Third Quarterly Report for the Period Ended October 31, 1942

[Third Quarterly Report for the Period Ended October 31, 1942]
[From the U.S. Government Publishing Office, www.gpo.gov]

UNITED STATES OF AMERICA
OFFICE OF PRICE ADMINISTRATION
LEON HENDERSON, Administrator
THIRD QUARTERLY REPORT
FOR THE
PERIOD ENDED OCTOBER 31
1942
UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON i 1943
LETTER OF TRANSMITTAL
Office of Price Administration, Washington, D. C., January 19, 1943.
fI honor to submit herewith the third report of the
Office of Price Administration, covering the period ended October 31 1942. ’
I u Prof°und pleasure to be able to report that the mandate of the Congress and the directive of the President to halt inflation have ^nus far been carried out. The initial and at times seemingly insuperable difficulties in going forward have been overcome. There can be no relaxing of our efforts—indeed they must be redoubled—but the dikes have been constructed, the levees have been built, and the flood can be held in check. The future is within our own hands. Brv- fsPect of victories cannot be won without casualties. In VT, i made. C™ry effort to insur6 individual hardships shall be held to a minimum. I am confident that the record bears the success of those efforts, and that when viewed against the ^nagmtude of the victory over inflation that is now surely within our grasp, these casualties will not be thought to have been too high a price to pay.
rePort I shall submit. It is appropriate, therefore that this report broadly review the manner in which the responsibilities laid upon me by the Congress and the President have been discharged. J. was directed to stabilize prices. That directive was obeyed. I was directed to establish prices fair alike to buyer and seller. That direc-tive was obeyed. I was directed to stabilize rents. Rents have been reduced and stabilized. I was directed to distribute scarce goods on a basis of fairness to all. That directive too was obeyed
: May I express my deep gratitude to Economic Stabilization Director Byrnes for constant and invaluable help and to the Congress and the Chief Executive for the opportunity to have served in the Nation’s crisis.
Sincerely yours,
Leon Henderson,
■ Administrator.
The Vice President.
The Speaker of the House of Representatives.
in
TABLE OF CONTENTS
Letter of Transmittal___________________________________________ In
Chapter I. Review of the Quarter________________________1_______1
The Threat to Economic Stabilization___ Legislative and Executive Action to Meet the Inflationary Threat______________________r_;__________ j
Development of Rent Control and Rationing_______Z__ 2
Summary and Outlook________________________________ 4
II. The Effectiveness of Price Control___•_____________Z__2 5
Price Control in World Wars I and II_______________~ 8
Savings to Government as a Result of Price Control_ 8
Savings to Consumers_______________________________ 11
III. Price Control and Industry__________________________” 14
The Fairness of Industrial Prices._________________ 14
Price Control and the Expansion of Production______ 17
Price Control and Small Business___________________ 19
IV. Price Control and Agriculture__________________________ 22
Farm Prices and Farm Costs_________________________ 22
Stabilization of Farm Prices_______________________” 24
V. Conclusion_________________________________________! " 26
LIST OF CHARTS
Chart 1. Wholesale Prices in First World War and in Present War_____ 6
(Chart 2. Cost of Living in Two Wars_____________________________ _ 7
Chart 3. Dollar Savings to the Government on the Cost of the War____ 9
Chart 4. Dollar Savings to Consumers by Preventing World War I Price t Increases________________________________________ ___ 10
Chart 5. Dollar Savings to Farmers by Preventing World War I Price
Increases____________________________________________ j2
¡Chart 6. Profits of All Corporations_______________________________ 15
fChart 7. Industrial Production and Prices__________________________ 18
Chart 8. Annual Farm Production and Monthly Prices of Farm Products. _ 25
v
Chapter I
REVIEW OF THE QUARTER
THE THREAT TO ECONOMIC STABILIZATION
The preceding report emphasized the growing pressures upon the price structure and the increasing threat to the entire program of economic stabilization which stemmed from the failure to implement fully the President’^ 7-point program. In spite of the General Maximum Price Regulation, the outlook for inflation control at the close of the summer was very bleak. Although the prices brought under control by the GMPR were held firmly, the prices which, by reason of the limitations of section 3 of the Emergency Price Control Act, could not be controlled continued to rise, indeed at an accelerating rate.
In consequence of the failure to stabilize farm, wage, and other incomes, the volume of consumers’ purchasing power was swelling month by month. Furthermore, the efforts, through increased taxes, increased purchases of Government securities, and the reduction of consumer debt, to bring consumers’ purchasing power down into balance with available supply were falling behind. Finally, costs of production were not being stabilized, their continued rise being the direct consequence of the failure to stabilize wages and farm prices. I To quote from the preceding report, the situation was about as follows: “Under the General Maximum Price Regulation a salient had been thrown out into enemy territory in expectation that major forces would be brought up to reinforce it. These reinforcements had not appeared. The line, thinly held, was under increasing pressure at all points and the enemy was pouring through a breach in one flank.”
Immediate stabilization of prices and incomes was imperative. In this connection it was pointed out that the stabilization of farm prices and wages would stabilize the economic position of farmers and workers at the highest levels in our history. Both groups were enjoying the highest earnings on record, in real as well as in dollar terms. This favorable position was unique in war, as comparisons with other belligerents so plainly indicate. Only immediate stabilization could prevent a resumption of the wage-cost spiral, which had been temporarily halted by the GMPR in May. Only such stabilization could protect farmers and workers against the deterioration of their economic position which must inevitably result from acute ¡inflation.
