of war price administration and which can be used with most facility is the criterion of aggregate profits (before income and excess-profits taxes) in a base period, adjusted for changes in investment. We start with the general proposition that, under the Act, prices should be no higher than necessary for general fairness and equity to sellers. If, under our price ceilings, sellers of a commodity, as a group, earn profits which are no less than the profits they earned in peacetime, in most cases it would seem that these prices are generally fair and equitable. Use of a fair prewar base period provides the best available approximation of the profits which these firms would have earned in the absence of war influences ; it is plain that we are not required to let war influences raise their profits appreciably above what they would earn in peacetime. That would be clearly inconsistent with most of our objectives.
Prices must be fair not only to sellers but also to buyers. First, • they should be as low as possible consistent with the other criteria; otherwise, they are not fair to buyers. Second, some tests of quality maintenance must be used. Inflation occurs, even though prices are held down, if quality is at the same time depreciated.
The first three objectives of price control (as set forth above) will ordinarily be met if regulations arc generally fair and equitable to sellers and buyers. The fourth objective, to facilitate needed production, may in some instances require price arrangements which go beyond the standard of general fairness and equity.
m
Discussion of standards merges easily into a discussion of some general principles of price control. We believe there are three such principles :
1.	Whenever a price has risen or threatens to rise in a manner inconsistent with the objectives of war price administration, a maximum price should be set on the commodity in question.
2.	A maximum price should be increased only when necessary to make it generally fair and equitable and/or to effectuate more satisfactorily the purposes of war price administration, especially to facilitate production and allocation programs.
3.	A maximum price should be reduced whenever necessary to make it generally fair and equitable and/or to effectuate more satisfactorily the purposes of the war price administration—to keep down the cost of the war, to keep down the cost of living, or to relieve the inequitable incidence of price and cost changes.
These statements are rather formal, but some explanation will make clear their significance.
The first of them sets forth, in effect, the simple thesis that price e.p.ilings should be established wherever inflationary forces exist or threaten to develop. Such ceilings may, in various instances, be established at, above, or below current price levels. The circumstances which justify a price increase or which make necessary a price reduction are discussed below.
The simplest way to set a maximum price is to freeze it as of a given date and hold it there as long as you can. As early as the fall of 1940 we were catching and holding the prices of some of the basic metals and other materials. In the ensuing months, we had to proceed similarly in other areas in the economy. The General Maximum Price Regulation, freezing prices as of March 1942, involved the use of this method on a grand scale. The temporary regulations on food and farm products, issued shortly after the Act of October 2, 1942, became effective, represent another example of this method.
Now this sort of price control is really only a stopgap. This is true whether the instrument used is some kind of informal agreement, as was common in the early part of the period, a base-date freeze, a temporary regulation, or whatnot. There is no reason to suppose that the prices which we catch at a given point and hold there are the prices which would best achieve the objectivés of price control. It is obvious enough that frozen prices must be continually reexamined and reappraised to see whether they are, in fact, the prices which best promote the objectives of the Act.
As you know, it has been settled OPA policy to issue separate maximum price regulations for important individual commodities or groups of commodities. Careful appraisal of price control in a particular commoditv area is inevitably involved when the General Maximum Price Regulation is replaced by a specific maximum price regulation, and whenever a specific regulation is revised. Not only are such specific regulations more enforceable than regulations of the general-freeze type, but they are ordinarily more closely in line with the requirements and objectives of the Act. It is of the utmost im
portance that we extend as rapidly as possible the areas of the economy subject to specific regulation.
A specific price regulation may, in some cases, simply set forth a uniform ceiling, applicable to all buyers and sellers of a particular commodity, regardless of variations in transportation services, size of package, type of containers, size of order, credit arrangements, use of commodity, “type” of buyer, “type” of seller, cost of production, etc. Some commodities are sold at uniform prices, regardless of these variations. Many more commodities, however, are sold according to price schedules which take into account one or more of these factors. The techniques of differential pricing, particularly as they bear on differential costs of production, are integral to equitable and effective price control.2
The Office of Price Administration now has premium prices for copper, lead, and zinc at so many cents per pound above the respective ceiling prices. Each producer of any of these metals is assigned a production quota, for which he gets the regular ceiling price. For all production over and above his quota he receives the premium price.
Another example of differential pricing is the schedule on West Coast logs, under which a producer who works more than 48 hours a week is permitted to add a certain amount to the maximum price. There are different brackets, depending on the length of the workweek above 48 hours.
Still another example is ethyl alcohol. A general amendment to this regulation provides that key plants which are converted to the production of ethyl alcohol may charge a price based on the sum, per gallon, of certain costs, plus a flat profit per gallon. The Defense Supplies Corporation buys all of the alcohol so produced and then sells it at average acquisition cost.
Wherever the costs of production vary markedly between different parts of the supply of the same commodity, there are great advantages in the use of differential pricing. Where the Government is a large consumer, differential pricing permits very great savings in the total cost of the commodity to the Government, as compared with the total bill which the Government would have to pay if a uniform price for the whole supply of the commodity were set at a level high enough to cover the high-cost part. Similarly, where a commodity enters mainly into civilian consumption, differential pricing enables us to hold down the cost of living in a much greater degree than if we used the alternative of uniform pricing. Wliere costs vary widely differential pricing has another important advantage. When we use uniform bulkline pricing, the low-cost producers have very large profit margins. Large profit margins are always an open invitation to requests for wage increases. Hence, the opening up of large profit margins is very likely—even, it appears, with wage control—to have the effect of bringing about wage increases. Wage increases in one industry encourage increases in others. General wage increases are certain to bring about price increases. Hence, differential pricing, by holding down profit margins of low-cost producers, can help prevent the development of an inflationary spiral. Insofar as differential pricing can-be used to hold down the cost of living, it also helps to hold down wages, for it is obvious that no wage control can thoroughly stabilize
? See paper by Clair Wilcox on differential pricing.
wages if the cost of living keeps on going up. Cost of living and wages spiral together. In order to stop either we must stop both.
The second general principle of war price administration has to do with price increases. Price increases are justified only insofar as they help to carry out the various purposes of the Act. These purposes have already been discussed in some detail.' Our freedom to grant increases, even within the statutory limits, is restricted by Executive Order 9328 of April 8, 1943, which directs the Price Administrator “to authorize no further increases in ceiling prices except to the minimum extent required by law” and “to use all discretionary powers vested [in him] to prevent further price increases.”
No guidance in the matter of price increases is provided by the familiar proposal to “pay whatever price is necessary to get the production,” since it is within the power of many producers to elect not to produce certain things at any given price. The soundest general rule seems to be that the price of a particular commodity should not be increased so long as sellers of the major portion of the supply have combined aggregate profits on all operations, before income and excess profits taxes, which exceed their prewar average (1936-39), and so long as the maximum price of the commodity covers its direct costs. If aggregate profits (as defined above) are below, the prewar level, something more than direct costs should be allowed; but the profit-sales ratio on the commodity in question should not ordinarily be allowed to exceed the normal prewar level. The unit margin above direct costs to be permitted on essential supply in any specific case will vary depending on size of output, value of investment, nature of production processes, and other such factors.
Something of a special case arises when output is declining. Suppose an industry’s output has fallen below the level of a* representative prewar period; assume that unit costs have risen as a result of the decline in output, and that most firms in the industry have unused capacity. In general no price increase should be allowed in this situation. Denial of relief under these circumstances helps to promote the shifting of manpower, equipment, and materials from the contracting industry to expanding war industries. Second, it helps to promote concentration programs, and concentration programs obviously help to promote the most efficient use of manpower, materials, and equipment. If we should allow higher unit costs to provide the occasion for price increases wherever volume of output declines, we would tend to interfere with the most efficient use of the resources of the country.
Where the effect of a price increase, in terms of relief for suppliers, can be achieved by other and less inflationary expedients, such expedients are of course preferable. Thus a rollback in the price of a raw material, or a subsidy to high-cost producers, can obviate the need for an outright price increase or reduce such an increase to a minimum amount.
Let us now consider briefly the third broad principle of price con-frol namelyj to reduce maximum prices where required to make them generally fair and equitable and to achieve the objectives of the Act.
The Emergency Price Control Act of 1942 states that the level of prices prevailing during October 1 to 15, 1941, should be the
basic guide to the level of controlled prices, although certain exceptions are made (especially with respect to agricultural prices). The Price Control Act of October 2, 1942, instructs the President “to issue a general order stabilizing prices, wages, and salaries affecting the cost of living * * * on the basis of levels which existed on September 15, 1942.” This second price control statute authorized the use of September 15, 1942, levels chiefly as a starting point for control of previously uncontrolled items, such as wages and salaries, or as a basis for increased control over partially controlled items, such as agricultural prices. The use of September 15, 1942, in this connection in no way limited the use of the October 1 to 15, 1941, base period set forth in Section 2 (a) of the first Act. Executive Order 9250, issued October 3, 1942, states that “the Price Administrator in fixing, reducing, or increasing prices, shall determine price ceilings in such a manner that profits are prevented which in his judgment are unreasonable, or exorbitant.” Executive Order 9328, issued April 8, 1943, directs the Price Administrator “to prevent profiteering and to reduce prices which are excessively high, unfair, or inequitable.”
To give substance to our third broad principle of price control, we must translate these statutory and executive injunctions into the operating terms of day-to-day price control. Prices should be reduced when the price-cost-profit-output situation reveals that prices are higher than a level that represents fairness and equity to producers and consumers. More concretely, if the price of a commodity is at a level that is generally fair and equitable and if output is at or above the prewar level, and unit cost subsequently declines because of expansion of output, decreased cost of raw material, simplification of the product, or other such factors, then price should ordinarily be reduced. Also, if unit profit exceeds that of a highly profitable recent year owing to elements other than managerial efficiency, then price may be reduced. Price reductions under proper circumstances promote the war effort and the battle against inflation by removing inequities that might hurt war morale and by facilitating both effective wage control and effective use of resources.
3.	COSTS AND PRICE CONTROL
Herbert F. Taggart
Director, Accounting Division
r1
Although these lectures are billed as dealing with the relation of costs to price control, I shall not confine myself to costs, but shall talk about costs and profits as related to price control. More broadly, I shall discuss accounting data as an aid in price control. In the first lecture I want to indicate some of the limitations of cost and profit data, as well as to outline the uses to which they may be put. I shall also describe the accounting resources of the Office ot Price Administration, both in data already collected and in manpower for collecting additional data, and I should like to indicate what seems to me to be the ideal relationship between the Accounting Division and the rest of the shop. In the second lecture I expect to give a little instruction in the use of accounting terms and wind up with a statement of OPA policy on costs and profits as it has developed up to the present time.
It is probably a little unusual for a man with merchandise to sell to start in by pointing out its defects, but I propose to do exactly that. It is my belief that those who are not accountants, and even sometimes accountants themselves, are lulled into a false sense of security by the apparent exactitude of accountants’ figures. Their balance sheets balance to the penny; their profit and loss statements tie exactly into the surplus account; their statements of unit costs are carried out to the nth decimal place and convey an impression of mathematical precision. If called upon to defend either the statements I am about to make or their opposites, I should prefer to defend these:
1. It is impossible to determine exact net profits for a given period of time; •
2. It is impossible to determine the precise cost of any commodity or service;
3. Business concerns generally do not have adequate accounting systemp, especially for purposes of ascertaining product costs;
4. Prices are not ordinarily based on costs.
Those statements make the case for the accountant in OPA look pretty black. If we are not able to measure costs and profits accurately, if our clients do not possess reliable accounting systems, and if the relationship of costs to prices is not determinable, what are the accountants doing here?
Before answering this question, I should like to defend the general correctness of the four statements I have made. In the first place, every accounting statement is made up on the basis of certain assumptions. Its validity depends on the correctness of these assump-tions—a proof which in many cases will not appear for several years
* Delivered December 22, 1943.
60
to come. The principal assumption—the one which underlies all the pthers—is that the business entity whose statement is being presented is a going concern. It is assumed that this company will continue to operate at the same old stand in much the same old way for an indefinite period in the future. Other necessary assumptions are that land, plant, and machinery will continue to be useful and used for substantially the present purposes for assumed lengths of time; that the firm’s credit customers will pay their debts; that materials will continue to be available; that productive processes will not change over night; that the value of money will remain reasonably constant; that the government will maintain the sancity of the contract, and all the other assumptions which it is necessary to make in order to believe that a balance sheet or a profit and loss statement reflects a more substantial degree of fact than of fancy.
It is literally true, then, since not all of these assumptions are ever entirely correct, that it is impossible to determine with complete accuracy the net income of a business enterprise for a particular period of time. The profit and loss statement is crammed with estimates and loaded with judgments.
If it is true that we cannot accurately determine net income, it is still more true that we cannot accurately determine product costs. So well recognized is this fact in industry that the most modern cost accounting systems have given up trying to ascertain product costs with any degree of finality. It is not an unfair statement to say that the only cost systems which* are directed primarily at showing product costs are a little on the old-fashioned side.
Why can we not determine product costs? The reasons are so numerous that it would take considerably more than the time allotted to this lecture to enumerate them. Perhaps the simplest way to go at it is to review the elements of cost. Costs are usually classified as direct materials, direct labor, factory overhead, and commercial overhead. It is often blithely assumed that the first two are easy to ascertain. It is true that it is frequently easy to measure the amount of various kinds of material going into a given product. Ordinarily it is relatively simple to measure waste factors,, and even to make due allowance for spoilage, especially if costs are being measured over a substantial period of time. It should be noted, of course, that waste and spoilage factors vary with the weather, the speed of operation, the skill of the employees, the degree of maintenance of machinery, the quality of the material itself, and the time of day of its use. vThe passage of time irons out many of these variables, however, and it is fair to say that in most cases waste and spoilage are ascertainable.
Now, however, we have only the quantitative measurement—the number of pounds, or gallons, or yards; or board feet, of material required. To get cost we must have a valuation factor. The figure to be used as unit cost depends on the theory followed and the detail of the records kept. The most common theories are designated as first-in, first-out; last-in, first-out; weighted average, and specific lot cost, and the resultant cost figure from the use of any one of them depends to a considerable extent on clerical methods and the degree of detailed accuracy deemed necessary.
Direct labor is frequently very easy to measure, especially when
wages are paid on a piece-rate basis. But the spoilage factor enters-even here, and there are frequent cases in which workers who are, directly engaged in making products operate more than one machine or work on more than one kind of product at once. Also there are nice problems of how to account for overtime and incentive payments, and many another factor of wage cost.
While we are on the relatively simple problems of direct labor and materials, it should not be forgotten that there are certain fields in which there is no such thing as the direct cost of a particular product. What is the direct labor and material cost of a fresh ham, for example, or of a gallon of gasoline ? No one can say. Although there is a conventional method of determining the cost of joint products which is quite satisfactory for certain purposes, such as inventory valuations, there is no such method for price control purposes, since the costs depend on the prices, and there is no way of making the prices depend on the costs.
Time forbids going into the intricacies of the application of manufacturing and commercial overhead to products. Suffice it to say that most of these costs are joint costs—that is, they apply to several or all of the products made in a plant, or sold by an organization, and the amounts applicable to given products depend on the theories followed and the meticulosity of the accounting system. The pitfall» in the application of overhead are recognized by OPA in many pricing formulae which carry cost ascertainment only through direct labor and material and permit thé addition of an allowance for overhead on some more or less arbitrary basis. These formulae avoid a lot of difficulties, but they frequently produce absurd results. Lacking in precision though they may be, the conventional methods of applying overhead frequently produce more intelligible results than a blanket allowance.
Even if we assume, in spite of all the difficulties of accurate cost accounting, that correct product costs have been arrived at as of a certain day or for a certain period, we haven’t much. Costs are changeable. They vary with the seasons, with the rate of production, with the volume of individual orders, with the efficiency of men and machines, with the quality of materials, and with a thousand other variable factors. They differ from plant to plant in the same company and from company to company in every industry. One factor of particular importance at the present time is that the cost of any particular commodity varies with the variety of products being produced at the same time. Reduction in sizes, styles, models, and colors results in a corresponding decrease in the unit costs of the remaining sizes, etc., providing total volume of output remains the same.
All this means that, within broad limits, any producer can conscientiously report to OPA any cost he pleases, and there is frequently no way for OPA to say that the cost submitted is not an accurate reflection of the facts, especially if assumptions and theories are not controlled. This opportunity to present a biased cost picture has often been greatly facilitated by an insistence upon the use of the unit cost questionnaire. This device which practically never attempts to fetter the imagination of the respondents by definitions and instructions, is an open invitation to choose, at èach of the many points where uncertainty may attend the computation, that theory or method which wiD
produce the desired result. If there were any way of measuring and discounting the resultant upward bias, the use of these apparently simple and labor-saving devices might be justified, but there is not. All we can do is either to take the respondents’ word for the costs shown, knowing them to be exceedingly liberal, or to throw the whole thing in the wastebasket and proceed on horse sense.
My third proposition is that business concerns generally do not have adequate accounting and cost-finding systems. In support of this I want to cite one statistic—the only one I shall use in either lecture. The Census Bureau tells us that of all manufacturing concerns in the country 50 percent employ 5 people or less; 75 percent employ 20 or less; 92 percent employ 100 or less. That statistic indicates pretty clearly why at least 75 percent of all manufacturing concerns have no more than rudimentary accounting systems. If they employ no more than 20 people, they can’t afford to set one of them at work constantly keeping books. To that 75 percent must be added the very large number of larger concerns which are not managed by any methods of scientific management. .It must be remembered that the only substantial purpose of detailed accounting records is to aid management. If management thinks it needs no such aids, or is indifferent to them, then there will not exist the kind of accounting system necessary to give OPA the cost information which OPA needs.
This does not necessarily mean that these concerns do not know all they need to know about their costs for purposes of their own price policies. They do. Nor does it mean that they do not fill out OPA’s unit cost questionnaires. They also do that. But when OPA accountants occasionally go out to find out how these companies arrived at certain results they are treated to remarkable demonstrations of ingenuity and imagination. And I know of only one case in which the accountant arrived at a higher cost by his own ingenious devices than did the company.
The fourth proposition is that prices are not normally based on costs anyway. The truth of this probably needs no demonstrating to this audience. It is frequently said, as a matter of fact, that prices determine costs, rather than vice versa. Both statements are exaggerations. It would be quite wrong to say that costs have nothing to do with prices, for of course they,do. However, except in the case of cost-plus contracts, the cost of individual producers have little bearing on the prices they can charge. At least this conclusion holds for the short-run period. No further demonstration of this fact is needed than that so large a majority of companies do not have the facilities for accurate cost determination.
Now that I have made such a good case against reliance on accountants and accounting data, what can be said in their favor ? Before I go into that I would like to point out some lessons to be drawn from what I have been saying. The first is that all accounting figures showing net profits and costs should be taken with a grain of salt, no matter who prepares them. They are subject to a certain margin of error no matter how expertly they may be computed, and no two accountants, left free to adopt their own theories and methods, would ever find them to be exactly alike.
Another important lesson is that OPA must never put itself in a position where its actions are dependent upon a completely accurate
determination of product costs or of net profits. Here I refer to a deplorable tendency to put out adjustment criteria, for example, which promise total cost plus 5 percent under certain conditions. If you want accountants to run OPA, that’s the way to bring it about. Nobody would ever have time to do anything else but figure costs or to argue about them once they were figured. Similarly, OPA must never put itself in the position of making enforcement depend on a precise determination of costs or profits. Whatever the difficulties of enforcement may be now, they are as nothing compared to what they would be if we had to prove to a jury’s satisfaction the exact total cost of a commodity or the precise profit on it for the years 1936-39.
A third lesson which I hope to drive home is that accounting figures are not as simple as they appear and that it is undesirable for amateurs either to collect them or to interpret them after they are collected. Even the most experienced accountants, trained in all the tricks of the trade, are not infreqently fooled, but they have a much better chance of separating the wheat from the chaff than does the economist or business specialist or lawyer without accounting background.
Lest my meaning be mistaken, let me hasten to say that the job of controlling prices is necessarily one of teamwork. I happen to be describing the job of the accountant, but I do not by that intend to decry the essential functions of the other members of the team—the lawyers, the economists, the business specialists—all of whom must make their characteristic contribution to the final result. In football terms, I think of the accountant as a guard or a tackle. Perhaps, on offense, he might be a blocking back. These positions are essential, but they don’t make a team. The accountant does not call the signals or carry the ball. Just as the ball carrier should not attempt to block, so the other members of the price control team should not undertake the accountant’s work. If a touchdown is made, there will be glory enough for all.
Perhaps the easiest answer to the question as to why we have accountants and accounting data in spite of their infirmities is that we have to, whether we want to or not. The Price Control Act directs the Administrator to take increases and decreases in costs and profits into account. Even if this clause were not in the law, however, there would be no avoiding a consideration of costs and profits in connection with the fairness and equity of price ceilings. Industries would insist on presenting such data, and we could hardly refuse to receive them.
This would seem to make the accountant a necessary evil—something forced on OPA by circumstances beyond its control. If I believed that, I shouldn’t be here today. The accountant can make a real contribution to the price control program. Although his figures must necessarily be regarded as approximations, they may be close enough for practical purposes. His costs and his profits are an essential supplement to price histories, production statistics and studies of economic trends for purposes of telling the Price Executive that his decisions are correct. Accounting data are a potent weapon for searching out the soft spots in the price structure and, conversely, for indicating points where relaxation of too stringent regulations may be in order.	J
Furthermore, there are accounting figures useful for OPA purposes which are entirely precise and reliable. In addition to thé obvious examples of cash and sales and other items whose measurement is wholly objective, it is a fact that, given consistent methods of accounting and computation, cost increases and decreases can be accurately measured, as well as increases and decreases in profits. These increases and decreases are often fully as important as the total costs and profits to which they are related. However, their measurement requires expert skill and their interpretation for OPA purposes requires a careful accounting and economic analysis of their causes.
It is probably unnecessary to cite specific examples of the utility of accountants and accounting data for price control purposes. However, to make the story complete, let me enumerate the kinds of accounting studies which are carried on. The first is the industry-wide survey which normally precedes the issuance of a dollars-and-cents regulation or an amendment thereto. This may, and generally should, take the form of personal visits to the offices of the 'affected business enterprises, but it may also be done by means of a carefully drawn-up mail questionnaire. If the latter method is used, some checking by personal visit is desirable, in order to measure the reliability of the results. These surveys may cover both costs and profits, or either. Profit data alone may usually be obtained from the records of the Financial Reporting Branch,'which I shall describe in a moment.	. ,
Other studies by the Accounting Division are concerned with the situation of an individual company. They are made in connection with protests, petitions for adjustment, and enforcement cases. Ihey range from the simple study to get a few key figures, to a complex investigation which may take several weeks. The latter is most frequently a part of enforcement proceedings, in which the lawyers may insist on ferreting out every individual transaction which may have involved a violation.	.
The Accounting Division engages in many miscellaneous activities which do not fall precisely in the two categories just described. For example we had some dozen or 15 accountants working in New York goth ering data for the preparation of an answer to a query about the effect of a proposed wage increas.e for truck drivers^ We have concluded a similar study in St. Paul and Minneapolis. One section of the Accounting Division has audited claims of coal dealers and industrial coal users in New England and New York under Compensatory Adjustment Regulation No. 1.
The accounting resources of OPA, both in manpower and collected information, are quite substantial. As to personnel, the Accounting Division in the National Office consists of some 375 people, of whom perhaps 200 are professional accountants. The field organization consists of some 325 more in Regional and District Offices. The principal resources of generally applicable information are to be found in the Financial Reporting Branch, which is the custodian of the income tax transcripts and Forms A and B. The transcripts are cards obtained from the Treasury Department which show condensed financial data from about 75,000 companies over the 6-year period 1936-41.
Forms A and B were sent out in May to some 20,000 companies. The program is a voluntary one, and responses were received during
1942 from somewhat more than two-thirds of those approached. The companies covered are manufacturing, mining, and construction companies which, as of the end of their 1940 taxable year, had total assets in excess of $250,000, plus a sampling of wholesalers, plus a few com-paniesadded to the list at the request of various commodity branches.
The Accounting Operations Branch, which conducts the cost studies, has several thousand such studies in its files. Precisely how many companies and commodities are covered it is impossible to say, although we have a fairly adequate index and can tell whether or not we have made a study in a particular industry or of a particular company. In addition to these materials located in Washington the accounting field staff has made numerous studies, for the field price personnel of which we do not ordinarily receive copies.
This resume of our accounting resources would not be complete without pointing out that for many large and important studies the Tariff Commission and the Federal Trade Commission have furnished the manpower. Their experienced staffs are at our service.
Before describing the ideal relationship between Price Executive and accountant, it may not be amiss to indicate why the Accounting Division was set up as a separate entity in the first place. This arrangement was made partly by accident and partly by design. It happens to represent my own personal idea of the best way to assure all branches of OPA the best in accounting service. The typical accountant values his independence above allhis other possessions. Public accountants have traditionally made much of their independence of thought and objectivity of viewpoint. The accounting department of the typical large industrial company is responsible to the controller who, in turn, is responsible not to the operating executives but to the president of the company or the board of directors. Thus accountants both public and private are not supposed to be influenced in their acts and conclusions by those whom they serve, but strive only to present the facts as they see them.
Whether or not this ideal is ever attained, it is still a good ideal, and it appeals to the accountant. Since he has been accustomed to this type of organization in industry, it has seemed likely that he would fit best into the OPA team by means of using some such organization. Whenever, by reason of legal or economic considerations, it may be necessary for price actions to fly in the face of the accounting ¡data, all of the reasons for such actions should appear in the record. ; It should always be kept in mind that the Accounting Division is a service organization. Its only reason for existence is to provide expert help to those in need of help. It initiates no studies; it makes no policies, except its own internal policies; it makes no decisions as to actions to be taken. It is willing to give advice, of course, on all these matters.
We have assigned accountants to specific commodity branches, making our choices according to the individual accountants’ principal experience. . After making studies the accountants are required to prepare written reports, which are checked and approved by accounting supervisors before they go to the operating executives. The procedure for planning investigations and making reports is set forth in the following extract from a memorandum prepared by one of the members of the accounting staff.
It is assumed that the advice of the accountant to be assigned a specific job has been secured by the Price Division in determining the need for accounting services and the possibility of obtaining accounting data which would bear upon the problems at hand. In this connection the files of correspondence and reports of conferences held with the company to be investigated should be made available to the accountant.
The accountant who is to make an investigation should have the following questions answered for him before he goes out to make the investigation: (a) For what purpose is the report to be used? (bj What facts are supposed to be brought out by the investigation? (c) What problems is the report to clarify? (d) What is the relative importance of the various problems and questions for which the investigation is made ?
The answers to these questions should be set forth in detail in the request for accounting services so that the accountant assigned to the job may be fully acquainted with the purpose of his work. The details needed to answer the above questions and to clarify the problems involved should be set forth for the accountant to be used by him in his investigation. Naturally, the accountant may be limited by the type of accounting system and the adequacy of records kept by the company. The assignment should be sufficiently clear so that all information necessary to verify the problems involved will be obtained and unnecessary data eliminated.
Given a background as outlined above, the accountant conducts the investigation and prepares all the working papers required on the specific investigation. His working papers should be in first-class condition so that any person may use them. They should be checked for arithmetical accuracy. The person in charge of the investigation will review the report and working papers to verify the adequacy of accounting methods used. It is not intended that the working papers be typed as a part of the report, but they should be in condition to be typed if necessary.
On return from investigation, the accountant should consult with the Price Executive on results of his investigation before preparation of his report. The report to be submitted by the accountant should be prepared from the working papers and any additional information gathered by the accountant. The report should be written concisely, covering the points for which the investigation was made. Only summaries of pertinent information should be in the report. In order to emphasize the important information and to support the conclusions of the report, an analysis of the working papers must be made. The character of the analysis and the various summaries prepared will depend on the nature of the information gathered and the problems to be solved.	.	_
Comments of the accountant and his conclusions should be based on the facts which he has found. His opinion should be expressed as an expert accountant. A-ny special considerations, comments on the method of accounting, limitations o.n the data collected, and any other factor bearing, upon the interpretation of his figures should be carefully stated in the report.
II2
In this lecture I shall spend some time on the meanings of certain accounting terms which are frequently used in OPA regulations, field price instructions and other literature, and then comment upon certain OPA policies with respect to costs and profits.
Accounting terminology labors under three major handicaps. In the first place, it is composed almost entirely of terms in general use by nonaccountants. Businessmen, lawyers, economists, and statisticians all use the same terms as do accountants, and generally in senses differing either slightly or a great deal from the accounting sense. When, therefore, the economist or the lawyer hears the accountant use a given term, or sees it in accounting literature, he assumes that the accountant’s use of the term is similar to his (e. g. the economist’s) use and he may thus be seriously misled. Conversely, the accountant may assume that the economist, etc., has the same concept as himself of the meaning of terms used by both. Thus perhaps there may appear to be a meeting of minds where in reality there is none.
, Take, for example,,the word “surplus.” To the accountant, surplus signifies the excess of total corporate proprietorship over the par or stated value of outstanding capital stock. It refers entirely to the right hand side of the balance sheet, and has no relation to any specific item or group of items among the assets. To the layman surplus means something left over, or, in the words of Webster, “That which remains when use or need is satisfied.” The concept of surplus as something left over is ordinarily associated with some commodity, and, when related to business, the commodity is frequently thought of as cash. Now it is a fact that a company may have a very large surplus and not a nickel of cash, and, contrariwise, a distended pocketbook and no surplus whatever.
With this infirmity of accounting terminology all economists will sympathize. They are bedeviled by the same circumstance, and envy the physicists, the biologists, and other scientists whose technical jargon no one else pretends to use or to understand.
The second difficulty with accounting terminology is that it is unstandardized and ill-defined by accountants themselves. Different terms are used to mean the same thing, and the same term is used by accountants with different meanings. Thus, what is frequently described as a profit and loss statement is also called a statement of income and expense, an operating statement, an expense and revenue statement, an income sheet, and numerous other variations. The heading on the right-hand side of the balance sheet is variously “equities ” “liabilities,” “liabilities and capital,” and so forth. “Costs” and “expenses” are frequently used interchangeably, even by careful accountants, as are “overhead,” “burden,” and “manufacturing expense.” Every writer of a college textbook on accounting tries to bring order out of chaos, and usually ends up by inventing new terms. If they catch on at all, they add to the confusion; if they do not, the poor students merely have something to unlearn.
Accountants themselves have never succeeded in getting together on careful and accurate definitions of their own technical terms. For a good many years the American Institute of Accountants has had a Committee on Terminology. Some years back this committee pub-
a Delivered January 5. 1943.
lished a tentative report, embodying painfully gathered definitions of many accounting terms. The principal use for this volume has been as a target at which all accountants who did not participate in its preparation could take derisive shots.
The third, and for OPA in some ways the most serious, difficulty with accounting terms is the fact that many of them are afflicted with a high degree of relativity. By this I mean that they cannot be defined in the abstract ; they have no absolute meaning, but must always be defined in. relation to the circumstances under which they are used. The best example is the term “direct costs,” which all of you will recognize as one in common use for OPA purposes.
Nearly always it is assumed that direct costs are costs directly applicable to or chargeable against a given product or increment of product. In this sensé direct costs include direct labor and direct materials and any other cost items which are related directly to a given product. However, there is nothing absolute about the . definition of direct costs. Costs may be direct with respect to a class of products, as well as with respect to one particular product, or they may be direct as to departments or plants or manufacturing processes. For example, the wages of the foreman of a particular department and the repairs to machinery in that department are direct costs of operating the department, although they are seldom direct costs of manufac-turingxa given product.
The time factor is important in connection with directness, also. If the time factor were eliminated, for example, the cost of a machine devoted solely to the manufacture of a given product would be a direct cost of that product. However, since costs and profits are ordinarily determined on a periodic basis, the cost of the machine is charged in as depreciation, which is then treated as an indirect cost.
It is important to note that not all direct product costs are manufacturing costs. The commission paid a salesman for selling a given product is just as direct a cost when related to that product as is the raw material which goes into it.
Furthermore the practical distinction between direct costs and indirect costs is often not a matter of theoretical relationships but of bookkeeping procedures. For example, glue, nails, and other small items of material in furniture manufacture are direct materials in the sense that they enter directly into the product and could be so handled in the accounts, but they are frequently treated as indirect costs on the books, simply because they are of minor importance and the greater exactitude to be gained by accounting for them as direct materials does not offset the added clerical cost of doing so.
A direct cost may be defined as any cost related to a product, an increment of product, a class of product, a department, a process, a plant, a period of time, or other relevant object, which bears such a relation to that object that it may be said to be a cost thereof without the use of any arbitrary or estimated methods of allocation or application. The term “direct costs” should never be used without reference to the object to which they are directly related and, generally, some indication of the cost elements intended to be included.
In view of these three difficulties, it is not surprising to find that OPA price regulations and field price instructions misuse accounting terms. I have no hope that it will be possible completely to eliminate such misuse. It is desirable, however, to go as far as we can in the
direction of agreeing on desirable definitions of terms for OPA purposes and then strive to be consistent among ourselves. Perhaps we can go so far as to eliminate the use of a single term in two senses in the same sentence; as is done in Section 1410.102 (d) (1) of Maximum Price Regulation 163, as amended. Here we find the term “manufacturing cost” used in a sense which must be interpreted as “all manufacturing costs other than raw material costs” and two lines later it means “the total manufacturing costs, including the cost of raw materials.”
Usage of thè term “manufacturing cost” varies somewhat, but the best meaning would include materials, labor, and all the other cost factors necessary to complete the manufacturing process. Thus manufacturing cost becomes total cost at the point at which manufacturing is complete. That point varies from product to product and industry to industry, but it is generally fairly well ascertainable in any individual case. In general, manufacturing cost covers all that the accountant is willing to include in setting up inventory values. He is willing to admit that manufacturing costs constitute valid assets and to include them in his inventory values. He will not ordinarily accord the same treatment to selling and administrative costs.
The best term by which to describe manufacturing costs other than materials is “conversion cost.” This is a logical and useful term which has rather limited use among accountants, and very little in OPA regulations. As usually defined, it includes labor and all the other costs necessary to.transform raw materials into finished product. It is used in a different sense by OPA in Amendment No. 2 to BPS 28 and in Order 108 under the GMPR. In both of these cases “conversion costs” includes only certain relatively variable manufacturing overhead items. It does not include direct labor or the relatively fixed items of manufacturing overhead, which are grouped under the heading “plant overhead.” In this case there may be some justification of the particular usage of the term by reason of industry custom. This suggests an additional reason why we probably cannot expect completely to rationalize OPA use of accounting terminology. This is because certain uses of particular terms are so imbedded in the language of certain industries that there is no possibility of change. And OPA regulations and forms must follow industry terminology in order to be understood.
Working backward, while we are on the subject of manufacturing costs, it may be well to consider direct materials and labor. In my last lecture I paid my respects to these two cost elements, indicating that they are not as easily measured in practice as is often supposed. Direct materials are often defined as those materials which enter physically into the product. The definition might also include materials which, while they do not enter physically into the product, are necessary for its production and directly chargeable thereto. Such items as plates for printing and dies and special tools for metal working fall into this category. However, general usage seems to prefer the narrowed definition.
In my last lecture I dealt with methods of attaching unit Values to materials, and it is unnecessary to repeat. It is important to note that certain elements other than the invoice price are ordinarily and
properly taken into account. For example, inward transportation charges are part of the cost of materials, though not always accounted for as such. Discounts from invoice prices should be deducted, and certain types usually are. Concerning so-called cash discounts there is a good deal of argument among accountants and an equal lack of consistency in OPA regulations. Recently I saw an interpretation of “actual cost of materials,” specified as part of the formula of MPR 251, which required the deduction of all discounts, including those offered for prompt payment. On the other hand, in MPR 295, “net cost” of materials is to be “determined in accordance with the accounting procedures in use by the manufacturer on September 30, 1942.” This provision means, with very little doubt, that cash discounts will not be deducted, since the deduction of these discounts in determining material costs is rather uncommon in practice.
There are similar problems in placing a dollars-and-cehts figure on direct labor. Accountants frequently discuss the pros and cons of including such items as social security taxes and compensation insurance premiums in direct labor, and practice varies. Also there is no standard practice with regard to whether or not overtime payments made to direct wage earners are direct labor costs. At first glance it might appear that they should be so regarded, but there are many cases where more logical treatment requires their exclusion from direct labor costs. As far as I am aware, no OPA regulation deals with any of the problems here mentioned.
Another favorite OPA expression is “out-of-pocket costs.” This term appears to have as many meanings as there are people who use it. To many it is synonymous with direct costs. Others would identify it with all costs requiring cash outlays within a given period of time. To others it means the same as marginal costs or incremental costs. The truth is that it is one of those relative terms which mean something different in every context. It should never be used except when accompanied by a clear statement of the intended limitations of its meaning. As a matter of fact, all costs are out-of-pocket costs, in that all costs require the expenditure of funds. From this state-men must be excepted that controversial element of cost called interest on investment. That requires no outlay, but we have never recognized it for OPA purposes yet, and I hope we never shall. So vague is this term “out-of-pocket” costs that its complete abandonment by OPA would be fully justified.
The terms “marginal costs” and “incremental costs” are, as far as I know, synonymous, although I cannot be sure, since these are economists’ terms and not those of accountants. It is a curious fact that, although the concept of marginal costs is a very useful one, it is very little understood by accountants and very little dealt with in accounting textbooks. As a result, accounting techniques for measuring marginal costs are undeveloped. The idea is gaining ground, however, and textbook writers are beginning to venture into discussions of it. The marginal cost of a commodity is that amount of cost which would be incurred in producing specified additional units of it, or conversely, that amount of cost which would be saved by eliminating some or all units from production. This is another of the relative terms. You must say whether you mean all or only some units of a commodity when you are talking about its marginal cost. Marginal costs ordinarily 536932—43--------6
include all direct costs and some portion of indirect costs, the amount depending on whether some or all of a given commodity is under discussion. The answer will also depend on the length of the period for which production is to be stopped or increased, as the case may be, and on whether or not alternative uses exist for facilities and manpower.
One of the expressions most abused by nonaccountants is the term “cost of sales.” For some réason, to all but accountants this seems to mean all costs of doing business, including both the cost of merchandise or manufactured goods and the cost involved in their sale and the general administration of the business. To accountants, “cost of sales” means only the cost of merchandise or manufactured goods sold. Another and somewhat better name for the same thing is “cost of goods sold.”
The difference between cost of sales or cost of goods sold and the net sales figure is “gross margin” or “gross profit.” These terms, which are synonymous, seem to be well understood. Of the two, gross margin is preferable, since this item is still a long way from being profit. Occasionally these terms may be confused with “gross income,” an income tax concept which has very little accounting use. “Gross income” is used in Field Price Instruction No. 4 to signify the total intake of a service enterprise. A much better term for this purpose would be either “sales” or “revenue.” x
In the course of preparing this lecture I asked the accounting Section Heads to give me lists of the most abused accounting terms in their particular sections. Nearly all of them called my attention to the terms I have mentioned, although many were also concerned with terms whose application was limited to their own Sections. One Section Head wanted something said about two accounting documents, namely, the “cost sheet” and the “short form of income statement.” There seems to be a tendency to write to companies asking them for these documents, without very much notion of what the companies are likely to send in reply.
There are various types of cost sheets. One type, and probably the one which most accountants would think of when the term is mentioned, is an integral part of the accounting records of a manufacturing concern. A firm would be no more willing to send it to Washington than it would be to send its journals, ledgers, or any other integral part of its corporate records. Other cost sheets are cost estimating devices, used in the course of production and sales planning and not forming part of the company’s accounting system. An-other document which might bQ called a cost sheet is a cost report, or cost summary, which condenses for managerial purposes cost data obtained from the cost records. In view of the many ways in which the term “cost sheet” is used, it would be just as well to specify what is wanted, rather than merely to ask for a “cost sheet.”
There is no standard “short form of income statement.” Asking for this, without further specification, will bring the greatest variety of noncomparable documents. It is absolutely necessary to specify what figures are wanted if you expect to get anything that will be useful.
Many accountants are concerned about the distinction between “costs” and “expenses.” The truth is that there is no clear-cut dis
tinction. Many accountants feel that the term “costs” should be confined to capitalizable or inventoriable outlays, while “expenses” should be used to denote outlays which are written off the books in the year in which the money is spent.or obligations incurred, such as selling and administrative expenses. Unfortunately for this theory, different uses of these terms are so deeply ingrained that the distinction which they attempt to draw seems unlikely ever to become universal. For example, manufacturing costs other than direct materials and labor are very commonly called “manufacturing expense” or “factory expense.” Also there has been a great deal of talk in recent years about distribution “costs,” which are otherwise known as selling and administrative “expenses.” I do not mean to imply that the terms can or should be used interchangeably in all cases. There are distinctions, but they are so involved that I prefer not to attempt them in this lecture.
The term “overhead” is much sinned against. When the merchant uses it he is probably thinking of his fixed expenses, such as rent, insurance and taxes. The manufacturer may use it in the same sense, or he may mean all his costs of manufacture other than direct labor and materials or he may refer to his selling and administrative costs. The only way ohe can be sure what is meant by this term is to consider the context, and even then he may be wrong. As far as I know there is no standard meaning for this term. It should never be used without clearly indicating what particular significance is intended.
Terms connected with the balance sheet have not in general created much difficulty within OPA. Some misunderstanding of the term “invested capital,” however, seems occasionally to arise. At least the following meanings have been ascribed to this term in various branches of OPA:
1.	Total assets.
2.	Total fixed assets.
3.	Net worth plus funded debt.
4.	Net worth only.
5.	Net worth adjusted to eliminate intangible or fictitious values. As a matter of fact, the term “invested capital” is not an accounting term at all. It is never found on accounting statements and has no generally accepted significance for accounting purposes. It is used for purpose of the federal corporate excess profits tax, where it means, roughly, net worth plus one-half of total indebtedness. That concept would hardly be useful for OPA purposes.
There seems to be no theoretical reason why “invested capital” should not have any of the five meanings listed, for OPA purposes.' However, to aid the campaign for consistency in OPA terminology, my suggestion is that the expression be dropped from our language and that we say what we mean in each case.
In discussing OPA policy with respect to costs and profits I am, of course, treading on dangerous ground. As has been heretofore explained the Accounting Division makes-no policies, except its own internal policies. It is strictly a service organization. However, our operations affect policies, since we decide what is to be included in costs and how they are to be computed, and we have a somewhat similar -control over profits figures. Thus, although we do not attempt to say what conclusions shall be drawn from cost and profits figures, or
what the profit standards ought to be, we influence the conclusionsand the application of the standards by the character of the figures which we produce. In making decisions on matters within our sphere we attempt to follow what we consider to be the soundest and most acceptable accounting principles and conventions. In doubtful cases we are probably influenced by what we consider to be the best interests of the anti-inflation program, but we try to be unbiased and objective. Our aim is to present a fair, factual picture.
In the material on policies which follows I shall not always distinguish carefully between OPA policy and Accounting Division policy,, nor between what actually is OPA policy and what I think OPA policy ought to be. This latter difficulty may be due to the fact that OPA policy in certain respects has not been definitely formulated. With all due apologies and trepidation, therefore, I make the following observations.
As to costs, our attitude can be summarized very briefly. In a basic sense the entire function of OPA is that of keeping down costs—the cost of the war, the cost of living, and the cost of making postwar adjustments to a peacetime economy. More specifically, OPA has been interested in stabilizing costs from the very beginning. This is evidenced by the fact that the issuance of price schedules was started by concentrating on raw materials and other cost factors, on the theory that if we could control the costs, the prices of finished products would control themselves. OPA has consistently supported all efforts to stabilize wages and farm prices. Although we have no direct control over public utility and transportation rates, the October amendment to the Price Control Act provides the opportunity to express opposition to rate changes which would increase these factors of cost. The Standards Division is interested primarily in maintaining quality for the' benefit of the consumer, but its work in the fields of standardization and simplification is in part aimed at reducing costs. OPA has also promoted a program for streamlining retail operations and cutting out unnecessary frills for the purpose of enabling retailers to combat the squeeze resulting from the General Maximum Price Regulation.
In making determinations of cost for guidance in its pricing policies, OPA’s concept of costs can be a fairly simple one—even to the point of being naive. We take costs pretty much as we find them. On the other hand, we try not to carry naivete to an extreme. When an official of a small company who, before 1941, never received any salary, is credited on the books (not paid) with $25,000 during that year, we go so far as to make inquiry as to why his services have suddenly become so valuable. When a company’s advertising appropriation increases more than 300 percent in a single year, and inquiry discloses that the cause is a trade promotional program on a product which cannot be made any more, we are not inclined to raise prices to cover increased advertising costs. When a company whose rate of operations has doubled or trebled continues to use the same old burden rates, we are likely to suggest that the unit costs thus arrived at are a little high. We do not accept the repayment of indebtedness as a cost, or taxes based on net income, or the recoupment of losses of past years, or the charges made to establish vaguely designated reserves for dimly foreseen contingencies. Speaking of reserves, we were more
than a little surprised to discover that one company with a half-million-dollar inventory had a reserve for inventory decline of $800,000.
If we did have any preconceived notions about the requirements •of a good cost accounting system, we should have long since had them destroyed by our actual experiences. One of the acountants came back from a trip with a scornful story about cost records kept on loose scraps of paper in the pigeonholes of an old-fashioned roll-top desk. He was amazed to find that the company paid good money to an accountant who could not devise a scheme any better than that. On his next trip he visited a plant in the same industry which had the most modern record-keeping system imaginable, complete with all attachments. Its unit product costs were within small fractional percentages of being the same as he had found in the first company.
Our definition of cost is the businessman’s definition, and is necessarily adaptable to the degree of accuracy which can be obtained from existing records. For Government contracts we are well satisfied with the definition of costs contained in the little green pamphlet issued by the Government Printing Office3 and familiar to all accountants who have anything to do with cost-plus-fixed-fee contracts. In fact, the general principles of cost-determination set forth in that green book would go a long way toward fitting most of the costing problems we contend with.
On frequent occasions the OPA has been asked to accept the thesis that wage rate and material price increases automatically mean corresponding unit cost increases in finished product. Certainly no one could deny that such increases in cost factors are important evidence, but they are hardly conclusive. The only conclusive evidence is actual operating experience. In normal times, of course, wage rate increases and material price increases do not necessarily result in increased product costs and, even if they do, the final result is not necessarily increased prices. If wage rates go up, measures are taken to increase the efficiency of labor, or to cut down on its use. If material prices go up, attention is given to the use of substitutes, or to cutting down on waste and spoilage. If labor and material costs go up, attempts are made to economize on other costs. If total cost increases, it may nevertheless be impossible for trade or competitive reasons to increase prices.
It must be granted that some of the expedients for meeting wage and material increases are not available under current conditions. Nevertheless, it should hardly be conceded that managerial ingenuity is dead. Witness the ingenious devices for getting around price and •credit controls and priorities, if you want any evidence on that point. Our own cost investigations have made us a bit reluctant to make too ready concessions with respect to anticipated cost increases. We have investigated, for example, an industry in which wage rates have risen 40 percent, while labor costs have increased only 20 percent, and total unit cost has actually declined. On the other hand, we have in our files the case of a company whose wage rates had not advanced at all during the period under investigation, and yet whose labor cost per unit of product had increased more than 30 percent.
It is only natural that we are more concerned with direct costs than with indirect costs, and with costs which require current outlays than
8 Entitled “Explanation of Principles for Determination of Costs Under Government Contracts.”
with those which involve no immediate expenditure. Our primary concern with direct costs is based on two chief considerations: (1) That these costs are usually more, significant in amount than the others, and (2) that there is less room for argument about their allocation to products. Frequently, the direct labor and material costs of a’particular product can be ascertained with a sufficient degree of precision without any cost accounting system whatever. An acceptable allocation of indirect costs, on the other hand, requires something, at least, in the way of a cost system. Wherever we find a respectable cost system in operation, we gladly take the figures provided. We have few preconceived ideas as to how costs should be allocated, and seldom try to tell anyone that his cost methods are unacceptable. However, it should be realized that decisions as to price actions are not likely to be based so exclusively on cost considerations that precise methods of allocation would make any difference.
Not even the most clearly proven direct unit cost increases should automatically lead to the granting of higher maximum prices. A number of exceptions should be noted. One is the case in which a company or an industry can readily afford to absorb increases. Another is a material cost increase based on illegally high purchase prices. For obvious reasons the OPA must limit its consideration of material costs to those which reflect purchase prices no higher than those set by our own regulations. A third case is illustrated by the provisions of certain maximum price regulations which bar consideration of wage rate increases incurred after a given date. In dealing with illegally increased pay rates we are required to exclude from costs not merely the amounts of illegal increases but also the entire pay of the employees involved. That could be a pretty severe penalty, though not as severe as the analogous directives to the Bureau of Internal Revenue and the branches of the War and Navy Departments in charge of cost-plus-fixed-fee contracts. Still another example of refusal to recognize direct cost increases is the case in which a company, before the imposition of price ceilings, paid speculatively excessive prices for commodities with the expectation of being able to resell at equally speculative increases. In effect, the company was betting that the OPA would not establish ceilings on prices of the particular commodity and it lost.
The interest of OPA in profits is distinctly secondary to its interest in prices. Typically, the question about profits is simply this: Is this company, or this industry, making enough money so that a rather stiff attitude on price increases will not work a hardship? Or, to put it another way, is this company, or this industry, making enough money so that it can reasonably be asked to absorb some cost increases and thus make a contribution to the fight against infla-tion ? The answer to this question obviously requires some standards of profits. To date no rigid standard has been developed, and it is to be doubted if one ever will be. Industry is too complex, economic conditions are too varied, and the factors to be taken into account are too numerous to permit any rigid formula to be followed.
The Emergency Price Control Act directs the Administrator to take account of “general increases and decreases in profits,” but establishes no precise standards for doing so. Emphasis on “increases and decreases” implies some comparison with prior periods, but the prior
periods are not specified, and we have not attempted to supply the lack in any definitive way. In many cases we compare current profits with those of the 4 years 1936-39, making due allowances for increases or decreases in investment. Frequently, however, comparisons -embrace longer or shorter periods, and in no case are decisions based exclusively on profit considerations or on the idea that we can predict costs and profits with any degree of precision. ' Contained in the Executive Order establishing the Office of Economic Stabilization is a directive requiring the Price Administrator to give attention to preventing “profits which in his judgment are unreasonable or exorbitant.” This directive would seem to open the way to direct attack on situations in which profits have increased beyond reason.
In spite of the lack of a precise profit standard, many cases arise in which we are sure that profits are excessive. After the imposition of one ceiling a company submitted a petition for permission to continue to charge its previous prices, which were higher than the ceiling. Investigation brought out these facts: The company was capitalized at $75,000. As of December 31, 1940, its net worth was $125,000. During 1941 it made $3,500,000 of sales and realized a net profit of $550,000 before taxes, but after paying $315,000-in salaries to three company officers. And the most profitable items of business were diverted to a partnership consisting of the same officers. The petition was denied.
There is a great deal of argument about over-all profits versus profits on a particular commodity. A considerable number of correspondents with respect to Forms A and B have told us that we could not possibly get any good out of the profit figures shown on these reports, since these profits are on all lines of business, and are not confined to any particular commodity. Obviously, the net profit of a company is the algebraic sum of all the net profits and losses on every commodity it handles. However, in the majority of cases, the net profits or losses on individual commodities cannot be established with such precision that we can rely on commodity profit and loss statements to the exclusion of any necessity of looking at the over-all picture. Cost accounting methods simply are not as reliable as that. It is only in the over-all profit and loss statement that all of the conditions and influences and transactions that affect a company’s operations finally come to rest. Only in the general profit and loss statement are the effects of opinion and estimate reduced to their lowest terms. We are not in a position to compete successfully with a company’s accountants as to fine but important points in the allocation of joint costs.
The company, on the other hand, is at some disadvantage as compared to ourselves if, in spite of all fears about what OPA and WPB and WMC are going to do, and after making all allowances for accelerated depreciation and curtailed volume, and every other contingency, the profit and loss statement stubbornly ends up with a healthy black figure. Like the traditional salesman’s expense account, we fear that the commodity or departmental profit and loss statement may be the repository for fancy, as well as fact, but the company operating statement, especially if it covers a full year and is tied into balance sheets at both ends, is something on which a much greater degree of reliance can be placed.
IV.	WAGE POLICY AND PRICE CONTROL1
Robert R. R. Brooks, Director, Labor Office
The price, rent, and rationing programs of the OPA have had a significant impact upon labor, both as consumers and as producers. Price control, especially, has affected the producer status of workers—most strikingly in its effects upon trade unions as institutions and their members as wage earners. The staff of the OPA has always been unusually sympathetic with the broad objectives of organized labor. Writing in the June 1942 issue of the American Federationist, Mr. Henderson said: “I have always been deeply conscious of labor’s needs and of labor’s rights. I am anxious that the rights of organized labor and the principles of collective bargaining be preserved and extended during the war period. I think it can be done.”
With this purpose in mind, the Administrator, on June 30, 1942, established a Labor Office in the Office of the Administrator, responsible to the Economic Advisor. One of the functions of the Labor Office has been to maintain a close relationship between the Office of Price Administration and the leaders of organized labor. To implement this function, the Administrator, early in July, established an ad-, visory Labor Policy Committee, composed of three members each from the AFL, the CIO and the Railroad Labor Unions. The Labor Office, during the last 6 months, has worked closely with the Labor Policy Committee in an effort to provide a two-way avenue of communication between the OPA and organized labor.
The Labor Office has solicited advice and suggestions from labor with respect to its interests under major OPA policies, and has regularly supplied organized labor with information about price, rent, and rationing regulations. The Labor Office, working with the Labor Policy Committee, has also developed procedures to facilitate the participation of union members in the work of local war price and rationing boards, to establish joint labor-management transportation committees having jurisdiction over industrial plant transportation problems, and to encourage the formation of union Consumer Committees whose principal function is to participate in the enforcement of OPA price, rent, and rationing programs at the local level.
In addition to these functions, the Labor Office has maintained liaison between the OPA, the Department of Labor, the Labor Production Division of the War Production Board, the War Manpower Commission, and the National War Labor Board on all issues of common interest to these agencies.
Finally, the Labor Office has served as a central clearance office within the OPA for wage, labor policy, and labor relations issues arising in connection with OPA programs. In this capacity, the
1 Delivered January 7, 1943.
78
Director of the Labor Office, working with the Economic Advisor, has developed a somewhat intimate and not altogether painless body of experience with issues resulting from the impact of price control upon changing wage rates.
In the light of this experience, it is an understatement to say that the OPA in general, and the Labor Office in particular, was for 5 months after the issuance of the GMPR plagued by the absence of an effective national wage policy.
Under the terms of the Emergency Price Control Act of 1942, the OPA was precluded from establishing direct wage controls. Nor did the staff of the OPA ever desire to assume the administration of direct wage controls. Nevertheless, the existence of price ceilings exercised an indirect influence over wages—especially in the areas of industry and trade in which profit margins were narrow and labor cost factors high. On the other hand, wage increases in these areas were beginning to exert strong upward pressures on prices. Politically and logically, therefore, the Office was caught in a dilemma. If ceiling prices were rigidly held in the face of efforts to increase wage rates,, we were certain to be charged—in fact, were repeatedly charged— with exceeding our statutory powers by taking over control of wage rates. On the other hand, if prices were permitted to rise on every occasion that increased wage rates could not be absorbed from profits, the Office would have surrendered its obligation to prevent inflation. Therefore, during the spring of 1942, it became increasingly apparent that administrative wage control must accompany administrative price control.
On April 27 the President called for wage stabilization as a major part of the national economic program to stabilize the cost of living. The War Labor Board was designated as the agency to administer wage stabilization. But the jurisdiction of the War Labor Board during this period was limited. It was concerned only with dispute cases, and these only in the war industries. Nevertheless, the OPA had to work within the existing administrative organization. For this reason we announced that the Office would not recognize increased wage rates as a basis for price adjustments unless the increased wage rates were ordered by the War Labor Board and then only after requiring the fullest possible absorption of the increased labor costs from profits.
This policy had the effect of forcing more and more employers to resort to the machinery of the War Labor Board for approval of wage increases which they contemplated giving and upon which they intended to base requests for price relief. We were, in effect, creating a market for the services of the War Labor Board, and in a good many instances the demands for relief became quite acute.
In spite of these efforts, however, wage increases continued to be granted in all industries and in all parts of the country. These increases took place outside the area of the WLB jurisdiction—that is, they were voluntary increases involving no dispute which would bring them before the Board. On the one hand, labor demanded wage increases to match the increase in the cost of living that had taken place and which, despite the GMPR, continued to take place. On the other hand, the increasing demands for labor on the part of industry generally, coupled with the withdrawal of manpower into the armed
forces, induced employers to meet—and more than meet—the wage demands of labor. In many industries “pirating” became a common practice.
Under the influence of these mounting pressures, hourly earnings continued to increase at a rate no less than that experienced in the months which preceded the President’s announcement. Wage stabilization was simply not being achieved.
As the summer drew to a close, it became increasingly evident that a successful program of wage stabilization required an enlargement of the jurisdiction of the agency charged .with this responsibility. This conclusion was admirably stated by the WLB itself in its decision in the General Cable Case. In this decision, the Board, in referring to the “Little Steel” formula, stated:
* * * it should be recognized by all concerned that the wage formula adopted by the Board will not and cannot result in wage stabilization if it is limited in its application to wage disputes which come before the War Labor Board for final determination. If wage stabilization is to be accomplished, the terminal limits set forth in the formula must be applied universally and uniformly to so-called voluntary wage increases. In order to accomplish such an end it would appear, necessary to require governmental review and approval of all general wage increases. The inflationary effects of a race between prices and wages cannot be stopped in the absence of a governmental check upon voluntary wage increases as well as those which arise from wage demands iii disputed cases.
On October 2,1942, Congress authorized and directed the President to stabilize prices, wages, and salaries affecting the cost of living. On October 2, Executive Order 9250 was issued by the President setting up the policies and organization of a program of complete economic stabilization. The National War Labor Board was again designated as the. agency to administer wage controls and was given sweeping jurisdiction and powers.
The basic relationships established between the OPA and the War Labor Board by Executive Order 9250 differ only in minor details from those which the OPA sought during the summer of 1942. The War Labor Board administers wages under criteria which are constantly becoming more precise. It is making full use of the services of both k -^age an^ Hour Administration and the Conciliation Service of the Department of Labor. It is rapidly developing procedures for dealing with an immensely complicated task. It is decentralizing its operations with a speed which will test the ingenuity of OPA officers 1± we are to maintain cooperative parallel operations. In short, it can be said that we now have administrative wage control.
Under Title II, Section 2 of Executive Order 9250, all wage increases proposed by the War Labor Board which will result in price increases must be approved by Director Byrnes before they may be made effective. It is to be expected, however, that few of the cases in which the Board approves proposed wage increases will call forth the provisions of this order.
There are two distinct reasons for this. The first is that there are large areas of American business and trade in which sufficient profit margins remain to permit wage. increases to be granted for some time to come without creating hardship serious enough to raise the question of necessary price adjustments. Not only do the profit figures compiled by our own Research Division bear out this statement, but it has also been the experience of the War Labor Board and
the OPA in the cases which we have processed thus far. Only a small fraction of the total number of employers or unions seeking wage increases have at the same time indicated a need for price relief. Of the first 70 voluntary wage increase cases, for example, which have come to Us from 1 Regional Office of the War Labor Board, only 3 relatively small companies have indicated that they would file an application for adjustment, contingent upon approval of the proposed wage increase. In another group of 50 cases which has come in from another War Labor Board Regional Office, only 2 employers have indicated a need for price relief. Of the first 97 wage dispute cases which have been processed by our price branches, only half a dozen have clearly indicated need for price relief.
Consequently, the fact that in both voluntary and dispute cases employers are required to state in advance of a proposed wage increase whether they will seek price relief if wage increases are approved will, in a large number of cases, eliminate the price issue altogether from the complex of considerations upon which wage decisions must be based. Even in the cases in which it is alleged that price relief will be sought, the OPA will frequently be able to facilitate the adjustment of wage issues by establishing that, as a matter of accounting fact, approval of a proposed wage increase will not require price adjustment. If, therefore, we are mechanically able to ■carry out quickly and accurately the accounting function assigned to the OPA under Executive Order 9250, we should be able in the great majority of cases to clear away some of the difficulties which may lie in the path of the War Labor Board, rather than to add to its already complex and numerous problems.
Second, in the cases in which proposed wage increases will require price increases and which must be presented to the Office of Economic Stabilization for aproval, it by no means follows that the OPA will oppose granting such price increases as may be necessary to permit the wage increase to become effective. The OPA in such cases will undertake to inform the Economic Stabilization Director of the extent and effect of the price increases that will Ibe required. We will inform him as to how widespread the required price adjustments will be, whether they will affect the cost of the war or the cost of living and, if so, to what extent. On the basis of these considerations, we will express an opinion as to whether these price increases should be made or opposed. To date, in the relatively few cases which we have had to present to the Economic .‘Stabilization Director—cases in which proposed wage increases would require price adjustments—the Office has been fully prepared to accept the price consequence of War Labor Board decisions.
In the New York laundry wage cases, for example, in which wage increases for women workers from 43 cents to 47 cents an hour were proposed, the Office informed Director Byrnes that it was fully prepared to increase laundry prices if necessary in order to permit the War Labor Board’s decision to become effective, on the ground that it was a clear case of substandard wages and such inflationary consequences as might flow from an increase in the cost of laundry services would not be so serious socially and economically as the consequences which would flow from women workers working for 43 »cents an hour.
On several occasions the Office has informed Director Byrnes that it was ready to take any price action reasonably consistent with Office price policy necessary to permit the application of the 15-percent: cost-of-living wage adjustment policy, commonly known as the “Little Steel” formula. Striking examples of this position may be found in the New York and Baltimore trucking cases, and in the New Haven cigar maker’s case, which required an amendment to a specific dollars-and-cents price schedule.
In cases involving silica sand, chemical, and machine tool companies, the Office, with the approval of Director Byrnes, has allowed price increases necessary to permit wage increases approved by the WLB as a step toward the elimination of gross inequities in wage, rates.
A series of nonferrous metal mining wage cases illustrates the readiness of the OP A to make price adjustments necessary to permit, wage increases justified by the War Labor Board on the general ground that they are required to aid the effective prosecution of the war. In these cases we have attempted to inform ourselves in advance of prospective. War Labor Board actions in order to be prepared to take appropriate steps as rapidly as possible.
It is important to point out in this connection that the OPA has-no intention of questioning the criteria of War Labor Board action nor of reviewing the application of these criteria to specific cases. There is no ground, therefore, for conflict between the OPA and. the War Labor Board in the area of wage policy itself.
This does not mean that there are no grounds for anxiety over the relationship established by Executive Order 9250 among the War Labor Board, the OPA, and the Economic Stabilization Director. There are issues of both policy and procedure which will require the most careful thought if painful difficulties in particular cases are to be avoided.
Perhaps the most important policy issue is raised by the fact that the OPA has already moved a long distance toward the establishment of price controls on an industry-wide basis, while the War Labor Board, because of the nature of the problems which confront it, cannot be expected to develop an industry-wide approach to the same degree in the immediate future. Although the difficulties in the way of the adoption of specific prices on a commodity or industry basis are great, they do not compare with the difficulties of dealing with wage rates on a similar basis.
Consequently, during the period in which the OPA was formulating its decision to move away from a policy of making individual adjustments toward a policy of granting price relief only by amendment of regulations affecting whole industries, we were required by Executive Order 9250 to reconsider our position in view of the War Labor Board’s case-by-case approach.
The Office decided to hold to the new adjustment policy. We explored the issue with the War Labor Board, and I think that in general they understand the implications of the difference in proceeding on an industry basis as compared with dealing on a case-by-case basis. At any rate, after discussing it with the War Labor Board, we decided not to modify the decision which the Office had already reached to drop the individual adjustment policy. For this reason, if an
employer bases his request for price relief upon a proposed wage increase, requiring War Labor Board approval, and if the price regulation involved contains no adjustment provision under which the employer might qualify, we will inform the War Labor Board that no price question is involved.
In these cases the War Labor Board may make the wage increase effective and the case need not go to Director Byrnes. However, in these cases we will also inform the War Labor Board that our conclusion is no indication that the employer can or cannot afford to absorb the proposed wage increase. The fact may be that the employer is unable to absorb the proposed wage increase. In that event, it is up to the War Labor Board to determine whether or not to approve the wage increase.
The War Labor Board has taken the position that financial ability to pay is not a factor to be taken into consideration in making wage determinations. Approval of the wage increase might, therefore, bankrupt the particular employer involved. So far as OPA is concerned, our determination in a given case not to amend the regulation either to increase prices generally or to add an adjustment provision under which the employer might qualify for price relief is an indication that, first, the OPA does not consider the particular employer’s continued existence in the industry necessary for the effective prosecution of the war. or for the maintenance of a standard of living consistent with the effective prosecution of the war and, second, that the consequences of making such an amendment to the price regulation are more serious to the war effort than the withdrawal of the particular employer involved from industry.
Approval of the wage increase by the War Labor Board in these cases may have one unfortunate result. If an employer agrees to make the wage increase, the War Labor Board’s approval merely permits the employer to grant the wage increase. The Board’s order in these cases is not mandatory, but permissive. If, therefore, in fact, the employer is unable to absorb the proposed wage increase, he will refuse to grant it voluntarily and a voluntary case may be turned into a dispute case. Although this is a problem for the War Labor Board to decide, I venture to say that the solution for this problem is the adoption by both the OPA and the War Labor Board of industrywide procedures in making wage and price determinations.
We have made considerable headway in working out both the intraoffice relationships in handling these problems and those between OPA, the War Labor Board, and the Office of Economic Stabilization. Under Operating Order No. 7 the responsibility for establishing procedural relationships between the War Labor Board, the OPA, and Director Byrnes and the responsibility for formulating policy determinations for the Administrator in wage-price cases have been assigned to the Office of the Economic Advisor. A section in the Labor Office, responsible to the Director of the Labor Office, and through him to the Economic Advisor, performs the operating tasks involved.
I shall not attempt to explain in detail all the routing and rerouting of forms, communications, and memoranda involved. For present purposes, it will suffice to say that employers who expect to make proposed wage increases the basis for an appeal for price relief must,
under the terms of Supplementary Order No. 28, file their applications for adjustment or petitions for amendment within 15 days after they have filed their applications for wage increases with the War Labor Board’s regional offices or, in dispute cases, within 15 days after the War Labor Board has assumed jurisdiction over the case. Thereafter, the OPA field offices or the price branches here in Washington are notified by the Economic Advisor when to begin to process the applications or petitions. They treat the proposed wage increase as though it were actually in effect and had the status of any other increase in cost.
In general, the ordinary criteria which are applied under Office price policy to applications for adjustment or petitions for amendment will be applied by the field offices and the price branches. The Price Department as a whole will regard the cases arising under Supplementary Order No. 28 as having no different status in substance from other cases but as requiring all possible speed in handling. The findings and recommendations of the price branches or field offices in these cases will be routed to the Office of the Economic Advisor, which will in turn formulate the recommendation to the Economic Stabilization Director.
I again emphasize that the special arrangements which have been made for handling wage-price cases are not by any means to be interpreted as a departure from the Office’s announced policy of operating on the basis of industry-wide regulation rather than by individual adjustment.
For the next several months the greatest contribution which this office can make toward improving its relations with the War Labor Board and with the employer and labor groups over which the War Labor Board and the OPA have common jurisdiction will not lie in the cloudland of high policy but in the mundane realities of cutting red tape and handling particular problems quickly.
The country now has a national wage policy and a public agency charged with its administration. It is the OPA’s job to live with it and help make it work.
V.	SURVEYS AND DATA COLLECTION1
Bernard F. Haley
Director, Textiles, Leather and Apparel Price Division
Data collection is a very important aspect of the work of the Office of Price Administration, and one with regard to which an intelligent and understanding attitude on the part of the operating staff is tremendously important. From day to day in the determination of prices we are, of course, dealing with problems, with respect to which available data are not at all adequate. Data usually have come into existence from one source and another with no close relation to price control and, consequently, we have to start fresh. We frequently are forced to gather our own data to constitute a basis for our decisions and our policies.
Another reason why it is necessary for us to gather a very substantial amount of data before we can invade the field of price control is the heterogeneous make-up of the industries with which we deal. Costs of production and the conditions of production differ widely as between different firms. Under these circumstances it is necessary for us to have a survey of costs for a considerable number of firms in those cases in which we are using costs of production as a criterion for price determinations. This lack of homogeneity in our data is one of the rather serious problems which requires much more preparatory work than otherwise would be necessary in the development of price regulations.
It is always necessary to keep the importance of data collection in mind, because whatever price action we take may sooner or later be challenged in the courts. Under such circumstances, we must be in a position to defend the price which we specify or the action which we take with regard to price determinations. One of the strongest pieces of evidence that we have examined a situation carefully and have taken our action only after due consideration and careful study, is our ability to demonstrate that we have made a careful, thorough survey of the data necessary for sound price action.
We should have as good data as we can obtain in a reasonable length of time relative to the acuteness of the emergency. We are never in a position to take all the time necessary to obtain all the data that we need in order to be absolutely sure the action we are taking is precisely the right action. In nearly every case we must reach a compromise between the necessity for reasonably adequate data and the necessity for rapid action. That compromise, of course, is necessitated by the fact that if we attempted to get complete data in every casé, inflation would go on uninterrupted and undisturbed
1 Delivered January 12, 1943.
while we busied ourselves with gathering our facts and making up •our minds what we should do about inflation. Such an eventuality must be avoided at all cost.
The responsibility for data collection must be delegated to specialists who are experts on various phases of data collection such as ■sampling, form designing, and tabulating. Nevertheless, anyone whose job is to pass judgment on a regulation must pass judgment on the data underlying the regulation. Therefore, I, as well as other Divisional Directors, have had the opportunity to observe points of .strength and of weakness in OPA’s data collection. I would like to discuss a few of these observations.
First of all, I believe it is a very good idea that the purpose of a survey be envisioned clearly by the operating section or branch before the survey is made. That is rather obvious; and yet not infrequently somebody says, “I think we had better have a survey—I think we had better get the facts,” when there isn’t a very clear idea as to what is to be done with the facts after they are obtained or exactly what kind of a regulation is to be based on the facts. It is difficult to be sure you are getting the right facts until you know, as precisely as possible, what is to be done with the facts after you obtain them. We hear vague statements such as these: “We are going to have a survey so that we can build up a stock-pile of information with regard to the industry,” or, “We need a survey in order to control prices,” or, “We need a survey in order to educate the trade or to obtain better compliance.” Such vague phrases indicate ignorance of what is going to be done with the results of the survey, or an unwillingness*—it is a rather laborious task—to work out a prospective regulation to be built upon the data after they are obtained. All sorts of mistakes can be made under those circumstances. You may get the wrong kind of data—very expensive and not really necessary data; and when the time comes to write the regulation, another survey is necessary. So, I would suggest that before you have a survey you determine as precisely as possible what kind of a regulation is needed and how you are going to use the facts, so that the survey can be patterned to yield the necessary type of data. The most important improvement I could suggest in our present procedure would he along that line, because probably the most frequent mistake in the development of surveys and plans for the collection of data is the failure to envision clearly the pattern of the regulation which is to come into the world after the survey is completed. In fact, the careful planning of a survey may itself contribute very much to one’s thinking on matters of policy. For instance, when you try to work out the plan for a particular survey and set forth the precise facts you are going to need, before you know it you*are forced to settle questions of policy about which you might otherwise procrastinate. The survey plans actually do help to precipitate decisions. Final policy decisions must, of course, await a careful analysis of the data. Tentative decisions, however, can be made.
