ERP Midyear 1951

The Midyear Economic

Report of the PresidentTRANSMITTED TO THE CONGRESS

July 1951

Together With a Report to the President

THE ECONOMIC SITUATION AT MIDYEAR 1951

By the

COUNCIL OF ECONOMIC ADVISERS

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis


The Midyear EconomicReport of the President

TRANSMITTED TO THE CONGRESS

July 23, 1951

Together With a Report to the President

THE ECONOMIC SITUATION

AT MIDYEAR 1951

By the


UNITED STATES GOVERNMENT PRINTING OFFICE

WASHINGTON : 1951


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LETTER OF TRANSMITTAL

THE WHITE HOUSE,Washington, D. C., July 23,1951.

The Honorable the PRESIDENT OF THE SENATE,The Honorable the SPEAKER OF THE HOUSE OF REPRESENTATIVES.

SIRS: I am presenting herewith a Midyear Economic Report to theCongress. This is supplementary to the Economic Report of the Presidentof January 12, 1951, and is transmitted in accordance with section 3 (b)of the Employment Act of 1946.

In preparing this report, I have had the advice and assistance of theCouncil of Economic Advisers, members of the Cabinet, and heads ofindependent agencies.

Together with this report, I am transmitting a report, The EconomicSituation at Midyear 1951, prepared for me by the Council of EconomicAdvisers in accordance with section 4 (c) (2) of the Employment Act of1946.

Respectfully,

(in)



ContentsPage

THE MIDYEAR ECONOMIC REPORT OF THE PRESIDENT 1Building our defenses 4Strengthening the other free nations 6Expanding and stabilizing the economy 11

Our production goals 12Production aids 13Our stabilization goals 13Taxation 14Public expenditures 15Credit policy 15Voluntary saving 16Price and wage stabilization 17Rent control 18

Summary of economic developments in the first half of 19 51 . . 19

THE ECONOMIC SITUATION AT MIDYEAR 1951 (a report to the Presi-dent by the Council of Economic Advisers) 25

(V)



To the Congress of the United States:

Our economic problems in this country are now based mainly upon worldproblems. Our economic tasks are heavy because of the weight of our worldresponsibility.

To succeed in our economic job at home, we must understand fullyour job in world affairs.

This job is plain. By every means within our power, we must continuethe search for a just and lasting peace among all peoples.

We do not seek this peace through the medium of war. We do not seekit through appeasement. And we do not seek it alone. We seek this peacethrough the international cooperation of all who want sincerely to join inthe effort. On these terms, the door into a friendly association of nationsis open to all.

But the door is not open to aggression and conquest. To prevent that,the combined strength of the free peoples must be made so great that noaggressor will be able to destroy freedom in the world.

The security of the free world is not a matter of guns alone. It requiresalso economic, political, and moral strength. The defense program of theUnited States embraces all of these.

In the next days and weeks, the Congress will decide the future of thiscomprehensive defense program.

In its consideration of military appropriations, the Congress will decidewhether we as a nation are going to achieve adequate security in the nextfew years.

In its consideration of the Mutual Security Program, it will decidewhether we will continue to join boldly in marshalling the whole strengthof the free world in a common resistance to communist aggression.

In its consideration of the Defense Production Act, it will decide whetherwe will channel our resources effectively to meet the demands of nationalsecurity.

In its consideration of that Act and of revenue legislation, it will decidewhether the line will be held against inflation.

Throughout the past year, we have been going through the transitionfrom a normal peacetime economy to a defense economy. Military pro-duction is increasing, and schedules are now becoming firm. The expansionof the basic economy, to support the defense program, is moving forward,and additional expansion goals for specific industries are being set. Thepattern of economic controls required by the defense program has beengenerally established.

Where we go from here depends on the decisions made by the Congress.


We can drive ahead on the course of the present defense program, or wecan retreat.

The safety and welfare of our country require that we drive ahead.This Economic Report is therefore a discussion of the kind of defense

build-up which we are now undertaking, and which I propose we continueto undertake. It is also an analysis of the measures which have beentaken, or must be taken, to strengthen and stabilize the economy to supportthat build-up.

We are engaged in a long-term effort.The need for military strength did not begin with the Korean war.

Nor will it end when and if the fighting in Korea ceases.The need for building strength was undergoing an urgent review before

the attack of June 25 on the Republic of Korea. That event precipitateda quick and clear national decision to enlarge our military strength rapidly.This course should have—and, though no doubt in smaller measure, wouldhave—been taken anyway.

We must be ever-mindful that the Soviet imperialists are relentlesslypursuing a long-range plan. Their tactics change, but their strategy isclear and persistent. That strategy is to probe for weak spots in thestrength or morale of the free people, and, if a weak spot can be found, tostrike another blow.

Whatever happens in Korea, we must take into account what is happen-ing in Iran, on the borders of Yugoslavia, in Indo-China, and, most of all,what we know to be going on inside the Soviet Union itself. The maindanger to world peace comes from the Soviet rulers, from the growingmilitary force at their disposal, and from their proved willingness to useaggression to gain their ends. The military build-up of the Soviet Union,which has been continuing since 1945, has no other purpose than to blackmailthe free world into submission to communist domination. Or, if the freeworld lacks strength or determination to prevent it, the purpose is tooverrun its members one by one.

This is the central threat to our country, and to every free country in theworld. We cannot have peace unless this threat is overcome. That is thepurpose of our defense program.

This sustained effort on our part is something new in history. Freemen have always been willing to take up arms, and to do their utmost, ina supreme crisis. But never before have free men in such large numbersacted together in advance, to prevent a supreme crisis. Never before onso vast a scale have free men assumed great risks voluntarily, so thateven greater risks may not descend upon them involuntarily. Never be-fore has there been so deep and widespread in the hearts of mankind thefeeling that the price of peace is the willingness to fight for justice.

This is an effort of great hope and promise. It is a practical means bywhich we can bring to reality the great vision of world peace under law.


But this effort—like any enterprise on a grand scale—will succeed only ifwe put into it the resources, the sweat and toil, the unremitting force ofwill, that it requires.

Our immediate plans must be flexible, as we constantly review ourprogress in the light of changing conditions. Right now, for example,we are reviewing our immediate goals for military strength, and it is quitepossible that we shall have to raise them in several important respects.

But our fundamental course is unaltered. The free world must buildthe strength—moral, economic, and military—that is needed to deter ag-gression or, if aggression comes, to defeat it.

The greatest weakness we could disclose would be vacillation or lack ofdetermination. To win in the contest between justice and aggression, thepurposes of free men must be clear and persistent.

We must avoid shifting from one extreme of policy to another with everynew development—either international or domestic—when such develop-ments do not alter the fundamental situation.

Immediately after the initial Korean aggression, there were some ex-tremists both in military and economic affairs. In military affairs, theseextremists wanted immediately a 10-million-man armed force and a 100-billion-dollar-a-year military budget. In economic affairs, there were someextremists who wanted to freeze the whole economy in a strait jacket of con-trols more extensive than anything attempted during World War II.

Fortunately, the saving common sense of the American people avoidedthese extremes. We embarked upon a substantial build-up of our militarystrength, but without going on a total war footing. We started upon aneconomic mobilization program which bore a sensible relationship to thesize of our defense effort and the likelihood of its long duration. Thiseconomic mobilization included measures to expand production and tocontrol inflation. But it wisely did not attempt to mix full economicmobilization with partial military mobilization. That would have gottenour great productive economy all out of joint. It would have made usweaker, not stronger.

Today, extremists are pulling in a diametrically opposite direction. Atthe first signs of a let-down of the conflict in Korea, they have commencedto clamor for a reduction in our defense program. On the economicfront, as soon as there is a slight softening of inflationary pressures, theseextremists are ready to discard the whole structure of inflationary controlsor shoot it full of holes.

If we were now to heed these extremists, it would be an even morecostly mistake than to have heeded the extremists of a year ago. We haveno reason to believe that the events in Korea have fundamentally changedthe basic Soviet intentions. The events at home have not removed theneed to expand our economic strength, or to overcome the basic inflationarydanger.


We must press on to build our defenses.We must press on to strengthen the other free nations.We must press on to expand production and prevent inflation.Only by pressing forward can we make the vision of peace among all men

a lasting reality.

Building Our DefensesOur defense program is designed to create substantial armed forces, ready

for action, plus the ability to enlarge those forces very rapidly if the needarises. We have almost reached our first goal of 3/a million men andwomen on active duty. But in the case of many types of weapons, wehave months and years of hard effort ahead, before we will have producedenough modern equipment for our active forces, for helping to equip ourallies, and for the reserve stocks we need.

We have accomplished large increases in military production since theKorean invasion. Deliveries of hard goods—such as aircraft, tanks,weapons, and ammunitions—have more than tripled. Nevertheless, mili-tary output as a whole has moved up somewhat more slowly than scheduled.This has been due partly to some shortages, such as in machine tools.We have been "tooling up" thus far, but this stage is now well advanced.From this point forward, every effort must be exerted to catch up withproduction schedules and keep abreast of them.

In the cause of national safety, these schedules must be met.Our total security program costs have now reached an annual rate of

more than 35 billion dollars. In terms of constant prices, this is almosttwice the level of a year ago, and 50 percent above the level of 6 monthsago. These costs are scheduled to increase to an annual rate of morethan 50 billion dollars by the end of this year, and to nearly 65 billionby the middle of 1952. The proportion of the Nation's total output de-voted to security purposes, which was about 6 percent before Korea and isabout 11 percent at present, will rise to approximately 15 percent by the endof 1951, and will approach 20 percent by a year from now. (See chart 1.)

These outlays cover pay and subsistence for our military forces, deliv-eries of military goods to our own forces and our allies, economic aidto other free nations, and other security expenditures. More than 85percent of the total for the present fiscal year is allotted to building upthe military strength of this country. This includes the sums to be spenton our military establishment, the atomic energy program, stockpiling, andother domestic security programs.

The major part of the scheduled increase of almost 30 billion dollars inthe annual rate of security expenditures from the middle of this year to themiddle of 1952 will involve procurement of aircraft, weapons, tanks, and


CHART 1

GROSS NATIONAL PRODUCT ANDNATIONAL SECURITY PROGRAMS1st HALF OF 1951 PRICES

During 1944 nearly one-half of. our total national output wasused for war purposes. The present national security programwill at the peak take about one-fifth of the nation's output ofgoods and services.

100BILLIONS OF DOLLARS

200 300 400

1940

(944

2nd Qtr.1950 U

2nd Qtr.1951-^

2nd Qtr.1952^

FOREIGN MILITARY ANDECONOMIC AID

TOTAL GROSSNATIONALPRODUCT

TOTAL NATIONAL SECURITY

jy SEASONALLY ADJUSTED ANNUAL RATES.

SOURCE: COUNCIL OF ECONOMIC ADVISERS.

other military end items, and some of the specialized equipment used intheir production. Within the next 12 months, hard goods deliveries arescheduled to rise from a monthly rate of about 1 billion dollars to aboutthree times that amount. During the same period, aircraft deliveries areto be tripled, and the tank-automotive program increased to four times thepresent rate of deliveries.

Measured by costs and by the strain on the economy, this is a largeprogram. But it is a minimum program measured against the need, andis well within our capacity. The accompanying Review by the Council ofEconomic Advisers reveals in detail thatf with wise policies, our economycan support this effort and yet remain sound and grow stronger. Comparedwith the rise of almost 30 billion dollars in security outlays scheduled for


the coming 12 months, we expanded such outlays by about 75 billion dollars(in terms of present prices) in the first year of our participation in WorldWar II. The program as now scheduled is not expected to absorb at itspeak more than about one-fifth of our total output, compared with almosthalf in 1944. A year from now the program is expected to require about11 million men and women directly or indirectly engaged in defense,contrasted with about 25 million at the peak of World War II.

We cannot now be sure what our production needs will be beyond that.If further aggression does not occur, we hope to be able, within two orthree years, to" level off our defense program, and to move on to a main-tenance basis. At present, however, our principal concern is not withmaintaining military strength. Our principal concern is to build up mili-tary strength in the first place.

We have been moving toward interim goals for Army, Navy, and AirForce strength. It now appears, as we review our strategic situation inthe light of world events, that these goals may need to be raised, whetheror not we have an armistice in Korea. The strategic and military studiesneeded for such decisions have not been completed; if it is indeed necessaryto raise our sights, I shall later submit to the Congress requests for theadditional funds required.

Regardless of the need to lift our goals for the active military forces,we must move full speed ahead toward our present goals.

Strengthening the Other Free NationsThe defenses of the free nations are inseparable. Our defenses are

bound up with the defenses of other free countries in every way—strategi-cally, economically, morally—and their defenses are bound up with ours.

Due partly to historic events since the turn of the century, the UnitedStates has greater economic strength and potential military power than anyether nation. But with only 10 percent of the free world's population, andonly a fraction of its natural resources, our difficulties would be enormousif we were cut off from the rest of the free world.

Western Europe, together with Turkey, has a population 80 percentgreater than ours, with a high proportion of skilled workers. It producesone-third of the steel of the free world, one-fifth of the aluminum, andnearly one-half of the coal. Moreover, areas outside the United States—in many cases the economically underdeveloped countries—produce about43 percent of the free world's crude petroleum and about half of its ironore. They produce about 70 to 80 percent of its lead, zinc, tungsten, andrubber supply, and virtually all of its cobalt, manganese, nickel, tin, andwool. We are vitally dependent upon imports for many of these products.

It would be a military disaster to us if these resources fell under hostiledomination.

6


But it is not only in terms of the possibility of world conflict that weshould view this problem. If we establish a secure peace, our prosperitywill be linked with that of other nations. The economic upbuilding of onepart of the world benefits also the other parts. As standards of productionand of living rise in one area, this provides more markets for the products ofother areas—and expanding production and markets are the lifeblood ofeconomic progress.

The moral aspects of this issue are even more important than the eco-nomic. The great need of the twentieth century is to achieve a steadilyimproving morality to keep pace with growing technology. We mustcooperate with the rest of the free world because the future progress of thefree world is indivisible. Even if we could prosper in a world where othersdid not, we could not live at peace in that kind of world.

The people of the United States should ever bear in mind the soberingobligation to live up to the responsibility which our strength imposes.The past four decades have been marked by two world-wide wars to re-sist aggression. In these previous wars, many of those now allied with uspoured out more blood, and more treasure relative to their resources, thanwe did. They emerged from those fearful struggles for survival with eco-nomic handicaps which have lasted for a generation and longer. On theother hand, the United States, because of geographic and other factors,did not suffer such destruction.

At the end of World War II, the other free nations set about to repairthe ruin they had suffered. The Western European countries, mainlythrough their own efforts, but with vital assistance from us, made a re-markable recovery. Their industrial production has by now mountedabove prewar levels by about 40 percent, and their total production bymore than 15 percent. On a per capita basis, the increase in their total pro-duction has been more than 5 percent above prewar levels.

This increase in production was greatly facilitated by economic aidfrom the United States. In the three years after 1947, our foreign economicaid to Western Europe totaled about 11 billion dollars. Over the sameperiod, the total annual output of these aided countries expanded by about45 billion dollars.

Even with these increases in production, these nations could not notablyadvance their standards of living. This was because they had to allot somuch of their resources to the rebuilding of productive capital equip-ment. In most instances, living standards did not begin to equal or sur-pass prewar levels until a year before the Korean outbreak. And justwhen hope was bright, the new turn in the international situation requiredthese nations to redivert more of their resources to defense purposes. OurEuropean North Atlantic Treaty partners are doubling their military pro-duction in the course of one year, and many of them are committed tocontinuing large increases in the future. Their defense expenditures are


CtiARf $

MILITARY EXPENDITURES AS PERCENT OFGROSS NATIONAL PRODUCTCURRENT PRICES

Our European NATO partners, like ourselves, are devoting anincreasing proportion of their production to defense.

PERCENT

15

10

PERCENT

15

1951

— 1950

iV

i^

*'^

10

UNITED TOTAL UNITED

STATES EUROPEAN KINGDOM

NATO

COUNTRIES

FRANCE OTHEREUROPEAN

NATOCOUNTRIES

NOTE: MILITARY EXPENDITURES EXCLUDE SOME SECURITY EXPENDITURES, AND ARE ON A DISBURSEMENT,RATHER THAN A DELIVERY, BASIS.

CALENDAR YEARS USED FOR UNITED STATES, FRANCE, AND FIVE OTHER COUNTRIES; FISCAL YEARSUSED FOR UNITED KINGDOM AND THREE OTHER COUNTRIES.

SOURCES: ECONOMIC COOPERATION ADMINISTRATION AND COUNCIL OF ECONOMIC ADVISERS.

being raised from less than 5 percent of their combined total output in1949, and about 5% percent in 1950, to about 7l/2 percent in 1951. (Seechart 2.)

This is not as large an increase in defense outlays as we are making. Butthe total economic situation in these other countries is very different fromours. Compared with the period just before World War II, the goodsand services now available to the people in our country, for purposes otherthan defense, have risen about 50 percent per capita in real terms. Incontrast with our situation, our European North Atlantic Treaty partnersnow have available goods and services, for purposes other than defense,less than 10 percent more per capita than in the period just before WorldWar II. This problem is even more clearly revealed by another compari-

8


CHART 3

PER CAPITA GROSS NATIONAL PRODUCTAND MILITARY EXPENDITURESPRE-WORLD WAR II AND POST-KOREA

1st HALF OF 1951 PRICES

Our defense expenditures, per capita, have increased since beforeWorld War IE much more than those of our European NATOpartners, but our production available for other purposes hasrisen much more than theirs, and is at a much higher per capitalevel.

DOLLARS

2,500

2,000

1,500

1,000

500

PER CAPITA GROSS NATIONAL PRODUCT

BOTHER EXPENDITURES FORX^GOODS AND SERVICES

DOLLARS

2,500

2,000

1,500

,000

500

OTHEREUROPEAN

NATOCOUNTRIES

NOTE: MILITARY EXPENDITURES EXCLUDE SOME SECURITY EXPENDITURES, AND ARE ON A DISBURSEMENT,RATHER THAN A DELIVERY, BASIS.