LEGISLATIVE AND EXECUTIVE ACTION TO MEET THE INFLATIONARY
THREAT
I On September 7, in view of the gravity of the situation, the President addressed a message to the Congress calling for the prompt amendment of the Emergency Price Control Act. The urgency of
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THIRD QUARTERLY REPORT
the situation was emphasized by the President and appreciated by the Congress and the people. The Act of October 2 was passed, amending the Price Control Act.
On October 3 the President by Executive order created the Office of Economic Stabilization and made its Director responsible for the development of policies in all the agencies concerned with economic stabilization. At the same time, he directed that action be taken immediately to stabilize prices under the additional authority conferred by the Act of October 2.
The Office of Price Administration moved swiftly to extend its controls. On October 5 the prices of poultry, butter, cheese, evaporated milk, eggs, wheat flour, com meal, onions, navy beans, and oranges were regulated at both the wholesale and the retail level. This extension raised to 90 percent the proportion of all food prices under control at retail, in contrast to 60 percent previously under control.
The retail prices of foods that had been exempted from the GMPR had risen 15.9 percent since May, as contrasted with the rise of only 0.4 percent in the retail prices of foods covered by the GMPR. As was made clear by the analysis presented in the preceding report, it was this movement of uncontrolled food prices that accounted for the rise of 1.4 percent in the cost of living between May and August, a rise which continued into October, totaling 2.6 percent by the middle of that month.
This extension of the coverage of price control, together with the implementation of the control of salaries and wages, marks a major advance toward victory in the fight against inflation. Through these actions, not only was the cost of living stabilized on a basis that could be maintained, but costs of production were stabilized as well. This did not mean that no further price increase could be expected; it did mean that control was at last sufficiently complete to permit of price adjustments, where necessary to the effective prosecution of the war, without risk of the price situation’s getting out of hand. Flexibility in price management is possible only when control is firm. When control is infirm, flexibility must quickly degenerate into a rout.
DEVELOPMENT OF RENT CONTROL AND RATIONING
During this period also the rent and rationing programs were further developed as essential techniques of economic stabilization. At the President’s direction all previously undesignated areas in the! continental United States, Alaska, and Puerto Rico were designated’ by the Administrator for eventual extension of rent control. At the close of October, therefore, a total of 443 areas, containing a population exceeding 133,000,000, were designated. Of these, 287 areas,! containing nearly 70,000,000 persons, Were already under Maximum Rent Regulations.
The effectiveness of rent control was apparent not only in a reduction of the rent component of the cost of living index amounting to 1.7 percent between May and October, but even more strikingly by average reductions in two war production centers of 11 and 12 percent and in seven others of 4 to 10 percent below the peaks reached earlier in the year.
These rent reductions do not, however, comprise the full benefit’ of rent control. The restraint placed upon evictions and the certainty
OFFICE OF PRICE ADMINISTRATION 3
of tenure thereby provided have contributed as powerfully to the morale and productivity of war workers as has the stabilization of .this most important single item in the budget of every American ¡family. Furthermore, these reductions have operated equitably between tenant and landlord. Studies made by the Office show that in war centers where rent control has been longest in effect, net operating income for both apartment houses and small (one- to four-family) structures, are substantially above pre-war levels.
In the field of rationing, the fuel-oil program became effective October 1. This difficult program, which was somewhat delayed in authorization, absorbed the energies of a considerable fraction of the staff during the quarter. In addition, preparations were being made for the transformation of gasoline rationing, previously effective only in the East, into a mileage rationing program—covering the use of both gasoline and tires—to be Nation-wide in its application. Finally, intensive work was done to prepare for the rationing of foods, in which field the supply situation was becoming critical.
Programs in force at the close of the period fall into two types. In the one, a standard per capita ration is assigned; in the other the ration is geared as closely as administrative considerations permit to the needs of the individual. In the case of sugar, for example, the fact that the supply was not greatly reduced below pre-war levels and the fact that the needs of individuals do not vary widely made the first type of rationing appropriate. Special needs, as for canning, etc., were easily met out of the available supply by supplementary rations. In the case of gasoline and fuel oil, however, the supply situation was far more critical and a tighter control was obviously required. Furthermore, individual needs for these products vary much more than for staples such as sugar. Both considerations made it necessary to “tailor” the ration to the needs of the individual in order to insure that the scarce supply would be used where it was most urgently needed. This was particularly the case with fuel oil; in gasoline rationing it was possible to provide a basic ration for every user, together with a system of standardized supplementary rations geared to individual needs.
In the rationing of foods that was in preparation, a third type of program was decided upon—“point” rationing, such as has been developed in Great Britain. Under this system, substitutable commodities are rationed together, each being assigned a point value representing its relative scarcity. The consumer is thus free to spend his ration of points on whatever combination of the substitutable commodities he desires. This is the primary advantage of the system: the freedom of choice it permits the consumer. A further advantage is to be found in its administrative flexibility. By the changing of the point value of particular commodities, demand can be adjusted to changing supply conditions. For example, the point value may be reduced to encourage the consumption of an item whose supply has increased; the point value may be increased whenever it is necessary further to restrict demand.
The mileage and fuel-oil rationing programs have been subjected to very considerable criticism. In part this has been due to the sheer magnitude of the task and the speed with which it had to be accomplished. Merely to recruit and train an organization in the limited time that was available was in itself an overwhelming job. In part
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it has been due to mistakes made in administration, which stem from lack of experience in the planning and administration of rationing. In part this criticism has been based upon public misunderstanding | of the gravity of the supply situation and of the procedures developed to meet it. This misunderstanding was, furthermore, deliberately encouraged by parties adversely affected by the programs. On the one hand, the necessity for the program was questioned. On the other, the hardships resulting from scarcities were attributed, not to their true cause, but to the procedures for distributing goods equitably, without which the hardship of wartime scarcity would be intolerable.