Before making a survey, one should make sure that adequate facts for the particular purpose are not already available. There are publications of other governmental agencies such as the Department •of Commerce, Bureau of Labor Statistics, etc., which should be consulted before one launches on a survey. It should also be remem
bered that other governmental agencies have gathered facts from time to time regarding many industries. Thus, before the OPA undertakes a survey it is a very good idea to make sure that the WPB has not already gathered the necessary information. Or if not the WPB, possibly the Tariff Commission or the Federal Trade Commission, The Bureau of the Budget will check to ascertain whether the requisite information has already been previously obtained by one agency or another when a proposed survey reaches them in the process of clearance, but it is much less embarrassing to discover it at the branch level rather than at the Bureau of the Budget.
Another point with regard to the development of the survey plan is one which has received a certain amount of Congressional attention: the questions of the survey or questionnaire should be held to a minimum. To put that another way, it is a good idea not to ask any questions the answers to which you are not going to put to any important use. If, for example, you ask for the direct cost of producing a particular commodity or article and if you then go on to ask that the direct cost should be further broken down into various types of labor and the number of hours which it takes to complete various types of jobs, it is a good idea to know if you are going to need that particular breakdown of labor cost and be able to defend the request for that rather elaborate information. Of course, you can’t always be absolutely sure at the time you are planning the survey what the needs will be at the time the survey is completed. Early last summer the members of our divison started to plan a retail margin survey. That survey is now, some 8 months later, almost completed. Eight months ago we had considerable difficulty in envisioning the needs for 6 or 8 months ahead. Fortunately, most of our surveys are completed in a matter of weeks rather than months but, even so, it is necessary to anticipate that the data should perhaps be more extensive than appears to be needed at the moment.
It is necessary to make a decision as to the proportion of the industry to be covered by a survey or questionnaire. You must decide whether you are going to cover the whole industry or take a sample. That is a rather technical decision and I suppose we ought to leave it to the technicians to decide, but I think in too many cases people have a tendency to feel that the survey or the questionnaire should have complete coverage, when a good deal of time and expense could be saved by taking a sample. It really never occurs to them that they can get along with less than the cost figures for all of the manufacturers of, for example, men’s work gloves in the country.
Let us suppose we do adopt the policy of taking a sample of the industry; then, of course, it is necessary to be sure that this sample is properly selected. If we are making a survey of retail margins in the apparel field, we want to have a sample from every region of the United States. We will make sure there is a fair selection of stores in each of the eight OPA regions. We also want to be sure that large stores and small stores are included, we want to be sure stores in large cities and small cities and rural towns are included, and we want to be sure we have a sampling of department stores, chain stores, independent and specialty shops.
536932—43-------7
Careful consideration should be given to the construction of the questionnaire itself. In this connection particular attention should be given to clarity of terms. It does no good to ask a man what his costs for a particular variety of men’s work shirts are, because he has a number of different costs. For instance, he has his invoice cost, which in turn may or may not be net of cash discount. He also has certain transportation costs which he may or may not add in; and if you ask him simply for his costs he might or might not think he ought to add in certain carrying costs. There surely are certain specific items you want him to include in cost, so if you use the word “cost,” be very precise in defining the word. This is also true of “price,” because he may have had a number of prices to different types of buyers, and may have had prices net of cash discount or prices which are not net of cash discount. He may have had a list price, and a different actual price marked on the article. So, the word “price,” or any word of that sort which has a critical importance in the questionnaire, should be very carefully defined.
We had a recent experience which illustrated this point. A survey was conducted of small stores in a small town. We asked for information with regard to the number of clerks which they had. The word “clerk” was not defined, and immediately, of course, a question arose on the part of some of the respondents to the questionnaire as to what is a clerk. Is the man in the back room who does a certain amount of bookkeeping and handles the cash register and steps out once in a while to handle a customer, a clerk? Is the proprietor of the concern who waits on customers during rush periods a clerk? The respondents got into difficulties and developed a feeling of frustration because they were not sure what the Government wanted. So, it is a good idea to define your terms precisely and unmistakably in simple language.
Furthermore, you should have the whole schedule or questionnaire in as simple a form and in as clear a construction as possible. In framing a questionnaire there should be a clear recognition of the possible difficulties which the respondent may encounter in filling out the form. The availability of the data should likewise be kept in mind. Can the questionnaire be easily filled out by the person to whom it is directed, or is he going to have to go back into his books— perhaps he does not have any books that far back—in order to provide the information requested ? This difficulty arises frequently when we ask for the prices bn a particular article charged by a particular firm, for example, for October 1941. When we do ask that question, as we do occasionally, we sometimes overlook the fact that some of the small people to whom we address these inquiries might not have any information as to what thev were doing in October 1941.
We should also have in mind the cost of gathering these data from the point of view of the respondent. In some cases the cost involved in answering the questionnaire may be exorbitant in proportion to the importance of that information to us. On the other hand, I think it is important to remember that it is impossible for us to handle the problem of price control adequately apd satisfactorily without a reasonable amount of information. In many cases we do have to ask for information for purposes of price control, even though the cost is considerable.
Consideration should also be given to the availability of our per-onnel—not only personnel for collecting and tabulating the data, but
also personnel available for interpreting the data after they have been obtained. It is certainly foolish to spend a lot of money and effort collecting data which are so elaborate that we have not the time to use them to the full extent. The cost of the survey in terms of personnel and time should be very carefully weighed.
Questionnaires should be tested before they are used. They may be tested by means of an industry meeting. We have found it helpful to bring in a few representatives of the industry to be surveyed who have the requisite knowledge and training for the purpose of reviewing the questions. Thus, we obtain their advice and suggestions. This is not only desirable as a means of perfecting the survey, but also desirable from the standpoint of obtaining the support of the industry in putting a survey through and getting beneficial results from it.
After that has been done and the necessary adjustments have been made, we often make a pilot survey. If the survey is an important one, I think the experimental survey should be stressed. The difficulties and errors of the survey plan will usually be brought out very clearly. Theri the survey can be revised before it is put out to the field.
At the present time there are some very, very serious criticisms of the whole matter of Government surveys and questionnaires. Some of these criticisms are, I think, unsound, and some of them have a certain amount of merit. I don’t believe we can justify any survey which is badly timed from the point of view of the industry that is required to provide the information. I mean a survey which, for example, comes just at the beginning of the Christmas season. I don’t believe we can justify questionnaires which come to the respondent on a form so large that it has to be put in an oversize typewriter in order to be filled out. I don’t believe we can justify surveys that? are in awkward and unmanageable forms, that are very costly to complete, that are vague with regard to their instructions or definitions, that call for data that are more elaborate than are needed, or that are required to be completed in 3 days when it takes at least, a week to do the job properly. More consideration has been given in recent months to the convenience of the respondent, to the availability of material, to the size and form of the questionnaire, etc. Furthermore, the much-complained-of duplication of requests for information'has, in general, been eliminated. Most of the criticisms; we still hear really apply to incidents that occurred some time ago, and few occasions for criticisms now arise. In spite of the fact that questionnaires and surveys are frequently subjected to public criticism, justly or unjustly, it is important that we should recognize that, if we are to control prices and to do it reasonably arid intelligently, we must have adequate data. The proper course would appear to be to proceed as carefully and intelligently as possible, utilizing these methods where we genuinely need to use them, with due caution, reducing the cost and eliminating inconvenience to the respondents, so far as possible.
Finally, I would like to call attention to a very useful booklet entitled Criteria for Review of Public Reporting Forms and Surveys prepared by the Statistical Standards Office of OP A. Some of the points I have discussed, and many others, are outlined in that pamphlet.
VI.	PRICE CONTROL FOR THE ARMED SERVICES1
J. Philip Wernette, War Goods Price Coordinator
At the present time in the United States there are people who seem to believe that OPA ceiling prices do not apply to sales to the Government. They think a contract with a Federal Procurement Agency makes,the price legal. This is not true. Unless specifically exempted, and many have been, sales to Government agencies are as much under ceiling prices as any other sales.
I will cover very briefly four different topics: first, the war procurement agencies and their activities; second, war goods price control policy; third, OPA’s essential provisions for war goods; and, fourth, suggestions on operating procedure in the area of war goods price regulation.
My first topic then, is the war procurement agencies and their activities. We might begin by making a distinction between war procurement agencies and nonwar procurement agencies of the Federal Government. A reasonable beginning would be to ask, How many procurement agencies are there in the Federal Government? No one knows. Some time ago the War Production Board began a study and started to have an accounting made. When they counted 800, they decided they had enough for their purposes because they were getting to such procurement agencies as Howard University, whose purchases are pretty limited. A paint survey showed, for example, 1,203 different Federal agencies buying paint.
The war procurement agencies get special treatment from OPA. They include the War Department, the Navy Department, the Maritime Commission, the Treasury, the Department of Agriculture,2 and four subsidiaries of RFC (Rubber Reserve Corporation, Defense Plant Corporation, Metals Reserve Corporation, and Defense Supplies Corporation), plus the purchasing commissions of foreign governments. I shall emphasize the problems of the Army and the Navy because of the size of their purchases and the peculiar nature of many items bought by them and their subcontractors.
Consider the following figures which relate to the expenditures program and commitments of these agencies. As of October 31, 1942, the total program of the War Department amounted to $127 billion; commitments $90 billion. The Navy Department program, $64 billion; commitments, $40 billion. Lend-Lease, $18 billion; commitments, $12 billion. RFC and subsidiaries, $15 billion; commitments the same. The other United States War Agencies program,
* Delivered January 14, 1943. An appendix deals with some problems of pricing for Government purchases. This appendix was prepared in May 1943.
2 These five agencies are designated as procurement agencies for Lend-Lease.
$13 billion; commitments, $10 billion. The grand totals on the program are $238 billion and for commitments, $168 billion.
For what commodities is the Treasury’s war dollar actually being spent ? A breakdown of the war goods appropriations, as of November 30, 1942, shows the following distribution of the average war dollar: 24 cents goes for aircraft; Navy and Army vessels get 15 cents; nonmunitions items, 15 cents; ground ordnance and signal equipment, 14 cents; miscellaneous munitions, 10 cents; industrial construction, 8 cents; nonindustrial construction, 7 cents; merchant vessels, 3 cents; and unclassified, 4 cents.
How much is the Federal Government currently spending? In 1939, it spent about one billion and a half dollars on national defense. In June 1940 my essay-estimate was that expenditures of the United States might easily attain 45 billion dollars. That was ridiculed but, in November 1942, the last month for which complete figures are available, actual expenditures were $6,112,000,000 in one month, which is the equivalent of $74 billion a year. The President’s estimate for the fiscal year 1943-44, as revealed in his Budget message of January 6, 1943, is $100 billion.
I have heard it said that these procurement agencies are not interested in expense, but only in getting the goods. This is unfair and untrue. In the hectic period of a year ago, costs were not disregarded, and with every passing month, cost control and price inspection have become better organized. Furthermore, practically all Army and Navy contracts are subject to renegotiation, under which Price Adjustment Boards may revise downward contracts payments for any particular contract. Very recently powers of these Boards were liberalized so that they do not need to restrict revision to particular contracts, but may appraise the total profits earned by any company on all war goods contracts, and effect an adjustment on an over-all basis, without respect to any specified contract.
It is true, however, that price is not the only thing that engages the attention of procurement offices and officers of the armed services. Technical problems relating to the nature and the design of products are important. The timing and location of production require attention. Transportation is a troublesome problem and provisions of many laws and regulations must be considered. Also, priorities and allocations present problems.
Some of these aspects of procurement and supply were touched on in a recent radio talk on food problems by the Quartermaster General, Maj. Gen. Edmund B. Gregory. General Gregory said in part:
We have to figure on supplying over a ton of food a year for every soldier in the armed forces. With hundreds of thousands of men gathered in every section of the globe, it becomes a tremendous job. Food produced on the farms of the country goes out to our men at dozens of different points from Iceland to the Solomons, and from Alaska to North Africa.
Getting the food to the fighting front is a big job. Just try shipping meat from the United States to distant points below the Equator, especially if there is a shortage of refrigeration facilities and a shortage of shipping space in the first place. Drastic changes have been necessary to get around problems we never thought of in peacetime. For instance, we are rapidly extending the use of many dehydrated foods. Dehydrated eggs, vegetables,, fruits, milk, and now beef. Without the water, these products weigh less, take up less shipping space, and
keep better. Most of them are precooked so that the job of preparing meals is greatly simplified. Some foods couldn’t be used in certain areas because of the natural problem involved. Butter couldn’t be used in the Solomons, because of the high temperature. So a combination of butter, dried milk, and cheese was developed that stands up at a temperature of 120° F. without refrigeration.
I doubt if many people realize the endless problems, little and big, that are involved in a large scale military operation like the one in North Africa. Just imagine thousands of troops swarming ashore in the darkness of early morning, with more and more following, going ashore in a strange area to conduct immediate military operations. These troops have to eat almost before they can ao anything else. Their operations are numerous and varied—some go this way, some go that. But wherever they go, they have to eat. Field kitchens must go ashore right along with the troops. They must be set up and ready to operate wherever the troops may be. Endless supplies of food must be kept moving from ship to shore to the many points where troops may be. As the operations develop and troops fan out and advance, the supply problem becomes more and more complicated. In operations against organized enemy resistance, there may be losses—maybe a ship will be sunk and all its food supplies destroyed. And after the troops have landed, a food shipment moving to the front may be destroyed by enemy bombing or artillery. That means that some soldier’s dinner is lost. So other supplies have to be rerouted at the last minute. Of course, as a last resort, each man in the field has his emergency rations but it is our job to see that he never has to use them. A soldier learns to use emergency rations only as the very last resort because he never knows when he will be in a greater need of that reserved food.
Beside food items, of course, there are dozens of other types of combatant and noncombatant items which present similar problems. The job of the Army and Navy very definitely is to get the goods, fight with them, and win the war. With the cooperation of American labor and industry, that is being accomplished. Indeed, it is what I think we might have expected if we had realized the potentiality of American industry.
My next topic is war goods price control policy. The basic question of course is this, Why should OPA control prices paid by the Government? Why not leave these prices and profits to the control of shrewd buying, renegotiation, and the excess profits tax? Wouldn’t such an arrangement facilitate the procurement and production of military goods? These questions were provisionally settled by an agreement last fall between the OPA and the armed services.
The agreement provided for a virtual freeze of the exercise of price control over types of goods as it stood last September. Under that freeze status, in accordance with Supplementary Regulation No. 4 to the General Maximum Price Regulation, effective May 18, 1942, combat military items and their specially designed parts and subassemblies were exempted from the GMPR. Many parts and subassemblies had been previously or were subsequently placed under control by specific maximum price regulations. The following are examples of finished military goods that are under GMPR or some specific regulation: aircraft maintenance and repair tools, sleeping bags, airplane tires and tubes for noncombat purposes, many food items, laundry facilities, soldiers’ and sailors’ uniforms, shoes, flags, camps, haversacks, and ammunition-conveying equipment.
Exempt from OPA price control are the finished combat articles such as planes, tanks, guns, ammunition, and ships. But, as oiie goes
back along the assembly line that puts one of these exempt items together, one begins to encounter parts that are sold subject to OPA price control as, for instance, radio equipment for planes, tanks, and ships, gyroscopes, motors for tanks and planes, boilers and electric motors in battleships, aircraft stabilizers, iron and steel castings, and armor plate. Going back still farther, one finally encounters raw and semifinished materials, almost all of which are under OPA ceiling prices. Examples are lumber and many other building materials for war plants, coal and oil, parachute cloth, chemicals, metals, leather, cotton cloth, and wool serge.
In making changes in price regulations, the Branches are charged with the duty of informing the liaison officers early in the process in order to give the armed services an opportunity to present their attitude and to give OPA a chance to explain to them the reasons why such a move is necessary. There are liaison sections to the Office of Price Administration in both the Army and the Navy. If you wish to get in touch with them, you can do so directly, or I can put you in touch with them.
Mr. Henderson’s agreement to refrain from exercising control over military goods was subject to the stipulation that the services should make available information on prices and procedures adequate for appraising the effects of their methods of control, since OPA must continue to watch price developments in the military goods area and be prepared to reconsider the exemption in any sector of it if the services are unable to achieve effective control. Branches, therefore, are asked to determine what information the OPA needs for this purpose in their several fields. Requests for such information from the services are to be cleared through my office.
The Office of Price Administration has made special arrangements for war goods. Some are applicable to the war procurement agencies, some apply specifically to the goods, and some to the sellers. Revised Supplementary Regulation No. 4 to the GMPR 3 exempts from the GMPR combat military items, as listed, and specialized parts and subassemblies. Also exempted are goods sold pursuant to “secret’5 contracts, developmental contracts, and emergency purchases. These last three exemptions are also found in a few, but not many, of the specific MPR’s, and the question which deserves consideration is the possible extension of these exemptions to other MPR’s.4
Supplementary Order No. 7 lifts from the eight war procurement agencies the prohibition against paying prices higher than ceiling prices. It also lifts the civil and criminal liability from the officers of such agencies, who are not deemed buyers in the course of trade and commerce. The OPA, however, takes the position that this does not mean the services are entitled to pay whatever they want to pay. There remains a moral obligation not to pay more than our ceiling prices. A procurement officer buying any substantial quantity of any product should be acquainted with our ceiling prices and not knowingly pay more. Furthermore, the prohibition is not lifted from the sellers. The restriction against offering for sale or delivering or
3 This regulation has been consolidated into Revised Supplementary Regulation No. 1.
4 Subsequently, Supplementary Order No. 42 excepted sales under “secret” contracts from
all OPA price regulations.
selling at prices higher than ceiling prices applies to sales to procurement agencies just as it does to other sales.
Supplementary Order No. & plus Procedural Regulation No. 6 provides for price adjustments on war goods. I think it is worth noting that our recently enunciated policy with respect to civilian goods, of not making adjustments for individual firms, does not apply to war goods. The provisions of Procedural Regulation No. 6 remain in force, and price adjustments on the basis of individual firms are still allowed.
Supplementary Order No. 27, entitled “Sales by Certain Stores Operated or Regulated by the War Department or the Department of the Navy,” exempts from all price regulations such stores, including commissaries, canteens, and post exchanges.
Supplementary Order No. 34 entitled “Packing Expenses on Sales to Procurement Agencies” allows sellers to charge prices higher than maximum prices when the war procurement agencies specify special packing for goods bought by them, in an amount limited by the terms of the order. This order, like all other supplementary orders, is in effect an amendment of all MPR’s except those which specifically state that the order does not apply.
In addition to these special provisions, many of our MPR’s apply to war goods. It has been estimated that at least 70 percent of the specific Maximum Price Regulations apply more or less to war goods. There are also certain MPR’s which deal exclusively with war goods. They are No. 141, Domestic Raw Shearlings and Tanned Shearlings for the Armed Forces; No. 156, Certain Beef and Beef Products Purchased by Certain Federal Agencies; No. 157, Sales and Fabrication of Textiles, Apparel and Related Articles for Military Purposes; No. 199, Lead Bullet Rod; No. 217, Walnut Gunstock Blanks; No. 286, Certain Sausage Products for War Procurement Agencies. There are also some amendments to other MPR’s that relate specifically to war goods sold to war procurement agencies.
These are the general provisions which govern sales of war goods to government agencies, and it is our policy to accommodate them to the war needs as rapidly as possible both in methods of handling price adjustment cases and in enunciation of regulations and amend-ments. It is our duty to give the best possible service we can.
Finally, may I offer a few suggestions on operating procedure in the area of war goods, with respect to price regulations. I make these suggestions with some hesitation, bearing in mind the schoolboy’s famous essay on Socrates 5 “Socrates was a Greek. Socrates went around giving people advice. The people killed Socrates.”
My first suggestion has to do with the possibility of conflict and the problem of making adjustments where two OPA policies conflict. One of our policies is to keep prices down; another is to avoid impeding the procurement and production of war goods. With the first policy, we are all more or less familiar, and its necessity in this war has been impressed upon us by the experiences of the last war, as illustrated by the sad fate of the 5-cent cigar. You remember of ^FSe’ Yice President Thomas Marshall’s dictum in the other war, What this country really needs is a good 5-cent cigar.” Now, the plain truth was, there were plenty of good 5-cent cigars in the country at the time. The trouble was, they were all selling for 10 and 15 cents.
This policy of keeping prices down may very well run into conflict with the second policy of not interfering with the production and procurement of war goods, or at least keeping that interference at an absolute minimum. I think we have to reckon with the occasional but very infrequent possibility that some OP A maximum price or •other regulation may interfere slightly with the production and procurement of war goods. The excuse for it, of course, is that on the whole the program creates a generally stabilizing effect upon the economy, which has an extremely favorable effect on the over-all production and procurement activities of the country. In this matter, however, we do need to be very careful. If we blunder in the civilian goods area, some civilians may be inconvenienced, but if we blunder in the war goods area, some American boys may be killed. We need to steer a very careful course between the evils of accepting glib assertions by industry that the price is too low and stubborn refusal to lift a ceiling when it is needed.
My second suggestion is, We need to understand as thoroughly as possible Army and Navy procurement problems and problems of the suppliers arising in production. Now, quite naturally, the background of experience and knowledge of most of us is in the area of civilian goods—the processes of civilian trade and commerce and the roles played by the manufacturer, the wholesaler, the retailer, and the housewife. War goods are different.5 War industries have their peculiarities. If we are going to make sound decisions in this area, we must make them on a basis of a thorough understanding of the problems involved.
My third suggestion is on writing regulations. The chief suggestion is the most obvious: Make the regulations, so far as possible, plain and clear, not merely to the people that write them but to those who have to read and understand them. Furthermore, in writing regulations, so far as is possible, anticipate the peculiar problems relating to war goods and war goods prices. Operate on the principle that the more adequately such problems are anticipated, the less need there will be for amendments and adjustments. Therefore, in enunciating new regulations or amendments that affect war goods, Price Executives should hold appropriate consultation with representatives of the Army and Navy.
We have not undertaken to formalize the nature of this appropriate consultation. We have not, for instance, stipulated that advance copies of regulations must be made available to the Army and Navy by some stated time limits. Now, of course, providing an advance copy of the regulation is a very simple and inclusive way of indicating to the Army and Navy what we propose to do. It prevents accidentally leaving something out as might happen in the case of a written or oral summary. But these procedures are up to the branches, with the stipulation that the treatment must be fair and in good faith and that we give the information necessary to enable the armed forces to tell us what their reactions are to our proposed move.
It appears that the timing is also up to the branches. I can only say , that it shouldn’t be handled as it was in the case of one regulation. When this regulation was due to be put in the Federal Register within 1 day it occurred to somebody in the branch concerned that the Army
8 A subsequently issued memorandum on war goods prices is attached to this paper.
was a large buyer of the regulated product and that perhaps it would be a sound idea to ask that service how the regulation would affect it. So one of the Army officers came over at the request of the branch and was asked a few simple questions about how the Army bought the commodity. In 5 minutes the branch people said, “We will have to get out an amendment to the regulation.” That is the way not to give real service.
Finally, since there is not yet enunciated an administrative order relating to my office, I shall make a few suggestions on the operations of my office with respect to the branches and these problems.6
It is not our policy to have all war goods price problems handled in my office. They are to be handled in the several Divisions and Branches, by the experts on the commodities involved. If we can give any assistance, we shall, of course, be glad to do so. The policy, furthermore, is not to have all contacts with war procurement agencies channeled through or cleared through my office. The office is a facilitating establishment, not a bottle-neck. It is my function to assist in getting procurement officers and OPA officials together and to help wherever possible in swift and sound handling of the problems. The office furthermore acts as a central information repository and clearing point on war goods problems, and we stand ready to supply information on practices, policies, and activities in this area. The office is to be kept informed by memoranda or otherwise of any important discussions, meetings, decisions, actions taken, or any other major matters in the war goods area.
On Monday of this week, President Roosevelt presented the budget for the fiscal year beginning next July. In it he called for war expenditures of about one hundred billion dollars. The Office of Price Administration has the twin duties of seeing that, so far as our controls go, the Government gets its money’s worth, without interfering with the great flow of war goods that we hope will carry us to victory in the same fiscal year, so that, on the 4th of July 1944, we can celebrate the victory and the peace.
APPENDIX
Maximum Prices Applicable to Sales to Governmental Agencies
It has been suggested that some of the OPA maximum prices applicable to sales to governmental agencies are too high, that some are too low, and that in manv cases these governmental prices should be fixed especially.
Branches, therefore, are requested to survey the maximum prices applicable under their regulations, to sales to governmental agencies, and to determine whether these prices are appropriate. Branches will not, however, make anv changes in such prices, or establish any such prices in the future except (1) after ment^agende^11^ a^ter consultation with appropriate governmental procure-
The study may well begin by considering the two following questions. Propter answers to the questions may depend on consideration of the list of factors which follows them.
1.	Is governmental purchasing presently being hampered because sales to gov-are^°I^ned by too low or otherwise unsuitable maximum prices. If the answer to this question is Yes, prepare appropriate changes
2.	Are governmental purchases presently being made at unnecessarily high prices because the maximum prices governing sales to governmental agencies are too high? If the answer to this question is Yes, consider whether these prices
6 Administrative Order No. 77 was promulgated later.
could be reduced without causing difficulties for the governmental procurement agencies, or whether it is possible that more skillful procurement would be a better solution.
If, however, the answer to both of the foregoing questions is No, presumably no action is needed.
It is important that OP A avoid setting governmental prices so low that a reasonable seller would not want to sell to governmental agencies. Unduly low prices for Government agencies may result in diverting supplies from them to civilian channels, to the detriment of the war program. Below are listed instances in which the original regulation placed the Government oh a lower-price basis, and, having resulted in an obstacle to procurement, had to be amended to permit higher prices on sales to the Government.
(a)	The original MPR 333 provided special maximum prices applicable to sales of eggs to governmental agencies. This resulted in procurement difficulties to the extent that MPR 333 had to be amended so Government procurement could compete with civilian consumers.
(b)	Amendment 9 to MPR 169 (beef) permitted Government agencies to waive their discounts in the purchase of meat so as to obtain the necessary supply, after it was found that procurement was hampered by the special discount provision of this regulation.
(c)	Amendment 16 to SR 14 to GMPR permitted the Government to pay the same prices charged consumers for cornstarch. This action also was attributable to procurement difficulties under a preferred price provision of that regulation.
A simple provision to the effect that the maximum prices on sales to governmental agencies be no higher than the maximum prices applicable to sales of comparable quantities to nongovernmental buyers is not necessarily desirable. Such provision would produce in some cases too high a price ; in other cases too low a price. So simple a provision would neglect the probable presence of special factors affecting the costs and desirability of producing and selling goods to the Government.
Therefore, in preparing a special price or prices applicable to sales to governmental agencies, careful attention must be given to such factors. The following list of factors is not meant to be complete, and none of the factors presumably would apply to every commodity.
1.	Special requirements in Government purchasing.—The War Production Board has issued a directive (No. 2, amended) to war procurement agencies which reads, in part, as follows :
(b)	(1) In negotiating contracts relating to war procurement the following considerations shall govern :
(i)	Primary emphasis shallbe upon securing deliveries or performance at the times required by the war program.
(ii)	Subject to the considerations stated in subdivision (i), contracts shall be placed with concerns needing to acquire the least amounts of additional new machinery, equipment, or facilities for performance of the contracts.
(iii)	Subject to the considerations stated in subdivisions (i) and (ii), it shall be the policy of all war procurement departments and agencies to avoid contracting for the production of items or materials elsewhere. The War Manpower Commission shall be relied upon to certify to the war procurement agencies, communities, and areas in which acute labor shortages exist to such a degree that the policy stated in this subdivision is applicable.
(iv)	Subject to the considerations stated in subdivisions (i), (ii), and (iii), such contracts shall be placed so as to conserve, for the more difficult war production problems, the resources of concerns best able, by reason of engineering, managerial, and physical resources, to handle them. Accordingly, contracts for items which involve relatively simple production problems shall be placed with concerns, normally the smaller ones, which are less able to handle the more difficult war production problems.
(v)	Subject to the considerations stated in subdivisions (i), (ii), (iii) and (iv), and also subject to the provisions of the Production Concentration Programs, which have been or may in the future be instituted by the War Production Board, such contracts shall be placed so as to spread production among as many firms as is reasonable and feasible.
(c)	War procurement departments and agencies are hereby authorized and directed to pay higher prices than would otherwise be required if such action is necessary to put into effect the policies stated in subdivisions (i) through (v), inclusive. If all the considerations set forth in subdivisions (i) through (v) have been met and there is still need for selection among contractors, contracts shall be so placed as to obtain the lowest price for the Government.
It will be noted that price is not the prime consideration in war procurement purchases. In determining a maximum price, therefore, due consideration should be given to other required considerations.
2.	Need for speed.—Particular consideration should be given to the need for speed in establishing prices and in adjusting prices. Provision has been made for speedy handling of price adjustments of war goods in Procedural Regulation No. 6. Adequate provision has not been made, however, for the speedy establishment of new prices.
3.	Pricing for smaller war plants.—The Smaller War Plants Act requires the services to give preference in placing contracts to such plants, even at higher prices. There is undoubtedly need for closer integration of production and pricing problems, and special studies, if necessary, should be made in this area.
4.	Quantity purchases.—The tremendous increase in the amount of many goods purchased has resulted in decreasing costs by mass production methods and other savings. Many manufacturers had never made war goods before or in comparable quantities to those now being manufactured and, consequently, it would seem to follow that prices based upon earlier costs of production or selling might well be drastically reduced. This problem should be approached from a factual standpoint, however, since higher labor and material costs, changes in specifications, and substitution of materials may be offsetting factors. In addition, it should be borne in mind that the Government purchases large amounts under General Schedule of Supply or term contracts, under which individual deliveries may be relatively small, resulting in higher costs of delivery, packing, handling, accounting, and shipping.
5.	Selling costs.—Selling costs are often much lower on Government sales than on private sales.
6.	Method of payment.—Payment on sales to the Government may not be received for 60 to 90 days after invoices are submitted. There is no uni-form method of submitting invoices; multiple special forms are often required. On the other hand, Government payment is certain, and in many instances the Government grants considerable assistance in financing production.
7.	Inspection.—-By and large, goods sold to private concerns undergo much less rigorous inspection and testing than do those sold to governmental agencies. This sometimes means extra delay, storage difficulties, and disputes. On the other hand, the knowledge and experience of Government inspectors is sometimes of value to private concerns in providing ideas for improvement, and in answering inquiries concerning the goods being worked on.
8.	Use of specifications.—Much governmental purchasing is done to specifications. These must be studied carefully by suppliers lest some provision be overlooked. Procurement officials are quite rigidly bound by law to requiring observation of all details of specifications.
9.	Elastic-quantity clause.—A Government contract may include a clause providing that the quantity of goods may be increased or decreased. Although usually limited to 10 percent of the contract amount, this clause introduces an element of uncertainty for the supplier.
10.	Bid bonds.—When bids are invited, the Government usually requires that each bid be accompanied by a bid bond. If a contract results, it may require additional security if the surety upon the original performance bond becomes unac-ceptab’e to the Government. Note, however, that formal bidding has been generailv replaced by negotiation.	J
11.	Services performed by buyers.—Private buyers sometimes perform services for sellers that are of sufficient value to the latter to persuade them to quote lower prices to such customers.
12.	Stop orders.—'The war procurement agencies continually carry on studies research, and testing to improve war goods or to use substitutes for scarce materials. Improvements so determined are translated into production. This sometimes requires a producer to stop production once or more while running through a contract. If changes in specifications are made, provision is usually made for equitable adjustment of prices.
13.	“Red Tape.”—The rules of procedure in dealing with governmental agencies are numerous, complicated, and quite inflexible. This sometimes causes difficulties. Such rules are now embodied in some detail in Government purchasing manuals and careful study of Government procedure simplifies the supply problems.
14.	Renegotiation.—Many governmental contracts are subject to renegotiation, which may make them less attractive to sellers.
15.	Interruption of regular business.—Some sellers dislike to sell to the Government when such sales mean selling less to their regular customers, which may involve losses of good will, customers, and organization. On the other hand, sales to the Government have certain definite advantages, e. g., employees prefer Government work.
16.	Channels of distribution.—Sales to governmental agencies are sometimes made direct by manufacturers, and sometimes by manufacturers’ distributors. Maximum prices should not be established that interfere with the reasonable preferences of manufacturers, distributors, and governmental agencies in the matter of channels of distribution, under present conditions. With respect to this consideration and others, classification of governmental agencies into proper categories of purchasers is important.
17.	Black market competition.—The governmental procurement agencies are morally bound and required by the Comptroller General not to pay prices higher than the applicable OPA maximum prices. The evidence indicates that violation of OPA ceiling prices by these agencies is negligible. Contrariwise, in many goods, violation by nongovernmental buyers is frequent. The governmental buyer, in the case of such goods, is competing not with the legal price, but with an unlawful higher price. OPA must try to prevent occurrence of such situations, and must stand ready to take some kind of effective remedial action promptly, when necessary.
VII. TECHNIQUES OF PRICE CONTROL
1.	THE PRICE FREEZE 1
Neil Staebler
Price Executive, Building Materials Price Branch
First let us inquire, “What is a freeze?”
All price control utilizes the principle of a freeze. Whether a regulation takes the form of dollars-and-cents pricing, formula pricing, or a date freeze, the maximum prices are, in effect, held in a fixed relation to some previous status. Furthermore, the justification for any type of price control frequently rests upon the principle of a freeze, that is, upon the prices and the conditions of sale that prevailed during a given period. What we are talking about today, however, is not the principle of the freeze underlying all forms ot price control but the more limited form of price control which we in OPA have come to designate as a freeze technique distinguished from dollars-and-cents pricing and from formula pricing. What do we denote by a freeze ?
In attempting to define a freeze, I have discovered that there is not exact agreement within OPA as to terminology describing working methods. I happen to belong to the school that divides price control into three types—specific or dollars-and-cents pricing, formula pricing, and the freeze. Some members of OPA find it desirable to distinguish more than these three types. Other members of OPA who utilize the same division into the three types do not put the dividing lines at the same points. Fortunately, it is of almost no significance in our operations, and of only minor importance in our internal discussions, that we have precise definitions of our internal operating . methods. But you should at least be put on notice that the definitions I am using in today’s discussion, though they enjoy considerable currency in OPA, are not official and may not be in complete accord with the terminology of later speakers.
With this disclaimer, I suggest that a freeze may be distinguished from specific dollars-and-cents or formula control by the character of the data which determines the maximum price. A regulation may be said to utilize a freeze when the maximum price is determined by reference to pricing practices not uniformly related to specific prices, except in time, and not related to specific methods by the terms of the regulation.
1 Delivered January 19, 1943.
100
The significance of the definition becomes more evident when examples of the three types of price control are examined:
MPR 36, Acetone, is a clear example of specific pricing. It provides for a dollars-and-cents delivered price in tank cars, drums in carload lots, and drums in less-than-carload lots. It provides for dollars-and-cents differentials for different regions and types of delivery.
Another example of specific pricing is MPR 272, Cast-Iron Boilers and Cast-Iron Radiation. Here the specific prices are not enumerated but specific price lists aré referred to, and. the control, to all intents and purposes, is as specific as though the hundreds of different prices had been listed in the regulation.
Formula pricing is illustrated by RPS 60, Sugar, which utilizes a formula to cover a problem presented by increasing costs of unequal amounts for different sellers. The regulation established the base price for wholesalers by means of a freeze, based upon a choice of time periods in 1941. It then provided the formula that to this base price may be added an amount equal to the difference between the net purchase cost upon which the basic maximum price was established and any higher net purchase cost.
The freeze technique is most familiar because of its application in the General Maximum Price Regulation, which will be the subject of a special discussion later in the series, but it is very common in other maximum price regulations.	.
An example is found in RPS 86, Domestic Washing Machines, in which it is provided that the maximum price for any model in a price list in effect between October 1 and 15,1941, “shall be the highest price quoted in any price list for such model to the same person or to a person in the same general class”; and for other models sold between January 1 and October 15, 1941, not in the price list of the manufacturer during October 1 to 15, “shall be the highest net price, f. o. b. manufacturer’s point of shipment at which such model was sold, or contracted to be sold, by him during the period October 1 to 15, inclusive, to the same person or to a person in the same general class, or, if there was no such person, to any person; or if such model was not sold, or contracted to be sold, by him during such period, the highest net price f. o. b. manufacturer’s point of shipment at which such model was sold, or contracted to be sold, by him during the period January 1 to September 30, 1941, inclusive, to the same person or to a person in the same general class, or, if there was no such person, to any person.”
You will observe that the price of a washing machine, though related to the price for a model between October 1 and 15, 1941, is defined as the highest price quoted to the same person or to a person in the same general class. It is evident that a regulation applicable to all manufacturers of washing machines could not be based simply upon price lists. The manufacturers applied their price lists in different ways to different persons or classes of persons. The regulation, therefore, is as specific as circumstances permit. The practices of each manufacturer during a given period provide the basis for the determination of price. .
Moreover, you will observe that in attempting to cover all models of washing machines, three different conditions were encountered: some machines were in the price list, some were not in the price list
but were sold during the period, and some were not in the price list and were not sold. An all-inclusive method of pricing washing machines must necessarily recognize the differences between the practices of manufacturers and yet relate the entire industry to some common standard. The. special utility of a freeze arises from this ability to supply common standards to diverse pricing methods to a greater degree than is possible under dollars-and-cents and formula pricing.
It should be pointed out that very few regulations are clear-cut examples of a single type of price control. A great many of them utilize two or three methods with respect to different parts of the problem.
MPR 133, Retail Prices for Farm Equipment, for example, utilize» all three methods of control. In cases where the manufacturer ha» issued a suggested retail price, it provides that the maximum retail price shall be the sum of several items, including the following:
1.	The suggested retail price f. o. b. factory and an allowance for dealer’s handling, based upon 5 percent of the manufacturer’» suggested retail price up to $400, plus 2 percent of the amount by which the suggested retail price exceeds $400.
2.	An allowance for each truck trip required for delivery to a purchaser located more than 30 road miles from the dealer at the rate of 10 cents for each mile going and coming outside the 30-mile-zone.
3.	A reduction equivalent to the dealer’s cost of the service i» required in the maximum allowance for dealer’s handling if any of the following services is not performed: erection of equipment,, installation of attachments, delivery of new equipment and carrying away trade-in equipment.
The above items illustrate the combined use of the three method» of price control. The manufacturer’s suggested retail price, since it refers to exact published prices, is equivalent to dollars-and-cents pricing. The allowance for dealer’s handling, since it is expressed in a specific percentage and is applicable to a specific published price, i» also equivalent to dollars-and-cents pricing.
The use of a formula is illustrated by the provision for the addition of delivery charges at the rate of 10 cents a mile for customers located more than 30 miles from the dealer.
The freeze technique is used in the provision that the dealer’s markup must be reduced by his maximum allowance for service which he does not render, such as erection of equipment and installation of attachments.
The farm equipment regulation infuses meaning into the definition of a freeze, which may here be examined again in the light of the specific example. . You will remember that a freeze technique was defined as one in which the maximum price is determined by reference to> pricing practices not uniformly related to specific prices, except in time, and not reducible to defined methods within the scope of the regulation. You will note that in the formulas used in the farm equipment regulation, an indication was given as to how much might be charged per mile and under what circumstances it might be charged.
But where the freeze is used to require a reduction in the dealer’s
maximum allowance equivalent to his cost for any service which he does not perform, you will observe’ that the amount of allowance is determined only in terms of the individual dealer’s past cost; it would thus differ from dealer to dealer, from service to service, and from one type of equipment to another. It might differ between customers, depending upon circumstances.
It would no doubt be interesting to illustrate the ingenious methods by which the various types of control have been utilized in conjunction, and to point out illustrations of regulations where it is almost impossible to determine how much of the regulation is based on one type of control and how much upon another. But the further refinement of definition is far less important than an examination of the advantages and disadvantages of the freeze type of price control compared to advantages and disadvantages of formula and specific dollarsand-cents pricing. I have grouped the advantages under six heads: (1) Justifiability, (2) Minimum of Investigation and Speed of Application, (3) Adjustability to Existing Business Practices, (4) Adjustability to Other Factors, (5) Expediency, (6) Preservation of Differentials.
I.	Justifiability.
Because the principle of a freeze rests upon the firm ground of acceptance of an industry’s practices as of a given date or period, a freeze is almost self-evident in its demonstration of the equity of a regulation. The law under which we operate directs that, so far as practicable, consideration be given to the prices prevailing between October 1 and 15, 1941, but that the Administrator shall make adjustments for such relevant factors as he may determine and deem to be of general applicability. A freeze requires scarcely more than an examination of price levels prior and subsequent to the base period to determine that the level is in accord with broad standards of the Office in relation both to consumers and to producers.
After determination that the general level is satisfactory, it is only necessary to ascertain that, during the period selected for the freeze, relations with competitive industries or between companies in the given industry were not characterized by unusual circumstances. This is not to say that a freeze period can generally be found in which the relations of all business elements to one another can be called normal. • In any industry not completely stagnant, changes in relationships among companies within the industry will constantly occur. But the examination for purposes of a freeze need go no further than to determine that such changes have not departed from a range of variation characteristic to the industry.
II.	Minimum of Investigation; Speed in Application.
Because a freeze accepts pricing practices as of a given date, it may be applied with comparative rapidity. The time-consuming study of detailed pricing methods required in other forms of regulation is obviated by the acceptance of the statics quo as of any given date or period. The only investigation required is a determination that the date or period selected for the freeze bears a proper relationship to prior and subsequent price levels and that the relationship between individual companies or industries in the period is not abnormal.
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III.	Adjustability to Existing Business Practices.
Price control—the maintenance of prices at fixed levels—is in itself a contravention of normal business-; procedure. Supposedly, prices are the nervous system of business, the mechanism by which business contracts or expands and by which it determines when and how to move. We are all aware of the fact that in desensitizing some of these controls, we are not subjecting business to a wholly unfamiliar experience. The inelasticity of prices in the past has been the subject of numerous studies, the most notable of which was the TNEC investigation. However, in recognizing that prices are affected by a certain amount of price leadership or conventional acquiescence within an industry, or are in some degree administered by businessmen, we do not overlook the fact that prices still perform a large part of their theoretical function. To a considerable degree, they do guide the actions of producers and consumers; and to interfere with them is to run the risk of shifting production from one company to another, from one area to another, or from one product to another.
Under present circumstances, when the equilibrium of many markets is upset by a great number of new conditions, a disturbance caused by a change in price may possibly counterbalance other changes and serve to maintain stability better than the preservation of so-called normal pricing practices. But where an industry has not been disturbed by other factors, the preservation -of its customary pricing practices may be desirable. Because a freeze recognizes more of the individual idiosyncracies in any price structure, it will occasion less interference than any other method of price control. As a corollary, it should be observed that the utilization of a freeze may also preserve more of the competitive spirit, however feeble it may be, which may exist in industry.
IV.	Adjustability to Component Cost Figures.
Where it is important that regulation of an industry or a group of industries be related to other factors such as wage levels, agricultural prices, or imports, a freeze may offer the most ready means of securing the proper adjustment. This is particularly true where the factors involved may have different weights which are not readily determinable, but where over-all trends may be indicated in a general way.
In MPR 152, Canned Vegetables, the maximum price is determined by several factors, two of which are as follows-:
(1)	The weighted average price per dozen charged by the canner for the kind, grade, and container size during the first 60 days after the beginning of the 1941 pack; plus
(2)	The actual increase per dozen cans in the cost of the raw agricultural commodity up to and including May 4, 1942, over the cost of the raw agricultural commodity for the 1941 pack.
Here the cost of the raw commodity is an important part of the total cost of the finished product. At the time the regulation was issued, data on the thousands of buying prices in th^ many vegetablegrowing areas were unavailable. The utilization • of a freeze at this point was the only feasible means by which the costs of the raw agricultural commodity could be included in a pricing formula. By recognizing the weighted average cost of each commodity to each canner, a cost is obtained which can serve as a component for a maximum price.
V.	Expediency.
An agency limited in personnel, as is OPA, must necessarily distinguish between more important and less important commodities and fields for regulation. In many instances, the amount of work necessary to secure data justifying a dollars-and-cents or formula regulation is not warranted in view of more pressing problems. Here a freeze may be resorted to as a matter of expediency.
Within a given field, OPA must often distinguish between major and minor inflation hazards. In numerous instances where the bulk of an industry is subject to dollars-and-cents or formula price control it happens that some minor portion of the industry—a few obscure commodities or some particular geographical area or some class of buyer—may involve difficult determinations or may present situations in which it is administratively impossible to secure accurate information. In such cases a freeze may be employed in a portion of the field.
MPR 121, Miscellaneous Solid Fuels, is probably an illustration of a freeze designed for reasons of administrative expediency. It provides that the maximum price shall be the price specified in the last price circular, list, or schedule issued by a producer on or before December 31, 1941, and in effect during any portion of the period December 15 to 31, inclusive, and based upon the same kind, size, and quality of fuel, upon quantities taking the same price per ton, to purchasers of the same general class, by the same method of delivery, under the same terms of delivery. I surmise that it was determined that the difficulty of securing all the price lists and the varying concessions from the list was, in this instance, not worth the effort that would have been required for the establishment of innumerable dollars-and-cents prices, and a freeze was adopted instead.
Another kind of administrative expediency is illustrated by the same regulation, where it is provided that if the maximum price cannot be determined by the methods just described, the maximum price for the sale of such fuel shall be the average price charged by the same person during the period December 15 to 31, inclusive. Here a freeze is used to provide an alternative method to cover situations where the preferred method of control is inapplicable.
A third kind of expediency is illustrated by BPS 45, Asphalt or Tarred Roofing Products, in which specific prices and a formula are used for every part of thé country except a small area in the neighborhood of Salt Lake City. There-a freeze was used because the investigation conducted in the area indicated no determinable price pattern, and it was not deemed worth while to conduct an exhaustive study of the area which might possibly have revealed the necessary data.
VI.	Preservation of Differentials.
A freeze may afford advantages over dollars-and-cents or formula price control where it is difficult to distinguish price differentials and to find an adequate means of expressing the reasons for granting them. It may be used to preserve differentials in the following situations:
1.	Where differences in quality are important in differing degrees to different buyers.
2.	Where intangibles such as long-continued reliability of a product under very trying use may have led to differences in price levels.
3.	Where different sellers in the same industry have placed a. different competitive emphasis on different types of buyers, selling; comparable products to buyers of the same volume at different margins.
4.	Where the minutiae of competition are important—for example, in differing types of package, method of shipment, slight gradations of quality.
5.	Where an industry engages in practices, such as freight ab-sorption, which differ from seller to seller.
6.	Where the commodity consists of a myriad of shapes and parts, individually of small magnitude, as in special shapes of firebrick.
7.	Where a standard item is sold with a large number of accessories, the assortment of which is different in each sale, as, for example, in machinery subject to MPR 136.
8.	Where it is essential to preserve the output of marginal producers but impossible to set up or justify a differential pricing system.
9.	Where genuine or irrational differentials exist.
10.	Finally, where it is important to recognize unpredictable fluctuations in joint-cost products.
Such a situation is recognized in MPR 169, Beef and Veal Carcasses,. which embodies a type of freeze that recognizes a very unstable differential. It provides, 'first, that the seller shall ascertain the highest price actually charged by him during the period March 16 to 28, 1942v at or above which at least 30 percent of the total weight volume of his sales of various cuts was made; second, it provides that in the event that the forequarters and hindquarters of each grade are sold separately at the price computed on the basis just mentioned and yield a. greater total sales realization than the total sales realization obtainable from the sales of the same forequarters and hindquarters of each grade in carcass form, at the seller’s maximum price for a carcass of such grade, the seller shall adjust downward the prices to remove such excess.
Now let us turn to the disadvantages. The disadvantages of the freeze technique may be grouped under these heads: (1) Inadvertencies, (2) Difficulty of Dealing with Changes, (3) Administrative Difficulty, (4) Other Dangers of an Unanalyzed Market.
I.	Inadvertencies.
Although a freeze may be more readily justifiable, in general, than dollars-and-cents or formula control, it is somewhat more susceptible to the danger of blanketing in erratic prices which may have prevailed on a given date or in a given period. The very administrative advantages that recommend a freeze—its speed of application and the minimum of investigation required to institute it—may turn out to be a disadvantage. A freeze presupposes the likelihood that prices on a given day or at a given period reflect “normalcy.” This presumption may be vitiated, in whole or in part, by the presence of special cirum-stances. We refer to most of these special circumstances as a form of" “squeeze”; they arise from a variety of situations among which might. be mentioned the following:
1.	Special sales.
2.	Seasonal prices.
3.	A temporary concession to a buyer of a given class.
4.	If the freeze applies to several levels of production and distribution, there may be a lag in price adjustment between levels.
5.	Individual companies in an industry may lag in their adjustment to a new price level.
6.	Many companies, due to delay in replenishment of inventories, may have lagged in the adjustment of individual items.
7.	The existence of contracts from prior periods entered into at lower price levels may be made permanent by a freeze, unless otherwise provided.
8.	In many fields, companies that deviate from the general practice of the industry in resisting price increases may be frozen with margins narrower than their competitors.
A squeeze may be encountered under any type of price control, but under a freeze correction is likely to be especially difficult. The absence of data which prompted the use of a freeze makes it difficult to establish criteria by which adjustments can be made. Furthermore, under the present policy of making adjustments of general applicability, nearly as much time may be required in dealing with a particular squeeze as would have been required in setting up a specific price regulation.
IL Difficulty of Dealing With Changes.
Inasmuch as a freeze seeks to apply control by reference to circumstances that prevailed in a given period, every change that subsequently occurs will tend to make the freeze less applicable. Consider the variety of factors that provide a source of change:
1.	New products may be developed, some of which may be unrelated to old products.
2.	New sellers may emerge.
* 3. New types of buyers may put in an appearance.
4.	Goods may be wanted in new localities. In industries where products are sold on a delivered basis or freight absorption is practiced, this may cause hardship to buyer or seller.
5.	New conditions of delivery may arise.
6.	The volume of sales to different types of customers may alter radically, warranting changes in discount.
7.	New packages of different materials or different sizes may be necessary.
8.	Changes in the relative importance of an industry’s products may occur—commodities which have heretofore been byproducts and priced on a byproduct basis may suddenly encounter greater demand than the prior prime product of the industry.
Many of these difficulties can be overcome by the inclusion of formulas applicable to new products or new conditions, as, for example, in MPR 188; which is a little GMPR for thousands of items but provides four pricing methods applicable to changed items or methods of doing business.
However, RPS 40, Builders’ Hardware, illustrates the difficulties which may arise through the introduction of new products. When the schedule was issued in its revised form in March 1942, it embodied a simple freeze at the maximum prices in effect during October 1 to 15,1941, for approximately the same grade, quality, and amount? In connection with new products the provision was this:
If no delivery of products- of approximately the. same grade, quality, and amount was made, the maximum price shall be determined from the price of a related builders’ hardware product, delivered during such period, by making an appropriate adjustment for differences in type of product, grade, quality, amount, and type of purchaser.
Since March 1942, builders’ hardware has been radically changed by WPB limitation orders. Producers have been puzzled by what an ‘‘appropriate adjustment” means. The result in the hardware field has been the adoption by producers of prices varying from a very strict interpretation of “appropriate adjustment” to a very loose interpretation. In some cases manufacturers interpreted “appropriate adjustment” as relating to price; in other cases they interpreted it as referring to manufacturing process. In the case of one item of hardware a number of producers sought to stretch “appropriate adjustment” to mean a resemblance to a fancy finish on a type of hardware previously sold at a very high mark-up.
III.	Administrative Difficulty.
The virtues of a freeze—its ready justifiability ahd ease of application—may conceal numerous administrative difficulties which would have been disclosed by the investigation required by the promulgation of a specific-price or formula regulation. Among such administrative difficulties are the following:
A.	Lack of visibility. The multiplicity of pricing methods that may have recommended the use of a freeze at the manufacturing level is likely to be present in even greater degree at wholesale and retail levels. Under such circumstances the ultimate purchaser may have great difficulty in determining the ceiling price; without consumer cooperation few price levels will hold. This particular disadvantage of freezing prices is not usually present in situations where sellers have printed price lists. A regulation that can refer to specific price lists that may be widely distributed and available to every potential buyer is not a freeze but a disguised form of specific dollars-and-cents pricing.
B.	The multiplicity of prices possible under a freeze, the variation from seller to seller, the difficulty of interpreting classes of buyers, the dependence upon more or less esoteric information available only to persons very familiar with the industry, all contribute to the difficulty of enforcement.
C.	A freeze faces the dilemma of being either too restrictive or not restrictive enough. If it freezes every transaction, it freezes inadvertent circumstances into the normal price structure; if it freezes classes of transactions, it imposes the difficulty of interpreting the meaning of such classes.
D.	Because of the lack of visibility, the uncertainty of distinguishing classes of buyers, and other similar characteristics of a freeze, this type of regulation is likely to have an unfavorable effect upon public confidence and morale. The argument and suspicion that grow out of the uncertainties of a freeze negate one of the important purposes of price control in wartime. Price control seeks not merely to stabilize prices but to demonstrate that the burdens of control fall with impartiality upon everyone.
E.	By its generality it requires a growing body of interpretation to deal with borderline cases.
F.	Because of its over-all applicability, a freeze tends to be inflexible.
IV.	Other Dangers of an Unanalyzed Market.
Among these, the following should be mentioned.
A.	Danger of deterioration in quality. The reliance of a freeze upon a reference to prices, commodities, and practices in evidence during a given period overlooks .the fact that commodities in many fields are not of unvarying quality but may customarily have been changed within limits as circumstances have made such changes advantageous. Under a freeze, serious deterioration in quality may occur unless quality standards are carefully defined. If standards must be defined, the freeze may lose its simplicity.
B.	The freeze may also cause the disappearance from the market of low-margin products. Under circumstances which govern the actions of OPA, it has been difficult to prevent this type of development in industries where limited materials could be offered the market in a range of products having differing profit margins. A serious weakness in coping with this problem is created by the fact that the freeze technique is not specific.
C.	Failure to reflect changes in volume is another disadvantage of the freeze. Due to limitation on the use of raw materials, innumerable shifts have occurred in supply and demand. Many products have encountered a “windfall” demand which has had a tendency to reduce costs; many others have encountered severe decreases in output and consequent increases in cost. In many industries, both circumstances have been encountered in differing degrees. A freeze, by failing to take cognizance of such changes, may promote inflation in the one case or jeopardize essential production in the other.
D.	Finally, there is the danger of the shift from low-margin sellers to high-margin sellers. If a freeze applies to an industry in which sellers had different margins in the base period, and if changes in costs require considerable absorption, the low-margin sellers may be forced out of business. Buyers will then be compelled to purchase from high-margin sellers, and the net effect of the freeze may be inflationary.
All of these dangers may exist in connection with other types of price control as well as under a freeze; but the fact that a freeze is adopted without a thorough analysis of the market exposes it to somewhat greater hazards and makes correction far more difficult.
After weighing the advantages and disadvantages of a freeze, two things are evident: first, that a freeze is generally inferior to specific pricing and frequently inferior to formula pricing; second, that for a variety of reasons, mostly administrative, considerations of feasibility will occasionally call for the use of a freeze.
Since the method must sometimes be used, it may serve some purpose to suggest the following precautionary measures: First, the field to which a freeze applies should be narrowed as far as possible and be clearly limited. Second, all possible variables capable of formula or specific-price definition should be so treated, leaving as few variables as possible to be frozen. Third, in spite of the fact that the freeze will be used largely because the field to which it applies is not susceptible of definition through procurement of data, it should be carefully tested by spot checks. Fourth, care should be taken to see that the freeze is clearly understood by both buyers and
sellers. This is especially important in view of the fact that the price will depend upon individual practices and hence is likely to be subjectively interpreted. Where price lists or other objective data are not available, some measure of definition can be obtained by requiring posting or filing of prices or the keeping of adequate records by the seller.
It is, of course, helpful to recognize a set of advantages and disadvantages in connection with the use of a freeze, but is it possible to propose any further generalizations as to what weight to give these advantages and disadvantages? Because of the infinite variety of circumstances which characterize different fields? I think any generalizations must be very tentative and very restricted. Perhaps these general criteria may be of some small help in suggesting considerations that may be kept in mind:
First, a freeze should be used only when specific pricing is not feasible and after weighing the relative merits of freeze and formula pricing applicable to the case.
Second, before using it, the danger of evasion under it should be weighed against the hazard that prices may be raised by a formula or specific price ceiling.
Third, the possibility of changes in the field should be weighed against the expected duration of the regulation. If the freeze is applied to an industry in which changes are frequent, provisions should be made to catch the new developments—new products or new buyers or new sellers—by some other means, perhaps formula or specific pricing or, as a last resort, through reporting.
Fourth, consideration needs to be given to the composition of the market. Are the buyers few and purchases repetitive, or are the buyers numerous and purchases nonrepetitive ? In proportion as buyers are numerous and their contacts with the market so occasional as not to acquaint them thoroughly with prices, a freeze rapidly approaches the point of indefiniteness where it may have no effect at all..
Fifth, consideration should be given to the possibility of combining the freeze with specific-price or formula control in portions of the field. In RPS 41, Steel Castings, specific prices are given for many common types of castings, and if the casting is substantially different in design, the producer is required to relate it to a reference schedule and to file proposed prices subject to the approval of OPA.
As you all know, for many months it has been the policy of OPA to replace the General Maximum Price Regulation with specific regulations embodying more specific types of control. By and large this means that dollars-and-cents pricing and formula pricing will be given preference oyer the freeze technique. In the light, of the disadvantages of the freeze method, it is easy to understand why OPA is moving in this direction. However, it is highly improbable that the freeze technique can be entirely discarded. It will be applied in many portions of a larger field in which it is difficult or impossible to secure precise definition of practices or prices. It will have to be used in some large areas to preserve differential pricing. In spite of the waning importance of the freeze technique, it will still continue as a significant tool for price control—a blunt one to be sure, but indispensable when all other devices fail—and one, finally, that is capable of considerable improvement.
2.	FORMULA AND NEW GOODS PRICING
James A. Perkins1
Price Executive, Paper and Paper Products Price Branch
I want to discuss with you this afternoon pricing by the formula method, which will, of course, include the general range of problems encountered in pricing new goods. The first question that should logically be raised is: W hat is formula pricing ? To clarify the approach to this particular problem, it is important to establish that there are really two distinct methods by which maximum prices for a particular item may be established. The first involves a determination by the Office of Price Administration of a dollars-and-cents price, that is, a maximum price which we determine is applicable to all sellers or to specific sellers of a particular commodity. This may be called a universal ceiling. The second type of price control involves the establishment of a pricing method by which each seller of commodities determines his individual maximum prices. This type may be called the individual ceiling method. On the one hand, OPA specifies the specific maximum; on the other, OPA specifies a method by which sellers may compute their own maximum prices. The first type of price control—that is, the specific pricing by OPA—will be discussed by Mr. Kennedy. It is formula pricing that I wish to discuss with you this afternoon.
To repeat and to summarize, formula pricing may be defined as that type of price control which provides individual sellers of commodities with a method by which each may determine his own individual ceiling prices. You have probably noticed I have not mentioned “freeze” as a separate method. I omitted it advisedly because in an effort to untangle fieeze from formula, it was apparent that there was no regulation in this Office that does not, in some part, use a formula technique, and there is no formula method that does not use the freeze technique. Any attempt to separate these would force me into a dilemma. ¡So I have not tried to distinguish between these two; I shall attempt later to develop different categories of formula.
Formulae for the determination of maximum prices vary widely, principally because of the variations in the industries to which they are to be applied. They vary also because there have been different degrees of precision in language in the various formulae. It is important, however, that we fully understand the characteristics common to all formulae. One such characteristic is the existence of some common foundation upon which a formula can be based. This foundation must be easily ascertainable by the industry involved, and easily checked by OPA.
All formulae make use of one of three types of foundations or fixed
1 Delivered January 21, 1943.
Ill
elements. The first foundation, or fixed element, is the maximum price that a particular seller charged for a given item at a certain time. This basic factor is easily determined by a particular seller and can without too great difficulty be checked by OPA.
A second foundation, or fixed element, is the pricing method and the pricing factors employed by a seller at any given time in determining his selling prices.
A third foundation, or fixed element, is the margin between acquisition costs and selling price, when resales are involved. All formula pricing—at least, all formulae I have been, able to discover—are based on one or the other of these three fixed elements and sometimes a combination of the three.
The second important ingredient, other than the foundation of any formula, is made up of the variable factors that may be added to or subtracted from this foundation, and the development of methods for measuring these variable factors. I give you an analogy of this part of the formula problem: If you have 20 blocks of different sizes, it is possible, by stacking them in various ways to develop a wide variety of patterns. If the variables in any formula may be pictured as these 20 blocks the problem is to make sure that a seller uses the same blocks that he used during a base period, that the blocks remain the same size, and that the seller constructs his pattern in the same way that he did during the base period.
The problem of all formula pricing can, therefore, be stated somewhat as follows: A fixed element must be discovered upon which the formula is to be built. The variable factors to be added to this foundation must be defined in such a way as to assure their having the same contents as in any base period, or as described in any regulation, and they must be put together in the same manner as they were in a given base period. The problem of determining the foundation factor and the variable factors is, therefore, the common problem in developing Government pricing formulae for the determination of sellers’ maximum prices.
Let me take up formulae with the margin as a base. Some formulae have been developed using as the foundation the margin between the seller’s acquisition costs and selling prices as of a particular date. This type of formula has been extensively used at the wholesale and retail levels where the commodities concerned have not been processed by the seller.
This margin can be computed in one of three ways. First, it may be computed as a percentage of the acquisition costs or selling price. That is the percentage factor. The main drawback to this means of describing this fixed element is that the higher the acquisition cost, the greater in dollars and cents will be the margin. Thus, there is little or no incentive on the part of the seller to keep his acquisition costs low, and we lose one of the main weapons for keeping prices down.
A second method for describing this margin is to allow the seller the same dqllars-and-cents margin that he received in a particular period. This method of computation avoids the difficulty of using percentages, that is, the margin does not increase as the acquisition cost increases.
The third method is for the OPA to specify in dollars and cents the
actual margin to be applied in the resale of specific commodities. In this method we really have a formula with one factor spelled out by this Office, and the other factor—cost of raw materials—determined by the seller himself. The advantages of the spelled-out margin lie in increased precision and definiteness. It is most difficult to employ, however, where the margin used by various sellers varies widely.
In using established margins of whatever variety, we immediately encounter the problem of determining the maximum prices for items not sold during a specified base period. The first alternative is to apply the margin already received for a similar article sold during the base period to this new commodity. We are perhaps all familiar with the procedure outlined in Section 3 (a) of the GMPR by which the margin received for a “comparable article” is applied to a new commodity. Those who drew up the GMPR presumably knew what they meant, but unfortunately the GMPR employs the word “comparable” rather than the word “similar,” and does not advise any definition of what “comparable” means. Where no comparable item exists as a basis for determining the appropriate margin to be used, a new Section -3 (c) has been developed to permit the seller to come to OPA and request a formula by which he can determine his selling price.
The use of margins as the base for a formula has been successfully employed also at the manufacturing level. Its use here must be limited, however, to those cases where raw materials are the overwhelming factor in the selling price and where, conversely, the raw materials have undergone slight processing by the seller. MPR 151 on new'bags is an example of this type of regulation. Margin in this regulation was defined as “the greatest difference between the offering price for the same type, size, and quality of new bags, for delivery in a comparable quantity to the same point of delivery, to a purchaser of the same general class on any day in March 1942, and the replacement cost of the material in such new bags on the same day in March 1942.” This type of formula at the manufacturing level has all the advantages of simplicity since there are only two factors, raw material and margin, but should not be used in any case where factors other than raw materials have any important bearing on determining the selling price or where a wide variety of raw materials is used in manufacturing.
The second fixed factor other than the margin is the specific maximum price charged for an article during a given base period. This type of basis for a formula is perhaps the most commonly used by GPA. It has the great and obvious advantage of establishing, once and for all, the maximum price for any item sold during the base period. The main difficulty it presents is, as Mr. Staebler pointed out, in determining the maximum prices for commodities not sold or delivered during the specified base period. In these cases, various additions have been made to this basic formula, in efforts to fill in the gap.
The first such addition or variable is the price of a “similar” article sold during the base period. The crux of the problem here is to define “similarity” in such a way as to provide the seller with as narrow a choice as possible but, at the same time, offer him a guide as to which commodities he must use as a basis for comparison. Various tests of similarity have been devised, such as use, serviceability,
same price line, and identity except for minor changes in shape and design. These variables are frequently not subject to any precise measurement or very precise definition in particular cases arid, therefore, this formula has presented many difficulties both afe a guide to the seller and as a check to the OPA on the correctness of the seller’s determination. When permitting the use of the similarity test, we should give careful attention to developing as specific a definition as possible of the word “similar.”
A second variable employed by OPA regulations in determining the maximum price of goods not sold during the base period is the rule that, where the commodity differs in size, or length, or number of items in a package, from one sold in the base period, the price shall be decreased in proportion to a decrease in these factors. This rule has been written in to the GMPR by interpretations and has been made explicit'in several regulations, of which MPR 129 on converted paper products is an example. MPR 129 in Amendment No. 8 broadens this rule to include both increases and decreases in the above-mentioned factors when compared with a product sold during the base period. This rule will serve as a basis for determining the maximum price for goods not sold during the base period.
A third variable that has been used in conjunction with the maximum price charged during a base period is to allow sellers of a commodity not sold in a base period to interpolate this commodity pricewise into an already established price series. Thus, if three commodities, A, C, and D, happened to be sold during the base period, and B was sold thereafter, the seller may compute the price of B by putting it in its proper relation price-wise to A, C, and D. This type of variable can be used obviously only where sellers have well-established price lines and where many grades or types of the same commodity are produced. This formula has not been used nearly so widely as it might have been.
A fourth variable that has been employed is to permit a seller of a commodity not sold during the base period to determine his maximum price by adding or subtracting the price change in raw material costs on an item that was sold during the base period. This type of formula is particularly valuable where the same items are being produced but with substitute material necessitated by WPB orders. I understand that it has been used in the Consumer Durable Goods Price Branch for pricing of certain rugs and other fabrics and also has been used in many regulations where the changes in the costs due to the shifting containers or packages were again caused by a WPB order. Furthermore, this variable is subject to rather precise measurement by any seller and can be checked with relative ease by OPA.
The use of these four variables in conjunction with the highest price charged for commodities during the base period has in many cases gone far towards providing a formula for the determination of maximum. prices. However, in most cases it has been found necessary to provide a last resort method for determining maximum prices by leaning more heavily on costs than on already established maximum prices. Section 3 (b) of the GMPR provides the opportunity for sellers to ask OP A to establish an appropriate formula by which the maximum price in these cases can be established. Many regulations specify in some detail the formula that the seller may apply. This procedure could
not, of course, be followed in the GMPR, because of the wide variety of items covered by this general regulation. This leads us naturally into a discussion of the third main foundation for formula pricing, namely, the seller’s pricing methods and costing and pricing factors.
Many commodities are so unstandardized and custom-built for the particular specifications of a customer that reference to the maximum price charged for another commodity cannot be the exclusive basis for determining a proper maximum price. In these cases, the only foundation upon which a maximum price formula can be built is the seller’s pricing method and the cost of the separate elements that go into determining selling prices. However, in determining the content of a particular pricing factor or variable, reference will have to be made in almost all cases to the selling price of some comparable article during an appropriate base period. That reference may be made in order to determine raw materials, or labor, or manufacturer’s costs or margins, but every regulation of which I am aware has, in order to determine some part of that formula, made reference to an established maximum price of some article that can be considered comparable.
The extent to which the selling price in a base period for a comparable commodity is important will depend upon the extent to which each factor in a pricing formula is isolated and defined. Many formulae based upon these factors have been developed in separate regulations issued by this Office. I do not know of a single Branch that does not have some type of formula regulation. The fact that they have been developed in order to provide a pricing method hand-tailored to a particular industry is largely responsible for the wide variety of formulae developed by this Office. This type of formula will without question be a necessary instrument until such time as standardization and simplification of lines have progressed to a point where greater uniformity of products has been established. We can well afford, however, to study critically past, present, and future regulations that are based upon pricing methods and pricing factors, in order to see how much the terminology can be tightened up and made more precise.
Three generalizations on this score can be made. The first is that we must make an intensive study of actual pricing methods in the industry that is to be controlled by this type of formula regulation. From such a study we should seek to gain precision in developing pricing methods to be used, identified, and described in our regulations. A member of the Accounting Department this morning was telling me of a case that got OPA into difficulty because the pricing formula employed in a particular regulation was not at all appropriate for a number of companies that followed an entirely different costing and pricing technique. The net result is that they are going into court. In order to follow the regulation, they would have to alter all their cost accounting methods and, with a large company, that is no small order. So, we must be very careful before we develop a formula regulation of this type to know in considerable detail the actual costing and pricing methods used in the industry we are to regulate. "We cannot, just on our own, clamp upon industry* a pricing and costing method which is unknown to those to whom our regulations apply, even though it may seem appropriate for our
purposes.
The second generalization is that we must attempt to place limitations on the variable factors in our formulae in efforts to reach the maximum precision both as to pricing methods and factors to be used by those methods. Without maximum precision, formula pricing of this type will not only fail to provide the seller with clear-cut rules for determining his maximum! prices but will also make the job of detecting violations an almost insurmountable one.
The third generalization is that we should realize that the more precise we make our formula pricing, just to that extent do our formulae become more complicated and difficult to understand. We must remember that, probably four-fifths of all the companies with which we deal do not have adequate costing and accounting methods established and, if we come out with a very precise and carefully defined but therefore complicated formula, these people are going to throw our regulations in the wastebasket. The same accountant with whom I was talking this morning has made a very useful generalization by saying that an accountant can, with great ease, prove that a seller abided by a formula regulation, but finds it very difficult to prove that he did not abide by it.
Many of the formulae in our regulations attempt to separate three main factors: raw materials, cost of conversion, and margin. I will take up each of these three factors in turn and attempt to point out the various ways in which they have been construed.
The variable that is subject to the most precise definition in any formula is raw materials. There are a number of ways in which the maximum amount for raw materials may be computed by any manufacturer. The first way is to say that the maximum amount is the supplier’s ceiling price for a particular raw material. The precision with which this factor, so described, can be determined depends upon the nature of the ceiling under which this raw material is sold. If the ceiling is of the dollars-and-cents variety, the amount can be ascertained with great ease. If the ceiling is. of the formula variety—that is, where each seller has his own maximum price—then this amount may vary, depending upon the supplier from whom a manufacturer purchases his raw materials. When his raw materials are •under a formula ceiling, the manufacturer will, in all probability, use his actual costs of raw material, on the assumption that his supplier was not selling him in excess of his ceiling.