CALENDAR YEARS USED FOR UNITED STATES, FRANCE, AND FIVE OTHER COUNTRIES; FISCAL YEARSUSED FOR UNITEp KINGDOM AND THREE OTHER COUNTRIES.

SOURCES: ECONOMIC COOPERATION ADMINISTRATION AND -COUNCIL OF ECONOMIC ADVISERS.

son. In the United States, total output per person, even after deductingoutput for military purposes, is estimated at nearly $2,000 for 1951. Amongour European North Atlantic Treaty partners, the figure is estimated atless than one-third as high as ours. Allowing for shortcomings of inter-national income comparisons, this difference is striking. (See chart 3.)

Under these circumstances, these countries are obviously limited in theamount of resources they can rapidly divert to defense purposes, withoutundermining their economic and political stability, and thus playing intothe hands of communist minorities.


All of these factors have been taken into account, in the development ofour program to help strengthen the other free nations.

For this purpose, I have recommended appropriations of 8.5 billiondollars for fiscal 1952. Of this amount, 6.3 billion dollars are to providemilitary assistance to other nations of the free world where increasedmilitary strength is needed to combat or forestall communist aggression orsubversion. Such assistance will consist primarily of planes, tanks, guns,and other military weapons which must be produced in the United Statesbecause they cannot be produced abroad within the required time. Whilethe largest portion of this aid will go toward filling the equipment needsof our partners in the North Atlantic Treaty, substantial quantities arealso destined for countries in the Near East, Far East, and Latin America.

The remaining 2.2 billion dollars would consist of economic aid. Overhalf of this amount would go to Western Europe, in order to create thekind of economic strength which is necessary to support an increasedEuropean rearmament effort, and to do this without sacrificing the politicaland social stability required for security over the long run. This assistancewill permit the diversion of men, materials, and facilities from civilianto military production, and aid the expansion of total production. Else-where in the world, where the problem is more economic than military,such assistance will help the peoples to combat the poverty, disease, andilliteracy on which communist subversion thrives. It will contribute, more-over, to a substantial expansion in the production of basic materials,particularly strategic materials, which are essential to the economic andmilitary strength of the free world.

In addition to the materials and equipment provided under the Mu-tual Security Program, we are giving positive assistance, where necessary,to the export of goods which represent the essential requirements of theother free nations, and are paid for by them. And these exports will beconsiderably larger than non-military supplies which we finance.

The magnitude of the proposed security program, including foreignassistance, is well within the capacity of our productive resources. Pro-posed outlays for assistance to the other free nations over the nextyear comes to less than 15 percent of our total security program, and toonly about 2 percent of our estimated total output during this period.We can carry forward both the domestic and the foreign aspects of our totalsecurity program, and still maintain domestic consumption and businessinvestment at high levels.

The determination of the size and scope of the aid program which weshould undertake this year has resulted from the same kind of carefulpreparation which has gone into the development of our scheduled expan-sion of United States military forces. It is in fact an integral part of ourover-all security program.

10


For example, the military assistance I have recommended will make pos-sible a rapid build-up in Western Europe of trained forces equipped withmodern weapons. The existence of such forces is essential to the securityof the United States. The cost to us of supplying equipment through ouraid program is only a fraction of the cost of raising a comparable forceourselves.

The value of our aid programs, however, is far broader and more signifi-cant than simply a good investment in security. These programs will meanthat free men, in many countries, will be able to stand up against the threats,the lies, the subversion of communist aggression. They will be. able todefend themselves against bullets—and they will be able to combat com-munism's allies of poverty and hunger and sickness.

That is why our military and economic aid programs are as essential andas urgent as any part of the work we are doing to build up the defensesof freedom.

As we move forward with this program, we must continuously reviewand, if necessary, revise it to assure maximum results. We must be surein the conduct of this program that other nations do their full share.We are challenged by the hard task of a new kind of cooperation, basedupon a new kind of international situation. We must face these problemsof the future realistically and courageously.

Expanding and Stabilizing the Economy

During the past year, the growth of production in the American economyhas been very large. During the second quarter of 1950, our total outputwas at an annual rate of about 300 billion dollars, measured in today'sprices. During the second quarter of 1951, measured in the same prices, ourtotal output rose to an annual rate of 330 billion dollars, or a real gain of30 billion. This gain far exceeded the increased outlays for nationaldefense. Our economy is stronger now than it was when the defensebuild-up started.

This growth in our productive power was not achieved without consider-able inflation, partly because the measures for controlling inflation tooktime to enact and get into operation. But since these measures have beenin full swing, we have continued to expand total output without inflation.That is a salient fact about economic developments since the early partof this year.

We are now in a position where, if the Congress enacts adequate legisla-tion, we can continue to enlarge our defense efforts, to expand our produc-tive capacity, and to hold inflation in check. I emphasize that our successin these matters will depend on a series of legislative measures which theCongress is now considering. If the Congress enacts sound and stronglegislation, as I earnestly hope it will, we can achieve our goals.

II


Our production goalsThe Council of Economic Advisers estimates that we have the ability

to increase our total output by at least 5 percent within a year's time.This goal is practicable, and we should strive to surpass it. Expansion ofoutput will make it possible to carry forward our security program withless strain upon our economy. It will make it easier to raise necessarytax revenues, and to restrain inflation. It will offer the prospect of reducingirksome controls in due course, if the international situation does notworsen. Increasing our basic productive capacity will place us in astronger position to mobilize fully and quickly if that necessity should beforced upon us.

Manpower is our prime productive resource. Within a year, throughvarious programs for the voluntary mobilization of our manpowerresources, as well as through population growth, we should expand ourtotal labor force by 1^2 to 2 million persons. This expansion is entirelypossible, and with it there should be no general manpower shortage,although there will be shortages in certain skilled trades, and in some indus-tries longer hours will be needed.

A major obstacle to the further expansion of production is the shortageof capacity in a number of key industries. It is not possible to expandcapacity in all directions at once. We must concentrate on assuring ade-quate capacity for military equipment, and on basic materials, transpor-tation, and power. We must postpone those types of investment whichadd least to our productive strength. We must relate our own expansionof capacity to the capacity available in other countries, and to total poten-tial supplies of basic materials.

A number of basic expansion programs have been prepared by thedefense agencies, and are now going forward under continuing review. Insteel, the program calls for an increase of capacity from 107 million ingottons annually now to nearly 120 million tons by the end of 1952. The alu-minum program is planned to more than double our 1950 rate of outputby the end of 1953. The proposed electric power program looks towarda 40 percent increase of generating capacity by the end of 1953.

These are only examples. Large-scale investment in tools and equip-ment for factory, farm, and transport must be continued for several years,at or near the peak levels which have recently been reached. We must, fora time, limit investment in non-essentials—as we are doing. But we mustbe very careful in deciding what can be postponed and what cannot. Thestrategy of a prolonged partial mobilization requires a much broaderproduction base than the strategy of total war.

For example, it is now more urgent than before that we begin at oncecertain developmental projects—like the St. Lawrence seaway and powerproject—which will not be completed for several years, but which areespecially needed in a defense economy. Furthermore, we must resume, as

12


soon as we can, some of the programs which can only temporarily becurtailed without ultimate sacrifice of economic power. For example,the expansion of educational and health facilities, of long-range resourcedevelopment and housing, as contemplated before the emergency, mustbe resumed in time to avoid serious impairment of our national strength.

This is why we need a production advance on a very broad front. Thismeans more than the expansion of capacity and the improvement oftools in a few select areas. It means the application of business acumenand labor skills in a joint effort throughout the whole economy. It meansthe joinder of new science and new technology with the industrial machine.It means drawing upon all the resources, material and moral, whichreside within our system of enterprise and government.

Production aids

To encourage the necessary expansion of our productive capacity, theGovernment is allocating scarce materials, and extending special aidsthrough direct loans, government guarantee of private loans, commit-ments to purchase, and rapid amortization of facilities for tax purposes.These aids are becoming increasingly effective, in connection with specificexpansion programs.

The authority for these production programs, with the exception of taxamortization, is included in the Defense Production Act. Renewal ofthis authority is urgently needed in order to achieve our production goals.Adequate funds are also required. In addition, the defense agencies shouldbe given certain additional production powers, such as the authority toconstruct defense plants where this is essential to the mobilization effort.

Our stabilization goals

After the Korean outbreak, a wave of inflation swept over most coun-tries. It was less serious in the United States than in some other places.But even here, it raised living costs by 9 percent, and wholesale prices by16 percent. This inflation encouraged speculation, and put heavy burdenson many of our people. Those fortunate enough to have rising incomeswere able to maintain their living standards. But more than half the fam-ilies of the Nation had no income gains between early 1950 and early 1951,and almost one-fifth suffered actual declines.

During the past few months, there has been relative price stability.Wholesale prices are now somewhat below the peak levels of last March.Consumer prices are no longer soaring, although they rose slightly fromFebruary to May.

The easing of the inflationary pressure since spring has been due partlyto larger civilian supply. It has also reflected higher taxes, credit restraints,and the application of price and wage controls early this year. Moreover,as the military situation improved, many consumers switched from frantic


buying to cautious buying, while businesses felt that some inventories wereexcessive, and curtailed their orders.

These recent developments have led some people to think that the infla-tionary trend is ended. This is a dangerous assumption. We cannotaccept it as a guide to national policy.

The fundamental fact is that we must increase the annual rate ofnational security expenditures by about 30 billion dollars during the nextyear. In order to produce more airplanes, tanks, and other munitions, wemust continue the cutbacks which have been made in the production ofconsumer and investment goods, and possibly make some further cuts.

While total consumer supplies cannot be expected to rise significantly,incomes will continue to grow, because total production and employmentwill and must continue to expand. It is estimated that, by a year fromnow, personal incomes before taxes, measured at an annual rate, may riseto a level 15 to 20 billion dollars above the current annual rate. If taxesand saving are not sufficiently increased, there would thus be a growingdisparity between the incomes which people would desire to spend and thesupply of consumer goods. This disparity represents the inflationary gap.If controls were to be relaxed, the inflationary gap would be greater—probably very much greater. The price-wage spiral would again be setin motion.

Inflation stimulates the production of many nonessential goods, thus pull-ing resources away from essential production. It favors some groups atthe expense of others. It lifts the cost of national defense, and shifts theburden toward those least able to bear it. Inflation impairs the value ofpeoples' savings, and undermines their willingness to save.

Winning the battle against inflation is an essential element in ourstruggle for peace. The battle cannot be won by using only one of theweapons available to us. Stabilization depends upon a combination ofmeasures, each of which reinforces the others.

TaxationThere is no more important single measure for combatting inflation,

under present circumstances, than the maintenance of a balanced budget.The substantial increases in taxes adopted by the Congress since theKorean outbreak have helped to stabilize the economy and aided in haltingthe price rise. The public approval of these tax increases has demon-strated that the American people are ready to pay the price of protectingour way of life.

Government expenditures for national security have risen from an annualrate of 18 billion dollars (in present prices) before the Korean outbreakto a current rate of about 35 billion dollars. It has been pointed outthat the annual rate of these outlays is scheduled to increase by about 30billion dollars within the next 12 months. This increase, even when


accompanied by economy in other expenditures, is bound to result ingrowing deficits under present tax legislation.

To put our security program on a pay-as-we-go basis, and to reducethe inflationary pressure which this program will generate, we need anincrease in taxes of at least 10 billion dollars this year.

Such an increase in taxes, though heavy, would not interfere with neededwork and production incentives. It would be consistent with maintenanceof a good standard of living, and an equitable distribution of spendableincome. It would aid substantially in the stabilization of prices. It wouldease the problems of managing the huge national debt.

Public expenditures

We must also continue to pare down less essential or postponable publicspending. This is another avenue toward a balanced budget and towardthe control of inflation. The less urgent public activities of Federal, State,and local governments should be reduced or retarded, until the securitybuild-up has passed its peak, or until our over-all productive power catchesup with the increased burden imposed by the security program.

In a protracted period of partial mobilization, the distinction betweendefense and non-defense activities is not as clear as in a total war. Thestrategy of our current defense effort is not to build maximum defensivepower at once. It is instead to build reasonable power, and to reinforceit with the underlying productive capacity and basic economic strengthwhich will enable us to be ready for any problem of the future. Thatunderlying strength, for the long pull, includes education and training,health services, development of natural resources, research, and scientificprogress. We must strike a careful balance, not doing as much of all ofthese things as we ought to do in normal peacetime, but not doing so littleas to weaken ourselves for the long pull.

The budget which I have submitted to the Congress for the current fiscalyear represents a minimum program consistent with this policy. Further,the spending activities of the Government are under continuous review.Those which can be reduced without weakening the defense effort are beingreduced. Those which can be redirected to make a further contributionto defense are being redirected.

Credit policy

Credit expansion contributed to the inflation of the past year. We mustprevent it from adding to future inflationary pressures. In the currentnational emergency, when some types of credit extension are necessary inorder to increase production of certain essential defense and civilian require-ments, while other types of credit extension defeat the purpose of themobilization program by permitting the expansion of production in unnec-essary areas, it is essential to use credit controls as selectively as possible.


General credit measures reach areas not touched by selective credit meas-ures, but they do not discriminate between activities which should besupported, and those which need to be restrained. For this reason, effectivemeasures of selective credit control, such as regulation of consumer andreal estate credit, are needed. The legislative authority to impose themshould not be impaired.

One important merit in the selective credit controls is that they may beloosened or tightened by prompt administrative action, in response to shiftsin the economic situation. This flexibility would be destroyed, if theCongress by excessively detailed legislation were to narrow the range ofadministrative discretion within which the Board of Governors of theFederal Reserve System could operate in exercising selective credit controls.I recommend that the Congress avoid unwise limitations upon the use ofan instrument which has clearly proved its worth.

I have recommended several times that the Congress authorize the placingof margin requirements on speculative trading in commodity futures. Irepeat this recommendation now. Similar provisions for margin require-ments in stock trading have proved very useful.

Authority to impose additional reserve requirements when needed wouldstrengthen the Federal Reserve System's influence over credit conditionswith minimum effects on the needs of debt management. I recommendthat the Congress give careful consideration to the plans for accomplishingthis purpose outlined in the attached Midyear Economic Review.

As a phase of the Government's credit policy, all major Federal lendingand loan guarantee programs have been revised, to minimize their infla-tionary impact and to contribute most to the defense effort.

I am also glad to note that lending institutions throughout the country,and State and local governments, are cooperating in a voluntary creditrestraint program which has been initiated by private financial insti-tutions under the sponsorship of the Board of Governors of the FederalReserve System.

Voluntary saving

Voluntary saving is an essential part of a well-rounded anti-inflationaryprogram. Without a large volume of voluntary saving, taxes high enoughto close the inflationary gap might reduce incentive and cramp production.Also, without a large volume of voluntary saving, only the most severedirect controls could prevent prices from being swept upward by a flood ofdemand.

In addition, voluntary saving serves other purposes in our economy. Itprovides a source of funds for investment. It adds to the family's sense ofsecurity for the future. When the time comes to make the transition froma defense economy to a peacetime economy, the prudent use of accrued

16


savings will help to maintain demand and employment during the change-over period.

The Government savings bond program is very important in the effortto promote voluntary saving. The Treasury has carried on an intensifiedpayroll savings drive since shortly after the outbreak of hostilities in Korea.Commencing on Labor Day, the Treasury will call upon all Americans todo their part in a full-scale savings bond campaign which will reach intoevery community and every home in the Nation. Because it is a voluntaryprogram, this effort must be made in the last analysis not only by the Govern-ment, but also by every voice that can be heard throughout the country.

Consideration should be given to developing voluntary savings plans inconnection with productivity wage increases. Such plans would help tokeep these increases out of the inflationary stream. This would be beneficialto workers, who would not be trying to spend their additional income untila time when they could spend it without driving up prices. These plansshould be tied in with the Savings Bond Payroll Deduction Program.

But voluntary saving is not a substitute for adequate taxation or otherinflation controls. Nothing could be more destructive of the willingness orability to save, than constantly rising prices. After other inflation controlstook hold earlier this year, and helped to stabilize prices, the rate ofvoluntary saving moved very sharply upward.

Price and wage stabilization

Indirect measures for controlling inflation are vitally important. Butwith inflationary pressures as large as those which we may face in the yearahead, indirect controls are not enough. They must be buttressed by directprice and wage controls.

The basic objective of price control now is to hold the general priceline. Ceiling prices should not be raised except where essential to provideadequate production incentives to business, or to correct clearly inequitablesituations. As a general rule, price increases should not be approved, evenwhere some costs have risen, if the industry is earning a fair and equitablelevel of profits. Just as some upward adjustments of some prices will beneeded, some rollbacks will be needed in selected cases, for example, whereprices or profits are excessively high. This is the practical way to maintainadequate flexibility in the price structure, while holding the general priceline. This requires legislation which strengthens, not weakens, price control.

Wage stabilization requires a careful balance among three major objec-tives. First, it should seek to prevent an increase in total payrolls so largethat, after making due allowances for taxes and voluntary saving, theywould seriously inflate total demand. Second, it should provide adequateincentives for increased productive effort, and redress serious inequitiesin the wage structure. And third, it should minimize wage increases of akind which would require price increases.


The achievement of these objectives is the primary task of the WageStabilization Board. In the January Economic Report, I expressed heartyagreement with the principle that effective wage stabilization in a democ-racy requires the active participation and cooperation of management andlabor. This is being attained through the present Wage StabilizationBoard, which contains equal representation of those two groups and ofthe public. In addition to its stabilization responsibilities, the Board isempowered to handle labor disputes affecting the national defense programif parties jointly submit their case for recommendation or decision. TheBoard is also empowered to recommend a settlement in labor disputes cer-tified by the President as threatening the progress of the national defenseprogram. The labor dispute responsibilities of the Board are the minimumnecessary for the mobilization effort.