It will be recalled that similar criticism was directed at sugar rationing in the spring and early summer of 1942. Now that the program has been operating smoothly these many months, not only has criticism disappeared but there is general satisfaction. In the mileage and fuel oil rationing programs, administration is rapidly gaining experience. While serious problems still remain, the extraordinarily difficult situation in both these fields is being managed. As in the case of sugar, it will be recognized before long that these programs have operated effectively to distribute the limited supplies of these commodities, so essential to the well-being of the Nation, on a basis fair to all.
SUMMARY AND OUTLOOK
At the close of the period, it was clear that the economic stabilization program had been substantially advanced, both by the plugging of the gaps on the price and wage fronts and by the steady development of the rent and rationing programs. By the end of October, furthermore, the first war tax bill had been enacted and the savings program was developing along ever broadening lines. In summary, therefore, every element of the national stabilization program had finally been brought to bear during the month of October.
It would be a grave mistake, however, to underestimate the magnitude of the task that still lies ahead. Difficult as have been the problems of economic stabilization during the first year of the war, they will be dwarfed by those of the second year. In the year that lies ahead, the output of war goods will be doubled and the supplies available for civilian consumption savagely reduced. In the year that lies ahead, peak mobilization for war will be attained, with the inevitable strains and pressures throughout the economy.
Furthermore, although the elements of the stabilization program are all in place, their full development is yet to be achieved. There must be a still more vigorous tax program, supplemented by an unprecedented expansion of savings. There must be firmness and toughness in the control of prices and incomes. There must be a broadening of the rationing program until all essential goods which are in short supply are equitably distributed. These are requirements which impose severe demands upon all. But they must be met and they can be met. Inflation can be held in check if we, as a united country, adhere to the line that has now been staked out.
Chapter II
THE EFFECTIVENESS OF PRICE CONTROL
The prospect of success in the battle against inflation is firmly grounded upon what has already been achieved. These achievements are striking, not only in terms of the impact of price control upon the price structure but also on the basis of comparison with our experience in World War I.
The general index of wholesale prices rose 19 percent during the year preceding January 1942, when the Emergency Price Control Act was approved. This represents a rise of 1.5 percent a month. Between January 1942 and October 1942, however, wholesale prices rose only 4 percent, or less than one-half percent a month. Thus the controls imposed following passage of the act cut the monthly rate of increase by more than two-thirds. The effect of price control is more strikingly shown if May 1942, the month in which the GMPR went into effect, is taken as the dividing line. During the year preceding May, wholesale prices rose by 1% percent a month. Between May and October they rose by only one-quarter percent a month. Thus the GMPR cut the monthly rate of increase of wholesale prices by more than four-fifths.
The imposition of the GMPR resulted in a comparably sharp reduction in the rise of the cost of living. During the year preceding May 1942, the cost of living rose by 12.6 percent, or 1 percent a month. Between May and October, in contrast, it rose by only one-half percent a month. Even these figures do not bring out the full effectiveness of the controls that were imposed, for they indicate the average movement of all cost of living items, those not brought under regulation as well as those that were.
The items of the cost of living which were brought under control by the GMPR (together with the Service Regulation and the Maximum Rent Regulations) rose 18 percent during the year preceding May 1942. This amounted to 1% percent a month. Since May, these items, taken in combination, have risen only one-half percent throughout 5 months—one-tenth percent a month. Certain of these items— particularly rent—have actually been reduced since May. In contrast, the food items which prior to October could not be controlled, and which constituted 40 percent of the consumer’s food budget, rose 15.9 percent between May and October. This was almost twice as rapid a rise as these items showed during the corresponding period of 1941.
The prices which were brought under control were firmly held. It was the rise in uncontrolled prices which accoun ted for the rise in the cost of living between May and October.
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THIRD QUARTERLY REPORT
WHOLESALE PRICES IN FIRST WORLD WAR AND IN PRESENT WAR
ALL COMMODITIES
SOURCE". Bureau of Labor Statistics and Office of Price Administration.
office of price administration DIVISION OF RESEARCH
NO. 3090
Chart 1
OFFICE OF PRICE ADMINISTRATION
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COST OF LIVING IN TWO WARS
SOURCE: Off ice of Price Administration ond Bure ou of Labor Statistics.
OFFICE OP PRICE ADMINISTRATION DIVISION OF RESEARCH
NO. 26 46
Chart 2
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THIRD QUARTERLY REPORT
PRICE CONTROL IN WORLD WARS I AND II
This record of achievement stands in striking contrast to the record of price movements in World War I. October 1942 was the thirtyeighth month of the present war. The rise of wholesale prices over pre-war levels totaled 33.3 percent by that date. By the thirty-eighth month of World War I, on the other hand, the rise of wholesale prices over pre-war levels was 83.5 percent.
The same contrast holds with respect to the cost of living. By this stage of World War I, the cost of living had increased 32.2 percent, as compared with an increase of 20.7 percent between August 1939 and October 1942. Furthermore, in the third year of the present war (October 1941 to October 1942) the cost of living rose 9 percent, whereas between October 1916 and October 1917 it rose 20 percent, or more than twice as much. At this stage of World War I, the cost of living was rising more and more rapidly (it was to reach a peak 108 percent above pre-war levels before deflation set in). Today the cost of living, while not yet fully stabilized, is rising less than half as rapidly as a year ago, and stabilization requires only national resolution to use the means available and firmness in their use.
This record has been made, furthermore, in the face of pressures which have developed far more rapidly than in World War I and which already are proportionately heavier than they were at the peak of the 1918 war program. Today we are devoting nearly half of our total output to war, and our goal is still higher, whereas the highest proportion reached in World War I was only slightly more than one-quarter.