A second method for determining the raw-material factor may be to use the current cost of acquisition. An example is MPR 187 on fiber containers. Current costs of acquisition may or may not be identical with the ceiling price. If the business of the manufacturer concerned is part of an integrated operation, or if he is able to make favorable raw material purchases below the ceiling, the use of acquisition costs will reduce the value of his raw-material factor when he comes to compute his maximum prices. This definition of rawmaterial costs is attractive when an important raw material has been selling below ceiling levels, but presents considerable difficulties to the manufacturer in that at different times he may have varying raw-material costs to compute for each item. This difficulty can be partially overcome by stipulating that the manufacturer may recompute his raw-material costs monthly or quarterly.
The third method for determining raw-material costs has been to
figure them as of a certain date. This method will make it possible for the seller to use a permanent maximum raw-material factor in his pricing and will also deter him from unnecessarily or unwisely paying higher prices for his raw materials. Where raw-material costs have increased since the base period selected for this method, increased costs will have to be absorbed out of margin. Furthermore, the Office can expect to receive numerous complaints from the industry involved. However, this method should be employed wherever the margin of profit has been large because by requiring the manufacturer to figure on lower than actual costs, that margin can be reduced.
It is difficult to say in the abstract which of these various methods is the best. Before a selection is made, a careful study should be made of the ceilings under which the raw materials are regulated. You must study the nature of those ceilings, the movement of the raw material prices, and the level of the prices that the regulation is designed to establish. On the whole, the safest way is to require that raw materials be figured on acquisition costs as of a certain date, or on ceiling prices, whichever is lower.
The second variable in the formula may come under the heading of conversion charges, which is perhaps the most difficult problem in defining and limiting the factors of any pricing formula. By conversion charges, I mean all those expenses other than raw materials,, interest charges, taxes, and profit. Some regulations have frozen those conversion charges as a lump sum. Others have attempted to break them down into their constituent parts, such as labor, overhead, selling-and administrative expenses, etc. I promise you that I am not going to be drawn into a detailed discussion involving complicated accounting terminology and techniques. It will serve our purpose here if we-discuss some of the general problems that arise in making clear the definite measurements of these constituent factors.
One of the constituent factors that have frequently been separated from the general term “conversion charges” is wage rates or labor costs. This procedure has been followed wherever labor bulks large in the final cost of a particular item. Attempts to define the wage rate that may be employed in computing the price of any specific item are bound to run into a number of difficulties, the first of which is. determining the maximum rate that may be applied to a particular manufacturing process. If the term “highest wage rate” is emplqyed,. we may get an inflated factor if different workers are paid different rates for performing the same process. Furthermore, it is difficult to calculate the total amount of labor time that should be properly allowed to make a particular item. This is particularly difficult when many different items are being produced at any given time. These two factors, the actual rate and the amount of time by which this rate should be multiplied, limit the effectiveness of segregating wage rates to those processes that are relatively simple and uniform.
Where they are complex and where wage rates are difficult to determine, it is far safer to use a general term, such as total manufacturing costs or conversion charge, that will include in its definition both labor and factory overhead. This general factor can be defined with more precision in those industries where labor and overhead are determined in terms of rates for hand operations or machine operations.- Where the rates per hour of a particular machine operation have been estab
lished in a particular industry, the maximum precision in handling this factor can be gained by freezing these rates as of a particular time. Care must be taken, however, to ascertain whether a profit factor has been included in this rate. If it has, then no additional profit factor can be allowed. Where industry has not developed rates for a machine operation and where a formula therefore allows for allocations of indirect cost in computing the total manufacturing cost of a particular item, we should recognize that we are laying ourselves open for all kinds of accounting manipulations. In these cases, the only thing that can be done is to study carefully the costing practices of the industry concerned and so describe the applicable conversion charges in a way that will reduce to a minimum the freedom of choice for a particular manufacturer.
Let me now discuss margin. Margin as one of the variables to be computed in any pricing formula has been used in our regulations in two different ways: To describe the difference between the selling price and those factors that have already been identified, and as a term to describe profits.
As used in the first context, it refers to those costs and other charges incident to making a particular product that remain after certain particular items have been isolated and identified. For. example, some formulae are composed of two parts, a raw material factor and then a margin between raw materials and selling price. This type of formula has already been described, and margin, so-called, is useful in those cases where raw materials bulk large in the final costs, and where manufacturing or processing is relatively simple.
Margin is also used to mean the difference between raw materials and direct labor costs on the one hand and final selling price on the other. Here the variables have been isolated one further step, and the factors to be included in margin are consequently limited and reduced. In a few other cases margin has been used to mean the difference between raw materials and total manufacturing costs on the one hand and selling price on the other.
MPR 136, the Machinery Regulation, and MPR 188, the regulation that covers new building materials and consumer durable goods, are good examples of regulations that established margin as the difference between materials and direct labor and the selling price of comparable items. In this case, margin would include such items as selling and administrative expenses, interest on investment, taxes, etc. As more factors are identified and isolated, margin becomes more and more narrowly defined. The extent to which it is wise to separate from this general term “margin,” the various factors over and above raw materials costs must be determined by the complexity of the industry to be regulated, and the ease with which individual variables can be described. It should be recognized that the more factors that are included within the term “margin,” the less chance there is for accounting manipulation. However, what is gained in safety is lost in inflexibility. It should be also recognized that the use of margin, no matter what factors are included within this term, requires reference to the selling price of some other item, the maximum price for which has already been established. I merely mention this to point out that- even in the most refined type of cost formula, there will be dependence upon the establishment of a similar product for purposes of reference.	r
“Margin” is also used in some regulations as a synonym for profits. ! Stipulating the amount of profit that can be earned on a particular 'item is fraught with extreme peril. Unit profits are at best difficult to compute and at the worst are subject to all the accounting manipu-' lations in the book. In order to show a high profit on the item with which comparison is to be made, overhead can be allocated at a minimum. If this high-profit factor is then used as the gauge of profits on a new item, particularly if overhead has been heavily loaded into the cost of manufacture of this item, the possibilities of getting inflated prices are immeasurable. Extreme care should be taken, therefore, in drawing up any formula regulation that attempts to define unit profit as such. The constant help of our best accounting talent will be needed in order to avoid the pitfalls in the way of any correct administration and identification of such a factor.
Even assuming these difficulties are surmounted, there will remain a problem in connection with profit for those industries that are accustomed to determining the amount of profit to be gained on a particular sale by the class of customer for whom the article ite intended. Where the profit margin is directly tied in with a class of purchaser, it is necessary that that correlation continue. The result is that one more variable, namely, class of purchaser, has been introduced into the picture, a variable which is subject to little precise measurement.
Let me summarize the main conclusions that can be drawn from this discussion and analysis of the formula technique of price control. First, it seems clear that for some time to come, our regulations are going to have to rely on one or another of the formula techniques already described. Second, the difficulties in using these formulae, while they differ among the various types, will only be surmounted if the business-entities so controlled have a clear understanding of our intent and are prepared to abide by not only the letter but the spirit of the regulation. Third, in fields where formulae are necessary, every effort should be bent to determine the practical extent of further standardization and simplification of production and even, where possible, distribution. Fourth, where formulae are absolutely necessary, efforts should be made to couch them in simple language, so that they will be readily understood, and to describe the terms involved with maximum precision. Fifth, that wherever possible, attention should be given to the transforming of the formula regulations into regulations with precise prices. In many cases, this can appropriately be done by requiring the seller to figure out his selling prices according to the formula, and to submit them for OP A approval. This procedure is, of course, out of the question where a multiplicity of firms or of products is involved. In any event, we should, wherever possible, require a post-audit check of the prices so determined, either with or without a stipulation that the prices are tentative until approved by this Office. This approval can take the form of a specific approval, or the use of the technique that unless they hear from us to the contrary within a certain time, the price is approved.
In an economy as complex as ours, formulae are a necessary instrument of price control. We will not be doing our job, however, unless we introduce into the administration of these formulae the maximum of precision, based upon careful study of the factors to be employed.
3.	FORMULA PRICING1
Roswell Whitman
Chief, Review and Adjustment Branch, Reta'd Trade and Services Division
Section I. Introduction.
Much discussion of 3 (b) pricing has proceeded on the assumption that the elaboration of a precise formula is equivalent to the determination of a precise price. Though a single dollars-and-cents figure may be arrived at, the nicety of the formula is no guarantee that the price is the one envisaged by the formula. Such an assumption is not only contrary to fact, but prevents any pragmatic discussion of the problem. In order to make possible orderly discussion in this introduction, I will set forth and attempt to answer certain major issues. These principles will be the framework upon which my conclusions and recommendations will be based. If they are acceptable, my conclusions and recommendations will follow. These principles, although not having the force of axioms, can be demonstrated without elaborate argument.
The basic proposition, contrariwise to the one stated in the first paragraph, is that 3 (b) pricing, perhaps even all formula pricing, is not a rigorous and precise method of price control. . It is imprecise and nonrigorous in spite of whatever precision there may be in the actual formula as such. The important corollary to this proposition is that, contrary to the belief of some, a 3 (b) formula cannot be used to administer a precise squeeze to an industry, and strict application of a 3 (b) formula written in terms of the ideas of OPA as to proper price and profit levels cannot be enforced across the board in the face of ingrained industry practices. I further believe that an attempt to use 3 (b) pricing for such aims is not only useless but probably results in less, rather than more, price control.
Before elaborating on these points, let me quickly disclaim any apostasy from the basic OPA program. I believe in as tight price control as can be justified on the usual OPA standards and can be administered effectively. I also subscribe to the use of price control in some instances to reduce “exorbitant” profits, although somewhat less enthusiastically. I am, however, flatly opposed to any plan to use 3 (b) as a tight price and/or profit control.
My position can perhaps best be illustrated by reference to the recent amendment to MPR 41 (Steel Castings). This amendment slashed prices for a wide category of castings from the too high levels of original regulation (a point which I am free to make, since I was largely responsible for the original level) by changing a freeze
1 Excerpt from a report on the problem written March 1943.
120
to a specific set of prices on a lower level. This action will undoubtedly be very effective, but I can say, on the basis of my own experience, that to have set the standards of the new schedule by a process of reviewing the prices of new castings (the regulation had an automatic price device, with review) would have been impossible. The bickering would have been endless, and little would have been accomplished. In other words, tight price control was achieved by writing a precise schedule, and not by attacking individual small problems piecemeal.
There are several reasons why 3 (b) pricing cannot be tight:
(1)	In many instances there are alternative opportunities to produce. If the price established for a new item is too low, it will not be produced, even though it may be essential to the war effort. This point was basic in the problem of price control in castings, and will be also on a number of items still under control of the GMPR.
(2)	The matter of reporting either before or after setting a new price is at least 99 percent a matter of Voluntary compliance. Does anyone imagine that the 3 (b) orders issued by the OP A in the 10 months the GMPR has been effective represent more than a fraction of the new prices set and which should have been priced through 3(b)? Does anyone claim that we will ever have an enforcement program that will catch more than a minor fraction of such violations?
2 (a) and 2 (b) pricing is so loosely controlled that practically any businessman can claim he was pricing under these provisions or, at the worst, can plead ignorance convincingly enough to avoid a court case.
(3)	Costs upon which the price is based are usually only inaccurate estimates, and have an unknown amount of padding in them. It does not take much trouble for the businessman to arrive at what he thinks is a “fair and reasonable price.” True, OPA may cross him up once, but the next time he will have his figures ready. Theoretically, this padding of costs is subject to our control; but who will claim that the administrative resources are available to control the problem ?
If the basic proposition that 3 (b) pricing is neither rigorous nor precise is accepted on these grounds, certain fairly simple conclusions as to the proper framework for 3 (b) pricing can be drawn.
(1)	The 3 (b) pricing formula must be as easy and simple as possible to enable the businessman to comply. It should be set up for a maximum of speed and a minimum of red tape.
(2)	The price arrived at should be strictly an “in line” price. It should have no more and no less squeeze than the particular business man has under the GMPR or under another pertinent regulation which has a provision similar to 3 (b). It is not always easy to apply in practice the meaning of “in lineness,” but the detailed recommendation will attempt to cover it as well as possible.
(3)	The formula used, whether stated explicitly or not, should appear fair and reasonable to the businessman. This means that in practice OPA should not try to impose its theory of “in lineness” on the businessman who has customarily had some other theory.
(4)	Administration rather than a formula is the keynote to the control of new goods pricing. Effective administration requires:
(a) Speed of handling.
(&)	Fair application of criteria which the industry understands and accepts.
(c)	Close contact with the industry, a knowledge of its problems, the cultivation of a spirit of cooperation.
(d)	Knowledge of prices and costs in the industry.
The main purpose of working out a proper formula is to make possible a sound administration of the pricing process.
In conclusion, it should be admitted that the enforcement of a “tough” formula is possible when the number of firms is small and the knowledge of the authorized office is comprehensive. In general, the better the administration, the tighter the formula can be. This, report, however, is mainly concerned with what should be done about the tail-end problems of pricing new goods, still under the GMPR. Here the administration is not tight. Hence the attempt will be made to find a formula and procedure that will lay the basis for the development of administrative control. It is on this theory of the objective of 3 (b) pricing that the balance of the report will depend.
A question has arisen as to the relationship between the general policy recommended for 3 (b) pricing and the tougher standards set for action on adjustments such as those on military goods. It should be pointed out that the standards used for adjustments simply are unworkable if applied to 3 (b) pricing for the reasons stated above. The circumstances of adjustments and new goods pricing are, after all, considerably different and sufficiently so to alter the standards used. The abstract reconciliation of the standards for two different types of action is less important than having workable standards for each action.
Section II. Present Standards of 3 (b) Pricing.
While no attempt has been made to examine all cases of 3 (b) pricing under the GMPR and under other regulations having a similar provision, a sufficient number of cases, together with materials provided by the Branches, have been examined to make possible a statement of the present standards and criteria used for 3 (b) pricing. A fairly detailed summary of these standards is given in another part of this report. At this point a general summary and a broad evaluation of the current situations are appropriate.
In spite of the diversity of methods and standards of 3 (b) pricino-, three major approaches can be distinguished:
(¿0 A price for a new item can be established by reference to the prices of competitors. This can be called the “competitive price” method. It has been less used than the others, although in a number of cases it may be used as a supplementary method.
(^) The second method of establishing the price of new items may be called the “comparable product” method- The price of the new item can be determined by adjusting the difference in direct cost compared with a comparable item (dollar margin standard) or by multiplying the direct costs of the new item by the percent margin on the comparable item (percent margin standard) Essentially this is parallel to the method established by 3 (a) for wholesalers and retailers.	' '
(c) The third method can be called the “cost analysis” method.
This differs from the second method only in the way in which the proper margin is chosen. Both methods start out with direct cost, but in the cost-analysis method the margin is determined not by direct reference to a comparable product but by applying the seller’s standard cost, by taking general indirect costs of the industry, or by using other similar methods which appear to give a proper differential between direct cost and selling price.
While the method of various branches can be divided into these three basic approaches, there is no discernible standard for choice between one method or another. Apparently the preferences of the people involved have been controlling. However, certain trends in choice of methods can be observed and are discussed below.
The competitive price method is less used than the other two, especially when GMPR 3 (b) pricing is involved. For other price schedules which establish dollars-and-cents prices the same basic type of pricing technique can be frequently used for setting 3 (b) prices. The price of the new item can be related to the other schedule prices on the basis of the same logic used originally to construct the schedule. In this instance, of course, the schedule prices are the competitive prices.
The comparable-product method is the main choice of the various Branches. The choice of this particular basic method, however, does not bring with it any necessary uniformity in application. The divergencies in use are very marked.
Probably the most typical case is the calculation of the prices of the new items on the basis of March wage rates and material costs and the addition thereto of the March margin on the comparable item. In the application of the general formula, however, the following types of divergencies can occur: Calculation of costs can be based on March, current, or October 3, with margins determined accordingly or not as the case may be. The margins can be calculated on a percent or dollar basis or a combination of the two. Costs can be defined as direct costs narrowly calculated or they can include various components of factory burden, etc. Definitions of a comparable item also vary greatly. Furthermore, the margins arrived at under this method can be deliberately squeezed by reference to competitive or industry or some other margins.
The third method, called here the cost-analysis method, can have a still greater diversity than the comparable-product approach because of its necessary generality. The same number of choices exist with regard to the base period for cost calculations. The detail of the cost data in some instances is very great and in other instances is quite sparse. Cost can be built up on the basis of cost-accounting methods of the particular firm with a wide choice of dates from which the cost factors are taken. The opposite extreme is the taking of rates which seem to be fair and reasonable to branch personnel knowing the industry or having cost studies of it. The choice of margins may also range from theoretical March margins to current over-all margins based upon profit study of the firm, or to known industry margins, or to margins which are considered fair and reasonable by the branch personnel.
In conclusion, it appears that not only is a wide range of standards and methods of 3 (b) pricing found, but that variations are apparently
not explainable in terms of industry differences or differences in the facts of particular cases. True, in some cases the choice of the basic method will be determined by the facts of the case, but in the particular detailed formula used there is no apparent basis for choice. Surprisingly enough, methods differ as much or more within a Division or even within a Branch as they do among Divisions. .
Quality of the work on various 3 (b) cases from the standpoint of meticulousness of handling and care in gathering pertinent data, the logical application of whatever criteria were in use, and the general expeditiousness and neatness in handling differ among Branches as much as criteria used.
The question of whether the final prices arrived at by the variegated pattern of 3 (b) pricing used in the National Office in the last 10 months are too high or too low is beside the point. The major question is whether or not improved handling of 3 (b) pricing can improve our general control over the pricing of new merchandise. Of the answer to this, I believe, there can be no doubt.
Section III. Critical Issues in 3 (b) Pricing.
In this section of the report I will discuss what appear to be the critical issues in working out proper standards for the control of 3 (b) pricing. Specific administrative problems will be discussed in Part 5. At the end of the discussion of each issue my recommendation is stated. The issues which I am about to discuss have resulted from (1) our perusal of the wide sample of files on 3 (b) orders, (2) the statements of various Branches on their ways of handling 3 (b) pricing, and (3) numerous conversations with the people actively concerned with the problem;
Issue 1. To what extent is standardization of criteria and automatic pricing of new products feasible?—These two problems may seem somewhat different at first glance. I have bracketed them here because, from the standpoint of policy and procedure, they seem to be closely related. First, let me discuss briefly the possibility of standardization of criteria. When the GMPR was first issued there was considerable discussion of the possibility of setting forth standards for new goods pricing. Apparently at that time there were so many different opinions on the subject that it was left open. The present Section 1499.3 (b) is a postponement of the problem.
From the point of view of OPA as a whole I do not see any sound basis for differing the treatment of people subject to the GMPR merely because their cases are handled by one Branch rather than by another. To this and to the desirability of standardization there will be general agreement; but it will be said that circumstances differ so much that standardization is not possible. Our own exploration of the problem however, did not disclose sufficient differences to justify the variety of treatment now taking place. While our position is not proven until the subsequent argument has been read, we believe the following degree of standardization to be not only feasible but desirable:
(1)	Universal rules for choice of pricing methods: competitive price, comparable-product, cost-analysis.
(2)	standard formula for the comparable-product method.
(3)	Establishment of general principles and setting of controlling patterns for cost-analysis pricing. Here precise meth
ods will differ in each case, but there need be no departure from the principles.
I believe that such a program will cover not only all of the GMPR 3 (b) cases but also most other 3 (b) cases as well. Some change in formula and approach is possible under a separate new goods pricing regulation, but a maximum of uniformity is still desirable.
Granted for the moment that considerable standardization of criteria is possible, what about the question of automatic pricing ? It is my belief that if criteria can be sufficiently standardized and uniformly applied by each Branch they can also be set forth for uniform application by businessmen. If this is true, there is certainly .no' excuse for not having automatic pricing whether or not reports are required. Certainly the present procedure under 3 (b) is inefficient. We may say that OPA does not have to adapt itself to normal business practices, but we can be certain that business practices will not automatically conform to OPA desires. If a businessman cannot obtain a price for a new product for 3 to 4 months or longer, his likelihood of attempting to get the price rather than going ahead on his own is rather . slight. The experience at the time of the issuance of Regulation 188 was instructive. After the issuance of this regulation an increasing flow of reports on prices established came in.
Going back to principles of the introduction, & (b) pricing must be-as quick and as efficient as possible. . Automatic prepricing, with review, if desirable, is the only way this can be accomplished. Furthermore, it is feasible if proper standards can be set forth, and judging by MPR 188 experience, it will give much better results than present 3 (b) pricing under GMPR.
I do not believe there will be much opposition to this plan; Branch by Branch, there has been a tendency to develop automatic prepricing arrangements. My proposal will speed up this process and prevent a considerable amount of duplicate activity by the Branches.
Recommendation.—The handling of 3 (b) pricing should be standardized for all new goods pricing under the GMPR in accordance with the three points stated above. The non-GMPR 3 (b) pricing should be similarly handled unless there are strong reasons to the contrary. The burden of proof should be on the Branch proposing the change. The standard formula for the comparable-product method should be incorporated into the GMPR to permit automatic pricing with reports.
The details of this recommendation are discussed below and incorporated in the other parts of this report.
Issue 2. To what extent should 3 (b) pricing be used to discourage production of new items?—In the introduction to this report, the question of the use of 3 (b) prices to effectuate a squeeze was discussed briefly and was disposed of with the argument that 3 (b) pricing should be neutral in its effect; that is, it should give no more and no less squeeze than the GMPR and thus should result in about the same percentage margin of profit that the businessman has in alternate product opportunities. This position was taken largely on the basis of the administrative difficulties of using 3 (b) to effect a squeeze. This price is also theoretically proper, since it is “in line” with March prices as laid down in Section 1499.3 of the GMPR. The one place, however, where this theory of neutral “in line” pricing does not hold
is where it appears desirable to prevent the introduction of new items. In many fields new items are extremely important and desirable, due to raw-material shortages and similar problems. In other cases, however, the introduction of new items may be part of a deliberate attempt to evade a squeeze on the item being produced. The Textiles Division believes this is particularly important in many of their lines and has been interested in giving penalty prices to new items on the theory that this would discourage the dropping of other items. The effectuation of this theory is, of course, dependent upon having 3 (b) prices reported to the National Office. It stands to reason that the more certain the imposition of a penalty price the less likely the businessman is to give OPA a chance of setting such a price.
My conclusion from this is not that penalty pricing is improper but that another method of doing it must be found. Ideally, a regulation should be written which would provide automatic penalty pricing if the businessman or manufacturer departs from the production of items listed in the schedule. This is an important part of thé method in the new rayon hose schedule. If is probably adaptable to other regulations ; 3 (b) pricing may, if desired, be a method of getting relief from the automatic-penalty price of such a schedule, and standards upon which prices will be established should be decided by the Branch and incorporated into the schedule. Thus an “in line” price may be granted if the production shift is desirable and otherwise should be refused.
Recommendation.—3 (b) prices should be “in line” prices, giving the same squeeze as on established lines and thus yielding neither more nor less profit than alternative production. If it is desired to discourage production of new items, either because they may be used as an evasion of the schedule or for other reasons, this should be done by constructing a schedule which contains an automatic-penalty pricing provision; 3 (b) orders should not be used for this purpose.
Issue 3. To what extent should the competitive level of prices and competitive profit and margin levels be used in 3 (&) pricing?—Various Branches have differed considerably in their stress on competitive prices and margins in determining 3 (b) prices. In general, the Textiles Division has given greater emphasis to this approach than have other branches. Part of this is apparently due to their desire to use this approach as a means of reducing prices. In other words, if a competitive price-could be found that was lower than the price requested, this would be a basis for cutting the requested price; and, if competitive margins were apparently lower than those requested, they could also be used as a standard for price reduction. Their present trend, however, is away from using competitive prices (Amendment 16 to MPR 118).
The question of the use of competitors’ prices and margins arises in a number of circumstances. First, there is the question as to whether 3 (b) pricing should be used at all under the GMPR. Since 3 (b) pricing cannot be used in the GMPR if it is possible to price by a competitive product sold in March, it would theoretically be proper to spend considerable time, or force the applicant to spend considerable time, in finding competitive prices. Our experience with using competitive prices as a standard in the GMPR, however, has not been satisfactory. When a competitive price is readily known it should, of
course, be used to establish the applicant’s price under 3 (b) formula. When it is not readily known, however, it is usually preferable tb accept the applicant’s statement that no competitive price was established in March.
Second, should the competitor’s price be used in 3 (b) pricing not under the GMPR ? If the MPR is a freeze regulation, the above holds; but in certain price regulations the competitive levels are established by the regulation itself in fixed dollars-and-cents prices. In such circumstances the proper “in line” price may be established by direct reference to the quality or “value” of the item as compared with the prices fixed in the regulation. Alternatively, the “in line” price may be set on the relative costs of comparable items. The choice of approach will depend largely on the industry. Ideally, a cost analysis should be required of the applicant, and the “in line” price on a cost basis should be checked by direct reference to the structure of prices in the regulation.
Third, there will be instances when pricing “in line” with an applicant’s own March prices will be impossible. (See discussion of issue 4 below.) This will occur because the applicant was not producing in March 1942, or was in an entirely different line, or has extremely poor cost records and little chance of getting good cost estimates. In such instances, if the information can be obtained, pricing on the basis of competitors’ prices will be the soundest method.
A unique variation of this method has been developed by the Consumer Durable Goods Price Branch. The proposed retail price of the new item, based on cost estimates and normal margins, is compared with the prevailing retail price of similar items. A price is selected which is “in line” with such prices; i. e., one which gives approximately the same consumer value. This is then checked back against the requested price, which is based on estimated costs.
Fourth, competitors’ margins as well as competitors’ prices are very useful in checking the reasonableness of the applicant’s price by allowing a check of the reasonableness of the requested margin. Knowing full well the possibility of manipulation in arriving at a price, it does no harm to check the situation against the known industry facts. The theory of using the industry data in this case, however, is not to squeeze the applicant’s price below a true “in line” price but rather to correct what we suspect will be a price higher than the applicant’s actual “in line” price. It would appear, therefore, that competitive margin data are a check on the exact price arrived at rather than a standard of pricing, and they should'be used accordingly.
Recommendation.—A price “in line” with competitive prices should be set for other than GMPR 3 (b) prices provided this is suitable to the regulation concerned. As for the GMPR, an applicant should be forced to use a competitive price rather than a formula price only in the most obvious cases. Except that, when the comparable-product method of pricing cannot be used, and pricing on the basis of general “in lineness” with the seller’s own prices (by cost-analysis method) is not satisfactory due to poor costs estimates or uncertainty as to proper margins, "competitors’ prices should, if possible, be used to determine the price of the new commodity..
Issue 4- "What is the proper dividing ling between the use of the cost-analysis method and the comparable-product method of 3 (b)
pricing?—As defined in Section II, the comparable-product method is the setting of a price for new goods by adding to the direct costs the margin on a comparable product or products. The cost-analysis method is the setting of a price on new goods by adding to the direct costs the other elements of costs and profits as shown by the books of the applicant or found to be typical of the industry. The comparable-product approach is subject to fairly exact formulation and is therefore suitable for use as a basis for automatic pricing. In view of the desirability of automatic pricing, the comparable-product approach should be preferred to the cost-analysis method, other things being equal.
There are two situations, however, in which the cost-analysis method should be selected. The first instance is that in which cost-accounting methods of the industry are well established, in which the industry habitually prices new items of merchandise in a formal manner according to regular rules of procedure, and in which the methods of cost accounting and the quality of such costs accounts are known to the OPA. In such instances cost-accounting methods may be so sound as to permit the use of the method without even a reporting of prices to the OPA. This is the control adopted in MPR 136. It is presumably successful in this schedule partly because of an intensive educational campaign in the industry and partly because the necessary conditions as stated above are present.
Most areas in which this approach is to be preferred have probably already been blocked out in special regulations directing the industry to price in its usual manner with the use of certain base date cost figures. Such regulations may or may not require the reporting of the price to the OPA. There have turned up, however, certain areas covered by the GMPR in which this method of pricing has appeared suitable. One example was the Crane Co., where a great number of new items are turned out yearly. The company also has standard cost-accounting methods, a formal method of arriving at new prices, etc. The solution adopted for this company of writing a special automatic price regulation (in the form of a 3 (b) order) was very desirable and should be adopted in other cases where circumstances are similar.
In the balance of cases the comparative-price method, as indicated in the proposed GMPR Amendment or in MPR 188, etc., should be used whenever possible. This method, it is true, is somewhat more arbitrary than a very carefully applied cost-analysis basis, but in practice it will be more effective except in those cases already noted. The staff of the OPA simply does not know enough about margins and cost structures in most 3 (b) pricing situations to establish a price which is superior to the one found by a straightforward selection of margins on comparable commodities. The fact that the comparable-product method can be used for automatic pricing is in itself sufficient to make it preferable to the cost-analysis method whenever it is applicable.
The second situation requiring the use of the cost-analysis approach arises when the comparative-cost method is not applicable. The latter method requires comparable products, and in many instances this will not be the case. The manufacturer may be new in the business or going into a new line. The radical changes of the product may be
such as to make impossible the finding of a comparable item. Furthermore, the firms may be so small as not to have a standard method of accounting which would permit ready comparison of margins. In these instances a formal method of obtaining the margin on comparable products is not applicable, and for better or worse the price must be arrived at by building up the cost on individual products (or by reference to competitive prices as discussed above).
The recommended division between the two methods has been that toward which the various Branches have been drifting. While in some instances one finds that cost-analysis method has been used even though the margin on comparable product method was probably available, there should be little opposition to the recommendation.
Recommendation.—The cost-analysis method should be used in a few instances in which it is distinctly preferable because certain conditions are present, such as a standard cost-accounting method for the industry, etc.; otherwise, only in those cases in which the margin on the comparable-item method is inappropriate due to the lack of comparable items or marked inadequacy of cost data.
Issue 5. Should dollar mark-up or percent mark-up or combination, of both be 'uped?—There has been a considerable diversion between the Branches on the question of whether to use a simple percent mark-up on the comparable item or dollar mark-up on the comparable item, or a combination of both. The logic of introducing the scheme of the dollar mark-up apparently is that since there is a general tendency to move into higher price ranges or to obtain higher costs for the same product because of substitute materials it is inequitable and inflationary to give the same percent mark-up on the higher base cost. The argument against the use of the dollar mark-up is that in a great many cases the comparable item is not logically related to the item being priced and, therefore, whether the applicant is squeezed on his current percent margin (which may be already squeezed by the GMPR) is more or less a matter of chance. The method is arbitrary and may result in a price which is inequitable.
The case for using the dollar margin makes the most sense where the item being priced and the comparable item are closely associated. This case might arise when the major change is the substitution of one material for another, and the differences in unit direct costs are, say, less than 20 percent. When comparisons have to be made with items not in the same cost range, the dollar mark-up provision, whether used by itself or combined with the percent mark-up provision, seems to have less argument to support it. It is most safely used in an industry in which the new item is almost certain to be a close substitute for the comparable item, but even in such instances erratic results may be obtained.
A third alternative (to the use of either percent mark-up or dollar mark-up alone) is to use dollar mark-up for certain items (such as those with only a .small change in cost, or only a change in material) and percent mark-up for the balance. The objective of such a compromise would be to carry the dollar mark-up concept as far as it could be justified, and only then to switch to a percent mark-up, The obvious objections to the scheme are the increase in complexity, the difficulty of differentiating the items to be priced by one method rather than another, and the introduction of a squeeze in one situation and not in another.
The percent mark-up method has the virtues (as against the other two methods) of simplicity, of being in accordance with business psychology, and of avoiding the arbitrary results the others give. Besides, it will give a fair “in line” price in almost all cases.
Recommendation.—The simple percent mark-up on the comparable item method should be used in 3 (b) pricing in the GMPR. In specific new goods regulations a somewhat greater complexity of formula may be permissible but only if it can be shown that the formula proposed fits the industry’s pricing practices and circumstances better than does the established alternative.
Issue 6. How to define comparability.—Issues which have arisen in the definition of comparability are, first, whether process or use of product is a better basis. This issue, unfortunately, cannot be decided for the general case. In one instance the process may make the best comparison, and in another case use or type of item may be better. Therefore, only a general definition is possible for the GMPR.
The second issue arises when an established business begins to make products in another industry. Is the business to be permitted to use the margin based upon the most similar commodity in its regular business, or must it take margins in new business? Generally wherever this question has arisen the decision has been made to hold the business to the margins of the industry iii which it is entering, but no higher than its previous margins.
The third problem is whether the selection of items is to be permitted under a general broad definition of comparability or whether selection is to be tied down more arbitrarily. The alternatives are to tell the applicant to take the “most comparable commodity” or to tell him to select among comparable commodities the item with a certain arithmetical relationship to the new item. One method of doing this is the “sandwich” procedure in MPR 188. This requires the choice of two comparable items: the one with the next lower and the one with the next higher direct costs. A second alternative would be to depend on only one item, defining it as the one with the next lower cost or (if not available) the one with the next higher cost or the one with the nearest cost. This requirement may be further tightened by limiting the permissible spread between the costs of the new and the comparable item. The “sandwich” method has the advantage of getting more than one item for comparative purposes. It has the disadvantage of sometimes leading to peculiar results, particularly if it is combined with the dollar or percent mark-up—whichever is lower—technique. It also requires more steps in calculation bv the applicant.	J
Recommendation.—-In any general amendment to the GMPR, comparability must be defined fairly broadly to bring in the concepts of both process and use of product. If it is essential to have a more rigorous definition of comparability, a separate regulation must be pre-pared. Whenever a firm enters a new business the new or old margin— whichever is lower—should be the standard. Within the limits of comparable, the choice of the seller should be limited to the item whose costs are nearest to the item being priced. The “sandwich” method is too complex for the GMPR and is generally not to be jprcicrrcci.
Issue 7. What should be the choice of base period?—The problem
of choice of base period has been given a great deal more importance than it deserves from a substantive point of view. Leaving aside the fact that errors in cost calculations overshadow the results of precise formulas, the specific base period chosen is not vital. Let us first examine the comparable-product approach. This approach may use a dollar margin or percent margin (the latter if our recommendation is accepted). The comparative results are shown in the mathematical appendix to this section. For the typical percent margin case it can be seen that whether base-period costs and margins or current costs and margins are used the results are identical. When the dollar margin is used the price of the new item will be higher under the current cost and margin basis than under the March basis if costs have increased because of a change in materials, and lower if they have decreased. The difference is not great; and furthermore, actual observation of cases shows decreases in material costs to be about as frequent as increases. A serious difference in results from the choice of one rather than another base can occur, however, when the cost change from March to date has been different for the new and the comparable item. This is most apt to occur in a food-processing industry, since many ingredients were not under March ceilings. Thus the March base in some instances will give a higher price than the current base will. The current base, which is keyed directly to present production alternatives, is more certain than the March base to give a reasonable “in line” price in all circumstances.
Other than in this particular situation, however, the choice of March versus current is largely a matter of psychological rather than of material importance. We might prefer to use March cost if we wanted to impress the businessman with how tough we are, whereas we might choose current costs as being more likely to elicit voluntary cooperation and accurate calculations.
The problem in the cost-analysis method of pricing new goods is quite different. If the method is automatic, such as in Schedule 136, base-period rates obviously must be used in order to get an “in line” price. The logical parallel to this would be to take current costs and add the March margin (of the class of items, the entire firm, or the industry, as the case may be) properly adjusted for the squeeze which has occurred since that date. Practically speaking, it will be found that in most cases of cost-analysis pricing neither method can be used at all precisely. If the recommendations of this report are followed, the cost-analysis method will be used only when pricing cannot be made against comparable items. In practice, this means that the most frequent cases will be those of a firm just beginning business or entering an entirely new type of production. It is obvious that in their circumstances the March costs are not going to be accurately determined, nor, for that matter, are the March margins or profits (properly squeezed for increases in costs since that date). In practice, the price will frequently be set on the básis of current costs plus “reasonable” margins and profits. About the only practical issue is whether the fiction of March costs is to be maintained. ;
Recommendation.—In using the comparable-item method, I recommend that current costs and current margins be the standard. In my opinion, no material advantage is gained from maintaining the March base, and the use of a current base has definite advantages from its
apparent simplicity in getting cooperation of the trade. In the costanalysis method the standard should be current direct cost plus a “reasonable” margin;, i. e., in line with the current margins. The fiction of March cost should be abandoned in such cases.
The handling of the case, however, should make clear that costs are not to be based on wages higher than those permitted bv War Labor Board rulings.
iiMathematiccdr> appendix to discussion of issue 7
Let px=price to be determined
/>2/=price of comparable product as set in the base period cx=direct costs of new item calculated on base-period wàge rates and material prices
Cy~ direct costs of comparable item figured on the same base h>=multiplier to transform base period cost to current cost.
If price is to be set by the percent margin method, then the baseperiod cost and base-period margin gives—
Px^—^Gx Cy
Using the current costs, current margin standard we have—
Px
It is apparent by observation that the formulas yield identical results, provided, however, that the costs of the new product and the comparable product change by the same degree; i. e., the Æ’s are identical This will usually be, roughly, true since the comparable product is defined as being made by the same process and has a similar use. If, however, the Ids are different, the current costs, current-margin standard, gives a higher price than the base-period standard, provided the costs of the new item have increased proportionately more since the base period than the costs of the comparable item and vice versa.
If the price is to be set by the dollar-margin method, then the base-period cost gives
Px Pv~h (fix Gy)
On the basis of current costs we have—
Px Py~\~h(cx Cy)
Thus the results of the two formulas differ by the degree of increase in wage rates, etc., times the difference in direct cost between the original and altered goods. If substitute materials have higher costs and if wage rates, etc., have increased, the base-period calculation gives a lower price. If substitute materials have a lower cost, contrariwise.
Issue 8. How should retail and wholesale prices be handled?_______ A number of 3(b) orders under the GMPR have specified retail and wholesale prices. This has been the case mainly in the Food and
the Chemical branches, and also to some degree in Consumer Durable Goods. Whether retail or wholesale prices are established seems to depend largely upon the desire of the producer to have retail prices set.
Whether or not the establishment of a uniform retail or wholesale price is desirable depends largely , upon the custom in the trade. If similar merchandising is usually priced and merchandised in such a fashion, then the setting of such a price is not inflationary and it aids in the administration of price ceilings at the wholesale and retail levels. Indiscriminate getting of such maximum prices is inflationary, however, since retail margins normally vary, and the retail price would have to cover high-cost distributive channels. Another disadvantage is that the procedure prevents the use of a simple automatic formula, since each case must be investigated from the standpoint of the distribution pattern as well as from the standpoint of costs and profits to the manufacturer.
The Food Division has used set retail maximum prices in a number of instances which will not be pertinent when the margin regulation is issued.
One alternative to handling this problem is the writing of a special regulation giving rules for pricing at retail and wholesale and permitting automatic pricing there as Well as at the manufacturing level. Such regulations are now being prepared for Drugs and Consumer Durable Goods.
Recommendation.—3 (b) orders should set retail and wholesale prices if setting of these prices has only a_ slight inflationary effect ; the increased ease in administration of ceilings at retail and wholesale levels is highly desirable. Whenever there are a number of similar cases that allow the adoption of specific standards for the setting of such prices, the writing of a special regulation providing for such pricing is desirable. Otherwise all cases which cannot be handled under the automatic provisions recommended for GMPR must be handled as separate 3 (b) orders.
Issue 9. Should 3 (&) prices be reviewed?—In almost all instances, 3 (b) prices will be based upon estimates of direct cost rather than upon actual cost experience for a significant period. It would be logical, therefore, to have costs reviewed and prices recalculated (presumably downward) after a stable production level had been reached. The difficulty with this approach is, it adds greatly to the administrative burden of the office.
Many Branches have used the technique of requiring recalculation where it is obvious that the original cost calculations are rough or the item is important in volume or general economic importance. The Rubber Branch is about the only one which requires such recalculation in all instances as in MPR 220.	.
Recommendation—Recalculation and reporting of a new price after production has been stabilized should be required in all 3 (b) orders which are based upon rough cost calculations and/or have considerable importance because of volume or significance of the item.. In the case of automatic prepricing it is not recommended that this be made a general requirement as in MPR 220, but whenever review of a price report indicates a very important item or a very rough cost calculation, recalculation of cost and price should be expressly stipulated.
Section IV, Summary of Recommendations.
1.	Amendment of GMPR.—The GMPR should be amended immediately to permit automatic pricing of new items with the price reported subject to change by OPA, except for items which cannot be priced under the methods provided in the proposed amendment. A draft of the proposed amendment is included as part of this report.
2.	The specific formula recommended for the GMPR amendment.— A simplified MPR 188 formula is recommended. For reasons given above, certain changes should be made :
(a) Current costs and margins should be used rather than March 1942 costs and margins.
(&) The “sandwich” and “dollar margin or percent margin, whichever is lower,” features of MPR 188 should be eliminated and the simpler “percent margin on the comparable item with nearest cost” substituted.
3.	Specialized formulas.—Specialized formulas such as those in MPR 188 should be developed by the Branches and incorporated in specific regulations for the pricing of new goods. Specialized regulations have the advantage of being tailor-made and also permit formula pricing at retail (in limited situations) and lay the basis for better OPA-industry relationships. It is recommended, however, that such specific regulations follow the general lines laid down in this report except where particular Branches can make strong cases for individual methods and practices.
4.	Standardization of criteria and handling of nonautomatic pricing.—It has been recognized throughout the report that there must inevitably be some difference in the handling of nonautomatic 3 (b) pricing. It is recommended, nevertheless, that criteria and methods be standardized for the cases remaining under the GMPR to the extent that such standardization is included in the proposed Field Price Instruction appended to this report. While the proposed instructions do not go much beyond explaining the general objectives of 3 (b) pricing and outlining methods which have proved successful, a conscientious following of them will reduce considerably the present variation.
4.	Responsibility in the field.—The administration of the 3 (b) pricing remaining under the GMPR should be delegated to the field (with such explicit exceptions as may be individually justified). Furthermore, the administration of some of the 3 (b) pricing in other regulations should possibly be similarly delegated. Specific study of this possibility is recommended to each Division.
&	National Office administration of 3 (b) pricing.—National Office administration of all 3 (b) pricing (whether under the GMPR or not) should be strengthened. Al] unnecessary differences of treatment and multiplicity of standards should be prohibited. Processing should be simplified and speeded. Education of the staff as to standards and methods for proper 3 (b) pricing is the most essential step in obtaining the desired results.
Processing the cases in both the National Office and the field should be expedited by substituting a letter for the order and opinion.
4.	DOLLARS-AND-CENTS CEILINGS 1
Donald D. Kennedy
Price Executive^ Iron and Steel Price Branch
Assisted by
Weldon Welfling, Head
Fabricated Products Section, Iron and Steel Price Branch
Homes Widener, Chief
Retail Prices Unit, Tire Price Section, Rubber Price Branch
H.	W. Swalwell, Head
Pap er-Making Materials Section, Paper Price Branch
Walter Shoemaker, Head
Construction and Extraction Equipment Section, Machinery Price Branch
Hilding Anderson, Chief
Raw Cotton and Cotton Ginning Unit, Cotton Section, Textiles, Leather, and Apparel Price Branch
Paul McGuire, Chief
Analysis Unit, Economic Research Section, Petroleum Price Branch
James Reppert, Head
Bituminous Mine Price Section, Solid Fuels Price Branch
Glenn Degner, Head Ferro-Alloys Section, Nonferrous Metals Price Branch
This discussion will be limited to a consideration of dollars-and-cents ceilings. The necessary background material relative to the policies, principles, and procedures of price control has been, or will be, presented by others and can be omitted here.
They say that there is nothing new under the sun. This is certainly true of dollars-and-cents ceiling prices.
The first dollars-and-cents price control established was, I think, about 301 A. D., when the Emperor Diocletian issued an edict setting prices in terms of specific figures for his whole Empire. The edict had everything, including a good statement of considerations. It provided for all the products of the Empire, although fragments are still missing. It not only set prices- for specific items, but faced problems of quality, transportation, and services.
I want to give you just two short excerpts from the edict of Diocletian:
* * * we have decreed that there be established, not the prices of articles for sale—for such an act would be unjust when many provinces occasionally rejoice in the good fortune of wished-for low prices and, so to speak, the privilege of prosperity—but a maximum, so that when the violence of high prices appears
1 Delivered January 26, 1943.
135
536932—43---------10
anywhere—may the gods avert such a calamity—avarice (which, as if in immense open areas, could not be restrained) might be checked by the limits of our statute, or by the boundaries of .a regulatory law. It is our pleasure, therefore, that the prices listed in the subjoined summary be observed in the whole of our Empire in such fashion that every man may know that while permission to exceed them has been forbidden him, the blessing of low prices has in no case been restricted in those places where supplies are seen to abound, since special provision is made for these when avarice is definitely quieted.
* * * it is our pleasure that anyone who shall have resisted the form of this statute for his daring be subject to a capital penalty. And let no one consider the penalty harsh, since there is at hand a means of avoiding the danger by the observance of moderation. To the same penalty, moreover, is he subject who in the desire to buy shall have conspired against the statute with the greed of the seller. Nor is he exempt from the same penalty who, although possessing necessities of life and business, believes that Subsequent to this regulation he must withdraw them from the general market, since a penalty should be even more severe for him who introduces poverty than for him who harasses it against the law.
In the Appendix, or subjoined summary, there follows in the translation some hundred pages of specific prices, and I have culled out one of them for purposes of illustration: “Loin cloth or girdles which are inferior to aforesaid qualities, third grade, one web, dinars 600.” I am told a dinar was worth seven-tenths of a cent.
The field to be covered here includes:
1.	A statement of the concept of dollars-and-cents ceiling prices and dollars-and-cents maximum price regulations.
2.	A brief presentation of the advantages and disadvantages of this method of price control.
3.	A discussion of the means whereby the specific dollars-and-cents prices are determined.
4.	An examination of the existing maximum price regulations with reference to the extent of use of the dollars-and-cents technique.
5.	An indication of when dollars-and-cents ceiling prices are applicable;
At first glance it might seem to be a fairly simple matter to define what is meant by a dollars-and-cents ceiling price. However, there are qualifications necessary which lead to some difficulty. The test of publication in a regulation of dollars-and-cents prices for specific items does not serve Some regulations establish dollars-and-cents ceiling prices without the formality of printing them (Maximum Price Regulation No. 147—Bolts, Nuts, Screws, and Rivets). Also, the test of uniformity of prices for sellers or buyers or for classes of sellers or buyers may be difficult to apply. In some cases, a uniform price for all of continental United States is established (Maximum Price Regulation No. 310—Reusable Structural Steel Shapes, Plates, and Shaft-
’/P -Ot^en	of uniformity may be difficult to dis-
cern (Revised Price Schedule No. 4—Iron and Steel Scrap). In addition it seems to me necessary to maintain some distinction between dollars-and-cents ceiling prices and ceiling prices established by a
^110U^hpth? demarcation may become indistinct in a few instances (Revised Price Schedule No. 6—Iron and Steel Prod-ucts; Maximum Price Regulation No. 118—Cotton Products).
lor the purposes of this discussion, dollars-and-cents ceiling prices are maximum prices which are known to, or easily and definitely determinable by, all buyers, all sellers, and the OPA, and are either—
(a) Uniform for all sellers or all buyers;
(&) Uniform for classes of sellers or classes of buyers as determined by function, area, or other category; or
(c) Uniform for a given base territory.
A dollars-and-cents maximum price regulation is one which establishes dollars-and-cents ceiling prices for all or a large majority of the products or sellers covered. On the one hand, it would be unwise to call every maximum price regulation which contained a few specific prices a dollars-and-cents one; on the other hand, it would seem too strict to limit the classification to those regulations which establish such prices over all items and sellers or buyers covered.
Generally speaking, dollars-and-cents prices are set forth in the regulation. It is this factor which provides for the widespread knowledge of the maximum price which is a feature of the method. However, this is not an absolute essential—reference in the regulation to the price lists of the price leader or leaders of the industry where .such price lists have been generally distributed and are available provides for dollars-and-cents ceiling prices in as effective a manner as does publication in the regulation.
Where sellers are so few that the prices of each may be listed separately in dollars and cents in the regulation, the distinction between dollars-and-cents ceiling prices and prices established by a freeze becomes a difficult one to determine, particularly if the prices published are for a uniform base period. However, this situation is rather unusual, since the number of sellers in most industries is large enough to require some grouping in order to make publication practicable. Hence, price regulations using the freeze technique usually will not establish a common knowledge of prices through publication; neither will they establish any uniformity of price among sellers or buyers. A further difficulty in making a clear-cut distinction between the dollars-and-cents technique and the freeze technique occurs when the industry has been characterized by price uniformity prior to the issuance of a regulation. Where prices were generally known, their freezing as of a specific date would establish dollars-and-cents ceiling prices.
Advantages of Dollars-and-Cents Ceiling Prices.
The advantages of dollars-and-cents ceiling prices may be stated briefly:
1.	Dollars-and-cents ceiling prices are more easily enforceable than are prices established by either the price freeze or the form/ula methods.—In general, the Enforcement Division prefers regulations containing dollars-and-cents prices, since the proof of a violation is easier when prices billed may be shown to be in excess of specific prices established in a dollars-and-cents maximum price regulation. Compliance with maximum prices mav be, and must be, obtained by less drastic, less costly, and less formal means than is typical of court action. In obtaining such compliance the assistance of volunteers, the cooperation of buyers, and the help of competitors are essential. Volunteers, buyers, competitors—all can aid much more effectively if the specific applicable price is definite and known. This cannot be so, generally, under other methods of price control.
Another interesting development in making dollars-and-cents
prices more generally known is found under Maximum Price Regulation No. 278—Totaquina and Totaquina Products, in which the manufacturers are required to print the applicable retail ceiling price on the label before it is shipped.
2.	Dollars-and-cents ceiling prices avoid some of the complicating factors found under other methods.—Both the freeze and formula methods make possible and perpetuate differences in prices between sellers in the same market for the same item. The formula method involves the complications of any control based on cost of production or merchandising. Further, this method cannot establish effective control, since it is impossible to provide a ceiling on the time factor in the formula as applied to a specific job. Finally, the freeze method will perpetuate price differences that may be established on a basis of pure chance or because of seasonal fluctuation.2
3.	Dollars-and-cents ceiling prices are easier to administer than are prices established by other procedures.—For example, where ceiling prices of this character are in effect, it is possible for the Office of Price Administration to make available price information on request and to check quickly price complaints. Such needs arise under various circumstances, particularly in connection with requests from the War Production Board, the Armed Services, the Maritime Commission, and the Lend-Lease Administration. Also, .price adjustments may be made for the whole of the production covered by the regulation or any part of that output; and these adjustments may be made in such a way as to modify to a specific degree the price level of the industry as a whole. Adjusting quickly for volume changes constitutes a special case.
Further, dollars-and-cents ceiling prices do not freeze into a regulation, to the same extent as the freeze method, chance differences between producers which do not represent normal relationships. To this extent, the administrative problem of special hardship cases is reduced considerably.
It is recognized, of course, that this advantage overlaps to a degree other advantages cited.
4.	Dollars-and-cents ceding prices are more acceptable to sellers generally.—Of course, from one point of view, degree of acceptableness rests on the general price level established ; and the higher that level, the more acceptable to the seller the price is. However, where equivalent levels prevail under each of the methods as used, dollars-and-cents prices would be more acceptable than prices otherwise set, since greater certainty with respect to the allowable maximum exists. Less checking and computing are required, and like sellers or like buyers are treated on a more uniform basis.
5.	Dollars-and-cents ceiling prices are more acceptable to buyers than are princes established by other means.—A buyer cannot check a price established under a formula method, and hence is unable to judge accurately, or in many cases even approximately, the price charged. Both freeze and formula methods may establish different prices to different buyers for identical items in the same market at the same time ; this characteristic may cause some hardship so far as the buyer who is purchasing from the high-priced seller is con-
a Cf. the discussion in papers by Messrs. Staebler and Perkins.
cerned. With legal liability attaching to buyers frequently as well as to sellers in those cases where prices above the allowable maximum are charged or offered, and accepted or paid, buyers are in a better position to guard against violations if a specific dollars-and-cents price is set and generally known.
6.	Dollars-and-cejds ceiling prices reduce record-keeping and report-making on the part of those subject to the regulation, as contrasted with svmilar requirements under the other types.—Frequent requirements in many regulations include the maintenance of all pertinent records during the base period, the filing of base-period prices, the filing of extras, specials, terms and conditions, the filing of cost formulas, the determination of costs by particular products or jobs, and the maintenance of these cost estimates, or even, in some cases, the filing of such cost estimates. Many requirements of such nature can be either eliminated or reduced considerably under a dollarsand-cents maximum price regulation.
7.	Because of these factors, dollars-and-cents maximum-price regulations are better received generally, and hence result in better public relations.—This advantage is a cumulative result of other advantages already stated ; it is significant, in view of the fact that general acceptance of, and compliance with, maximum-price regulations must rest on voluntary cooperation. Such voluntary cooperation is a necessary and a vital part of the success of the whole program.
8.	Dollars-and-cents ceiling prices may aid in standardization.— As a usual rule, it is felt that standards are a necessary preliminary to the establishment of dollars-and-cents ceiling prices. However, it is possible to aid the movement toward standardization by the establishment of dollars-and-cents ceiling prices according to major lines or classes of products. In certain cases this will accelerate the elimination of high-cost items which tend to be over the ceiling established, as well as the abandonment of high-cost services previously rendered. For example, a price range in dollars and cents which specifies a maximum price for the best quality, and a lower maximum for the poorest quality, without further determination of grades, will tend, in many cases, to reduce the number of grades between by a process of concentration on the two extremes of the price range.
9.	Dollars-and-cents ceiling prices as compared to formula prices not only help in keeping prices from rising but aid in stimulating cost reductions where possible.—Even in wartime it is possible for producers to develop cost-saving methods. In certain cases the establishment of a specific price will encourage business to develop means of cost reduction as a way of further maximizing profits. It should be recognized, however, that if excess-profits taxation and renegotiation by the Price Adjustment Boards eliminate profits above a flat level, this advantage will not be operative.
10.	Dollars-and-cents ceiling prices aid in allocations.—Under conditions of uniformity of price, either for all sellers or for well-recognized classes of sellers, the War Production Board will not have a price problem due to price differences between sellers. For example, allocation of the output of a high-price seller may be affected by the ability of the buyer to absorb this higher margin above what he usually pays. This consideration of price inevitably will either com
plicate somewhat the work of the War Production Board or will cause further difficulties on the score of price adjustments for this Office.
Disadvantages of Dollars-and-Cents Ceiling Prices.
The disadvantages of dollars-and-cents ceiling prices may be stated briefly:	-
1.	Where tens of thousands of items are involved, the dollars-and-cents ceiling-price method is more difficult to use than the freeze or formula method.—The burden of listing, checking, and printing prices for so many items often is too onerous unless ready-made price lists are available. Also, the burden of checking each price list to determine that it is the actual going price may take considerable time and may not accomplish much more than a freeze ceiling does.
2.	The dollars-and-cents ceiling price technique is not adapted to emergency use.—In many cases the complexities of products and pricing require additional, extensive study to determine the specific prices. This factor is not an important one now, since products not covered by specific maximum price regulations are under the General Maximum Price Regulation. However, it may become urgent to remove a specific product or industry from under the Genera! Maximum Price Regulation at some future date, and this qualification would then be a factor.
3.	Dollars-and-cents ceding price control imposes an additional burden on OP A.—The Office must assume the burden of determining each specific price as the proper maximum prior to its issuance. This requires the Office to make all the basic computations. Under the other methods, the seller and the buyer have that responsibility, and we reserve the right to investigate later, after sales have been made, and to state that the price they determine is above the maximum.
4.	Loss of differential pricing results where it is impossible to provide for such differentials as may or should exist.—A dollars-and-cents ceiling price, where established on some basis of uniformity, may be more inflationary, and hence less desirable, than a ceiling price established by a freeze. Differentials due to minor quality variances, variances in competitive practices, relative efficiencies, and chance may be maintained by a freeze, whereas they may tend to disappear, or may disappear entirely, under a uniform dollars-and-cents ceiling. It should be pointed out that dollars-and-cents pricing does not preclude the use of differential prices. This can be achieved by providing for classes of sellers or buyers, or by amendment to the regulation for a specific seller. Also, it does not follow that differentials which exist will disappear under a uniform dollars-and-cents price. In industries not subject to increased demand for high-volume output due to war conditions, it is likely that some excess capacity remains and as a result that sellers will continue usual differentials in order that they may retain their trade contacts and maintain their volume of sales.
This point must be measured “on balance,” however. Other considerations may outweigh, and I believe frequently do, the net savings which result from the preservation of small differences in prices in a market at any one time.
5.	Dollars-and-cents ceiling prices may generalize errors.—In specifying particular prices which apply for all companies, an error will likewise be generalized for the whole industry. This is in contrast with the freeze method, which will cause particular errors for indi
vidual companies but which will not generalize them for all companies.
6.	Dollars-and-cents pricing is not uniformly applicable—In some cases it is impossible to use this method.—This is especially true in the case of most new products. It also is a difficult, if not impossible, technique to use in the field of tailor-made products, although we may be able to develop ways of doing so in the future.
Those cases in which the disadvantages outweigh advantages mark out areas where dollars-and-cents price control would not be applicable.
Methods by Which Dollars-and-Cents Prices May Be Established.
We are now ready to discuss the methods by which dollars-and-cents prices may be established. For this purpose I have asked the individuals who have worked on specific regulations to take over the job of illustrating each method. These men have been most cooperative in assisting on this project. One qualification I should like kept in mind. Every regulation has used, to a greater or lesser extent, two or more methods in finally establishing the specific prices that it incorporates. Hence in this discussion, although we are going to illustrate each method with a particular regulation, it should be remembered that other methods were probably employed as well; in each case the speakers will probably make reference to these variations.
After all methods have been illustrated, I will resume the discussion.
(i)	USE OF PRICE LISTS OF LEADING PRODUCERS
(MPR 147. Nuts, Bolts, Screws, and Rivets)
Weldon Welfling
Maximum Price Regulation No. 147 deals with industrial fastenings; more specifically, nuts, bolts, screws, and rivets. In this regulation we have what you would think at first glance is a “freeze.” It is simply a listing of the principal producers, and it says, to be exact, that “maximum delivered prices shall be an amount not in excess of the equivalent of the applicable list price schedules and extras in effect between October 1 and October 15, 1941, and published by any or all of the following producers”—27 in number.
The reason that method was adopted in this particular industry is that there are over 200 producers, defining “producers” as those whose principal products are these items. However, over 50 percent of the sales are made by 8 of these firms. Consequently there is a fairly typical situation of price leadership and a very high degree of uniformity in price. If any one of the 8 leading firms changes its prices there is a tendency for all the rest of the producers to change their prices promptly.
There is a further consideration that although prices were very uniform, they were also very complex, for two reasons, primarily. One is the complicated system of list prices and discounts that has prevailed in this industry. Nuts, bolts, screws, and rivets are customarily sold on a base price minus several discounts; that is, a base discount, jobber’s discount, discount for full containers, and for full carloads. Consequently, it requires the use of difficult arithmetic to calculate the price to begin with. In the second place, there are thousands of items
of different specifications, and especially of different sizes. Since each of the producers produces some items which the others do not, a complete list of the items would require a very bulky volume; to list in the regulation all of these items, all of the prices, and all of the possible discounts would have been a tremendous job.
That, incidentally, leads to one of the more peculiar aspects of this regulation, which was the drawing up of the simplified list of stock items, which was done by the Office of Price Administration in conjunction with the War Production Board, the Army, the Navy, Treasury Procurement, and the Panama Canal Commission. The number of items, stock items, was reduced a great deal, although there was no great reduction in terms of sales covered. Those stock items are listed, and their prices are the ones which are determined by the price list.
The advantages of this method of pricing obviously lie in the elimination of the necessity for a very bulky “Appendix A.” The catalogs and prices and discounts are in the hands of buyers anyway, and they are the only people interested; in fact, they are about the only people who know how to figure prices. This method permitted the maintenance of industry practices of freight absorption, freight allowance, basing points, etc.; and finally, to summarize in general, the same result was obtained as if there had been a very bulky list of specific dollars-and-cents prices.
(ii)	USE OF PRICE LISTS OF SEVERAL MAJOR PRODUCERS COMBINED TO OBTAIN THE AVERAGE BASE PRICE
(RPS 63. New Rubber Tires and Tubes)
Homer Widener
Revised Price Schedule No. 63 is for retail goods sold by perhaps 300,000 different retailers, including a host of small dealers, who sometimes sell a single tire. Demand naturally is not as rational as it is in industrial channels—and the buyers, people like ourselves, probably are not so much concerned about buying to a close price down to the last penny.
But what you want to know, I think, is how it happens that, by referring to some brand owner’s price list, the individual retailer can name a dollars-and-cents ceiling for almost any tire in the market. List prices were used in a very important way, but of course they do not represent the whole matter.
The schedule works primarily by brands and price lines. At least six fundamental steps were necessary in arriving at the final results, a result which produced ceiling prices for each brand of tires and tubes through all the complex variations of size, ply, tread, color, fabric— cotton or rayon—and type.
The first step was informal control of prices for all tires sold for 6 months before the schedule appeared. Conferences with the industry and representatives of the trade, telegrams, and two cost studies were required for this work.
Second, data for several thousand individual net realized retail prices on or about November 25, 1941, were collected by brands for popular sizes to show the scatter of consumer market prices in relation to consumer list prices.
Third, the modal group of manufacturers’ consumer price lists for 100-level brands was adopted to secure a báse price for the schedule. (Industry 100-level brands are sold as original equipment to vehicle manufacturers.) This base was adopted because considerable uniformity was found to exist among list prices of different brands, among market prices of different brands, and between corresponding list and market prices, at this point. Some lists were allowed to rise; we knew that. Some lists had to fall.
Fourth, development of a group of formulas for all non-100-level brands came next. This was necessary because such brands are less uniformly priced than original equipment brands. You could not lay down one uniform price for all these other lines, amounting to several hundred.
Fifth, after all these steps had been completed, the schedule was drawn up and issued to be effective January 4,1942.
Then sixth, working the formulas ourselves along with the industry and securing correction of published lists has been necessary. It was only step six, I might say, that yielded specific lists of dollars-and-cents maximums to guide the retailer. The retailer did not have to figure his ceilings in 99 perceñt of the cases and more.
I think, finally, it ought to be understood that the six steps do not outline the whole method of “63.” We had the proverbial exceptional cases. We had the reclaimed-rubber war tire, which was a new line, for which we could not use the method outlined here. Again, several manufacturers had never had consumer lists. We had to do something about that. There were obsolete brands and sizes that had to be dropped from lists.
(iii)	USE OF AN AVERAGE PRICE OF A PORTION OR OF THE TOTAL OUTPUT SOLD OR OFFERED FOR SALE
(MPR 114. Wood Pulp)
H. W. SwALWELL
Price Regulation No. 114, covering Wood Pulp, illustrates a method of developing price control and establishing a maximum price through an averaging of a large portion of the total production in the United States.
I shall discuss four aspects of the problem. First is the background, so we will know what we are talking about j the second is the conditions imposed upon anyone writing a regulation of this nature; the third is the problem itself; and the fourth is the solution of the problem.
Wood pulp, the subject under discussion, is the basic commodity from which all paper, practically all smokeless powder, rayon, cellophane, and some types of plastics are manufactured. It is really a purified form of cellulose derived from wood by dissolving the lignin and other materials out of the wood, leaving a fibrous cellulosic material.	-	_
There are four major pulp-producing areas in the United States— New England, Lake Central, Southern, and the Pacific Northwest. There is a small area around Puget Sound and the Columbia River that produces a high percentage of certain types of pulp.
The Southern and Pacific Northwest States are low-cost areas.
They are inherently low cost, and practically all of the mills in those particular areas have very much lower cost than the mills in the Lake Central and Northeast areas. Mr. Henderson, in July of 1940, finding that the price of pulp was increasing rather rapidly, called in a number of pulp manufacturers and stabilized the price at that time. Since then, the price has not moved; hence we did not have the problem of writing a regulation. on a commodity whose prices were rapidly increasing. This market price was producing a reasonable profit for all except the marginal mills and was producing what might be termed “an overlarge” profit for the mills in the South and the Northwest, although, inasmuch as wood pulp is a basic commodity upon which other commodities rest, it was necessary to build a level floor and have a uniform price throughout the United States in order to establish fairly uniform prices on paper made from pulp. This consideration was so compelling that the fact that some companies made an over-large profit was disregarded, because we sought to establish a level just over the top price for most of the producers in the New England (a high-cost but necessary) district, and then granted exceptions to some marginal mills. Therefore, on a bulk-line basis, our ceiling price will appear to be rather high.
There were other reasons for not rolling back prices and for permitting what might be called a rather generous profit to some mills.
1.	In any given producing area there are both high- and low-cost producers; and as the output of the high-cost mills was and is necessary, it was felt that a reasonably substantial price to cover some of the high-cost production was necessary.
2.	With respect to pulp, the pattern of production during this period was and is not different from the last. Labor becomes scarce, pulp production decreases because of lack of wood, and fiber shortages develop. Mills run part time at high costs. Profits decline.
When this regulation was written and published in April 1942, we estimated that production would begin to decline toward the end of 1942. It did. Therefore, any profit picture would change rapidly. It has.
So much for the background. Now the conditions that are imposed upon anyone handling this type of regulation, I think, are three. The first is that he must have a single maximum delivered price for each grade of the commodity throughout the United States, inasmuch as it is a raw. material and it is desirable to have a fairly uniform price for the finished product.8
Second, this maximum price includes a specified amount of freight which must be absorbed by the producer, any excess freight to be absorbed by the consumer. This splitting of freight was calculated after an analysis of a large amount of statistical data collected from the mills through a questionnaire, and in this particular instance freight adjustments cannot be made without a statistical study.
Unfortunately, the traffic and freight arrangements in the pulp industry are complex; there is no such thing as a brief explanation of the adjustments made in MPR 114. If anyone has a problem involving
8 Cf. the paper on Differential Pricing.
the allocation of freight expense between buyer and seller, we will of course be glad to explain the mechanics we used.
The general philosophy is as follows:
The distribution of freight costs between the buyer and seller will vary as between the various pulp-producing districts. The Southern and Northwestern producers absorb a high freight cost because the mills are at a long distance from their markets but in areas where production costs are low. Thus the low costs more than compensate for high freight expense and keep these mills in a favorable competitive position.
In the Lake Central and Northwest districts, operating costs are high; but as the mills are near the market, freight costs are low.
These cost-freight relationships are of long standing; therefore, all we had to do was measure them in exact terms and incorporate the results in a regulation. Further, by slight adjustments of freight absorption it is not too difficult to bring about a condition of fairly uniform delivered costs to a consumer in the United States.
The solution of the problem may be developed along the following lines: We issued a questionnaire and studied each particular kind of pulp shipped from the mills in the United States to the consumer, covering a total of 580,000 tons of pulp. These data were analyzed as follows: For the major grades of wood pulp, the delivered price charged for each shipment by each mill in each producing area was tabulated; and from this delivered price was deducted the freight cost involved in each shipment. The resultant figure is known in pulp parlance as the “mill net realization,” which means the effective selling price; that is, the price actually charged on the invoice less the freight. This mill-net-realization, then, represents the delivered price less freight or the f. o. b. producing mill price. The mill-net-realization values or prices were segregated by grades and by producing mills and the weighted averages taken. These individual mills’ weighted averages were again weighted and averaged for all the mills within a given producing area making an identical grade of pulp. This figure then gives us the weighted average f. o. b. mill price for all of the mills in the given district.
The f. o. b. producing-mill prices were calculated in this manner for each of the four producing districts.
The weighted average freight charge which the producers actually absorbed on all shipments of the grade prior to the issuance of the regulation was calculated by the same method. Then, in order to determine the maximum delivered price included in the regulation, the weighted average freight charge was added to the weighted average net-mill-realization. Where a grade of pulp was produced in more than one area, a weighted average of the delivered prices for the different areas was obtained to give a single delivered price for the Nation.
The next part of the problem was to determine the maximum freight allowance to be absorbed by the producer. This amount, known as the basic transportation allowance, was calculated as follows: The shipments of wood pulp studied were segregated for the four United States producing areas and the six United States consuming areas. A separate basic transportation allowance was determined for each producing area. For each major group of wood
pulp produced in a given area, the weighted average cost of delivery to each consuming area supplied by that part of the country was calculated. The average value obtained for the consuming area, involving the highest transportation costs for shipments from the producing area under consideration, was considered as the maximum freight to be asorbed by the producer. If more than one grade of pulp was produced in a given area, the values obtained for each grade of pulp were combined to give one basic transportation allowance for each producing area, regardless of grade.
If the total transportation costs exceed the basic transportation allowance, the excess is absorbed by the consumer.
(iv)	PRICE ESTABLISHED BY EXAMINING THE RELATIONSHIP TO PRICES OF OTHER ITEMS
(MPR 134. Construction and Road Maintenance Equipment—Rental Prices) Walter Shoemaker
Maximum Price Regulation No. 134 is entitled “Construction and Road Maintenance Equipment—Rental Prices and Operating and Maintenance Service Charges.” In addition to setting up a formula for the establishment of operating and repair services, this regulation contains over a thousand listings of dollars-and-cents ceilings for the rental of construction equipment.
These dollars-and-cents prices are percentages of average selling prices of the equipment. The percentages themselves vary from 5 percent per month of the average selling price for some of the heavy equipment which does not require a great deal of repairs, all the way up to 20 percent per month of the average selling price for smaller items which have a short life and require a great many repairs. The maximum rental rates for such equipment, of course, include certain items such as depreciation and interest on the investment. They also include the expense of overhauling the equipment, which is. necessary periodically, and a margin for operating the rental agency.
In order to determine what percentages should be used, it was necessary to investigate many fields. The areas of our investigation which directly carried weight in determining the percentages were:
1.	The prices of a group of major suppliers of this rental service as found in published price lists.
2.	Schedules that were put out by trade associations. The trade associations. price lists were averages of reports by the members of the associations of rentals that were actually in effect.
_3	. A schedule of rental rates issued to its local offices by the United States Engineers, augmented by the actual experience of the United States Engineers and the Bureau of Yards and Docks m renting equipment.
vx Th? cost of rePairing and owning equipment by the Tennessee Valley Authority.
'5’ ^he recommendations of Office of Price Administration experts. 1 hese recommendations were made after an 8,000-mile trip
over the entire country in order to get first-hand information from members of the industry in every section of the country.
These investigations, in addition to determining the percentages that should be used, also convinced us that—
1.	Dollars-and-cents ceilings were not only feasible but desirable.
2.	We should not have a regional rental schedule, but one schedule to cover the entire country.
3.	There should not be a differential allowed for different types of services.
4.	We should set up base rentals for the equipment and have this base rental invoiced separately for any other services rendered in connection with the rental of the equipment.
The information was assembled under extreme pressure because the Army and Navy felt it was necessary to have the regulation issued as soon as possible. As a result of this, some of the rates were not given quite as much study as was desirable. After the regulation was in effect for a period of 5 months, it was found necessary to issue an amendment to adjust rates and broaden coverage.
To date, the regulation has been in effect 8 months. We have received many comments from the industry, and I think I can say that, from these comments, everyone is convinced that the regulation is not inflationary. However, I think I should add that enough of these comments were favorable to the regulation to convince us that while it is not inflationary, it will not bankrupt the industry or any group of the industry.