Fair and practical wage policies are in process of development. This isnot a simple task. The Board has recognized that wages should be adjustedto compensate for changes in the cost of living. Other wage adjustmentsare also desirable, if hardships and inequities are to be dealt with, as re-quired by the Defense Production Act. The Wage Stabilization Board hastaken steps to deal with the difficult problems of productivity allowancesand so-called fringe benefits. Within proper limits, productivity allowancesprovide desirable incentives and can make a real contribution to the mobili-zation effort while some fringe benefits may be anti-inflationary. Theseand many other problems must be solved in developing integrated wagepolicies.

Rent control

The control of rents is important to the success of our mobilization effort.As we expand output in different industrial areas, we have to attractoutside workers who would be repelled if rents were allowed to rise exorbi-tantly. Simple justice also requires us to protect the families of our soldiers,who move to the areas where military camps are being reopened or ex-panded.

Despite the great postwar building boom, vacancy rates are very low,while the expanded mobilization effort is creating new and large demandsfor housing in many parts of the country. We cannot control prices andwages effectively if rents are uncontrolled.

The rent control law now in effect was designed to permit orderly decon-trol of all rents by this time. But it was not enacted in an environment ofgreat defense expansion. That effort is already seriously affecting thehousing supply in many areas. The new law that is being considered bythe Congress should be geared to the new needs of the defense effort. Itshould permit effective control of rents, where an inflationary rise is threat-ened which would be harmful to the mobilization effort.

18


Summary of Economic Developments in theFirst Half of 1951

In its second half year since the Korean outbreak, our economic mobiliza-tion for defense made heartening progress. Since the middle of 1950, theeconomy's over-all output has increased at a faster rate than in any previouspostwar period. Price and wage inflation, rampant in the first weeks of1951, was checked by the imposition of general price and wage controls atthe end of January. Soon thereafter, and partly as a result of this action,inflationary pressure subsided temporarily as consumers moderated theirabnormal rates of buying. Government spending for defense and defenseproduction mounted at an accelerating pace, however, presaging a revivalof inflationary pressures later on. (See Chart 4.)

Both on the production and the stabilization sides, the record leaves roomfor improvement.

Employment has increased substantially during the last year, with un-employment falling sharply, the total labor force growing at about twicethe normal rate, and our armed forces more than doubling. Nonagricul-tural employment, after expanding rapidly following the Korean out-break, has been relatively stable in 1951, while agricultural employmenthas continued its long-run, year-to-year decline. In June, total civilianemployment was 61.8 million—300,000 higher than in June 1950.

While there is not yet any over-all manpower shortage, we do face seriousshortages in certain skilled trades and professions, some of which have beenlong-continuing.

Unemployment in the first 6 months of this year was 1.8 million lowerthan in the same period last year. In June, it reached the lowest level forany June since World War II—2.0 million. The average duration ofunemployment, as well as the number of people out of work, has declined.

Working hours, which lengthened considerably during the second half of1950, declined somewhat during the first half of this year. In June, theaverage workweek in manufacturing industries was 40.8 hours, comparedwith 40.5 hours in June 1950, with all of the increase occurring in durablegoods industries.

Production of goods and services as a whole (as measured by gross nationalproduct in constant prices) was more than 5 percent higher in the firsthalf of 1951 than in the second half of 1950, and about 10 percent abovethe first half of last year.

Industrial production, which soared during the last 6 months of 1950,increased from an index figure of 218 in December (1935-39= 100) to 223in April. But since then, because of raw materials shortages, cutbacks, andslackening of civilian demand, the over-all index has shown no change.

Continuing high rates of agricultural production indicate that our supply


CHART 4

EGCHXPERCE

+ 10

0

-10

-40

-50

+ 40

+ 30

+ 20

+ 10

0

-10

-20

+ 30

+ 20

+ 10

0

-10

+ 20

+ 10

0

I/ CHA

DNOMIC INDICATORSkNGES FROM A YEAR AGONTAGE CHANGE PERCENTAGE CHANGE

__ EMPLOYMENT pi

TOTAL f ;/;>;/.:] NONAGRICULTURAL °MRA

/N

BU

LE ^MANU-^ I 1CIVILIAN f'-'-'-'-'i EMPLOYMENT MANU- MANU- 1- I

EMPLOYMENT l&v:! EMPLOYMENT FACTURINO FACTURING f 1r.-Vv.vj EMPLOYMENT EMPLOYMENT I I

- LiiiJ l | "7y- AGRICULTURAL f l '"i

EMPLOYMENT I 1

UNEMPLOYMENT

_ PRODUCTION

m M-

\ i-f I

GROSS NATIONAL INDUSTRIAL TOTAL HHH " PRODUCERS* PUBLICPRODUCT PRODUCTION PRIVATE /y ^^ PLANT AND CONSTRUCTION

(1ST HALF OF .. CONSTRUCTION-^ ^^ EQUIPMENT1951 PRICES)-^ ^^ EXPENDITURES

~" (NONFARM)-^ "~

PRIVATERESIDENTIAL /x

_ INCOME _

NATIONAL COMPENSATION PERSONAL WEEKLY AGRICULTURAL ênr?-^. INCOME^/ OF EMPLOYEES^ DISPOSABLE EARNINGS INCOME^ occnoc "

INCOME^ (MANUFACTURING) TAXES^

- PRICES

ALL FARM FOODS INDUSTRIAL ALL FOODCOMMODITIES PRODUCTS (OTHER THAN FARM ITEMS %/

PRODUCTS AND FOODS)

+ 10

0

-10

-40

-50

+ 40

+ 30

+ 20

+ 10

0

-10

-20

+30

+20

+ 10

0

-10

+20

+ 10

0

NGES FROM 1950, 2ND OTR..TO 1951, 2ND QTR. ALL OTHER CHANGES EXCEPT CONSUMERS* PRICES,

£/ CHANGE FROM JUNE 1950 TO MAY 1951.

SOURCE: APPENDIX B.

20


of foods in the year ahead should be at least as great as in the year justpassed, and fully adequate for normal requirements. The demand for food,however, is unusually high. Fortunately, current crop prospects are encour-aging. Production of cotton will be sharply expanded this year.

Prices at midyear 1951 were far above their levels a year earlier, re-flecting largely the surge before the General Ceiling Price Regulation wasissued at the end of January.

Wholesale prices stabilized by mid-February, and tended down slightlyin the second quarter, returning by midyear to a level only slightly abovethat at the time of the General Ceiling Price Regulation. In June, farmerswere, on the average, receiving prices equivalent to 106 percent of parity,but there were wide differences among commodities. Throughout thesecond quarter, wholesale industrial prices were in a very slow but steadydecline, and at midyear were at about their January level.

Consumers' prices, which were climbing about l*/a percent monthly inthe buying wave at the turn of the year, increased only 0.9 percent fromFebruary to May, reaching in the latter month a level of 8.9 percent abovethat of June 1950. Retail food prices were 2.5 percent higher than inJanuary. They moved down 0.3 percent in June, but were 11.7 percentabove June last year.

Wages continued to rise in the first half of 1951, but at a diminishedrate. Average hourly earnings in manufacturing, which had increasedover 8 cents an hour from July to December 1950, increased by almost5 cents an hour from January to June of this year. Weekly earnings indurable goods manufacturing advanced almost $3.00 during the first 6months of 1951, but rose only 10 cents for workers in nondurable goodsmanufacturing during the same period.

Work stoppages have not been a serious problem so far this year. Whilethe number of stoppages was higher than in the comparable period of 1950,total man-days of idleness were at considerably lower levels.

Profits of corporations, before taxes (not adjusted for changes in inventoryvaluations), are estimated to have reached a new record annual rate of 50billion dollars in the first half of 1951. The level estimated for the secondquarter of 1951—481/% billion—is below the peak of nearly 52 billionreached in the first quarter. It compares with 37J/2 billion in the secondquarter of last year. Corporate profits after taxes, reflecting higher taxrates, averaged 221/2 billion for the half year, compared with 19 billion inthe same period of 1950 and a peak rate of nearly 28 billion in the fourthquarter of last year.

The net income of nonagricultural unincorporated business, after drop-ping off in the fourth quarter of 1950, reached a new peak in the firstquarter of this year, and then declined. The net income of farm pro-prietors moved steadily upward from mid-1950 to the spring of 1951,reaching an estimated annual rate of 17 billion dollars in the second

21


quarter of this year. This was 5 billion higher than last year, but 1^4billion short of the record level in the second quarter of 1948.

Money and credit developments in the first half of 1951, in contrastwith the general expansion occurring in the first 6 months after theKorean outbreak, were divergent.

The privately held money supply (including demand and time deposits) ,declined in the first quarter of the year, under the usual impact of personalincome tax payments, and then expanded in the second quarter.

The total loans of all commercial banks increased about 5 percent, ornearly 3 billion dollars, between December 1950 and June 1951. Duringthe same period a year earlier, the increase was 4 percent; in the second'halfof 1950, it was about 17 percent. Mortgage credit continued to rise inthe first half of 1951, but at slower rates than in the last half of 1950, ascredit restrictions took hold. Consumer credit outstanding, after soar-ing 2.4 billion dollars in the second half of 1950, declined about 900 milliondollars in the first 6 months of 1951.

Personal income rose nearly 6 billion dollars (annual rate) in the firstquarter of 1951 and, advancing almost 6 billion more in the second quarter,reached an annual rate of 250 billion. Despite the tax increase, personalincome after taxes rose from an annual rate of 215 billion dollars in thelast quarter of 1950 to 217/2 billion in the first quarter of 1951 and 223billion in the second quarter.

Consumption expenditures, following roughly the same pattern as inthe last 6 months of 1950, spurted in the first quarter of 1951 to a recordannual rate of 208 billion dollars, and then declined to an estimated annualrate of 203 billion in the second quarter of this year. In constant prices,consumption in the first half of 1951 was about 2 percent less than in thesecond half of last year.

Net personal saving, under the impact of the first quarter buying wave,is estimated, in that quarter, to have amounted to only 4 to 5 percent ofdisposable income. In the second quarter of 1951, saving apparently roseto between 8 and 9 percent of disposable income—the highest rate of thepostwar period, but far below the rates attained during World War II.

Gross private domestic investment in the first half of this year reacheda record level of 62 billion dollars at a seasonally adjusted annual rate, 40percent higher than in the same period last year, and 15 percent above thesecond half of 1950.

Plant and equipment expenditures reached a new high in the secondquarter of 1951, nearly one-third above the corresponding quarter of1950, with the increases concentrated in outlays for industrial facilitiesdirectly or indirectly serving the security program.

From the Korean outbreak to May, the book value of inventories inmanufacturing and trade rose at a record rate. Inventory accumulationslowed in the first quarter of 1951, but then in the second quarter rose again,

22


as sales failed to meet expectations. In May of this year, the ratio of inven-tories to sales dropped slightly, but was close to postwar highs. At the retaillevel, the inventory-sales ratio was considerably above any previous postwarfigure.

While new construction activity was at a record level of about 32 billiondollars (seasonally adjusted annual rate) in the first half of 1951, the moststriking change has been the increasingly sharp fall since February inseasonally adjusted new private housing expenditures, as the credit controlshave begun to take hold. But private industrial and public constructionhave far exceeded the levels of a year ago.

International transactions of the United States in the first half of 1951reflected expansion of United States exports and leveling off in imports,as our very heavy post-Korean buying eased somewhat. Our export sur-plus increased from an annual rate of 2.5 billion dollars in the fourthquarter of 1950 to an estimated 5.8 billion in the second quarter of thisyear.

Largely as a result of increased military aid, total net financing of foreigntransactions, including export of military equipment, by the U. S. Govern-ment rose from an annual rate of 4.5 billion dollars in the last quarter of1950 to 5.1 billion in the second quarter of 1951. With the greater exportsurplus, the outflow of gold and dollar assets from the United States wasgreatly reduced.

In Western Europe, increasing need for imports raised the trade deficitfrom an annual rate of 3 billion dollars in the final quarter of last yearto more than 5 billion in the first quarter of this year. Price inflation duringthe first half of 1951 became more and more clearly a world-wide problem,with most countries suffering greater post-Korean price increases than theUnited States.

Government finances in the first 6 months of the year involved a tem-porary surplus of Federal receipts over expenditures, as the growth of defenseexpenditures lagged for the time being behind the increase in taxes. Thebudget surplus was 4.1 billion in the first half of calendar 1951, and 3.5billion in the fiscal year ended June 30, 1951. The Government's total cashreceipts from the public, including social security and other transactionsas well as those appearing in budget accounts, exceeded payments to thepublic in the first half of 1951 by 6.9 billion dollars, or by 3.9 billion whenadjusted for the seasonal peak in receipts in the first quarter.

Estimates of changes in State and local government finance indicate thatin the first half of 1951 the small deficit incurred by these governments inthe last 6 months of 1950 was virtually eliminated.

HARRY S. TRUMAN.JULY 23, 1951.



The Economic Situationat Midyear 1951

A Report to the President

By the




LETTER OF TRANSMITTAL

COUNCIL OF ECONOMIC ADVISERS,Washington, D. C., July 20, 195 L

The PRESIDENT:SIR: The Council of Economic Advisers herewith submits a report, The

Economic Situation at Midyear 1951, in accordance with section 4 (c) (2)of the Employment Act of 1946.

Respectfully,

Chairman.



ContentsPage

1. REGENT TRENDS AND THEIR SIGNIFICANCE 33The emergence of a defense economy 33The general upsurge in demand, output, and prices 34

The rise in general demand 34The rise in total output 38The inflationary rise in prices 39

The fight to curb inflation 41The lull in inflationary pressures 42The lull in the growth of industrial output 43The expansion of defense production 44The underlying forces at midyear 45

II. THE SHAPING OF THE DEFENSE ECONOMY 50Main objectives 50Our economic potential 51

The World War II production achievement 53The course of production from World War II to

Korea 55Changes in output from mid-1950 to mid-1951 58How much can we expand total output? 60

Major required adjustments in the use of the Nation'sresources 63

Major changes in the use of output, 1940 to 1944 64The postwar period to mid-1950 66Changes in the composition of the Nation's output

from the first half of 1950 to the first half of 1951... 67Prospective changes in government outlays, private

investment, and consumption 67The current national security program 68

Size of the security program 68General character of the security program 70The impact of military production programs on mate-

rials 71The impact of the common security programs on

materials 73The industrial build-up 75

Over-all investment objectives 75Plant and equipment 78Priorities in expansion 78Expansion objectives in specific industries 82

29


II. THE SHAPING OF THE DEFENSE ECONOMY—Continued PageImpact of the security program on consumption standards. 88

The growth of consumption, 1940 to 1944 89Consumption in the postwar period 90Consumption during the period of the new defense

build-up 94III. ECONOMIC POLICIES FOR DEFENSE 97

Prime importance of economic programming 97The production effort 99

Industrial production aids 100Defense production aids and regional development. . . 109Aids to agricultural production 110Manpower build-up 112International production and resources policies 114

The stabilization effort 120The nature of inflation 120Appraisal of prospective inflationary pressures 122The strategy of stabilization 125Tax policy 127Curtailment of less essential Federal spending 136State and local participation in the stabilization

program 137Credit policy 137Debt management 142Price policy 144Subsidies and food prices 151Wage policy 154Savings programs 159The world-wide problem of inflation and stabilization. 159

IV. DETAILED ECONOMIC DEVELOPMENTS DURING THE FIRST HALFOF 1951 162

The expanding economy 162The labor force 164

Employment 164Unemployment 166

Production 167Industrial production 168Agricultural production 169Services 170

Prices 170The inauguration of controls , . . 170Wholesale prices under controls 171Consumers' prices under controls 175


IV. DETAILED ECONOMIC DEVELOPMENTS DURING THE FIRST HALFOF 1951—Continued Page

Wages 178Wage stabilization 178Work stoppages 181

Profits 182Money and credit 184

Money supply 184Credit ' 184

Flow of goods and purchasing power 187Personal income 188Personal consumption expenditures 188Personal saving 190

Business investment and finance 191Plant and equipment 193Nonfarm inventories 193Construction 195Corporate finance 196

International developments 198Government fiscal operations 203

Progress of spending for national security program.. 205Cash payments by the Federal Government 206Cash receipts of the Federal Government 206State and local government finances 207

The Nation's Economic Budget 207

APPENDIXES

A. Statistical Tables Relating to the Nation's Economic Budget.. 211B. Statistical Tables Relating to Employment, Production, and

Purchasing Power 223C. Lists of Text Tables and Charts in The Midyear Economic

Report of the President and The Economic Situation at Mid-year 1951 275



I. Recent Trends and Their Significance

THE EMERGENCE OF A DEFENSE ECONOMY

THE invasion of South Korea a year ago decisively altered the courseof the United States economy. Until then, our major efforts since the

end of World War II had been concentrated on expanding civilian produc-tion to meet the high postwar level of demand swollen by the shortages builtup during the war, and on maintaining a high level of employment.While furthering this peaceful task at home, we had not neglected theeconomic plight of other free nations. We made a major contribution tothe rebuilding of the war-shattered economies of these nations.

By June 1950, the transition from the aftermath of war had been prac-tically completed. In reaching this position, the path had not been easy,marked as it was by a substantial inflation and many difficult problemsof readjustment. But the vigor and resiliency of our economy made itpossible to avoid the severe depression which so many had feared. Infact, the downturn in 1949 was no more than a minor digression fromthe postwar record of growth. The revival which quickly followed broughtthe prospect of a period of economic stability, with growing levels of civilianproduction, employment, and consumption.

With the Korean outbreak, we were confronted with the need to charta new path for the economy. If we were to avoid a new world war, orbe ready for one if it came, the obligation became clear to build up our de-fensive strength at a much more rapid rate and help our allies build theirs.Only in this way could the free world make plain its resolve to resist aggres-sion. Whether we shall be called upon to fight elsewhere than in Koreadepends upon plans of others. But the free world must be prepared. Itshould not be lulled into complacency by ostensible changes in the strategyof the aggressor nations. Only when it is compellingly clear that aggressionis no more to be feared can we afford to relax. We are moving into aposition of preparedness which may have to be maintained for years.The long ordeal we are embarked upon requires steadiness of nerve andiron patience, as much as material build-up in physical strength.