SAVINGS TO GOVERNMENT AS A RESULT OF PRICE CONTROL
Price control has paid dividends to the entire Nation and to every I group within it. It has saved the Government billions of dollars and will save scores of billions before the war is over. Stabilization of the cost of living has saved the consumers of this country other billions and they too will be saved billions more.
The munitions program between June 1940 and December 1942 cost 25 billions less than it would have cost if prices had been permitted I to rise as they did in World War I. In the light of the vastly greater I pressure upon prices this time, there can be no question that in the I absence of price control the rise of prices would have outstripped by | far that which occurred in the earlier war. The figure of 25 billions I is therefore a conservative estimate of the saving to the Govern m en t j on the war program. This saving, which has already been made, I approaches in magnitude our entire war outlay in 1917-18.
If prices are held at current levels, this saving will grow to I nearly $80,000,000,000 by the end of 1943. Arms that would cost I $236,000,000,000 under a repetition of World War I inflation will cost f only $157,000,000,000. The following table shows the relevant I data.
OFFICE OF PRICE ADMINISTRATION
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THE ACCOMPLISHMENTS OF PRICE CONTROL!
DOLLAR SAVINGS TO THE GOVERNMENT ON THE COST OF THE WAR
Actual
If current prices are held
SOURCE} Office of Price Administration, Division of Research
OFFICE OF PRICE ADMINISTRATION. DIVISION OF RESEARCH
NO. 2938
Chart 3
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THIRD QUARTERLY REPORT
THE ACCOMPLISHMENTS OF PRICE CONTROL-H
DOLLAR SAVINGS TO CONSUMERS BY PREVENTING WORLD WAR I PRICE INCREASES
SOURCE' Office of Price Administration, Division of Research
OFFICE OF PRICE ADMINISTRATION -DIVISION OF RESEARCH
NO.2939
Chart 4
OFFICE OF PRICE ADMINISTRATION
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Dollar savings on the cost of the war
Cumulative from June 1940 to— War expenditures 1 Total savings by preventing World War I price rise Savings as percent of actual expenditures
If prices are held at current levels Under price pattern of World Warl
Percent
Oct. 31, 1942 $51,200,000,000 $71, 000,000,000 $19,800,000,000 39
Dec. 31,1942 64; 900,000' 000 90, 700; 000^ 000 25, 800, 000,000 40
June 30,1943 no, 500, ooo, ooo 159, 200', 000', 000 . 48; 700; ooo; OOO 44
Dec. 31,1943.. 157, 300,000,000 235, 600,000,000 78,300,000,000 50
i Munitions and war construction only.
The effect of these savings on the size of the national debt is similarly impressive. Had prices been permitted to follow their World War I course, the Federal debt in December 1943 would be at least $50,000,000,000 greater than the debt now actually in prospect. This estimate makes full allowance for the higher tax receipts that would have resulted if a repetition of World War I inflation had been permitted.
The annual interest on $50,000,000,000 of debt is about $1,250,-000,000 a year, or nearly $30 for every family in the country.
SAVINGS TO CONSUMERS
These are savings which are substantially reducing the dollar cost of the war and significantly lessening the problems of post-war economic readjustment. But price control is also resulting in savings here and now to the great mass of American consumers, both in the cities and on the farms.
The cost of living has risen so much less during the present war than during the same period of World War I that consumers have been saved (by December 1942) just short of $6,000,000,000, or nearly $140 per family. As in the case of the savings to Government, this must be considered a conservative estimate because, due to the pressure being generated by a Vastly greater war program, the movement of prices, had there been no control, Would unquestionably be far greater than in 1914-18.
These savings of $6,000,000,000 will grow during the coming year, if prices are held at current levels, to $23,000,000,000. This rapid growth in the savings of price control reflects the sharp rise of prices which set in at this stage of World War I but which today we are in position to prevent. The matter may, in fact, be put precisely in those terms: $17,000,000,000 is the immediate stake which the consumers of this country have in seeing that prices are held at present levels during 1943 instead of following the pattern of the other war. If that stake is won, if prices are held, the savings per family will grow to over $500 by the end of 1943.
The achievements of price control, measured in terms of our success in avoiding a repetition of the experience of World War I, are substantial and highly satisfactory. Furthermore, it is clear from the record that these savings have not been achieved at the expense of producers or distributors and that price control has not interfered
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THE ACCOMPLISHMENTS OF PRICE CONTROL’. HE
DOLLAR SAVINGS TO FARMERS BY PREVENTING
WORLD WAR I PRICE INCREASES
ACTUAL
IF CURRENT PRICES ARE HELD
SOURCE,' Office of Price Administration, Division of Research
Chart 5
OFFICE OF PRICE ADMINISTRATION DIVISION OF RESEARCH
NO. 2940
OFFICE OF PRICE ADMINISTRATION 13
with, but on the contrary has facilitated, the enormous expansion of production that has resulted since June 1940.
Among the compelling considerations which led the Congress to enact the Emergency Price Control Act in January 1942 was this country’s experience with prices in the First World War. The Congress, in that act, directed the Price Administrator to prevent a repetition of that experience, both to safeguard the Government against the dissipation of war appropriations and against the unnecessary growth of the public debt and to protect consumers and others of relatively fixed incomes from the harsh and inequitable effects of unnecessary increases in the cost of living. The Congress directed the Price Administrator to stabilize prices. That directive has been obeyed.
Chapter III
PRICE CONTROL AND INDUSTRY
THE FAIRNESS OF INDUSTRIAL PRICES
While the Congress directed the Price Administrator to control prices, it directed him also to establish prices which were fair and equitable to seller and buyer alike. It did so not only in the interest of simple justice, but also in the interest of the swift mobilization of all our resources for war. Industry can produce only on the basis of prices which cover costs and provide reasonable profits.