(v)	PRICES ESTABLISHED BY EXAMINING THE RELATIONSHIP TO PRICES OF OTHER ITEMS
(RPS 35. Carded Grey and Colored-Yarn Cotton Goods)
Hilding Anderson
Price Schedule No. 35 was an offshoot of Price Schedule No. 11, which was issued on June 27, 1941, and which was, therefore, one of the first price schedules issued. The schedule covered Cotton Grey Goods, which may be defined as cotton goods as they come from the loom of the weaving mill, before any bleaching or finishing process is applied. They represent the raw fabric from which finished muslins, percales, sheets, shirtings, etc., are made.
The method by which maximum prices in this schedule were established was that of determining the relationship between the price of each fabric and the price of print cloth, the major fabric of the textile industry. The importance of print cloth in the industry may be seen from the fact that its production constitutes approximately 20 percent of all woven grey goods produced. Also it is recognized in the organized grey goods market in Worth Street as the price leader. That is why this particular fabric was chosen as the bench mark from which to measure, or rather to relate, the prices of other products.
Now if you examine Price Schedule No. 35, you will not find any of this framework there. It does not state specifically in any place that the price of print cloth was used as the base from which other
prices were established. Nevertheless, that is the method which was used.
Now, obviously, if the prices of other fabrics were to be related to the price of print cloth, then the price of print cloth had to be established. This was done by negotiating with a textile panel composed of representatives of the textile industry, and a price of 43 cents per pound was established. Anyone who is familiar with the pressure which is brought to set prices as high as possible will appreciate the difficulties of establishing that price. As a matter of fact, at times Price Schedule 35 has been under criticism as being somewhat too liberal. It was more liberal at the time it was issued, in June 1941, than it is now.
Accordingly, the prices of other fabrics were then computed by ratio to the price of print cloth. By “other fabrics” I m;ean such commodities as sheetings, tobacco cloth, carded broadcloth, and osna-burg. The ratios were computed for a period of 5 or more years, and the prices of individual fabrics were kept in line with these ratios. It was not as difficult to do that as it might be in some of the Iron and Steel Schedules, where you have to rely upon prices. As you know, Worth Street is an organized market, and the results of trading every day are listed in the Daily News Record in quite an accurate fashion. It’s not too difficult to get a series of prices which may be used for ratios over a period of time. The price of tobacco cloth, for example, which is not used for tobacco but for surgical dressings, was set at 46 cents a pound, about 3 cents above the price of print cloth. The price of carded broadcloth was set at the same price as print cloth—-43 cents—and three different sheetings range from 351^ to 38 cents a pound.
In subsequent pricing we used the same method. For instance, the prices of drills and jeans used in the making of work clothing were established by ratios to the price of sheeting, since the method of manufacture was quite similar.
It seems to me that the chief advantage lay in the dispatch with which the price schedule could be applied. Given a base from which to work, other prices may be set quickly to reflect the usual historical relationships, and thus bring about the minimum of confusion in the application of price control. At the time this schedule was put out, we really did have an inflationary movement in prices of textiles. Prices had risen, in the preceding 6 months, about 65 percent. Speed was necessary to check a price movement that was rapidly getting out of the hands of the conservative element in the industry. The price-ratio method demonstrated its usefulness where speed was essential and cost-of-production data not available at the time.
On the other hand, this method is not free from flaws. Unless the bench mark is properly determined, the prices of products based upon it will be proportionately out of line. As I said before, some criticism has been made of MPR 35. Since, under this method, cost-of-production data or profit criteria are not utilized, the resulting set of prices might vary very widely from what may be considered well-regulated prices. Probably the price-ratio metliod may be utilized best as a check on the cost-of-production approach to the determination of ceiling prices, when a variety of related products are
to be considered. While this method of using historical precedent to arrive at price differentials may be open to criticism, any other method of approach, however, may well be tested by asking the question: How nearly have past relationships been reproduced in the Schedule as established?
(vi)	USE OF PRICES AS REPORTED IN TRADE PUBLICATIONS (RPS 88. Petroleum and Petroleum Products)
Paul McGuire
I feel that this method of converting trade journal quotations directly into price ceilings is probably of historical interest only; and seeing that time is running short, I am going to try to make the discussion brief.
In February 1942 the Petroleum Branch was on the spot, as people having to deal with petroleum in Washington quite often are. We had to issue a Price Schedule in a hurry, one which covered every phase and branch of the industry, and we did not have data—especially data applying to the new base period, October 1941, which had just been written into the Price Control Act by Congress. On the other hand, we did want some kind of specific prices, at least as a guide for the rest of our schedule. So we reached out and put our fingers on the National Petroleum News and the Chicago Journal of Commerce, which had been publishing price lists for years, five or six pages of them, which seemed quite comprehensive, although we later found out they did not cover quite as much as we thought they did. We simply said that wherever one of these quotations was applicable to a given transaction, the quotation would be the ceiling price; and then, for transactions to which no quotation was applicable, we used the freeze technique and said the price ceiling would be the price charged on the last similar transaction in the base period.
The fundamental thing you have to realize when using trade journal quotations is that trade journals are not in the business of publishing price lists or maximum price regulations, and they naturally do not meet OPA standards. We can’t blame them for that. Their coverage is likely to be spotty, and the quotations are likely to be of unequal accuracy at different points and different levels. It is quite embarrassing sometimes to attempt to correct these prices by OPA action, because every time you do that, you are casting a slur upon the trade journal’s reputation for accuracy, and they resent it—and with some justification, since, after all, they did not ask to be involved in the price-control process.
Then there is the problem of uneven quality of quotations at different marketing levels; for example, the significance of quotations at the refinery level may differ from that of quotations at the wholesale level, because of different trade practices in providing quotations at the two levels. For example, we found that quotations supposedly covering transactions between refiner and wholesaler were merely quotations of bids and offers by the refiner in the spot market. But the greater part of sales of petroleum products by refiners to wholesalers are not made in the spot market. They are made under contracts providing for absorption of freight and various other concessions from
spot market quotations, given by refiners to protect their steady wholesale customers from local market competition.
Quotations for transactions between wholesalers and retailers, on the other hand, closely reflected actual money changing hands on such transactions. Since refinery quotations did not, acceptance of both types of quotations as ceilings created a situation which was wide open for a squeeze on wholesale margins, and we were in the embarrassing situation of having apparently invited such a squeeze and given legal sanction to it.
So it simply means that you must know the trade practices with respect to quotations well enough at every point, in every marketing area, and at all marketing levels, to be able to read into the bare quotation figures the meaning which the trade attaches to them.
Of course, if after complete analysis you find that trade journal price quotations are, in fact, the specific prices you wish to establish as ceilings, then you can save considerable Government paper, printing and mailing expense by simply referring to the quotations printed in the trade journal. But, since trade journal quotations were not intended for use as price ceilings, it is unlikely that they will prove satisfactory as price ceilings without substantial qualifications and revisions.
(vii)	PRICES ESTABLISHED AS A RESULT OF INFORMATION OBTAINED FROM OTHER GOVERNMENT AGENCIES
(MPR 120. Bituminous Coal Delivered from Mine or Preparation Plant!
James Reppert
Maximum Price Regulation 120 provides specific dollars-and-cents prices for bituminous coal at the mine level.4 We were very fortunate in having available actual information on costs and other data which producers regularly submit to the Bituminous Coal Division of the Department of the Interior.
Through an exchange of letters between the Price Administrator and the Secretary of the Interior, it was possible to work out a program whereby the Bituminous Coal Division cooperated with the Solid Fuels Branch of OPA in administering this Regulation. Our Branch, of course, was responsible for the administration of the Regulation under the Emergency Price Control Act.
October is considered a normal operating month, so the statistical information available at the Bituminous Coal Division, including about 250,000 invoices for coal shipments made by operators in October 1941, was used. Using IBM cards, we were able to determine the average price of coal sold at the mines during the month of October 1941 for each size, kind, and quality. We then made adjustments for increased mine costs which had occurred between the months of October 1941 and May 1942, when the Regulation became effective.
This Regulation is comprised of 22 separate and distinct Price Schedules for the 22 producing districts throughout the country. These bituminous coal producing districts range from Pennsylvania in the East to the State of Washington in the West. We feel that without
4 Cf. discussion of MPR 121 in Mr. Staebler’s paper.
the statistical data made available by the Bituminous Coal Division, it would have been necessary to rely upon some other method of fixing maximum prices; consequently there would have existed a somewhat chaotic condition in the bituminous coal industry for both the producer and the consumer. We believe the present maximum prices are fair to all parties. Petitions and protests have been received from approximately 3 percent of the industry, affecting about 5 million tons out of 580 million tons mined during 1942.
(viii)	PRICES BASED ON COST STUDIES
(MPR 138 Standard Ferromanganese)
Glenn Degner
In determining the maximum price for ferromanganese and increasing the maximum price from $120 per ton to $135 per ton, we relied for the most part on cost studies. There were other considerations, but I think it is a fair statement that this Regulation was based primarily on cost studies; and in that connection I think it fairly well illustrates some of the comments that Dr. Taggart made in his recent lectures to this class.
Parenthetically, I might say that ferromanganese is one of the most essential items of raw material for the war effort. You can’t produce a ton of steel without ferromanganese. And in the last World War ferromanganese sold as high as $459 a ton, as compared with $135, the maximum price set in Regulation No. 138.
Really our problem of cost studies was very simple. The problem broke itself up into two classifications. First, an appraisal of the cost of manufacturing, or conversion costs, as they are called in that industry; and second, a determination of the principal raw-material cost.
In connection with the first half of the problem, I think you might be interested in knowing that the major production is accounted for by the U. S. Steel Corporation and Bethlehem Steel, and that the production of ferromanganese is an integrated part of their steel making.
Ferromanganese production is not departmentalized. Blast furnaces are shifted from the production of pig iron to ferromanganese, and no accurate accounting records are kept by these two companies for very obvious reasons. I think ferromanganese in both cases represents less than half of 1 percent of total sales. However, we were fortunate in having the records of one independent producer who had been in operation for many years, in fact, since before the last World War; and he did keep very careful cost records in two plants at which ferromanganese was produced exclusively. It was on a basis of the data furnished by this company that our estimate of what would be fair production costs was determined. We did, to be sure, have some information made available by U. S. Steel and Bethlehem and, in addition, information from two marginal producers, producers who were marginal in their ferromanganese production at least, although they were not marginal companies.
In connection with the marginal companies, you might be interested in knowing something about our approach in relation to these com-
536932—43---------11
panies. They were operating on a fair and reasonable over-all profit basis—in fact I think it could be called very satisfactory—so we felt we would be correct in establishing a maximum price which would permit them to cover their total costs without consideration to any profit made from ferromanganese production.
So much for the conversion or manufacturing costs. After we had arrived at what appeared to be a fair estimate of these costs, we focused our attention on the principal raw material, which is manganese ore. It takes about 2% tons of manganese ore to produce 1 ton of ferromanganese. And manganese ores represent about 65 or 70 percent of the total cost.
Early in 1940 manganese ores were selling at around $31 a ton. By March 1942 the prices had advanced to around $42 to $43; or, in other words, the ore cost per ton of manganese had jumped from around $70 to around $97.
The raw-material cost had advanced to those levels largely because the industry is dependent on imported ores for 95 percent of its supply; and those ores come from distant sources such as Africa, India, Russia, the Philippines while we still had them, and, to some extent, Cuba and Brazil. Ocean transportation costs were advancing very rapidly over the period. No effective means had been worked out for control, which really forced us to advance the price of ferromanganese to cover the raw-material cost.
Moreover, the accumulation of lower-cost inventories held by the producers was about exhausted, so their inventory costs for manganese ore were equal to, roughly, the replacement costs at the time.
Hence, with those two parts of our problem solved, by adding together the raw-material costs plus the conversion costs, we arrived at a maximum price which we felt allowed a fair margin of profit to permit continued full production on material as critical as ferromanganese.
(Resumption of Mr. Kennedy’s discussion.)
Maximum Price Regulation No. 198—Imported Silver Bullion provided for a price set under an agreement with a foreign country. In this case the price of silver bullion was raised by amendment from 35.375 cents to 45 cents per troy ounce, f. o. b. New York or San Francisco. This was done under agreement with Mexico to enable Mexico to impose an additional tax on exports of silver.
Survey of Dollars-and-Cents Regulations.
A survey of the extent to which dollars-and-cents maximum price regulations have been issued by the Office of Price Administration through December 31,1942, indicates that approximately two of every three schedules are of this type. The current proportion of dollars-and-cents ceilings is considerably higher than thist since Office policy directs the use of this method wherever possible.'
In many cases it is difficult to determine the exact classification of a regulation. Most price regulations are hybrids so far as pricing method is concerned, and frequently enough factual data are not available to determine the extent to which the major portion of the sales volume covered by the regulation is governed by the dollars-and-cents ceiling. For this reason it does not seem wise to discuss the question of the classification of each regulation.
So far as the Iron and Steel Branch is concerned, however, the following summary is of interest:
Iron and Steel Branch
Total sales for 1942 under dollars-and-cents regulations
Schedule number :	Amount
4______________________________________________ $472,525,000
6_________________________________________,____ 6, 000, 000, 000
10__________________________________________________________   187,	560,	000
43_____________________________________________________________ 45,	000,	000
46_____________________________________________________________ 50,	000,	OOO
77_________________________________________________________ 27,225,000
147_________________________________________________________4 490, 000, 000
159_____________________________________________-___________ 163, 200, 000
230___________________________________________,_____________	100, 000,000
Total (9 schedules)_________________________ 7,535,510,000
As of December 31, 1942, there were 17 price schedules under the jurisdiction of this Branch, covering a total sales volume for 1942 of approximately 12 billion dollars. Somewhat more than 70 percent of the total sales volume of the industry was under dollars-and-cents price control.
Types of Dollars-and-Cents Maximum Price Regulations.
1.	Uniform delivered prices and uniform, shipping point prices.— Some dollars-and-cents maximum price regulations provide for a uniform price to the buyer, others provide for a uniform price to the seller. For example, Maximum Price Regulation No. 170—Antifreeze, establishes a uniform price per gallon delivered to retailers by any person. On the other Jiand, Maximum Price Regulation No. 310—Reusable Structural Steel Shapes and Plates, and Shafting establishes a uniform price at shipping point of 2% cents per pound. This applies on a Nation-wide basis.
2.	Uniform, Nation-wide prices, uniform, loosing point prices, and uniform zone prices.—Some dollars-and-cents maximum price regulations establish uniformity on a Nation-wide basis, while others establish uniformity on a basing-point system, and still others use a zone system. For example, Maximum Price Regulation No. 146—Appalachian Hardwood Lumber establishes f. o. b. shipping point prices for the country as a whole; e. g., Tough Ash No. 1 common, 1 inch thick, in a rough, air-dried condition, $45 per thousand feet.
Maximum Price Regulation No. 6—Steel Mill Products lists basing points for the determination of prices. Within each basing point the base price is uniform. These basing points are established by products, and the number varies considerably. For example, on wire nails 19 basing points are listed in the regulation. On the other hand, for wrought-iron pipe only one basing point—Pittsburgh—exists. Where basing points are used there is not a uniform delivered price, since the buyer pays the basing point price plus freight from the basing point. On the other hand, sellers do not have unif orm realization, since they must pay the actual freight from shipping point to destination while charging freight from basing point to destination. Maximum Price Regulation No. 4—Iron and Steel Scrap establishes what might be termed a “reverse” basing-point system for steel scrap.
Basing points are listed in the regulation, with the corresponding price for each grade. To determine the shipping-point price the seller deducts from the basing-point price freight from basing point to the point of shipment. Freight from the point of shipment to the buyer’s point of receipt may be added, however. For example, scrap rail carries a basing-point price of $21.50 at Middletown, Ohio. If the rail is to be shipped from Dayton, Ohio, the shipping-point price is determined by subtracting from the basing-point price of $21.50, the freight from Middletown, Ohio, to Dayton, Ohio ($1.38), giving a maximum shipping-point price of $20.12. To this sum may be added the freight to destination.
Maximum Price Regulation No. 230—Reusable Iron and Steel Pipe uses a zone system. This regulation establishes seven zones, each zone being determined by freight rate differentials rather than by geographic area. The zones are demarked in steps of 25 cents per hundred pounds. For example, Zone 1 is the zone where freight for 100 pounds of pipe costs less than 25 cents. Within Zone 1 the shipping point prices are uniform. Maximum Price Regulation No. 206—Vitrified Clay Sewer Pipe and Allied Products establishes zones within zones. Major zones are established on a geographic basis combined with subgrouping according to freight rates.
3.	Prices established by product, size, grade, and quantity.—Many dollars-and-cents price regulations contain specific prices for definite products, listed sizes and grades, and stated quantities. Maximum Price Regulation No. 13—Douglas Fir Plywood provides for specific prices for industrial plywood, rough panels, %-inch rough, 3-ply, sizes up to 48 by 96 inches. In straight carload quantities the price is $29.20 per thousand; in less than carloads, $31.95. Extras are provided also. For example, wide widths (over 48 to 60 inches) are $8 extra per thousand square feet; long lengths (96 to 108 inches) are $5.25 per thousand square feet extra. Similarly, specific extras are provided for other sizes.
Maximum Price Regulation No. 75—Dead-Burned Grain Magnesite provides a maximum price of $22 per ton f. o. b. Chewelah, Wash., with $4 extra for bagging of maintenance grades. This is the base price at Chewelah. By amendment a special price ($32 per ton, f. o. b. Patterson, Calif.) was established for Westvaco Chlorine Products Corporation for sales to two customers.
4.	Price adjustments either in dollars and cents or in percentages.— Instead of providing for specific prices for every possible product, price differentials are frequently provided in terms of specific dollars and cents or in terms of percentages. For example, Maximum Price Regulation No. 44—Douglas Fir Doors establishes list prices from which specific maximum prices are to be determined by application of percentages. The basic discount for one class of buyers is 72 percent; it is determined by the fact that during the first 9 months of 1941 they received the seller’s prevailing maximum discount. For all other buyers the discount is 70 percent. Price adjustments also are provided on the basis of product grade differences. The price for No. 2 doors, “B”grade, is established at 1 point longer than basic discount; for No. 3 doors, “C” grade, at 2 points longer than basic discount. Dollars-and-cents extras are specified also for such items as flat and raised panels.
In Maximum Price Regulation No. 206—Vitrified Clay Sewer Pipe and Allied Products three geographic zones are established. For the Eastern Zone list prices are set forth in 19 tables, accompanied by a percentage discount table. Each applicable discount is determined by a freight zone. The discounts vary from 31 percent to 73 percent. The base is Akron, Ohio, and a delivered price results.
5.	Prices determined at successive levels of production and distribution.—In Maximum Price Regulation No. 170—Antifreeze, delivered dollars-and-cents prices are established on sales by manufacturers to persons other than retailers, on sales to retailers by any person, and on sales at retail. Prices are set on three classes of products, Type “N,” Type “S”—Other and Type “S”—Zerone. For example, on tank-car deliveries of Type “N,” the maximum price is 58 cents per gallon, for sales by manufacturers to persons other than retailers. On less-than-carload shipments 5 cents per gallon may be added. On sales to retailers by any person of containers over 35 gallons, the maximum price of Type “N” is 87 cents per gallon; on sales at retail in quantities of 1 gallon or more., $1.40 per gallon; in quantities of less than 1 gallon the maximum price is 35 cents per quart.
6.	Prices determined seasonally.—In some cases dollars-and-cents prices may be established at various levels in accordance with seasonal factors. This is illustrated by Maximum Price Regulation No; 271— White Potatoes, Except at Retail. For example, the maximum price for red-skinned Wisconsin potatoes, U. S. No. 1 grade and in bags, in January 1942, was $2.10 per hundred pounds; in April 1943, $2.40 per hundred pounds.
Special Problems.
Many special problems. exist under dollars-and-cents regulations as well as under other methods of price determination. It is possible to indicate but a few at this time:
1.	Margins.—Various relationships occur where prices at successive levels, such as wholesale and retail, are involved. For example, prices may be based on a fixed margin, times a wholesale price determined by a freeze; or such prices may be based on a fixed margin, times a dollars-and-cents wholesale price; or the retail price may be determined by freezing the retail margin and applying it either on a wholesale price which is determined by a freeze or on a dollars-and-cents wholesale price. Whether or not a dollars-and-cents maximum price results depends on what combination actually exists. Specific margins applied to dollars-and-cents prices result in dollars-and-cents price control.
2.	Discounts and Allowances.—Another special problem exists in the handling of discounts and allowances. What appears to be a clear-cut dollars-and-cents price regulation may be little more than a freeze if it provides simply for the application of the customary discounts and allowances. The extent to which the advantages of dollars-and-cents prices would be lost under such a circumstance varies directly with the degree and complexity of the discounts and allowances prevalent in the trade.
In some cases rather extensive provision for discounts and allowances is made. For example, Maximum Price Regulation No. 85-— New Passenger Automobiles embodied in the regulation the retail price lists as prepared by the manufacturers; e. g., Chevrolet, 5-
passenger coupe, $790. However, this price was subject to the following adjustments: If the retailer removes standard equipment, the price will be reduced by 75 percent of the retail price of such equipment; if the manufacturer removes equipment, the list price will be lowered by the amount of reduction the manufacturer made to the retail dealer; allowances will be made for Federal excise taxes and for transportation; and an allowance of 5 percent of the list price, or $75, whichever is lower, will be made for standard delivery operations. Also, a charge equal to 1 percent, or $15, whichever is lower, is allowed for each calendar month after January 31, 1942, which elapses prior to the delivery of the automobile. .
3.	Freight.—Some regulations make little or no reference to trans-/ portation charges. Others include extensive and detailed provisions which, in effect, establish both maximum shipping point and maximum delivered prices. In a few cases complicated transportation provisions are found. Maximum Price Regulation No. 264—Industrial Waxes (chemical) provides: The maximum prices are calculated upon freight of $2 per hundred pounds to New York, marine insurance at 0.5 percent, and war-risk insurance at 1% percent for Central and South America and 3 percent for Africa. Any actual charges in excess of the amounts based on these rates, if such excess amounts to more than 25 cents per hundred pounds, may be added to the maximum price established and separately charged to the buyer’s account. In the event actual charges are less than the amounts based on the above rates by 25 cents or more per hundred pounds, the maximum prices established shall be reduced accordingly, and the reduction credited to the buyer’s account.
Revised Price Schedule No. 4—Iron and Steel Scrap contains extensive provisions regarding transportation, distinguishing between the transportation charges which are to be subtracted from the basing-point price and transportation charges which may be added from shipping point to point of delivery.
4.	Containers.—Dollars-and-cents maximum prices should be set up for containers where they are not an integral part of the product. An illustration of a provision of this character is found in Maximum Price Regulation No. 270—Dry Edible Beans, Sales Except at Wholesale and Retail. In this regulation specific prices are set forth for containers by size of container; e. g., up to 2 pounds, the sum of $2 is added per hundred pounds. The $2 includes containers as well as packing. A specific complication exists where containers are reusable and a deposit system not previously employed is established in the trade in question.
5.	Services.—Failure to provide adequately for services reduces the coverage of a dollars-and-cents maximum price regulation and may make ineffective the price control established. For example, Revised Price Schedule No. 43—Used. Steel Drums and Used Steel Pails, establishes a ceiling price of $2.25 per drum when sold by the reconditioner and a maximum buying price by the reconditioner of $1.60. However, no specific charge was established for the service of reconditioning when the reconditioner did not buy the drum. It now develops that reconditioners have practically ceased the purchase of drums, and have transformed their operations into the providing of a reconditioning service for customer-owned drums.
6.	Special grades and minor products—Formulas and usual differentials.—Practical considerations limit the extent to which variations in quality, special grades, and minor products can be recognized. In most cases usual differentials are frozen or a formula is provided. In Maximum Price Regulation No. 170-—Antifreeze a formula has been provided by which a maximum price is to be established on substandard antifreeze. This formula involves the use of the dollars-and-cents price of the applicable standard grade as established in the regulation for the same quantity of standard antifreeze of the same type in the same kind of container. The maximum price is to be determined in the following manner: 25 percent of the price of the applicable standard grade is to be subtracted and the result divided by the number of gallons of such substandard antifreeze which must be added to 1 gallon of water to reduce the freezing point of the resulting mixture to 10° below zero, Fahrenheit. In connection with the container problem, it also might be noted that containers are to be included in the delivered price as specified; if returned, the price is to be reduced by $0,025 per gallon.
Conclusion.
The Office is under a directive to use dollars-and-cents ceiling prices as widely as possible. This is based on the generally admitted fact that the advantages of such maxima far outweigh the disadvantages. This generalization has been recognized by Mr. Perkins and Mr. Staebler in their discussions.
However, there should not be blind adherence to this point of view, for it must be recognized that dollars-and-cents ceiling prices are not universally applicable. In some areas involving new or tailor-made products, other methods must be used. Likewise, in certain cases, it will be wise to continue the use of dollars-and-cents pricing in conjunction with other methods of price control. Such combinations of control methods must be used on occasion to meet particular industry problems or to fit the immediate needs of practicability.
In general, specific areas bf usefulness for dollars-and-cents pricing seem to be:
1.	Where there are published price lists.
2.	Where there has been price leadership.
3.	Where there is a standard product—one item; a few lines.
4.	Where abandonment of base freeze will not be inflationary.
5.	Where there are possibilities of adapting differential pricing in order that inflationary increases may be prevented in shifting from a base freeze.
6.	To aid in establishing specific ceiling prices at the retail level, although dollars-and-cents ceiling prices at the manufacturing and wholesale levels may be less desirable than retention of a base freeze.
There still remain difficult problems that call for solution under this, as under other methods of price control. Dollars-and-cents maximum price regulations can be complex and unworkable; they can have the appearance of dollars-and-cents pricing without the actuality; they can be made too simple—not adequately following trade practices; they can be too complex—following to the last ell every minutia of a •complex competitive system; and they can be inflationary.
However, I believe that dollars-and-cents pricing offers the best path toward the realization of a workable and professional job of price administration. By this, I mean price administration in a broader sense than that involved in simply holding prices. However we started, the Office has been moving rapidly into a program of price adjustments by several methods and for several reasons. We are faced with a major problem of adjusting prices by products and by companies in some areas, in order that we may adequately perform our job of holding to as low a level as possible both the cost of living and the cost of the war;
With the qualifications that have been noted, the dollars-and-cents price technique offers the best means of performing this larger task efficiently, expeditiously, and surely.
5. DIFFERENTIAL PRICING 1
Clair Wilcox
Director, Industrial Materials Price Division
I.	Types of Differential Pricing.
Several types of differential pricing are embodied in the regulations issued by OPA. These include differentials between different lines of products and different grades of the same product, between different classes of customers, and between different quantities sold, the price per unit usually declining as volume rises. In all these cases, the Office has sought to discover the traditional practices of business and to apply them in its regulations, in order to hold down prices on the lower-priced lines and the lower-priced grades, prices to favored classes of customers, and prices on sales of larger quantities. The Office has not undertaken to reform American industry.
The regulations also contain differentials between prices to buyers at different locations, setting maxima on a delivered basis, perpetuating systems of freight absorption, zone pricing, and basing-point pricing that have existed for many years. Here again, trade practice has been adopted, without approval or disapproval, for the purpose of fixing maximum prices.
We will not deal, here, with any of the types of differential pricing mentioned above. We are now concerned only with that form of differentiation which involves the establishment of different maximum prices for different sellers, even if they sell the same quantities, in the same grade, in the same line, to buyers of the same class, located in the same area.
The problem with which we are concerned presents itself where the costs of production of different sellers, or the costs of producing different increments of output turned out by the same seller, vary widely. Here the Office must determine whether, on the one hand, . it is to establish a single maximum price for all of the supply and, if so, whether it is to establish this price at a point which covers the costs of the highest-cost portion or the supply, or those of some high-cost portion which is deemed to be essential, or the average or typical costs of a unit of the supply, or whether, on the other hand, it is to set maximum prices at different levels for different portions of the supply in order to cover individual costs.
II.	The Bulk-line Cost Method in the First World War.
During the first World War the policy adopted by the War Industries Board, the Price Fixing Committee, and the Fuel Administration was that of covering the bulk-line cost. Under this method there were obtained, through the Federal Trade Commission, average unit cost data for each firm in an industry. The figures thus obtained
1 Delivered January 28, 1943.
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were arrayed from the lowest cost to the highest, showing capacity and output, firm by firm, and the ceiling was then placed at a figure which was calculated to cover average total unit cost plus a reasonable profit for the highest-cost producer whose output was required. This might be the highest-cost producer in the business, or it might be the so-called bulk-line producer. In the latter case, the price was typically set at a point where it would cover costs and give a profit to a concern whose contribution was required in order to obtain 90 percent of the normal output. The theory behind this procedure was that bulk-line pricing achieved the result which would have been achieved by competitive market forces under normal conditions, rewarding lower-cost producers for their efficiency and compelling higher-cost producers to increase their efficiency and cut their costs.
This, in general, was the pattern of maximqm price fixing in this country during the first World War. Under this program, the prices of steel, for instance, were set well above average costs found by the Federal Trade Commission, at levels high enough to enable any steel mill in the country, whatever its costs, to produce. The price of copper, with average costs estimated in 1918 at between 14 and 17 cents, was set at 26 cents. So the Government paid 50 to 75 percent above cost to get an extra 5 or 10 percent of output. The result was that the large profits realized by the producers of metals became one of the major scandals of the last war.
In times of scarcity marginal costs rise much more rapidly than average costs. A price which is high enough to cover marginal costs will give very high profits on output having average costs and excessively high profits on output having the lowest costs. It will give inflated profits to a large percentage of the firms in an industry on a large percentage of their output. On the other hand, a price which is low enough to prevent windfall profits will cut off required output, a result that cannot be permitted where goods are needed for military use. A compromise price, in between the two, will do both; that isy it will permit windfall profits at the bottom and it will cut off necessary output at the top. The solution to this dilemma is to be found in differential pricing.
As a matter of fact, differential pricing has always been employed in wartime in the case of nonstandardized goods and services which are sold to the Government on a cost-plus-a-percentage-of-cost or a cost-plus-a-fixed-fee basis. In this case, lower payments are made to lower-cost producers and higher payments to higher-cost producers. The only reason that a different policy has been applied in other cases is that the goods sold in these cases are standardized. There seems to be no particular reason why more favored treatment should be given to low-cost producers of standard goods than is accorded to low-cost producers of nonstandard goods. The only difference between the two cases is in the devices whereby differentiation in prices may be achieved. III. The Legal Status of Differential Pricing.
Section 2 (a) of the Emergency Price Control Act of 1942 provides that maximum prices shall be generally fair and equitable. This might be taken to indicate that the policy intended was that of bulk-line pricing. It also provides, however, that maximum prices shall effectuate the purposes of the act and among these purposes are the elimination and prevention of profiteering. Section 2 (c)
further states that regulations may contain such classifications and differentiations and may provide for such adjustments and reasonable exceptions as, in the judgment of the Administrator, are necessary or proper to effectuate the purposes of the Act. Section 2 (e) provides for the purchase and sale of commodities and the payment of subsidies. The Amendment of October 2, 1942, moreover, empowers the President to provide for making adjustments with respect to prices in order to correct gross inequities. And in Executive Order 9250 this power is delegated by the President to the Price Administrator. The President further directs the Administrator in fixing, reducing, or increasing prices to determine ceilings in such a manner that profits are prevented which in his judgment are unreasonable or exorbitant.
Acting within the authority conferred by these instruments, the Office of Price Administration has gone much further in the direction of differential pricing than did its American predecessors in the first World War.
IV.	Purposes Served by OPA Differential Pricing Programs.
There are a number of purposes that the Office has sought to serve by introducing programs of differential pricing. The simplest of these is the preservation of historical differentials between sellers. Where low-cost sellers previously undersold high-cost sellers, the Office has undertaken to prevent them from seizing upon the expansion of demand as an opportunity to raise prices. This is the purpose of every regulation, including the General Maximum Price Regulation, which freezes each seller to his own base-period price.
This purpose may be illustrated by Maximum Price Regulation No. 113 on iron ore. The published price of standard-grade iron ore at Lower Lake ports was $4.45 a ton in 1941. The industry was willing to agree on that as a maximum price for 1942. But, as a * matter of fact, only 27 percent of the ore had brought $4.45 in 1941; 73 percent of it had brought less than that, 60 percent of it less than $4.25, 40 percent of it less than $4.20, 20 percent of it less than $4.10, 10 percent of it less than $4, and some as little as $3.75. And at these prices, profits in the industry had ranged from 5 percent to 150 percent on net worth, with a tenth of the sales bringing 20 to 30 percent and a tenth of them over 30 percent.
The alternatives facing the Office, according to the Statement of Considerations, were four: First, the establishment of a single maximum price at a figure that would cover the price of the highest-cost producers. This alternative was rejected because it would have permitted substantial price increases on three-quarters of the total sales. Second, the establishment of a single maximum price at a figure which would cover the weighted average price of all producers. This alternative was rejected because it would have established a price below that previously obtained on the upper half of the sales and might thus have interfered with the production of tonnage required for the war effort. Third, the establishment of a program or Government purchases at prices which would cover the individual cost of each producer, and resale at a price which would cover average costs. This alternative was rejected because it involved a substantial administrative undertaking, because it would seriously nave delayed the application of a regulation covering the 1942 season, thus
creating undesirable confusion in the trade, and because it was possible more simply to attain the objective which it would have served. The fourth alternative was the adoption of a regulation which would require each producer to resell during the 1942 season at the prices at which he voluntarily sold during the 1941 season.
The fourth alternative was adopted because it prevented inflationary price increases, because it permitted the continuance of higher-thanaverage prices which were necessary to obtain the required tonnage, because it was relatively simple, and because it was equitable to all sellers, since it provided merely for the continuance of the prices under which they had freely chosen to sell in the previous season. The savings resulting from the freeze on ores moving in the open market are estimated, for the 1942 season, at about $2,400,000.
In Maximum Price Regulation No. 63, setting retail prices for new rubber tires and tubes, different maxima are established for tires and tubes of identical size and quality, with a higher price list for nationally advertised tires sold through independent outlets and a lower price list for private-brand tires sold through mass-distribution outlets. The effect is to preserve historical differentials between distributive channels.
In the retail field we find costs of distribution differing between different types of outlets, margins normally differing, and prices differing. We are thus faced with the alternatives of establishing a margin or'a price which is high enough to cover the most costly type of retail distribution, allowing other types of distributors to level up, thereby raising the cost of living; or setting a margin or price which is low enough to prevent windfall profits, thereby eliminating many small business units, some of which may be needed; or setting an average margin or price which will both give windfall profits at the bottom and eliminate business units at the top; or we can turn to differential pricing through a classification of outlets into independents, chains, and supermarkets, with different margins or different maximum prices for outlets of each class. The latter is the present direction of policy in the field of distribution. The principle is to be applied both at wholesale and at retail for foods, clothing, and other consumers’ goods.
The second purpose served by differential pricing is to cover increases in costs on part of a supply without raising prices on the rest of the supply. This is achieved through individual adjustments and through special provisions in regulations.
There are cases, first, where more expensive materials must be used. Consider, for instance, MPR 37 on Butyl alcohol. If Butyl alcohol is produced synthetically from petroleum, prices are under an individual freeze, ranging from 10% to 14% cents, with most of it selling under 13% cents. But if it is produced by the more costly method of fermentation from grain, the maximum price is 14% cents. So, too, with silver. Imported bullion has a ceiling price of 45 cents. The supply, however, is inadequate to meet wartime needs; we must therefore use metal produced domestically. The price of the domestic output is pegged at 71.11 cents by the Silver Purchase Act. That price became the maximum price of domestic silver under the GMPR. Fabricators, therefore, buy bullion at two different prices and sell semifabricated forms of silver at two or more different prices, charging 45 cents for that part of the silver content of the article which is produced from
imported silver and 71.11 cents for that part which is produced frorçi domestic silver.
Second, there are cases where it is necessary to use more costly labor. A provision in MPR 161 on West Coast logs applies where a company operates overtime and pays overtime wages. If it operates 48 to 53 hours a week, it can add $1 per thousand board feet to the price of its logs. If it operates 54 to 59 hours, it can add $1.50. If it operates 60 or more hours, it can add $2. The orders that have been issued so far cover about 6 companies in the $2 bracket, 12 in the $1.50 bracket, and 180 in the $1 bracket. Everybody else in the business remains under the former ceiling. Similarly, in the regulation of. Western wooden agricultural containers, under MPR 186, it was found that factories in cities showed substantially higher costs of production than those in the sawmill areas. So factories within 5 miles of 8 specified cities were permitted to add $5 a thousand feet on sales made within a radius of 25 miles ; others are kept under the common ceiling.
Third, there are cases where more costly methods of production have to be employed by certain firms. Blast furnace coke, for instance, is under MPR 29 if it is produced in a byproduct oven, which accounts for the largest part of the supply ; under MPR 77, if it is produced in beehive ovens in Western Pennsylvania ; and under MPR 121 if it is produced in beehive ovens in Virginia or West Virginia. The prices of coke produced by different methods and sold in any local market may differ. In Pittsburgh, for instance, the price may be $6 if the coke comes from a local byproduct oven, $6 plus freight from Connellsville if it comes from a beehive oven, and $6.50 plus freight from Connellsville if it comes from a hand-drawn beehive oven. When the more costly beehive ovens were brought into operation, the maximum price of byproduct coke was not advanced. Similarly, when wages on hand-drawn ovens were raised, the maximum price of thé rest of the beehive output was maintained.
There are cases, finally, where higher-cost imported goods have to be employed. MPR 6Ô, for example, sets a maximum price per hundredweight on sugar refined from beets at $5.35, and on sugar refined from cane at $5.45, except in Pennsylvania, New York, New Jersey, and Massachusetts, where the refineries have higher costs and the maximum price is $5.60. In fact, under Supplementary Regulation No. 12, all imported goods can be sold above the GMPR ceiling, if processors will absorb the increase in delivered costs. But the prices of domestic supplies cannot be increased accordingly.
Differentiation may also be employed for the purpose of holding lower-cost sellers to lower prices, even if there are no historical differentials, and even if there are no war-induced increases in costs. Thus in Great Britain, the Board of Trade has set different prices for the same product when it is produced by different manufacturers with different costs. In pricing utility lines of consumers’ goods, it has established an over-riding ceiling for a trade and required individual producers to cut their prices if their profits exceed the maxima allowed.
OPA has followed a similar practice. MPR 234, on approved stirrup pumps, for instance, establishes a dollars-and-cents ceiling, based on cost, for each of the 6 companies making pumps approved by the Office of Civilian Defense, these prices varying at the factory from $1.84 to $2.18. Amendment No. 2 to MPR 182 on Kraft paper made
a price cut which maintained the normal differential for machine-‘glazed Kraft over the price of the standard grade. But it was found that 2 producers could sell at the new level and 3 could not. As a result the 2 producers were left there, and the 3 were permitted to add 50 cents a hundredweight to the normal differential. Similarly, MPR 295 on West Coast Ethyl alcohol, which removed the previous national maximum of 50 cents a gallon in this area, established a 44-cent maximum for one independent producer, who accounted for about 15 percent of the output, and a 38-cent maximum for the 3 major producers, who accounted* for the other 85 percent.
The Office also undertakes to differentiate in order to obtain higher-cost increments of supply, both from old and new producers, without raising the price on the previous volume. The problem here presents itself particularly in industries of increasing costs, typically in mining. It is in this field that the Office has developed its most elaborate program of differential pricing—the premium price plan for copper, lead, and zinc, to which reference will be made later on.
V.	How Differential Pricing Is Accomplished.
Differentiation is accomplished in many ways; first, by granting exemptions. MPR 244, on gray iron castings, Exempts foundries with an annual volume less than $40,000—some 400 foundries, or 20 percent of the total number, with only 1^ percent of the sales. MPR 125, on nonferrous castings, exempts foundries with an annual volume less than $50,000—about 600 foundries, or 54 percent of the total number, with about 3 percent of the sales. MPR 225, on printing and printed paper products, exempts firms with annual sales of less than $20,000. The Regulation on cotton products, MPR 118, excludes 21 small high-cost companies in the north. These concerns, who account for about 5 percent of the output of towels, are allowed to sell under the GMPR, which gives them a higher price. Producers of the other 95 percent of the output must sell under the ceiling established in MPR 118, which is lower. In all these cases, the exempt groups are permitted to charge more if they can get it.
Second, differential pricing is accomplished through adjustments. These are provided for in perhaps a third of the regulations. In the case of steel-mill products, for instance, about l^ percent of the total volume and a little over 3 percent of the ingots, billets, slabs, plates, and shapes moves at prices above the schedule. In the case of bituminous coal, 5 to 10 percent moves above the ceiling. Differentiation can be achieved through adjustments, of course, only when the number of producers that have to be handled in that way, and the number of adjustment cases involved, is small.
Third, differentiation is accomplished through cost-formula ceilings and, fourth, through base-date freezes. Under all of the costformula ceilings the individual is required to use his own cost elements, not an average of cost elements for the whole trade. As a result, the maximum prices of different sellers must differ. Freezes of individual prices on base-dates, on the other hand, will result in a common ceiling, theoretically in a perfectly competitive trade, and actually in a tightly-controlled and thoroughly-disciplined trade. But they will produce differing individual ceilings in a trade that is really competitive. If everybody is frozen where he happened to be on a certain date, the maximum prices of‘different sellers will differ. It follows, then, that
OPA maximum price regulations provide for a great deal of differential pricing, since nearly a third of the regulations issued up to the first of this year, about 100 out of 300, were pure cost-formula ceilings, or pure freeze ceilings, or a combination of formula and freeze.
It is now the policy of OPA to move as rapidly as possible from formula and freeze to dollars-and-cents pricing in order to get regulations that are more readily enforceable. But since formula and freeze ceilings usually involve differential pricing and dollars-and-cents ceilings more commonly set single maxima for a whole industry, the effect of this movement might be inflationary, since it would permit the lower-price sellers to rise to the maximum fixed for the trade. The question arises, then, in each case, whether more is to be gained in enforceability than will be lost in leveling prices upward.
In the case of formula ceilings, there is no question. Control under cost formulas is always weak. The elements in a formula are open to individual judgment and sellers can make the decisions which are most favorable to them. - It may even be possible for them to pad their costs without detection. The Office can freeze the unit costs of factors but it cannot effectively control the quantities of the factors that are used. A cost formula may involve automatic escalation as elements in the base rise in cost. It involves the Office in the mysteries of cost accounting. It produces cases which may be difficult to take into court. It gives the buyer no basis for checking on the legitimacy of the price which he pays. The movement from formula pricing to dollars-and-cents pricing, therefore, is desirable wherever it is possible.
There are circumstances under which the movement from a freeze to a dollars-and-cents ceiling is likewise desirable. This is the case, for example, where all sellers have identical prices or prices which differ very little; where differences in prices, though substantial, are not enforceable, because buyers and sellers are numerous or because there is little information available to them; and where it is possible to achieve equivalent differentiation under a dollars-and-cents ceiling. The shift may be undesirable, however, where the freeze amounts to a dollars-and-cents ceiling on a differential basis and is enforceable as such, because contracts or published, filed, or posted prices are, in effect, incorporated by reference in the ceiling, and where buyers and sellers are few and information is readily available. Here, perhaps, it would be wise to stick to the freeze unless it is possible to devise means of achieving equivalent differentiation under a dollars-and-cents ceiling. At least, differential maxima should not be sacrificed merely for the sake of getting figures down in dollars and cents.
Differential pricing is achieved, finally, in dollars-and-cents ceilings. This is accomplished in a variety of ways. It would be possible, for instance, to freeze base-date discounts from a common list, although there is no illustration of this case. Differentiation is obtained, however, by listing maximum prices for individual sellers, as in the cases of stirrup pumps, Ethyl alcohol, and Kraft paper. It is accomplished more frequentlv by classifying sellers and establishing different maxima for the different classes. Thus sellers have been classified by lines or grades of products, as in the c^se of tires and tubes; by types of operation, as in the cases of coke, Butyl alcohol, and West Coast logs , and by the zones in which sales are made, as in the cases of sugar and Western agricultural containers.
Still other methods of classification can be and should be devised. Consider, for instance, the present situation in the die-castings industry. Here profits before taxes range from 2.7 percent to 37.5 percent on sales and from 11.8 percent to 203.4 percent on invested capital, and 40 percent of the output comes from 4 firms that make over 20 percent on sales and over 90 percent on investment. This situation presents the familiar alternatives, first, of setting a common ceiling at a point that will eliminate high profits but cut off necessary output, or at a point that will preserve necessary output but give the stronger firms windfall profits; or second, of establishing differential prices. This differentiation, in turn, might be accomplished through a low ceiling with individual adjustments, or through a high ceiling with profit recovery by renegotiation, or through a differentiated ceiling which cuts prices by different percentages in relation to the return realized by different firms. This sort of a situation presents a challenge to price control to develop valid principles and practicable means of Classification and differentiation.
VI.	Multiple Prices vs. a Single Price to Buyers.
So far we have dealt with differentials in the prices paid to sellers. It remains to consider the prices charged to buyers. Can the same product be sold in the same market at the same time at two different prices? In most cases, that is exactly what is being done. Differential pricing has usually involved different prices to buyers. This is true in the case of exemptions, adjustments, formulas, and freezes, the GMPR, the retail price program, and the regulations governing iron ore, coke, Butyl alcohol, Ethyl alcohol, Kraft paper, West Coast logs, tires and tubes, stirrup pumps, and towels.
A system of multiple prices, however, will work in some cases and not in others. It will work at retail, where different prices have always been charged by different types of outlets. The movement of goods will not be impeded by the establishment of different ceilings for independent stores, chains, and supermarkets. The consumers who have customarily bought at the higher-price outlets will continue to buy there.
Differential pricing at retail might conceivably create difficulties under rationing. It would certainly do so if the consumer were tied to a specific outlet, or if rationing were done on an expenditure basis. But it is not unworkable where the consumer is free to buy at any outlet he chooses, and where rationing is based on physical quantities or points.
A multiplicity of prices at an earlier stage of production will occasion no difficulty if there are buyers who are willing to purchase the higher-priced portions of the supply. This is the case where buyers sell, in turn, under cost-plus contracts or ceilings. The higher-priced goods may even move to buyers who sell under a common ceiling, if such buyers, under conditions of imperfect competition, have customarily paid different prices, if demand so far exceeds supply that buyers cannot satisfy their needs by shifting to lower-priced sellers, or if the products in question are an insignifi-cant part of the buyers’ costs, and if their profits give them an ample margin for the absorption of the higher prices. Under these circumstances, it is perfectly possible for identical goods to move at different prices in the same market at the same time.
A system of multiple prices at earlier stages of production will not work, however, where buyers must sell, in turn, under a common ceiling, where different prices are not customary in the trade, where the buyer of the low-priced goods would get windfall profits, and the buyers of the high-priced goods would be squeezed, where the prices of the goods in question are a significant part of the buyers’ total costs, where the buyers’ margins are so narrow that they cannot absorb the higher prices, and where supply is so far in excess of demand that buyers will shift their purchases to low-price sellers, and high-price sellers will not be able to dispose of their output. Under any of these circumstances, it would be unwise for the Office to establish a ceiling which would require buyers to pay different prices, or to preserve a base-date freeze which would have this effect.
Differential pricing with different prices in the market also creates difficulties for allocation. Where the War Production Board is allocating scarce, essential materials or products, a one-price system permits it to act solely for the purpose of expediting the flow of supplies. A multiple-price system arises from considerations which are irrelevant to the major purposes of allocation. There is no difficulty here, of course, if the recipients of the material sell on a cost-plus basis, if the price of the product is an insignificant part of their total costs, or if the differential between the low price and the high price is small. But there is difficulty if the recipients sell under a common ceiling, if the price of the product is a significant part of their costs, and if the difference between the low and the high price is large. Under these circumstances, the allocation authorities must do one of three things: They must either force the high-priced supply on certain buyers (and if they give the high-priced supply to the high-cost buyers, there is a great deal of difficulty); they must so allocate that all buyers have the same average cost, which means that they have to allocate without reference to the desirable movement of supplies; or they must so allocate that the low-priced material goes to the high-cost producer, and the high-priced material to the low-cost producer. For the purposes of price control, the latter solution would be ideal, but from the point of view of WPB, it would be a nuisance or worse. The subordination of allocation to price policy is open to serious objection. It might disturb established business relationships; it might interfere with speed of delivery; it might require cross-hauling. The War Production Board, therefore, prefers normally to operate on a one-price basis.
These difficulties may be avoided, however, by combining multiple prices to sellers with a single price to buyers. This may be accomplished in a variety of ways. It may be achieved, first, by separating markets and establishing different ceilings in different areas. Markets may be separated geographically, as has been done in the cases of sugar, Ethyl alcohol, and western agricultural containers. They may be separated on the basis of types of buyers; sellers may be permitted to sell to the Government at higher prices and required to sell to other people at lower prices, as was done in the case of cement and sewer pipe; or they may be required to sell to the Government at lower prices and allowed to sell to other people at higher prices, as was done in the case of silver.
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Second, a one-price system may be achieved by subsidizing high-cost output. This has been done in the case of imports of strategic and critical materials, where the Commodity Credit Corporation and subsidiaries of the Reconstruction Finance Corporation buy imported goods above ceiling prices and sell them at ceiling prices. It is done also by the Steel Recovery Corporation, Copper Recovery Corporation, and War Materials, Inc., in the case of acquisition of frozen and reusable domestic supplies of steel and copper and hard-to-get iron and steel scrap. In these cases, agencies of the Government absorb the higher costs and take a loss when they sell at the ceiling which is established for the rest of the supply.
The outstanding case here, however, is the premium price plan for copper, lead, and zinc. Under this plan, which became effective on February 1, 1942, a quota committee, composed of representatives of OP A and the War Production Board, fixes quotas based on the 1941 output of each mine. Metal produced within the quota must sell subject to the ceiling prices: 12 cents for copper, 6% cents for lead, and 8^4 cents for zinc. Metal produced in addition to the quota is purchased by the Metals Reserve Corppration at a premium price which is 5 cents above the ceiling for copper and 2% cents above for lead and zinc, and is resold, subject to the ceiling, at a loss. In practice, the smelters act as agents of Metals Reserve, paying ceiling or premium prices, as the case may be, and selling everything within the ceiling, and Metals Reserve pays the loss. The quota committee has established nearly 4,000 quotas on more than 1,500 mines. Based on consideration of the metal content of the ores involved and the cost of producing them, the quotas have ranged from zero on the poorest mines, the smaller properties, and properties newly coming into production, to amounts which exceed the 1941 output on some of the richest properties. The aim has been to include in the quota all the metal obtainable at the ceiling price and to pay the premium only on metal which would not otherwise be forthcoming. As a result, in the case of copper, there are two prices, 12 cents and 17 cents. There are really, in mine realizations, many more than two prices. As producers average the part of their output on which they get 12 cents and the part on which they get 17 cents, they will experience an infinite number of prices ranging within the limits of 12 and 17 cents. Adjustment to rising costs under this plan is achieved, not by raising the ceiling price on the low-cost output, but by reducing quotas, or by establishing quotas carrying still higher premiums for the highest-cost increments of output. At the present time, about nine-tenths of the copper, three-fourths of the lead, and three-fifths of the zinc still sell within the original ceiling prices. It is estimated that in 1942, at a cost of less than 20 million dollars, the plan saved $400 million. It should be noted, however, that this particular device can be successfully employed only in pricing products that are homogeneous in character and standardized in quality.
It is also possible to attain a one-price system in the market, with differential prices to producers, by recovering profits on low-cost output. This, of course, is done when the Price Adjustment Boards renegotiate contracts on the basis of past profits. Here, sales have been made on a one-price basis but windfall profits are recovered. There are cases, in the military goods area, in which the objectives
of differential pricing are best achieved by close cooperation between OP A and the Price Adjustment Boards. This is true where goods are not standardized, where specifications are rapidly changing, and where the methods and the location of production are shifting. But when a Price Adjustment Board requires firms to reduce their prices in order to prevent them from realizing excessive profits in the future, a multiple price system will result unless OPA intervenes to cut prices according to its own pattern and to work out a subsidy, a refund, or a pooling arrangement in cooperation with other agencies. Aluminum is a case in point. The Army Price Adjustment Board has carried through a price reduction, initiated by OPA, which has required the Aluminum Corporation to refund 76 million dollars from the profits of 1942 and to make a price cut of 67 million dollars, computed at the 1942 volume, which will probably involve a reduction of about $120 million in Alcoa’s income in 1943. The costs of independent fabricators, however, are such that they cannot sell at the level to which Alcoa has’ been reduced. The result will be a two-price system for allocation, unless some plan is worked out which will subsidize the independents, or pool all purchases and sales, or require Alcoa to sell its output to the Reconstruction Finance Corporation at the low price and permit RFC to resell it at the high price and make a profit on the transaction. These are the alternatives that are now under consideration.
There is, finally, the possibility of reconciling multiple prices to sellers with a single price to buyers through the establishment of an equalization fund. Such a fund may be admiftistered by industry itself or by the Government. The danger of a private fund, of course, is that it lends itself to abuse during the war and that it may be employed for the purpose of eliminating competition after the war. Either type of fund can buy from producers at individual cost plus a profit and sell to users at average cost and break even on the operation, or make a little, or lose a little. This plan has been used extensively by the Germans in both wars. It was used in the United States in one case during the First World War. At that time, the Food Administration set up a Sugar Equalization Board which paid different prices to beet, Louisiana cane and Cuban caiie producers and sold at a common price to refiners, who sold in turn at a common price to the trade.
The only such fund established in the United States during this war is the one set up for the purpose of equalizing the increased cost of transporting petroleum to the East Coast, occasioned by the diversion of tankers and the use of higher-cost methods of transportation. When gasoline prices were raised in the Spring of 1942, the resulting revenues were paid into an industry pool, and the oil companies were paid for their increased transportation costs out of the pool. The purpose was to make the price rise cover the increased transportation cost instead of giving windfall profits to some producers and not covering costs for others. Some companies, however, found that they could more than meet their increased costs out of the increased prices and withdrew from the pool. The result was that the pool was unable to meet the claims presented by others; its deficit consequently mounted to about 30 million dollars. In August 1942, the price of gasoline was cut and the increase in transportation costs was assumed by the Defense Supplies Corporation. The oil
companies now pay the remaining portion of the price increase into-the pool, which is paying off its old debt. It is probable that the industry pool will be eliminated, that company payments will be made to Defense Supplies, and that the increase in transportation costs will be met by Defense Supplies. The result will be a Government-operated instead of an industry-operated pool.
Differential pricing has not escaped criticism. First, businessmen do not like it. The low-cost, high-profit producer thinks it is unfair to make him sell below others, even though he has always done so. The high-cost, low-profit producer thinks it is unfair to call attention to his position. He thinks that the Office should let the low-cost producer sell at the higher price.
Second, there is the argument that price differentials will destroy competition, since the high-cost producer will not be able to survive at the low-cost producer’s price. The assumption here is that the low-cost producer should be allowed to hold an umbrella over the trade, that it is preferable to arrive at monopoly by collusion rather than by competition.
Third, it is argued that differential pricing penalizes efficiency, rewards inefficiency and removes the profit incentive to increase efficiency. But differences in cost are not entirely a matter of efficiency. It should be noted, moreover, that differential prices do not take all of the higher profits produced by lower costs and that they do not follow future cost cuts promptly or completely. There is still plenty of room for initiative.
Finally, it is argued that we should not undertake to get at excessive profits by differential pricing, that we should leave that problem to renegotiation or to taxation. The answer here is that renegotiation and taxation are delayed in operation and that they may recover only a portion of the excess. It should also be remembered that a price cut at an earlier stage of production may prevent the pyramiding of prices further along the line.
VIII. Conclusions.
There are cases in which it is not worth while or practicable to introduce a program of differential pricing. It is always desirable at retail. It may not be feasible at earlier stages of production. It may not be worth while where differences in costs are small. It may not be practicable where enterprises are so numerous that the administrative burden would be too great to bear. But it is certainly desirable wherever differences in costs are very large. And it is practicable where the business units involved are manageable in number and in size.
Certainly the Office should never set a bulk-line or marginal-cost ceiling in cases where costs vary widely, until it has explored the possibility of differential pricing. More than that, it should never raise a price, when costs increase, without exploring and, insofar as practicable, exhausting the possibilities of differential pricing. It is easier to raise the general level of an industry’s prices than it is to devise and sell a program of subsidies, refunds, or pooling. It is also more inflationary. To invent and to install a workable mechanism of differential pricing takes imagination, energy, and hard work. But it will reduce the cost of the war; it will hold down the cost of living; it will check inflation. It has been done in many cases. It can be done in many more. The surface has scarcely been scratched.
6. DIFFERENTIAL PRICING IN NONFERROUS METALS1
John D. Sumner 2
Price Executive^ Nonferrous Metals Price Branch
The purpose of this paper is to describe the present use of differential pricing in wartime regulation of three important nonferrous metals, i. e., copper, lead, and zinc, and to suggest certain problems that have arisen which may be of interest to members of the Association.
Initial Steps in Price Control.
Due to price instability in an area of large importance to a wartime economy certain of the principal nonferrous metals were early selected by the Office of Price Administration and its predecessor agencies3 for regulation. During the late summer and autumn of 1940 informal conferences with industry representatives led to a voluntary stabilization of the price of copper at 12 cents 4 and zinc at 7% cents 5 per pound. Subsequently, in the spring of 1941 lead was stabilized at a price of 5.85 cents per pound.6 In October 1941, and January 1942, the prices of zinc and lead were advanced by 1 cent and .65 cent per pound, respectively, due to accumulated cost increases and to substantial differences in cost between increments of mine output. These early actions involved the establishment of a single price for each metal (with due allowance for customary difference in price between grades), and the adoption of prevailing industry practices with respect to basing-point and delivered pricing systems which had developed in the industries concerned.
As the pressure of demand for each of the metals increased sharply, it became apparent that the continuance of a single price system would produce highly inflationary consequences. Moreover, the demand for materials so essential to a war economy is highly inelastic, and it appeared improbable that material price increases could “choke off” demand to any appreciable extent. The physical limitations associated with supply were too serious, especially in copper and zinc, to make it at all possible fully to satisfy the necessary demand of Government and of private industry for these essential metals. At the same time it was recognized that the maximum level of production permitted by physical factors would require resort to submarginal ores far too costly to be produced at the ceiling
1	This paper was prepared for the Fifty-fifth Annual Meeting of the American Economics Association and was published in the American Economic Review, Supplement, March 1943.
8	While the author is a member of the Office of Price Administration this discussion is not a statement of the views of that Office. The author is indebted to Mr. Frederick Holder for
8 The National Defense Advisory Commission and later the Office of Price Administration and Civilian Supply.
* Delivered, the Connecticut Valley.
• For. “prime western” grade, f. o. b. East St. Louis.
• Common lead, at New York.
price. In other words, costs rise rapidly in these extractive industries with material increases in total output.7
Policy Alternatives.
The OPA was confronted with two alternative lines of policy: The continuance of the usual single-price method of regulation would necessarily bring about very great increases in price in order to tap the most submarginal sources of ore which could be produced under existing or prospective shortages of material and manpower. An alternative policy was to develop some method or methods by which price could be differentiated between more and less costly sources of production.
The first or single-price policy could not well be of a “bulk-line” sort under which price would be high enough to cover the cost of, say, 80 percent to 85 percent of the total output. One deficiency of a bulk-line method of pricing in the mailing area is that cost differences between various increments of supply are due essentially to physical factors, such as those relating to differences in the grade of ore, location relative to transportation and labor supply, and to differences in geologic formation affecting the costs of mining. Especially where government policy requires maximum production, a bulk-line principle, which may well operate to curtail output by ignoring such cost differences, is subject to serious objection.8
If, on the other hand, a single price is geared to the most expensive sources of supply which are needed, the cost to the Government as a principal purchaser of metal, as well as to the community, will necessarily be extremely high and will tend constantly to rise as better grades of ore are exhausted or as the prices of production factors, notably labor, increase. Over-all increases in metal prices also tend to behave in snowball fashion. This is due not only to practices in the industry which tie cost levels to price through formal contracts and informal practices but also to the effects of high profits on wage levels under collective bargaining. A further disadvantage of a rising single price level is its adverse inflationary effects through the pyramiding of costs.
Consequently, the OPA soon turned to the use of pricing policies which would recognize cost differences between various portions of desired output while maintaining stability in the market price of metals. The first efforts in this direction involved the establishment of cost-plus contracts between the Metals Reserve Co.9 and* high-cost copper producers, principally in the upper Michigan Peninsula. In these cases the Metals Reserve Co. has resold the metal at the regular or “ceiling” price. As the problem of metal production became more acute the issue was whether greatly to extend the use of tjie cost-plus device or to develop other means of differential pricing.
The widespread extension of cost-plus contracts was subject to serious economic and administrative objections. While space does
1 Differences exist among the three metals as to the proportions of total output ordinarily
coming from a few large low-cost mines, with relatively constant costs per unit of output. As output increases, resort is necessarily had to higher-cost properties, many of which are
submarginal at a “low” level. Moreover, in some mines, both large and small, the grade of
ore is “tapering” to such a degree that, at a higher price, the output of the mine is capable
of significant expansion.
8 In manufacturing industry generally, the operation of bulk-line pricing is in a setting
where inherent cost differences between increments of supply are probably less great than
in mining.
* A subsidiary of the Reconstruction Finance Corporation.
not permit a discussion of these, it may be pointed out that among the economic objections were: (1) The risk of encouraging wasteful production methods and (2) the repercussional effects of cost-plus arrangements upon general cost levels. The latter point may be illustrated by reference to the effects of this policy in shipbuilding and elsewhere upon the level of wages in other branches of industry. On the administrative side, the careful use of cost-plus contracts is tedious and time-consuming. For example, there are at present some 1,500 mines which produce zinc, usually in conjunction with other metals. Most of these are essentially high-cost sources of supply, and the negotiation of contracts on a cost-plus basis was not believed to be a method that could be widely employed without serious delay.10
The Premium Price Plan.
The policy developed and jointly announced by the OPA, WPB, and MRC in January 1942, is commonly referred to as the Premium Price Plan.11 In essence, it involves the establishment of production quotas for each property or group of properties in each of the three metals produced by that property. For production in excess of such quotas, premia are paid by the MRC.12 The quotas are established at levels which represent approximately the output which, it is estimated, can reasonably be produced by the mining companies at the regular ceiling price for each metal. Premium payments are made by the Metals Reserve Company directly for over-quota mine production. The ores or ore concentrates continue to be sold by mining companies to smelting companies at market prices which do not reflect such premia. The market price of metal, therefore, remains unaffected by the operation of the Plan.
Quotas by Mines or by Companies?
The Premium Price Plan recognizes cost differences and the marginal principle of pricing under which companies tend to judge the output of a particular mine or even a portion of the output of that mine from the standpoint of whether the additional revenue to be received will adequately compensate for the additional costs incurred. Whatever the merits of the marginal calculus, its application seems particularly realistic in an industry such as mining where costs differ widely and where production planning can be geared to any one of innumerable levels of output. A crucial question that had to be determined at the outset was whether quotas should be set for the over-all production of a company which operates a number of mines scattered in various parts of the country, or should be set for particular mines or groups of mines. A logical case could be made for either arrangement. On behalf of over-all company quotas, it may be argued that if the quota is accurately set, it becomes unprofitable for a company, at the expense of total production, to shift its productive resources-between high- and low-cost output or between different mining properties; to collect a
M Moreover, in many cases, variations in the grade of ore within a given property are such that maximum production would require special arrangements with respect to properties generally regarded as above the margin.
11	Official descriptions of the Plan are contained in press releases FEA 641, issued January 12. 1942: PM 2160, January 13, 1942; PM 2458, February 1942; and MRC release dated March 7, 1942.	..
11	T.o stimulate longer range planning the effective period of the plan was initially set at 2% years and has since been extended one year, the present date of expiration being July 31, 1945, subject to termination and adjustment by MRC in the event of prior cessation of hostilities.
¥remium, a company must increase its over-all production of ore. heoretically, a quota set for a particular mine or group of mines does not insure that a company may not discontinue or diminish output in certain low-cost operations and transfer its activities to other properties, perhaps of poorer grade, where it will be able to collect as much, if not more, premium money.13 The other side of the case is that an over-all company quota places the enterpriser in the position of having the dollars-and-cents result of any particular mining venture contingent not only upon the given operation but also on the ability of the company elsewhere to maintain a full level of quota production. Thus the risks attendant upon operations in a particular property become associated not only with conditions there but conditions elsewhere in the company’s operations. Moreover, administratively speaking, it seems more practicable to deal with quotas case by case rather than to review and adjust an over-all quota covering perhaps 20 or 30 properties each time a situation develops in a particular property which might seem to require additional premium payments. A further consideration weighing against the “company quota” policy is psychological. Individual mine managers and personnel may work more effectively in relation to an official quota established with respect to “their” mine, than in relation to an over-all company quota, or a hypothetical quota set for them by the home office.
For these above and related reasons, quotas are fixed for mines and groups of mines rather than with respect to over-all company operations.
Criteria in the Establishment of Individual Quotas.
A major economic problem in the administration of the Premium Price Plan is and will continue to be the development and application of criteria appropriate to the establishment and revision of individual quotas. Under the “rules” of the Plan, quotas may be revised downward, and in certain circumstances combined as between properties, but in no case may they be revised upward to a level greater than the quota initially established.14 While the establishment of quotas has been carried on for less than a year’s time, it is already apparent that the selection and application of criteria must in large measure be developed pragmatically. This is not to say that certain principles do not become clear as experience develops.
In general, the issues have centered around two problems: first, the determination of costs that have been and may be encountered in a particular mining project, and second, the determination of an adequate profit margin above such costs.15
In the estimation of costs a number of questions have arisen and from them a few $re selected for comment here:
1. Experience is demonstrating that cost estimates mlust allow in many cases for a substantial development expense in order
13	A further purpose of such action, of course, would be to conserve low-cost ore reserves for the future. To guard against these possibilities it is provided in the Premium Price Plan that in the case of a company with two or more properties, should the production of any single property show a material decrease below its quota, the MRC, after hearing, may eombine the separate quotas into a single quota.
14	The reason for this is to give assurance to mine operators that the Government will not later establish quotas more unfavorable to the company than were initially determined. Such assurance is necessary if a full measure of expansion of mine operation under the Plan is to be obtained.
18	From the outset it was recognized that if production were to be aided by the Plan, it would be necessary generally to allow some profit margin above estimated costs.
that mining enterprises will be able and willing to push rapidly the development of ore reserves. Some development work is uften called for with respect to ore bodies that in “normal” times would be decidedly submarginal and hence must be amortized over a comparatively short period of time. Moreover, the current rate of mine production in some cases is so great that the maintenance of ore reserves to insure the continuance of production a few months or years later calls for the crowding of developmental activity to such a degree that its costs become abnormally high. The administration of the Premium Price Plan attempts to allow for these considerations in the establishment and revision of the quotas.
2.	The inclusion or exclusion of costs of depletion of existing ore reserves raises a highly difficult question of mine valuation which cannot be solved with precision in the time available during the present emergency. Nevertheless, it is clear that the extent to which depletion is allowed for should turn largely around the extent to which the ore reserves under exploitation are what would generally be considered submarginal. Certainly it is not appropriate to compensate for depletion of historical investment if in fact the ore bodies have little or no value in a peacetime market.
3.	A similar question arises in the case of the amortization of any capital investments in new mining or milling equipment. Generally, it is not the purpose of the Premium Price Plan to provide funds for the amortization of capital investment. At the same time, cases arise in which it is clear that additional investment, directly related to the marginal operations under consideration and often involving comparatively minor but essential physical assets, must be made in connection with properties which will have little, if any, value after the present conflict. Where this is the case, it is frequently necessary that such investment either be amortized rapidly under the Premium Price Plan or that the investment funds be provided directly by the Government. Both policies are employed to some extent and the choice between them is in some measure governed by considerations of administrative expediency.
The approach to a determination of profit margins above costs must .be similarly pragmatic. It is however, both necessary and practicable to recognize certain elements which will influence the level of estimated profits per ton of ore or ore concentrates for 'which allowance may be made. In the mining industry “profits” are closely associated with the risks obtaining in highly uncertain ventures. Analysis demonstrates, however, that certain types of projects are much more affected by uncertainties than are others. In some districts and types of geologic formations costs are more predictable than in others; the size of ore reserves is subject to more careful estimate; the possibilities of flood or other physical contingencies are greater; and ore grades are more uniform and less subject to erratic variation.
The “measurement” of cost factors and profit margins is difficult at best. When it must be done quickly and without benefit of long experience on the part of the Government agencies concerned, the inherent difficulties of the case are multiplied manyfold.16 Experience
18 It must not be forgotten, of course, that many of these same difficulties are present in the intelligent administration of any price control policy in the mining industry.
in the development and application of criteria with respect to both costs and profit margins, however, is making it possible to arrive at increasingly precise determinations. Beginning with a staff of mining engineers widely familiar with different mining districts, supplementing their experience and judgment with data obtained directly from companies for whom quotas are being determined, and giving increasing attention to a breakdown of the factors involved in different types of situations, an essentially pragmatic approach is being followed with considerable success.
At the same time, anyone having contact with the development and administration of the Premium Price Plan cannot help but be more sympathetic with the circumstances which have doubtless led the Supreme Court in matters of rate regulation to refuse over many years to single put any particular standard for the determination of such matters as the “rate of return” and “fair value.”
The Inflation Aspect.
If the Government were the sole and direct purchaser of metal, the analysis of the fiscal aspects of the Premium Price Plan as they relate to inflation could be brief. A policy of monopsonistic buying clearly operates to reduce government expenditures, and tends to minimize the volume of credit created through deficit financing. A problem arises, however, to the extent that private consumption of metal continues and the Government in considerable measure buys final products rather than metal itself.
Since in large measure the Government purchases metal products rather than metal as such, it is benefited by a stabilization of the ceiling price of metal inasmuch as a so-called pyramiding of cost is eliminated. The extent of this saving to the Government is impossible to estimate and is contingent both upon the efficiency of Government buying of final products as well as upon other considerations.
Insofar as private consumption of metal and metal products continues, it might be argued that the Premium Price Plan is inflationary in its consequences. The analysis would run as follows: The Government, in order to pay for high-cost mine production, borrows money and hence creates additional purchasing power, thereby subsidizing private consumption which occurs at a lower buying price. A full evaluation of this line of argument would be a paper in itself. Certain factors that would have to be taken account of are as follows: (1) The Government is increasingly becoming the major purchaser of metal.17 (2) Private'consumers do not use low-cost metal as such and it is impossible to determine what proportion of high-cost production should properly be assigned to so-called essential civilian consumption as against Government consumption.18 (3) An. increasing metal price in the areas of private consumption has much the same inflationary consequences, through its repercussional effects on wages and profits, as does any other price increase.19
17 It is not appropriate to cite the particular proportions of metal supply now soins for Government account. Suffice it to say that current estimates indicate that by far the greater proportion of copper production is going directly or indirectly for Government use : ™e	of 7inc production is likewise directly or indirectly for Government account
and a considerable proportion of the lead supply.