A basic requirement of national policy in these dangerous years is thefirm welding together of the elements of a strong defense economy. Withthat, military power can be successfully organized as the bulwark of na-tional security. Without it, military strength would languish for lack ofsupport from its economic roots.

33


This is the third semi-annual Review in which the Council of EconomicAdvisers has faced the unusual problems of a partly mobilized economy.A year ago, the economic problem implicit in the defense program wasalready apparent as the response to the Korean aggression began to destroythe economic balance of June 1950. Six months ago, the country wascontending with inflation, although defense mobilization was only begin-ning to have major direct impact on our resources. Most kinds of economiccontrols existed only in rudimentary form.

In sharp contrast is the economic situation at midyear 1951. (See chart5.) Four major features have marked the course of the economy duringthe first half of this year: the brief renewal in January of the general upsurgeof demand and prices; the institution of a broad structure of economic con-trols; the temporary abatement of inflationary pressures; and the rapidexpansion of primary defense production. The economic prospect is nowfurther affected by the possibility of a quiescent situation in Korea, althoughthis does not affect the need for the defense build-up.

The Council must now examine the trend of the economy and the prob-lems of national economic policy in a setting which is neither that of fullmobilization for war nor that of high-level, dynamic production andemployment in a peaceful world.

THE GENERAL UPSURGE IN DEMAND,, OUTPUT,, AND PRICES

Before the Korean attack, the economy had been rapidly recovering fromthe 1949 recession. The index of industrial production had regained lostground and risen to the highest point since 1945. Wholesale prices hadalso recovered, although for most commodities and especially for farmproducts and foods they were below 1948 peak levels. Unemploymenthad been reduced by more than 1 million below the peak of January 1950,although it was still more than 1 million above the level of June 1948. Theeconomic outlook was for further growth in production, and a furtherdecline in unemployment.

The rise in general demand

The Korean attack and the response by the United States and the UnitedNations added to an already highly active economy an unprecedented in-ci;ease in private buying. There were two distinct waves of consumerbuying, reflecting the changing fortunes of war in Korea. By early fall,there were signs of some subsidence of the first wave; but following theChinese intervention on a massive scale in late November, the buying pres-sure was renewed. The record shows that consumer buying rose to anall-time high in the third quarter of 1950, declined slightly in the fourthquarter, was renewed with great vigor and reached still another all-timehigh in the first quarter of 1951, and then declined again. (See appendix

table B-4.)

34


CHART 5

PRODUCTION, SPENDING, AND PRICESSINCE MID-1950While production,spending,and prices are now at much higher levelsthan those of mid-1960,industrial production has been stable since thefirst quarter. Consumer spending dropped in the second quarter of 1951,and wholesale prices eased off slightly from March through June.INDEX

120

110

100

PRODUCTION2nd Qtr. 1950 = 100

INDUSTRIAL PRODUCTION

INDEX

120

110

100

2nd Qtr. 3rd Qtr. 4 th Qtr. 1st Qtr. 2nd Qtr.

150

140

130

120

HO

100

130

120 -

CONSUMER, BUSINESS, AND- GOVERNMENT SPENDING^/

2nd Qtr. 1950 = 100

GOVERNMENTEXPENDITURE

v/BUSINESS / — — ..tL

EXPENDITURE / • ' — '

/ .' CONSUMER// EXPENDITURE

2nd Qtr 3rd Qtr 4th Qtr 1st Qtr. 2nd Qtr

150

140

130

120

110

100

130

- 120

100A M J J A

1950

J/ INDEX BASED ON GROSS NATIONAL PRODUCT IN 1ST HALF OF 1951 PRICES

ZJ INDEXES BASED ON EXPENDITURES IN CURRENT PRICES

SOURCES: DEPARTMENT OF COMMERCE, BOARD OF GOVERNORS OF THE FEDERAL RESERVESYSTEM, DEPARTMENT OF LABOR, AND COUNCIL OF ECONOMIC ADVISERS.

35


In July 1950, the increase in retail buying was 8.5 percent above that inthe preceding month. Retail sales in July and August exceeded the Junelevel by an amount equivalent to 1J4 percent of total sales in 1950. Thishad great effect only because it was superimposed upon a high level ofconsumer demand. It was followed by some reaction in the autumn, inthose lines of goods which consumers had stocked beyond their currentneeds.

The expansion of private demand for goods came not only from con-sumers, but also from businesses. At first, it was not possible for busi-ness buying to keep up with consumer buying, and inventories declinedin July 1950. Thereafter, business inventories mounted steadily. Busi-ness demand was reflected also in the rate of expenditures for new plant andequipment, which rose from an annual rate of 17.3 billion dollars in thesecond quarter of 1950 to 23.3 billion in the fourth quarter, and to anestimated 25.7 billion in the second quarter of 1951. (See appendix tables

B-20 and B-21.)The growth in business demand was undoubtedly stimulated in part by

defense contracts, actual and anticipated, and by expectations of marketshortages and direct controls which would restrict the accumulation anduse of materials. The increased direct demand by the Government inconnection with the defense program was a relatively small part of the total,during the first few months following the Korean outbreak. The FederalGovernment was spending in all less than it had a year before, and wasrunning a cash surplus.

The annual rate of expenditures for security programs rose from 16.3 bil-lion dollars in the second quarter of 1950 to 23 billion dollars in the fourthquarter. These figures, however, do not fully reflect the impact of defenseactivity. Expenditures occur, in the main, after production is completed.Production takes time; and before production can begin, plans must bedrawn, contracts let, plants tooled up, subcontracting arrangements made,material bought, and labor hired. Thus, much of the effort and resourcesrequired for an expanding defense program must be expended manymonths before they are matched by cash expenditures of the Government.Yet the great increase in business spending which extended through the firsthalf of 1951, while conditioned by the defense environment, was runningfar ahead of primary defense activity. It reflected a broad and ebullient"boom" psychology, an expectation of enlarged market opportunities andhigher prices in an economy whose general expansion would be acceleratedgreatly by international trends.

The financial environment at midyear 1950 and thereafter was veryfavorable to this rise in private demand, because both liquid assets and bankcredit were plentiful. Between 1940 and 1950, the total of currency,demand and time deposits, and Government securities owned by individ-


sj rose about 225 percent whereas as disposable personal income rose only170 percent during the same period. In 1950, liquid assets of corporationswere at the highest level in history. The increased demand was financed inpart by drawing on liquid assets, in part by borrowing, and in part by theincreases in income which were the inevitable outgrowth of the largerphysical volume of production and the higher prices. (See appendix tablesB-30,B-31, andB-39.)

In addition, consumer borrowing rose at a record rate until RegulationW was re-established in the fall. This action discouraged further ex-pansion of instalment credit, and reduced the amount of credit involvedin those instalment sales which were made. Business also borrowed heavily.Total business loans of all commercial banks rose 5 billion dollars, or 30percent, between June and December 1950, and expanded 1.6 billion dollars,or 7 percent, during the first quarter of 1951. Some of the rise in businessloans during the second half of 1950 was seasonal, but the rise in early 1951came at a season when loans usually decline.

The uptrend in private demand was also supported by increased incomes.The growth of personal income during the second half of 1950 was phe-nomenal. Contrasting the second and third quarters, the rise amounted toabout 5 percent. Contrasting the third and fourth quarters, there was afurther increase of 5 percent. The first quarter of 1951 brought an addi-tional increase of about 3 percent, followed by an additional 2.5 percent inthe second quarter. (See appendix table B-7.)

The general upsurge in the desire to buy, backed by the funds to doso, was responsive to the expansionary environment which existed at mid-year 1950, and was greatly augmented by international developments. Theimpelling reason for the spurts in buying during the third quarter of 1950and the first quarter of 1951 was the expectation of shortages and priceincreases. Consumers projected into the future the vivid memories oflack of goods during and immediately after World War II. Business-men foresaw glowing profit opportunities in brisk markets and rising prices.In the intense reaction after the first Korean aggression, and again afterthe Chinese onslaught, consumers and businesses alike tried, by promptprivate stockpiling, to protect themselves against the possibility of emptyshelves, rationing, quality deterioration, and rising prices. Fear of beingthwarted by the competing demands of others intensified the buying waves.The ensuing inflation in prices led to anticipation of further price increases,and accelerated the buying rush to beat the rise.

While these spurts have an important bearing upon the current outlook,they are not more significant for the long run than the more permanenttrend reflecting more basic factors.

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The rise in total output

Immediately after the Korean outbreak, it became clear that one ofour most important economic tasks was to expand production of essentialgoods. The President's Midyear Economic Report in July 1950 opened withthese words: "Recent international events make it more important nowthan ever before that we maintain and expand our strength on the homefront. For the sinews of all our strength, everywhere in the world, are foundin what we achieve here at home. We must make full use of our greatproductive resources, our ever-improving industrial and scientific tech-niques, and our growing labor force. We must redirect a part of theseresources to the task of resisting aggression."

Viewing the past 12 months as a whole, the upsurge of demand hasbeen accompanied by a remarkable further increase in total productionfrom the high levels already existing in June 1950. The output of goodsand services in real terms, i. e., after full allowance for price changes, in-creased by about 10 percent, comparing the second quarter of 1950 with thesecond quarter of 1951. (See chart 5 and appendix table B-3.) Thismeant the highest peacetime level ever recorded, and exceeded the peakyear of World War II. It has been a major accomplishment of Americanenterprise during the past year to meet the requirements of a growingdefense production, to invest at record rates in inventories and in new plantand equipment, and at the same time to furnish the highest level ofconsumption in history.

By far the largest part of the growth in output took place during thefirst 7 months after the Korean aggression. The advance was spectacu-lar. The index rose from a level of 199 (1935-39= 100) in June to 218 inDecember, a rise of more than 9 percent, with a further jump to 221 inJanuary 1951. Total real output, however, rose by only about 4^ percent,comparing the second quarter of 1950 with the fourth quarter.

Since initially the volume of total production grew more rapidly than thevolume of defense production, civilian production was also increasing.New peaks were reached in the production of automobiles, washing ma-chines, vacuum cleaners, and other consumer durable goods. The rate ofgross private domestic investment also continued to reach new peaks; asubstantial part of this was undoubtedly in preparation for defense pro-duction.

The unusual record of growth from June 1950 through January 1951was sparked mainly by the increase in demand on the part of bothconsumers and business, which has already been reviewed. The expansionin output was accomplished in part by increased employment and longerhours of work, and in part by greater productivity. Nonagriculturalemployment rose 4.5 percent, comparing the first half of 1950 with thesecond half. Average hours worked per week in manufacturing rose from


40.5 in June to 41.4 in December. Increased productivity has partlyresulted from programs for modernizing and expanding productive facilities,which have been carried on since the end of World War II.

Industrial production expanded not only in the United States, but alsoin other countries. This expansion has contributed to the current short-age of raw materials. Output in other countries has been rising sinceWorld War II. New impetus was given by the rapid expansion of demandin the United States after Korea, and the consequent sharp increase inAmerican imports. World industrial production outside the United Statesand the Soviet Union, which had been rising prior to the outbreak of hos-tilities in Korea, has since risen somewhat more rapidly, exceeding the cor-responding level of the year before by 15 percent. Production in WesternEurope averaged still higher during the first part of 1951.

In parts of Western Europe and even more in Japan, manpower andplant are available or could be provided to permit further gains. Alimiting factor is raw materials. Although material supplies appear to besufficient to permit production at current or slightly increased rates, a sub-stantial further growth of output in Western Europe is being hamperedby shortages of coal, sulphur, wool, high grade iron ore, steel scrap, andnonferrous metals. This results somewhat from the fact that in 1950,when the United States was building up inventories, some countries ofWestern Europe were running down their inventories of many importantraw materials. But primarily, it reflects the failure of raw material produc-ing capacity to grow sufficiently to meet the needs of the United Statesand other industrial countries, when their economies are all operatingat high levels at the same time.

The inflationary rise in prices

Prices, which had risen moderately during the first half of 1950, beganto climb rapidly with the expansion of business and consumer demandafter the North Korean attack. The sharpest of the early advances occurredin markets for raw materials, which responded quickly to the flood ofbuying orders. Food prices, both wholesale and retail, reacted less violentlybut moved up rapidly and substantially. Prices of industrial products wentup somewhat more slowly in the early weeks following the Korean out-break, but had risen by about the same percentage as food by February1951, when wholesale prices leveled off. The rise in consumers' prices,which had begun in March 1950, was accelerated after Korea, and, lag-ging as usual behind wholesale prices, continued somewhat after the latterhad stabilized. (See appendix tables B-24 and B-25.)

The timing of price increases reflected the two great spurts in consumerbuying. There were sharp increases during the summer of 1950, then ashort period of relative stability during which some prices at wholesaledeclined, followed by a sharp upward movement between November and

39


February. During January, the price advance was rapidly accelerating,prompting issuance of the General Ceiling Price Regulation late thatmonth. Wholesale prices continued to rise for a few weeks, but laterdeclined somewhat, varying within a narrow range from the middle ofFebruary through the balance of the half year.

The spread of price increases throughout the economy was primarily dueto very strong demand, but was also an adjustment of sales prices to risingcosts, the imitative reaction of businessmen to other price increases, andan effort to anticipate and be in readiness for the later imposition of priceceilings. Most manufacturers and merchants had an active sellers' market,which gave promise of long duration. Believing that the increases in theircosts would not be temporary, they quickly brought prices into line withcosts. Expectations of direct control of prices encouraged this speedyadjustment. Many firms raised their prices in anticipation of the cost in-creases without waiting for them.

A price increase for one commodity brought higher prices for othercommodities, with spiraling effect. Moreover, as the prices of consum-ers' goods rose and demand for workers increased, widespread upwardwage adjustments followed. The number and speed of these reflectedthe number and strength of organized workers, and the presence of cost-of-living escalator clauses in many wage contracts. Business concernswere in a financial position to grant large wage increases, and employerswanted to lift their wage rates to a level favorable to the recruitment ofworkers before controls took effect. The higher production costs, whichresulted from higher material prices and wage increases, led to still highersales prices and thereby entered into the spiral.

The inflationary price pressures were not limited to the United States.The response of the free world to the Korean development created upwardpressures upon prices in many countries. Particularly, there was increaseddemand for such materials as rubber, wool, tin, and woodpulp. Theinfluence of developments in the United States was augmented by theactual and anticipated acceleration of defense expansion in Western Europeand some other countries.

The result has been to generate an inflation of worldwide scope. Al-though the slackening in price rises here has been followed by some recentslackening abroad, the rise of prices has gone to far greater lengths in mostother countries than it has in the United States. Contrasted with the 15percent increase in our wholesale prices since the outbreak of Korean hos-tilities, nearly half the countries in Western Europe have suffered increases inwholesale prices exceeding 30 percent since June of last year. In the caseof Japan, where there are special factors associated with its role as a stagingarea for the Korean campaign, the increase through April exceeded 50percent. The enormous price increases which have occurred constitute insome countries a danger to political and social stability, and to the securityprogram of the free world.

4o


THE FIGHT To CURB INFLATION

The inflationary danger was recognized by the public and the Govern-ment immediately after the Korean outbreak, and a number of steps weretaken to meet it. The Defense Production Act was passed. Priorities andexport controls were placed on the flow of scarce materials essential to de-fense production. Measures to reduce civilian demand were designed. Thepublic was repeatedly informed that there was a plentiful supply of mostgoods, and was urged not to buy more than necessary. All Federal Gov-ernment programs were reviewed aiming at the curtailment, as far aspossible, of nondefense spending. A tax-reducing and adjusting measurewas turned into a major tax-increasing measure, an unprecedented achieve-ment made possible by the close cooperation of all concerned. Later, theexcess profits tax was passed. Selective credit controls were imposed on thepurchases of new houses and consumer durable goods, and some generalmeasures of credit restraint were adopted to make credit less available fornonessential purposes. Actions were also taken to achieve maximum ex-pansion of domestic agricultural production.

"Indirect" measures are essential to counteract an excess of demand oversupply, and are therefore fundamental. But to deal with waves of massbuying, financed by accumulated liquid savings, more direct and drasticmeasures are also at times required, such as price and wage controls. Thelegal powers to impose such controls were enacted in September 1950. Bythen, the situation in Korea seemed more favorable, the wave of consumerbuying was dying down, and prices were leveling off. But the new waveof mass buying, which followed the entrance of the Chinese into the con-flict, again altered the outlook. On December 15, 1950, in declaring anational emergency, the President announced the determination to imposemandatory price and wage controls.

During December and January, administrative preparations were madefor this step. As a stopgap, the Government called for voluntary restraint,and promulgated in December a set of voluntary pricing standards. Thesemeasures undoubtedly had some usefulness, but public belief that manda-tory controls were soon going to be applied probably accelerated the upwardprice and wage movement. Confronted with this critical situation, anddespite the lack of an adequate administrative staff, the Office of PriceStabilization late in January issued the General Ceiling Price Regulation.In effect, this froze most prices at the highest levels at which deliveries hadbeen made during the period from December 19, 1950, through January25, 1951. At the same time, a parallel order was issued freezing all wagesand salaries.

New and stronger measures of credit restraint were also brought to bear.Member bank reserve requirements were increased, further attempts weremade to limit the amount of funds available for lending through a new


policy on open-market operations, regulations applying to loans for newconstruction were broadened, margin regulations on stock exchange loanswere tightened, and the major classes of lending institutions were broughtinto a voluntary program to limit lending for purposes not related tomobilization objectives.

Meanwhile, the tremendous increase in general output, reviewed above,was building a curb against inflation from the supply side. These produc-tive achievements tended to be overlooked in the general public concernwith military difficulties on the battlefield and the evidence of inflationon the homefront.