The record of success in restraining price increases may be cited in support of the proposition that the prices established have been equitable to buyers. The truest test, however, of whether they have been equitable to buyers is the same test as that by which equitability to sellers must be measured, namely, what has happened to the profitability of business under price control.
THE RECORD OF CORPORATE PROFITS
In 1939, the first year of the war, the profits of all corporations before taxes were $5,300,000,000. This was an increase of 18 percent over the average for 1936-39, the period selected by the Congress as normal for purposes of calculating excess profits tax liability. Total profits grew to $7,300,000,000 in 1940 and to $14,800,000,000 in 1941, 180 percent above the 1939 figure. Corporation profits in 1942 are estimated by the Office at $19,500,000,000 to $20,500,000,000, or nearly 300 percent above 1939. So great was the increase of profits before taxes that despite the increase of tax rates, profits after income and excess profits taxes totaled $7,900,000,000 in 1941, 97^ percent above the $4,030,000,000 total of 1939. For 1942, profits after taxes will remain at approximately the 1941 level.
For price control purposes it is profits before taxes that are signifi-cant. The Congress determines, in its tax legislation, what shall be the distribution of the financial burdens of war—who shall pay the taxes and how much they shall pay. To permit prices to increase so as to cover income and excess profits taxes levied upon corporations, and thus to permit such taxes to be passed on by the corporation to the consumer, would defeat the intention of the Congress.
Although industries and industrial groups have varied widely in the degree of their participation in the growth of profits since the outbreak of the war, the increase has not been concentrated but has ! extended throughout the entire economy. In mining and manu- i facturing, profits have increased most markedly—by over 300 percent j above the levels of 1939—but both in trade and in services increases j of 200 percent have occurred.
PROFITS PER UNIT OF SALES
This substantial improvement in the profit position has not been limited to the aggregate of dollar earnings. Profits per unit of sales
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OFFICE OF PRICE ADMINISTRATION
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PROFITS OF ALL CORPORATIONS
BEFORE AND AFTER INCOME AND EXCESS PROFIT TAXES
SOURCE: 1929,1939 and 1940 U. S. Treasury Department, STATISTICS OF INCOME.
1941 and 1942 Office of Price Administration, Division of Research.
OFFICE OF PRICE ADMINISTRATION DIVISION OF RESEARCH
NO 3027
Chart 6
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THIRD QUARTERLY REPORT
have likewise increased sharply. Analysis of a sample of 1,324 large corporations shows the following results:
Percent return on net sales
1939 1940 1941
4 All corporations (total sample) — 8.1 10.3 13.5
Durable goods 10.1 14.0 17.6
Aircraft and parts 13.5 21.9 26.0
Automobiles and accessories 11.4 13.4 15.7
Building 8.5 10.1 15.4
Industrial machinery : 14.9 21.8 26.2
Iron and steel 6.9 11.6 15.8
Nonferrous mining and products 12.2 15.9 18.1
Shipbuilding _ i_.‘. ... 7.2 16.0 11.6
Nondurable goods 7.8 9.0 11.6
Beverages. 8.8 8.3 9.5
Chemicals 21.5 24.6 27.1
Foods 4.0 4.3 5.2
Leather and shoes.. — 5.5 5.4 7.0
Paper and products 5.4 12.0 16.5
Petroleum 8.3 9.7 13.9
Rubber products __ 6.8 7.3 12.0
Textiles 6.5 8.0 12.8
Tobacco products 11.4 12.2 12.4
Trade and services 5.5 6.0 7.9
On the basis of available reports, it is clear that profits per unit of sales will be substantially higher in 1942 than they were in 1941.
This continuous increase of profits since 1939, both in the aggregate and as a percentage of sales, has resulted in considerable measure from the expansion of total output and from the increase of efficiency that has gone hand in hand with capacity operations. It has resulted in part also from the desire of the Office of Price Administration to facilitate to the utmost the expansion of production. So necessary was the expansion of output to our defense in the period prior to December 7, 1941, and to the successful prosecution of the war since that date, that the Office felt impelled to err in the direction of laxity rather than in the direction of rigor.
In a number of industries, profits in the aggregate and per unit of output are unquestionably excessive. To that extent the prices in these industries are inequitable to buyers and are inconsistent with the spirit and underlying principle of the economic stabilization program. The Office is now engaged in a survey of its price schedules to determine where profits are grossly excessive. Such price schedules will be amended as rapidly as is practicable.
In general it must be recognized that the “honeymoon” period of industrial expansion is over. In many industries production is now past the level which may be termed optimum from the viewpoint of efficiency. Costs are increasing month by month. Furthermore, the, steady withdrawal of skilled men for the services, the increasing difficulty in replacing obsolete equipment and in making repairs, the necessity of using substitute and more costly raw materials, the congestion in transportation—indeed all the strains and pressures which are the inevitable consequence of total mobilization—spell increasing costs of production and increasing pressure upon our price ceilings.
The extremely favorable profit position, far above normal peacetime levels, provides an ample cushion to absorb these pressures with
OFFICE OF PRICE ADMINISTRATION
17
in the framework of stable prices. The Administrator had this in mind in permitting earnings generally under price ceilings to expand as rapidly as they have. For the future, economic stabilization requires a more rigorous policy.
PRICE CONTROL AND THE EXPANSION OF PRODUCTION
I The record clearly demonstrates that in general the prices established by the Administrator have been equitable, as required by the act. The question may legitimately be raised, however, whether these prices, however equitable, have not been so well controlled that production has been hampered. The record on this point is equally clear: price control has been a major factor in bringing about the most tremendous and rapid expansion of production in the history of this or any other country.