“ Hence the problem is partly the general question of whether price regulation is in fact anti-inflationary.
with the severe curtailment that has already taken place in metal consumption - trough Government order it is incorrect to assume that a reduction in metal supply would be wholly at the expense of private consumption.
On balance it is certainly correct to conclude that the Plan is decidedly anti-inflationary in its consequences. A quantitative estimate of the gains in this direction, however, is fraught with the greatest difficulty, as it involves a consideration of the extent to which cost pyramiding would occur with an unstable metal price, corporate tax offsets, and similar hypothetical factors.
The Premium Payment Plan as an Incentive Arrangement.
The Plan is an incentive method of pricing in the same sense that any price which is established on the assumption that profit should be permitted the producer is an incentive policy. Quotas are established and revised with reference to estimates of the costs that will be encountered in connection with all or portions of the output of the mine in question. The allowance of a profit margin above such estimated costs is thus an incentive arrangement, but only in the same sense that a single price which is high enough to permit some profits above cost is an incentive arrangement. Price differentiation in this case, however, does recognize the wide cost differences that may exist between different portions of the supply and assumes that it is not wise to expect producers to bring out submarginal materials at a loss or at a price which covers merely the direct expenses of mining. Similar factors doubtless have led Congress to exempt premium payments from the excess profits provisions of the Revenue Act of 1942.20
The Plan is not an incentive device in the sense that it is intended to confer lavish rewards. Moreover, it is not the purpose of the Plan to guarantee that costs will be covered. Quotas are not revised in order to compensate producers for losses previously incurred.
Thus, the Plan differs from a straight cost-plus arrangement in two respects: (1) It does not insure that mine operators will not, in fact, lose if expenses prove to be higher than those estimated. (2) It does not provide that any economies below estimated costs will be automatically passed on to the account of the Government.21
Subidy?
The Premium Price Plan is a case of monopsonistic buying with the Government acting as monopsonist. While the Government does not buy directly or indirectly all of the copper, zinc, and lead produced, it nevertheless through the War Production Board has not only severely curtailed private uses of these metals and their products but determines what amount of metal may be used for particular purposes. At the same time, the Government through OPA has determined the price which may be paid by private users of metal. In the realities of the case, therefore, the Government is in effect a monopsonistic buyer of the three metals.22
In the operation of the quota system there appear to be two levels of price, i. e., the ceiling price (translated into a price for ores and con-
20 The Act provides that bonus income, retroactive to taxable years beginning after December 31, 1940, received by mining companies from a Federal agency for production in excess of quotas is exempt from excess-profits taxes if specified conditions are met. The Act also permits a special deduction from adjusted excess-profits net income to mining companies whose current production exceeds average annual output during the period 1936—39 by as much as 5 percent of estimated reserve. If nontaxable bonus income is included in non-taxable income from exempt excess output, the taxpayer may elect which credit to take.
21 Of course, cost estimates that have proved to be too high may lead subsequently to an upward revision of quotas not to exceed the quotas initially established.
22 Even though in the case of the Premium Price Plan premia are paid on over-quota production without the Government electing to take title to the concentrates or ores on which such premia are paid.
centrâtes), and a premium payment in addition to the ceiling price for over-quota production (i. e., premia paid on such production even though the MRC does not elect to take title).
In fact, however, there are not two prices but a number of average prices for the output of different mines, dependent on the proportions between quota and over-quota production. In examining the case of a particular property, the Government, after taking due account of the estimated cost-revenue situation, determines a quota. After the determination of the quota, a mine, while receiving premium payments as well as the ordinary market price for its output, is receiving an average price for its production which may be anywhere between the ceiling price as a minimum and the ceiling price plus the premium as a maximum. In effect, therefore, the Government through the Premium Price Plan tends to estimate the cost situation of the property in question and to relate premium payments to such costs.23
Thus, under the Premium Price Plan a monopsonistic buyer differentiates between the cost of different increments of supply. The procedure is not dissimilar from that of a monopolistic seller who chooses to sell at different prices in different portions of his market.
Whether under this situation it is appropriate to state that the Premium Price Plan involves government subsidy turns largely on a none-too-useful discussion of what is meant by “subsidy.” Certainly, if the Government were the sole user of metal, it could not be regarded as a subsidy in any sense. The issue arises only to the extent that private consumers of metal may secure at the regular ceiling price metal which is made from ores produced partly from over-quota mine production. However, through the activities of OPA in keeping down the price of metal products and through the operations of the price adjustment boards and the excess profits tax provisions of the corporate tax structure, there are substantial offsets to any gains otherwise accruing ta private users.
2a The above is a generalization which does not necessarily hold in each particular case-or type of case.
7.	GEOGRAPHICAL PROBLEMS1
Karl Anderson
Associate Price Executive, Nonferrous Metals Price Branch
If only every commodity came in one standard grade easily amenable to unambiguous specification; if it were sold only through one channel of distribution with none of the complications which arise from the intricacies of different and changing channels; if the sales were made to just one class of customer and always in the same quantity ; and if the costs of the different producers of the commodity were always the same; and if, in particular, there were none of those differences of costs and of marketing conditions which arise by accident, by design, or by nature from geographical circumstance—under these conditions, maybe we could have the comfortable experience of setting forth one maximum price in each of our price regulations and do it compatibly with conscience, with reason, and with the purposes of the Price Control Act.
Mr. Wilcox, in his paper last week, showed plainly how far from these visionary conditions the actual facts are. He made it clear that however pleasant a system of uniform maximum prices might appear in contemplation, it is not a system that we can use. If we are to set forth price regulations reasonably in accordance with actual market conditions and properly designed to curb inflationary tendencies, we must use differential pricing. Geographical pricing problems are characteristically differential pricing problems^ They should be dealt with according to the same set of rules which guide our actions in regard to differential pricing generally. Mr. Wilcox commented on those rules last week.	.
There are at least three classes of circumstances which lead normally, and hence which lead now, to geographical differences in prices. In the first place, in the case of many commodities and especially in the case of raw materials, production tends to be localized in one region or in a few regions so that, although the commodity might be sold everywhere in the country, it will naturally be sold at different prices in different localities depending upon the cost of transportation, cost of selling, and other related circumstances. It would be unreasonable to expect bituminous coal or softwood lumber to sell at the same price everywhere.
In the second place, costs of production*differ in different areas because raw materials are unequally available. Wages and other items of expense vary. Power and transportation rates differ, and methods of production are not always alike. It is quite natural, therefore, that vitrified sewer pipe should sell at different prices in the southern . area and in the eastern area, and that sheet lead should sell at a price in New England different from that around Chicago.
1 Delivered February 4, 1943.
179
In the third place, there have arisen, in connection with the distribution of many commodities, systems of pricing such as the basing-point system in steel and the ex-St. Louis system in zinc which, whether they originate in legitimate circumstances or not, nevertheless have for a long time controlled the pricing basis. Such pricing systems tend to become so deeply ingrained in the commercial structure that it would be extremely inadvisable to attempt to disturb them without good cause. Our business is to hold prices down, not to reconstruct pricing methods.
These circumstances—the localization of production in certain areas, geographical differences of cost, and the existence of long established pricing systems—give us sufficient reason, even though not always the most desirable kind of reason, for the occurrence of geographical price differences.
I say “geographical” price differences. Strictly speaking, a geographical price differential is a difference between the prices paid for a product in different location^ or areas specifically stated as such—say, one price for deliveries east of the Mississippi and a different price for deliveries west of the Mississippi. It is impossible, however, if one is to illustrate at all adequately the geographical problems with, which the Office has had to contend, to confine oneself to a discussion of geographical price differentials in this narrow sense. To approach the matter in any reasonable perspective requires a wider view; the view has to be wide enough to take in instances in which prices differ between two points because there is a difference in the cost of transporting the commodities to those points. It has to be wide enough also to permit recognition of the fact that there are such things as “official” territories and accepted basing points. That is to say, geographical pricing problems include a wider range of factors than merely geographical price differentials, even though they might be most easily identifiable and most strikingly illustrated in cases where there are expressly stated geographical price differentials.
Perhaps it will serve to emphasize my point here, as well as to introduce a discussion of the treatment of geographical probleirfs in our various price regulations, to state that geographical price differences of the most intricate and subtle kind arise precisely in connection with the very pricing systems in which geographical terms are not mentioned at all. I refer to the system of uniform, nationwide f. o. b. prices and the system of uniform, nation-wide delivered prices. Obviously, even when prices are fixed on a uniform f. o. b. basis, buyers do not necessarily pay uniform prices even though the sellers may receive them. On the contrary, buyers having, as they do, to pay delivery costs, pay different prices, depending upon their location with respect to sellers. Buyers located at a considerable distance from sellers pay a higher price than those located more closely to sellers. Buyers of waste paper, for example, quite consistently with the provisions of Maximum Price Regulation No. 30, which provides maximum prices on an f. o. b. point-of-shipment basis, could pay different prices for waste paper depending upon, their location. Of course where sellers are fairly numerous and scattered geographically in such a way that buyers always confine themselves to sellers within a reasonable distance, no great price
difference as between buyers will occur on this account. However,, when there are only a few sellers, or when sellers are localized in one or a few regions, substantial dfferences in prices to buyers can occur from this source.
The case is the same with delivered prices except that here the price differences that arise are differences to sellers instead of to buyers. Here again the price differences that arise are well marked only when sellers are relatively few in number or when they are concentrated in one or a few regions, and when buyers are not always easily accessible. For example, it happens that there are relatively few producers of zinc oxide. Buyers are situated at varying distances from the producers. Hence, although Maximum; Price Regulation. No. 166 provides a system of uniform delivered prices,, sellers in fact receive different prices by virtue of their having to* absorb different amounts of freight.
It is apparent that differences of price which arise in this way in connection with f. o. b. and delivered price schedules are not amenable to description in purely geographical terms. When, for instance, under a delivered-price system, a seller sells to a number of different customers located at varying distances from his point of shipment, he clearly receives a different price from each buyer. Likewise, under an f. o. b. system, any buyer who purchases from a number of different sources pays prices that vary according to the distance between him and the source of supply. It would not be possible to represent by any sinople kind of map the price differences which occur in connection with these pricing systems. Nevertheless, the price differences are still present and they are essentially geographical in origin.
The Office has issued quite a number of price schedules providing an f. o. b. basis and quite a number providing a delivered-price basis. Some examples of the f. o. b. basis are Revised Price Schedule No. 9 covering Hides, Kips, and Calf Skins; Revised Price Schedule No. 11, Fine Cotton Goods; No. 18, Burlap; 47, Waste Rags, Rope, and String; and 115, Silk Waste. Schedules of delivered prices are given in Revised Price Schedule No. 32, Paperboard, where prices are on a delivered basis East of the Rocky Mountains; again in Revised Price Schedule No. 87, Scrap Rubber; Maximum Price Regulation No. 200, Rubber Heels, Rubber Heels Attached and the Attaching of Rubber Heels, which furnishes, by the way, so elaborate a system of maximum prices according to the grade of heel, the brand, and the type of sale, that we know definitely that anybody anywhere in the United States who wants to have attached to his shoes a pair of “O’Sullivan service grade” rubber heels can have it done for 55 cents.
One of the most intricate and, I imagine, most difficult schedules to construct is that of zinc, the price of which is governed according to Price Schedule No. 81. Here we find an f. o. b. basis and a delivered basis in the same schedule. The price of Prime Western grade zinc is 8% cents f. o. b. East St. Louis. On the other hand, the price of highgrade zinc is 91/4 cents delivered anywhere in the United States. The f. o. b. East St. Louis arrangement for Prime Western dates back to the time when the big bulk of zinc production took place in an area around St. Louis. By reason of peculiarities with freight rates and by reason of the location of the consuming industries, that basis has been
retained pretty nearly intact ever since the beginning. The delivered-price system of high-grade zinc has a different kind of origin. The major producers put the price on a delivered basis as a matter of price policy—I suppose they would say as a matter of meeting competition.
In all of these instances it has been necessary for the Office in drafting Price Regulations to consider whether the pricing basis should be changed from that established in business practices. In few of these cases, at any rate so far as I can determine, has there been found any strong reason for change. I shall refer later to one or two instances in which there was.
I should like to refer now to at least one instance in which the Office has had the chance to determine from the outset whether an f. o. b. or delivered-price system should be used, an instance in which geographical circumstances would have some importance. This was the case of Maximum Price Regulation No. 199, Lead Bullet Rod, in the making of which I had a hand. For all practical purposes lead bullet rod was a new item in the production of lead fabricators. The conditions of the market can be described fairly briefly. There were several large buyers, ammunition plants, located at different points in the country. Each plant had a number of lead fabricators within fairly easy distance, but each plant had estimated requirements so liberally that they could not be accommodated by any one fabricator and had therefore to be accommodated by a number. The price of lead varies in different parts of the country and hence fabricators have different costs. The problem was to get as low a price as possible, yet to establish a pricing basis that would be in no way discriminatory among lead fabricators. The problem was solved by introducing a combination of f. o. b. and delivered-price systems. The maximum price was set at 1.10 cents per pound f. o. b. point of shipment over the cost of materials delivered to the point of production. This permitted the different fabricators to pay different costs for materials and to sell at different maximum prices, yet allowed each of the fabricators to produce on even terms with all the others. The arrangement also meant that whenever an ammunition plant had to go a longer distance in order to get supplies, the only increase in price called for was an increase in the amount of freight which the buyer had to pay. The price formula prevented there being any inflationary price increase across the board.
Perhaps the simplest type of specific geographical price differential is exemplified in those regulations—of which there are quite a number—which permit a differential over the generally applicable price for sales in certain specified territories or for sales in connection with which the freight charge exceeds a certain specified amount. Maximum Price Regulation No. 34, Wood Alcohol, in this manner provides a differential of 3 cents per gallon above the general price of 60 cents per gallon for sales of wood alcohol in tank cars west of the Mississippi. Similarly, Maximum Price Regulation No. 36 provides an additional half cent per pound above the general price of 7 cents per pound for sales of acetone in tank cars in western territory, the term “western territory” being very carefully defined. The geographical differential provided in these cases is of course a kind of average representing the additional costs of delivering the commodity to points of consumption in the specified areas.
It is a small step from this type of regulation to one in which the additional costs of delivery are not averaged but are dealt with presumably with great precision. Maximum Price Regulation No. 32, Paper Board, provides that where the transportation costs exceed $6 per ton, there may be added to the maximum price a charge which is exactly equal to the actual excess delivery cost. That is, actual freight above $6 may be added to the maximum delivered price. The regulation further provides that in the case of certain very heavy types of cardboard and in the case of material which is imported from Canada, the $6 figure is replaced by a figure of $10, and of $12, respectively, freight in excess of those amounts being chargeable to the buyer in each case.
It is worth remarking in connection with this matter of allowing additions to maximum prices for sales in certain territories that the Pacific Coast makes a particularly frequent appearance. To a considerable extent this seems to be simply a consequence of higher freight costs, but it is at times a consequence of other factors. It has been found in the case of fabricated lead products and tin-lead alloys such as solder products, which are under the GMPR, that sales in the Pacific Coast territories are characteristically made on a delivered-price basis while sales in the rest of the country are f. o. b. It has been stated by the industry also that costs of selling and delivery are higher on the Pacific Coast than they are elsewhere in the country because there is such a big area to be covered. These circumstances would have to be allowed for in any specific maximum price regulation.
A more complicated system of geographical differentials—more complicated, that is, than the specification of one single area which is allowed an extra differential—has been set up in a number of regulations. Price Schedule No. 206, Vitrified Sewer Pipe, while leaving prices in most areas to be regulated by the GMPR, establishes three carefully defined zones—an Eastern, a Southern, and an East Central zone—for which specific maximum prices are provided in the form of specific discounts from standard list prices. The regulation follows in this regard well-established industry practices. The price differences are based mainly on differing costs of production in the different areas, clay suitable for the manufacture qf the product being unequally available, costs of fuel and transportation differing, and the situation of different producers with respect to their market differing also.
One of our most elaborate systems of area pricing is found in Maximum Price Regulation No. 120, Bituminous Coal. A few years ago, conditions in the marketing of bituminous coal became so chaotic, and cut-throat competition was so prevalent as a result of overproduction, that the Guffey Coal Act was enacted to put some order into the affairs of the industry. In accordance with the Guffey Coal Act, there was established a Bituminous Coal Division in the Department of the Interior. This Division worked out an arrangement of minimum prices for bituminous coal applicable to 22 separate coal-producing districts. The minimum prices that were established presumably took into account in each case such factors as the structure of the mines, the richness of the veins, the cost of production, etc. Maximum Price Regulation No. 120 takes over the geographical arrangement established by the Bituminous Coal Division and sets prices separately for 536932—43--------13
each area. This Regulation of course provides maximum prices instead of minimum prices, and it is interesting to notice, that in some cases the maximum prices established by the Office of Price Administration are lower than the minimum prices previously established by the Bituminous, Coal Division, our maximum prices prevailing. The construction of Maximum Price Regulation No. 120 preserves the practices established by the Bituminous Coal Division and does not attempt to make substantial changes. It has made some price reductions, of course, and perhaps there will be further adjustments in the near future in order to make it easier for the railroads to obtain supplies of coal and to alter differentials in prices between coal shipped by rail and coal shipped by water.
Other examples of regulations in which differing prices for different areas are provided are to be found in petroleum and in lumber. These regulations adopt practices which were already well established and illustrate no new point of principle. A more interesting regulation is MPR 148, Dressed Hogs and Wholesale Pork Cuts. This regulation offers a premium for fresh cuts and the premium differs in different places. For fresh cuts from hogs, delivered within 36 hours after the initial cutting of the carcass, a premium of $1.50 above the base price is allowed in New England, New Jersey, Delaware, and some other places; a premium of $1 is allowed in the western part of New York State and in Pennsylvania; and a premium of 50 cents is allowed in Virginia, West Virginia, Kentucky, and several other States. These differentials help to allow for the higher cost of shipping live animals from the corn belt to local slaughterhouses and they also recognize the higher price which fresh cuts usually can fetch.
I mentioned earlier that geographical problems are presented by such things as basing-point systems. In general the Office has made no particular effort to alter these basing-point systems where they have been found well established, but has taken the course of using the systems pretty much as they stand and formulating maximum price regulations in corresponding terms. The only basing-point system with which I am in any way familiar is that in lead, the prices of which are regulated by Revised Price Schedule No. 69. Here I can do best by quoting directly from a memorandum written by Mr. Tow, who handled the primary lead schedule. TtIn general.” he writes, “the basing-point system in primary lead is one by which delivered carload prices at various points are equalized with the price at New York in respect to such difference as there might be between the freight cost from the smelter to New York and from the smelter to the delivery point. In practice this general rule has been modified to the extent that there are points at which the price is somewhat higher than could be accounted for by actual freight differences. In Chicago, for example, where primary lead sells at 6.4 cents per pound, the price is somewhat higher than it would be if accurately adjusted according to freight costs with respect to New York, where the price is 6.5 cents pet pound. This holds also, of course, for the region around Chicago.”
In originally setting up Price Schedule No. 69, after having decided upon the base price for pig lead, the Office of Price Administration followed the industry practice in regard to established geographical differentials. Price Schedule No. 69 contained at first some 150 separate basing points; through revisions and amendments, some ten additional points have been recognized.
Mention of the addition of new basing points to the list originally given in No. 69 brings me to the subject of modification of established pricing practices by the Office of Price Administration. One might question whether the addition of new basing points to an established basing-point system is in any significant degree a modification of practice. One might question it particularly in this case, since the maximum prices which have been established for the added basing points have been arrived at in just about the same way as they would have been arrived at normally by the industry—that is, these new prices have been calculated in accordance with differences in freight costs with respect to New York shaded to the nearest round dollar per ton. The addition of these points, I might remark, was occasioned in some cases by the development of a fairly substantial consumption of lead at points, where consumption previously was not very large, and where the use of the price of the nearest previously stated basing point might have proved onerous to sellers.
A more significant kind of change in customary price practice was provided in Price Schedule No. 17, Tin, although at the time the Schedule was originally written, it was not recognized how extensive the changes would turn out to be. Tin as everyone knows, used to be imported into the United States. There was practically no domestic production. The Schedule provided, therefore, a maximum price of 52 cents ex dock or store, port of New York, with maximum prices at other ports of entry appropriately adjusted to take account of the differences in the ocean freight to those other ports as against New York. The reasons given for the provision of these ocean freight differentials at the time of original issuance of the schedule were these : “They provide for delivery at any port of entry, and they eliminate any special disadvantage which might, through the operation of a price ceiling, favor one or a few ports of entry. This provision encourages delivery at ports close to the consumers. It anticipates any changes in shipping routes, particularly the anticipated diversion of shipping to the West Coast by the Maritime Commission.” That was before Pearl Harbor! It was fortunate that the schedule did take account of domestic production by providing a maximum price of 52 cents per pound f. o. b. producer’s plant for it. This provision is rapidly becoming the starting point of an entirely new price structure in tin. Previously, tin used to be priced at various points in the country according to the New York price or the price at some such port of entry as San Francisco, plus cost of transportation from the port to the point of delivery. With the elimination of imports, and with the construction of the large tin smelter at Texas City, Tex., which was in the wind at the time the schedule was originally written, the price structure that is developing is one of 52 cents f. o. b. Texas City. It is fairly evident, even on the basis of the most naive pictures of the geography of the United States, that this new price structure will bring about substantial changes from what previously existed. Some of those changes have already become apparent. It is perhaps not too extravagant to entertain the idea that the future tin price structure will continue to develop out of Texas City, and it is not too much to say that, if that development occurs. Price Schedule No. 17 will have been one of its main origins.
While speaking of PS 17, it is worth noting that the existence of
the detinning plants, whose production also must be sold at the maximum price of 52 cents f. o. b. plant and which are located at various points in the country, means that in a number of places tin sells at two different maximum prices; the one, the price of locally produced tin; the other, the price of Texas City tin. This has led, as one would expect, and as Mr. Wilcox suggested last Thursday, to a problem in the allocation of the tin: how to allocate fairly among different producers and not discriminate price-wise among them. I understand that the problem has been solved by the War Production Board by the simple device of allocating the rather small supplies of tin produced from the detinning plants to the small consumers and allocating the larger output from the Texas City plant to larger consumers. This results, generally speaking, in extending the benefit of the lower price to small consumers. The difference, however, is very small—too small to be serious.
Price Schedule No. 17 is a case in which the pricing system was changed, as it were, by accident. The Office has gone much further than this. In Maximum Price Regulation No. 239, Lamb and Mutton Carcasses, we have gone so far as to create our own system of zones for the purposes of the Price Regulation. Generally speaking, dressed meat must be shipped from the Middle West to the West Coast and to the East. The Office, after considering various possibilities of pricing, finally decided upon a zoning plan as the one best suited to the case. After careful study and after extensive discussion with the traffic officers of some of the meat-packing companies, a system of zones was set up using Kansas City as a base. The zones are marked off with reference to unit differences of actual freight costs from Kansas City, plus unit differences in estimated costs of icing. This arrangement has worked out so well that it has been found practicable to use the same zoning system for the regulation of maximum prices of lamb, beef, and (now under consideration) veal.
Another alteration in established pricing practices is exemplified in Maximum Price Regulation No. 218, Wooden Mine Materials and Industrial Blocking. This Regulation alters pricing from a delivered base to an f. o. b. basis. It was found that the system of delivered prices originally established in the schedule gave rise to a considerable disparity between the mills selling close to the point of shipment, and those selling from greater distances; this led to a change of the schedule. The schedule as now revised puts prices on an f. o. b. basis. In choosing the maximum prices on the new basis, of course, care had to be exercised so as to avoid imposing any serious hardship on those who were previously benefited by the delivered-price system. I might add—this is for the sake of accuracy—that pit posts remain on the delivered-price basis because the problem did not arise there.
The most ambitious kind of alteration of pricing practices to which I want to refer was made by the Office in Maximum Price Regulation No. 114, Wood Pulp. Wood pulp always used to sell on four different bases; on dock Atlantic coast, f. o. b. producer’s mill, delivered at the consumer’s mill, and delivered at the consumer’s mill with allowances of freight only up to a certain amount. The first method was the result of competition between West Coast suppliers and Canadian and European exporters. These latter
quoted on-dock prices, and the West Coast producers using ocean freight to the Eastern market quoted competitively on the same basis. Other producers in this country also offered on-dock quotations, although in fact they shipped by rail. I offer this explanation of the on-dock pricing basis merely in order to illustrate the fact that there were real reasons for the existence of each one of the four methods of price quotations. Various circumstances, however, led the Office to provide in Maximum Price Regulation No. 114 only one pricing basis. First and most obvious has been the curtailment of ocean shipping. It is no longer sensible to think about imports of wood pulp from Europe or by sea from Canada, nor about shipments of wood pulp by water from the West Coast to Eastern seaports. Second, a large amount of wood pulp is now being allocated by the War Production Board to the Lend-Lease Administration and, as a result of this, there has been a considerable shift in the channels of shipment. Third, from our point of view, it would be very difficult to maintain an adequate price control, even with a schedule, with maximum prices on a variety of bases. For these reasons, there has been set up a single, delivered-price basis. However, there are four distinct areas in which wood-pulp production takes place: the northeastern area, the Lake Central area, the West Coast, and the South. Neither production conditions nor market conditions are the same in these areas. Hence, there is a different delivered price for each of the four areas except that, where a grade of pulp is produced in more than one area, a single price for all the producing areas is used. In arriving at these prices an analysis was made of sales of over 500,000 tons of wood pulp in order to determine with accuracy exactly what the freight costs were, and exactly how much mill realizations were. I shall not trouble you with the details of this analysis. The main point is that the maximum prices arrived at could only be determined after an extremely difficult and tedious quantity of statistical work. More important than this, however, is that the Office saw fit to expend energy on this work in order to arrive at a system of maximum prices that would satisfy one’s notions of fairness, and at the same time implement the purposes of the Price Control Act. A still more important point is that in Maximum Price Regulation No. 114 we have a good illustration of the fact that, although we may in most regulations be content to follow traditional pricing practices, there is no compulsion upon us to do that. If we find that a change in traditional practices can be introduced without causing serious dislocations and with substantial gain to the price control program, then we may change traditional practices.
I should like to conclude with one or two remarks as to the future of geographical-pricing problems. I have already stated at the outset that, in dealing with geographical-pricing problems, we are dealing with differential-pricing problems, and that any system of differential prices arrived at geographically should obey the ordinary rules for differential pricing; that is to say, it should be used where it can be used with advantage to keep prices down—to curb inflationary tendencies. It should not be used, even though it might serve such a purpose, where it would cause so great a disturbance as to bring more trouble than benefit. I have a feeling that in
the future, with shortages of manpower, and with increases in labor costs developing apparently unevenly across the country, when labor costs rise for one industry in a region, they will probably rise for all industries, or at least all industries that use the same type of labor, in that region. There will develop, that is, a pressure of labor costs on price ceilings which will be uneven geographically. It seems to me that one of the main uses to which differential pricing might be put in the future is to meet this condition by using geographical differential pricing instead of across-the-country pricing. Our policy is, as everyone knows, never to offer a higher price across-the-board if there is something that can be done short of that. I submit the use of geographical price differentials as one way.
One of the things that has surprised me most in examining the various price regulations for the purposes of this paper, is the discovery that there are relatively few price regulations in which geographical price differentials are specifically provided—though there are a great number, as I think I have indicated, in which they are perhaps unintentionally provided. That seems to me to be most unfortunate. It signifies a failure to use a type of differential pricing which has great possibilities.
Vili. RETAIL AND SERVICES PRICING
1.	RETAIL PRICE CONTROL POLICY 1
(i)	Merle Fainsod
Director, Retail Trade and Services Division
This is the first of a series of three talks on various aspects of retail trade and service price problems. I am merely going to introduce the subject today, and Mr. Coombs and Mr. Villard in the next two lectures are really going to deal with it. I should like today to outline some of the factors which present difficulties and create complexities in this area of control, and also to examine, by way of background for talks that are to follow, the development of OPA policy in the retail field. Every price controller, I suspect, dreams at some time or other of an ideal setting for price control. I have a Nirvana all my own. Nirvana, or heaven for this retail price-fixer, would be the kind of economy where there are no political pressures, where everything is administratively possible, where all retailers are uniformly intelligent, where the price-fixer can communicate with all of them without any trouble at all, and where no retailer has any inclination to violate or seek loopholes in regulations through which the intent of the regulation could be frustrated. On the economic side, all consumer goods would be standardized and capable of easy identification; they would have uniform delivered costs to all retailers, over large areas. Beyond this, all retail stores would be similar in their major characteristics or at least would all fit neatly into a few simply defined classes. Given such conditions, the retail price-fixer could readily establish specified dollars-and-cents retail ceilings on all goods; manufacturers could preticket these prices on the merchandise; and retailers and consumers alike would at all times be fully informed of the retail ceiling prices in the simplest possible manner.
It is cheerful to think about heaven, but the basic conditions which face the Office of Price Administration in the retail field stand in sharp contrast. Let me go over some of these factors with you. First, there are a large number of retailers with a wide range of characteristics. Price control in the United States applies to more than 2^ million retail establishments, if you include service trades. These range in size from the store doing a few-hundred-dollars-annual business in the front section of the family dwelling to the billion-dollar corporate chain selling through thousands of outlets in many States. They differ widely in their merchandise assortment. Their operations run the gamut from cash-and-carry self-service markets to stores offering credit, delivery, and telephone service, and a place to check the
1 Delivered February 18, 1943.
189
baby. Some retailers buy direct; some manufacture their own goods or take the full output of their suppliers; others purchase from a wholesaler or through a whole hierarchy of jobbers; and some even purchase goods from other retailers. And there is considerable variation in the operating costs and the mark-up practices of different retailers, even for identical merchandise.
This conglomeration of retail establishments presents many difficult administrative problems. For example, simplified price control frequently demands classification of sellers, yet we continually encounter groups so motley that they practically defy classification. Efficient accounting records are a great aid to price control, yet the basic accounting system in thousands of these concerns takes the form of a cracker barrel filled with dusty invoices. Effective price control calls for a rapid flow of information to all persons affected and the full understanding by them of their responsibilities. These basic prerequisites are in large degree lacking in the retail field. Even where the Government does succeed in getting bulletins into the hands of merchants, there is no assurance that they will be read or understood, no matter how simply written. Language itself frequently presents major difficulties. It is interesting that many of our retail regulations have already been digested in numerous foreign languages.
One of the most important difficulties arises from the lack of uni-fqrrmty in either the purchasing costs or the operating costs among different types of retailers selling identical merchandise. Where these differences are pronounced and cannot readily be standardized, the setting of uniform retail ceiling prices for all merchants is practically precluded unless you want to give a windfall to the low-cost operators or put a very costly squeeze on the high-cost ones. The best that can be hoped for under such circumstances is the setting of two or more uniform prices at different levels, applicable to specified classes of stores. Even within a given class of stores there is usually sufficient disparity of historical margins to cause considerable dif-hculty. So, if the margin is set too low, retailers on the high-cost end of the scale are badly squeezed; but if the margin is high enough to cover the high-cost members of the class, you give a windfall to the others and you produce undesirably high prices. That is one maj or source of difficulty.
The second arises from the large number of consumers’ goods and their lack of standardization. Over-all retail price control embraces everything manufactured which passes through distribution channels.
maiOT^ ^ose countless products are not standardized. Ihat happens in part because billions of dollars have been spent in past years in the promotion of trade names designed to make products seem unique, even though their basic physical characteristics are often similar or identical. Beyond this, there is steady change in the specifications of many products, especially where style is a factor and new products constantly make their appearance. Wartime shortages of various materials, particularly metals, have forced many changes m construction which would otherwise have not occurred. Each of these changes means modifying an old price ceiling, creating an entirely new ceiling, or making provisions for prices, on these variations.
This wide variation of product specifications presents one of the
greatest obstacles to the simplest method of price control; that is, the setting of uniform dollars-and-cents ceilings. To some extent, the establishment of Government standards, as in the case of “Victory Models,” holds considerable promise of overcoming these difficulties, not only for simplified price control, but for conservation of critic’al materials. Experience to date, however, suggests that this is a slow and painful process and its application is limited. There have been notable accomplishments to date in the field of “Victory Models” and commodity standardization. Some of them have occurred in such items as stoves, bedsprings, automobile tires, and rubber sundries. In the food field, wholesale cuts of pork and beef have been standardized with uniform retail cuts to follow very soon. Just recently our grading order in the butter field was issued. On the agenda are grade labeling of canned fruits and vegetables, specified gradés for other food products, and standard specifications for women’s hosiery, men’s wrork clothes, and a variety of other important apparel items. But, as I said, it is a slow and painful process.
A further difficulty arises from the absence of uniformity in the delivered cost of similar goods. In the retail field there are frequent variations in delivered costs of similar merchandise to different retailers or even to the same retailer. This comes about because of unequal transportation costs, either to variously located retailers from the same shipping point or to the same retailer from various shipping points. It comes about because of the disparity in the ceiling prices of different supplies of substantially identical merchandise, and it comes about because of differences in the purchase costs of various retailers arising through quantity discounts or other allowances or differences in the source of supply.
The price freeze technique of the General Maximum Price Regulation accentuated our difficulties in this respect, since it had the effect of freezing price and discount differentials at pre-retail levels which happened to exist in the base period but which may no longer be appropriate under present changed market conditions. In a shortage market, adherence to frozen price differentials which arose in a period of less scarcity has the effect in some cases of encouraging a disproportionate flow of goods to those classes of customers from whom the supplier is permitted to receive the most favorable ceiling price. This is one of the reasons which forces us to replace the price freeze with selective regulations establishing uniform dollars-and-cents prices at producer levels or modifying former differentials in prices to different classes of buyers.
As a general rule uniform dollars-and-cents retail prices on a standardized commodity are difficult to achieve wherever transportation— freight—is an important element of co'st, unless uniform delivered ceiling prices are set for manufacturers. The experience of OP A to date suggests that to obtain such uniformity is far from easy wherever it has not been the trade practice in past years, and wherever the price regulation is not buttressed by some system of freight absorption.
These general points are familiar to most of you, but they illustrate the factors which complicate the problem of retail price-fixing. So often I hear someone ask why we can’t have uniform dollars-and-cents prices at the retail level right now. These are some of the
reasons why it is not easy and why, when OPA entered the retail field last April, it was forced to take the rather crude step of the price freeze.
The GMPR was admittedly a crude instrument and was never intended to be the last word in price control. Rather, it was designed as an emergency measure to head off the sharp upward surge of prices which had been accelerated by the economic events following Pearl Harbor. It was realized at the time that it would have to be amended and tailored to meet the many difficult problems still unsolved. It had all the strength and the weaknesses of the freeze technique. Its strength from the point of view of the trade was that it was based, by and large, on the individual experience of each seller; that is, it froze competitive relationships as it found them. Its weaknesses were also soon revealed. Since it favored those who had raised prices most and penalized those who had raised prices least, the cry of inequity was soon heard, and adjustments had to be granted to give relief to the seller who was out-of-line with his competitors.
Even more serious was the looseness of such concepts as “similar” or “comparable” in pricing new items. The further away we got from March, the more difficult became the problem of pricing new goods. To the retailer who sought to beat the game, “similarity” and “comparability” became open invitations to evasion and circumvention. Even to the more conscientious retailer, they remained formidable temptations ini the path of righteousness. Compliance and enforcement were rendered more and more difficult.
To these difficulties there was added an even more serious one— the problem of how to adapt the GMPR at retail to the necessity of granting price increases at preretail levels. Since the food field presented this problem in its most acute form, I should like to turn to that field for a good part of my remaining discussion.
I think all of us know that the food trade produced more than its proportionate share of problems during the summer, fall, and winter of 1942. These difficulties emerged mainly from one basic cause— increased costs, primarily of farm products and second of labor, which were not under control. These increased costs—some of which had been in the making in the period prior to March—could have been handled at the processor level in one of two ways. Those which could not be absorbed by the processor might have been absorbed by the Government as special costs attributable to war needs and, in this way, conceivably the March price level for foods could have been held. The alternative was for the higher costs to be paid by food processors and reflected in higher ceiling prices. Without going into the history of the long and difficult battle of last summer for subsidies, it is enough to say that OPA found itself obliged to take the latter course—that of raising processor ceilings in order to cover increased costs and hence to assure maximum production. We had to take that action first in canned fruits and vegetables. That was followed by a whole series of other items, including most recently such products as flour and canned milk. These increases in processor ceilings created the need to make corresponding adjustments in the ceilings of food distributors. It meant, in other words, puncturing March ceilings and raising the cost of living. Without such price adjustments, the margins of wholesale and retail grocers—that is,
the spread Between their buying and selling prices—would have disappeared, or would have been squeezed very badly. Such a margin squeeze, though confined to only some of the goods they would have sold, would have represented a considerable burden, particularly on small wholesalers and retailers, and would have impaired the distribution of vital foods to consumers.
In a nutshell, the major problem which confronted OP A during the initial phase of price control in the food field was that of reflecting in wholesale and retail prices the ceiling advances which had been required at the processor level because of increased farm product and labor, costs. Had there been no such cost increases, there would have been no need for departing from the March retail prices frozen by the General Maximum Price Regulation—no need, in other words, for issuing additional regulations to complicate the life of the retailer.
Another set of problems which should be mentioned arose from the second big freeze of retail food prices. This occurred on the third of October 1942, directly following the Congressional Amendment of the Emergency Price Control Act. For the first time, price control was applied to such items as butter, cheese, eggs, potatoes, citrus fruit, canned milk, and a number of others. Since this freeze was in the form of a temporary regulation which had to be replaced within 60 davs, and since it covered various products whose prices had to be allowed to fluctuate seasonally, it was necessary to follow through immediately with the new regulations which were designed to handle these problems on a permanent basis. That meant more regulations and amendments to old regulations for wholesale and retail grocers to get acquainted with. Under a fast-moving program of price control, this was unavoidable. These perishable items and most of the others which were frozen late in the game have since been handled by the fixed mark-up method of control.
I will go into that shortly. But the problem of making appropriate adjustments in wholesale and retail ceilings was exceedingly difficult and complex and, despite our strong efforts to keep things simple, it was inevitable that life would become much more complicated for the grocer. At first we tried to use the technique of the so-called “permitted increase” wherever possible. By this method suppliers notified their distributors of the precise “permitted increase” which could be added to the March ceilings of designated products. For example, a canner would notify his wholesalers, who would in turn notify retailers, that an amount of 2 cents could be added to their original ceiling price on X brand and size of canned peaches. It looked like a simple procedure of adding specified amounts to the March ceilings of individual wholesalers and retailers on particular items. Yet even this simple procedure gradually became more and more troublesome as more items were added to the permitted increase list, and retailers found difficulty in keeping up with the latest developments.
In some cases it was impractical to use this permitted increase technique, and so in the fall a second and equally simple method was devised to permit wholesale and retail grocers to adjust their ceilings wherever their margins were badly squeezed on an important list of food commodities. On this list were such items as cereals, canned fish, cooking and salad oils, sugar, canned vegetables, coffee, rice, and shortenings. I might say, parenthetically, that not all distributors
found their margins squeezed on these items. The picture was very spotty; some sellers felt no pinch because they had applied speculative margins in March; others who were tied to more normal margins in March found themselves very tightly squeezed.
This problem was handled by the so-called “adjustment mark-up” method. Its operations were fairly simple. OPA issued a list of percentage mark-up figures which merchants who were frozen below these mark-ups could use. If a particular merchant found that the application of tl^ese mark-ups yielded a ceiling more favorable than his existing ceilings, he was free to adjust his ceilings upward, to these mark-ups, provided that he so reported. If, for example, he had an 11-cent ceiling on a can of corn, which allowed him no mark-up at all, and the regulation permitted him to taka a mark-up of 20 percent on cost, he was allowed to use that mark-up in computing his new ceiling. OPA merely asked that the wholesaler and retailer report such adjusted ceilings, for the protection both of the merchant and the consuming public.
Looking back over this phase of price control in the food field, a number of characteristics stand out. It was a period of successive emergencies, feverish activity, and strong pressures on the OPA. Tremendous problems had to be met by a series of improvisations. The job of OPA was to hold the price level as far as it could, to allow only such increases as were absolutely necessary. Overall, I think it is fair to say that controlled food prices advanced remarkably little— in view of the strong upward pressures that were being exerted on the price structure.
One thing which is worth emphasizing but which receives little public attention todav is that virtually every food distributor regulation issued since the General Maximum Price Regulation was designed to relieve wholesalers and retailers from an actual or potential margin squeeze and, in most cases, was strongly urged or lobbied for by the trade. The unfortunate fact, however, is that this series of relief measures did have the effect of burdening many small merchants with a considerable variety of regulations. There was no clear alternative at the time. OPA did not as yet possess adequate facts for moving into a simpler pattern of regulations. It was only in the process of collecting these facts. Moreover, it was having to move too swiftly from crisis to crisis to pause and redesign the whole system of price control.
The problem which confronted us by late fall was perfectly clear. There was a growing need to convert the accumulated body of regulations affecting food stores into a simplified and standardized pattern of controls, written in clear English and embodying pricing methods familiar to and understandable by even the smallest merchant. With these objectives in mind, OPA examined various alternatives, consulted with the trade, and came through with some new proposals.
The first proposal was for OPA to specify dollars-and-cents retail ceilings for various items wherever feasible. This was designed to make price control as simple as possible for the merchant and crystal clear to the public. The second proposal was for OPA to extend margin control where dollar-and-cents ceilings were not feasible.
Setting retail ceilings in dollars and cents is unquestionably the
most enforceable method of control for OPA and the most understandable for the consumer and for the retailer. We have already used dollars-and-cents prices in a number of lines, such as household appliances, automobile tires, women’s hosiery, rubber footwear, and rubber sundries. Where they have been used, the experience has been favorable.
In many cases there are formidable technical problems involved in arriving at a set of fair and equitable dollars-and-cents ceiling prices, but where it can be done, it should be done. Our present plan for the food field calls for the eventual establishment of dollars-and-cents ceilings—top prices in a given community on most of the key food items sold and consumed in that community. In some cases these dollars-and-cents prices will be uniform for the whole nation, as in the case of soap. In other cases, there will be slight variations by zones, as for meats. That is one aspect of the OPA retail food program.
Another is the use of specified mark-ups. Let me illustrate how that system works. We already have about a third of all food items under specified mark-up control under Regulations 238 and 268. These regulations differentiate retailers into five classes. A mark-up figure is provided, class by class, for a category of food items. Typically the mark-ups are higher for the smaller stores; independent stores generally are given higher margins than chain stores. The supermarkets are given lower margins. Obviously, one purpose is to protect the position of the smaller merchants who, because of .the nature of their operations and the greater service which many of them offer, usually have a higher margin and higher operating costs. In other words, the device of classifying stores avoids giving supermarket margins to the crossroads grocer and it avoids increasing the prices of large stores by giving them higher margins.
These mark-up figures were based on the most extensive survey of food distribution margins ever made in this country, conducted for OPA by the Bureau of Labor Statistics over a period of many “months and covering many thousands of wholesalers and retailers of different types.
These simplification efforts of OPA are not intended to end with mark-up control. As I have said before, we hope to go further and achieve even greater simplicity wherever possible by the gradual establishment of uniform dollars-and-cents retail ceiling prices for important food items. For many products this will have to be done on a community basis. It has to be done that way because of the transportation factors which cause variations in food prices among different areas.
For the past month or so, we have been making a pilot study in the District of Columbia. We could today, if we wanted to, set flat dollars-and-cents prices on some 750 food items handled by grocery stores in the District. We do not plan to do that immediately, but, when we move, we are likely to move all over the country at the same time in key population centers. We are prepared to issue very shortly a list of specific retail ceiling prices on various cuts of pork, and similar action will be taken on beef. These will be zone prices, varying from one geographical area to another.
, As rapidly as the resources of OPA field offices permit, uniform ceiling prices for important food products will be established community by community. These- prices will be published prominently for the guidance of merchants and consumers alike. They will be the top prices that can be charged in that community. Stores classified as chains and supermarkets will be required to sell under those top prices at margins which have been assigned to them. It will take considerable time and energy on the part of our field staff to extend this program of community food ceilings over the whole country, but it will be done with all possible speed.
The experience to date provides some useful guides for future retail price-control policy. Above all, the regulations must be kept simple both in language and substance. Further, if they are to be complied with, they must be regarded by the majority of retailers as being fair and equitable. We. cannot possibly police 2% million retailers. There must be the kind of compliance that comes not only from understanding, but also from recognition of the equity of the regulation. Beyond that, we must avoid piling a multitude of regulations on individual storekeepers. We in OPA are broken up by commodity branches; and tend to. think in terms of our commodity. We sometimes forget that the average retail store handles thousands of commodities. The commodity on which we are working may affect only one manufacturer, but when we pile commodity schedules on the retailer, we produce in the aggregate an assortment of retail regulations which becomes simply impossible for the retailer to digest. By the same token, retail regulations should embody pricing methods familiar to the small merchant. I have said the highest priority should be given to uniform dollars-and-cents retail prices, preticketed wherever possible; where that is not feasible a standardized mark-up should be specified, by types of merchandise and by class of store where necessary. There will have to be greater emphasis on commodity standardization wherever that is feasible, but, above all, it is necessary to make these regulations simple in form and substance if there is to be understanding and compliance.
(ii)	Alfred Auerbach
Price Executive, Consumer Durable Goods Price Branch
Three distinctly independent points crossed my mind as Mr. Fainsod was talking, and all point to the fact that we ought to recognize that there are certain potential inflationary characteristics inherent in any such marginal control over cost. I am, frankly, 100 percent in favor of this type of retail control, so what I say from this point on is not to be taken as disagreement with that tactic at all. HoweVer, there are three potentially inflationary factors which should be recognized.
In the first place, retailers, once they are assured of a given percentage mark-up above cost on their purchases, will no longer in any way function as outposts or scouts, or patrols, or policemen for OPA so far as manufacturing prices aré concerned. It may be argued that they have not been functioning in that capacity to any pronounced
degree, but to whatever degree they have been serving as a checkrein, they will no longer continue to do so.
The second is that when retailers get a given percentage above cost, and where there is a shrunken available supply, there is a natural tendency to put the merchandizing emphasis on the middle- or higher-priced brackets. There is going to be, I believe, a certain pronounced trend toward the promotion of the better or more profitable grades under retail regulations based on a percentage mark-up over cost.
The third and possibly lesser factor bearing upon the same problem—one which I believe will be more marked in those areas where the commodity is so scarce that a retailer can get any price as long as he has the product—is that the retailer will tend to buy from jobbers, rather than from manufacturers, in order that he may have a higher base on which to project his percentage mark-up. -
These are three inflationary aspects. There is another aspect in terms of broad public relations that warrants consideration; that is, we may have difficulty with manufacturers because their distributors, regardless of their costs, get a fixed percentage mark-up, while manufacturers, on the other hand, have a fixed ceiling. If manufacturers’ costs go up, ceilings still have to stay put. We can foresee any number of OP A conferences and conversations with individual manufacturers, trying to explain away what they may hold to be an inequity and an inconsistency in our reasorting. We will have to convince manufacturers that there is fairness and equity in our retail policy. We can defend the principle in several ways. In the first place, the distribution field has been uniformly dedicated to a percentage concept, but that has not necessarily been true at the manufacturing level. We can also defend it in terms of administrative practicability. Finally, I believe we will have our clinching defense in the argument that the percentage we have taken is a normal percentage, and does not necessarily take into consideration all of those new developments that are increasing operating costs.
I should like to touch on two more brief points. One deals with the standardization of a product and the concomitant development of a dollars-and-cents price. We may vary our percentages by different types of outlets. We might say, for example, that a department store is to get a 40-percent mark-up and another store a 45-percent mark-up on a standardized item. On a dollars-and-cents ceiling, on a thoroughly standardized product, we have in Consumer Durable Goods, attempted to circumvent the tensions which such- differential pricing involves, if the data permit. We have, therefore, moved across the board and taken one fixed figure, regardless of the type of outlets, in some markets. If that has not been possible we have narrowed the number of differentials as much as we could. It is sound policy to do this.
The third and final point I want to talk about deals with just one phase of the complex task of determining any margin percentage for a given type of retail store on a given commodity. In defining what its maximum margin is to be, we find a consistent argument that whatever the percentage is, the store will not be able to utilize it on all of the subdivisions of that commodity classification. For example, if we were to say that 40 percent is the maximum mark-up on furniture, we
would be told that it is highly doubtful that the retailer can take 40 percent on every item of furniture he sells. If that is the case then, our percentage may perhaps have to be slightly cushioned so that items which must be sold below the average can be offset by others priced above. The retail craft has insisted that it cannot sell everything in a classification at the average realized margin and that competition continues to make it imperative to sell some items at a closer mark-up. Hence they argue we must allow them some tolerance. In other words, they wish us to establish the maximum margin at a point above the realized margin in the hopes that the fluctuations will produce a final figure not below the one that we had planned to allow.
2.	TECHNIQUES OF RETAIL PRICE CONTROL 1
Philip Coombs
Executive Assistant to the Director^ Retail Trade and Services Division
The past nine months of OPA experience with retail price control offers some valuable lessons for the future, both as to techniques to follow and methods to avoid. Examination of these methods is not a matter of mere academic interest. Over the next 6 months a considerable portion of the existing structure of retail controls must be replaced by simpler, more uniform, and more effective regulations. Our present system of control has had a gratifying degree of success against heavy odds, but it has certain basic weaknesses which make it unsatisfactory for future operations. Every commodity branch that handles goods or services sold at retail must devote a large share of its energies over the next few months to the fashioning of better retail controls which can last out the war. This is the biggest price job that is facing OPA today. We cannot afford to do it in anything short of first-class style. In brief, OPA must bring quickly to a close the initial phase of retail price control. That phase was begun by the issuance of a sweeping freeze order—the General Maximum Price Regulation—and has since been characterized by a series of makeshift supplementary actions designed to provide expedient solutions to the pressing problems which this regulation created or left unsolved. The second phase must be characterized by a more durable and better integrated set of retail controls which can hold retail prices down against the heavy pressures ahead.
It has been said that the greatest ally of the General Maximum Price Regulation was the inventory situation. As long as there were abnormally heavy stocks of most important consumer goods in warehouses around the country, OPA could count on considerable support from competition. As long as the sales volume of retailers remained at high levels—in many cases the highest in history—OPA could expect the mass of retailers to follow the rule of March prices without serious objection. But these heavy inventories are vanishing fast and production sources are drying up. It will take much stronger ceilings than now exist in most comrhodity areas to hold firm against the heavy pressures of declining volume which face our retail system in the immediate future.
A brief review of the major weaknesses in our present body of retail controls provides some important guideposts for future price actions.
In the first place, the present retail regulations form a patchwork and not a well integrated pattern. As was suggested earlier, this is
* Delivered February 23, 1943.
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because every commodity branch was harassed by demands to provide expedient solutions to pressing problems. Of course, it would be very unrealistic to assume that the day will come when OPA ceases to be confronted by a continuous series of crises, but, in the process of solving these perennial problems, the solutions must be integrated with one another and fitted into a reasonably neat pattern well thought out in advance. This means, in brief, that each commodity branch must coordinate its actions closely with those of other branches dealing with different commodities sold through the same distribution channels.
In this connection it should be noted that the breakdown of the Price Department into specialized commodity branches, while having many advantages, presents certain serious dangers. Take the situation of the corner grocer as an example. The several branches of the Food Division handle various foods for human consumption; the Chemical Branch controls soap, cleansers, and bleaches; the Paper Branch regulates napkins, toilet tissues, and matches; and you will have to consult the book to see who takes care of clothespins, mops, and mousetraps. As far as the grocer is concerned, however, these are all grocery items, whether edible or not. A similar condition exists in regard to commodities and services sold by filling stations. The prices of automobile tires, spark plugs, gasoline, antifreeze, lubrication service, seat covers, and Coca Cola, are each handled by a different OPA branch. And you can run down for yourself the list of items sold in the modern drug store—that useful institution which in recent years has become a kind of vest pocket department store with a large drug department. The obvious conclusion is that if each OPA Branch goes in for rugged individualism in the development of price control techniques, the grocer, the filling station operator, and the druggist will soon find themselves buried beneath an ever enlarging patchwork of dissimilar regulations. If this trend should continue for long, the retailer would either smother or crawl out from under the patchwork.
The same problem can be stated in another way. A commodity branch reared on a diet of selective price regulations, usually tailored to fit the manufacturers of specific commodities, may find itself quite naturally thinking in terms of selective commodity regulations for retailers. But unfortunately the retailer typically carries a far wider assortment of merchandise than the manufacturer. A whole series of selective commodity regulations—unless they are of the very simplest dollars-and-cents variety—would quickly give him a bad case of regulatory indigestion. What is needed for retailers is one regulation tailored to fit most of the items in a food store, another for the druggist, and still another for the apparel merchant. In short, we must aim for storexoide retail regulations which are tailored to fit the operations of specific trades, and we must studiously avoid narrow commodity regulations, unless they provide simple dollars-and-cents ceilings. Wherever more than one regulation is applied to the same type of store, those regulations must be earefully integrated.
A second maior weakness of present retail regulations, especially of the General Maximum Price Regulation, is that the methods provided for pricing new goods not sold in the base period are too vague and complex. Such concepts as “comparable” and “similar” are a
foreign language for the retailer. The subjective judgments required under these concepts are a source of grave risks and worry for the honest merchant and present inviting loopholes to the less honest. Elsewhere, as in the seasonal food and apparel regulations, the retailer is asked to base his current prices on his record of costs and prices of an earlier period. Most retailers simply do not possess such elaborate historical records and consequently are forced to pull figures from the air. Our retail regulations in the future must provide very clearcut guides to legal ceiling prices—guides which do not employ historical records and guides which the majority of retailers can understand on first reading.
Many retailers today seem to have only the most rudimentary notions about price control, even where they have had every opportunity to learn the fine points. It is significant that these merchants apparently have but one major impression about the pricing requirements, namely, that the Government does not want them to exceed their “normal mark-ups.” Thus, instead of wrestling with the intri-; cacies of each new regulation and amendment, they follow the general rule of “mark-ups as usual” with considerable self-assurance that by conforming in this manner with the spirit if not the precise letter of the law they are being patriotic and will stay out of jail. A very recent court decision in an important case of alleged retail price violation suggests that retailers are not alone in applying this “rule of reason.” Another notable tendency is for retailers to accept the manufacturer’s suggested retail price on new goods without regard to whether or not such prices exceed their correctly determined ceilings.
This strong inclination to follow “mark-ups as usual” and to adopt manufacturers’ suggested prices provides a strong clue as to the course OPA must pursue if it is to fit price control to the retailer’s customary brand of thinking, to his native intelligence, and to his physical facilities for record keeping. It should be clear by now that there are just two pricing methods with which the majority of retailers are acquainted : First, they are well experienced in charging prices which someone else—in the past, their supplier—has told them to charge; second, they usually know how to apply a mark-up to their costs, because they have been doing it all their lives. These two pricing methods will be discussed in detail later.
A third major weakness of existing retail regulations is that they involve too much paper work for everyone concerned—both the retailer and OPA. Moreover, there is no necessary consistency between the mechanical requirements of different regulations which apply to the same retailer. An important lesson of recent months is that too much paper work does not get done. Perhaps it should not have taken a retail price control program to teach this after all the years of filling out income-tax reports. This is not to say that price control can get along without any paper work. Obviously, it cannot. But here again there is the danger of reasoning from the manufacturing field, where normal record keeping and facilities are relatively much more abundant, over to the retail field, where, as Mr. Fainsod indicated last week, the accounting system may take the form of a barrel in the back room filled with dusty invoices. It is equally important to keep in mind the limited paper work facilities of the local War Price and Rationing Boards.
There are several reasons why individual regulations get launched with an excess cargo of record-keeping and filing requirements. In some cases it results, ironically enough, from the laudable enthusiasm of various individuals to achieve unquestioned victory against inflation for those particular commodities over which they have responsibility. The conscientious fellow who controls mousetrap prices, for example, wants to devise the best mousetrap regulation that can be had—one which will force inflation to beat a path of hasty retreat from the consumer’s door. If mousetrap prices stay down, the battle against inflation is well on the way to being won. So he designs a regulation which will button down mousetrap prices for the duration, beyond all reasonable doubt. If he has his way, every retail seller of mousetraps will keep a full record of each purchase and sale, showing the name and address of purchaser or supplier, the date, the model number, a physical description, and the price charged or paid. Our enthusiastic price fixer may also require periodic filing of various items of information by each retailer, preferably with the Washington office, though more likely with the local board if he has previously been cautioned against requiring retail filings with Washington.
This is perhaps a rather extreme example, but it is not without a certain amount of historical basis. There is the danger of losing perspective—of forgetting that retailers sell many things besides mousetraps, and have other regulations to cope with. There is the danger of asking for much more than can ever be achieved in the way of record keeping. There is the danger of regarding the Federal Register as a kind of magic lamp.
Another explanation for excessive paper work is the frequent indifference to the apparently unimportant mechanical details of a regular , tion. The bulk of effort is put into the development of the pricing method—the heart of the regulation—and the mechanical provisions are tossed on at the end like so much parsley on a chicken salad. The record-keeping and filing provisions may be patterned after some other regulation, but possibly with slight variations to provide a glint of freshness and individuality. These mechanical details—the so-called “boiler plate” provisions—are very uninspiring items to work over; yet they are often half the regulation to the merchant who has to operate under it, and they may spell success or failure for the regulation. It is of the utmost importance that the mechanical requirements of any particular price action be tied in neatly with the mechanics of other, regulations affecting the same sellers. And it is important to bear in mind that there are very sharp limitations on the amount of price control mechanics which a retailer can be expected to indulge in, especially with rationing programs springing up all around him.
Out of the foregoing weaknesses of our present system of retail controls rises one of the gravest of all—the fact that many of them are not easily capable of enforcement. If you have conducted experiments of your own on measuring compliance in specific retail stores, you have undoubtedly been impressed with the extreme difficulties involved in many cases. It is very simple to discover that a grocer, for example, has not complied fully with all record-keeping, filing, and posting requirements; but for that very reason it often becomes impossible to prove whether or not his prices are too high. Under the pres
ent system of controls, it seems almost inevitable that a heavy portion of our very limited enforcement energies will be frittered away on the enforcement provisions, rather than on the enforcement of price ceilings themselves. Retail price control techniques in the future must rest to the maximum possible degree on very little more than the records which a merchant can be expected to keep as a normal part of his operations. These techniques must be so designed that OPA investigators can check price compliance speedily, without wasting time looking for required records which are not there—and never will be there in satisfactory form as long as the record-keeping requirements are unduly time-consuming. Best of all, of course, are those regulations which require no records at all, but instead provide the merchant with a list of specific ceiling prices which every consumer can police. More and more we must rely upon the general public, upon volunteers, and upon our local War Price and Rationing Boards to make price control work. Checking of compliance with existing regulations is many times an impossible job even for a skilled investigator. Much work remains to be done before local Boards and volunteers can do this job effectively for the majority of cost-of-living commodities.
From this critical appraisal of present retail regulations, let us turn to the question of what can be done to achieve effective control over the cost of living during the difficult months ahead. Whatever techniques are employed, they must be easily understood by retailers and preferably by consumers as well; they must add up to an integrated pattern of control for any given type of store; they must be regarded as generally fair and equitable; they must involve a minimum of paper work for the retailer and OPA alike; they must provide crystal clear guides to correct ceiling prices; and they must be subject to simple and efficient enforcement.
This transition cannot be made overnight. Hence the first problem is where to move first. In general, the following considerations should determine the order of priority:
1.	The relative importance of each commodity in the consumer budget.
2.	The relative ineffectiveness of the regulations now applicable to each commodity group.
3.	The relative facility by which various commodities can be standardized.
4.	The facility with which prices of different commodities can be made uniform at pre-retail levels.
5.	The amount of retail price and margin information now available, or the ease with which new information may be secured.
t These are tests which each Price Branch must apply to the commodities within its domain.
In order to avoid lengthy exploration of all the conceivable techniques of retail control, I propose to focus the remainder of this discussion upon the two basic techniques mentioned earlier, which I believe are the only two that the majority of retailers can readily understand; namely, the fixing of specified dollars-and-cents retail ceilings and the establishment of fixed retail margins.
Of these two, the first is obviously preferable, but its use is unfor
tunately limited. The administrative task of determining specific prices for the thousands of commodities distributed through a variety of channels to innumerable locations is impossible. Dollars-and-cents schedules should be given first priority on important cost-of-living items and especially on scarce commodities where demand pressure is particularly heavy. No medicine works as well to cure a black market as well-publicized dollars-and-cents maximum prices which become known to every consumer. It is highly desirable to set specific prices on rationed commodities whenever possible, even though it may involve eliminating considerable differentials which have previously existed.
Two basic conditions are requisite to thé setting of uniform prices for all retailers or for different classes of retailers : first, the existence of physical standards by which a commodity may be readily identified and, second, reasonable uniformity in the delivered costs of the merchandise to all retailers with the same ceiling. Thus, dollars-and-cents ceilings are most feasible :
First, where the commodity is highly standardized or is capable of standardization, as in the case of victory models, coal, gasoline, men’s work clothes and shirts, and women’s hosiery.
Second, where historically there has been a considerable degree of uniformity in the prices or margins of most retail outlets, as in the case of fluid milk and many nationally advertised products.
Third, where prices at the manufacturing and wholesale levels have in the past been uniform for all suppliers or can now be made so.
Fourth, where the cost of transportation is a negligible factor, or is equalized to all retail buyers, or where it proves feasible to establish uniform delivered prices to retailers by geographical areas. This situation has long existed in considerable measure, for example, for coal, fuel oil, gasoline, soap, and advertised brands of soup, coffee, and cereals.
Fifth, where a significant portion of total production is concentrated in the hands of a few producers who have customarily enforced minimum retail prices. This is true of many pharmaceutical and cosmetic products, men’s hats, shirts, and summer suits, and women’s corsets. It will be possible in some such cases to set uniform ceiling prices for the major brands and cover the remainder of the field with specified margins.
Sixth, where there are long-established cost lines and price lines by which pricing has been done throughout a trade in past years. This is true, for example, to a considerable extent in the apparel field.
Already, as you know, a number of items have been placed under dollars-and-cents ceilings, including new and used rubber tires, antifreeze, sanitary napkins, refrigerators, nylon hosiery, and victory bicycles, to mention only some of them. Other important commodities are slated for such treatment shortly, most notable of which are pork and beef.
Where specified ceilings are not feasible, margin control is often the second best choice. Substantial historical margin uniformity among all retail outlets is not a prerequisite to margin fixing. In
some cases, retail stores will have to be classified for the purpose of establishing differential margins by classes. Similarly, commodities will have to be grouped into fixed-margin classes.
While dollars-and-cents pricing and margin control are very attractive techniques, they are not without serious difficulties, as the experience of OPA has already demonstrated. There are four problems in particular which deserve examination:
First, the problem of classifying retail stores for the purpose of setting differential prices or margins. This becomes important wherever there has been in the past a wide dispersion in the prices and margins of different types of outlets which in general have been correlated with differences in the operating characteristics of these stores.
Second, the problem of classifying commodities into broad groups for the purpose of setting a fixed margin for each group; and similarly the problem of defining and identifying commodities on which specified prices are set.
Third, the problem of selecting the margins which stores will be permitted to apply to net costs of merchandise, or the margin which will be allowed retailers under a specified price. In this connection it should be noted that dollars-and-cents price-fixing really involves margin-fixing, because, in order to set the price, a decision must be made as to what margin will be provided to retailers.
Finally, there is the problem of defining net cost of merchandise where fixed margins are used. As noted in the discussion last week, margin-fixing has many dangers if retailers are left free to hunt up the highest possible net cost to which they apply the allowed margins.
All of these problems are closely related and must be solved with reference to one another. There are two basic conditions which give rise to difficulties: First, the sharp differences in the characteristics of retailers, including the wide dispersion in their historical merchandise costs, their margins and their prices; and, second, the rapidly falling volume of merchandise flowing through retail stores as a result of war curtailment.
It is not possible to set flat prices or fixed margins without disturbing past relationships to some extent and without implying one kind of influence or another upon the shape and size of the distribution system in months to come. Price control is just one of the major war forces—along with declining volume, drainage of labor and other resources, certain rising cost factors, etc.—which collectively are bound to effect drastic changes in the distribution system. One of the great virtues of the General Maximum Price Regulation was that it made price control a fairly passive factor in this dynamic process which must inevitably occur, and which must inevitably squeeze many pocketbooks. The GMPR simply froze the price and margin relationships as they existed during the base period. Hence OPA had to take no responsibility for these relationships since they were presumably the result of competitive forces and the free decisions of private enterprise. But in moving into the sphere of uniform prices or uniform fixed margins, OPA assumes responsibility for setting
these delicate relationships and hence must expect to receive a disproportionate share of the blame for the hardships which must come in any event.
As retail volume declines, excess capacity will expand quickly in the retail field; unit operating costs will rise; and, if margins are held to past levels when volume was higher, profits are sure to decline substantially. This is less true, of course, to the extent that retail capacity shrinks along with merchandise volume, since the remaining stores will inherit the share of volume which would otherwise have been handled by the disappearing stores. This, then, is one of the big decisions facing OP A: Should price control encourage the preservation of all existing retail capacity or, alternatively, should it encourage the shrinkage of retail capacity to fit wartime volume conditions? Obviously the former course would be disastrous, for it would mean a constant increase-in margins as volume declined. Yet, on the other hand, price control by itself is hardly the appropriate instrument for tailoring the distribution system to fit wartime needs. Much of that job is a problem for those responsible for releasing manpower and other resources from less important to more vital uses. The wisest course for OPA is perhaps the most nearly “neutral one”— a course guided by the general criterion of setting margins and prices' which will result in a general level of retail prices substantially in line with the weighted average level of prices which existed under the GMPR.
A second difficult decision relates to the selection of- the level at which to set a uniform price or margin for a given class of stores. This question can be viewed separately from the problem of declining volume just discussed. Any uniform price or margin for a class of stores must be an average figure which reflects as faithfully as possible the “typical” experience of that class in the past. The fact is, however, that no. matter how stores are classified, there will always be marked dissimilarities of historical experience within each class. Picking a specific price or margin for a particular class becomes a matter of achieving a rather unhappy balance between two antagonistic forces. To the extent that the margin or price is generous enough to cover most members of a class, it provides an unnecessary windfall to many and yields undesirably high prices. But to the extent that a tighter margin or price is set, it squeezes those members of the class who were formerly enjoying a higher figure. Somewhere in between these two extremes, a balance must be drawn.
Let us look briefly at some of the considerations in classifying stores. Since most commodities move into consumption through a variety of types of stores, large and small, offering varying amounts of services and operating under essentially different - cost conditions, it will frequently happen that no one retail price or margin can meet the requirements of all stores handling a commodity. For example, cash-and-carry supermarket prices and margins would obviously not be appropriate for the small independent grocery store, nor would the reverse be desirable either. Yet, on the other hand, OPA cannot tailor its regulations to fit the pecularities of every individual outlet. Thus the problem is essential Iv one of selecting store categories into which the majority of stores can be fitted with the least amount of discomfort to them and the least inflation to consumers. Our choice of store classes must be guided by several considerations.
1	• .Wo Diust set up simple classifications into which retailers can readily fit themselves, and preferably ones which can be recognized by the general public as well.
2.	The number of classes must be held to a minimum to avoid making the regulations too complex.
3.	Classes must be defined with sufficient clarity—and made mutually exclusive so that enforcement will be simple and effective.
4.	Stores must be so classified that the current prices of low-cost stores will be raised as little as possible, and the maximum ■justice done for high-cost types.
5.	Attention must be given to the extent to which certain types of stores which might be squeezed can probably adjust themselves to the situation by achieving various economies.
Some of the problems which arise in connection with classifying stores have already manifested themselves in the OPA experience to date, particularly in the food field. In the latter case we started out with five store classes: (1) independents under $20,000 per year (2) b^tween $20,000 and $50,000, (3) independents between $50,000 and $250,000, (4) chain stores under $250,000, and (5) all stores, chain or independent, with an annual volume over $250,000. The extensive survey of retail margins conducted by BLS showed wide differences in the margins among these various classes, but considerably less dispersion within any one class. Yet it was not long before we heard from a variety of special types of stores who found uncomfortable the pigeonhole to which they were assigned. The strong current of trade pressure for simplicity which had been building up for weeks suddenly be^an to reverse itself as these special groups demanded more classes, which would obviously complicate the regulation.
The objections in such cases are likely to come from two directions: First, from stores whose special characteristics give them higher costs despite efficient management, for example, wagon-route retailers and superservice independents handling special quality merchandise or, second, from those individual stores that are distinguished from other members of their class by nothing more than their relative inefficiency.
It would obviously prove fatal to price control if stores were allowed to charge higher prices simply because they were inefficient. In general, these are the, stores whicn are on their way out, quite apart from price control. To subsidize them through the price-control system would be indefensible, particularly in wartime. But the problem of sj^cial types of stores which happen to appear as misfits in the classes OPA has set up, presents a more serious problem. The choice is either to let them stay in that class and probably go out of business in the end, or provide for adjustment of their situation. Adjustment in such cases amounts not to “special treatment” but rather to “equal treatment.” The best case to use as an example is perhaps the large service independent store which happens to land in the same class as cash-and-carry supermarkets simply because it does over $250,000 business per year. The fixed margins for that class reflect chiefly the experience of supermarkets. It cannot be argued that there is any historical basis for applying these margins to service stores whose operations and costs have always differed sharply from those of the giant self-service stores. But, since they are relatively few in number, it seems wiser to handle
such stores by special adjustment provision rather than to complicate the regulation with another class tailored to fit them more comfortably. This is but one of the “misfits” which have appeared under the food margin-control program. Similar problems can be expected to arise in other trades where stores become classified by regulation.
An especially difficult problem arises in the case of commodities which are handled by various kinds of stores, such as grocery, drug, and department stores, whose margins and prices have differed widely in the past. This would be true, for example, of such items as soap, napkins, and toilet tissue.. Such conditions require classification of stores in several trades rather than merely a single trade.
There may also be significant geographical differences in the cost of retailing which, if cut across too sharply, may create local shortages. Thus OPA must provide for adjustments by field offices in certain localities where the cost of doing business is abnormally high for special reasons. If it is merely a case of historically high prices resulting from the lack of competition in an isolated community, the case for adjustment is dubious. But if the real costs of doing business there are exceptionally high, the case may have merit. Take, for example, the grocery store far off in a mountain mining community which is forced to buy infrequently and thus carries heavy inventories for long periods. Spoilage costs in such instances may also be high. In such an instance, OPA may be faced with the alternative of adjusting prices upward or forcing a food shortage upon that community.
I mentioned earlier the problem of defining net cost in such a way as to minimize the undesirable possibilities of price increases under margin control. The first necessary condition is, of course, a firm control of prices below the retail level. If this condition exists, it is then merely a problem of preventing the retail margin layer from inflating. The greatest danger is that goods will flow to retailers through abnormal channels, from abnormal sources, and in smaller than customary quantities which may command premium prices. For example, a chain store which formerly bought direct from a canner and achieved economies by performing its own wholesaling functions mav now make a few token purchases from a service wholesaler in order to establish a high cost for purposes of applying the fixed margin and getting a higher ceiling than was intended by OPA. Similarly a store may start making purchases at a greater distance than normally, thus incurring higher freight costs. To prevent such evasion, the price regulation must preclude, as a basis for calculating ceiling prices, the use of any net cost derived from a purchase not made in the customary manner. In other words, the regulation must encourage the flow of goods through normal channels and in normal amounts.