THE LULL IN INFLATIONARY PRESSURES

A feature of the first year of the security effort was that, just when defenseproduction began really to expand, a lull in inflationary pressures developed.Beginning about mid-February 1951, buying slowed down and prices showedsigns of stabilizing. Real consumption expenditures (first half 1951 prices)declined from an annual rate of 208.2 billion dollars in the first quarterof 1951 to 203.0 billion in the second quarter. In the second quarter,there was a softening of some markets, and many prices eased off fromtheir peaks.

Paradoxical as this slowing down may appear at first glance, it should nothave been surprising. The strong, sometimes even violent, spurts in buyingduring July and August 1950, and again early in 1951, had importantemotional elements—the fear of early shortages and of rising prices. Therewas some factual basis for this reaction, in that a greatly expanded securityprogram must add substantially to demand, and lead to a shift of resourcesfrom civilian to defense purposes. But general public expectations of thetiming and degree of impact of the program proved to be incorrect. Therush to buy on the part of consumers and business created the very situationwhich had been feared. Prices did surge upward, and temporary shortagesbegan to appear, thus accentuating the rush to buy.

Two factors deprived this phase of the inflationary movement of itsmomentum.

In the first place, the general freeze of prices late in January allayedthe fear of rising prices. Suddenly, there was no need to buy to beat theprice rise. With this pressure removed, other stabilization measures alsobegan to exert continually increasing restraint.

Second, the fear of early shortages was reduced by several developments.There had been a large increase in the output of civilian goods since theKorean outbreak. The effect of this growing supply was temporarilyobscured by the continuing rise in prices, and by fear that the war in Koreamight spread to a wider area. As the military situation improved andstabilized, and as prices were brought under control, consumers realizedthat the fear of immediate shortages had been exaggerated. Moreover, by

42


this time consumers had greatly increased their stocks of durable goods,and many of them had spent a substantial part of their accumulated savingsor had gone into debt. In this situation, consumer buying began to slacken.

Since civilian production during the first quarter of 1951 continued ator close to the peak rates achieved in 1950, the result was a continued highrate of inventory accumulation, particularly at the retail level and espe-cially of consumer durable goods. Retailers who since Korea had placedlarger orders than normal, to be sure of receiving an adequate supply, foundthemselves with a flood of deliveries. These caused no difficulties, so longas consumers continued to expand their purchases. But with the decline inretail sales after mid-February, retailers became concerned. This wasenhanced by the failure of Easter sales to meet expectations. As a result ofslower sales and quicker deliveries, a substantial volume of involuntaryinventory accumulation took place. During the second quarter, retailerscut new orders sharply and attempted to reduce inventories throughaggressive sales promotion. Particularly noteworthy was the temporarywar on privately-price-fixed items in New York and several other cities.

The chief effect of the lull has been a softening in some prices, and aleveling off in some important business activity. Wholesale prices, whichhad risen sharply to an all-time peak of 184.0 (1926=100) in March,leveled off, and were down to 181.7 in June. A somewhat sharper drop wasexperienced by prices of farm products, and by prices of some industrialcommodities, especially some textiles and some chemicals. Wholesale foodprices were down less than 1 percent from their peak. The most pro-nounced drop was in the prices of basic commodities, which had begun toweaken in mid-February and fell by about 13 percent by the end ofJune. The cost of living, however, was about 1 percent higher in Maythan in February.

Just as the immediacy of the impact of the security program was exag-gerated, there is now the danger that the significance of the present lullmay be similarly overestimated. To the extent that the lull has restoredbuying to more normal proportions, its effect is all to the good. But tothe extent that it leads to a state of complacency about the future risk ofinflation, its effect is harmful. The current period of hesitation must beseen in the perspective of the basic, longer-range factors affecting demand.

THE LULL IN THE GROWTH OF INDUSTRIAL OUTPUT

The lull in inflationary pressure has been accompanied by a slowingdown in the rate of growth of industrial production. The gross nationalproduct in real terms has expanded about 5 percent from the fourthquarter of 1950 to the second quarter of 1951, while the Federal ReserveBoard index of industrial production rose from an average of 216 toan average of 223, an increase of 3.2 percent. (See appendix tables B-3 andB-17.) Although the index has not increased in recent months, indus-

43


trial production has been running at very high levels. Consumptionexpenditures, however, declined about 5 billion dollars (annual rate) fromthe first quarter to the second quarter of this year. Associated with thisdecline in consumption expenditures has been an offsetting increase in theaccumulation of inventories amounting to about 5 billion dollars (annualrate) during the same period.

The slackening in the vigor of industrial expansion during the past6 months has been due to three sets of causes: first, some industries hadreached capacity; second, some industries were forced to reduce outputbecause of limitations on the nondefense use of metals or other raw materials;and, third, some industries faced a drop in demand.

Steel is one of the industries in which output has been limited by existingplant capacity. Steel capacity is being increased, but the expansionnecessarily will be slow.

At present, about 8 percent of the gross national product is going into newnonfarm plant and equipment, so that industrial capacity is rising signif-icantly. Expansion programs in bottleneck areas such as steel, aluminum,power, and transportation equipment are particularly effective in raisingour productive potential.

The main raw materials bottlenecks have been metals, including steel,copper, lead, zinc, aluminum, and tin. It has been necessary to restrictthe use of these materials. Such restrictions account^ in part for recentdecreases in the output of automobiles, washing machines, refrigerators, andother durable goods.

However, some industries have been operating at less than capacity levelsbecause of the market situation. Large inventories, and in some casesreduced demand, appear to explain recent drops in output in a number ofindustries, notably textiles, shoes, and liquor.

THE EXPANSION OF DEFENSE PRODUCTION

Primary defense production, which started slowly following the Koreanoutbreak, has been picking up speed, and is now rapidly moving ahead.

The increase in defense production involves conversion of many facilitiesbeing used in other ways. In addition, it requires substantial industrialexpansion. The Government has employed a number of incentives for en-couraging expansion in the desired industries. Accelerated tax amortiza-tion reduces some of the risks of investment. Defense loans are availablewhere financing is needed. Long-term purchase contracts and standby pur-chase agreements help give assurance that the plant will have a market.

In the second half of 1950, there were large increases in the output ofmany goods and services which are necessary in a defense economy. Theindex of machinery production increased from 262 in June to 321 inDecember (1935-39= 100). Chemical products jumped from 261 in Juneto 283 by the end of the year.

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There was little increase in deliveries to the Government of finisheddefense products during the second half of 1950. In the first 6 months of1951, however, deliveries of military goods and military construction haveincreased rapidly, and have now reached a level of 1.5 billion dollars amonth, which is more than three times the monthly rate before the Koreanoutbreak. Large further increases are ahead. The Second QuarterlyReport of the Director of Defense Mobilization indicates that the deliveryrate is scheduled to rise to 4 billion dollars a month within a year.

The total security program took 6 percent of the gross national productin the second quarter of 1950, 8 percent in the fourth quarter of 1950, and10 percent in the second quarter of 1951. According to the present schedule,it will increase further to about 15 percent in the last quarter of 1951.(See chart 6.) We have greatly enlarged the production of aircraft andcombat vehicles, electronic equipment, and other military goods. Defenseproduction of all kinds will mount rapidly in the future. It takes timeto work out specifications, draw up contracts and subcontracts, and getproduction lines organized. Much of the tooling up and other prelim-inaries has now been accomplished.

THE UNDERLYING FORGES AT MIDYEAR

As the Council seeks to appraise the economic outlook at midyear, themost important factors to be considered are the prospective levels and

CHART 6

THE EXPANDING SECURITY PROGRAMthe security programs represented 10 percent of ournational output in the second quarter of this year. A yearfrom now they will take nearly 20 percent, according toschedule.

-SECURITY EXPENDITURES (PERCENT OF GNP)

2nd Qtr.I960

2nd Qtr.1951

2nd Qtr.1952

NOTE: BASED ON DATA ADJUSfEO TO 1ST HALF 1931 PRICES.


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trends in the security program, in business investment, and in consumerdemand. The relationship between the total of these forms of demandand the available supplies of goods will mainly determine the nature andintensity of the stabilization problem to be met.

Powerful international tensions continue to dominate domestic eco-nomic developments. The President and the governmental agenciescharged with responsibility for national security have made clear that thesecurity program should continue as planned, regardless of the outcomeof negotiations in Korea. The reason compelling this conclusion is clear.To stop the aggression of the Soviet Bloc in Korea is not to prevent ag-gression elsewhere. Since 1945, the Soviet aggressors have sought to createpolitical and economic instability in nearly all non-Soviet countries. Whenconditions seemed right, the aggressors have used military threats andactions. Such tactics have been particularly successful in China, but wereresisted in Iran, Greece, Turkey, Berlin, Indo-China, and Korea. If wefalter or relax in our security build-up, it is reasonable to expect that thiswould prompt a renewal of pressures at other points. Only throughstrength can we succeed in proving that aggression does not pay.

The rate of defense production is rapidly increasing. During the sec-ond quarter of 1951, the output for security reached an annual rate ofover 35 billion dollars. Under present schedules, we are to achieve anannual rate of almost 65 billion dollars a year hence. It is manifestly im-possible to accomplish such an enlargement of the security program, withoutplacing strains upon many parts of the economy. Our total output cannotbe increased as rapidly, during the next year, as the security program. Inthe case of many vital commodities, the increased security requirementswill greatly reduce the amounts available for other purposes.

A large increase in defense spending, to the extent that it is not offset byreduced spending in the private sector of the economy, will greatly increasethe incomes of consumers and businessmen. With increasing defense ex-penditures, the Council would expect the number of people gainfullyemployed to rise, hours of work and overtime payments to increase, andwage rates to creep upward even under an effective wage stabilizationprogram.

A rising level of defense production and consumer spending stimulatesbusiness demand for plant and equipment, which has been running at all-time peak rates. In fact, the most recent declarations and surveys ofbusiness intent reveal that affirmative policies must continue to be usedto bring the total of private investment downward toward a less infla-tionary level. By weeding out nonessential investment, this can be donewithout impairing the high level of investment in plant and equipmentrequired to keep our economy strong enough to support the defense burden.

Thus, with these fundamental forces at work, strong restraint on bothbusiness investment and consumer spending is required if a new inflationarymovement is to be avoided.

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There are, to be sure., some substantial uncertainties in the picture.Many people have interpreted the opening of negotiations for a cease-firein Korea as evidence of a fundamental change in the economic outlook.This would be a correct interpretation only if the schedules for our basicdefense build-up were to be substantially altered, and this is not theintent of national policy. Nonetheless, the cessation of hostilities in Koreacould have important intermediate effects upon the climate of publicsentiment which conditions the economy.

There might, for example, be important effects on consumer spending,which does not always follow a predictable pattern, particularly in theshort run. Durable and semi-durable consumers' goods were purchasedat an exceptionally high rate for a good many months in the second halfof 1950 and early in 1951. The immediate necessity for consumers to buysuch goods has accordingly been somewhat reduced. Although personaldisposable income rose by more than 5 billion dollars (annual rate) from thefirst to the second quarter, personal consumption expenditures dropped bymore than 5 billion, resulting in an increase of over 10 billion in personalsaving. At the same time, there was an increase of 5 billion dollars (annualrate) in inventories, probably much of it involuntary. No one can forecastprecisely how long the lull in consumer expenditures may continue.

If consumers should interpret the international developments to meanthat there will be plenty of goods at lower prices, there might for a time be asubstantial decline in purchases, despite rising personal income. It doesnot seem probable, however, that this would continue for long, even inthe absence of any new alarming international developments which mightstart a new spurt in buying. The pressures to buy the necessities andcomforts of everyday living are very strong in the case of most families.In the longer run, changes in prospective incomes are as good a measureas there is available of changes in prospective spending. In the secondhalf of 1950, disposable personal income was at an annual rate about 14billion dollars higher than in the first half of that year. In the first half of1951, it was at an annual rate 9 billion dollars higher than in the second halfof 1950. In the second half of this year and on into next year, this growthis likely to be very substantial.

Businessmen, likewise, are in a position to decide whether to continuewith their plans for a very high level of business investment. They could,if they chose, substantially reduce their plans, even below the point whererestrictions would have to be placed upon them. This is certainly a pos-sibility to be reckoned with, but we believe that on balance it is not likelyto occur. The interests of business lie in maintaining a high level of invest-ment, to meet both the demands of the defense program and of the civilianeconomy. Even in the ultimate event of a general and more perma-nent improvement of international relations, the basic expansion programswhich have been outlined by those in charge of the mobilization effort would

47


not result in any general overexpansion of facilities. There is hardly anyimportant expansion program for basic industrial commodities which ex-ceeds the sound needs of an expanding peacetime economy. If it shouldbecome possible at some later time to reduce our defense goals, the expand-ing output of steel and other commodities could find ample markets in theunsatisfied needs of our own people and in the expansion of world trade.The high level of saving which will be generated by an effective stabiliza-tion program, and the opportunity of reducing the very high level of taxa-tion if and when defense needs dwindle, will help support markets duringsuch a transition period.

Businessmen also recognize that they have a large responsibility to con-form their investment plans to the level and composition which will fulfillthe strategy of the defense program. This responsibility is particularlyheavy, because private expansion is now being relied upon much moreheavily and public investment in plant much less heavily than duringWorld War II. To falter in this responsibility would jeopardize nationalsecurity in the event of a more critical situation later.

The analysis we are advancing may be stated in this form: First, thereis nothing in the international situation to justify a basic alteration ofcourse, and the build-up of the security program will be continued. Second,while carrying out the security program will require that total businessinvestment be cut substantially below the all-time peak rate of recentmonths, nonetheless such investment must be encouraged to remain at levelswhich will still be very high by past standards. Otherwise, we could notbuild the necessary industrial complement to our growing military strength.And third, the pursuit of these needed military and industrial objectiveswill in itself augment consumer incomes, which already are high enough tobe potentially inflationary, even though there has been some lull in buyingduring recent months.

Although the Council recognizes the existence of some uncertainty in theimmediate economic outlook, even with the continuation of the securityprogram as planned, the uncertainty is mostly a question of short-rangetiming. The precise length and depth of the lull are difficult to forecast,and we do not attempt to do so. It seems highly probable that the under-lying inflationary pressure developing from the defense program will expandto serious proportions, as production under that program increases.

With civilian incomes in the aggregate likely to rise much more rapidlythan civilian production, the basic forces are inflationary even though thecurrent erratic buying on the part of consumers or businesses may preventthese underlying forces from manifesting themselves in any particular monthor even for a few months. Over a longer period, which is of greater signifi-cance for national policy, civilian incomes rising faster than civilian produc-tion will generate inflation, unless there is an effective containment program.For such a program, we cannot rely mainly upon the further increases in the


rate of voluntary saving which would be required to do the job alone. Therate of saving has already increased greatly in recent months, and thisincrease itself has been in large part the reaction of the public to the factthat other anti-inflationary measures were initiated and have been takinghold.

In any event, the implications for policy are clear. The only safe courseis to be continually prepared to meet expanded inflationary pressures to theextent they arise. An ineffectual program, by removing assurances againstnew breaches in the price line, would bring danger of repetition of pastspurts in consumers' buying, and resultant inflationary pressures even beyondexpectations based on rising levels of incomes. It takes time to put measuresinto operation and to make them effective. For example, those who saythat price and wage controls were established too slowly should be the lastto reduce the power to impose those controls; it takes time to build upadministrative organizations capable of effectively applying controls. Allour equipment should be in good order to fight the fires of inflation. Whenthey are burning vigorously, it is too late to start getting ready. It wouldbe a most unwise gamble now to deprive the economy of reinforcementsagainst inflation.

In the following sections of this Review, we undertake to fill in thesegeneral conclusions with more specific details, both as to the shape of theeconomic outlook and as to necessary measures.

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II. The Shaping of the Defense Economy

MAIN OBJECTIVES

AT the present time, our principal task is to make ourselves more secureand help to make the rest of the free world more secure. This in-

volves a two-fold economic objective. First, we must speedily build up andequip armed strength. This includes, as a current objective, maintain-ing our own armed forces at 3.5 million military personnel, producing theincreased quantities of armaments and military equipment needed for ourexpanded forces, and helping other free nations to build up their militarystrength. The second and equally important part of our two-fold task is tokeep our economy strong by assuring an adequate flow of civilian goods,and to make it stronger for the great challenge now confronting us—andthe even greater challenge which could arise—by expanding our totaloutput and by adding even more to our productive capacity or industrialpotential. In addition, we need to help other free nations in furtherdeveloping their economic strength.

Each element in this effort is a necessary part of the whole program. Byrebuilding our military power, we hope to deter aggression and prevent amajor war. Since it would be imprudent to dismiss the possibility thatactions of hostile powers might bring about such a conflict, it is necessaryto lay the foundation for the rapid achievement of full mobilization shouldthat become necessary. Helping other free nations build up their militaryand economic strength is also vital, because our security is bound up withthe rest of the free world, just as its security is bound up with ours. Thisinterdependence takes many forms—military, economic, political, andpsychological. On the economic side, we are to a growing extent depend-ent on foreign countries for a large fraction of our supplies of certainimportant raw materials, while the industrial capacity of other countriesis a vital element in the common capacity to produce military goods.

The economic significance of these security objectives in present plan-ning is highlighted by the fact that the national security programs arescheduled to rise from an annual rate of about 35 billion dollars in thesecond quarter of 1951 to nearly 65 billion dollars in the correspondingperiod of next year.

It should be observed that this is not, in the Council's judgment, amaximum program. To be sure, the maximum practicable size of a


defense program cannot be determined completely by the primary purposeof achieving national security; it is necessarily limited by the size andstrength of the economy, by the willingness of the people to incur sac-rifices, and by the prospective duration of the emergency. In a short,intensive effort, the expansion and even the replacement of industrialequipment can be omitted, but if this were done in a long-continued effort,the productive machine would break down.

In this Review, however, the Council is not concerned with what couldbe the maximum size of a security program. We are confident that theprogram which has been adopted is readily sustainable, as will clearlyappear in the pages which follow. The practical problem now confront-ing the country is what implications this defense program has for the Na-tion, and what steps need to be taken to achieve the defense program,while at the same time maintaining the strongest possible civilian economy.