By October 1942 the Federal Reserve Board index of production stood at 189, which was 78.3 percent above the level of August 1939. During the same period industrial prices rose only 19.2 percent. Never before in our history has so large an increase of industrial production been achieved with so small an increase of industrial prices. This is a demonstration of the effectiveness of price control both in holding prices down and in facilitating and encouraging industrial expansion by the assurance of firm future prices.
Our experience in this regard provides another striking contrast to our experience in World War I. This time, through the stabilization of costs and prices, we have facilitated expansion. That expansion continues. Last time we failed to stabilize costs and prices. Production suffered.
In the first 2 years after the outbreak of war in 1914, our industrial production increased 20.6 percent and this increase was accompanied by a rise of 30 percent in industrial prices. At this stage, further expansion could be expected to involve greater and greater strain. What happened, however, was that this fairly rapid rate of expansion of production was greatly retarded and soon was reversed by developments on the price front. Between 1916 and 1917, industrial prices rose 32.2 percent, or by an average of more than 2% percent a month. During this period, industrial production increased only 4.1 percent. From this point on, prices continued to skyrocket—and because they continued to skyrocket, production actually declined.
Stabilization of prices and costs would have made possible the further expansion of production. The uncertainties resulting from the unpredictable movement of prices and costs, and the speculative hoarding of raw materials and finished products that was permitted to develop, made orderly planning of production impossible. The speculator and the profiteer had a field day. The producer, and the Nation he.served, suffered.
This experience provided one of the most powerful considerations in the enactment of price control in the present war. It was recognized by the Congress that we did not dare permit production to be hampered by demoralizing price movements, and that ultimate victory and national survival would be jeopardized if we ignored the lesson of the past. How greatly we have profited from this lesson is clear from the record.
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INDUSTRIAL PRODUCTION AND
AUGUST 19 39-OCTOBER 1942
PRICES
OFFICE OF PRICE ADMINISTRAT«* DIVISION OF RESEARCH
NO. 2032
Chart 7
OFFICE OF PRICE ADMINISTRATION
19
PRICE CONTROL AND SMALL BUSINESS
It has frequently been charged that price control, while perhaps fair and equitable to big business, has injured small business. So vital has been the role of small business in the building of America, so important is small business to the winning of the war and the winning of the peace, that were this charge valid all the foregoing would be unavailing to meet the indictment. Here again, however, the record is clear.
Dollar sales volumes in the retail and wholesale fields, which include the largest fraction of all small business, are today at all-time peaks. Profits in the field of distribution, as in the field of production, are higher than ever before in our history. While in the case of individual firms here and there, and in the case of individual items for some firms, price regulation has worked hardship, it may be said flatly that business, small as well as large, is in better position today than at any previous time. This proposition is supported not only by the profit record but also by the facts on business mortality. Business mortality has declined substantially since the outbreak of the war. The claim, so frequently made, that small business is being eliminated is without foundation.
Number of industrial and commercial failures—monthly, January 1939 through October 19^3
1939 1940 1941 1942
January.. 1,567 1,237 1,124 962
February i; 202 1,042 1,129 916
March . . 1,322 1,197 1,211 1,048
April.. 1. 331 i;29i i, 149 938
May li 334 i;238 1119 955
June _ 1,119 1,114 970 804
July 1,153 i; us 908 764
August. . h 126 1,128 954 698
September i;043 '976 735 556
October . 1,234 1, 111 809 673
November 1,184 1^024 842
December! • 5153 1,086 898
Total. _ . 14,768 13,619 11,848
Monthly average 1,231 1,135 987
Total through October 10,108 8,314
Monthly average through October .. liOll 831
Source: Dun & Bradstreet, Inc.
Particular sectors of small business have, it is true, been hard hit by the allocation of scarce raw materials needed for the war effort and by the shutting down of production and distribution of many durable goods. Furthermore, war contracts have to too large an extent gone to the large producers, while many small producers, able and willing to convert their facilities, have been neglected. This situation is being improved by the appropriate technique, namely, the better distribution of war contracts. It cannot and it should not be met by action of this Office. Clearly there is no price rise within the realm of reason that would be sufficient to protect an industry whose output has been savagely curtailed, let alone eliminated. To attempt to protect such industries by price increases would be the sheerest folly and the concentrate of inflation itself.
20 THIRD QUARTERLY REPORT
It is unquestionably true that those industries and those producers which are casualties of the war have a right to expect from their Government some protection against disaster which is not of their making. The Office of Price Administration, however, is not responsible for the condition nor has it been empowered by theCon-gress to provide the protection. The Administrator, however, has urged such Government policies before the Small Business Committees of both Houses of Congress.
THE “SQUEEZE”
The charge has frequently been made that the General Maximum Price Regulation imposed a squeeze upon retailers which has worked great hardship upon them. It is true that the broad action taken in April to prevent a price explosion squeezed the profit margins of many sellers. No action so broad could possibly have been perfectly equitable to all sellers or to all buyers. But in this as in all great matters it was necessary to make a beginning. It was the hope of the Office to restore fair margins for distributors by reducing prices at the wholesale and at the manufacturing or processing level. It was planned in this way to stabilize the cost of living and at the same time to maintain equitable margins for distributors and producers alike.