This is difficult to achieve for two main reasons. First, it frequently happens that an individual store has made an occasional purchase in the past from a high-cost source, and it may use this historical practice as a justification for making such purchases in the future to use as a basis for calculating ceiling prices. An effort has been made to handle this problem in the food margin regulations by requiring that net costs be based only on purchases from customary types of suppliers, in customary quantities, and delivered by the customary mode of transportation. Some way must be found, however, for
tightening up this loose provision without unduly complicating the regulation.
The second source of difficulty, however, arises from the fact that many goods simply cannot be obtained in customary quantities or from customary suppliers today, due to wartime shortages. Thus, it appears advisable to make allowance for such cases in the definition of net costs which may legitimately be used for determining ceiling prices under margin control. But in so doing, we run into the danger of encouraging a costly form of competition among retailers to reach out into one another’s normal area of supply in order to secure a larger share of the scarce supply. This problem still awaits a satisfactory solution. The only final answer lies in the direction of allocation. The extension of rationing in the food field holds much promise for stabilizing the flow of merchandise more or less along normal lines. Another important factor working on the side of compliance is the prevailing unwillingness of manufacturers and wholesalers to take on new customers in view of shortages, and hence it becomes somewhat difficult for a retailer to switch suppliers for the purpose of securing a high net cost.
The final problem suggested earlier is that of classifying and standardizing commodities. Under margin control it is advisable to lump together as many items as possible into a single group for which a maximum mark-up is specified. Thus, it is better to have one mark-up for all canned fruit than separate classifications of peaches, pineapple, cherries, and so forth. This involves, however, ironing out previous margin differences within any such commodity group. Under canned vegetables, for example, canned tomatoes are likely to have carried a lower mark-up than artichokes in the past. The fixed mark-up figure should reflect generally the weighted average margin in the past for the whole group. Hence it may mean a slight readjustment of relative prices within a store. Similarly a given store is likely to find that the fixed margins are higher for some commodity groups and lower for others than the store has applied in the past. The important thing to keep in mind in grouping commodities and in setting margins for them is that in total they must average out to an overall store gross which is regarded as reasonable and yet is low enough to prevent undesirable price increases. In short, then, margin control inevitably means disturbing preexisting price relationships within stores and between stores, but this can be justified in terms of achieving simple and effective price control, and it can be as fair and equitable as any other technique if care is taken to set margins on various items which will balance out to an appropriate storewide margin.
In setting flat ceilings the problem is one not of classifying various products into broad commodity groups but rather of defining clearly the product for which a price ceiling is established. This is a task that runs back to preretail levels and must be handled in manufacturer schedules. In this connection it cannot be too strongly emphasized that those persons responsible for controlling manufacturers’ prices have a heavy responsibility for the success of retail price control. The whole basis for effective retail control lies below that final level of distribution. Wholesale and manufacturing regulations must be designed with retail control in mind. Two important conditions should be sought after in every regulation applying to the pricing of consumer
goods below the retail level. First, every effort should be made to achieve physical identification—and if possible, standardization— which will carry right through to the retail shelf. You cannot fix a retail price on potatoes in general or butter in general. You can only tie a specified price to specified grades. And the fixed retail price is meaningless unlegs retailers and consumers can readily identify such grades. Second, prices below the retail basis should be fixed in terms of uniform dollars-and-cents prices to provide a solid foundation for uniform retail prices.
I know that in this discussion I have only scratched the surface of some of the technical problems arising under various techniques of retail price control. I trust, however, that I have not left any impression that it is a simple business. Even if the technical problems themselves were capable of relatively easy solution, the problem of gaining acceptance for these techniques by the trades affected and by consumers, and the problems of accounting to Congress for whatever actions are taken, in themselves present staggering difficulties. I conclude by repeating my early remark that perhaps the biggest price job which is facing OPA today is that of converting our present collection of retail controls into a well-integrated and highly simplified pattern. There will be all kinds of pressures on OPA to soften up its controls as the volume squeeze begins to pinch. But if retail price control grows soft, the fight to hold the cost of living will certainly be lost.
3.	PRICE CONTROL IN THE SERVICE TRADES 1
Henry Villard
Chiefs Service. Trades Branch
I.	What We Cover.
First of all, what is covered hy price control in the services field?. The list ranges from air-raid precautionary services and ash, trash, debris, or garbage removal to the kiln drying of sweetpotatoes and the weighing of foods. In between come services ranging from maintenance of beer pumps and coils to aspirating grain, fumigating hops, and cleaning cesspools. Apart from such individual items, the services we cover can be grouped in three main categories: First, the laundering and cleaning of clothes; second, automotive and farm equipment repair services ; and third (closely related to the second but usually performed by different firms), many other mechanical repair services, such as electrical appliance or radio repair.
The annual amount of business covered by MPR 165 cannot be accurately determined, because there is no separate census report of the value of services performed by establishments whose main business is supplying commodities. But it has been estimated that perhaps a million establishments, doing an annual business of between 4 and 5 billion dollars, are covered by MPR 165. If this estimate is correct, it follows that even in 1939 the average family in the United States spent over a hundred dollars each year for services which are now under MPR 165. With the possible exception of the retail field, no area of the economy is characterized by as small-scale business as prevails in the service field. In 1939 the average receipts per establishment were only a little over $5,000 ; the average number of employees was less than two ; and the average wage per employee was less than $1,000. Put otherwise, 68 percent of the firms doing 16 percent of the business had gross receipts of less than $3,000 a year. Over 90 percent of the establishments doing almost 40 percent of the business received less than $10,000 a year. Only a little over 1 percent of the establishments doing a little over one-third of the business had gross incomes amounting to more than $50,000 a year. Hence, in a sentence, the field is one in which the average firm grossed in 1939 only a little over $5,000, had less than two employees, and paid its employees less than $1'000 a year.
II.	How We Cover It.
It was clear at once that a field which was both as important and as difficult as the services field required a separate regulation. The drafting of such a regulation was begun a little less than a year ago when, in the conference which preceded the issuance of the General Maximum Price Regulation, it become evident that services required
1 Delivered February 25, 1943.
special treatment. A first attempt at separate price control, issued last June, was limited to consumer services. This limitation proved impractical; the regulation, therefore, was completely revised and issued in its present form last August. While it hewed as closely as possible to the line of the GMPR, it provided certain important new pricing provisions designed to fit the peculiar price problems characterizing the services fields. Thus, in addition to the familiar “highest price charged by the seller or his competitor for the same or a similar service,” our regulation contains a provision permitting the seller to use, in determining his maximum price, the rate or pricing method which he regularly used in March 191$. Thus the repair shop which customarily charged a certain amount per hour of labor supplied, plus the cost of any materials used, is permitted to apply this same pricing method to any service which it now performs, provided it is a service to which this pricing method would have been applied last March. In general, this rate or pricing method may only use charges for each item which are no higher than those in effect last March. Allowance is made, however, for changes in prices of materials due to changes in price regulations*issued by OPA. This is done by permitting the price of any commodity or article sold in connection with a sale of a particular service to increase, or requiring it to decrease, by the difference between the maximum price for the commodity under MPR 165 and under the regulation which specifically applies to the commodity in question.
In order to make it possible to price all possible services and so to provide for a completely “closed” regulation, two methods are provided for determining maximum prices for services which cannot be priced under one of the more familiar pricing methods. If the seller supplied any service at all in March 1942, he may charge, for a service for which a maximum price cannot otherwise be determined, what the direct labor and materials would have cost last March, plus the percentage mark-up which he used in figuring the price on the service which accounted for his greatest gross revenue at that time. As a last resort, the seller who cannot find his price, in any other way may write to the Office of Price Administration for approval of the price which he has determined.
In addition, many services are seasonal in nature, being subject either to seasonal variations in price or actually performed in only one season of the year. In order to provide for the pricing of such services, special paragraphs were included in the regulation permitting the seller to add to his 1941 seasonal price the percentage increase in the cost of living between that season and March 1942. The figures for the cost-of-living increase were obtained from the Bureau of Labor Statistics, and permit a maximum increase of about 13 percent over the 1941 season.
As I was not in the Branch at this time, I think I can fairly say that these pricing provisions were extremely well drawn. We have found very few services that have had difficulty in determining their prices under the regulation.
III.	Adjustment Provisions.
When MPR 165 was originally issued it contained adjustment provisions similar to 18 (a) and 18 (b) of the GMPR. I need say nothing regarding these provisions, as they were the standard pro-
visions under which OPA sought to compensate for hardship arising from the choice of the loase date. As you are all aware, these provisions have already been removed from all regulations, although they were not removed from MPR 165 until early this year in view of the fact that retail services did not go under price control until last July 1. At the same time that removal of these provisions was announced, a local shortage provision similar to 18 (c) was added to MPR 165.
I think three elements of our adjustment policy under our local shortage provision may be of interest to you:
1.	Measures of hardship and shortage for laundries;
2.	A recently issued automatic adjustment procedure for firms supplying automotive and farm equipment repair services and having eight employees or less; and
3.	A largely automatic adjustment procedure which we are just issuing for adjustments at the nonretail level.
About one-third of the adjustment applications we have received have come from laundries. Laundries are generally the giants of the service field, ás the 6,000 odd firms of the country do an average annual business of almost $100,000 a year. Mr. Fainsod opened this series of talks by outlining a price controller’s Nirvana in the retail field; I have more modest aspirations and would settle for a heaven in which laundries had a uniform system of accounting, and pricing methods which were designed to indicate what it was they were pricing, rather than to reduce price competition by making it impossible for the average housewife to compare laundry prices! Profits, we found, were useless as a measure of laundry hardship as almost any laundry can handle its accounts so as to appear to operate at a loss. This is done by placing an appropriate number of relatives on the pay roll, placing ’the land and building in which the plant is located in the wife’s maiden name and paying an exorbitant rent on it, and figuring as a cost of operation the interest on notes owed the father-in-law. As a result, we found that salaries, interest, and rent varied from less than 2 percent to oyer 20 percent in comparable plants, with profits and losses fluctuating accordingly.
For large plants, at least, I think we have overcome this problem by developing a concept of “returns” to management and capital, consisting of executive salaries, interest, one-half the rent, and the profit or loss, as the case may be. This is based on the theory that, if a laundry is paying interest on a bank loan or rent on a building, its owners have just that much less capital invested on which they should receive a profit. Only one-half of the rent is used, however, because roughly that portion of the rent is a return to the money invested in the land and buildings. The remainder goes to meet building operating costs which would be considered loona fide costó of operation for. a firm which owned its building and did not pay rent. Taking “returns” computed in this fashion, we then say that hardship such as to threaten supply exists if returns are less than 6 percent of sales or 75 percent of 1941 “returns,” whichever lower, except that in no circumstances is a firm given a return or less than 2 percent of sales. AVe were forced to use a 1941 base and a base as short as a single year because “returns” for previous years were, in most cases, simply not available.
The main objection to the use of a base period to measure hardship is that it benefits firms which were unusually profitable during the base period and does not eliminate the threat to supply in the case of firms which had heavy and unusual losses during the base period. This is especially so when the base period is as short as a single year, as it has to be in this case. We feel that we have met this objection by cutting back profitable firms to 6 percent of sales on the one hand and, on the other hand, making sure that no firm, no matter how unprofitable it was in the base period, gets a “return” equal to less than 2 percent of sales.
In the laundry field we have also had to decide the meaning of “local shortage of an essential service.” Our solution may be of some general interest. We feel strongly that the concept of “essential” and “shortage” must be tackled on a quantitative basis; in other words, that a shortage exists when less than the essential amount of an essential service is present in a given area. To give but one obvious example of this point, let me ask the question: Are laundry or photographic services more essential? It is clear that laundry services are generally more important than the developing of camera snapshots. But actually, identification photographs for use on badges in war factories to make sure that unauthorized people are not admitted are highly essential—more essential certainly than almost all laundering. In other words, photographic services are very essential in very small amount, while beyond this small amount, they are less essential than laundering. It is, in other words, entirely a quantitative matter.
In the laundry field we have said, in general, and with a number of qualifications, that if less than 100 percent of the 191il per capita poundage of laundry service is available in an area of average labor shortage, a local shortage of laundry services may be declared to exist. This standard will, of course, not be very easy to apply in practice, because information on the poundage available and on the degree of labor shortage is not easy to obtain. It has, however, the great merit of facing openly and explicitly the fact that “essential” is both quantitative and dependent on the alternative uses which are available for the particular factors of production involved.
In going this far we are, of course, getting over into the field of the control of production which is the proper domain of the War Production Board. The services field, however, is one in which price still plays an important role in determining production, and in allocating productive resources. In other words, whether we recognize it or not, our adjustment policy will influence production to some extent. We must, therefore, either recognize this influence explicitly in our adjustment policy, or have exactly the same influence on production without being willing to recognize it. The standard which we have laid down has the merit, as I see it, of explicitly recognizing this influence, and taking it into account in reaching our decisions, in order that they will be in line with the needs of the war program. I need hardly add that as soon as the War Production Board or the War Manpower Commission issues directives for the laundry field, we will bring our standard into line with their directives. It is already in line with the so-called “bedrock” program issued by the Office of Civilian Supply of the War Production Board.
In the field of farm equipment and automotive repair services, we faced a very different problem. The typical establishment is both small in size and largely lacking in accounting records. I am perhaps unduly sympathetic to these firms ever since I broke down late one Saturday night in the town of Merillon, Wis. It seems that I had blown the head off a piston, and the pieces had distributed themselves all over the inside of the engine, ruining various valves as they went. The result was that I and the two proprietors of the local repair shop spent from 9 a. m. to 7 p. m. on Sunday, and then 3 hours more on Monday, pulling apart my Ford and putting it together again. Yet they were almost apologetic when they requested for their 25 hours of labor the magnificent sum of $10!
As most of you are aware, pricing in this field—at least in establishments with more careful pricing methods than the ones I have just described—is done by a so-called customers’ hourly rate. This rate is-set so as to cover not only the wage cost of the mechanic, but also all the overhead costs of operating the service establishment. In the automotive field the prevailing practice is to mark up the mechanic’s wage by 150 percent. Put the other way around, this means that 60 cents out of each dollar in the usual automotive establishment goes to the management and 40 cents to the mechanics. This customers’ hourly rate is then multiplied by the number of hours a particular job takes, and the customer is charged accordingly.
There can be little question but that these services, and especially farm equipment repair services, are essential in view of the lack of new equipment and the heavy reduction in mechanics which has already taken place. The reduction in mechanics in the rationed East amounted to almost 50 percent between January 1942 and January 1943. This, added to the fact that the War Labor Board has generally exempted firms with eight or less employees, meant that we faced an avalanche of applications from' firms whose services were essential, where wages were not controlled, and which had little or no accounting data, especially as the service side of their business accounted usually for a relatively small portion of their gross revenue.
In handling this problem, we decided, first of all, that it was administratively impossible to undertake to determine in each case whether or not the failure of a particular firm would cause a local shortage of its services in the area in which it operated; in effect, therefore, we decided that, wherever a firm demonstrated a threat to the supply of its services, it had thereby demonstrated a threatened local shortage of an essential service. But how were we to deterriiine the threat to supply under these circumstances? This is really two problems: First, how could we maintain in operation an adequate number of service establishments; and second, how could we make it possible for them to retain their mechanics?
The first of these problems is complicated because the survival of firms supplying these repair services depends on the available amount and price of new equipment, used equipment, and parts, in addition to the profit on service sales. Most automotive repair firms had a 60-percent gross hourly profit margin in March 1942, so that it was not felt generally necessary to increase their margins. But many farm equipment repair firms were supplying repair services as an accommodation 536932—43--------15
in connection with their sales of new equipment, and had inadequate profit margins to induce them to continue to supply these services alone in the face of the greatly reduced amount of new equipment available. Yet it was administratively impossible to distinguish between farm equipment and automotive repair.
We dealt with this problem by permitting firms which employed less than eight and which were exempted by the War Labor Board to take the highest of the following three items as their gross hourly profit margins: (1) The actual gross profit margin they had in March; (2) the average hourly wage they paid in March; or (3) 60 cents. This in effect permits firms which had satisfactory margins in March to keep these margins, but permit firms in the high-wage Pacific Coast area to mark up their average March wage by 100 percent, which gives them a gross hourly profit margin equal to at least 50 percent of their customers’ hourly rate. It also permits firms in the Midwest which had low margins and were paying low wages to obtain an absolute gross profit margin of 60 cents. These provisions, in our opinion, are just about adequate to induce small repair firms themselves to remain in business.
The second problem of permitting these firms to maintain their mechanics has been solved by permitting each firm to add to the gross hourly profit margin I have just described the present average wage it actually pays to persons providing repair services. This, in effect, permits small suppliers of repair services employing eight or under to increase the wages they pay as much as they want, and pass on to their customers the entire amount of the increase. This solution may seem to many of you quite inflationary; actually I believe it is less inflationary than any possible alternative and has the great added merit of solving the problem once and for all. It is less inflationary than it appears because the employer does not gain in any way whatsoever from the increase in wage rate, as his gross profit margin is frozen. Instead, if he raises his wages unduly, he merely antagonizes, without any benefit whatsoever to himself, the customers to whom he must count on selling equipment as soon as the war is over. This will, I feel, induce most employers to pay no more than they actually have to pay to retain their labor, so that customers’ hourly rates will rise further only as wages must be increased to retain mechanics.
Given a situation in which we are unable administratively to handle individual applications and where absorption in the industry as a whole is impossible, freezing the gross-profit margin at the minimum necessary level seems to me about the best we can do. The only other alternative involves the setting of area prices; but this is, in my opinion, not only more laborious but also far more inflationary, because low-priced suppliers of repair services have every incentive to increase their gross profits by going immediately to the permissible price in the area, rather than raising their prices, if they raise them at all, gradually,* in response to actually realized wage increases.
Let me stress that all I have said applies only to firms having eight or fewer employees. In the farm equipment repair field firms with nine or more employees are not particularly important, but in the automotive repair field, they are very important. For these firms we believe it will be administratively possible to make an actual determination of area shortage before granting price adjustment. In addi
tion, we propose to apply a fairly stiff standard of hardship or threat to supply. We count, therefore, to a considerable extent on competition between the more tightly controlled firms employing nine or over and those employing eight or less to serve as a check upon price increases by smaller firms in the automotive repair field.
A third adjustment technique which may be of interest to you is one covering adjustments at the nonretail level. In our enthusiasm to minimize price increases we have developed the doctrine that, if a different price was charged in March to a unique purchaser (such as a school district) this purchaser was a separate class of purchaser. This means that a laundry’s ceiling price to this purchaser is not the highest price charged in March to commercial customers, but the highest price charged in March to a purchaser of this particular class. While this doctrine is generally desirable, the more we hold prices down in this way, the more local shortage adjustment applications we will receive. Thus, if the price charged in March to the school district becomes generally unacceptable to laundries in the area in question, we are forced to declare the existence of a local shortage, not of laundry service in general, but of laundry service to this particular school district. This is so because all laundries in the area, whenever the purchaser is unique, are forced under our pricing provisions to take as their ceiling price the price of the laundry which was actually supplying the school district in March. But if no laundry is willing to supply the district at this price, there is clearly a local shortage of laundry service to the school district.
It was to eliminate the need to adjust under the local shortage provision the price of most of the country’s commercial laundry contracts (and a great many similar contracts in other service fields) that we developed an automatic adjustment procedure. Under this procedure, if, first, the purchaser is willing to certify that he agrees to the price, cannot get a lower price from other suppliers, will not pass on the price increase to his customers in any form, and will not use this price increase in applying for price adjustment, and if, second, the seller is willing to certify that he cannot continue to supply the service without price adjustment and that the price increase is no more than enough to compensate for the lawful increases in the cost of labor and materials since March, then a price increase is permitted 15 days after an application for adjustment is filed with OP A unless the applicant has been previously notified to the contrary. These conditions clearly mean that adjustments granted under this procedure will have no effect on retail prices.
Perhaps the most interesting thing about the procedure is the form which we have devised to implement it. It requires, first of all, that the supplier request a price increase on a percentage basis. It next requires him to report the cost of supplying the service over the last 2 months, first at March costs of materials and labor and second at current costs of materials and labor. Finally, the supplier is requested to report the revenue he received from the service during the same period of time as that for which costs are reported. This permits a very simple check on whether the requested price increase is or is not authorized by the adjustment provision. If the requested percentage increase in price applied to the revenue received from the sale of the service is larger than the amount by which current labor and materials
cost exceeds March labor and materials cost, then it is clear that the applicant is requesting more than enough to offset his cost increases and he will be notified accordingly. We really feel that not more than 15 minutes should be required to process an application, w’hich I believe is something of an OP A record !
IV.	Area Pricing.
I should like to conclude by outlining a few of the objectives which we are seeking to achieve by area pricing. Area pricing does not seem appropffiate to all service fields, but it does seem appropriate in a number of fields, especially the laundry field. In this field we are moving toward area pricing as fast as we can. In most cases we are using the setting of area prices as the occasion for a simplification of pricing methods in the interest of greater understanding by the consumer and therefore superior enforceability. Despite the elaborate pricing methods used, laundries perform only a small number of distinct operations and, with a little effort, clear-cut and understandable prices can usually be established.
A second objective in area pricing is a setting of minimum standards. This is, of course, closely tied in with the first point in regard to consumer education, but it also makes possible the elimination of dependence on customary practices or March practices or some other similar concept equally difficult to enforce. Even more important, it permits the elimination of unnecessary or unduly complicated services, and the simplification of those remaining, in the interest of economy of operation and minimum use of manpower.
Finally, in Supplementary Service Regulations establishing area prices in three New England areas, we have inserted what I believe is the first low-end maintenance provision, issued by this Office. Under this provision no laundry is compelled to provide a service it does not wish to provide, but it is compelled to continue to provide any service which it provided in March so long as it continues to provide a more expensive service which contains the same or substantially the same processes. This means that if a laundry was supplying wet wash in March,.it must continue to supply wet wash at the present time, because all laundering services include the wet-wash process. This provision is issued under the Administrator’s power to prevent manipulative practices. It is our contention that, when a laundry makes a customer purchase the washing and ironing of his laundry in order to get it washed at all, he is in effect forcing the customer into a combination deal, the illegality of which is well recognized.
I hope that in this brief survey I have been able to give you some idea of the problems we have faced in the field of services and of the manner in which we have tried to deal with them.
4.	TRADE RELATIONS 1
George T. Bryant
Chief, Trade'Relations Branch
In the few minutes allotted to me I want to give you some facts about our Trade Relations Branch, which I hope will give you an idea of the place that we occupy in the OPA picture. I particularly welcome this opportunity of appearing before you because I have often felt that too little is known about trade relations—that its importance is not fully recognized by many who work here in Washington.
I should like to tell you first a little bit about our past and current activities; then to give you some ideas about our thinking for the future.
First of all, what is the Trade Relations Branch? The Trade Relations Branch was established in the spring of last year as part of the Retail Trade and Services Division to fill a particular niche in dealing with the 2 million retailers who were affected by price control. The growing importance of retail price control, called for the services of just such an organization, to act as a liaison between retailers and OPA. The Trade Relations Branch is an organization composed of a small group of businessmen whose advertising, sales, and sales promotion experience spread out over a variety of fields.
And second, what is trade relations work? First, let us not confuse it with public relations work. Perhaps it is well to define as our function the handling of OPA’s relations with the trade—to be exact, with retailers. Public relations has to do with the public— consumers—and this is handled by the Information Division. The Information Division has the responsibility of preparing the press releases with which you are all familiar. They also have the responsibility for the final preparation and distribution of retailers’ bulletins and much other important material, and they are doing a splendid job with it. Speaking strictly of our own field, we aim at a higher degree of compliance through the medium of giving retailers a better understanding of regulations and amendments.
Third, what do we do ?.
We collaborate with the Information Division in the preparation and distribution of retailers’ bulletins. We deal with dozens of trade organizations and associations. We are preparing digests of important retail regulations to put in loose-leaf form for the use of all Local Boards throughout the country. We have promoted the Economy for Victory Program—that program which was announced last year in an effort to encourage retailers to whittle down their operating costs so that they could better weather the coming storm.
We maintain contact with 1,800 chambers of commerce and the distributive education departments of the various States so that .we may have their cooperation in various educational programs being
1 Delivered February 25, 1943.
put on throughout the country. We have selected the best compliance campaigns sent in by the various Regions, prepared digests of them, and sent the material to all Regions for their use.
These are just a few of the typical activities of our Branch— all aiming at a better and more cooperative understanding and appreciation of price control.
Just now, one of our most important projected activities is the educational program for the new, forthcoming, over-all food price regulation. The mark-up plan, which will be an amplification of the one now used under MPR 238, and the dollars-and-cents ceiling plan must be sold to these retailers. Somehow, we must reach 600,000 retailers with the details of this new regulation. In addition to furnishing the trade with the usual retailers’ bulletins, we are arranging a program of visual presentation which will make use of charts and slide films.
In a large part, our activities are somewhat like those of a. sales promotion department. Price control is law, and everyone should obey it—-without persuasion or urging—but we must be realistic and admit that price control does not work that way. Price control is regulation and regulation of any kind is hard to take. Businessmen admit the need but still dislike it. In our free and easy Amer-ican way of living we never have had restrictions placed on us— and in spite of this it has already been well demonstrated that thousands of merchants are ready and willing to do whatever is necessary to comply with our price control program. But the degree to which the larger portion of merchants will comply will depend on the usual trio of conditions; naniely, education, acceptability of the program, and enforcement.
We have also discovered that there are two kinds of compliance, reluctant and willing. We have come to the conclusion that the best results can be obtained if our educational work is both informative and persuasive. Price control is a continuous process, at least for the duration.
The mere publishing of a regulation in the Federal Register does not inform the public about it. If the regulation is of necessity long, and possibly complicated, a simplified retailers’ bulletin must be prepared. This must be distributed promptly and in adequate quantities. Our field personnel must be given all details on or be-fore the effective date and not 2 weeks late. Regulations must be distributed. The cooperation of trade associations and trade papers must be sought.
If the particular regulation involves any radical departure in pricing methods, there is an educational job to be done—that is, if you expect the retailers to understand it. If they do not understand it, they will not comply—first, because they can not, and, second, because of their unwillingness to try to figure out the details.
Mr. Fainsod in his paper strongly urged the use of simple words in regulations and a general simplification of structure. I also recommend that, but will go further by saying that every day this procedure is delayed, so is compliance delayed. Much has been said about simplification and I think the current trend really gives us some encouragement. We must have price control that is understood by all types of retailers and not just by those with legal training or with higher learning.
IX. SPECIAL PROBLEMS
1.	EXPORT PRICE CONTROL1
Seymour E. Harris
Director, Office of Export-Import Price Control
I.	Protect Foreign Buyer.
Adhering to commitments made at the Rio Conference, the Office of Price Administration issued the Maximum Export Price Regulation (MEPR) on April 26, 1942. The relevant resolution reads as follows : “That the American nations take measures to prevent commercial speculation from increasing export prices of basic and strategic products above the limits fixed for the respective domestic markets.’ Our MEPR is, so far as I know, the first attempt of a major power to protect foreign nations from paying exorbitant prices for the export products of its nationals. Other countries that enforce price control are inclined to allow export prices to find their own level. In some cases, shortage of exchange may justify charging what the traffic will bear. There have been other occasions, though not usually in wartime, when sellers and governments have aggressively pressed for low export prices. The motives have generally been predatory, however. Dumping is a well-known phenomenon. Exporters sell at prices below total costs to foreign customers where competition is keen or the foreign buyer is unable to pay the domestic price. Frequently the objective is to drive the foreign domestic producers or other foreign competitors out of the market and then to exploit fully the foreign market. Again, fascist techniques are well known. In general, they buy cheap and sell dear. But they also will sell cheap, at least temporarily, either to obtain control of the market or to exchange bargain prices for political control.
Our policy has not been predatory. We refuse to allow any exporter to exploit the foreign market when the foreign buyer is at the mercy of the Amprican seller. In many markets the Latin American importers are prepared to buy 5 or 10 times as much as the WPB and the BEW can allow to go out of the country. In such cases, and particularly when the commodity is essential, prices, in the absence of controls, might well rise by several hundred percent. .
Most established exporters would not exploit their customers. Control is not directed against them. It has taken them many years to establish close and friendly relations with their customers; and they would not jeopardize their markets for a purely temporary gam. Unfortunately, there is a small minority of chiselers; and in th© present very favorable price situation, many parasitic middlemen
1 This paper was not delivered at the Price School. It was written in February 1943.
insert themselves into the distributive process who do not contribute towards the consummation of sales but who in the absence of our controls, would send prices skyward. Our MEPR, which I had the privilege of writing and administering this last year, is aimed at these two groups.
II.	Preclusive Buying.
We have made one exception to our control of American export prices. We allow the BEW and, at the direction of the BEW, the United States Commercial Co. to sell at prices in excess of those allowed tmder the MEPR. The reason for this request is that such exports are not ordinary commercial transactions. Rather, they are part of quasi-barter arrangements, whereby the United States Commercial Co. exports merchandise from this country in exchange for preclusive purchases. As we know, preclusive purchases are often made at abnormally high prices, as a result of actual or potential competitive bidding with the enemy ; and the countries in which purchases are made for the most part lack the effective regulation of price that we have in the United States. Further, the prices received by the United States Commercial Co. for exports from the United States constitute one of the principal means of obtaining foreign exchange for making further preclusive purchases. In consideration of these factors, therefore, it is apparent that the prices received by the United States Commercial Co. for its exports should not be limited by the price regulations applicable to normal commercial exports. III. Other Objectivés of Export Price Control.
Our commitments at the Rio Conference played an important part in the determination of export price policy. But the problem is complicated by other considerations.
Why was a maximum export price regulation necessary? The answers are as follows: One: A general price freeze, which exempted exports, would result in pressuré to divert supplies from domestic markets, and thus deprive the United States of necessary supplies. It would, furthermore, be unfair to exempt one group of sellers from a general price order and make those subject to the order feel that they were being treated unfairly. Domestic price orders are, then, binding on sales to foreign markets, although the exporter is permitted to make certain additions to the domestic price.'
Two: Although a modicum of control of export prices had been achieved before May 1, 1942, the results had not been entirely satisfactory. While many of the price schedules in effect prior to the maximum price order contained export provisions, and most of the others applied to exports, though containing no specific export provisions, the applicable provisions varied widely.
As an inevitable consequence of the foregoing lack of uniformity, there was discrimination between exporters, which gave rise to complaints against such control as had been exercised. In the light of the administrative experience under existing schedules, and the demonstrated need for a uniform export price control policy, the Maxi-' mum Export Price Regulation was formulated.
An analysis of the first one hundred and twenty individual price schedules or regulations issued by the Office of Price Administration prior to the promulgation of the Maximum Export Price Regula
tion shows that only 32 of them made any separate provisions for export prices. Less than half of these permitted additions to the domestic ceiling on account of ocean freight and marine and war risk insurance charges. About one-third of them provided for the addition by the exporter of a designated percentage premium and some of them differentiated between the premium allowed to the various types of exporters who perform different functions. About one-quarter specified certain absolute premiums and another quarter either said that the premium could cover the extra costs of export sales or that the exporters could apply to the Office of Price Administration to cover extra costs. Less than one-fourth of the 32 schedules with specific-treatment of exports provided specifically for the addition of extra packing costs and only one allowed specifically for warehouse charges. Some exempted contracts entered into before certain dates.
The fact that 88 of the first 120 ceilings made no reference at all to exports was even more serious. Several said their ceilings included all commissions. Others provided that only one premium could be added. Seven schedules provided for addition of a designated premium by agents or brokers. About 20 schedules fixed ceilings on delivered prices; another 3 established maximum base prices plus freight from East St. Louis, and another 16 quoted prices as of certain dates, not mentioning whether these prices were f. o. b. or delivered. Since all these schedules applied to export prices, whether they said so or not, it is clear that the exporters were justified in complaining bitterly about the chaotic situation they were in.
The MEPR, then, removed discrimination as between exporters who had been subject to ceilings and exporters who had not; and, in standardizing, as far as possible, the premium charged, and the expenses to be compensated for, sought to assure all exporters fair treatment and adequate compensation for services rendered.
Three: The fundamental objective of the OP A is to keep down the cost of living. For this reason it is important to keep prices of exports from rising too much. If prices of exports rise, such rise is easily translated into a rise in the domestic prices of exportable commodities or commodities that are substitutable.
IV.	Export Trade in a War Economy.
In general, the correct trade policy in wartime is to encourage imports and to discourage exports; in particular, to import necessary articles and to export, if at all, nonessential commodities. This policy, however, cannot be followed by the United States in the present crisis. Imports are necessarily restricted, and exports are maintained on the basis of military and political requirements. Shipping difficulties compel the exclusion of imports that are not absolutely essential. A Shipping Priorities Committee is now at work on this problem.
Export policy at present is determined largely by the Board of Economic Warfare, in cooperation with the War Production Board and other agencies. The Requirements Committee determines how much of each scarce commodity will be made available to foreign purchasers. Available supplies have to be. distributed among mili-tary (inclusive of Lend-Lease), indirect military, essential civilian, and essential foreign uses. Within the limits set by allocations to
foreign countries, individual licenses will be granted. Certain requirements are made: the consignee must not be on the blacklist; a high priority rating for scarce materials and commodities is indispensable for exportation; the use of the commodity by the importing country must be sufficiently important (given the available supplies) to justify export from the United States; and, finally, price orders must be obeyed.
Conditions are different from those of the good old prewar days. A businessman who makes a profitable contract with a foreign importer cannot be assured that the goods are going out and, therefore, that the sale will actually be consummated. We all know that the exporter must get an adequately high priority; that the foreign importer must obtain a certificate of necessity abroad; that the exporter requires a license to export, and that he must find shipping space.
Exports have, of course, increased spectacularly since the beginning of the war. Total exports increased from approximately $3 billion in 1938 to over $5 billion in 1941, and to $7.8 billion in 1942. These figures, moreover, do not include exports to our armed forces, which are becoming very important. From the point of view of the export trade, it is the tremendously rapid rise in Lend-Lease exports which has caused apprehension. Lend-Lease exports were relatively small in 1941, but rapidly became the dominant factor in the export picture in 1942, increasing from $173 million in January to $607 million in December. In the last 3 months of 1942, more than two-thirds of total United States exports were Lend-Lease.
Commercial exports, meanwhile, showed some tendency to fall off, but, all things considered, they have held their own very well. The average monthly value of exports other than Lend-Lease in the first half of 1942 was $276 million, while in the 5 months from July through November, exports other than Lend-Lease averaged $255 million. These figures compare very favorably with prewar export values. The year 1937 was the most prosperous foreign-trade year between the depression and the outbreak of the present war. Average monthly exports in that year amounted to $279 million, and in the following year to $257 million. Some exporters, moreover, are getting a considerable amount of Lend-Lease business. It is true, of course, that our exports to certain parts of the world have fallen to negligible amounts, and this has hit very hard those exporters who sold to these areas.
V.	Export Prices.
Our research staff has been making a careful study of recent movements in export prices, although it has been handicapped by the lack of a good export price index. Obviously, our office was anxious to know whether or not the Maximum Export Price Regulation had brought to an end the rather abrupt rise in export prices which preceded its adoption. In order to obtain more up-to-date information than could be had from data published by the Department of Commerce, the research staff constructed a rough export price index based on the unit values appearing on export licenses issued by the Board of Economic Warfare. Although this index, of course, did not reflect the prices of exports shipped under general license or under Lend-Lease, it did have the advantage of providing a rough check on the effectiveness of our license-checking activities at the BEW. Fur-
thermore, it reflected relatively promptly current changes in prices actually being quoted by exporters.
The index had an upward tendency during the first 6 months of 1942, reaching a peak of 108.6 in June. (The base period is January-April 1942.) It dropped sharply in July and August, but rose again in September, and appears to have leveled off during October and November at a point considerably below the June peak, hut 3 to 4 percent above the average unit value for the January-April base period.
Export prices in the early months of 1942 were, of course, well above their prewar levels. According to the Department of Commerce index of the unit value of exports, the rise in export prices kept pace, on the whole, with the increase in wholesale prices until the middle of 1941, when the export price index began to rise much more abruptly than the wholesale price index. This tendency continued in 1942, and by August of that year, the Department of Commerce index was 50 percent above its prewar level, as compared with 32 percent for the BLS index of wholesale prices.
The Commerce index continued to display a strong upward tendency through August 1942, but fell off somewhat in September. Because of the delay between acceptance of an export order and actual shipment, however, it is quite possible that the Maximum Export Price Regulation had not begun to have any marked effect on the values appearing on export declarations filed in August. The sharp increase in prices reflected in the BEW index between May and June 1942, may very well correspond, because of the lag between the two series, to the sharp increase reflected in the Department of Commerce index in August.
The evidence offered by the BEW index is, of course, fairly satisfactory from our point of view. The OPA started the systematic checking of export licenses for compliance with the MEPR in June 1942. The index shows a sharp decline in July when the activities of the OPA Liaison Office may be said to have been well under way. The leveling off in October and November is encouraging. It will be interesting to see whether this tendency continues.
VI.	Latin American Control.
It is obvious, of course, that adequate protection of our foreign customers involves not only control of United States export prices, but also effective price control in the countries receiving our goods. We have heard numerous complaints to the effect that our export regulation was not offering much protection to the Latin American consumer because of speculative price increases that were taking place in Latin American countries. Our research staff has recently been investigating this problem and has found that the situation varies a good deal from country to country depending in large part on how effective the price control system in the particular country happens to be. On the whole, price increases in Latin American countries on typical consumers’ goods imported from the United States have been moderate. The most serious complaints have centered around certain construction materials, iron and steel products, and other industrial materials which are in extremely short supply in many of these countries. Copper wire was an item which was mentioned as having been subject to very heavy price increases in country after country.
Where speculative increases were reported in the Latin American countries, our office was anxious to determine the extent to which increased export prices in this country were responsible. It was found that, aipong the commodities for which excessive price increases were reported in Latin America, there were only two or three on which export prices in this country had increased exorbitantly. On the average, export prices on typical consumers’ goods exported to Latin America had increased about 11 percent between the end of 1041 and the late summer of 1942. Export price increases for most of the .producer items investigated were of a similar order of magnitude. Since these export price data were based on port of exit valuations, account had to be taken, also, of the very marked increase in ocean transportation expenses which occurred during the first seven months of 1942. It was found that increases in United States export prices and in ocean transportation costs between the end of 1941 and the summer of 1942 were large enough, on the whole, to account for substantial price increases in Latin America (15 to 30 percent), but not large enough to account for the extreme speculative increases which had been reported, especially on producers’ goods. These increases in export prices and transportation expenses, moreover, were followed by sizable decreases in the autumn of 1942. Export prices for the items studied, as indicated by the Department of Commerce statistics, showed a slight tendency to decline during the summer of 1942, and this,tendency became much more pronounced in the autumn. Warrisk-insurance rates declined considerably from November on. In other words, it is even less true now than it was in, say, October 1942, that excessively high prices for United States products in Latin America can be explained by excessively high landed costs for these commodities on importation into the Latin-American market.
There are some important exceptions to this general rule. We have already mentioned a few cases in which export prices in this country rose excessively during 1942. It is also true that in very recent months export prices on wheat flour and certain other foodstuffs exported to the Caribbean area have increased substantially. Cuba, m particular, has been affected by increases on wheat flour, lard, and milled rice, with resulting pressure on Cuban price ceilings for these commodities which play a particularly important role as cost-of-living items for the Cuban working population. Our office has been investigating these price increases, and the question of stabilizing the prices of these exports to Cuba is receiving the attention of the State Department and several other Government agencies.
On the whole, the solution of the Latin American price problem seems to lie in the direction of more effective price control and rationing systems in the various Latin American countries. A number of OP A representatives have been sent to Latin American countries as advisers on price control.
This whole problem of speculative price increases in Latin America illustrates how complicated price control can be.
Where there is a deficiency of supply, prices will rise unless control is introduced at every step. A commodity may sell at $1 (say) if our objectives are achieved. The price may well rise to $5, however, if demand is insistent and added supplies unavailable. It is our job to see to it that the commodity does sell at $1. At the present
time, the prices of the domestic commodities and the export mark-up are under control. There are numerous other areas that must be controlled effectively. There is the forwarding agent; shipping charges; the charge made by agents or dealers; the resale price of the importer; the resale price of the ultimate distributor abroad. Each group in turn will try to arrogate to itself the $4 which represents in this assumed case the difference between a completely controlled price and the market price in the absence of control.; 'Unless there is effective control at each of these points, the danger of price spiraling is present. We have had complaints about forwarding charges, which are under control. We have taken them up with our services branch. Many exporters are annoyed at the high freight rates and insurance rates. These are, however, compensatory rates justified by the increased costs of freight and insurance. The agent of the exporter or importer sometimes sees a chance for a killing. His charge is, of course, subject to control. In one case, the exclusive agent of a reliable machinery manufacturer put in a claim of 30 percent for engineering services, whereas the manufacturer was entitled to only 10 percent for the performance of the entire export function. We have also discovered cases where the foreign seller makes a killing. These problems have been discussed with the State Department, Latin American embassies and other authorities. Progress is being made. One Latin American minister told me that if there were any inflation, it was obviously profiteering at their end. I would not entirely agree.
VII.	Lend-Lease Sales.
Price problems on Lend-Lease sales have always been difficult. They are not exactly export sales nor are they exactly domestic sales. Procurement agencies purchasing at home are inclined to pay domestic prices. Yet the supplier frequently performs certain export functions: Engineering services, packaging, and in some cases bringing buyers and sellers together. The OPA obviously must try to keep prices as low as possible consistent with its regulations being fair and equitable. In cooperation with Lend-Lease, Treasury, and other Government agencies, the Office of Export-Import Price Control has evolved a Lend-Lease pricing policy. The principles are given in the following excerpts from the Statement of Considerations of the New Revised Maximum Export Price Regulation.
We should like to emphasize that the new regulation allows sellers to Lend-Lease to recover on export expenses actually incurred. No attempt is made to subsidize for past services, though it is hoped that exporters will be able to stay in business and maintain skeleton forces abroad and thus be prepared for the post-war struggle. Otherwise, the foreign connections will have to build up again after the war.
Under a ruling of the Office of Price Administration on June 16, 1942, sales to procurement agencies of the United States and of other governments, which take title and all responsibility for the material at the factory door or at the shipping dock, were classified as domestic sales. This ruling meant that sellers making such sales could be compensated for export packing costs, installation and servicing abroad, foreign selling expenses, etc., only to the extent to which compensation was permitted under the applicable domestic schedule or regulation.
It soon became evident that sellers to such agencies were being denied adequate compensation for export packaging costs and other legitimate export functions in many cases where domestic ceilings did not adequately allow for such compensation.
On October 23, 1942, therefore, a press release was issued declaring that it was the fundamental export policy of the Office of Price Administration to allow compensation for export functions actually performed. Sales to procurement agencies of the United States, purchasing for the account of Lend-Lease, were to be handled as before under the .individual commodity price regulations and the General Maximum Price Regulation. However, provisions were to be written into those schedules and regulations to permit the seller to receive compensation for certain export expenses which would not be involved in an ordinary domestic sale.
This piecemeal approach to the problem did not yield results. The Office of Price Administration has, therefore, decided to place sales to procurement agencies of both the United States and foreign governments in the category of export sales, thus entitling the seller to receive compensation, over and above the domestic ceilings, for export functions actually performed.
Sales to procurement agencies of foreign governments are now to be classified as ordinary export sales. The seller’s maximum price is to be determined in accordance with the general provisions of the Second Revised Maximum Export Price Regulation.
Sales to procurement agencies of the United States buying for the account of Lend-Lease, on the other hand, are to be treated somewhat differently. The seller is required to use as his basic price the maximum domestic price established for such transactions by the applicable domestic schedule or regulation. To this basic price he is permitted to add only the extra packing costs permitted by Supplementary Order No. 34—issued on December 21, 1942, to simplify the purchasing problems of the armed forces—and the difference between the greater cost of installation or other necessary services involved in the sale and the cost of installation or other necessary services which would have been involved in a comparable domestic sale, when such installation or services are procured by an agency of the United States. The seller is not entitled to the export premium permitted on other export sales, and he is not permitted to add to his domestic ceiling price any of the expenses which may be added on other export sales, except packing.
The justification for this difference in the treatment of sales to domestic and foreign procurement agencies is that frequently a foreign procurement agency which places an order direct with a seller in the United States is purchasing for the account of a private consumer abroad. Such sales are essentially private transactions. In most instances they result from the efforts of the seller’s agent or branch house abroad. Since such sales are like everyday export sales except for the formal placing of the order, it seems fair to permit the seller to charge a premium and to recover the allowable expenses to which he would be entitled on an ordinary export sale.
Sales to procurement agencies which purchase for the account of Lend-Lease, on the other hand, are not so frequently of a private ■character. While it is true that the commercial requirements of for
eign purchasers are being met to some extent through Lend-Lease purchases, the bulk of the commodities purchased for the account of Lend-Lease are ordered for the use of a foreign government. It has, therefore, been thought desirable to limit the seller to a mini-mum amount of compensation over and above his basic price, for export functions performed.
No extra compensation is permitted on Lend-Lease sales for services performed in the past, but only for those being performed in conjunction with the particular sale.
Payment of extra compensation is permissive and must be justified to the satisfaction of the procurement agency involved. The amount of compensation which the supplier receives will depend on the terms of the contract which he negotiates with the procurement agency. It will be limited to payment for installation, engineering, and other necessary work performed by the seller or his representative. It is, of course, understood that insofar as the domestic ceiling price is adequate to cover the cost of extra export packing, installation, and other necessary services, additional compensation will not be paid. It is also understood that when payment for these function^ is made by a foreign government in its own currency, the payment at home will be reduced correspondingly.
Some Technical Problems.
The complexities of the export machinery are such that painstaking and detailed consideration of many problems has been necessary to effect an adequate system of export price control. The structural organization of the trade and the mechanisms and procedures which are employed do not fall into set patterns but present a picture of blurred and shifting functional lines and of continual readaptation of techniques to new conditions in the market. They vary, moreover, from one commodity to another and from one market to another. The establishment of a workable over-all system of control has therefore been an especially difficult task. It has necessitated a continuous study of the structure and practices of the export trade, the application of the regulation to new and unforeseen situations as they arose, and the gradual tailoring of the regulation by amendment and revision to fit an industry, the ramifications and mutations of which could not possibly have been envisaged in their entirety when the original regulation was issued.
A brief summary of some of the problems which have been encountered in the application of the regulation to concrete situations follows:
1.	Sales to persons who buy for export.—Until the recent revision of the regulation these sales were treated as ordinary domestic sales. Specific provision has now been made for these sales whereby the seller is permitted to add to his domestic ceiling the extra cost of packing, servicing, and installation over and above what would ba involved in an ordinary domestic sale.
2.	Sales to commission houses, branch houses, etc., which take title in behalf of a foreign importer. A question arose as to whether such sales were to be treated as export transactions. An affirmative answer to this question was secured from the Legal Division last fall. The status of these sales has now been clarified in the last revision of the regulation.
3.	Sales by foreigners of commodities located in the United States'.—Under what circumstances do such sales fall under the export regulation? This problem has now been settled by the last revision, which provides that the sale is governed by the regulation only if the selling or invoicing is done in the United States.
4.	Direct invoicing.—Amendment No. 2 to the regulation, issued last fall, forbade an exporter to invoice a customer of his foreign buyer at a price in excess of his export ceiling to his own buyer. The purpose of this rule was to prevent evasion of the regulation. The rule having been found to be unworkable, however, it has been changed in the last revision to permit the exporter to bill the consumer at the same price which he can charge such a consumer on a direct sale.
5.	Purchasing agents’* commissions.—Commissions paid by exporters to buying agents of foreign importers were formerly treated in the same manner as selling agents’ commissions, i. e., they had to be paid out of the exporter’s ceiling price and could not be separately added in computing that ceiling. This rule has now been changed to permit such commissions to be included in the invoice price under certain circumstances, viz, that the buyer discloses the fact of the agency and that the seller notes such disclosure on his invoice.
6.	Freight costs resulting from use of emergency ports.—Manufacturers are required by the regulation to use their domestic ceiling prices as their basic prices in computing their export ceilings. A problem arises when the exporter uses a port of exit which is outside nis normal market area and his domestic ceiling is established by the applicable domestic schedule on a delivered basis. A provision has now been included in the regulation which permits him to use his delivered price at the normal port and to add thereto the additional freight costs resulting from the use of the emergency port. A similar provision has been included to take care of situations where the domestic schedule requires allowance of all or part of the freight.
1.	Drawbacks and export subsidies.—The first revised regulation required the exporter to deduct from the export price the amount of any export subsidy or drawback to which he is entitled. After considerable study this provision has been modified to require deduction of only that part of the drawback or subsidy which was not customarily retained by exporters of the commodity during the lower base period as a part of their premiums.
8.	Intramsit shipments.—The problem was presented as to whether the regulation should govern reexports of goods shipped into the United States from a foreign country. Such goods may be brought in under a Warehouse Entry and subsequently withdrawn for exportation or they may be imported under the I. E. or T. & E. Entry. The status of these goods under the export regulation has now been resolved by the inclusion of a new provision which exempts from its operation any commodity shipped into the United States for transshipment in bond. This would apply to goods handled under an I. E. or T. & E. Entry but not to those handled under a Warehouse Entry.
9.	Subsidiaries.—By an amendment of May 25, 1942, the regulation was broadened to cover sales by agents or subsidiaries abroad. This gave rise to a question as to how the export premium is to be
computed in such cases. The premium provisions of the regulation have now been changed to provide that in determining the applicable premium, due recognition is to be given to differentials in the premium resulting from the functions performed by agents or subsidiaries abroad. It is thus made clear that in computing the , applicable premium, the mark-up which was added by a foreign subsidiary, branch house, or agent of the exporter to cover its overhead and selling expenses is to be considered a part of the premium, and that the exporter who sells through such a subsidiary, branch house, or agent may now charge the premium which was customarily charged in the lower base period by exporters who operated similar foreign establishments.
10.	Stranded materials.—The question was raised as to what expenses may be included in the case of distressed or stranded merchandise—i. e., goods intended for previous export and shipped to a port of exit, but not transported abroad to the intended buyer because of war conditions. In such cases, various charges have usually accumulated before the goods are sold to a new buyer. The words “expenses incident to the export” in the MEPR were interpreted to permit the addition of the accumulated seaboard expenses to the basic price. This matter has now been clarified by a slight change in the wording of the regulation.
11.	Forwarders’ fees.—The question arose as to whether forwarders’ fees should be treated as specific export expenses or as one of the items of overhead expense which is represented by the premium. The new revision lists them among the allowable expenses.
12.	Base against which premiums are to he figured.—Many exporters had claimed that the term “cost of acquisition” should be considered to refer to the total investment of the exporter in the transaction up to the point of loading the goods on the vessel or landing them in a foreign country. The term “cost of acquisition” has not been so interpreted by this Office but has been held to refer to the total price paid by the exporter to his supplier, not to his investment in the transaction. A slight change has been made in the new revision to make it clear that the premium is to be calculated as a percentage of the basic price, not as a percentage of the f. a. s. or c. i. f. value of the goods.
13.	Export departments.—A difficult question was presented as to the status of manufacturers’ export departments, a term which is used rather loosely in the trade and may in some cases denote an export agent or an exclusive independent distributor. In the former situation, the manufacturer himself has been treated as the exporter, and it has been held that the agent’s compensation must be paid out of the manufacturer’s ceiling; in the latter situation, the export department has been treated as an export merchant.	,
14.	Premium differentials hosed on terms of payment —-’The original regulation provided that in determining the applicable base period premiums, recognition should be given to differentials in the export premiums charged by different types of exporters, etc. lh$ problem arose as to whether the regulation permitted recognition to be given to differentials resulting from differences in the credit terms extended to the foreign buyer. This question has now been clarified
536932—43---------16
in our new revision by a change in the wording of the premium provision.
15.	Sale of manufacturing avid trade-mark rights.-—The question was presented as to whether an exporter who sells the manufacturing rights or the use of a trade name along with some or all of the commodities that go into the finished product to be manufactured outside the United States may include the charge for such rights or privileges in his invoice price of the goods. The Office has ruled that these items are not part of the commodity sold, and that the charges therefor must be separately invoiced.
16.	Exemption of shipments when title passed before April 30, 19^2.—The regulation exempts shipment of goods for which an individual export license is required if such license was issued prior to April 30, 1942, the effective date of the original regulation. A number of cases have been presented in which no license had been granted prior to that date but the contract of sale had been entered into and title to the goods had passed to the foreign purchaser. Such shipments were held not to be covered by the regulation.
Conclusion.
We have discussed the objectives of and the problems raised by the Maximum Export Price Regulation. In the future our problems will be eased as basic domestic prices become more precise. The gradual removal of commodities from the General Maximum Price Regulation or from other ceilings that use the freeze technique will help. Another advance will come as further progress is made by foreign countries in protecting their consumers from higher prices for American products. Pricing for Lend-Lease sales will also require more thought. Finally, if manpower is available, we hope that the area of specific premiums will grow where they seem to be required.
2.	IMPORT PRICE CONTROL 1
Seymour E. Harris
Director, Office of Export-Import Price Control
The import price problem is fundamentally important for the same reason that most domestic price problems are important. Imports are vital to the United States war effort; they include not only all our coffee, tea, and cocoa beans, but all our tin and almost all our tungsten, nickel, and newsprint paper. They include indispensable fractions of our supplies of copper and nonferrous metals, vegetable fats and oils, fibers, and other essential commodities.
In terms of our over-all war economy, it is important to maintain as large a volume of imports as possible. The more we import, the more is available for the prosecution of the war. Goods coming into the country absorb purchasing power, and it is therefore important from the anti-inflation viewpoint to get the commodities in, even at relatively high prices. So I believe—with certain reservations which I will indicate later on—that we ought to encourage imports, even if it is necessary to increase prices for them.
One of the significant problems in the import field has been the large increase in transportation costs and war risk insurance. So long as these costs rise we must be prepared to exclude commodities, to arrange for subsidized importation, or else to adjust our price ceilings. It is impossible for the United States Government to control prices abroad. Those prices are set by foreign sellers. Insofar as costs rise abroad, it is inevitable that prices of imports will rise here unless we are in a very strong bargaining position.
When we are confronted with a rise of costs abroad, we can refuse to pay this increase in price and not get the material. This, of course, is hardly a desirable solution if continued imports of the commodity are important for the war effort or the civilian economy. In some cases, we may conceivably squeeze the foreign seller through monopoly buying abroad, or we may be able to squeeze distributor groups here. If these methods cannot be used, we may have to allow an increase in prices, especially to meet what we consider legitimate increases in cost. I shall discuss the alternative policy of subsidies at a later stage.
It is also true that in setting import prices we very often have to consider political factors. For example, we were urged by the State Department to increase the price of silver imported from Mexico
I would like to indicate briefly for your benefit the relation of the OP A to other agencies interested in the import field. There is a good deal of misunderstanding and confusion throughout the OP A on this issue. I have had great difficulties myself in discovering what the job of each agency is in the import area.
»Delivered February 11, 1943.	233
In the War Production Board there is the Stockpiling and Transportation Division, which is responsible for allocating shipping space for imports. This Division has established a regular priority system under its M-63 Regulation. What that amounts to is that the Division is given control over a certain number of ships by the War Shipping Administration and, in terms of the number of ships available in various areas, determines who shall get the space and under what conditions. Of course, in general, higher priorities go to strategic commodities.
We cooperate with this Division as follows: We do not make price concessions which might increase the importation of goods not needed for the war effort from areas where shipping space is scarce. For example, it would be a great mistake for the OPA to announce a rise of 100 percent in the price of Argentine wines. These wines come from an area where shipping is very scarce and importers should not be encouraged by price concessions to put pressure on the WSA or WPB to get ships for such a purpose. On the other hand, in the case of ships coming back from Great Britain, where plenty of shipping space is available, it is part of our policy to adjust prices in such a manner as to encourage imports, because otherwise the ships will come in empty. In such cases we are prepared to recommend substantial price increases when they are justified by higher real costs and in that way bring commodities into the country which will absorb excess purchasing power. We have a concrete program ready along these lines and we hope to have your cooperation in working out its details.
I might say that there is some misapprehension on this issue; I have seen a statement in the New York Times that the British have stopped the exportation of luxury and semiluxury items to the United States. That is not true. The British, largely on the grounds of inadequate supplies, have asked the WPB to approve certificates of necessity on particular commodities, certain cotton goods for mm-pie, before they will export them to the United States, but the area controlled in this manner is very limited. It is still possible to import large quantities of British finished consumer goods.
Another aspect of the Stockpiling and Transportation Division’s work is the stockpiling of strategic commodities. This works approximately in the following way: The Division gets notice from a governmental agency that there is a scarcity of a certain commodity; and is requested to see to it that somebody buys this material. The WPB Stockpiling Division pa>sses this request along to the appropriate commodity branch of the WPB. (For agricultural commodities the recommendations are made by the Agriculture Department.) On the basis of a recommendation from this Branch, the Division takes action. If, for example, the Branch recommends importation of the commodity, the WPB then requests the BEW to import a specified amount of the commodity. The BEW designates a particular agency as the appropriate purchaser of the commodity. In general, the BEW’s instructions to (for example) the Metals Reserve Corporation are simply to buy a specified quantity of the commodity involved, and the price is left more or less to the purchasing agency. Thus the instructions move from the WPB to the BEW to the procurement agency, or from Agriculture to BEW to the procurement agency.
That is a summary of interagency relationships in the field of imports. I would like to indicate to you what has been done so far by these other agencies on the import problem.
The Government has met the supply problem in some cases by payment of subsidies. In this manner sales are made here at prices below the delivered costs. War-risk cargo insurance on imports has been issued on a noncompensatory basis to mitigate or nullify the cost impact of the greatly increased actuarial risk involved; ocean freight rates on imports have been reduced in some cases below a compensatory basis; increased costs of rail transportation, where rerouting or diversion has been necessary, have been absorbed. In addition, increased foreign production of strategic materials has been encouraged, and an attempt has been made to provide as many ships as possible for the import program.
Encouragement of foreign production, provision of ships for imports, and Government buying programs would have been effected without the aid of OPA. Many of the present subsidy plans, however, would not be in effect if it were not for OPA price ceilings or for the inflation control which is OPA’s reason for existence. Some of the non-OPA actions, moreover, such as the reduction in war-risk insurance rates, were taken on the recommendation of OPA. Therefore even a summary of non-OPA import activities brings out the importance of the OPA in relation to imports. The remainder of this talk will summarize the characteristics of present OPA import regulation, outline the responsibilities of the OPA for improving import price control in the future, and discuss the elements which enter into OPA’s subsidy recommendations.
The summary of OPA import regulations which I will give you was prepared in our Office from an analysis of every price regulation issued up to March 20, 1943—i. e., 347 regulations.2 If you want to know how your particular regulations have treated the import problem, we will be very glad to discuss the matter with you. What I present to you now is a very brief summary.
At present the 50 most important imports in value terms constitute about 82 percent of total value of imports. Our study showed that slightly less than one-half, by value, of these 50 leading imports were covered specifically under individual maximum price regulations. About 30 percent were subject to the General Maximum Price Regulation. The remainder was divided equally between imports covered by maximum price regulations through interpretation, and imports whose prices were not controlled at all.
The 31 price regulations applying to items on our list of 50 leading imports and containing explicit import provisions were analyzed carefully in our office. Very few of these regulations were explicit as to control of the importer’s foreign purchase price. Most of them had general clauses declaring all purchases and sales above the ceilings illegal, but the relationship of these clauses to the import problem was not clarified. The General Counsel’s Office has ruled that all price regulations which establish dollars-and-cents ceilings apply to the importer’s foreign buying price.
* These figures were inserted after the delivery of the lecture.
A few regulations were explicit on the buying price. Four of these made it quite clear that the foreign purchase price was controlled, , while in two cases it was explicitly exempted.
The main point that I should like to make here is this: Not only should the regulation be explicit on this point, but the question as to whether the foreign purchase price should or should not be controlled ought to be settled by a deliberate decision on the part of those responsible for issuing the regulation. It should not be covered by a general ruling. In most cases, it is a mistake for us to try to control the foreign buying price on imports. It is a particularly bad mistake in the case of commodities purchased under WPB and BEW orders. We ought to assume that the men negotiating these contracts are experienced and can handle such problems. On the other hand, certain cases may arise where control of the buying price should be effected by the OPA. Where United States purchases constitute the largest part of foreign sales, we may be able to achieve substantial savings and ease of control through the introduction of a maximum buying price. This has been achieved in the case of Canadian newsprint.
For the most part, the import provisions of maximum price regulations are concerned with control of the importer’s selling price in this country. Of the 31 regulations which control leading imports, only a minority permitted maximum prices to be altered in response to changes in ocean transportation expenses. Nineteen regulations or parts of regulations allow no flexibility in the import price to compensate for changes in import costs.
This, I think, is a mistaken policy. While changes in the foreign selling price create a special problem requiring careful handling, there are strong arguments for permitting adjustments in maximum prices to allow for increases or decreases in ocean transportation expenses. There may be some cases in which increases in these expenses can be absorbed at some stage in the distributive process in this country, but when war-risk insurance rates rise as rapidly as they did during the first 7 months of 1942, there is a strong probability that imports will be discouraged if price regulations take no account of these increases. On the other hand, regulations which were issued last summer when war-risk insurance rates were at their peak and which included no provision for downward adjustment of prices if these insurance rates declined, may very well be providing unwarranted windfall profits for importers.
Numerous price regulations make no mention of imports. Often this is not a serious omission, since imports may be negligible or nonexistent in that field. If we consider the 50 leading imports, 12 percent in value terms are covered only by interpretation under 16 price regulations which have no explicit import provisions. These regulations raise difficult problems of interpretation in relation to import transactions, especially where, as is frequently the case, prices are set f. o. b. mill. Such treatment necessarily creates a twilight zone, since an interpretation cannot be well-publicized or well-integrated with general OPA policy. This is not good price-fixing.
According to a press release of May 21,1942, the General Maximum Price Regulation applied to imported as well as domestic commodities, although it did not apply to the foreign purchase of the import. Thus the position of imports under the GMPR was very similar to their
present position under many commodity regulations. This similarity soon disappeared, however; by June, supplementary regulations had exempted from the GMPR sales of imports in their original form to Government agencies and permitted a roll-forward to industrial users of increases in total landed costs over the March level. Differentiation continued with the issuance of Revised Supplementary Regulation No. 12 on December 15, 1942. This revision permits a roll-forward from the importer through the intermediate distributor to the industrial user, and allows the roll-forward even if importers or distributors process the commodity, so long as the commodity retains the same name, character, or use.
This summary of the price-control status of the 50 leading imports indicates both the diversity of control mechanisms employed and the inconsistencies now existing. These inconsistencies are of numerous types; a few regulations cover the purchase price of imports, while in many cases the status of the foreign purchase price is not clear; many rigidly control the sales price in this country; a few permit a degree of flexibility by allowing the addition of certain specified cost increases to the base price. Furthermore, those imports which happen to be under the GMPR are now allowed price increases equal to cost increases subject to absorption of the increases at later stages of the fabricating and distributive process. Finally, interpretations are unlikely to be clear to all of the importing interests, and differ greatly for different commodities.
Deficiencies in present important price control are evident from the following:
1.	Control of the foreign purchase price on imports should be effected, when appropriate, only through explicit provisions—not through general rulings. This control is probably desirable in some cases, but enforcement and policy angles should be thoroughly investigated before such action is taken.
2.	Many maximum price regulations control too rigidly the price at which imports can be sold in this country. This again may operate as a wholesome check on foreign buying prices. But if this control neglects transportation cost changes and is introduced without knowledge of the foreign buying market, the result may well be either diminished imports or a Government subsidy program of some sort. Either of these results may, of course, be desirable, but the decision must be taken after examining the situation in terms of these criteria.
3.	Imports priced according to maximum price regulations are subject to more rigid control than imports still covered by the GMPR. This may be unfortunate in many cases. The industrial user of an import is ordinarily more capable than the importer of absorbing cost increases without suffering hardships or reducing his demand for imported raw materials. Any regulation which attempts to place all cost increases on the actual importer is inviting trade reorganization, stoppage of imports, or subsidies, because the importer is usually working on a relatively narrow margin.
4.	Regulations which fail to mention imports are, of course, the most deficient of all if imports in the field regulated are important. Such regulations do not even recognize the existence of the problem. The same criticism applies to almost the same degree if imports are covered by interpretation. Interpretation is at best only an interim
substitute for amendment, and when the interpretation applies not to a specialized manufacture but to one of hundreds of commodities handled by the same importer, reliance on interpretation becomes downright indefensible.
5.	No satisfactory method of encouraging or even permitting the importation of finished goods—particularly finished consumers’ goods—has yet been developed.3 Here both freeze and dollars-and-cents regulations may stop imports. Furthermore, the roll-forward provisions of Supplementary Regulation No. 12 are not applicable because no industrial user exists. We are working on an amendment to take care of this problem.
6.	The OPA has not always kept itself informed of the buying arrangements of various Government purchasing agencies, nor has it discussed applicable selling prices with the agencies before the foreign purchase is contracted for. A subsidy as a result of a policy decision is one thing; a subsidy as a result of sheer confusion is another.
Import pricing is the OPA’s special job. Since imports are commodities, import pricing under commodity regulations must concern the individual commodity sections. We think that every past regulation and every contemplated regulation should be considered with the following questions in mind:
Are imports of this commodity important, dollar-wise or percentage-wise? ft there a likelihood that they will become important, or change in importance, in the future? What provisions in the regulation are likely to decrease imports or necessitate subsidies or Government buying? What provisions would be necessary to increase imports?
Are imports more important for supply in some areas than in others? If so, do the geographical provisions of the regulation recognize this fact ?
Are imports exactly the same as, or different from, domestically produced items in their physical or commercial characteristics ? Has the regulation allowed for the possibility of difference by appropriate grading or other provisions?
Is the intention to cover buying prices of the import? If not, is this made clear by excluding sales by a foreign seller and sales by a domestic agent of a foreign seller in explicit terms? If so, is enforcement possible, and has the possibility of diminished supply been considered ?
What are the resale price provisions relating to imports? Do they expose the importer to every possible squeeze by fixing his selling price in this country, or have they been drawn up after a study of the groups in the distribution chain who are in the best position to absorb cost increases ?
If the importers’ selling price is flexible, what criteria for allowable price increases are included? If cost increases are the criterion, what cost increases may be reflected in higher prices? To what extent? Is any attempt made to encourage foreign purchases which will result in the cheapest possible landed cost ?
If a landed dollars-and-cents price is applicable, what costs are supposedly covered by this price? Is the regulation so phrased as to force absorption of costs by the importer, or give him windfall profits, simply due to inaccurate terminology ?
* May 1943. A proposed amendment has been approved by the OES.
Are the customary channels of distribution recognized in the regulation? If not, is this due to deliberate intent to encourage new distribution methods, or simply to unfamiliarity with the organization of the trade in this commodity ?
This barrage of questions has been leveled at all of you in the hope that it will impress a few commodity people who perhaps have a more important responsibility for import pricing than they have previously recognized.
The final import problem I wish to present to you this afternoon is the series of lively issues centering around the question of import subsidies.
You probably all know that the Byrnes office has issued a series of criteria for subsidies which are not very rigid, and which are supposed to be interpreted in a flexible way. However, before anyone asks for a subsidy, he ought to have these criteria in mind. First, the commodity involved must be essential. Second, have the maximum economies been made ? Possibly a subsidy will be unnecessary if sufficient. economies are instituted. Furthermore, a subsidy must always be temporary, which means that it may be withdrawn at any time. Finally, have profits been required to absorb an adequate part of any rise of costs ?
Of course the necessity for subsidies arises when we fix a price at such a level that the supplier may not be able to sell the commodity unless he gets a subsidy. For example, we know that the Metals Reserve Corporation has been asked to buy a large number of commodities abroad, and in many cases must absorb a loss in selling these metals at ceiling prices. Naturally, a question arose between the RFC and WSA as to which agency should bear the extra cost of noncompensatory war-risk insurance and freight rates on these Government-imported commodities, and we were asked to arbitrate. Of course, it is very difficult for the RFC to estimate its own costs, because frequently'they cannot tell what their handling charges will be, what part of the country they are going to sell in, or what the selling price will be. In some cases, the OPA may not have given them a selling price. Whether they are actually losing money is not a very easy problem to solve.
In the case of metals, however, especially metals from abroad, the MRC was able to present us with a table which made it very clear that the cost of delivery in New York in every case but one, as I remember, was considerably higher than our ceiling price. So there is no doubt they are taking large losses in the case of most of these important metals.
What is our responsibility in these cases? In general we can say this—and I would like to emphasize this point because I don’t think it is generally understood in the OPA and it is important from the viewpoint of our objectives. We try to keep prices down, and the burden of proof for a rise of price should be on the seller, whether the seller is a governmental agency. or a private citizen. We will maintain low prices insofar as we possibly can. We need not necessarily raise prices for the RFC agencies when they buy something at a high cost. These agencies frequently purchase because private individuals don’t find it profitable to buy. They are buying in no small part because they are supposed to take a loss. If the commodity is very essential to low-income groups, or is used in various
products and, therefore, has a great many ceilings built on it, we can frequently tell the RFC that we must maintain our March price, or our 1941 price, or whatever price we think is the correct price. The fact that the RFC paid a higher price makes no real difference We recently discussed this matter not only with the RFC, but also with the CCC. In a number of cases, the CCC paid high prices for commodities, and then asked OPA for price action to enable them to recover their costs. CCC had paid these high pricks because they were asked by the BEW to make the purchase, and the only way they could do it, was to pay a high price. We pointed out to the CCC that we do not like to be committed to prices higher than we think correct in terms of our objectives. We, therefore, suggested that OPA be given advance warning of desired ceiling revisions. With this advance notice, we have time to look the situation over, and decide whether a rise in price is feasible, or whether, instead, we can reduce margins. Sometimes, of course, there are nQ possibilities for economies, and we cannot change our ceiling price, which means that the CCC has to take a loss. Our attitude in all these cases is: We must know at the outset what the agency involved is planning. If they can give us a general idea of what the purchase price is, or what they think it will be, we will keep them informed as to what the ceiling on the resale price is likely to be. They can buy the material at any price necessary to get it. They may find that they have to buy at a dollar, or a dollar and a half, when the correct ceiling price for resale is 80 cents; but it is their responsibility and not ours to present to the OES their case for a subsidy. In fact, purchase at a price in excess of the ceiling constitutes a subsidy.
We had an opportunity the other day to test this procedure. After we had presented this position to the CCC, the first case that came up involved rotenone, which is an insecticide largely used for the protection of vegetables. It is very scarce. The BEW told the CCC to get rotenone at any cost. Naturally, the CCC did not want to take a very large loss on it. The BEW thought that it should be procured regardless of price. It was finally agreed that the OPA would not impose a ceiling on CCC’s purchase price, but that it would be inadvisable to raise the ceiling on the final product. That is where we left the situation. Both the BEW and CCC seemed to think that we were perfectly justified in taking that position. The processors are absorbing as much of the increased cost as could reasonably be expected, while the remainder is being absorbed by the CCC.