To promote a strong civilian economy, while at the same time buildingup our defenses, requires both the expansion of productive power and themaintenance of economic stability. These objectives are often mutuallysupporting. For example, increasing production by increasing the numberof people at work, and the hours worked, makes it possible to meet theneeds of the defense program with more goods remaining for civilian use.However, increases in production through expanding industrial plant andequipment require the use of labor, materials, and existing plant, whichotherwise would be largely available to make goods directly for consumers.Rapid industrial build-up is thus likely to make the task of maintainingeconomic stability immediately more difficult. But for the future, it makesthat task easier, particularly if it results in greater productivity and theremoval of production bottlenecks.

In determining the rate of industrial build-up to be encouraged, itis thus necessary to consider the feasibility of holding down or reducingconsumer spending. Moreover, we must constantly appraise the use ofresources, and take appropriate action to effect the necessary changes.Decisions concerning resource use made on a piecemeal basis are likely eitherto overshoot or undershoot feasible goals, and to cause great waste and lossof strength by unsound allocation of resources. Only by comprehensiveprogramming of requirements and supplies is it possible to arrive at arational balance among objectives, to determine whether in total they arefeasible, and to shape carefully the individual components of our compositeof military and economic strength.

OUR ECONOMIC POTENTIAL

To sustain a large defense effort, we must accelerate the expansion ofour total output, and we must expand a few specific types of capacity tolevels even beyond those likely to be used in the short run, except in caseof war. A large increase in the output of basic industrial and agricultural

51


CHART 7

GROWTH IN PRODUCTION, 1940-44The total production of goods and services in 1944 was about 60 percenthigher than in 1940. The increase was much greater in industrial productionwhich rose 90 percent,and especially in the durable goods industries)where output in 1944 was more than 150 percent above the 1940 level.INDEX, IST40»IOO

250I N D E X , 1940 » 100

250

200 ~ ~ 200

TOTAL PRODUCTION ,OF GOODS AND SERVICES-^

- 150

100

INDEX, 1940= 100

3CXO

250

200

150

100

INDUSTRIAL PRODUCTION COMPONENTS

^S TOTAL INDUSTRIALS- PRODUCTION

DURABLEMANUFACTURING

NONDURABLEMANUFACTURING ....•

••••*

••••••**

300

250

200

150

1001940

NJJEX BASED ON GROSS NATIONAL PRODUCT IN 1ST HALF OF 1951 PRICES.

1944

SOURCES: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, DEPARTMENTOF AGRICULTURE, AND COUNCIL OF ECONOMIC ADVISERS.


commodities, both here and abroad, will make it possible to maintain a largesecurity program with a progressively lighter strain upon our economy, andon that of the free world generally. It would also permit within severalyears, provided that the international situation does not worsen, the resump-tion of improvement in living standards in the United States and elsewherein the free world. On the other hand, if output in the United States wereto increase no faster than the 2l/z percent average annual increment whichwas achieved between 1946 and the Korean outbreak, the impact of thedefense program would be prolonged. By increasing our capacity to pro-duce military items and certain key materials even more rapidly than weincrease actual output, we can have a large reservoir of power to draw uponquickly if critical events should require fuller mobilization.

Both the World War II experience and the postwar experience havedirect bearing on what we are able to do, and how we can best proceedto do it.

The World War II production achievement

From 1940 to 1944, the total national output (measured in real terms)increased about 60 percent, industrial production by nearly 90 percent, andthe production of durable goods, including military goods, by more than 150percent. (See chart 7.) While these figures need to be qualified becauseof the many difficulties of measuring wartime production, nonetheless theachievement exceeded all expectations. (See also appendix tables B-2,B-16, and B-17.)

A major factor in this growth was the much fuller utilization of ourmanpower resources. Between 1940 and 1944, the total labor force rosefrom 56 million to 66 million, and the proportion of the population ofworking age in the labor force rose from 56 percent to 63 percent. (Seechart 8.) Civilian employment rose by 6J^ millions, while the armed forceswere increased by almost 11 million; of this 175/2 million increase, 55 per-cent reflected growth in the labor force, and 45 percent reflected a reduc-tion in unemployment from about 8 million to less than 1 million. Dur-ing the same period, the workweek for factory workers was lengthened fromabout 38 hours to about 45, providing the equivalent of about 2l/z millionadditional production workers. (See chart 9 and appendix table B-13.)

Although increases in labor productivity can be measured only roughly,output per man-hour is estimated to have increased about twice as fastbetween 1940 and 1944 as it did on the average over the previous 4decades. This was partly a byproduct of bringing resources into intensiveuse, and partly a result of the changing composition of the national output.

The wartime production achievement also required a large expansion ofproductive capacity. From 1939 through 1945, total manufacturing ca-pacity increased by approximately 30 percent. (See chart 18, page 79.)The capacity increase in machinery producing industries was about 50

53


CHART 8

EXPANSION OF THE LABOR FORCE, 1940-44An increase in the labor force of 10 million and a reduction inunemployment of over 7 million made it possible to increase thearmed forces by almost II million and also increase nonagriculturalemployment by 7 million, contrasting 1940 with 1944.

MILLIONS OF PERSONS*80

LABOR FORCE

60

40

20

MILLIONS OF PERSONS*

80

TOTAL

-UNEMPLOYMENT

-ARMED FORCES

AGRICULTURAL"EMPLOYMENT

NONAGRICULTURALÊMPLOYMENT

60

40

20

1940 1944

PERCENT80

60

40

20

PARTICIPATION! RATE(TOTAL LABOR FORCE AS PERCENTOF NONINSTITUTIONAL POPULATION*)

PERCENT

80

60

40

20

1940 1944

*I4 YEARS OF AGE AND OVER.

SOURCE: DEPARTMENT OF COMMERCE.

54


CHART 9

INCREASES IN LABOR INPUT AND OUTPUT,1940-44The major factor in our wartime productive achievement was the inten-sive utilization of our manpower resources.INDEX,1940*100

I 1 1 1 1 TEMPLOYMENT, INCLUDING ARMED FORCES

1940 :gx::gSg::S^1944

HOURS WORKED PER WEEK

19401944

PRODUCTIVITY (GNP PER MAN-HOUR)*

1940 t::::::::::::::::::::::X:::::::::::::::::::::::::::::::::::::::::::::::::::::::::l1944

TOTAL PRODUCTION OF GOODS AND SERVICES *

1940 X1944 |

*INDEX

SOURCES: DEPARTMENT OF COMMERCE AND COUNCIL OF ECONOMIC ADVISERS.

percent, in chemicals about 70 percent., and in electric power somewhatmore than 30 percent.

Except in periods of full mobilization of resources, such as was reachedduring the latter part of World War II, the limits on the expansionof output are in practice seldom, if ever, reached. Within a surprisinglyshort time, seemingly impossible materials and facilities problems can beovercome. This was demonstrated not only by our own wartime experi-ence, but by Britain's and Germany's as well.

The course of production from World War II to Korea

From the 1944 peak to 1946, the total national output in real termsdropped about 15 percent, and the index of industrial production fellnearly 30 percent. A large part of this decline reflected the change-overto peacetime products. At the same time, there was a shortening of theaverage workweek in all branches of employment by about 5 percent, and inmanufacturing industries by more than 10 percent. Despite a large contrac-tion in the total labor force, the return of military personnel to civilian lifeincreased civilian employment.

55


CHART 10

CHANGES IN LABOR INPUT AND OUTPUTThe rise in output during the period from 1946 to the firsthalf of 1950 mainly reflected the gain in labor productivity. Sincemid-1950, employment has risen substantially and productivity hascontinued to increase gradually.INDEX, 1946 « 100

O

EMPLOYMENT, INCLUDING ARMED FORCES

1946I960, 1st Half

1951, 1st Half

HOURS WORKED PER WEEK

1946I960, 1st Half

1951, 1st Half

PRODUCTIVITY (GNP PER MAN-HOUR)*

1946

1950, 1st Half

1951, 1st Half

TOTAL PRODUCTION OF GOODS AND SERVICES '

1946

1950, 1st Half

1951, 1st Half

* INDEX BASED ON GROSS NATIONAL PRODUCT IN 1ST HALF OF 1951 PRICES.

SOURCES: DEPARTMENT OF COMMERCE, DEPARTMENT OF LABOR,AND COUNCIL OF ECONOMIC ADVISERS.

From 1946 to the first half of 1950, the gross national product (measuredin terms of first half of 1951 prices) rose from an annual rate of 270 bil-lion dollars to 294 billion, an increase of nearly 9 percent, while industrialproduction increased 11 percent. The rise in output occurred mainly from1949 to 1950.

This postwar rise in output was the result of increases in produc-tivity, since the increase in total employment was offset by the furthershortening of the average workweek. (See appendix table B-ll.) Out-put per man-hour appears to have risen about 2 to 2/2 percent a year—a somewhat larger rate of increase than had occurred during earlierperiods of peacetime prosperity. (See chart 10.) The equipping ofworkers with better productive facilities was mainly responsible for thisgain in productivity. During the period, manufacturing capacity appearsto have been increased a little more than 6 percent a year on the average.Electric power capacity rose somewhat faster, and much larger increases


CHART 11

CHANGES IN PRODUCTIONCompared with the first half of last year, all major sectors ofproduction are much higher. Production in the durablemanufacturing goods industries in the first half of 1951averaged 25 percent higher than in the first half of 1950and 43 percent higher than in 1946.INDEX, I946el00 INDEX, 1946 = 100150 | 1 150

140 -

130 —

TOTAL PRODUCTION , .IDF GOODS AND SERVICES J/ /

120 - - 120

- 110

100

INDEX, 1946 = 100

150

140 -

130 -

I N D E X , 1946=100150

INDUSTRIAL PRODUCTION COMPONENTS

- 120

no

1st Half1951

\J BASED ON GROSS NATIONAL PRODUCT IN 1ST HALF OF 1951 PRICES.ZJ BASED ON ANNUAL DATA.

SOURCES' BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM , DEPARTMENT OFAGRICULTURE, AND COUNCIL OF ECONOMIC ADVISERS.

100

57


took place in the chemical, oil, machinery, and automobile industries. (Seechart 18, page 79.) Despite these large increases, however, throughoutmost of the period a shortage of capacity restricted the growth of manytypes of output.

We thus found ourselves in mid-1950 with a productive plant so far supe-rior to what we had at the peak of World War II that we were clearly in aposition to exceed by far the 1944 production record, if we moved towardfuller utilization of our manpower and material resources.

Changes in output from mid-1950 to mid-1951

The decision last summer to undertake a greatly enlarged security pro-gram made it again necessary to step up the expansion of national produc-tion and productive capacity. Although we were at that time well on ourway toward full employment, there was a remarkable expansion of outputin the ensuing year. Short-term changes in total output cannot be preciselymeasured, but it appears that the total national product as well as industrialproduction increased considerably more in the 12 months following theKorean outbreak than they had in the entire period from 1946 through thefirst half of 1950. (See chart 11.)

Comparing the first half of 1950 with the first half of 1951, thegross national product expanded from 294 billion dollars to 324 billiondollars (annual rates, measured in first half of 1951 prices), an increaseof about 10 percent. From June 1950 to the beginning of 1951, totalindustrial production rose 11 percent. This sharp rise in output was dueto fuller utilization of the labor force, and continuing large increases inproductive capacity. Since January, the index of industrial productionhas shown little increase, partly because a number of firms were changingover to defense production, partly because of shortages of some specificmaterials, and also because the defense program did not move up fastenough to more than offset a moderate slackening in some types of privatedemand which occurred during the first half of the year. The totalnational output of goods and services, however, continued to expand dur-ing the first half of this year. (See appendix tables B-3 and B-17.)

The expansion in the total labor force and reduction of unemploymentduring the past 12 months have permitted an expansion of 1.6 millionin civilian employment, while at the same time the armed forces werebuilt up nearly to the 3.5 million objective. The expansion in the totallabor force has been much greater than the normal yearly increase. (Seechart 12 and appendix table B-ll.)

In manufacturing, the workweek was lengthened about an hour duringthe second half of 1950. In the first 6 months of this year, however,there appears to have been no further lengthening of hours in most sectorsof the economy. In the nondurable goods manufacturing industries, therehas been a larger than seasonal decline in average working hours, brought


CHART 12

CHANGES IN THE LABOR FORCE

The labor force continued to increase after 1946, with a particularlysharp rise following the Korean outbreak. The labor force growthand the reduction of unemployment since the first half of 1950made it possible to approach the armed forces goal and toincrease civilian employment at the same time.MILLIONS OF PERSONS* MILLIONS OF PERSONS*80

60

40

20

LABOR FORCETOTAL

AGRICULTURALÊMPLOYMENT

NON-'AGRICULTURALEMPLOYMENT

80

60

40

20

1946 1st Half1950

1st Half1951

80

60

40

20

PARTICIPATION RATE(TOTAL LABOR FORCE AS PERCENTOF NONINSTITUTIONAL POPULATION*)

PERCENT

80

60

40

20

1946

*14 YEARS OF AGE AND OVER.


1st Half

1950

1st Half1951

59


about by a slackening in the demand for soft goods. (See appendix tableB-13.)

At the time of the Korean outbreak, there was little idle capacity in theeconomy, measured by normal peacetime standards. Material shortageswere an obstacle to further increases in total output both here and abroad.But under the impetus of the defense program, we have considerably ex-panded productive capacity, and have brought existing capacity into moreintensive use. During the past 12 months, total private investment inindustrial, transport, and utility plant and equipment amounted to 18 billiondollars (measured in terms of first half of 1951 prices). In terms of thesame price level, such expenditures had averaged 16 billion dollars annuallyduring the previous 3J/2 years. Manufacturing capacity has probablyexpanded 8 percent or more since June 1950. In the same interval, therehave been considerably larger increases in the output of such basic essen-tials as electric power, petroleum, copper, aluminum, and synthetic rubber.

How much can we expand total output?

This appraisal of our economic growth during the war and postwar periodsis important for* evaluating our future opportunities for economic growth.In many respects, the problems involved in increasing output are nowdifferent from and more difficult than those we faced in 1940, whenresources were much less intensively utilized than at the present time.On the other hand, our future opportunities for growth cannot be assessedsimply by extrapolating the rate of economic expansion achieved betweenWorld War II and mid-1950. Expansion of output is now much moreurgent; measures for accomplishing this can and should be much more fullyexploited.

Before turning to a discussion of feasible output objectives, it shouldbe emphasized that these objectives do not represent predictions. Actualchanges in output can be influenced by a variety of unforeseeable circum-stances. We are concerned, rather, with describing our output potential,as a means of supplying the necessary quantitative background for a moredetailed analysis of major policy problems. The projections describedhere represent conservative estimates of what can be accomplished by thefuller utilization of our manpower and material resources.

Over the whole first half of this year, the total gross national product wasat an average annual rate of 324 billion dollars. In terms of first half of 1951prices, the annual rate of gross national product at midyear 1951 was in theneighborhood of 330 billion dollars, or about 10 percent above the level ofa year ago. Measured in terms of this same price level, it now appearsthat we should be able to increase total output by 5 percent or moreduring the coming 12 months, bringing the gross national product toan annual rate of over 345 billion dollars by the middle of 1952. (Seechart 13.) Over the following year, the opportunities for further growthwill probably diminish somewhat as resources are brought into still

60


fuller use. But it should be feasible also to realize during that period afurther increase of at least 4 percent in total output. Thus, over the next2 years, we should be able to increase total output at least twice as fastas we did during the period from 1946 through the first half of 1950.

Expansion of our economy at this rate will require that as a nation wework harder and longer, and devote considerable resources to economic ex-pansion, necessarily at the expense of current consumption. But there islittle doubt of our ability to do so. The actual course of production over thenext several years will depend, more than on any other single factor,on whether our security program moves forward as now contemplated.If we were compelled to undertake a much larger security program, there islittle doubt that, by harder exertion, output could be expanded faster.

In estimating tne oojectives for total output, it is assumed that industrialproduction will have to increase at a somewhat greater rate than the

CHART 13

GROSS NATIONAL PRODUCT1st HALF OF 1951 PRICESTotal output increased 10 percent, comparing the secondquarter of I960 with the second quarter of 1951. Over thenext year it should be possible to increase total output by 5percent or more.BILLIONS OF DOLLARS* BILLIONS OF DOLLARS*

300

200

100

TOTAL

PERSONALCONSUMPTIONEXPENDITURES

PRIVATE GROSSDOMESTIC INVESTMENT*.

GOV'T PURCHASES OFGOODS AND SERVICES .

AND NET v*"FOREIGN INVESTMENT

OBJECTIVE FORINCREASED OUTPUT

300

200

100

YEARAGO

* SEASONALLY ADJUSTED ANNUAL RATES.


NOW YEARHENCE

61


nation's total output of goods and services, and that the largest increaseswill have to occur in industries producing military goods and basic materials.It is also essential that most types of agricultural output be expanded.

Expanding total output by 5 percent or better from the middle of 1951to the middle of next year would involve substantial manpower require-ments. As unemployment is already at a low level, these requirementswould have to be met by further expansion of the labor force and lengthen-ing of the workweek in some industries. In this respect, the manpower situa-tion is now much tighter than at the beginning of World War II, whenalmost half of the additional labor requirements could be met by a reduc-tion of unemployment. On the other hand, the strength of the armedforces is now near the 3.5 million objective, and nearly all of the furtherexpansion in the labor force will be available to provide additional civilianworkers.

Under present circumstances, it would be desirable to meet additionallabor requirements primarily through expansion of the labor force. Train-ing a large number of workers would place us in a better position toaccelerate quickly the expansion of military output, should that becomenecessary. Over a mobilization period which might be long-lasting, anincrease in the number of people at work is a more promising source ofadditional output than is the lengthening of working hours. There islittle doubt that we still have large underutilized resources of manpower inthe economy, including housewives without young children, older people,members of minority groups, and the handicapped—many of whom wouldwelcome the opportunity to work. Some women with children can alsobe drawn into employment, if community care facilities are provided.