Where, by reason of the parity standard, this was not possible, it was hoped and expected that subsidies could be used in certain instances I
When this proved impossible for the time being, the Office proceeded through price increases to provide relief where relief was necessary. I This relief has eliminated the general squeeze which was imposed in certain sectors of retail trade by the GMPR. This is demonstrated by the following figures:
Wholesale and retail prices of food
Percentage increases to November 1942 from—
November 1941 May 1942 June 1942 September 1942
Wholesale 15.9 15.9 4.6 7.8 4.2 6.4 1.0 3.5
Retail

By November 1942, the increase in food prices at retail over the preceding year precisely equaled the increase in prices at wholesale during the same period. While the increase in retail prices prior to the imposition of the GMPR fell short of the increase in wholesale prices up to that time this indeed was the source of the squeeze of retail margins—the rise of retail food prices since May has been far greater than the rise of prices at wholesale. This has now in general relieved the squeeze resulting from the GMPR. This relief has for the greater part been the direct result of price regulations specifically^ designed for that purpose.
THE COMPLEXITY OF REGULATION
It is commonly asserted that the Office has injured small business by the complexity of its. regulations. It is true that the regulations have been complex. This complexity has been the result for the most part, however, of the necessity to provide relief and of the necessity to
OFFICE OF PRICE ADMINISTRATION 21
frame price regulations which are tailored to the particular needs of the particular industry. The General Maximum Price Regulation was a simple regulation. Like all simple regulations, it worked hardship upon some sectors of the economy even while it was generally fair and equitable. To relieve this hardship, to be fair and equitable to all sectors of the economy, it was necessary to depart from simplicity.
In some part, to be sure, the complexity of the regulations was the result of trial and error. Mistakes have been made. These mistakes are being remedied. The full resources of the Office are now engaged in the endeavor to simplify the regulations as far as possible. Nonetheless it must be recognized that to a very large extent it is impossible to secure both simplicity and equity, and that the choice is often between simplicity and inequity on the one hand, and complexity and equity on the other. Sound public policy requires steering a middle course between the extremes—the maximum of simplicity consistent with fairness to all.
Chapter IV
PRICE CONTROL AND AGRICULTURE
The record of price control in the field of industry is paralleled by the record in agriculture. Here too the Office was under statutory obligation to establish equitable prices. Here too there was a primary obligation upon the Office of Price Administration, as upon all other agencies of Government, to facilitate the expansion of production. On both counts, the Office has endeavored to discharge its duty in full.
In August 1939, farm prices were inequitably and uneconomically low. Despite the agricultural program since 1933, agriculture remained depressed in relation to industry. Farm prices stood at only 70 percent of parity at the outbreak of the war. In applying its controls the Office took full account of this unfavorable position of the farmers, and price policy was specifically geared to the restoration of parity for agriculture. This was accomplished by withholding control from farm prices until they had risen into balance with industrial prices, meanwhile imposing restraint upon the prices of the goods that farmers buy.
In December 1942, farm prices had risen 102 percent above the levels of August 1939. During the same period, the rise of prices paid by farmers was held to 24 percent. The result of this policy is disclosed by the steady improvement of the farmer’s position. In midsummer 1941, farm prices reached parity levels. In December 1942, they stood at 115 percent of parity. The objective of a decade has been reached and surpassed. This, to repeat, was no accident. It was the result of conscious price policy.
FARM PRICES AND FARM COSTS
Government policy has secured not merely a restoration of a fair relationship between farm and industrial prices; it has secured a profitable relationship between farm prices and farm costs as well. Farm wages, including the value of food and lodging furnished to farm workers, increased between 1939 and 1942 from $1,000,000,000 to $1,500,000,000, an increase of 50 percent. During the same period, all production expenses other than wages increased from $5,200,000,000 to $7,200,000,000, an increase of 39 percent. These production expenses include the cost of goods and services used in production, costs which have been held down by price control; the depreciation and maintenance of durable implements, equipment, farm buildings, and dwellings; and taxes and interest.
In contrast to these cost increases, the index of farm prices increased from an average of 92 in 1939 to an average of 157 in 1942, an increase of 71 percent. In consequence of the much sharper increase of farm prices than of farm costs, the net income of farm operators—that is, income after all expenses—increased from $4,500,000,000 in 1939 to
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OFFICE OF PRICE ADMINISTRATION
23
$9,800,000,000 in 1942, an increase of 118 percent. That this increase has not been confined to any particular section of the country is shown by the following table, which is taken from the preceding report:
Percentage increase in net farm income between 1939 and 194%, by type of farm
Percentage
Dairy farms: Increase
Wisconsin_________________________________----x______-_________________128. 3
New York_______________________________________________________________ 100. 7
Corn Belt farms:
Hog-dairy______________________________________________________________ 116. 9
Cash grain________________-------------------------------,------------- 124. 6
Hog-beef breeding-fattening____________________________________________176. 3
Hog-beef raising_________________________________________z------'------163. 5
Cotton area farms:
Georgia 2-mule--------------------------------------------------------- 128.7
Mississippi Delta 2-mule_ ___________________:_____________________ _ _ 96. 1
Texas black waxy prairie________________ _________________ _ _ ________111. 8
Virginia tobacco farms: Flue-cured____________________________------------------___------------ 117. 2
Fire-cured______________________________________— ----------------— 178. 8
Winter wheat farms:
Wheat. __________________________________________________-___■_-------- 204. 5
Wheat-corn-livestock____________________ —------------------:----------163. 3
Wheat-grain sorghum-livestock__________________________________________ 176. 8
As was also shown in the preceding report, this net income is the highest ever recorded in our history. It exceeds by a full billion dollars the farm income of 1919, at the peak of the inflation that followed World War I.
This revolutionary improvement in the position of agriculture is the more impressive—and the significance of price control in its achievement is the more clearly seen—if it is compared with what happened during World War I. At their post-World War peak in May 1920, farm prices had risen 137 percent above July 1914 levels. But during the same period the prices paid by farmers rose 101 percent, with the result that the parity ratio rose only from 101 to 119, an increase of 18 percent. In December 1942, farm prices stood 102 percent above the August 1939 level, an increase comparable to that of the earlier war, but the prices paid by farmers had risen only 25 percent during the same period. The parity ratio rose from 70 in August 1939 to 115 in December 1942, an increase of 64 percent in contrast to the increase of 18 percent during and after World War I.