Let me give you a few other illustrations. The subsidy on coffee is about one-half a cent per pound. The subsidy is not very popular with the importers because of the amount of paper-work involved, so they announced to the CCC and other agencies that they would like to replace it with a rise in price. The Budget Bureau and the OES considered the problem. OPA outlined its position as follows: We might accept a very small rise in the price of coffee if no other alternatives were available. The difficulty was, however, that this subsidy of a half a cent was supposed to cover the increased costs of transportation, and the increased cost of transportation varies from about one-fourth of 1 cent to 1.8 cents a pound. The removal of this subsidy would thus result in a very large increase in the price of coffee in some areas and a very small increase in others. The
elimination of the subsidy would be doubly harmful unless some system were worked out for averaging the increase in costs. At the present time, the subsidy is still in effect, but the OPA is studying the margins and absorption capacity of importers and roasters.
The case of wool illustrates still another aspect of the problem. Raw wool has been stockpiled on a large scale. Recently, the stocks held by the Defense Supplies Corporation became so large that they had to dispose of some of the wool, part of which had been held for at least 2 years and was deteriorating. They asked us to fix a price at which they might sell. The DSC had bought the wool from the British on favorable terms, and in the meantime the market price had increased substantially. Yet the OPA could not ask the DSC to sell below the correct market price, because this would have given rise to legitimate complaints both from the British and from American wool dealers. Thus, in this case, the DSC was in a position to make a sizable profit, which will help to offset some of its losses on other transactions.
I would like to say a word about subsidies on freight and insurance. War-risk insurance on imports is now largely carried on January 1, 1942, rates by the WSA as a result of recommendations made by the OPA. The subsidy involved here has been estimated at 40 to 50 million dollars a year. We have followed the policy of not recommiending low rates in the case of imported luxury items. The January 1 rates were used for most commodities, however, except where we thought rate reduction would result unfairly in a windfall profit to various business interests.
On ocean freight rates, there have been increases in the form of surcharges which frequently involve a rise in freight costs in excess of 100 percent. We have made definite recommendations that in cases where in terms of the OES criteria it is desirable to have a reduction in freight, this reduction should be allowed. For example, in the case of newsprint coming from Newfoundland, we have already worked out a reduction. It was quite clear that, unless we did arrange a reduction of the surcharge on freight, the newsprint which goes to the South from Newfoundland would not come in, which would be very serious. In this case, the OPA pointed out that the reduction did not involve an actual subsidy, since newsprint w’as being used for ballast on boats returning from Newfoundland, and in the light of that consideration, the rates being charged were excessive.
In general, we ought to remember that whenever we fix a price we have to keep in mind the problem of whether we are not in reality providing a subsidy, and if we are, we ought to consider the problem in terms of how it affects our ceilings, how essential the commodity is, and how a subsidy on this commodity will stand up under the Byrnes criteria.
In the import field we ought first of all to get the supplies, and in order to get these supplies we ought to cover legitimate cost increases except in cases where price rises will have a serious effect on related prices in the American market. One of the functions of our office is to cooperate with Divisional Directors, Price Executives, and other officials in working out general policies in the import field. For the most part, however, the detailed application of these policies must be worked out by the commodity branches.
3.	SUBSIDIES1
(i)	THEORY OF SUBSIDIES
Walter Salant
Chief, Price and Economic Policy Branch, Research Division
The whole question of whether OPA ought to use subsidies as an instrument of price control came up in connection with the General Maximum Price Regulation. Prior to this regulation, we had only selective price control. We were not faced with the problem of holding, dr trying to hold, every price.
However, at the time the General Maximum Price Regulation was issued, we felt it important to hold all prices quite firmly. We realized that there would still be some costs over which we had no control, even though we might have control of the price of the final product. We anticipated that some costs would rise, and we realized that we would have to have some policy for taking care of cost increases when they occurred. We had to decide whether, if such increases could not be absorbed in profits, the price should be permitted to rise, or whether we should try to hold the price and offset the cost increase in some other way.
I wish to say a word about why we anticipated rising costs at a time when we were attempting to exercise general control. In the first place, we realized ther^ was an area in the economy in which we had very little control—farm prices. You will remember that the possibility of controlling farm prices was slim early in 1942 because few commodities had risen to the point where the act permitted us to exercise control and also because the original Act prevented control below 110 percent of parity, as contrasted with the present limitation of 100 percent. We realized that agricultural prices would rise, and that we would have to find some way of handling food prices when basic food materials went up in prices. In the second place, the wage stabilization policy announced at the time the General Maximum Price Regulation was issued provided for increases of substandard wages, and increases necessary to take care of inequalities. So with respect to such wages and with respect to farm prices, it was realized that costs were not completely under control.
But entirely apart from these matters, which have to do with the prices of the factors used in production, it was inevitable that, on account of changes in the physical conditions of production, other cost increases would occur, even if every price and every wage were held constant. Such changes in the conditions of production and distribution were expected as the inevitable accompaniment of war. In the first place, we knew that large numbers of men would be withdrawn from the labor force—they are being constantly withdrawn. That would require drastic shifts of workers from industry to industry, re
1 Delivered March 9, 1943.
242
training of people, higher labor turn-over, and the introduction of unseasoned people into the labor market. Under such circumstances, a general decline in output per man-hour must be expected sooner or later.
In addition, it was inevitable that transportation costs would increase. The effect of submarine warfare on coastal shipping is an example—commodities formerly shipped by water now have to go by rail. Rail rates are higher than ocean freight rates, which means increased costs. Traffic would have to be rerouted. There might be congestion. There would be increased maintenance costs of all sorts. It might also be necessary to turn to more expensive raw materials, if the industry’s usual supply were short or no longer available.
For these reasons, it was clear that some device would have to be found to deal with the problem. The alternatives with which the Office would be faced, if these cost increases should develop were: First, to let the price go up in order to take care of the increase; second, to do nothing—just to let the increase be absorbed out of the profits if possible, or, if that were not possible, to risk cutting production or cutting distribution of the commodity; third, to grant a subsidy to cover those increased costs impossible to absorb.
It is quite obvious that permitting the production and the distribution of an essential commodity to decline is Entirely out of the question in a war economy. There are really only two practical alternatives for assuring ourselves of essential commodities when cost increases cannot be absorbed. Where profits are not sufficient to permit absorption, the choice is between raising the price and paying subsidies. I want to spend the rest of the time outlining the issues involved in this choice.
When a cost goes up and the Office permits a price increase, it is faced immediately with the effect of that price increase on subsequent stages of production and distribution. As Mr. Henderson was very fond of saying, one man’s price is another man’s cost. If the Office should want to hold prices at the retail level, it would have to force price increases which occurred at earlier stages to be absorbed somewhere along the line before they got to the consumer. That means that every price increase would require the reexamination of all the interrelated prices and the readjustment of many. If we found that an increase of the price at the stage where the original cost increases had occurred meant that the next stage could not take it, then, after having made the examination that gave us that information, we would have to raise that price. We would then have to do the same thing at the next stage, and so on. In other words, an enormous administrative problem of investigation, adjustment, further investigation, and perhaps further adjustment would be involved.
If this alternative of raising prices should be desirable on other points, the administrative difficulty entailed could not be regarded as decisive. However, there would also be serious disadvantages of a substantive nature, disadvantages having to do with holding the entire price structure. A price increase for one commodity has repercussions not only on the succeeding stages in the production and distribution of that particular commodity but throughout the economy. For example, it affects parity prices and, therefore, our ability to control farm prices. If this results in raising the cost of living, it likewise makes the wage stabilization program more difficult. I think that
it is not necessary to elaborate that point very much, in view of the present growing difficulties.
Finally, there is the obvious point that price increases are what we are here to stop. One does not have to go very far to find the reasons tor not increasing prices; they are written in the statute.
The use of subsidies raises certain problems, but it has the basic advantage of. providing an escape from the undesirable effects of upward price adjustments. When you grant subsidies, you can gear them quite closely to the amount of the cost increase; nothing has to be paid which is in excess of the unabsorbable cost increase. Subsidies do not
ve to be paid to all the firms. They do not involve raising paritv and thus limiting further the control over farm prices and therefore over food prices. They avoid the pyramiding that necessarily results when a price is raised at an early stage of production and distribution. And they can prevent the effects of a rise in the cost of living on wage rates. In other words, not only the direct effect of price increases, but all the secondary efforts that tend to make one price increase call f orth others, can be avoided by the use of subsidies.
I 4o not want to suggest that there are no problems involved in the use of subsidies. There are, of course, serious practical policy problems. There is also a theoretical question which always comes up m connection with subsidies—whether or not they are inflationary. Ihis question arises from the fact that subsidies involve more Government expenditures. Since inflation arises from huge Government expenditures it is natural to ask how you can logically use an instrument which involves increasing Government expenditures in a program designed to prevent inflation. I answer that with another question—when Government expenditures are being used to keep down prices. Can you call that inflationary ? The question and its answer never become clear until you distinguish what you mean by inflationary. If “inflation” here means “raising prices,” then the question becomes this: Does the use of subsidies result in higher prices than would a direct price increase ? The answer is very obvious—holding down a price results in a lower price than putting
But there is another very real sense in which subsidies could be regarded as inflationary. What do they do to the level of money demand? If a price increase could always be held down so that the amount of money involved is no greater than the amount involved in the subsidy considered as an alternative, a case could be made that the extent of pressure upon the prices through excess demand would be increased by subsidies. The Office considered that point, but it felt that the very reasons which led to the preference for the limited and careful use of subsidies for important commodities also led to the conclusion that it is academic to compare the effect on excess demand of a subsidy with that of an equal price increase. In practice, the alternative price increase would have to be granted to a larger number and would tend to be industry-wide. It would not be pared down as closely as a subsidy. And in a situation where there are many tightly knit and interdependent price and wage ceilings, it would give rise to other increases. In effect, therefore, the choice lay between a relatively small subsidy and a relatively large price increase which would result in other price increases, expanded
incomes, and a rise in private spending that would be greater than the rise in public spending which a subsidy entails.
From that point of view as well, therefore, it was felt that a subsidy would be more consistent with OPA’s effort not only to keep prices down directly, but also to limit the growth of excess demand, because the price increase would have repercussions on income, on wage rates, on pay rolls, and all the other things that I have mentioned.
(ii)	POLICY
Seymour E. Harris
Director, Office of Export-Import Price Control
My part in today’s program is to tell you something about subsidy policies. OPA has not a declared subsidy program, but a program is gradually being evolved.
As a matter of practice, it is very difficult to poll the general sentiments on the question of whether subsidies should be paid. For example, the OES says a subsidy should not be paid until we have made absolutely sure that standardization, concentration, and all the possible economies have been made in the industry. Actually when we ask a commodity branch whether there is a maximum squeeze on an industry, the answer is likely to be, “We don’t know; we will either have to investigate thoroughly or make a rough estimate.” The pressure is great; delays are fatal.
It is unfortunate that we frequently, therefore, cannot make a decision really based upon the facts. Time is required to investigate a matter of standardization or economies or concentration, whereas the issue we have to face is immediate: Will prices go up now,, or will we recommend a subsidy? We may get economies 1 year from now, but that will be too late. It is very difficult, therefore, in most cases to meet the requirements of the OES. We have to make a very hasty decision between a price increase and a subsidy.
Here is an example of the sort of problem we are up against. CCC tells us that they cannot pay a subsidy without previous permission from the OES. They do not know whether a subsidy is involved until they know at what price they can resell; they must get a ruling from the OPA as to the price at which they can resell. OPA cannot set a resale price without a fairly long investigation, in spite of all efforts to expedite matters. This situation is all right until the CCC is told by the BEW, who is told by the Department of Agriculture, that a certain commodity must be bought immediately.; CCC is under pressure for an immediate purchase, and, having once bought the commodity, is already committed to a subsidy unless OPA changes its price, because in almost every case CCC buys at a higher price than our ceiling. This is not a criticism. I mean simply that one of the reasons why procurement agencies are asked to buy is because private importers find it unprofitable to buy.
Mr. Salant quite rightly pointed out that one of the important reasons for a subsidy is that price increases are self-pyramiding. You get a rise of profits and you get a rise of wages; you get a rise of wages and you get a rise of farm prices; you get a rise of farm
prices and you get a rise of the price of processed farm products, and so on. Because of this we should not grant a rise in price even on an unimportant item. The dangers of price increases are particularly strong now with increased unit cost, overtime, women on the labor market who are not as efficient as the men, and so forth.
What are the occasions for subsidies ? You may, for instance, find that production of a critical material can be increased only at a high cost. If you allow this high-cost increment of supply to determine prices, you must raise the price, and the low-cost producer as well as the high-cost producer gets the higher price. Sometimes prices will not rise materially, but we are talking about the kind of case where there is a relatively large supply produced at low cost, while 10 or 20 percent of the supply, essential to the war effort, is produced at a considerably higher cost.
Another occasion for subsidies arises in cases where risks are so great that private enterprise is unwilling to take them except on payment of a very high price. The Government’s war-risk insurance program is an example of this sort of subsidy. The subsidy involved in this program is not so great as it seems, because the cost to the Government is probably lower than to a private enterprise. For example,' the rate of private companies may be 6 percent for war-risk insurance, but if the cost to the Government is 4 percent, and the Government charges 3 percent, the Government’s loss is equivalent to only 1 percent, not 3 percent. The Government saves the consumer 3 percent, but the only actual subsidy from the Government is of 1 percent.
Finally, another occasion for subsidies arises where costs increase, and rather than raise prices, with all the repercussions involved, you offset the increased costs through payment of a subsidy.
In what areas do we have subsidies? The import field is one of the very important areas. Subsidies occur in that area when the Government buys products abroad and sells at a price below cost of acquisition. A large proportion of these imports are used for Government contracts. Thus the subsidy involved in such procurement is not really a subsidy, because the actual transaction involves payment of a sum of money by one (government agency while another Government agency gets a lower price.
The most important subsidy, from the dollars-and-cents viewpoint, is the petroleum subsidy, which covers the increased cost of transporting petroleum resulting from the war. The explanation is to be found in the. wide repercussions which higher petroleum prices would have on prices and costs in general. The alternative to subsidizing the higher-cost transportation would obviously be a serious rise of petroleum prices, which would cost the consumer and the Government several times what the subsidy costs.2
In the case of farm subsidies, the incentive program for nonbasic crops would involve subsidizing large numbers of farmers. For that reason, it may be an undesirable subsidy. On the other hand, because of what it would save the public and the Government, it may be very desirable. The incentive payments may amount to 100 million dollars, but if the increased production is called forth, not
2 The rollback of the price of meat, butter, and coffee discussed in June 1943 promises to be much more costly than the petroleum subsidy.	P
through these payments, but through higher prices to all farmers who produce these crops, the total cost to the consumer may well be 500 million or a billion dollars.
Just a word about the alternatives. I would like to present a somewhat different classification from the one Mr. Salant mentioned. Another method of avoiding high prices for high-cost increments is to work out an arrangement whereby prices are averaged. If you average prices, what it comes down to is that, instead of paying the price of the high-cost unit, you average all your costs, and sell at the average cost.
The use of differential pricing is another way to prevent the high-cost increment from determining the price, and therefore raising the prices on the low-cost increments. I think perhaps that it may be better in some cases than using average prices, because, under differential pricing, though the average price is the same as under the averaging system, the commodities may be distributed or allocated in such a way as to result in a better price structure. In other words, you charge the high prices to those who can stand them.
I think a subsidy can be justified on the grounds that it may save the consumer a billion dollars and cost the Government 100 million dollars. In other words, if the saving on the cost of living is very large, or if the saving to the Government as a purchaser is large as compared with the direct cost of the subsidy, the subsidy can be justified on financial grounds. There is also an inflationary element involved in the subsidy in this, sense. I think we may just as well admit that more spending is involved when the Government spends 5 billion dollars more in subsidies, and there is, therefore, 5 billion dollars worth more of inflationary advance. We can be pretty sure that the Government will not increase taxes from 35 billion to 40 billion dollars merely because it is spending 5 billion dollars more. In other words, when you reach a spending program of 100 billion dollars, the tax bill is determined by other considerations. Usually, therefore, you do have some general inflationary effect, because you are spending more; besides, the inflationary gap is increasing. However, the great advantage of a subsidy program is that prices are kept down in an essential area, whereas an increase of purchasing power occurs over the whole area of spending. To a considerable extent, moreover, the cost of the subsidy is offset by savings on Government purchases.	.
One point about the British experience. Since 1941 they have had an increase in the cost of living of perhaps 1 or 2 percent. The price of food has gone down several percent. The stabilization of the cost of living would have been impossible without the general use of subsidies. If the British had had a 10-percent increase in the cost of living from 1941 to 1943, the cost of labor for Government contracts would have increased substantially more than the cost of subsidies.
It should be made clear, too, that, in most of these Government agency sales—also in the WSA program—-to a considerable extent what we refer to as subsidies are not subsidies. In the WSA case, war-risk insurance rates on many imports have been reduced from what the WSA regards as compensatory levels to January 1, 1942
536932—43---------17
levels. There is little doubt, however, that the compensatory rates are based on an estimate of expected sinking high enough to cover any contingency. Therefore, the actual cost of the subsidy involved in maintaining the low rates may be substantially less than a comparison between the subsidized rates and compensatory rates would suggest. Secondly, to. a considerable extent, the commodities on which WSA pays the subsidy are used for filling Government contracts ; therefore, they are merely subsidizing other governmental agencies. To that extent there is really no subsidy involved. The same holds true for many of the subsidies paid by the RFC; most of that material is used on Government contracts.
(iii)	USE OF SUBSIDIES IN OTHER COUNTRIES
James S. Earley
Assistant Chiefs Price and Economic Policy Branchy Research Division
While the' experience of foreign countries in wartime price control is replete with lessons for us, one of the clearest is that the cost of living cannot be stabilized without subsidies. This appears to be a generalization transcending differences in political and economic structure, the form of price control employed, and the degree of aid given price regulation by supplementary economic and legal programs. Fiscal severity, over-all price “freezing,” strict wage control, comprehensive rationing, and enforced simplification and standardization, cannot, apparently, do the job, even when backed up by severe regimentation and lavish use of “gestapo” methods. No other major belligerent of World War II has succeeded for long in maintaining reasonable stability of the cost of living without widespread use of subsidies. On the other hand, there is the clearest possible relationship between the use of subsidies and the substantial stability of the cost of living which has been achieved in Germany, Great Britain, and Canada.
Examples of subsidization of almost every class of goods, and of the use of almost every conceivable technique, can be found in foreign experience. Subsidies have been applied to importation, transportation, fabrication, and distribution, and extensively for the expansion of agricultural production.
There is far too little time for me to do justice to this important subject, and in the main I shall confine my remarks to a few aspects of the programs of Canada and Great Britain which are most nearly applicable to our problems.
The basic objectives of the subsidy programs in foreign countries vary somewhat but are essentially similar. The primary objectives, naturally, have been those which motivate price stabilization itself. The raison d'etre of subsidization is the avoidance of inflation.
In Germany subsidies have been used in part to solidify governmental control over industry and agriculture, but in the main to protect price stabilization in order to maintain the morale of the German population, whose memory of the dire consequences of uncontrolled inflation presents a constant danger to those in control of the Third Reich. In democratic Great Britain and Canada, the reason for the
use of subsidies to hold the price line is more closely connected with the vital problem of wartime income control. In both these countries the wage level is tied to the cost of living, in Canada officially, in Great Britain hardly less intimately. The stability of the cost of living in these two countries is thus the crucial thread in the fabric by which demands for higher wages and other incomes are held in check. I think we would all agree that our present position in America is dangerously similar. For more than 2 years in Britain and more than a year now in Canada subsidies have kept this thread from breaking.
In view of the very high proportions of total supplies of materials, finished goods, and especially labor, which each of these governments is currently purchasing, both hold the view that their subsidies are “good business” in the narrow sense, representing a prudent insurance premium against higher costs of procurement. Their primary purpose, however, is to insure against the calamity of inflation.
You will be interested in the dimensions of the British and Canadian programs, since one of the frequent criticisms of subsidies here is that “we cannot afford them.” While most arguments in this form miss the point by failing to recognize that subsidies are not a burden on a country’s ability to produce military or civilian goods, it is nevertheless illuminating to see how large a comparable program in 'this country would be.
To date the British program has been larger than that of Canada, both absolutely and proportionately, although the Canadians have subsidized a wider variety of products. In 1942 Britain spent some £140 million (about $560 million) on subsidies to restrain price increases. This was equivalent to only about 3^ percent of total British war expenditures and less than 1.5 percent of her gross national product. In Canada, 1942 subsidy expenditures, conservatively estimated, reached $75 million. This figure represents only a little more than 2 percent of Canadian war expenditures and a little less than 1 percent of Canadian gross national product in 1942. Canadian subsidy spending will be sharply higher—perhaps almost twice as high—during the current year. In both countries certain additional payments, not included in these figures, have been made to stimulate production of specific foodstuffs.
Had we in America spent the same proportion as Britain (3^ percent) of our $50 billion of 1942 war outlay on price-restraining subsidies, we would have spent about $1,650 million. If we had devoted the same moderate proportion of our gross national product (1.5 percent) we would have spent about $2,300 million.
There are, I think, some important lessons for us in foreign administrative arrangements. In Britain very few subsidies are paid to private industry directly. The Ministries of Food and Supply are in the fortunate position of dealing as monopolists in most of the subsidized products, although peacetime channels of trade are used and peacetime distributive personnel are ordinarily employed as. agents. The subsidy normally consists of a loss by the Ministry between its purchase plus handling costs and its selling price. No special negotiations with subsidized industry are required. The numerous transportation subsidies are similarly facilitated by exclusive Government chartering of ships and the financial responsibility for the railroads borne by the Ministry of War Transport.
Tn Canada a special corporation, the Commodity Prices Stabilization Corporation, administers most of the subsidies. Perhaps significantly, this Corporation is a subsidiary of the Wartime Prices and Trade Board (Canada’s OPA), and its activities are therefore the responsibility of the Board.
The handling of agricultural price and subsidy problems should be of special interest at this time. In Britain and Canada, as here, there has existed a rather difficult problem of harmonizing the work of those responsible for prices and those concerned with agricultural production and control.
The British subsidy program is primarily a food program. The decision as to which food products should be subsidized is made by the interdepartmental Food Prices Committee, composed of representatives of the Ministry of Food, the Ministry of Health, the War Cabinet, and the Treasury. • The actual pricing of wholesale and retail foods is performed by the Ministry of Food, whose functions in foods are rather similar to those of OPA generally. In most cases these price decisions fix the amount of subsidy paid, since that consists of a trading loss by the Ministry.
The Ministry of Agriculture, which is responsible for domestic food production, Tias no official voice in determining these wholesale and retail prices nor the associated subsidies.
On the other hand, this Department has a strong voice in the determination of the prices paid to domestic agricultural producers, through the Agricultural Prices Committee, which-consists of the above-mentioned Food Prices Committee plus representatives of the Ministry of Agriculture. This Committee makes recommendations as to the prices to be paid to domestic producers by the Ministry of Food. The payment of subsidies enormously eases both the economic and the administrative problems involved, by permitting prices at the growers’ level to be fixed as high as deemed advisable without upsetting the all-important cost of living.
In Canada there existed until very recently some conflict in agricultural price and subsidy policy between the Wartime Prices and Trade Board and the Canadian Department of Agriculture. It has now been decided that the Board has final responsibility in all matters of price, and exclusive jurisdiction over nonagricultural subsidies designed specifically to reduce costs to the consumer. In the matter of subsidies on agricultural products beyond the producer stage it must consult with the Department of Agriculture before taking action. Recommendations concerning subsidies paid to primary agricultural producers are made by the Ministry of Agriculture. In any case in which it is feared desired agricultural production cannot be obtained under established price ceilings, questions of price adjustment and subsidies are now settled by consultation between the two agencies. Bmefly this arrangement makes clear the authority of the Department of Agriculture over agricultural production, while maintaining the Wartime Prices and Trade Board’s final authority over prices, and its power to subsidize foodstuffs beyond the producers’ stage.
.Jn thtvery imPortant matter of standards for the payment of subsidies, there are numerous suggestions to be obtained from foreign experience. I have time to mention only one which has impressed me strongly. In Canada, both on most imported goods and on a wide
list of processed or fabricated items, a flat subsidy, or one based upon the difference between an established maximum price and the price or cost on some other date, is paid under approved conditions. This subsidy, as a maximum, is available to all eligible firms, but no subsidy is paid which would raise an individual firm’s profits above the point where its net taxable income reaches 116% percent of its “standard profits.” These are its average profits, before taxes, for the years 1936-39. Several British subsidies are similarly based on pre-war earnings of the recipients.
In these countries, with their present 100 percent excess profits taxes, this standard essentially amounts to not paying a concern a subsidy which would have to oe returned to the fisc, although it also precludes a firm receiving the 20 percent post-war refund on excess profits tax paid. But a somewhat similar system could .be applied in this country so as to accord with and strengthen our basic price policy. We could, for example, lay down a general rule that no subsidy should bring a firm’s profit before taxes above the level of profits in the chosen base period for price determination, or, alternatively, the base period used in the calculation of excess profits taxation. Guarantee of profits could be avoided by making the subsidy a maximum amount based upon conditions in the industry as a whole, and subject to other conditions which could be elaborated at considerable length.
(iv)	FOOD SUBSIDIES
James P. Cavin
Associate Director, Food Price Division
For my purposes, I define a subsidy as money paid by the Government to producers in lieu of a price increase which would raise ceiling prices on their products to consumers. The ultimate object of the subsidy is to keep down the cost of living to the end that the cost of the war effort shall be equitably apportioned. In addition, there is the indirect object of releasing the pressure for wage increase demands based upon advances in the cost of living.
As has been pointed out to you here, the subsidy has been a potent weapon in price control in other countries, particularly in the United Kingdom. When the General Maximum Price Regulation was enacted in this country, it was generally believed that a similar application of the subsidy device would be readily accepted. It seemed acceptable immediately after the issuance of the General Maximum. The various governmental agencies with funds at their disposal were generally willing to enter into subsidy agreements, and bills providing for subsidy appropriations were introduced in the Congress. But, as you know, the political climate has changed rapidly since the middle of 1942, with the result that subsidies have become the exception rather than the rule. Towards the end of this talk I shall comment briefly on the present status of subsidies.
The other speakers have been making classifications. I don’t like to introduce competing classifications, but I have made classifications too, so I will give them. The first classification is between subsidies available to all members of. the industry, and those available only to a segment. In food, the former have been universal. Second, we
have subsidies occasioned by cost factors external to the industry, such as transportation and war-risk insurance, and those which arise from cost factors within an industry, such as a squeeze between raw material costs and retail price ceilings. The former is illustrated by the coffee subsidy, which provides for governmental absorption of increased war-risk insurance and absorption of freight charges on abnormal rail shipments. The latter is illustrated by the fats and oils subsidy, which provides for Government resale of raw materials to processors at levels below those paid the grower. The third—and this is my own special classification—is between subsidies which the industry regards as subsidies and those which they think are not subsidies. I think the significance of these distinctions will appear as I take up a number of cases. I will start with the fats and oils case.
Immediately after we imposed GMPR, our studies showed that in •order for retailers to receive their lowest margin during the last 3 years, prices charged by wholesalers and processors for vegetable shortening needed to be rolled back substantially.
We estimated that this required a rollback of 1 cent per pound on crude cottonseed and crude peanut oil, and three-quarters of ■a cent a pound on crude soya bean oil. This rollback to growers, however, was impossible because it would have reduced prices of raw materials below the parity provisions of section 3 of the Price Control Act. We were faced with the alternative of rolling the whole price structure forward or obtaining an agreement from the Commodity Credit Corporation by which it would resell these raw materials below their support prices. Although our rollback data seemed reasonably conclusive, there was considerable discussion over the effect of the subsidy on the position of the individual processors, and we eventually compromised on the figure of half a cent. Now I understand that this figúre has been increased somewhat by compensation for items such as storage, and may be approximately at the figure we originally discussed. This illustrates one of the classifications I mentioned, namely, that it was confined to cost factors arising in the industry rather than outside the industry. I would like to point out that this particular subsidy not only affected the prices of the product involved, but enabled us to hold the line on food in general. At that time we were just out with the General Maximum Price Regulation; a break-through of some of these important items would have been very disastrous to the whole attempt to enforce the GMPR. The fats and oils subsidy, the coffee subsidy, and the sugar subsidy were justified on those grounds as well as on the particular price effects involved.
The coffee subsidy illustrates the situation in which compensation is made because of cost factors external to the industry. In coffee there was an absorption by the Defense Supplies Corporation of increases in war-risk insurance, marine insurance and ocean freight rates over those prevailing on December 8, 1941, plus an absorption of three-fourths of the excess inland freight caused by deviation—that is, by coffee having to be landed at strange ports and shipped under unusual cost conditions by rail.
In our recent review of subsidies under the directive of Mr. Byrnes’ office, we have examined the coffee subsidy quite carefully. This
subsidy amounts roughly to half a cent a pound to processors.- Green coffee would have to be raised about half a cent, and the retailer’s price about 1 cent if the subsidy were eliminated. But that rise of half a cent on the green and 1 cent on the final product doesn’t mean that you would eliminate all the difficulties which the subsidy overcomes.
Under the subsidy all producers are protected against their excess external costs. In other words, there are many coffee enterprises which receive a subsidy in excess of the half cent received by the industry at large. If the subsidy were eliminated and the average price of green coffee raised a half cent, the enterprises which required more than a half a cent to keep them within the ceiling price would be in trouble. This illustrates a strong administrative argument in favor of this type of subsidy. With the subsidy, the marginal producers are automatically taken care of; without the subsidy, we would have to raise the average price of coffee more than the average amount of the subsidy in order to protect these marginal producers or we would have to reopen the coffee schedule to individual adjustments, which would not only place a heavy burden upon the office, but would introduce more differential pricing in coffee, which would be difficult to reconcile with our objective of flat dollar-and-cents at retail.
I want to say something on the question of what industry regards as subsidies and what they do not regard as subsidies, or perhaps more accurately stated, what they regard as good subsidies and bad subsidies. There is not much fundamental opposition to a subsidy reimbursing an industry for some unabsorbable cost factor, particularly if that cost is directly related to war conditions. There is much more opposition to generalized subsidized operation such as the proposal for Government purchase of the entire vegetable pack, and Government resale into the channels of civilian distribution. I think the distinction runs primarily in terms of the amount of Government interference involved. Industries do not seem to be particularly worried about receiving Government compensation for certain increased costs provided that there is not extensive Government participation in their regular operations. When, however, subsidy involves more general examination of their operations and more complete control over disposal of their products, the opposition becomes quite strong. In other words, I think such opposition as we have had to subsidies has not been against the subsidy principle as such but rather against the idea of Government interference. Probably a less important factor, that does seem to appear at times, is the question of Government investigation of subsidy operations after the war. Industries frequently feel that they can defend their taking of a subsidy covering some cost item but might not be able to defend the taking of a more generalized subsidy, particularly if their profit position under the subsidy operation should prove particularly favorable. I believe, however, that as the inflation-preventing objectives of subsidies become more apparent to the various industries .they will gradually become more inclined to cooperate than to oppose.	. .
I considered making a prediction of things-to-come on subsidies. That would probably be inadvisable. Nevertheless it does seem that
if there is general opposition to subsidies, the number that will appear in the food field will be very limited. I do feel, however, that later there may be a swing back toward subsidies when the inflationary pressure becomes greater, when the producers of the raw products are receiving prices that are justified, and when some of the basic cost-of-living items move up to a point where the consuming public grumbles more than it does now. Then I am inclined to think that the subsidy will come back more strongly into the picture. The use of subsidies to date has been quite rough and ready, simply because the pressure of .time, and the necessity of giving the trade assurances, meant that we had to get out something fast in order to forestall price increases and to prevent production and distribution from stagnating because of uncertainty and delay. I do not believe we have done too badly.
4.	CONCENTRATION *
(z) William A. Neiswanger .
Coordinator, Concentration Program
Concentration of production is a program applied to manufacturing industries when output is seriously curtailed as a result of the wartime scarcities of manpower and materials. When the total production of a given commodity or class of commodities has been, or is about to be, seriously curtailed, “concentration” provides for an assignment of the reduced production to certain selected plants, designated as “nucleus” plants, within the industry. The remaining plants, not needed for the production of the curtailed quantities, are encouraged to convert their facilities to the production of other goods for the war program. Otherwise their facilities may be used merely for storage or they may simply close.
The object of the program is to attain efficient utilization of our scarce resources, both material and human. This is accomplished by selecting, for nucleus status, plants in excess labor areas so that manpower may be made available in the tight labor areas for other uses. These nucleus plants, in the excess labor areas, are then brought to capacity production so that they may provide full-time employment for their labor and realize the efficiencies of complete utilization of plant facilities. Nucleus plants are selected in such a way as to reduce cross hauls, relieve traffic con jestion, equalize the power burden, . and economize the use of scarce fuels such as oil.
That brief statement is undoubtedly sufficient to indicate that the program has potentially far-reaching social consequences. In a recent address, Mr. Thurman Arnold said that competition in American industry today is not so much competition for profit as it is for postwar position. Those charged with responsibility for the concentration program have, I think, a solemn obligation to see that this program, forced on us by the necessities of survival, is not made an instrument for the creation of monopolies. This obligation, it seems to me, determines in large part certain policies which any administration should follow.
The War Production Board has been given the principal responsibility for the concentration of industry because of its authority over material distribution. The industry divisions of the WPB have concentrated certain industries. On January 29 and February 11 of this year two orders were issued by the Steel Division of that Board concentrating the production of concrete reinforcement bars and galvanized sheets. The Division for Consumer Durable Goods has concentrated the production of bicycles and typewriters. The many departures by the industry divisions from a uniform horizontal curtailment of production constitute, in reality, concentration programs to greater or less degree.
» Delivered March 11, 1943.
255.
Concentration programs are also put into effect by other agencies. Mr. Harold Ickes, on March 8,1943, concentrated the canning of salmon in 74 of 120 canneries. 46 plants will be closed, and production concentrated in the largest and most efficient canneries. The Department of Agriculture is considering concentration at the processing stage of certain foods where the raw materials have diminished significantly during the war.
The Committee on Concentration of Production of the WPB has not, I think, played a dominant role in this movement up to this time. Its activities have resulted in the issuance of orders regulating the production of warm air furnaces and farm equipment. An order involving woodpulp production in the Northwest was also issued. These orders issued by the Committee on Concentration of Production were guided by this major policy: to concentrate production in the Smaller plants in loose labor areas.
One sometimes hears of concentration by attrition but, in this day of price control, concentration by attrition means concentration by the Office of Price Administration. Our Price Executives have the unhappy;duty of deciding where price relief should be given, of determining who among the various manufacturers shall have those price increases which may be necessary for their continued operation, and who shall not have them.
In a somewhat similar manner the War Manpower Commission is bringing about a change in the pattern of production by issuing lists of nonessential occupations. Such lists are purposely designed to drive individuals out of certain occupations, thus depriving certain undertakings of their manpower.
You will agree that the procedure of each agency operating on the concentration front under its own and separate authority will be unworkable-if not disastrous. When we, in the Office of Price Administration, speak of essential producers who should have price relief, we must have some conception of the bedrock quantity of production needed to maintain the civilian supply or the military supply and we must have some conception of the place of a given supplier in that picture. No product, not even military goods, is essential excepting in a certain volume ; and the essentiality of a producer cannot be judged solely on the basis of what he makes. There are also the questions of where he makes it, the demands he puts on the labor supply, the transportation facilities, and so on.
. It is a function of the Office of Civilian Supply to make estimates of bedrock requirements for civilian use; Our price program must be coordinated with its program.
If the War Manpower Commission were to use its power to draw labor from certain plants in tight labor .areas while we, through the use of price control, were closing other plants, the result might well, be a deficient supplv of what we call essential goods. If, added to this, the Industry Divisions of the War Production Board, through their material allocations, freeze but some producers and encourage others, the supply and manpower problems become very confused.
These comments indicate, I think, that the various governmental agencies are confronted with a major issue. Each agency is forced, by the day to day necessity of getting its job done,, to take actions which result in concentration. The easy, the inconspicuous, and the wrong way to do itj is this uncoordinated, unplanned way.
The solution to this problem is, I think, clear. The various agencies should unite in the development of a coordinated production program. The force of circumstances will oblige us to do this sooner or later.
There are several reasons why I think we will be forced into planned concentration on many fronts. We can distinguish four stages through which the American industrial economy must pass in its adaptation to total war. These phases overlap in point of time. I should like to trace these developments briefly and relate them as I see them to the concentration program.
First, there was the stage'of the foolish illusion. We recounted our great wealth, recalled the experience of the last war, and decided that we in America could have both the butter and bullets if we but planned wisely. This attitude died hard. Indeed, it persists to this day in the minds of those who rail against rationing and press for curtailments in Lend-Lease shipments.
The second stage was that of conversion ushered in by the cessation of automobile production and the program of retooling for war. This was a period of slack employment in areas which have since become tight, and industrial emphasis was placed on production of machine tools and structures. The passing of this phase has been dramatically revealed to us in Office of Price Administration by recent sales of second-hand machine tools below our ceilings, for the first time in many months. It is also revealed in the reduction of construction activities.
Next came the period of shortages of industrial materials as new batteries of machine tools cut into supplies. Priorities were established and material allocations were made which amounted to rationing of critical materials among the various claimants for them. It was then that manufacturers of civilian goods who had profited greatly during the last war found that this war was going to be different. Certain industries producing consumers’ durable goods from critical materials were cut off from the material markets entirely—for example, producers of. pianos, domestic radios, electric refrigerators, stoves and ranges. Other producers, such as furniture manufacturers, using in the main noncritical materials were scarcely touched by this curtailment due to material shortages. They were required only to find substitutes for some relatively small quantity of critical materials which they previously used. As lumber becomes critical, they too will feel the'pinch. Another large group of producers of civilian type goods, from which a certain minimum supply of civilian goods was needed, were curtailed. These curtailments were usually of the horizontal type, which means that manufacturers were told they could use 80 or 60 or 30 percent—or even 2 or 3 percent—of the materials they used in some previous base period, usually 1940-41.
The fourth phase—the one we are about to enter—is the phase of the manpower shortage. I am sure you have all anticipated me on this point. We in America have not yet experienced real manpower shortages, but the time is rapidly approaching when many industries producing civilian goods will be curtailed, not because of scarcity of materials but because of the necessity of putting their manpower to other uses. As you know, estimates differ; but if the armed services are to be increased to eleven million men—the figure which has been
set—it is estimated that from two and a half to three million men must be transferred from the production of civilian goods to the production of goods in the “fly, float, or fight” category. In other words, up until this time, the scarcity of certain materials has necessitated reduced operation of certain industries; in the period we are about to enter, the scarcity of manpower will occasion even more acute reduction.
It seems to me, therefore, that we in the OPA are soon to be confronted with another critical price issue. As material scarcities appeared, the War Production Board used mainly the horizontal curtailment method with the essential civilian type industries. Now, as manpower becomes a critical element, will the policy be to take out of each plant producing civilian type goods certain employees by direct or indirect means and leave a decimated crew ? Such treatment of the manpower problem would-be analgous to the horizontal curtailment used in handling materials. This is, in effect, the result of the publication of the lists of nonessential occupations. The policy of taking a few employees from each plant is proposed because—it is argued—the producer is permitted to limp along with curtailed materials and a skeleton crew if he wishes to do so. This proposal creates an issue, I think.
In this time of scarcity of materials and manpower and in the midst of our fight against inflation, should we accept a program of limping along or should we prefer to see industry concentrated ?
Anyone with operating experience in the OPA knows how efficiency deteriorates as the scale of operations is reduced. The time of personnel is not completely used, especially in supervisory positions; facilities are employed at less than capacity; purchases are in smaller volume; machine set:up time per unit of output increases as the runs become shorter and shorter; shipments may be in less than carload lots; and there are many other evidences of efficiency deterioration.
The inevitable result of curtailment in most industries is, therefore, the wasteful use of manpower, machinery and transportation facilities. This waste appears as increased costs on the cost sheets of enterprise. The squeeze is on, and there is no way of saving the producer by expanding output since the industry must curtail. The problem, therefore, comes home to the Office of Price Administration in the form of requests for increased prices. The problem of maintaining civilian supply will be left on our doorstep if this policy is followed.
Under these circumstances, I think it would be impossible for us to handle the program, even though we should grant price increases right and left. Once an industry is given to understand that it is nonessential in whole or in part, there is an exodus of employees from that industry. The recent experience with the list of nonessential occupations demonstrates that there was an undesirable exodus from the textiles and the garment trades which were not wanted because the word “stitcher” appeared on that list. The exodus constitutes a real threat, I understand, to securing the necessary supply of certain types of clothing.
Further, I think a nation engaged in total war cannot afford the wastes in the use of manpower, the technical inefficiencies in use of facilities, and the disorganization which would result from the increase in prices we would be called upon to give under a program of hori
zontal curtailment. For instance, if the soil pipe industry must be reduced to 26 percent of its 1941 operations, would it not be much better to put that production in 12 plants rather than let each of the forty run at such a reduced rate ? The 12 selected would then use their human, their plant, and their transportation facilities more efficiently than they possibly could at the 26 percent level. The certain way to assure essential civilian supply is by concentration. A few plants are designated, they are given a production quota, and they are assured of sufficient manpower and material.
But these are by no means the principal reasons for concentration. The plants, for instance the 12 soil-pipe plants which would be selected for continued operation, would be those in “loose” labor areas where the War Manpower Commission certifies there is no local manpower problem. They would be selected with relation to the market and their material supplies in order to minimize the demands on the transportation system. Power surveys have been made so that the concentration authority can select plants near an available source of power. Finally, there can be an analysis of the financial position of these companies which would assure the concentration authority that plants selected for concentration can actually produce the needed supplies economically and under our ceilings.
Actually there may be an opportunity to reduce the prices under concentration plans. In the case of one industry—I think it is exceptional—-which was studied for concentration, it was found that the surviving nucleus plants would earn more than twice as much profit as the total industry had earned in the base period. The profits would increase from some 4.6 million dollars a year to better than 9 million dollars. This would come about because of the reduction in unit costs as capacity operations are realized.
I think you will agree with the assumption that we are headed for more and more serious curtailments. In the fourth stage, in the stage of manpower shortage, further curtailment must be expected. I believe that you will agree also that it is better for someone in the Government to draw up an integrated plan for industry which will result in maximum savings in manpower, transportation, and energy and. which will preserve our ceilings against the inflationary forces of price increases. Indeed, this appears to be the only way to assure civilian supplies, obtain efficient use of manpower and transportation facilities, and save many of our ceilings. You now have my reasons for saying that concentration will be forced upon us, in the next stage of development, as we adapt our production mechanism to the requirements of total war.
Frequently the problems met in concentrating an industry are not very great. At a recent meeting, for instance, the members of a large industry said that they really wished it would not be necessary for them to make any of their civilian type products until the end of the war. They had converted substantially one hundred percent of their operations to profitable war work. It was an annoyance and a nuisance for them to have to interrupt the flow of those goods and transfer their men, who had become skilled and proficient in the making of the war goods, back to the manufacture of the old peacetime product in small quantities. Concentration in this case-presents no problem of compensation for the closed plant; there is
no question of survival. So bringing the remaining peacetime product into a few plants may be a move which the industry will support. There are, however, two problems which must be settled. One is that of trade names, which are of value in many of these industries. The other is that of distribution—getting the product into the right districts through the right channels.
Where an industry producing civilian type products cannot convert to the manufacture of war goods, or where it can convert only to the supplying of services which are already in excess—as in the making of gray iron castings—there are real problems. In such cases it seems to me that simple standards of fair, play require that some form of profit sharing be provided, according to which the substantial profits made by the nucleus plants would be distributed among the members of the industry who have no real opportunity to continue operations. Further, the demand for goods is shifting very rapidly as the requirements of the war change and it is desirable to maintain these non-nucleus plants in standby condition even though we do not see immediate need for them. Payment of compensation out of industry funds may make this possible. Indeed, some form of profit sharing, under this circumstance, seems to be necessary if the American economy is to emerge from the war with an industrial structure similar to that which existed before Pearl Harbor. The obligation to prevent the rise of monopolies would seem to require the distribution of some of the profits of nucleus plants, as compensation, to nonnucleus plants.
Problems of compensation and problems of price are inseparable. In the absence of government subsidies a profits pool may be created. In this case the amount of compensation available for distribution within an industry is determined by the price we have set as it relates to costs at capacity operation. Or, if one plant is authorized to produce under an agency arrangement for another plant which has been closed, the price at which the goods are transferred, as between plants, determines the compensation received by the second plant. There are, of course, many alternative arrangements which can be set up for compensating closed plants but each of these involves the OP A and its pricing authority.
It appears, therefore, that a concentration program promises to save our ceilings from pressures resulting from curtailment of output, but it brings other essentially new problems to us particularly as we relate price ceilings to the requirements of a compensation plan.
America is, of course, a fabulously rich country. In comparison with other warring nations the United States is today a land of great abundance. It may be possible for us to conduct total war with the waste and inefficiency our present separate and uncoordinated activities entail. It is my opinion, however, that this condition cannot be maintained during a long and difficult war. Requirements of survival and the desire to maintain the structure of a competitive economy may be expected to force us, however reluctantly, into a program of concentration of production. The desired results may be accomplished less directly and under another name, but the broad outlines of the program and OPA’s place in it are clear.
(ii)	Howard Coonley
Director, Conservation Division, War Production Board
I assume that my assignment should be concentrated on the work of the Subcommittee on Standardization and Simplification, but I am so deeply interested in standardization that I cannot help but carry one short message. Peacetime standardization is one of the finest implements we have for intelligent management. In time of war it is an essential tool in our activities. At the time the Committee on the Concentration of Production was set up, its chairman created three subcommittees: One on distribution, one on compensation, and a third on standardization and simplification. He asked me to act as chairman of that last subcommittee because I had that responsibility for WPB in the Conservation Division.
This subcommittee has also a representative of the Office of Price Administration. Whenever the Committee on Concentration of Production decides that a certain product should be studied for concentration, this subcommittee of mine is notified and we set to work to develop the standardization and simplification aspects as the first stepping-stone towards a program either of concentration or of stretching the small available quantity of materials to produce the maximum of useful civilian goods. Our method is to set up a project committee covering the same over-all representatives as the subcommittee itself. That Project Committee has a representative from OPA, Conservation Division of WPB, Civilian Supply, and also of the industry divisions involved. In other words, if it is a product in the field of consumers’ durable goods, the director of that division appoints his representatives who undertake a study of the simplification and standardization of that product. We have nothing whatever to do with recommendations for concentrations but we prepare the way for that final study of concentration. I believe we are submitting at our next meeting our eighth final simplification program. Under those programs we have found ways and means of spreading to a very considerable extent the use of a limited amount of material.
I must say something about the relationship in standardization and simplification between the OPA and the WPB because that is part of the study of this subcommittee. We in the War Production Board need standardization and simplification to make possible increased output for our armies and our fighting forces, to provide interchangeability which is now such an essential in the combat areas, to safeguard and save manpower, transportation, inventory, and productive capacity, and to provide a basis for studying the simplification that has to do with our materials for war.	...
We also have the responsibility of studying simplication and standardization in conjunction with the OPA for the safeguarding of goods needed for our civilian economy. To do that we must assure ourselves, just as you have to assure yourselves, that in trying to stretch a limited amount of material to produce a maximum amount of finished product we avoid manufacturing useless products, products that will not carry our civilian people through the war period. So we too are interested in quality standards and performance standards, not for the same reasons as OPA, which is interested in them as a basis for price ceil
ings and rationing, but in order to make the maximum use of critical materials, critical capacity, and critical manpower.
Each week we have a meeting of this subcommittee—very fully attended—and we have progress reports. It takes us from three to six weeks to develop a program of simplification and standardization, the time period depending upon whether the study has been started before the Project Committee is set up. It has proved to be a very successful method, and I am quite sure it has been of help to the Committee on Concentration of Production.
(iii)	Col. Charles M. Piper
Industry Council
I will try to tell you about a few of the problems that go hand in hand with concentration.
Concentration does not work, and is not going to w’ork, in a vacuum. There are many problems involved and, if any legislation or administrative order or committee plan or any other plan of operation fails to take all these problems into consideration, that order or plan will not succeed.
The problem of the small businessman comes first. It is not merely the problem of the small manufacturer but of the small wholesaler and a host of small retailers. Most consumers’ goods manufacturers and a lot of durable goods manufacturers have been in the habit of doing business through many outlets—for this is a big country—and most of these outlets are small firms run by independent businessmen. Materials and manpower shortages, which seem to be leading to an unplanned concentration, may almost disrupt the outlets that formerly handled the merchandise made by these people.
What are we going to do about these people, these retailers and wholesalers ? I think that any and all concentration must be directed and controlled by the Government but with the maximum amount of free cooperation from business. A plan which succeeds in one industry will not necessarily succeed, in each and every detail, in any other industry. Concentration at the manufacturing level must be coordinated with concentration at the wholesale and retail levels. Small business must be favored especially at the retail level. This is all very easily said, but it is going to be difficult to do. However, such an over-all approach can be made, and I think it probably can be made successfully.
I want to say something about the problem of compensation. First you have to decide whether to provide for compensation or whether we are to let the closed firms disappear from the picture. If we do let them disappear, then we have to be ready to answer the charge of helping to promote, under the pressure of war necessity, the building up of monopolies.
If these plants are to be kept in stand-by condition, who is going to pay the bill? Are we going to pay it by direct Government subsidy? Businessmen do not want that, at least those whom I have talked to don’t. Or are we going to try to accomplish all these stand-by costs through absorption into the ceiling price structure, or are we going to do it through reduction or elimination of profits ? We can
not wave aside compensation, but, again, this part of the problem is not going to lend itself to a rigid formula applied alike to all industries and businesses. What policies are we going to use and what method are we going to apply to the payment of this compensation? By what criteria are we going to measure that method? There are many problems involved. Compensation by Government subsidy is not only—at least at present—unpopular, but seems to me impossible because it may develop a huge'cost that would mean more and more public debt. I think definitely that compensation is a necessity, but that it should be within the framework of costs and thus provided by industry itself in its continuing operations.
As Mr. Neiswanger said, we have several studies which show that if the within-business plan for compensation is used it does not necessarily mean that we must pierce price ceilings. In many cases we will not have to; in some perhaps we will; but even where we do pierce them, we may succeed in doing a better job at a cheaper cost than through a subsidy method. Another difficulty, of course, is that the too liberal use of a compensation plan may lead to voluntary business stoppages.
We have a problem of debt structure in all business and in closed plants particularly. It presents a serious and varied picture. One business will be clear of debt with a balance to live on and to use up; another will be burdened with debt. These debts will take various forms. What are we going to do about that? Why not institute a plan for debt adjustment such as the British are using more and more? Some closed plants cannot be entirely compensated, because of their heavy debt. Probably they will be forced into bankruptcy if we cannot assist them to carry this debt and if they cannot get any relief from their creditors. Do we want to defend a position which makes us a creator of bankrupt firms? Should we riot make possible a wartime debt adjustment procedure and actually require its use before we will set up compensation? I think that is feasible and I think it will spread the wartime load. I think that the man who owns a mortgage has to carry part of this burden too.
What about the right of free entry into business ? Is it fair when compensation is a necessity to preserve the tools of* our civilian economy, to let, for instance, a chain of tire stores enter into the field of work clothing, mops, and laundry soap? That makes the chances of the small independents, who are struggling to stay in business to keep themselves and their families alive, even more hazardous. Why not an entry on a controlled basis vertically? Free entry into business is a democratic right, but in time of war we may have to give up that right. I feel very sure that if this right continues uncontrolled, it will lead to a mad scramble which may defeat the proper aims of concentration, especially at the retail level.
I will now have my little say about the social impact of the program. No amount of theory alone is going to feed the older people who have become unemployed, who will not be flexible and who cannot move into war production. Theory alone will not supply the missing taxes upon which many a small town exists. It is going to be very easy for the opponents of concentration to base a valid attack on our whole scheme if we fail to consider and weigh what is done in the light of its effects on people.
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The sixth point is one that most people will shy away from. What about the political effects of concentration? We know that we will have to pay attention to this part of the problem. In our democratic life politics are important, and we do not want to give up free political expression. Sound principles should not be sacrificed for political reasons, but we must take public opinion into account if we are to protect our democratic methods. When we undertake a program with the tremendous social implications of this one, we cannot ignore this aspect of the problem.
Up to the present time, practically all I have heard about concentration concerned itself with the subject of the manufacturing level. The problem at that level is difficult enough, but that is only the beginning. The real jobs for the concentration experts are in wholesaling and retailing. Here again I insist that theory alone is not going to suffice. The plans are going to have to be practical. That is why those who are responsible for this job of concentration must in themselves be practical and farseeing and mentally alert and elastic. I believe that concentration can still be done, and done well, provided that it is carried out at all levels under the proper kind of broad planning’, with allowance for all the variables that must be taken into account, and with authority for a great deal of voluntary cooperative functioning. But the situation is already serious; shortages, price actions, rationing, and other forces have had a greater effect than the bankruptcy figures show. The American businessman will do a great deal to help himself, but he will also need help, and that will require informed and sympathetic leadership. A plan during the war in this field should save a great deal of our structure, so that it will be available to us after the war.
It seems to me that the manpower problem alone is going to force concentration.. From my own contacts, I believe that the public and businessmen generally are ahead of us in the Government in seeing the need for this sort of operation. They want the job to be well planned and fairly applied. The uncontrolled mortality which we definitely face, or a mortality resulting from the theory that marginal and submarginal elimination is good for our economy, literally works havoc with the whole scheme of civilian economy. It will be very difficult to allow this uncontrolled mortality and have a sound basis to build on after the war. When you fail to preserve standby conditions for the thousands of small businessmen, you have shaken the democratic base on which this country rests. An uncontrolled mortality will bring our civilian economy to starvation rapidly and destructively. It has to be avoided, and we can avoid it if we do a good job in concentration.
5.	STANDARDIZATION AND SIMPLIFICATION
(i)	Dexter M. Keezer1
Deputy Administrator in Charge of Professional Services
I shall attempt to state the issues involved in standardization and simplification as related to price control. Allow me to begin with a few selected quotations from a booklet prepared in the Standards Division:
This report is a. major over-all review of a major OPA problem * * * now getting a great deal of constructive, collaborative attention from the Price and Rationing Divisions of OPA * * * because it will be one of the most acute problems of 1943. In relation to price control, it is essentially the story of a workn^n * * * who paid $1 for a workshirt that lasted him only half as long as his dollar shirts used to. This is a 100 percent increase in the cost of that shirt, due solely to the * * * deterioration of the shirt’s wearing qualities. It is a “hidden,” and, therefore unreported price increase. Unreported, because it takes careful measurements to discover how much a lesser thread count, a bigger shrinkage, a cheaper construction, may depreciate the actual value of a workshirt. Yet it is no satisfaction, to the man who must buy two shirts instead of one, to be told of “no change” in the BLS Cost-of-Work-shirts Index.
It is valid to ask: Just how much deterioration of the qualities of Civilian Goods is taking place? The answer comes from The National Bureau of Standards, the Bureau of Labor Statistics Field Staff, Reports- from OPA Regional Offices, letters to OPA, and the first-hand information of the Standards Division. Taken almost at random, here is some of the accumulating evidence.
Work clothing.—“Chambray workshirts are reported in some cases to be heavily starched, which conceals the flimsy fabrics until the shirt is laundered.”— OPA Region V Report, August 15, 1942.
Refrigerators.—Tests conducted at the National Bureau of Standards and made on refrigerators produced under WPB restrictions, revealed wide differences in quality and cost to the consumer.—Standards Division Internal Report (February 1943).
Enamel kitchenware.—“Survey in Washington shows that * * * the enamel in well over a majority of cases does not completely cover the metal, permitting unprotected areas to rust * * * Handles so poorly fastened they would beak off after very little service.”—OPA-WPB Investigation (November 1942).
Shoes.—“Many evidences of poor workmanship are reported; uncut threads, unfinished linings, nails untrimmed, one side of the upper longer than other, soles not neatly finished, insoles in boys’ shoes badly glued * * * ”—Bureau of Labor Statistics (December 1942).
This issue is certain to increase in 1943, because with the bulging inventories of 1941 and 1942 coming to an end, and with the production of new civilian goods shrinking at the current rate of 1% billion dollars a month in 1943 * * * (as more and more materials, manpower, and plant go into the war effort), it is inevitable that:
1.	The way in which goods are made is changing more rapidly than ever before in our history.
2.	The goods themselves are changing too.
3.	Many goods (especially the lower-priced, low-profit lines) tend to disappear.
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The fact of rapid change, in itself, poses a major problem to price control, for OPA must first know what any merchandise is before OPA can properly price it. Just as the public must be able to tell what those goods are, before people can properly buy them. This was not nearly so great a problem in the early days of OPA, as it is today, for then the quality of goods was relatively stable, particularly goods in inventory. But it is a great problem in 1943, in the year of “rapid changes” in all civilian goods.
It is a great problem for the manufacturer too. It is only when precise definitions of the quality of goods are established that manufacturers and distributors can easily know when they, and the rest of their industry, are complying with Price Regulations. Moreover, such wartime definitions of quality are a necessary protection to the individual manufacturer today. The ordinary competitive inducements for maintaining or improving quality are gone.
In such a situation, what manufacturer has any protection against the lower costs of someone else’s shoddy merchandise? How can he know what his “quality floor” should be when his competitors are not held to a clearly defined “quality floor” too?
Precise definitions of quality also simplify the problems of enforcement^ not only in cutting down noncompliance (by making it easier for manufacturers and distributors to comply), but by providing a clear and simple answer to what may well be the key question of price enforcement in 1943.
Important as quality definitions are to the price control program, they are also clearly important to the problem of stabilizing the cost of Iwing and to rationing.
We can illustrate this by the true story of the garbage pail, built to a Government order specifying the “maximum and minimum gauges of steel” which could be used in its production; an order necessarily designed to save steel. But the minimum was “too thin” to be serviceable.
Reports from the field showed that garbage pails, made under this order, wore out after only 6 days’ use.
Thus, (1) for the protection of the public, (2) for the protection of the manufacturer who wants to maintain quality as much as he can in order to protect his reputation and his customers, and (3) for the furtherance of the war effort itself, the truly “unfair competition” of viciously deteriorated quality must be controlled. And a corollary tendency, already showing itself in all markets of the country, must be likewise controlled. It is the deterioration of price lines, as distinct from the deterioration of the goods themselves.
We know from the British experience that as the familiar patterns of the distribution of civilian goods are changed, either by shortages or by rationing, there is a tendency on the part of some manufacturers to concentrate on the more expensive “long profit” lines of goods.
A potential example from our own country: With the national demand for shoes much greater than “three pairs a year per person,” and with enough money in the country to buy up all available shoes at high prices, the shoe manufacturer (as a “good business man”) may see no reason for making low-profit, low-priced shoes when he can, so easily, sell all the high-priced shoes he can make.
But there is a reason for continuing to supply large quantities of low-priced shoes, not shoddy shoes, but low-priced shoes of adequate quality.
Despite the “super-boom,” fully half the families in the United States still have total incomes of less than $40 a week. If manufacturers concentrate too much on high-priced lines, OPA will then be confronted with both a price and rationingproblem : that of insuring an adequate supply of goods of sound quality, at a price within reach of millions of American families.
How much of a problem does this present today? Reports from the Bureau of Labor Statistics indicate the following acute, shortages currently discovered by their investigators; and to quote the BLS: “These (shortages) have developed because manufacturers of low-priced lines of merchandise are now reported to be producing articles for military uses or are concentrating on higher priced goods which permit a wider margin of profit. Retailers, on the other hand, are stressing higher priced goods since low-priced merchandise cannot be sold profitably, and because the volume of sales is concentrated in higher price lines due to increased consumer purchasing.”
BLS reports acute shortages in “All lines of merchandise,” “clothing, cheaper lines” * * * “men’s work clothing,” “girls’ coato,” “part-wool blankets,” “sheets,” “furniture, particularly living room suites, bedsprings and mattresses,”-and many others.
The relation of quality control to rationing may be stated in another way: A rationing coupon promises more than a given quantity of goods. Implicit in the allocation of goods by rationing is the ability of these goods to satisfy certain needs for a certain length of time. This ability to satisfy certain needs for a certain length of time can be assured only by setting quality controls, on civilian goods, as well as quantity controls.
Summarizing the scope of the problem of quality, we find three major reasons why precise definitions of the qualities of civilian goods and some controls on quality are as essential, in this war, as quantitative controls on their production and prices.
By establishing a firm and clearly defined “quality floor” for all or most classes of civilian goods, we can prevent the production of goods which are : (1)	*	*	*	so shoddy or high-priced as to be	“inflationary” in their cost,
yet “hiding” their poor value from the buyer.
(2)	*	*	*	goods which are wasteful from the	standpoint of our resources.
(3)	*	*	*	goods which may seriously interfere	with the adequacy of ration-
ing programs.
This should not suggest any resistance to the idea of lowering many of the present qualities of civilian goods. Clearly, many qualities can and should be lowered, to further the war effort. These are, in a sense, “expendable” qualities; necessary “war-casualties.” Such “expendable” qualities fall into two classes: (1) The lowering of essential qualities of civilian goods because of war scarcities. These are designed to conserve materials and manpower. (2) The elimination of nonessential qualities, that is “luxury” qualities. This conserves materials, manpower for the production of necessities; and lowers costs for the manufacturer.
There remains, however, a third major category of quality changes : The wasteful and “hidden” deterioration of essential qualities of merchandise, undertaken by some manufacturers to take advantage of the “superboom” demand for all and any goods. Such changes, as we have seen, can waste materials and manpower, rather than conserve them, and they can be “inflationary” in their effect.
Because a large part of the swift changes now taking place in the qualities of civilian goods, whether of “expendable” qualities or otherwise, are often not visible to the casual or untrained eye, it is necessary, to define clearly and to control these changes—for the furtherance of the war effort, for the protection of the public, and of the well-intentioned manufacturer. .
(End of quotations from booklet.)
The presentation that has just been made I think rather properly closes on the point that a problem of such scope, with a subject matter of such complexity, confronts us with a series of issues that can be dealt with only in administrative terms.
Our Standards Division originated from a branch of the Consumer Division and was dedicated some months ago to the idea of protecting consumers from shoddy merchandise and hidden quality deterioration. As months have passed, and as the need for quality specifications and quality maintenance has become more and more apparent, OPA has concluded that the technique by which quality could be specified, and the methods by which quality controls might be imposed, are part of the processes of price administration and rationing control themselves.
It is this conception that has been reflected in Administrative Order No. 48, which for that reason is commended to your very careful reading from time to time as occasion permits. This order established a Standards Division. It enumerates a number of purposes that are to be served by the existence of a Standards Division somewhat in these terms; first, to establish in specific and concrete terms
the relationship between price and quality with full recognition of the fact that it is a highly dynamic situation within which such relationships must be maintained; further, to conserve scarce materials, to bring about the most efficient use of limited manpower and material and plant equipment; finally, and perhaps most important, to label the quality of items sold at retail as a device to facilitate the enforcement processes through public participation, which results where the retail purchaser is reliably informed with respect to the quality characteristics of what he is buying. (Enforcement in these terms must be considered as an additional factor, over and above specific litigation instituted with respect to a known and determined violator.)
The Standards Division itself is organized in terms of three principal branches. The first two, the Industrial Products Branch and the Consumer Products Branch, are, as their names would imply, concerned with the application of techniques to the broad categories of commodities grouped within each or those branches. A third branch, the Testing Branch, exists for the purpose of mobilizing to a maximum degree the technical laboratory facilities and equipment, personnel and staff inside Government and out, for two big jobs; first, establishing the basis on which quality standards will be defined and specified and, second, aiding in the enforcement work by a continuing surveillance of the basis upon which standards are being maintained.
Now when we visualize the number of agencies that have existed for a number of years—references will be made to them subsequently in this discussion—and when we visualize the range of commercial testing from one end of the country to the other, all of which have some part in an orderly procedure through which qualities are established and specified in the first place, and maintained in the second, something of the scope and extensiveness of the potential problem that we have here may be realized.
Solution of the next problem will require great wisdom. OPA’s number one administrative.problem is simply this: How to establish a setting in which technicians from a great variety of fields can be placed in a position to coordinate their own work to best advantage ?
Now the distinction I am trying to draw is as between the kind of work that OPA is necessarily engaged in and, let us say, the manufacturing of shoelaces, where the processes of coordination are so clear, so direct, so simple that they can be imposed from above. We are not dealing in that kind of a commodity and our objective increasingly in an administrative sense must be the creation of a set of relationships within which technicians from a variety of fields can coordinate their own work.
We do that in two ways: First, in providing the occasion in which such technicians can collaborate in developing the program. Naturally, operating Price and Rationing Branches have to determine which commodities are going to be priced or rationed, what the price and rationing technique will consist of, and the order of priority in which action in those respective fields will take place. There still will remain the job of determining what kind of technique is best adapted to any particular commodity for establishing its quality characteristics. It is at that point that the staffs of the Standards
Division must collaborate with those of the operating branches on the price and rationing side in blocking out What the program is to be, upon what assumptions it must rest, and in what order of priority individual projects will be initiated.
Our results to date, I think, are extremely gratifying. About 30 days or 6 weeks ago, a complete program statement was prepared through a committee representing the Standards Division of the Price Department, listing the categories of commodities in which price action would be taken and, in relation to each price action, the nature of the quality definition and control work which would follow. On the basis of such joint programming, it should be possible to establish our procedures in simple terms which need involve merely the assignment of technicians from the Standards Division to work with technicians on the Price and Legal and Rationing side in terms of a particular project made where all parties present have a very clear notion of how that particular project fits into a total program.
The object of the rest of the program is to indicate to the members of this group specific instances in which that kind of relationship has operated with a rather high degree of success.
(ii)	Melville Ehrlich 2
Head, Fruits and Vegetables Section, Food Price Division
I will give you a brief summary of the development of our policy on grading and labeling. At the outset last year when we put out our first regulation on canned fruits and canned vegetables we were working under extreme pressure. Crops were coming on. They had to be canned. We had to have a price schedule out. We had no information accumulated from previous years so we just had to adopt the quickest method—formula price control. In other words we had to adopt a variant of the freeze technique, which had many disadvantages in this case. It was difficult to write, difficult to understand, complicated in its nature, and dependent upon the canners’ last year’s records. Many of them did not have the proper records. By its nature it did not apply to cooperatives as they had to adopt a different system. It led to many individual adjustments. There were hardships, and if anyone found himself in a hardship during the base period, that hardship was perpetuated by that type of regulation.
When it came to grades, the most we could say was, “You compute your price under this formula for each grade as you did in 1941, using the formula for the same grades.” We did not define the grades. We could not, because in 1941 there was no uniform grading system used. There was nothing to prevent a canner from evading by changing his grade somewhat. We had no way of detecting such a situation; and there was no uniformity in the grades which bore uniform names.
This year we have a great deal of information. We have an idea of the profit picture of the industry. We know the costs in the industry. We know the levels of ceilings last year and, on that basis, we have been able in canned fruits and vegetables to move into flat
pricing by zone, by region, by can size, by variety, by type, and in addition, by grade or quality. You cannot have a flat price just for tomatoes. To' control prices adequately, you must have a flat price for good tomatoes and a flat price for bad, tomatoes and a flat price for each different grade of tomatoes. In Regulation No. 304 this year, which so far includes only canned grapefruit juice, but which is designed to cover the major portion of the canned fruits and canned vegetables, we have set up a pricing system by area, size, and grade. That makes for uniformity.
It means that instead of having uncoordinated prices, the same quality product produced in the same area, in the same size, gets the same price. In connection with the grading it becomes necessary for the purposes of proper price control and enforcement to indicate what the grade is. The most feasible way to do that is to state the grade on the label. The Grades that we have used in that regulation are the United States Department of Agriculture grades. The grading does not in my opinion impose a hardship on the industry because a very large portion of this pack will be taken by the Government. All of that which is taken by the Government must be graded according to these standards anyway, so that we merely require the balance of the pack to be graded the same way.
However, this did raise a controversial issue. We were charged with requiring labeling as a reform measure. I have been quite closely connected with the evolution of this regulation and I have seen no tendency in any part of OPA to adopt grade labeling in the regulation as a reform measure. It was adopted purely from the standpoint of effective control, in order to tag a price to a size, to a quality, and to a label, so that anyone can see what he is getting for his money and for his points and whether or not he is getting it at the ceiling price, or below.
The industry has advanced certain arguments against grading and labeling. They say the grading on labels slows production; there is sometimes a wait for an inspector. He has to take a sample, which retards the flow of goods through the plant. The argument is that the. grading slows the production. But the next argument of the industry is that the grade is not needed on the label; the grade can appear on the invoice. They consent to invoice-grading, which indicates to me that the argument is actually against the labeling and not against the grading. An argument advanced against the labeling is that it does not make for certainty of price control. It makes for confusion because you might find a product labeled grade B in a store at a higher price than a product labeled grade A, in a case where grade B happened to come from a greater distance and therefore had more freight attached. To my mind the answer is that the consumer, knowing that there is grade A and grade B on the market and that grade A can be bought at a cheaper price because it is of local origin, will know that she is getting a better value for her money in buying grade A at the lower price. Grade A at the lower price will soon leave the shelves, and there will be no further confusion about prices overlapping each other.
Another argument is that the industry fears seizures by the Federal Food and Drug Administration. When they place the grade on the label they are afraid of the possibility of being charged with
misbranding, mislabeling. That, to my mind, is an argument which stems more from fear than from reality, and partly from general unfamiliarity of the canners with the way the Federal Food and Drug Administration works. The canner can have the goods inspected by AMA of the Department of Agriculture and get an AMA certificate of grade. Now Federal Food and Drug has no independent inspecting agency of its own. It has all inspections done by AMA. Therefore, if it should make a seizure, I think the canner would stand in a very favorable position in regard to any charge which might be made against him, if he appeared with a certificate of AMA as to the grade.
(iii)	Arnold Saltzman 3
Head, Military Procurement Section, Textiles, Leather and Apparel Price Division
As you all probably know, the question of the relationship between price and quality gives rise to extremely difficult problems.
A brief history of the development of price control would begin with the Price Stabilization Committee which had general restraining powers, and continue through OPACS—the Office of Price Administration and Civilian Supply—which was set up in April 1941. OPACS functioned in a combination of ways, admonishing industry, hoping to freeze prices, at times succeeding, and in some cases fixing formal controls or ceilings on certain prices.
Under OPACS several ceilings were in fact established, in cases where quality issues were involved. These ceilings were easily related to quality standards because they applied to industries which did, in fact, sell their goods according to certain specific types and certain specific qualities, as in the case of cotton yarns or wool yarns.
However, under OPACS, spending for military purposes grew from a billion dollars a month to about two billion dollars a month and the pressures on prices and the resulting shortages in consumer goods placed even greater pressures on price, so that by the time of Pearl Harbor really explosive factors in our economy began to be clearly demonstrated, and the need for an Office of Price Administration, which would do a better job of holding prices, became clearly established. This was more true than ever after the President’s famous Blueprint for Victory speech in which he spoke of half of our total production going to the war effort and war economy. In the field of textiles and leathers, many commodities were critical in the war effort, and the possibility of rapid price increases was clearly manifested.