Placing major emphasis on labor recruitment would mean that the totallabor force would average some 1J/2 to 2 million persons larger in the firsthalf of 1952 than it did in the corresponding period of 1951. Of this in-crease, some 600,000 would come from the growth in the population ofworking age. The proportion of the total population of working age inthe labor force would rise to about 60 percent. This compares with a laborparticipation rate of 63 percent in 1944, and slightly above 58 percent inthe pre-Korean period.

Even if the labor force is substantially expanded, however, it still maybe necessary to lengthen the workweek further in a number of industries.This will be the case if more serious shortages of some types of equipmentdevelop, or if adequate numbers of skilled workers cannot be quickly trained.It is desirable that a longer than normal workweek not be accompanied bymodification of protective legislation and practices with regard to overtimehours and pay. At the same time, a number of people who have held part-time jobs may seek and be able to find full-time employment, thus furtherlengthening the average of hours worked.


Over an extended period of 5 to 10 years, we should be able, through asustained high level of investment in expansion and modernization of pro-ductive facilities, through worker-training programs, through the stimula-tion of industrial research, and through other means, to increase laborproductivity at a faster rate than we realized during past peacetime periods.Even though the results may not be immediate, all of these means shouldbe used as fully as possible. But in a period as short as a year or two,it is extremely conjectural to project productivity advances. Several factorsmay adversely affect productivity during the next few years. Substan-tial numbers of untrained workers will be taken into the labor force;frequent changes in the designs of military equipment will interrupt pro-duction; material shortages may hamper industrial efficiency. On theother hand, as defense production increases, there will be a shift in thecomposition of output towards higher productivity industries, and thebringing of our resources into fuller use may of itself encourage productivity.In projecting total output, the Council has assumed that over the next 2years we cannot count on productivity gains of more than 2 percent annually.

The most important physical limitation on increasing output at thepresent time is not the availability of manpower, but rather shortages ofbasic materials and power. The major investment programs needed topermit the realization of the production objectives outlined above arediscussed below in the section on "The Industrial Build-Up." Failure toovercome these basic capacity limitations would seriously restrict our oppor-tunities for economic growth for a number of years, and thereby prolongthe burden of a large security program. As the Western European nationsare in a similar position, we cannot overcome the materials limitationsimply by increasing our share of the total free world consumption. Weneed to place considerable reliance on increasing the output of scarcematerials both in this country and abroad.

MAJOR REQUIRED ADJUSTMENTS IN THE USE OF THE NATION'S RESOURCES

During the intensification of our productive efforts in World War II, andagain during the redirection of that effort after the war, there occurredmajor changes in the shares of our national output taken for public andconsumer use and business investment. These changes reflect in broadoutline the shifts which were accomplished in the use of our resources.The accomplishment of our current security objectives, including the expan-sion of our capacity to produce, is again requiring major shifts in resourceuse. These changes will not be nearly so severe as those which occurredduring and immediately after World War II, but they will neverthelessbe important in their impact upon the economy. A general description ofthese required adjustments will serve to indicate the major tasks of pro-duction and stabilization policy. This general description will be followedby a detailed analysis in later sections.

63


Major changes in the use of output, 1940 to 1944

In 1940, before the outbreak of war in Europe had a major effect uponour economy, total government purchases of goods and services and "netforeign investment" amounted to about 30 billion dollars (in terms of firsthalf of 1951 prices), taking about 15 percent of the national output. Thetotal of government purchases plus net foreign investment roughlymeasures the portion of the national output not available for privatedomestic use. During the following 4 years, the rise in output takenfor war purposes increased the annual rate of these expenditures by 119billion dollars (in first half of 1951 prices), bringing the total in 1944 to149 billion, or about 45 percent of the national output.

As chart 14 and table 1 show, practically the entire increase in theNation's output during this period was taken by the combined expansionin government purchases and net foreign investment. The moderate in-crease in personal consumption was nearly offset by the contraction of grossprivate domestic investment.

TABLE 1.—Changes in the major components of the gross national product,1940 to 1944

[First half of 1951 prices]

Major component

Gross national product -- . . - -

Government purchases of goods and services, and net foreign investmentPersonal consumption expendituresGross private domestic investment

Change, 1940 to 1944

Billions ofdollars

+121

+119+18-17

Percentage

+62

+393+13-56

Source: Council of Economic Advisers. For further details, see appendix table B-3.

The expansion of war expenditures from 1940 to 1944—over 135 billiondollars, in terms of first half of 1951 prices—was greater than the 119billion dollar increase shown in total government purchases and net foreigninvestment combined. Federal nonwar expenditures and the expendituresof State and local governments declined. A large part of the war expendi-tures went for the production of war materiel, shipbuilding, the buildingof war plants, and military construction—which took in 1944 more thanhalf the Nation's steel output. As we were cut off from many impor-tant sources of imports, and as our economic assistance to Allied nationsincreased, the total export surplus rose to nearly 6 percent of the 1944national product. From 1942 through 1944, more than one-half of ourtotal exports in each year were made available through lend-lease.

The rise in total output and the compression of investment—particularlyinventory accumulation—were sufficient to permit an increase of more than10 percent in the level of consumption. This increase was represented by

64


CHART 14

CHANGES IN COMPOSITION OFGROSS NATIONAL PRODUCT SINCE 19401st HALF OF 1951 PRICES

During World Warn, Government expenditures increased greatly, persona Iconsumption rose, and business investment declined markedly. Sincemid-1950, both Government expenditures and business investment increasedmarkedly, while consumption expenditures remained practically constant.BILLIONS OF DOLLARS

400

350 -

300 -

250 -

200 -

150 -

100 -

50 -

1940 1944 1946

BILLIONS OF DOLLARS

400

- 350

- 300

- 250

- 200

PERSONALCONSUMPTION-

EXPENDITURES

GROSS

PRIVATEDOMESTIC

INVESTMENT

GOVERNMENTPURCHASES

OF GOODS AN

SERVICES ANDNET FOREIGN

INVESTMENT

PERSONALCONSUMPTIONEXPENDITURES

GROSS PRIVATEDOMESTIC

INVESTMENT

GOVERNMENTPURCHASES

OF GOODS AN

SERVICES ANDNET FOREIGNINVESTMENT

- 50

1st 2nd 1stHalf* Half*

1950 1951

* SEASONALLY ADJUSTED ANNUAL RATES

SOURCE: COUNCIL OF ECONOMIC ADVISERS


types of consumer output which did not directly compete with war produc-tion for scarce materials. But as a proportion of the national output,consumption declined from about 70 percent in 1940 to 50 percent in 1944.As types of investment not needed for the war effort were practically elim-inated, gross private domestic investment declined from 15 percent to lessthan 5 percent of total output. Government investment in industrial facili-ties was substantial, however, raising the total of such investment consider-ably above the prewar level. (See chart 17, page 76.)

The postwar period to mid-1950

From the 1944 war production peak to 1946, the annual rate of total gov-ernment purchases and net foreign investment fell by more than 100 billiondollars. The proportion of total output taken for these uses declined from47 to 17 percent. Despite this contraction, however, total output fellmuch more moderately than had been generally expected. The impactof the decline in war expenditures was cushioned by substantial increasesin both business investment and personal consumption expenditures. From1944 to 1946, total consumption expenditures and gross private domesticinvestment increased by 57 billion dollars (in terms of first half of 1951prices). The combined proportion of the national output rose from a littleover one-half to nearly five-sixths. (See chart 14 and appendix table B-3.)

From 1946 through the first half of 1950, there were no major changesin the relationship of the major components of the national output. (Seechart 14.) Gross private domestic investment in equipment, construction,and additions to business inventories increased from 42 billion dollarsto 50 billion (measured in first half of 1951 prices); personal con-sumption expenditures rose from 183 billion dollars to 203 billion. Theirproportion of the national output increased moderately. Total governmentexpenditures and net foreign investment declined both relatively and abso-lutely. This was brought about mainly by a reduction in the total exportsurplus. With the rapid progress of reconstruction and recovery abroad,the export surplus of goods and services had been falling steadily since 1947.

The total level of output reached in the first half of 1950 was about 50percent greater than the Nation's output in 1940. The proportion takenfor consumption was about the same as in 1940. Gross private domesticinvestment was a somewhat larger proportion of total output; governmentexpenditures and net foreign investment combined took a smaller propor-tion of the national product. Despite the fact that we were maintaininga much larger military establishment and still continuing a large foreignassistance program, total Federal expenditures for goods and services tookonly 8 percent of the gross national product in the first half of 1950, com-pared with 7 percent in 1940. The relative increase in cash outlays wassomewhat greater, as cash payments included interest payments on thenational debt and veterans' benefits.

66


Changes in the composition of the Nation's output from the first half of1950 to the first half of 1951

Comparing the 6-month period preceding the Korean outbreak withthe first half of 1951, the total national output rose from 294 billion dollarsto 324 billion. (All of these comparisons are at an annual rate in termsof first half of 1951 prices, as shown in appendix table B-3 and chart 14.)About half of the 30 billion dollar increase in total output was representedby expansion of government expenditures and net foreign investment,Of the 15/2 billion dollar increase in these outlays, nearly 14 billion wasrepresented by the expanding security program. The other half of theincrease in total output went mainly into private investment, especiallyinventory accumulation. Consumer expenditures, in real terms, after thesubsidence of the post-Korean buying waves, were only slightly higher inthe first half of 1951 than during the first half of 1950.

During the past year, therefore, the security programs have not requireda net diversion of resources from other uses. The portion of the increasedtotal output taken for security purposes was not so great as to preventa large expansion of output for other purposes.

Prospective changes in government outlays, private investment, andconsumption

Realization of our security objectives will require that, during the nextyear, there must be a contraction in total output available for consump-tion and gross private domestic investment. The scheduled increase insecurity programs, as described earlier, would raise total governmentexpenditures by about 28 billion dollars from the first half of 1951 to thefirst half of 1952. Even if we are successful in expanding total outputby 5 percent or more, there still would have to occur a reduction in out-put available for nonsecurity purposes. If the increase were 5 percent,the contraction would have to be 10 to 15 billion dollars. In otherwords, even if we achieve a sizeable expansion of total output, almosthalf of the increase in output for security purposes would have to bemet by a diversion of resources from other uses, including public nondefenseactivities.

The largest contraction may be expected in gross private domestic in-vestment. During the first half of 1951, this total was at an annual rate of62 billion dollars, and will probably be reduced by something in the neigh-borhood of 15 billion dollars by the first half of 1952. The major reasonsfor the projected decline are, first, that inventory accumulation is expectedto decline markedly as business comes to expect greater price stability, andas inventory and credit controls become more effective; and second, thatsome types of investment in construction and equipment will be limited orpostponed because of the nonavailability of materials either for constructionor operation of new facilities. On the other hand, despite the projected

67


decline in total gross private domestic investment from recent levels, in-vestment in productive facilities should be maintained at a rate as high asor higher than in most recent years, though not as high as in early 1951.

The effort to increase output will have to be undertaken without theimpetus given workers by the large increase in consumption which ordinarilyaccompanies a more intensive labor effort. Even if we are successful inincreasing total output by 5 percent or more over the next year, realizationof our security objectives will prevent average family consumption fromrising significantly. Consumption may decline as a proportion of the totalnational output from 69 percent in the first half of 1950 to about 64 per-cent in the first half of 1951, and about 62 percent in the first half of1952. At the same time, there almost certainly will be a large rise in spenda-ble income, mainly associated with the increase in employment and output.As will be elaborated in Part III, the inevitably disproportionate develop-ments in incomes and consumer supplies are of major significance in assessingthe magnitude of the inflation problem.

THE CURRENT NATIONAL SECURITY PROGRAM

The two preceding sections have set forth our general objectives foreconomic expansion, and the general nature of the economic adjustmentswhich should be accomplished during the next year. We can expandtotal output by 5 percent or more, comparing the middle of this year withthe middle of next year, if as a nation we work harder and longer, andconcentrate the build-up of our industrial capacity in certain key sectors ofthe economy. Even if we expand total output by 5 percent, however, thebuild-up in our national security programs would require a sizeable diver-sion of resources from other uses.

This section describes in greater detail the nature of the security program,with respect both to its domestic and international economic implications.In the following two sections, the nature of the required industrial build-upwill be elaborated, and the adjustments which will have to be made in lessessential types of public and private investment, and in our consumptionstandards, will be described in further detail.

Size of the security program

During the second quarter of 1951, total security expenditures, measuredin terms of deliveries of military goods for our forces and our Allies, militarypayrolls, and expenditures on other foreign aid and domestic securityprograms, reached an annual rate of over 35 billion dollars. In terms ofconstant prices, the total was nearly double the pre-Korean level, and50 percent above the rate reached in the fourth quarter of 1950. As shownin table 2, these expenditures are scheduled to increase to an annual rateof over 50 billion dollars in the fourth quarter of this year and nearly 65billion dollars in the second quarter of 1952. Detailed programs have not

68


as yet been worked out for the period beyond June 30, 1952, but it is nowcontemplated that the rate of expenditures will be even higher in the fiscalyear 1953. The share of our total output used for security purposes wouldrise from about 11 percent during the second quarter of 1951 to more than15 percent in the fourth quarter of this year, and to a take of almost 20percent in the second quarter of 1952.

TABLE 2.—National security program: deliveries of military goods and otherexpenditures1

[First half of 1951 prices, seasonally adjusted annual rates]

Period

1944

1950 — Second quarterFourth quarter _ _

1951 — Second quarter8

Scheduled:1951 — Fourth quarter1952 — Second quarter..

National securityexpenditures

Billions ofdollars

141.7

18.123.635.7

52.064.0

Percentageof grossnationalproduct

45

68

11

»15»19

1 Includes certain work put in place and accumulation of inventories for the military account.2 Estimate based on incomplete data.3 Approximate.Sources: Bureau of the Budget, Department of Defense, and Council of Economic Advisers.

It is important to note that these estimates of the timing of the programare based on the value of scheduled deliveries, rather than on expectedTreasury expenditures. Neither deliveries nor payments furnish a whollysatisfactory measure of the economic impact of Government procurement,which begins to be felt as soon as—and even before—contracts are placed.Owing to the lag in expenditures behind deliveries, the total value ofdeliveries will be somewhat greater than actual Treasury disbursementsduring the period of program build-up. Thus, for the fiscal year 1952,it is estimated that the value of goods delivered to the military services,including certain work put in place and accumulation of inventories formilitary account, will be in the neighborhood of 4 billion dollars greaterthan expenditures.

Reaching these objectives will involve serious production problems.The types of equipment which we are now producing or preparing to pro-duce are generally much more complicated than World War II militaryequipment. Moreover, in a mobilization which is defensive in purposeand therefore protracted, it is undesirable to stabilize weapon designs tothe extent which would be appropriate in wartime. For this reason, weshall not be able to realize all the production economies which might ac-company an all-out effort. The highly specialized nature of some of the


equipment will result in serious difficulties in obtaining adequate com-ponent supplies. A serious machine tool problem has already developed,just as it did during World War II. Because of these and other difficul-ties, military production has not moved up as fast as was earliercontemplated.

Nevertheless, there can be no doubt that these programs, measured bytheir rate of build-up and by the level which would finally be reached,are well within the capabilities of our economy. Compared with the riseof almost 30 billion dollars in security expenditures scheduled for the coming12 months, we increased war expenditures by no less than 75 billion dollars(in terms of first half of 1951 prices) in the first year of our participationin World War II. The present program is expected to absorb not more than20 percent of our national output at its peak, compared with 45 percent in1944. A year from now the program is expected to require about 11 mil-lion men and women directly or indirectly engaged in defense activity (in-cluding those in the armed services). This figure compares with about25 million at the peak of World War II.

General character of the security program

More than 85 percent of the total security budget for fiscal 1952 is forbuilding up the military establishment of this country, and providing ourNorth Atlantic partners with military assistance. The foreign economicaid programs, as proposed by the President, will decline further in fiscal1952, to about 5 percent of the security budget. The remainder willbe divided among stockpiling, atomic energy, and other security-relatedprograms. (See chart 15.)

The current major objectives for strengthening our military establishmentare fivefold: First, to maintain our armed forces at a strength of 3.5 millionmen; second, to provide for equipping and maintaining the equivalent of 24army divisions; third, to build the Air Force toward the objective of95 air wings; fourth, to maintain an active naval fleet of over 1,100 shipswith the necessary aircraft and supporting elements, and the Fleet MarineForce of 25/3 divisions with essential aircraft and supporting units; andfifth, to establish a defense production base which could be expanded veryrapidly in the event of full mobilization.

Though the foreign aid expenditures represent a relatively small part ofthe total program, they are of great importance to the realization ofour policy objectives in the international field. The expenditures forforeign military and economic aid in fiscal 1952 represent a major part ofour most essential export requirements, but do not include export ofessential goods to countries which can pay us out of their own resources.Even though such exports do not involve financial aid, and may in factbe paid for by shipment of goods to us, they constitute a high-prioritydemand upon our total production and in some cases upon our supply ofscarce goods.

TO


CHART 15

FEDERAL BUDGET EXPENDITURESSecurity programs took 57 percent of budget expenditures in fiscal1951. They are scheduled to take 70 percent in fiscal 1952.BILLIONS OF DOLLARS

100

80

60

40

20

FISCAL YEARS

BILLIONS OF DOLLARS

100

1952,ESTIMATED

1951

TOTAL*

ALL OTHERPROGRAMS

OTHER SECURITYPROGRAMS *—'

DEPT. OF DEFENSEAND MDAP fe—9*

1950

80

60

40

20

SOURCES: TREASURY DEPARTMENT AND BUREAU OF THE BUDGET.