The point should be perfectly clear in the light of these contrasting records that it is not the rise of farm prices alone which benefits the farmer. It is upon the relation between the prices he receives and the prices he pays, and upon the relation between the prices he receives and his costs of production, that his well-being depends. The farmer recollects that the prices he paid skyrocketed during the last war, almost eliminating the advantage he had gained through the rise of farm prices. On the one hand he sold wheat at over $2 instead of 96 cents, but on the other, sodium nitrate cost him $94 a ton instead of $48. He sold his steers at $14.65 in the Chicago market instead of $8.40, but a cultivator which had cost $5 in 1915 cost $10 in 1918. Up and down the line, he found that through rising costs of production, inflation ate away the increase of income that rising farm prices conferred.
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THIRD QUARTERLY REPORT
In the present war, the price movements have been totally different. While farm prices have risen on the average by well over 100 percent, and key farm prices by much more, the index of farm machinery prices has increased 7 percent, items of equipment, such as horse collars and barbed wire, by an average of 17 percent, and fertilizers, which are of the most vital importance in farming, have been held to an increase of 13 percent. The contrast with the runaway situation in World War I could hardly be sharper.
At the present time the farmer is getting a substantially larger share of the consumer’s dollar than before the war. In the case of foods, in 1939 the farmer’s share of every dollar spent by the consumer was 41 cents, and 59 cents went for transportation and distribution at all levels. In 1942, in consequence of the restraint placed upon retail and wholesale prices and upon transportation costs, the farmer’s share of every dollar spent by the consumer for foods had risen to 53 cents. This fact, taken in conjunction with the facts on consumers’ savings and distributors’ margins, emphasizes again the basic proposition that all groups at every stage have benefited from price control. It emphasizes even more that that control has been exercised to redress the balance between groups whenever such redress was called for.
STABILIZATION OF FARM PRICES
In the period since the outbreak of the war, farm production has increased by .18 percent, a truly remarkable performance when account is taken of the fact that farmers maintain their production, in good times as in bad. This increase is a tribute to the patriotism and vision of the farmer. It is a tribute also to the price-control program.
Stabilization of farm prices is today imperative if the farmer’s wellbeing is to be protected. A further rise of farm prices would mean an increase in the cost of foods, an increase in wages, a break-down of the stabilization program, and an unleashing of the wage-price spiral which the President’s program has stopped. The farmer, like the worker, cannot win in the inflationary race between prices and costs. He cannot win much during the race—this is amply demonstrated by the experience of the last war. He must lose everything in the inevitable deflationary aftermath—this too is amply demonstrated by the experience that followed the last war. It was 20 years after the collapse of farm prices in 1920 before they were restored to parity with nonfarm prices.
Some increase of farm costs, particularly the cost of farm labor, must be expected during the coming year. Net income of farm operators, like the profits of industry, stands at a level which will in general permit the absorption of such increased costs, within the framework of stable farm prices, without impairing production. The sharing of the vastly improved position of agriculture among all who work on farms will not impede the expansion of farm production. Quite the reverse; it is essential to that expansion. As in industry, however, there are special problems, like manpower and equipment, which must be met with measures other than price.
OFFICE OF PRICE ADMINISTRATION
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ANNUAL FARM PRODUCTION AND MONTHLY PRICES OF FARM PRODUCTS
INDEX
INDEX NUMBERS 1939=100*
INDEX
*For Production Index Year 1939^100 For Price Index August 1939“100
OFFICE OF PRICE ADMINISTRATION DIVISION OF RESEARCH
MO. COM
Chart 8
Chapter V
CONCLUSION
The record of the Office is clear. Three programs, entirely new to the American people—price control, rent control, and rationing—have been administered effectively and fairly. Prices have been held firmly. Price controls have encouraged the expansion of production and the shift from an economy of peace to an economy of war. Furthermore, price control has been equitable. On the one hand, it has saved the consumers of the country billions of dollars and has protected the Government and all parts of the economy from unwarranted cost increases. On the other, it has permitted a marked improvement in the economic position of every group in the economy The over-all mandate of the Congress has been carried into effect.
Costs are inevitably rising, and must continue to rise even if complete stability of prices and incomes prevails from this time forward. The steady withdrawal of skilled men for the services, the increasing difficulty in replacing obsolete equipment and in making repairs, the disruption of. transportation—these factors of the war economy will be felt very severely during 1943. The strain in the economy will grow each succeeding month, and the profitability of industry and agriculture must be expected to decline during the coming year. This is war.
To resist the pressures which rising costs will put on price ceilings will call for more rigorous administration of prices than has thus far been necessary. As the going gets tougher, so too must price control. Only thus can we make sure that the growing pressures are not inequitably shifted and that the mounting sacrifices imposed by war are borne fairly and equitably. In short, price control must be tough in order to be fair. Fortunately, the economy and every important economic group is in position to withstand the strains. The record i of business profits and of net farm income shows how much elbowroom there is for the absorption of costs within the framework of existing prices. Ours is a lusty, vigorous economy, able to meet and to surmount its war problems.
This is the record and this the prospect. We have done what many thought impossible—we have halted inflation. We have done it in accordance with the instructions of the Congress. The task that lies ahead is the task of keeping inflation in check. It is difficult but it is crucial. The mechanisms and the organization are at hand. We know by the record that the job can be done. We know that to win the war and to shape our economic future it must be done.
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