The Office of Price Administration then embarked on two programs. The first one was the setting of specific ceilings for commodities where qualities and standards were easily demonstrated and easily set—e. g., cotton gray goods under Schedule No. 11 or 18 or raw yarn gray goods under Schedule 23. At the same time, however, we faced the critical problem of commodities that were under the base freeze—a large number of textile commodities, many leather commodities and practically all clothing. The problem under base freeze regulations—the large problem, even larger than that of
price—was in our opinion that of quality. Since the price itself has little meaning except as a measuring rod to evaluate qualities which satisfy human wants, the important job is to fix the standards, to set the qualities, and then to freeze the measuring rod or price in terms of those qualities and against the commodities which satisfy our wants. Aside from the specific regulations which were relatively easy to tie to standards because the industry had already been functioning under that set-up, we faced the problem of what to do with items like clothing.
A typical example of a regulation in the clothing field was the Women’s Clothing Regulation, No. 153. Here the formula type of control was evolved and the quality standards were indirect in the form of fixed amounts of labor and raw materials that had to go into any specific price line or any specific price for the commodity that was controlled. As the months went by and as we viewed the control under that regulation, it became more and more clear that a formula type of regulation with only indirect standards or qualities to which the price was pegged, was thoroughly unsatisfactory. It was unenforceable to a large degree and confusing to the people who were endeavoring to operate under it. We recognized that we had to change our policy to one of establishing fixed dollar-and-cénts prices for specific qualities.
I have spent most of my time on military goods, goods the Army and Navy and Lend-Lease purchases, which are all produced in relation to very clear standards; consequently the obvious advantages of price control in that kind of field were particularly clear. We attempted to develop the same techniques in other areas. After literally months of arduous labor, with the help of all of the people who aid the Price Department and all of the Government agencies in setting up standards for price, we finally evolved what I think is the typical example of what our Division feels is the ideal form of control—the rayon hosiery regulation which will be issued in a few days.
That rayon hosiery regulation accomplishes several things. First of all, it sets up specific controls, specific standards, for the most desirable types of hosiery. In doing so it utilizes the industry’s full productive capacities and the industry’s full capacities to absorb the raw materials that it needs in order to produce this product. We have specific dollars-and-cents prices based on cost and price data which are linked to the standards that have been set up.
There are literally hundreds of constructions that are priced. Furthermore they are priced at the manufacturing, wholesale, and retail levels so that there is control both of quality and of price all the way down the line from manufacturer right to the consumer, which is once again in consumer goods the most desirable from of control.
Mr. Keezer touched upon disguised price inflation. Where initial cost is in no way an indication of the total cost to a consumer for that commodity, it simply means that if you buy a pair of stockings which lasts a month for $1, you might perhaps be much better off to buy a pair which lasts a month and a half for $1.05. Incidentally this is not a backward way of saying that our regulation has raised the prices. As a matter of fact, in this commodity we have lowered them sharply. Nevertheless we have provided for premiums that can be charged for specific long-wearing qualities. Thus a manufacturer

might perhaps charge a quarter a dozen more for putting cotton feet on a given grade of rayon stocking. This quarter a dozen might be translated to forty or perhaps even 50 cents per dozen in some cases at the retail level, but any women who wore the hose would surely testify that the added wearing qualities were worth far more than the premium.
Another requirement which has been made in this regulation is labeling or preticketing. We have provided that the manufacturer will stamp the price, and the standards against which he prices, right on the stocking, so that there will be no case in which the consumer will not know the ceiling price and the standards or qualities against which this price is paid. A further point of assistance in quality control and pricing embodied in this regulation is penalty pricing for less desirable qualities of rayon hosiery. In so doing we hope to drive out of the market the least desirable constructions which perhaps carry a slightly lower price. In some cases they do not carry lower prices, but in any case they are less desirable to the consumer from the viewpoint of wearability and durability and general satisfaction. We are going forward in the same direction with work clothing, with work gloves, with underwear, with shirts and socks, and with a number of other commodities on which we have reports that quality deterioration has taken place throughout the country.
.1 might touch on one other regulation «that provides a quick, easy mechanism for translating down to the consumer level lower costs resulting from substitution. This regulation provides an automatic price decrease when carded yarn is used instead of combed yarn in underwear, since carded yarn is a less desirable and less costly type of yarn. These substitutions are a result of the war program; but there are two types of quality deterioration which may occur; the first is avoidable, and may represent evasion; the second, such as the substitution of carded for combed yarn is unavoidable. Where an unavoidable cheaper substitution occurs, it is clear in our Division that an automatic price reduction should be passed on to the consumer. This has been done.
Generally, then, we have three types of regulations: those under which dollars-and-cents pricing has been established with relative ease because the industry is set up that way; those, like the rayon hosiery-regulation, where we had to do a laborious job to achieve the standards and then peg the prices to them; and those which provide a quick formula for translating down to the consumer a reduction in price for an automatic reduction in quality.
(iv)	Dickson Reck4
Chief, Consumer Commodity Branch, Standards Di/vision
We have already had examples of standardization in textiles and foods. We might as well have had examples from any branch of the use of standards, because I do not believe there is any Price Branch which has not had occasion to use standards. Obviously, almost all the regulations Concerned with raw materials, producers’ goods, chemicals, etc., have been based on specifications or standards. Since last
fall, when we embarked on specific price regulations as opposed to base-period regulations—I think there were 21 such regulations issued between the first and the middle of September 1943, and in the two following months another 15 or so—standards have been developed for treadable tire casings, tire repair service, bed springs, dry edible beans, rubber drug sundries, used household vacuum cleaners, antifreeze compounds, exterior house paints, wax paper, flannel work shirts, ice refrigerators, porcelain enamelware, safety shoes, used washing machines, and kraft wrapping paper. You can see that we have covered almost every kind of commodity.
I think that there is a good bit of confusion, not only in OPA, but everywhere in the country, about the concept of standards. I would say that a standard is simply a definition. To show how the form and content standards vary, I would like to give some, specific examples. First of all, in the standard of quality for the base-period type of regulation, it is possible only to enumerate or list the factors that determine serviceability. To list those factors without putting any specific values opposite them makes it the responsibility of the manufacturer to find out what the quality values are and to use them in his pricing method'under the regulation. In the case of specific dollar-and-cents regulations not only are the factors that make for serviceability listed, but qualitative values are put on these factors. To illustrate, the standards in an apparel regulation which w’as issued last summer are enumerated as follows:
(3)	A garment shall be considered the “same” as another when: •
(i)	The garment belongs to the same classification (as defined in § 1389.217) ;
(ii)	The garment contains body material which is the same with respect to (a) construction, (&) weight and thread count within the tolerances of the Worth Street Rules, (c) finish, including shrinkage treatment, and (d) color fastness;
(iii)	The garment consumes substantially the same average yards per dozen and has substantially the same body dimensions;
(iv)	The garment contains trimmings of fairly equivalent serviceability;
(v)	The garment is constructed and assembled with the. same standards of workmanship and inspection. Differences in color which are ordinarily the basis of differences in price shall be disregarded.
Later, men’s cotton flannel work shirts were put under a specific regulation which now reads:
* * * Dimensions are “standard” when the average yardage consumed per dozen shirts throughout the size range is not less than the following: (i) 29 yards for shrunk fabrics in men’s regular shirts;
The shirt must not only be the same price as previously, but the regulation says what size it must be—29 yards per dozen. It says that stitching shall not be less than ten stitches per inch. It actually gives the number of stitches.
We are principally concerned with standards which define actual quality for the country as whole, so the rest of my discussion will be centered on that type of standard. The form and content of this type vary considerably. Standards can be defined in terms of construction or in terms of other factors. And, generally speaking, if it is possible, we define the standards for the particular commodity in terms of what the product will do, or its performance, design, and production methods. Style is one factor which we cannot include in a standard. To
quote an example, OPA’s method of testing the wood springs that are replacing steel springs is based on performance, depending mainly upon a certain impact, and a certain static load test. As a matter of fact, the standard does not specify wood springs, so that if a manufacturer could use plastic materials and still meet these performance levels, it would be a matter of indifference to OP A. The standards for beds using steel construction specifications are enumerated as follows:
Number and type of coils—80, 81, 88, or 90 single deck.
Gauge and kind of coil wire—Minimum: No. 12 high carbon spring steel wire.
Top assembly—Crimp wire.
'Gauge and kind of border wire—Minimum: No. 3 low carbon steel wire.
Frame—To be adequately braced and composed of the following members: Side rails—maple, oak, ash, or wood of equivalent strength and serviceability.
Cross members—9 for 81 coil bedspring, 10 for 80 or 90 coil bedspring, and 11 for 88 coil bedsprings ;	maple, oak, ash, or wood of equivalent
strength and serviceability, assembled with side rails by mortise and tenon or by notched and lap joint connection.
Frame finish—Baked enamel with sealer undercoat; or a finish of equivalent quality.
Weight of wire (not including hardware and accessories)—Minimum: 20 pounds.
The regulation goes specifically into the construction details of the bedspring. As new methods are found, or new constructions are developed, these specifications are still very useful for the purposes of the OPA.
Another problem is that a standard may cover one article, or it may cover a great number of them. For example, there is the order on smelts. After distinguishing the smelt from, the carp and other fish, it goes on to specify grades simply by the length; “7 inches or more in length.” That happens to be important. It is impossible to go into other factors. In contrast to that I am taking another food product, beef, the specifications for which go into great detail on points of edibility, tenderness, etc. They cover two and a half pages. The Department of Agriculture specifications were used in this order. Standards are also specified for the different cuts.
Another point is that standards should also be written in terms that will provide a basis for testing the final product. For example, some time ago the War Production Board issued a standard on certain rubber products which specified only the amount of crude rubber which could be used. It was not useful for purposes of price regulation because there was no way to measure the amount of crude rubber in the final product by subjecting it to any known test. We would have to go into the plant and watch them compound every batch. To cure this defect, we developed a standard for rubber heels which is currently used in the price regulations. It covers the abrasive index and tensile strength, both of which are closely related to the serviceability of the heel and both of which can quite easily be measured in a sample of the final product. This determines whether the actual grade is VI, V2, V3, or V4.
Another important factor is how the standards are used in price orders. In the canned fruits and vegetable regulation, all the existing varieties, covering a wide range of quality, are classified. All of them
which fall in the top standard are grade A ; in the middle standard grade B, and the lowest standard grade C. Standards used in this way are not based on production but on the quality of the product. Such standards are often called grade standards.
Standards can also be used to simplify the pricing problem and rearrange production. For example, in the rayon hosiery order, the standard was written establishing one level for well-constructed serviceable rayon hosiery, and after April 15, 1942, there will be one price for each type of hose in this upper level. The prices of hose that do not meet the standard are lowered by 25 percent. Their construction will have to be changed to the more serviceable construction which does meet the standards to obtain the better price. In this instance production is directly affected and some varieties are eliminated. Simplification is also achieved. From the viewpoint of WPB, it is a question of getting better use out of resources.
It is extremely important that we all are not confused by the idea that the use of standards in this way means regimentation or putting people into uniforms. I think the best illustration is the English Utility Program. In England they have “utility models” (we call them “war models”) which use exactly the technique I have described. Yet, in women’s dresses, which are part of this program, there are all sorts of varieties, all sorts of colors, all sorts of styles. All that has to be done is to eliminate shoddy goods at one end and wasteful luxury goods at the other end, leaving the middle range of serviceable constructions. They do not say how the garment shall be cut, styled, or designed ; they specify only the factors that make for serviceability. Thus, for the consumer there is as much variation as before. In fact, consumers will probably not notice standardization at all.
Labeling, when used in connection with specific price regulations, is a technique for facilitating enforcement. It has been required in quite a number of regulations. Outstanding examples are the canned fruits and vegetable order and the rayon hosiery order. In the latter case, thè gauge or needles which distinguish the quality and type of construction have to be noted on the label. The purpose of this is, obviously, to make enforcement easier. The consumer will be able to identify the quality. And in this case she will also find the retail price. The manufacturer is required to put the retail price on the label. Thus the consumer will be able to recognize a violation. Occasionally the hose should be tested to make sure the marking has been put on correctly. This marking is done by the manufacturer,, who has all the information on hand for doing it. Labeling of canned goods and vegetables, insofar as OP A uses it, is simply for enforcement. It is not, as many people have maintained, a reform measure.
I will say a word about our plans for the development of standards. We have worked out with a number of the Price Branches—-Consumer Durable Goods, Textiles—plans for developing standards of the “war model” type. In connection with most of the regulations that these various Branches expect to issue within the next 3 to 6 months, we plan to continue this cooperative method and hope to establish this work in the other Branches. We are trying to make the best use of our limited resources and your own.
It is very important to have some understanding about how standards should be developed. It should be remembered that all agencies throughout the world—the American Standards Association in this country, the British Standards Association, the German counterpart of that, and the Russian counterpart—use fundamentally the same procedure for developing standards. It includes the concept that a standard is not likely to be useful unless in its development all parties of interest have a chance to contribute. The producer or manufacturer and the user—either the ultimate user or the industrial user— should participate when a standard is developed. Usually, the question is considered in a committee and the consensus of the committee is arrived at before the standard is promulgated.
We must cooperate with the Federal Trade Commission, receive its criticism and comments, resolve the difficulties as best as we can, and then issue the standards.
The standard is most useful if it is measurable and understandable to the ultimate consumer or the industriar consumer. The materials available for producing the commodity must also be considered very carefully, so that while many manufacturers may have to alter the construction of the product to make it more serviceable, there should not be a machine in the country that could not be used.
A third general principle is that a way must be devised of reviewing standards and revising them whenever there are changes in machine facilities, manpower, or the needs the commodities must meet. That is fundamental to the problem of developing standards. In general, wê operate on the principle that the basic materials such as data, specifications, and technical competence for organizing technical data are to be found in various places, such as the American Standard's Association, retail laboratories, university laboratories, and among industry and trade groups. The need is to devise means of utilizing these materials in one operation, to analyze and sift all the data which most nearly meet the price or rationing need here, and then apply it to the OPA problem.
(V). Willis S. MacLeod 6
Chief, Technical Operations) Standards Division
I am frequently asked, “How can the Standards Division, this small technical division working with the people of the Price Department, carry out so large a problem?” The obvious answer is that we must mobilize all the technical capacity and assistance that we can possibly get throughout the country, if not throughout the world. With this in mind, what we have done in the Standards Division and in some of the Price Divisions is to work out with the existing Government agencies the plans whereby their technical staffs will be made available to us and give us whatever data they have collected throughout years of research work. For example, it was mentioned that we are using the Agricultural Marketing Administration grades in our canned foods and vegetable order. We have made arrangements whereby their technicians could be“ loaned to us to help work out the problems in that area. We are also working very closely
• Delivered March 17, 1943.
with the Food and Drug Administration. From time to time, they have helped us work out problems in the food and drug field. We are also utilizing the Bureau of Animal Industry. In textiles and other commodities,.we are working very closely with the National Bureau of Standards and the Bureau of Home Economics. Their laboratories and technicians are being made available to us on specific assignments—to help determine the quality values that we need to define textile products. We have also had cooperation from the Federal Trade Commission, the Quartermaster Corps, and the Forest Products Laboratories.
It is obvious also that we will never be successful in developing our standards unless we take into account the fact that we must have close contact with industry technicians in applying standards to the industry affected. We have, therefore, made arrangements to ask the industries to assign a technical person to work with us. We hope that we can work out standing technical committees from industry to help in developing dur standards program. They will in all probability be assigned to the Price Department and Industry Advisory Comimittees, so that we will be able to resolve the quality expected under a price regulation prior to an Industry Advisory Committee meeting, where both the quality and price will be discussed. Advisory committees reflect the viewpoint of the industry itself and will accept the recommendations without a great deal of difficulty.
The OEM worked out a joint contract permitting OPA expenditures up to $30,000 per year with the American Standards Association, which in this country is solely recognized for promulgating “American Standards.” OPA, through that contract, makes use of the regular committees of that organization, composed of representatives from industry, distributors, retailers, and users. These committees work out the quality definitions necessary. An outstanding assignment is the recent one on standards of men’s and women’s safety shoes. It represents really the first nationally applicable standards that have been developed in the shoe field. We have used the American Society for Testing Materials, the Society of Automotive Engineers, and other groups that have standing technical committees developing testing products and standards and resolving technical problems in the standards field. Our relationship with WPB is a more complicated problem. Mr. Reck indicated that OPA has essentially the authority to define and classify commodities and write these definitions and classifications into price regulations. That really means that We can deal with all commodities being produced, but we cannot make any adjustments in respect to limiting production or setting up mandatory requirements as to types, sizes, grades, etc., of commodities. The authority for. production limitation rests' exclusively with the WPB. Consequently, when we move, into the field of a “war model” program where we desire, by selection, to specify and. price a fairly narrow segment of the commodity or where there is a group of commodities which are extremely variable and impossible to price specifically without narrowing the field properly, we have to look to WPB for assistance to obtain that limitation of production.
Our most direct contact is with the Conservation Division of WPB, particularly the Standardization and Simplification Branch. There we exchange our project outlines and decide to whom specific projects shall be assigned. We meet regularly with the director of the division to discuss our joint programs and we exchange our project reports so that we have a close working arrangement there. To a lesser degree we have worked out a program with the Industry Branches under which we can operate to mutual advantage. OPA has a very heavy interest, as you know, in the field of concentration, and there we are represented in the Subcommittee on Standardization and Simplification working under the Committee on Concentration of Production. We are working out the types and varieties, etc., of the items which will be produced in the event any concentration order is enacted. There are about 20 project committees on various commodities, working out standards and specifications for concentrated production. These Standards will be directly applicable to specific OPA price regulations when concentration is put into effect.
To get additional assistance on the entire program, we have set up an Inter-Governmental Advisory Committee from all of the Government bureaus which are doing this type of work or which have the technical capacity to do it. There again, the Bureau of Standards, the Bureau of Home Economics, Customs, Laboratories, WPB Conservation Division, and the Federal Trade Commission are represented. We have also asked that a Consumer Advisory Committee be set up so that we can ask the consumer to advise us in preparing those standards.
Experience has shown that, if the Price Department formulates a program and the Standards Division is called upon in the early stages of the regulation, the deadlines can be met.
X. LEGAL ASPECTS
1.	FUNCTION OF THE PRICE LAWYER IN THE OFFICE OF PRICE ADMINISTRATION1
Harold Leventhal
Assistant General Counsel, Industrial Manufacturing and Fuel Price Legal Division
The best way to approach the question of the function of the price lawyer in the Office of Price Administration is to examine the nature of the Office of Price Administration and, in particular, to take note of the fact that it is an agency which is making laws. Every time that it issues a maximum price regulation, it is issuing a law, because a regulation by a Governmental agency, if it is valid, “has the force and effect of law.” Persons who violate the regulation know that in extreme cases and sometime in the future, they may be sent to jail or made to pay a criminal fine, and that they are subject to treble damages and other sanctions.
When an agency is involved in the process of making laws, many of its actions involve legal questions. Just what do you have to do in order to make a law ? How do you write it up ? What do you say when you issue it? Where do you file it? How much notice of it do you have to give in order for it to bind people who are subject to it? Not all those questions are hard questions, and many nonlawyers can answer them, but the fact is that they Are all legal questions. The agency cannot be sure that it is acting correctly or legally unless it receives competent advice and direction as to the requirements of the law. In general, that advice and direction must come from lawyers.
The legal questions raised are very often delicate and troublesome, and sometimes their proper resolution involves delay. Naturally, the lawyers, in order to write an effective regulation, must give consideration to its business and economic aspects, so that it is not at all unusual to find that some of the nonlegal gentry in our Office have speculated both to themselves and aloud as to just what the function of the lawyer is or should be. But that is an issue which arises not only in OP A. It arises in many other places and it has not appeared in 1942 for the first time. The law, and lawyers, the role of law, and the role of lawyers, have been topics that have provoked men for many years to say things that are witty or wise, to the outpouring of praise and the heaping of vituperation.
I should like to recall to you certain of the more famous passages about law or lawyers. One that is particularly amusing, you may remember, is the jingle of the judge in lolanthe who said:
The Law is the true embodiment Of everything that’s excellent; It has no kind of fault or flaw And I, my Lords, embody the Law.
1 Delivered February 16, 1943.
280
Of course, that is a rather prejudiced viewpoint. In Oliver Twist? Charles Dickens has a wonderful passage in which it is explained to poor Mr. Bumble that he has responsibility for his wife’s commercial acts because the law of England at that time presumed that a man had full control over his wife’s acts. “If the law supposes that,” said Mr. Bumble, “the law is a ass, a idiot.”
This difference of opinion holds true for the lawyers as well as the law. William Shakespeare in one of his plays has a character say, “The first thing we do, let’s kill all the lawyers.”
And Sir Thomas Moore wrote in his great work Utopia, about his perfect country, which needless to say was fictitious: “They have no lawyers among them, for they consider them as a sort of people whose, profession it is to disguise matters.”
Now, for my part I take it as consolation that de Tocqueville, a-great Frenchman of the 19th century, whose book Democracy in America is a penetrating analysis of American government, said, “I cannot believe that a republic could subsist at the present time if the influence of lawyers in public business did not increase in proportion to the power of the people.”
Now, in this grand and cosmic setting of wit and philosophy, L should like to talk about the humble little lawyer attached to the Price Divisions of OPA.
It may be helpful to give brief attention to the structure of the Legal Department as a whole. The Legal Department mirrors, in a sense,, the whole organization of the Office of Price Administration. There is a Rent Department in the Office and there is a Rent Division in the-Legal Department. There is a Rationing Department in the Office and a Rationing Division in the Legal Department. There is a Price Department in the Office and there are four Price Divisions in the Legal Department. Each Price Division in the Legal Department is headed by an Assistant General Counsel, of whom I am one. For example, I am the Assistant General Counsel of the Industrial Manufacturing and Fuel Price Division of the Legal Department. The officials in the Price Department with whom I work and who have a comparable rank in Price are the Director of the Industrial Manufacturing Division and the Director of the Fuel Division. In general, we have a break-down of lawyers assigned to work with the Price Department, Division Directors, and Branch Executives. Above the Assistant General Counsels there is an Associate General Counsel, and the next step in line is the General Counsel.
That is enough for the generals. I think we want to get down to the army which does the real work in the various commodity branches, t The head of the legal commodity branch is called the Chief Counsel,, a position in the Legal Department comparable to that of Price Executive in Price. There are commodity branches in the Legal Department corresponding to all the commodity branches in the Price. Department. For example there are branches called Machinery, Petroleum, Iron and Steel, Meats, Fats and Oils, etc.
I might say a word about the nature of the responsibility of the Chief Counsel of each of these commodity branches. The Legal Department has more or less decentralized its operation so that the Chief Counsel is authorized to speak for the Legal Department, and any
of the people in the Price Department who have conferences with him may rely upon his statement as the expression of the Legal Department. The Chief Counsel is supposed to get clearance on general matters from the Assistant General Counsel or the General Counsel, but that is all to be done before he undertakes to speak for the Legal Department. I am not attempting in any way to discuss the complicated network of the lawyers in the field, their organization, or their functions.
The key job done by the Price lawyers in the national office is drafting regulations. It is also the most time-consuming job and, of course, it extends not only to regulations but also to amendments of regulations, which are the primary work today.
The function of the draftsman involves more than just setting one word down after another. It involves the analysis of data and the application of principles to the data; but for the moment I shall speak only of the more narrow job of drafting—that is, of actually setting down words in regulation.
There are various requirements that a regulation must meet. In the first place, a regulation must contain effective legal wording to prohibit the doing of certain acts or to require the. doing of certain acts. The Emergency Price Control Act under which we operate does not do a thing as it stands; that is, it contains no prohibitions and no requirements. It is brought into life and into being only by the issuance of maximum price regulations under that Act, and the regulations themselves must contain legally adequate wording to prohibit acts or to require acts.
One of the legal requirements which the draftsman must keep in mind is that a regulation would not be lawful if it were so indefinite that it did not give reasonable men fair notice of just what they were supposed to do. I might recall to you that willful violation of these regulations leads to fine and imprisonment, and that there is a general doctrine that a criminal statute is not valid unless it gives clear-cut notice to the people subject to it of what acts are made criminal by it. It is on this ground that the Price Control Law—the Lever Act of 1917—was held unconstitutional by the Supreme Court. That Act prohibited anyone from charging “unreasonable” or “excessive” prices. That was all that was done in the Act to define what prices were unlawful. The Court held in an opinion rendered shortly after the end of the War that these words w’ere too indefinite to give men fair notice of what was made a criminal act and so the statute was held unconstitutional. We are not subject to the same restrictions as imposed by that case because we do not rely on such indefinite restrictions as merely prohibiting “unreasonable” prices, and we issue specific regulations. But that case reflects the type of consideration which the draftsman has to have in mind in order to issue a sufficiently legal regulation.
I would say, as a matter of analysis of what the price lawyers are trying to do, that they are going far beyond the requirements of being merely legal and that we have a large-scale program under way to make our regulations more intelligible to the ordinary reader. I suppose people who looked at our early regulations might be skeptical about this but it is definitely a trend which has developed now, particularly as our regulations are being projected at the retail level
and govern large numbers of people. The general simplification program is under the supervision of Mr. David F. Cavers, who is on leave from Duke University Law School. Now when the price lawyers go about simplifying a regulation they call it “Caver-izing” a regulation, a term of art which may get into Webster’s Dictionary.
While I am on the subject of simplification, I would- like to depart from the topic of the lawyers’ role for a minute to say that simplification really, as far as this Office is concerned, requires more than simplification of language. It will require a very definite simplification of rules of operation, and the rules we prescribe must be abided by. That is primarily what is going on now with respect to the retail food regulations. That is also the policy applied whenever we issue dollars-and-cents regulations, since those are usually the easiest to understand.
I would suspect that, in a country as complex as ours, no matter how much simplification we achieve, some regulations are going to be complicated. They are going to be more complicated than people like, regardless of the best efforts of the Price Department, the Legal Department, the Business Specialists and everyone else concerned. Certainly, however, we are all anxious to do as much as we can to make our regulations more intelligible to the average person and it is worth the expenditure of a considerable amount of time. It is worth much more time to simplify a regulation already issued than to issue another regulation which will not be understood.
After the regulation has been issued, the Price lawyer has the task of interpreting it. I woud like to make the point that interpretation of a regulation is an art, and is more than a matter of repair carpentry. There is very frequently an impression that if a regulation is inadequate, we can somehow fix it up when the time for interpretation comes around. That is a delusion. There are very definite limits and restrictions as to what can be done in the matter of interpretation.
First, I would like to analyze why I think certain regulations need interpretation. There are regulations that are ineptly worded, and accordingly not understood by those who read them. There are regulations that are perfectly well understood by those who read them but are wilfully misunderstood. There are none so deaf as those who will not hear, and people frequently raise questions about provisions concerning which there is really no question. I think the structure of our Office is such that we have to answer those questions as though they were raised in good faith, though we sometimes have reservations. Then there is the fact that the industries we control are so complicated, there are so many people in them doing so many different things or doing the same thing in so many different ways, that frequently the regulation which we issue has made no provision one wav or another with respect to something that is going on somewhere m the" land. Then we find the regulation has to be interpreted one way or another. It permits a certain action to be done or it does not. That permission has to be stated by way of interpretation. I think those are the most difficult questions of interpretation.
There are many doctrines of interpretation.. Even a first-year law-school student can find some doctrine of interpretation they are all set forth in books—to support you any way you want to go. Indeed, some lawyers use doctrines of interpretation m the same
way that a drunkard uses a lamp post—for support rather than illumination.
But the actual working out of these doctrines, reconciling them, and getting to a concrete result, involve legal work of considerable difficulty and professional importance. I think the most basic doctrine that the lawyers in OP A apply is one which has developed in the last 10 or 20 years—that a regulation should be construed so as to give full effect to its purpose. That is, it will be interpreted in such a way as to do what it was intended to do when it was issued. That is a doctrine which we lawyers are willing to push to the hilt. I think it is entirely appropriate, whenever a question of interpretation comes up, for the Business Specialist or commodity expert to point out that such and such is the interpretation which was intended when the regulation was issued or which will best effectuate what they are trying to do. That will have great weight in construing the regulation that way.
On the other hand, perhaps an even more basic doctrine is that the regulation must give fair notice to people of what they are expected to do. For example, if we issue a regulation and by a typographical error a price is stated which is a dollar higher than the price we intended to allow, no matter how much we tried to correct that we could not correct it by interpretation, because $10 is not $9. The rectification would have to be made by actual amendment of the regulation.
I think some of the lawyers may be interested in a famous opinion which bears out the point that clear notice has to be given. There was a case in which the defendant had been guilty of transporting a stolen airplane across State lines and there was a statute which made illegal the transportation of stolen vehicles. It was argued for the Government that an airplane was a vehicle because it had wheels, but the Court held that an airplane is not what is normally meant by the word “vehicle” and it was not going to construe the language beyond the reasonable meaning which people expect from a word like “vehicle”.
I might also add that a lot of words not only have a meaning in terms of common understanding which has to be upheld, but also have legal meaning because of the various court decisions which have used the word in a particular way. Thus provisions or regulations which use words like “sell” or “delivery” have to be interpreted in the light of a very considerable body of judicial decisions on the meaning of those words.
The most difficult set of interpretative questions that we have are the questions of evasion. Our regulations contain standard clauses that prohibit anyone from doing indirectly that which cannot be done directly. In addition, many of the regulations have many specific practices that are prohibited. I may mention the regulations issued in the Lumber Branch, as an example of those. But the fact is that we could never really get a list long enough to match the ingenuity of the people looking for ways around our regulations. We have, therefore, to be able to stretch the literal meanings of the words we have used to cover practices that are really only ingenious, or perhaps ingenuous, attempts to get around our regulations.
We should bear in mind that the interpretation which we give to a regulation can be tested in practically any court in the land. We have a provision in our Act which requires anybody who is going to object to the validity of a regulation to bring his objection to a special court, the Emergency Court of Appeals, but that is not required of a question of interpretation. Any time you bring a suit against a person to enjoin him from continuing his actions on the grounds that he is violating the regulations, and suit can be brought in any court, he is entitled to raise the objection that he has not violated the regulation because he has not violated the regulation as correctly interpreted; the court would then proceed to consider the correct interpretation. That makes the whole problem of how much we can really do by way of interpretation and ' how much we can stretch the meaning of the language of the regulation by interpretation that much more difficult, because there are so many courts that can disagree with our interpretation.
There is a general doctrine to the effect that the interpretations which an agency itself renders can be given “great weight” by the courts. I have had a fair amount of experience on interpretations of administrative agencies and I have rarely seen a court that gave those interpretations weight when it had a feeling that it really knew how the regulation should be interpreted.
Revised Procedural Regulation No. 1 contains specific provisions with respect to interpretations. It provides that the only interpretations on which a person is legally entitled to rely are interpretations rendered in writing and rendered by one of several designated officers of the agency, specifically the Administrator, thè General Counsel, an Associate or Assistant General Counsel, a Regional Price Attorney or a District Price Attorney. Of course, the Price Department can make statements about a regulation. The Price Department may render explanations as contrasted with interpretations. The line between those is somewhat hazy, and perhaps necessarily so. Certainly the people in the Price Department have to make certain statements in the course of their work as to what the effect of a regulation is. But I think it would be pretty safe to say that, if an inquiry is made specifically with reference to the meaning of a regulation as applied to a certain state of facts, no matter how simple the answer is, the best approach would be to regard such a formal inquiry as a request for an interpretation. That may be too broad as I have stated it, but I think it would avoid many questions that might otherwise arise.
I might also mention that there is a general Office policy of decentralizing interpretations. The volume of the interpretations rendered by this Office in any month runs into the tens of thousands. I don’t know whether we in the Washington office realize the very considerable volume that exists, because so many of those requests come to the field offices and are answered there. Of course, with such volume you just have to set up field offices to handle them. The national office should be free from those requests in order to perform other functions which the field offices cannot handle. But once you say, as we have said, that interpretations should be rendered in the field, you cannot at the same time continue to render them out of Washington. If you do that, you encourage people to “shop around.” If they go to field offices and get interpretations which they do not
like, they come to the Washington office. They may not tell us as much as the field office knows and, upon the basis of what they tell us the Washington office may give them a more favorable interpretation. That state of affairs is intolerable if the Office is to operate in a clearcut fashion. And so it has been decided that, as a practical matter, every case that comes into the Washington office should be referred to the field. If the field cannot answer it, it is appropriate to write a letter of explanation to the field or a memorandum indicating the correct interpretation.
There are some exceptions to that rule. Inquiries from Congressmen come into the National Office and are answered there—also inquiries from other Government agencies or national trade associations, or communication^ which are tied in with other work done by the National Office, such as the granting or denial of a petition.
The third basic function of the price lawer is that of giving clearance upon the validity of the regulation under the standards of the Emergency Price Control Act and the amendment to that Act of October 2, 1942. The Emergency Price Control Act of 1942 has two basic standards. It requires that a maximum price regulation must be generally “fair and equitable” and that it must “effectuate the purposes of the Act.” As you all know, in the first section there is a listing of the purposes of the Act. The Act also specifies certain subsidiary standards. It directs the Administrator to take into account the prices prevailing for any commodity on October 1 to 15, 1941, and to make adjustments for changes in costs and changes in profits. These standards are very broad and leave a considerable amount of discretion to the Administrator, but this discretion is not limitless. It has legal limits. For example, unless the Administrator states that it is not practicable to take October 1 to 15 prices and changes in costs and changes in profits into account, he is required to state that he took them into account and how he took them into account. The question of the standards being applied by the Office were touched upon in Mr. Wallace’s speech on price criteria. It is not my purpose to go again into what he has said but merely to make the point that you must show how you consider profits and costs and what consideration you give to them in order for your regulation to be valid.
In addition to legal questions as to conformance to these standards, there are special provisions in the Act which impose legal limitations. We are all familiar with the provisions governing agricultural commodities, which require certain price standards to be followed. There is also the provision of the Act which excludes from our control certain commodities (e. g. newspapers).
Then there are many complicated legal questions as to what this Office can do by way of issuing regulations that do not relate to maximum prices as such, but control industry practices which might be used to circumvent price regulations. For example, can we. in this Office prohibit an industry from changing the style or quantity or quality of the product? Changes of that sort make price regulation impossible. That type of question goes to the very limit of our legal powers, and raises the most difficult legal questions.
Last summer this Office issued Commodity Practices Regulation No. 1 prohibiting manufacturers of soap from changing the size of their various bars and packages of soap, insofar as packaged soap
was concerned, and prohibiting them from changing the quality. It was supported partly on the ground that if the soap manufacturers continued to be able to change size and quality freely, price control would be impossible, and partly on the ground that such changes constituted a means of evading the price regulation.
The question of whether a regulation of that sort, or even broader regulations, could be issued for any other industry would depend upon the facts of that industry. We made a fairly careful analysis of those facts in the question of soap before we issued that regulation. It occurs to me there would be some other industries, not necessarily all, in which similar regulations could be issued.
I might also mention another type of question which came up recently in connection with the manufacture of wooden bed springs to take the place of metal springs. Inquiry was directed to me as to whether we could prohibit.the manufacture of wooden bed springs which did not meet certain quality specifications. The answer was pretty clear that we could not. The War Production Board would have that authority; the Office of Price Administration would not. But we could require that the bed springs involved be subjected to a quality analysis test so that we could determine what price might appropriately be set for it. We have then required that the bed springs be subjected to a quality test before application is made for a maximum price governing the new model. We cannot, however, require that it pass the test before it is allowed to be produced.
I think it is important to point out that, in considering the question of validity, there is more than one forum in which those questions can be raised. The Act itself sets up the Emergency Court of Appeals, where the validity of a regulation can be tested, but perhaps even more important than that is the fact that the validity can be questioned by Congress, particularly Congressmen or Congressional committees. This, of course, has already happened. The validity of a regulation can be raised as an issue in the public newspapers. Finally, all of us in this room have a responsibility as employees of the United States Government—some of us have additional professional responsibility as lawyers—to make sure that we are not doing anything exceeding our powers under the Act.
Closely related to this problem is the question of Statements of Consideration. An integral part of the function of the Price lawyer is preparing or supervising the preparation of these statements. The Act itself requires that, whenever a price regulation is issued, the Administrator shall also issue at the same time a statement of the considerations involved in its issuance. Even apart from that requirement in the Act, there is a fundamental rule of law that action by administrative agencies is not valid unless based upon facts. It is imperative that our action be based upon facts or factual information if it is to be sound and valid.
If there is an issue of fact, and there is conflicting evidence as to how it should be settled, the Administrator will be upheld by the. courts, whichever way he decides. There is a standard doctrine that an administrative determination of fact is correct. But that doctrine has in general been evolved with respect to an administrative agency acting upon the basis of hearings. Our Act does not require hearings, and we can issue regulations without going through
hearings. Our Act has provided that, instead of holding hearings, we should issue a Statement of Considerations, because in order for an agency to issue a Statement of Considerations, it must show that it is acting upon the basis of an informed judgment, and not upon the basis of mere intuition or whim, and that is, after all, the primary purpose of a hearing.
This might be an appropriate place to go into some basic questions of administrative law. The most basic doctrine of administrative law is the one I have just mentioned—that the Administrator or the agency, or both, cannot take action upon the basis of mere intuition or whim, and without facts. Under our system of government, we do not tolerate a bureaucracy which has no restraint in its powers. The Legislature which sets up the agency must indicate certain limits to guide its actions. Sometimes the standards prescribed by the statute may be very broad. In wartime, it is even more permissible that they be broad, and our Act is an illustration of how broad that delegation can be. Thus, an agency like ours starts off with a relatively clean slate as to what we can do, subject only to what has already been written on that slate by Congress. But before we take any action we must write on our slates. We have to decide what our general theory of action is, and once we have done that, we have to take our subsequent actions in the light of what has already been written by the agency itself.
Another way of saying the same thing is that the law requires substantially equal treatment to persons in substantially the same situation, and the Administrator cannot grant relief in one instance and deny relief in another, when the two parties are in substantially the same position. That prohibition of law applies whether we are acting upon our own whim or because of ignorance or because we are applying an unreasonable theory of discrimination between the two. To take an absurd case, we could not decide in handling petitions that we would not grant relief to people who have red hair. That discrimination would not be legal, and could not be enforced by the Office. I might go further and say we cannot apply discrimination of that sort, even though we do not say that is what we are doing. There is a very historic case, Yick Wo v. TIopliins. which involved a San Francisco ordinance requiring laundries to secure a license before they could continue as laundries. In fact, it turned out that the San Francisco municipal authorities were granting licenses to all the white applicants, and were denying them to the Chinese applicants, not saying anything about it at the time. This was a basis of discrimination which was not admitted or expressly referred to by the agency. Yet the Court held it was invalid, and set aside the ordinance.
What I have said is that this agency cannot tell one group of citizens in one industry they must continue'to absorb costs and tell another group in another industry, which really is no different substantially, that they can be given price increases to cover their cost increases. We cannot do it in law, and we cannot do it in fact. If an agency ignored the idea of equality of treatment, it could not long survive. In other words, there is a legal responsibility upon the agency to develop a set of working rules and to apply them consistently. I do not want to be interpreted as saying that we have to apply the same
formula to all industries. We can make distinctions between industries. We can deliberately apply a more lenient standard when essential industries are involved. That would be valid because one of the purposes of the Act is that maximum prices should be such that the maximum amounts of necessary production should be achieved. We can then provide for adjustment provisions in the case of essential industries even though we do not grant them in the case of non-essential industries. Or generally we might say that we are taking into consideration 1936 to 1939 profits but that for particular industries which were unusually depressed in that period, such as the coal industry, it is not reasonable to take that base. We can do that provided we are prepared to show just what the differences are between the industries involved and the reasons for difference in treatment.
Moreover, the fact that we have developed one set of. principles does not mean we cannot change them, that a mark once made cannot be erased. We can change our principles if we decide after living with them that they are incorrect, but we have to state that we are changing our principles and change them all across the board. We cannot just change them for a particular case in order to get rid of a particularly troublesome situation.
I can understand why some persons may be disgruntled with this necessity for a statement of considerations. They are being called upon to justify their actions in print, so to speak. I have heard some persons say generally that they know that what they are doing is right. They do not know how to explain it, but they are convinced it is. sound and that it is the right thing for the office to do. They feel that the mere fact that they cannot state just why that is so and put it into a statement of considerations does not mean the office shouldn’t do it.
I think we have to speak plainly on that question. It is very fundamental. That is an attitude which violates the fundamentals of law and I think it also violates the fundamentals of good sense. We have all heard people state that they wish to do so and so, that they have an intuition that it would be the right thing to do. I might say parenthetically that intuition is very dangerous and that its usefulness is doubtful. Napoleon was famous for his intuition but Tolstoy’s book, War and Peace indicates that his alleged wisdom was really sometimes sheer folly. And) the newspapers have it that Hitler is famous for his intuition.
What we usually regard as sound intuition is not the lack of facts but a certain amount of reasoning on the basis of fact. The person does have the facts there, if he could only be induced to sit down and rediscover them. In my opinion no, businessman relies on intuition as much as he says. The more he relies on facts, the better businessman he is likely to be. In any event running a business is not the same as occupying a responsible position in the Government. An Administrator is not using his own power or property; he is using the power of the people. It is a public office, and a public trust under our form of Government cannot be run the same way as a business. Generally speaking, a businessman can say he does not have to tell you why he is doing something. He is doing it because he wants to and he is not called on to make explanations. That is just the sort of thing an administrator cannot do in our Government. That really
amounts to bureaucracy at its worst. We have set up our system in such a way that a person in an administrative post in the Government is called upon to state what he is doing and why.
I do not want to appear to be taking a didactic attitude. I am stating these considerations in a very clear, fundamental way so that we can all understand the very real reasons why lawyers will sometimes raise the point that there are not enough data to justify an action and that we have to set forth what data we are using in our regulation. Lawyers do not do that in the spirit of delay or because they want to arrogate excessive powers. It is all in obedience to a very fundamental principle of law under our Constitution. The Statement of Considerations must set forth what data we are relying on and how they justify the action taken. The particular way in which a Statement will read will depend upon the particular objective of the regulation; but the ultimate fact that eventually the Office will be called upon to issue a Statement of Considerations gives a , legal slant to the process of obtaining information in order to issue a regulation. That is, when we obtain the information we have to bear in mind not only that' we want enough information to issue a regulation but also at the same time that we should acquire information in such a way as to be able to write the necessary Statement of Considerations.
These general principles about discrimination and equality of treatment apply not only to the regulations and the different industries but also apply to particular provisions in a regulation. We have regulations which provide different prices for all sorts of reasons: differences in quantity or quality; differences in location of the buyer or location of the seller; or in the method of shipment or in the use to which a commodity will be put; or any one of a number of factors.
Now, generally, we maintain the same price differentials which have been customary in the industry. That is sound mechanics and also is legally desirable because the existence of a structure in the past is the best argument that it is reasonable. Occasionally, we may alter the existing differentials because we want to prevent diversion of x supplies, or because we want a regulation to be more simple. We have the legal authority to do that, but if we are changing from the previously customary differentials it will generally be advisable to state what we are doing and the reasons for the differentials prescribed in the regulation.
Our whole adjustment policy might be mentioned here. You all know that during the summer and fall of 1942 we had a policy of giving individual adjustments because of the special circumstances of a particular case. We are no longer giving individual adjustments but are proceeding through the issuance of a general provision. I state that broadly, although it is not that simple. When we were acting upon the basis of individual adjustments we were on legally more difficult ground because there was a strong chance that people in substantially the same position were not getting the same treatment and that one was getting a particular adjustment and another was not. Our present method of operation by acting only on general rules and principles is legally more defensible and solid.
In mentioning the function of the lawyer, I might refer briefly to protest proceedings. A protest is a formal document which a man may
file if he wants to attack a regulation. In handling a protest the issues which arise are the same as those of validity which I have discussed. There is also the additional question whether the burden is upon the Administrator or upon the protestant to bring formal evidence bearing upon validity or unvalidity. Those are very narrow questions but they are very complex and take a lot of time and analysis.
Finally, I might mention as a function of the lawyer the fact that he gives general legal advice to the commodity branch. Persons in the commodity branch might want to know what agency has authority to perform certain tasks or with what other agency we have to clear in certain cases. In the area of antitrust problems, we sometimes have to clear with the Department of Justice. The Act specifies that we have to clear some actions with the Secretary of Agriculture. A recent Executive Order specifies that when we raise prices because of an increase in wages we have to clear our order with the Director of Economic Stabilization. We all know that if we want to issue a questionnaire we have to clear with the Bureau of the Budget. Sometimes on particular commodities there are special requirements. We have to clear oil regulations with the Secretary of the Interior. The Price lawyers are available to the Price Department for legal advice upon the extent to which we have legal restrictions placed upon us in certain matters.
In conclusion, I might say that we all know government is a very difficult job, and very complicated, and that there are two aspects to it. We must both get things done and get them done in a way that is effective and does not bring undesirable repercussions upon the agency. The function of the Price lawyer is that of being responsible for the legal correctness of price actions. To perform those functions the lawyers have to learn a great deal about the price policy of the Office and about business and economic practices, and in the interests of economy in manpower they, having learned all this, should participate in discussions of matters of pure price policy. As far as such matters are concerned, the lawyers have only advisory functions. However, where matters of pure policy go over into the field of legal questions—whether the criteria applied are valid or whether the general things we are trying to do are valid or whether enough facts are stated to make the issuance of the regulation valid—the lawyers have more than advisory positions. They have a coordinate responsibility.
The Legal Department does not take the position that it has to veto a regulation in order to be able to express an objection to it. If its validity is doubtful, we may put the question whether, in that state of affairs, the economic considerations are such that we have to risk that doubt in order to get ahead with our job, or whether we can solve our problem in some other way. The plain fact is that many questions arise every time the Office of Price Administration does anything. There are legal questions and policy questions and administrative questions. The Price Division of the Legal Department, I think, should be regarded as being in a team with the Price Department in solving those questions. Once in a while, one of the horses goes a little faster or slower than the other, but it goes forward as a team. It is my earnest hope that the team-work which has prevailed in general thus far will continue to exist with equal benefits for the Price Department and Price lawyers alike.
2.	ENFORCEMENT1
f	Thomas I. Emerson
Director, Enforcement Division
First, I want to discuss certain matters regarding the background of the enforcement problem. I do not think it is possible to overestimate the magnitude and the complexity of OPA’s enforcement problem. The price regulations fix the price of practically everything the consumer eats, everything he wears, and virtually everything he uses. They involve several million retail establishments, 130 million people, and perhaps billions of transactions. Not only do the regulations cover a wide territory, but many of them are extremely complex. Any attempt to regulate the heart of American industry in the manner we nave done inevitably involves complex and intricate types of control. I think it is perhaps fair to say that never before in this country and perhaps in no other country has a Government faced as difficult 'ah enforcement problem as we face today.
Let me give concrete illustrations. We are now receiving in our various field offices complaints of violations at the rate of about 50,000 a month. Those are merely cases in which people are complaining to us. They of course do not in any sense represent the actual number of violations which may be occurring. Let us take, for example, the meat problem. There are several million farmers who raise and slaughter cattle. There are a million and a half small slaughterers. There are 300,000 retail stores that sell meat, and about as many hotels and restaurants and other public eating places that buy and sell meat. The meat problem alone in terms of enforcement, considering all the problems that have developed in the industry, is perhaps equivalent to our old Prohibition problem.
Or, take the case of the retail grocery regulation. There are 5,000 grocery wholesalers of importance, 600,000 retail grocery stores. We have at present a staff of about 2,800 investigators. Assuming that we were to use a quarter of those investigators in' the grocery field, there would be available 700 investigators. Of those, we would need at least 200 to investigate the wholesale grocery establishments. That would leave 500 investigators for 600,000 retail grocery stores. That would be one investigator for every 1,200 stores. Assuming that a single investigator could cover 10 stores a day, we would be able to visit each retail grocery store once every 5 months. If our rate of coverage were 5 per day, we would be able to visit each retail grocery store about once every 10 months. As a matter of fact, we could not get that much coverage, because if cases developed out of these investigations we would need the services of the investigators to make more thorough investigations. Consequently it would be totally impossible to cover an average of 5 or 10 stores per day.
* Delivered March 15, 1943.
292
In addition to price regulations, the enforcement staff must handle rent and rationing regulations. So, considering the amount of ground that we have to cover, it can be readily seen that the staff we have available, or that we are likely to have available, is almost insignificant in terms of being able to reach each establishment covered by one of our regulations.
At the same time, it is important to note certain favorable factors in the background of the enforcement problem. Perhaps the most important is the fact that we are now at war. In a period such as this, we can count much more heavily on cooperation from the public— from the persons whom we are regulating—than in a period of peace. That factor is perhaps the most favorable one in the present situation.
One word about thé question of voluntary compliance as against enforcement. There has been a certain amount of discussion on that question recently and I want to make my position on it clear. There is no doubt that OPA and the Enforcement Division want to do everything in their power to obtain voluntary compliance. There is no question of that. It would be totally impossible to attempt to obtain any kind of enforcement unless we had the cooperation and support of both the industry and the public. However, it seems to me perfectly clear that it is not enough to rely exclusively upon so-called voluntary compliance. Voluntary cooperation cannot possibly achieve the result unless it is accompanied by effective enforcement in cases of violation ; and, although it is true that court proceedings by themselves are not sufficient in a situation such as we have, nevertheless they should accompany voluntary compliance and cooperation and are indispensable. It is the purpose of the Enforcement Division not only to attempt to obtain as full cooperation as possible, but to proceed with positive enforcement proceedings in every case it can where violations occur.
We have recently reorganized the Enforcement Division in Washington, and now have fQur commodity branches and two branches which cut across the Division as a whole. The four commodity branches are the Food Branch, which handles enforcement of both price and rationing regulations involving food; the Apparel and Industrial Materials Branch, which handles textiles, apparel, leather, industrial materials and part of industrial manufacturing; the Fuel and Consumer Goods Branch, which handles petroleum and petroleum products and consumer goods (automobiles and tires are included in this group) ; and finally, the Bents and Services Branch, which handles rent and consumer services. Those four commodity branches have three primary functions. First, it is their job to work with the members of the Price, Rent and Rationing Departments who are framing regulations or amendments- to regulations, in order to see that the regulations or amendments are in the most enforceable form. Second, it is their function to plan the enforcement of the regulations in the particular fields that fall within their jurisdiction. Third, it is their function to carry out through the field offices the execution of these enforcement programs. As I have pointed out, the commodity branches embrace both Price and Rationing, so that here in Enforcement you have an amalgamation of the two. The two horizontal branches of the Enforcement Division in Washington are the Litigation Branch, which handles the litigation, and the
Procedures and Field Operations Branch, which handles problems that are common to the four commodity sections.
In the field we are, as you probably know, organized with a Chief Enforcement Attorney in each Regional and District Office. He has a staff of attorneys under him. In the Regional Offices we are now attempting to reorganize the enforcement staffs into four commodity branches corresponding to the Washington branches. In that way the chiefs of the Washington branches will be in direct communication with a corresponding attorney in the Regional Offices. In most of the District Offices there are not enough attorneys to break them down in such a way, and consequently one enforcement attorney will have to handle one or two or more of the commodity branches. Each of thé Regional and District Offices also includes a staff of investigators. These investigators work under the direction of the enforcement attorneys.
All together, there are about 500 enforcement attorneys in the field offices and, as I have said, about 2,800 investigators. We have attempted so far as possible to supplement dur staff with the staffs of other agencies. Thus, we are working with the Department of Agriculture to exchange information with them on matters in which we have a common interest. We have used to some extent the Federal Trade Commission and we use, wherever we .can, any other Federal agency.
We have also worked as closely as we can with the various local police departments, particularly in connection with the gasoline and tire regulations, and with the health and food inspectors in various municipalities. We have obtained a good deal of cooperation from them in several sections of the country. In addition to that, we are planning to use volunteers in enforcement, particularly in connection with the retail grocery regulations. To whatever extent we can, we are calling upon agencies and persons outside OPA to supplement our own efforts.
I come now to a problem which affects the members of the Price Department perhaps more than any other. It is the question of the effect upon enforcement of the form and substance of OPA regulations. I think it is difficult to exaggerate the significance of this problem. Certainly, from 50 to 75 percent of our enforcement success depends upon the regulation itself. There are some regulations which no group of attorneys and investigators, no matter how competent, could possibly enforce. There are other regulations which are relatively easy of enforcement and require little manpower. The shape of the regulation has as much bearing as any other single factor upon the success of our enforcement program.
Let me lay down five criteria which I think regulations should follow if they are to be successfully enforced. First, the price must be fixed *in precise terms; that is, it must be easily ascertainable. Second, the price must be in a form that can be readily known to the buyer. Third, the price must remain stable. Fourth, the regulation must be couched in understandable language. Fifth, the regulation must, so far as possible, be acceptable to the trade or industry involved.
The significance of these criteria is simply this : When those factors are present in a regulation, it becomes, easy to check compliance with
the regulation. It becomes easy to prove a violation once a, violation can be found. It becomes easy to obtain consumer participation in effecting compliance with the regulation. And it promotes a condition where the person who is regulated knows what he is supposed to do and is in general willing to comply.
I want to discuss, in the light of these criteria, three of the major types of OPA regulations. First is the freeze regulation. In general, this type of regulation can be enforced if the following circumstances are present: first, if there are basic records available to show what the frozen price actually is; second, if those records are filed with the OPA or are put in some place in which they cannot be tampered with or changed; and third, if the product or the commodity being regulated is sufficiently standardized and new styles or new forms of it do not develop.
Where those factors are not present, the freeze rather quickly becomes, or is, unenforceable. If there are no basic records available on which to determine what the frozen price is, obviously there is no chance of enforcement. Similarly, unless the OPA has in its possession and on file the prices that are permitted to be charged, it is very difficult to ascertain what the prices are when you go into an establishment. Finally, if the commodities that are regulated shift in style, or quantity, or quality, or some other way, the freeze rapidly becomes extremely fluid and extremely confusing.
I think I can best illustrate the point by taking the example of the General Maximum Price Regulation in the retail food field. When' that regulation was first issued I think it could have been enforced if we had then had the organization that we now have. But the situation began to change very rapidly. It was not long before we began to issue other regulations in the retail grocery field. More and more regulations came out, until at the present time there are perhaps twelve to fifteen regulations which affect retail grocery stores. These regulations are based in some respects on different theories and are extremely confusing and difficult for the retail grocer to understand. In addition there were changes in the commodities that had been frozen; for example, new brands appeared on the market and different sizes of containers. Consequently the original base prices soon became almost meaningless. At the present time the General Maximum Price Regulation in the retail grocery field is almost unenforceable.
As you know, a new regulation will shortly be issued which will supersede the General Maximum Price Regulation in the retail food field. At that time we hope to make a new start on enforcement m the retail grocery field, and I hope that we can do better than we have in the past.	'	.	,
The second type of regulation that we have been issuing is the formula type, a cost-plus system. The enforceability of those regulations depends a good deal, of course, upon the particular formula involved. In general, however, the formula regulations are more acceptable to the industry or trade. I think it is safe to say that it is because of that factor almost exclusively that we have had compliance with these regulations. I think it is fair to say that where there has been compliance, it has been because the regulation has been accepted by the trade and not because we have been in a position to enforce it through court proceedings.
536932—43---------20
I might give one illustration of the difficulty we have had in enforcement of a formula type regulation. The basic formula used in No. 152, Canned and Processed Foods, is that .the price of the canner is the weighted average price for 1941 plus 8 percent plus the increase in the cost of raw materials in 1942 over 1941. We undertook a campaign to obtain enforcement of that regulation. It took our attorneys about 2 months to agree on instructions that should be given to our investigators. The problems were so difficult that it required that long to tell our investigators exactly what they should look for and how they should report it to us. Then we inspected three to four hundred establishments. We had to start by ignoring the formula; that is to say, we asked the price division to calculate for us approximately what the price would be in most of the plants. We then had rough figures as to what the price should be and told our investigators to check to see whether the price was within 5 or 10 percent of that tentative price. It was only where the variation was more than 5 or 10 percent that we investigated further. In those cases it was necessary to bring in an accountant and make a thorough study of the books of the company.
The final result was that there was not a single enforcement proceeding brought in that field based upon miscalculation of the price. There may be one or two cases that will be brought where the company calculated its price and then charged more than the price it calculated. That is the only kind of case we have found we could •successfully prove with regard to that regulation.
The third type of regulation is, of course, the dollar-and-cents type. That obviously meets all the requirements the Enforcement Division would like to impose. A dollar-and-cents regulation is the ideal that enforcement attorneys dream about.
There are other factors about the regulations, of course, which affect enforcement very directly. For example, the possibility of enforcement rises in direct proportion to the amount of simplification and standardization of products that can be accomplished. This is particularly true in fields like the apparel field where there is opportunity for quality deterioration. Another factor which may affect enforcement is the sufficiency of controls. In the meat situation, we have a restriction order at the present time which prohibits the slaughtering of more than a certain proportion of the amount slaughtered during the base period, and we have maximum prices at the processing and wholesale level. The chief difficulties with enforcement in the meat field have been a lack of control over the slaughterers, the lack of control of distribution through a rationing system, and the lack of dollars-and-cents prices at the retail level. We have also been bothered a good deal by the lack of ceiling prices on livestock. That is a matter which perhaps cannot be remedied immediately. It is perfectly apparent, however, that when we have dollars-and-cents prices at retail and can put the pressure on the retailer to comply with those prices; when we have rationing of meat products, which will distribute the demand more evenly; and when we have licensing of the slaughterers, we will be in a position to control prices to a much greater degree. I think it fair to say that, although we have had at least a half of our enforcement staff working in the meat field over the past 6 weeks or 2 months, we have
not made very much progress. I do not think that the meat situation can be cured until we establish more controls throughout the industry.
I have already mentioned the simplification of language and acceptance of the regulation by the trade as aids to enforcement. These are perfectly obvious points, and I do not think it is necessary to go into them any further. ’
I turn now to a brief discussion of the various techniques of enforcement that we have developed and our methods of operation.
We started out in the enforcement field by investigating individual complaints. We waited until a complaint came in and sent somebody out to investigate it. That involved two major difficulties. In the first place we soon found that most of these complaints were without foundation. A very surprising proportion, running from 50 to perhaps 85 percent, depending on the regulation involved, proved upon investigation to be without foundation. Consequently we found we were using a good deal of our manpower in investigations which proved unfruitful. The other difficulty was that there were many sectors of industry where no complaints were filed. That did not mean, however, that there was successful compliance; on the contrary, it might equally well mean that there was no compliance at all. We soon found that we could not sit back and wait until complaints were filed in order to make sure that we were achieving compliance.
We then passed to a second stage—the enforcement drive. This involved the use of a large proportion of our investigators to make an intensive drive on a certain regulation or in a certain field. It had numerous advantages over the mere waiting for complaints. In the first place, it gave us systematic coverage of the industry and we were able to find violations about which complaints might or might not have been made. In the second place, it allowed us to use the technique of mass production; that is, to work out in advance exactly what our investigators were to do, to instruct them carefully, and thereby to obtain much more effective use of our manpower. It also had the advantage of presenting a dramatic drive in a particular field. It was especially impressive when we were able to announce that we had issued four thousand license warning notices in the retail field, or that we were starting criminal proceedings against 114 violators of the rent regulation.
However, the enforcement drive is weak in that it is not continuous in effect. It makes a dramatic entry into the field and for a time has an effect. But that effect may wear off if it is not followed up. Consequently, we are now moving toward a third method of operation. That is the development of enforcement programs. What we have in mind is to plan a program in a particular field and to assign a specified number of investigators to work in that field more or less on a continuous basis. The program would probably involve as ipuch attention to the prevention of violations as it would to the investigation and punishment of violations.
An example of such a program is to be seen in the enforcement of the new retail grocery regulation. We are there working out a careful program which will involve the assignment of a certain portion of our staff to the retail food distribution field, and a certain portion
to the continuous inspection of wholesale establishments. Others will maintain a similar inspection of the chain warehouses. Others will work with price panels and volunteers in ascertaining compliance and adjusting cases in the retail outlets themselves. We hope that by such a planned system of enforcement we can maintain continuous contact with the various establishments and continuous pressure upon them to comply.
There are certain situations where, by the use of a very small amount of manpower, we can maintain continuous surveillance over a troublesome area. That is true of some Industrial Manufacturing and Industrial Materials regulations. A small group of inspectors, perhaps half a dozen, constantly assigned to bottlenecks in the industry can bring about a fair state of compliance.
I would like now to say a word or two about the use and application of various sanctions that are incorporated in the Emergency Price Control Act. There are, as you know, five or six different sanctions that we can call upon when we find that there is a violation. It is a pretty important part of enforcement to know exactly how we intend to proceed against a certain type of violator.
First, there are, of course, criminal prosecutions. They are most severe in their application. They are also perhaps the most cumbersome. It is quite clear that we cannot bring a very large number of criminal enforcement proceedings without cluttering up the Federal courts with a mass of cases. The Department of Justice is constantly worried over the fact that the enforcement of OPA regulations may result in another situation such as we had under Prohibition. There were literally thousands of cases pending in Federal courts and the judicial process got further and further behind.
The second sanction that we use is the injunction. We have found it extremely valuable for rapid use against open violators. Recently in California one of the packing companies announced that it was no longer going to follow our price regulations. We were able to move quickly with an injunction proceeding; the company quickly entered into a consent decree, and that situation was cleared up so far as enforcement was concerned. The injunction is also useful against persistent violators. It has, however, certain limitations. By itself it does not involve any punishment. Only if there is a subsequent violation after the injunction is issued, is punishment involved and that is in the nature of a contempt of court. Fundamentally, then, the use of injunction is similar to the criminal process.
A third sanction in the act is the Administrator’s treble damage suit, to be used where the purchase is made in the course of trade or business. In those cases the Administrator has a right to bring an action for treble the amount of any over-charge. This also may be a rather rapid and effective enforcement proceeding. The trouble lies in the difficulty of proving the violation or, rather, of proving enough violations so as to make it unprofitable for the company to continue operating in violation of the regulation. It may be fairly easy to prove one or two violations, but, if there is a continuous series of violations not reflected by the company books, it is very difficult to bring a -treble damage proceeding which will punish the violator to the extent of depriving him of the profits he has actually made.
The other type of treble damage suit is that brought by the consumer. There have been relatively few consumer treble damage suits. The reasons are as follows: In the first place, it seems to be felt among consumers that it is not fair to bring a treble damage suit. There are undoubtedly many situations where consumers could bring suits but have refrained from doing so. In addition, consumers have been handicapped by not knowing in many cases what the legitimate price was. As soon as we have dollar-and-cents prices in the retail meat stores and if we move to community prices in dry groceries, we should expect to see a rather substantial increase in consumer treble damage suits. It is noteworthy that in those fields where we have adopted dollar-and-cents prices there have been considerably more consumer treble damage suits. The outstanding example of this is the nylon hosiery regulation, where a relatively large number of treble damage suits were brought.
A fourth sanction incorporated in the act is the suspension of a license. It is, of course, rather effective, but it is also, like the criminal sanction, rather cumbersome. In the first place, unless the company is doing business in more than one state or does business of more than $100,000 a year, the suit must be brought in the state courts. Many of the state courts have crowded dockets and it is hard to get a suit on trial in less than six months. Consequently, in many states the sanction is relatively useless. In any event, because of the harshness of the sanction (which involves putting a man out of business for a period of time) we have not had very many cases in that field.
I'hardly think it is necessary to point out in connection with this problem of sanctions that by far the largest number of our cases are settled without any kind of formal proceeding. I do not have precise figures, but I would estimate that 90 to 95 percent of the complaints we investigate are settled without any type of court or formal proceeding.
I want to speak for a moment about the relation of consumer participation and support in the enforcement field. There is no doubt in mv mind that one of the most important things for the Enforcement Division to do is to obtain fuller support from consumers. I think that developments within the next few months will greatly facilitate consumer participation in enforcement. I have in mind, for instance, the black markets in meat. At the present time it is difficult for a consumer to know whether or not the price he is paying for meat is in excess of the ceiling, or whether the meat he is buying has been slaughtered in violation of our restriction order. However, when retail ceiling prices are fixed for meat, the consumer will know whether or not he is paying a legitimate price. Similarly, when meat rationing goes into effect and the consumer has to give up a stamp in order to purchase meat, he will know whether or not he is buying in the black market. Consequently, we will be in a position to rely much more extensively upon consumer support against black market operations. Also, when we move to community prices, that is, dollar-and-cents prices in dry groceries and perishables, the consumer will be in a position to cooperate with us much more than has been true in the past.
Finally, I want to mention the relations between the Enforcement Division and the various Price Divisions. We can achieve successful enforcement only with the very closest kind of cooperation. Th"
Enforcement Division needs particularly the experience and, knowledge of the Price Divisions in the field. It needs the manpower of the Price Department to the extent that that can be secured. It needs to awaken the interest of the Price Department in enforcement problems so that members of the Price Department will be aware of the enforcement side of the picture when formulating regulations. As a means of accomplishing this we are planning to set up committees in most of the Price Branches to function as advisory committees to the Enforcement Division. In that way we hope to work more closely with the various members of the Price Department.
In addition to this positive form of cooperation, there is what may be called negative cooperation. We have found on occasion that members of the Price Department have made statements which have interfered rather substantially with enforcement proceedings. I would like to ask the cooperation of the Price Department in avoiding statements of that kind so far as possible. What I have in mind is that, at times, an establishment which we are investigating writes to Washington or communicates in some way with a member of the Price Department and this member makes a statement that the establishment appeared to have acted in good faith or that the violation involved seemed to be an honest mistake or that the regulation involved seems to be ambiguous or that it perhaps creates a hardship. Whenever such statements are made, they always come back to plague us in court. I do not mean to say that it is always the fault of the Price Department. But I would like to ask that all of you be as careful as possible in making statements of that type in cases where violations or suspected violations are found.
In conclusion, I would like to state that it is perfectly clear that enforcement is becoming more and more of a major factor in OP A operations. We are, indeed, at a very critical period. Unless we can achieve more successful enforcement in the retail food field, as well as in various other fields, we are going to find OPA in a very serious situation. I think we can achieve a measure of success only if the organization as a whole is thinking about enforcement and is positively working for it in every way that it can.
XL EFFECTIVENESS OF PRICE CONTROL1
Don D. Humphrey, Research Division
I should like to say first a word about the organization of the Research Division. One of our functions is to provide the broader view, and to help the operating personnel keep abreast of what the Office as a whole is doing and where it is going.
When OPA was originally organized we had considerable discussion as to how Research should be set up. Some people suggested that all the Research personnel be responsible to a central Research Division, but be assigned to the operating sections.. This idea was rejected at that time because it was felt that it would impede operations when speed was essential. There are, however, a number of general functions which must be performed by a central research group because they do not belong directly under any of the operating Branches.
Research Functions.
Fiscal policy is one of the fields in which the Office has a vital stake and which does not belong in any operating Division. In addition, there is foreign experience with price control. In the Research Division we have a Foreign Information Section whose job it is to provide current information and analysis regarding the experience of other nations. There are broad problems which are basic to the entire program, such as wage questions and many issues regarding farm prices. The Research Division has devoted considerable attention to the problems arising out of wages and farm prices.
Another job which the Research Division has is a periodic review and appraisal, in the nature of an independent audit, of the operations of a particular price branch. This is done really for the operating Branches and Divisions of the Price Department. Then we have the reporting job, which is explaining and interpreting the activities of the Office to the Congress and to the Office itself. We also undertake to assist the operating branches, and particularly the Research Economist in the Branches, on jobs that break new ground and raise new problems.
Finally, there is the job of forecasting the basic economic trends that bear on policy-making and that are needed in program planning.
The Effectiveness of the General Maximum Price Regulation.
At the peak of inflation during the last World War, the cost of living rose 2.8 percent monthly and food prices rose 4.4 percent monthly. In the face of inflationary pressures far greater than those in the last war, the OPA has thus far succeeded in avoiding a runaway rise in prices. We have not succeeded, however, in holding the line.
1 Delivered March 18, 1943.
The General Maximum Price Regulation was adopted at a time when the cost of living was rising at an average monthly rate of more than 1 percent-and when the prospect of rising expenditures together with a cut in civilian supplies threatened a rise in the cost of living of 3 percent or more per month by the end of 1942.
The GMPR was effective. By September 1942, the cost of living items controlled by OPA were fractionally lower than in May when the' regulation became effective. But only 62 percent of the cost of living could be controlled in May. Prices of the items remaining uncontrolled, principally 42 percent of the food budget, rose rapidly. The 1.6 percent rise in the cost of living between May and September 15 (when the Stabilization Act directed the President to stabilize both wages and prices) was due entirely to the 10.2 percent rise in the price of uncontrolled foods.
Changes in the cost of living May 15 to September 15, 19^2
All items_________________________________________________ + 1. 6
Controlled_______________________________________________________— . 3
Uncontrolled_____________________________________________________4-	4.	7
Food______________________________________________________________+	4.1
Controlled___________________________________________—_________— + . 2
Uncontrolled_____________________________________________________-¡-10.	2
Clothing__________________________________________________—	.	3
Rents_____________________________________________________________—	1.	7
Fuel, electricity and ice---------------.---------_------— + 1. 2
House furnishings________________________________________,--------+ 1.1
Miscellaneous_____________________________________________+ . 5
As to wholesale prices, increases in prices of farm and food products which taking place at a monthly rate of 4.9 and 3.5 percent, respectively, during the second quarter of 1941 were greatly slowed down during the period of selective price control before the GMPR. Since the GMPR, the monthly rise in wholesale farm and food prices has been less than 1 percent. All wholesale prices other than farm and food products were rising at a monthly rate of 1.4 percent during the second quarter of 1941. This was cut to a 0.4 percent monthly rise by selective price control. Since the GMPR, the monthly rate of increase has been less than 0.2 percent.
In the 43 months between the outbreak of war in August 1939 and March 1943, the rise of wholesale prices was 38 percent. During the first 43 months of World War I, wholesale prices rose 82 percent or more than twice as much. During the same period, the cost of living has increased 25 percent in the present war compared with 41. percent in the last war. While everyone recognizes that the pressures this time are vastly greater because this is a total war, these comparisons do provide a rough measure of OPA’s success.
We have done better, than the British, though not quite as well as our Canadian neighbors. By March 1943, wholesale prices had risen in this country 38 percent above the level of August 1939. In Canada, they had risen 36 percent, and in Britain, 65 percent. The cost of living increased over the same period by 25 percent, 16 percent, and 28 percent in the United States, Canada, and Great Britain, respectively. It is clear from these figures that while we have not done as well as the Canadians, we have done substantially better than the British.
There is, however, another comparison which is less favorable to us. The British have had a greater rise of prices than we, but once having made the decision to stabilize prices, they have held them more firmly. For over 2 years now, the cost of living in Britain has been held without any change whatever. The same is true of Canada. In the year and a half since Canada imposed a general ceiling on prices and wages, the cost of living has increased by only a fraction of 1 percent. In this country, on the other hand, in spite of the President’s. 7-point program, which was designed to stabilize the cost of living