The impact of military production programs on materials

The impact of expanding security outlays on the economy is accentuatedby the fact that a large part of the increase is represented by outlays formilitary equipment, defense production facilities, and military construc-tion. At the end of June, about 32 billion dollars of military orders wereoutstanding. Military orders are currently being placed at the rate of about4 billion dollars a month. Deliveries of military hard goods, which in-clude items of major procurement such as aircraft, tanks, and ammuni-tion, as well as some machine tools and equipment used in defense plants, arescheduled to rise from a rate of about 1 billion dollars in June of thisyear to about 3 times that level next June. Within the same period,aircraft deliveries are scheduled to be tripled, and deliveries of tanksand automotive vehicles increased to 4 times the level of this June. Morethan half of the increase in total hard goods deliveries is scheduled to takeplace by the end of this year. (A more detailed description of our militaryproduction targets appears in the Second Quarterly Report of the Directorof Defense Mobilization.)


Military and public industrial construction is scheduled to increase toan annual rate of about 6 billion dollars by the summer of 1952, whichis approximately equal to 20 percent of the present near-record volumeof total public and private construction. A large part of this constructionwill be in the form of training facilities and airfields.

Peak material requirements for these programs will necessarily precedethe peak of scheduled deliveries of equipment. Chart 16 shows the expectedmilitary requirements for copper, steel, and aluminum as percentages oftotal anticipated supply. Since a substantial increase in supply is planned inthe case of steel, and an even larger percentage increase in the case ofaluminum, the period of maximum stringency in these materials will havepassed before the peak rate of deliveries is attained. If military productionobjectives are attained, the percentage of our steel, aluminum, and coppersupplies going for military uses will have to increase very rapidly betweenthe second quarter of this year and the first quarter of 1952. The estimatesin chart 16 do not include stockpiling requirements, which are sizeable forcopper and aluminum. Moreover, the impact of military requirements is

CHART 16

MILITARY REQUIREMENTS FOR BASIC METALSPERCENT OF EXPECTED SUPPLYThe proportion of steel, copper, and aluminum supplies taken formilitary production will nearly double within the next year.

PERCENT PERCENT

20 ~

1951 1952

NOTE: EXCLUDES REQUIREMENTS FOR STOCKPILING.

SOURCE : DEPARTMENT OF DEFENSE


even greater in the case of some specific shapes and types of these metalsthan the over-all figures disclose.

For many of the materials required in the military production programs,we are largely—and in some cases almost wholly—dependent on importedsupplies. No less than 70 of the strategic materials comprising the stock-piling program come wholly or partly from foreign sources. Other securityprograms and essential civilian needs add further to our requirements forthese materials. Even with limitation of nonessential uses, major increasesin imports are needed in commodities such as cobalt, copper, iron ore, nickel,manganese, crude petroleum, tungsten, and zinc.

The impact of the common security programs on materials

In addition to the increased requirements arising from our domesticsecurity programs, and from our program of military aid to our Allies,there are other essential requirements of foreign countries which must bemet as part of the effort to attain the free world's security objectives. Alarge part of the common security program consists of the expenditureswhich the other North Atlantic Treaty countries are making out of theirown resources for their military establishments. They must buy capitalequipment and raw materials to support this expansion of military produc-tion. Foreign countries must buy equipment to maintain and expand capac-ity to produce raw materials which are in short supply, and to provide power,transport, and other facilities to support the operation of such productivecapacity. Goods are also needed to maintain the civilian economies andpolitical stability of friendly foreign countries, to reduce the dependenceof some of them on unfriendly countries, and to support development proj-ects in some areas where development of resources will strengthen socialcohesion and the will and ability to resist aggression.

These requirements, like our own, must be met from the total productionof the free world. They include not only United States goods financed withour foreign economic aid, but also goods purchased from the United Stateswhich the importing countries finance themselves, as well as goods they pro-duce themselves or purchase from other foreign countries which help supplythe United States economy. Where they involve scarce goods, the problemis to increase production; and, if that is not sufficient, to limit nonessentialuses throughout the free world.

The estimating of free world supplies and requirements for major rawmaterials is now in process, through the International Materials Conferenceand other channels. On the basis of present estimates, it appears that inthe coming 12 months there will be shortages of aluminum, cobalt, copper,zinc, nitrogen, sulfur, tungsten, molybdenum, nickel, iron ore, petroleum,steel, tin, wood pulp, and perhaps a number of other materials. Despiteincreased production of many scarce commodities, it will be necessary tocontrol nonessential consumption. Agreement has recently been reached

73


on interim plans for international allocation of sulfur, tungsten, andmolybdenum.

The United States consumes very large proportions of the free world'stotal production of many basic commodities. As a result, relatively smallpercentage cuts in our consumption may alleviate appreciably the pres-sure upon supplies available for other countries. Our share of free worldconsumption has in most cases increased considerably since before thewar, although in many cases our contribution to the total production ofthe free world has also increased. This is shown in table 3 below and inappendix table B-18.

TABLE 3.—United States consumption and production of selected commodities aspercentages of free world production

[Percent]

Commodity

Items not largely imported:Bread grains - -Coarse grains . ._ _ ._CottonFats and oils 3 _ _ _ . _ _ _ . .Fertilizer (nitrogenous)Lumber _ _Meat —Sulfur:

NativeAll forms _ _ _ _ _ ..

Items imported in substantial quantities:Aluminum - - „ __ _Cohalt«Coffee (green)Copper s _ _Iron oreLead*Manganese oreNewsprint _ _ -Nickel »PetroleumRubber (natural and synthetic)Sugar (raw equivalent)Tin* _Tungsten «Wood pulp (mechanical and chemical)Wool .Zinc *

193S

Consump-tions

19483026184031

53(4)

2227333032253143516259284523402038

i

Produc-tion

21505521114131

77(4)

27

3131241

12

70

17

13331134

195

Consump-tion 2

18545132317236

6643

6363556154645665686253276565523255

0 »

Produc-tion

24544633286639

9356

514

3851294

11

572016

23436

33

1951/52

produc-tion

24545535306638

8954

50(4)

3849294

11

55(4)

15

(4)

466

32

* Other years used for some commodities. For further details, see appendix table B-18.2 Apparent consumption (production plus imports minus exports), except for some commodities, noted

in appendix table B-18, for which estimates of actual consumption are used. Additions to domestic stocksare included in apparent consumption.

* Includes butter and peanuts.< Not available.5 Production represents metal content of mine production.

Source: Compiled by the Department of State.

From the point of view of the United States, the limitation of non-essential uses of some commodities will be necessary to make goods availablefor export and for essential domestic use, and to limit the need for im-ports. In general, it appears that the exports of commodities in shortsupply in the United States will be small in relation to total United Statesproduction of those commodities. The highest proportions exported are

74


likely to occur in the cases of cotton and sulfur. In the case of sulfur,our production will fall substantially short of export requirements andnormal domestic demand.

In foods, export requirements are not expected to be a major deter-minant of domestic supplies. The level of civilian food consumption in theUnited States during the next 12 months will be determined largely bythis year's crop production. The major imported foods, such as coffeeand cocoa, are likely to be plentiful.

THE INDUSTRIAL BUILD-UP

Over-all investment objectives

The special needs of the present emergency impose certain objectivesfor domestic investment. For the immediate future, the objectives are toassure adequate and sufficiently maintained capacity for direct military pro-duction, exports essential to our security, and essential domestic civilianneeds; and in addition, to build up reserve capacity for items which will beneeded in greatly increased quantity if international conditions become morecritical. Over a somewhat longer period, it is likewise important to providethe investment in facilities essential to the rapid over-all growth of thenational economy, and thus make it possible to remove direct restrictivecontrols on civilian consumption, while continuing to support the militaryestablishment in a high state of readiness and making our contribution tothe security and progress of the free world.

A primary basis for this continued growth is a high level of investmentin more and better capital goods. It is evident, however, that the currentlevel of business demand for equipment and construction materials couldnot be met without delaying the build-up of military power or disrupting thecivilian economy. While the maintenance of a high level of investment isimperative, the composition of investment must shift to reflect the urgencyof some types and the postponability of others.

Both the level and the composition of investment have changed Strikinglysince 1940. (See chart 17.) During World War II, the physical volumeof gross private domestic investment dropped to less than 40 percent of the1940 level. Nonindustrial construction was severely curtailed, to save mate-rials and labor. Private investment in industrial facilities was likewiseat a fairly low level after 1941, but this reflected the fact that a substantialpart of the industrial expansion of the period took the form of Government-owned plants and equipment. The total rate of investment in industrialfacilities, both private and public, rose to an all-time record in 1942, andthen fell off rapidly.

In comparison, the period from 1946 to the middle of 1950 showed amuch larger share of resources going into private investment than wasthe case during World War II. This reflected both Government with-

75


CHART 17

GROSS PRIVATE DOMESTIC INVESTMENT1st HALF OF 1951 PRICES

Business investment has risen rapidly during the past year. Increasesin equipment purchases and in the rate of inventory accumulationaccount for the entire growth in total business investment from the firsthalf of I960 to the first half of 1951.

BILLIONS OF DOLLARS

20

BILLIONS OF DOLLARS

70GOVERNMENT OUTLAYS FORINDUSTRIAL AND INDUSTRIALSERVICE FACILITIES.JULY 1, 1940 TO JULY 1,1945

1940 41 42* C H A N G E N E G A T I V E-^SEASONALLY ADJUSTED ANNUAL RATES.MOTE: INDUSTRIAL CONSTRUCTION'INCLUDES MANUFACTURING, *IN!N«. AND PUBLIC UTILITIES.SOURCE: COUNCIL OF ECONOMIC ADVISERS.

76


drawal from the industrial facilities field, and the availability of materialsand equipment for nonwar types of expansion and modernization.

Nonfarm housing construction outlays, adjusted to first half 1951prices, rose rapidly from the 1946 level of 6 billion dollars to well overdouble that annual rate in the first half of 1950. Nonresidential privateconstruction, on the same price basis, jumped quickly in 1946 to alevel exceeding anything since 1929, and held that level with only moderatechanges throughout the succeeding years. Producers' durable equipmentpurchases, already at an all-time high in 1946, increased 28 percent furtherby 1948; and after a moderate let-down in 1949, were again approaching anew record in the months before Korea. Accumulation of business inven-tories was more rapid than usual in 1946 and again in 1948, but gave wayto temporary liquidation in the 1949 recession.

During the 12 months which have elapsed since Korea, gross privatedomestic investment has claimed a record share of total national out-put: nearly 19 percent, compared with less than 9 percent in the periodfrom 1940 to 1944, and about 15 percent in the period from 1946 to themiddle of 1950. Comparing the first half of 1951 with the first half of1950, the physical volume of total gross private domestic investmentincreased 25 percent; that of inventory accumulation 181 percent; pro-ducers' durable equipment purchases 21 percent; and construction otherthan residential and farm 16 percent. The volume of residential and farmconstruction, after reaching an all-time high in the second half of 1950, was9 percent lower in the first half of 1951 than in the corresponding period of1950. (See appendix table B-5.)

This unprecedented level of all-round private investment, made possibleby the ample financial resources available, was induced by the upsurgein consumer demand following the Korean outbreak; by the widespreaddesire to hasten construction and equipment projects and to accumulateinventories in anticipation of increasing shortages and higher prices; and, inthe more recent part of the 12 months' period, by the actual impact ofdefense orders and the stimulus of Government aids to expansion. Restric-tions through credit terms, materials control, and direct licensing of sometypes of construction, have been reflected in actual reductions of some formsof investment only during the past few months.

During the next few years, fulfillment of our objectives will entail afurther curtailment of those types of investment which contribute leastto our productive strength. This includes residential, commercial, recre-ational, and also some kinds of industrial construction. Inventory accu-mulation likewise should be kept at a minimum, and should representa considerably smaller drain as the military production programlevels off. Total outlays for industrial, utility and transport expansion,however, should be encouraged to continue at levels somewhat higher thanin 1950.

77


The pattern of investment for 1951 and 1952 is likely to be intermediatebetween that of full peacetime prosperity and that of peak full-war mobil-ization effort, such as in 1942 and 1943, when Government investment wasvery great.

Plant and equipment

Expansion and modernization of productive facilities is, for the nextfew years, the crucial sector of investment. Such investment provides thecapacity needed to meet our security and growth objectives. But thistype of investment calls for much more steel and other scarce items, dollarfor dollar, than do other types such as housing or commercial building.Moreover, related types of capacity expansion must be kept in balance,and we must avoid waste of resources in setting up facilities for whichadequate materials will not be available to support their operation.

It is especially important, therefore, that programs of facilities expan-sion be evaluated as carefully as possible with regard for their contributionto needed production, their properly balanced relationship, and the magni-tude of their short-term drain on resources.

Our manufacturing capacity was being expanded during the five yearsfollowing World War II at an average rate of 6 percent a year. (Seechart 18.) A roughly similar rate of expansion prevailed in the electricpower industry. The total capital outlays involved, for expansion plusmodernization and replacement of manufacturing facilities, averaged about7y2 billion dollars a year, which at first half of 1951 prices would be theequivalent of about 9 billion dollars. Nearly four-fifths of the total non-farm plant and equipment outlays were spent in the mining, manufactur-ing, transport, and utilities fields. (See appendix table B-20.) Despitethe impressive increase in capacity during this period, our productivecapacity appeared to be, in mid-1950, close to full utilization by normalpeacetime standards.

The growth of total national product, set forth as a realizable objective ina previous section of this Review, is estimated to call for a continuedgrowth of industrial capacity at a rate at least equal to the 6 percentannual average of the postwar period, and a level of total outlays for plantand equipment roughly comparable to that of 1950. Considerably largeroutlays would be involved, if business went ahead with investment planson the scale suggested by surveys made at the end of 1950 and early thisyear.

Priorities in expansion

Within this total amount of investment in facilities expansion, a greatlyincreased share should be devoted to the kinds of expansion most urgentlyneeded.

First in priority is the capacity expansion needed to produce the mili-tary supplies for existing security programs, with a margin for a possible

78


CHART 18

EXPANSION IN INDUSTRIAL CAPACITY1939 TO END OF 1951Capacity in most major industries increased faster in thepostwar period than during World War n. Business plans for1951, as reported early this year, ref lected a furtheraccelerat ion of expansion.INDEX, 1939 = 100

400

350 -

300 -

250 -

TOTAL AND DURABLE MANUFACTURING

200 -

AUTOS JP J>-^••T*^

i ••?***• ^*— STEEL»«-*• I

INDEX, 1939*100

400

350

300

250

200

150

100

1939JAN.1946

DEC. DEC.1950 1951-

INDEX, 1939 & 100 .

400

350 -

300 -

250 -

TOTAL AND NONDURABLE MANUFACTURING

'200 -

INDEX, 1939*100

400

- 350

- 300

- 250

- 200

100JAN.

1939 1946•ABASED ON EXPECTATIONS AS REPORTED IN EARLY 1951.

SOURCE: MCGRAW-HILL PUBLISHING COMPANY.

DEC. DEC.1950

79


quick step-up to full war production schedules, should the need be im-posed on us. In the period from 1940 to 1945, this type of capacity expan-sion absorbed a large share of the Nation's investment of both private andpublic funds. About five-eighths of the total outlays for expansion of man-ufacturing facilities was in the field of aircraft, ships, ordnance, combat andother motorized vehicles, and chemicals (including aviation gasoline andsynthetic rubber) amounting to more than 25 billion dollars at first halfof 1951 prices. In those areas, the bulk of the investment was Federallyfinanced.

The present program for expansion of capacity for direct military itemsis considerably less extensive. This reflects not merely the lower level ofmilitary procurement now contemplated, but also the fact that we have asubstantial reserve of suitable plants used in World War II. Reequipmentand reactivation of a large share of these reserve facilities was started in1950, and the further program now envisaged runs mainly in terms ofsuch action rather than the building of new plants. The major Govern-ment industrial plant construction program is that of the Atomic EnergyCommission.

The Department of Defense plans to spend approximately 6 billion dol-lars, from fiscal 1951 and 1952 funds, for expansion of facilities for produc-tion of specialized military items, components, and materials. Three-fourths of this represents purchase of equipment, a major part of whichwill be installed in privately-owned structures. Expansion of aircraft pro-duction facilities will absorb nearly half the total sum.

In addition, a much smaller though substantial private investment inequipment and structures for war materiel production is under way. Itsmagnitude is roughly indicated by the fact that tax amortization certificateshave been requested for nearly a billion dollars of private investment inaircraft and other munitions production facilities, and already issued onnearly 400 million dollars. In addition, a substantial part of the contem-plated private investment in facilities for electrical, electronic, and otherequipment, and in other basically civilian-type industries, is designed toprovide capacity to serve military needs.

Outside the sphere of facilities expansions directly needed for militaryproduction, there are some other types of investment also deserving of highpriority because they are designed to augment the supply of materials,products, and services on which our all-around productive strength andits growth depend. Our general objectives will also require expansionof some of our basic industries to sustain the economy in readiness for fullmobilization. This will include expansion of capacity for producingaluminum and other light metals, requiring substantial additions to electricpower capacity in some areas; provisions for increasing our supplies of steel,copper, ferro-alloys, and several other metals and minerals; and enlarge-ment of our transportation capacity. Expansion of supplies available

80


from foreign sources is an important aspect of several of these programs.Goals are taking shape for the principal expansion programs, and sub-stantial progress has been made toward their realization. The status ofsome of these programs will be outlined below.

In cases such as aluminum and certain alloy metals and chemicals, theproduction of war materiel itself will absorb a large part of the supply.This is true also of certain steel mill products, and even of electric powerin a few specific areas. In the case of such basic types of capacity astransport equipment, petroleum production and refining, and power andsteel in the aggregate, the case for expansion at this time rests on thedesirability of maintaining the strength of our productive system in gen-eral, and not allowing the immediate demands of civilian consumers toinhibit the longer-range growth on which both our military security andour economic welfare ultimately depend.

But in a period when resources are scarce, we cannot afford to promoteor even permit all types of investment which make some contribution to totaloutput of any sort. Some kinds of output will be more important than othersduring the next few years, and some kinds of investment will make a moreeffective and useful contribution to output than do others.

In judging what kinds of capacity expansion—in addition to those kindsclosely related to short-run security needs—may deserve special considera-tion in this situation, relevant considerations include these:

(a) Expansion at bottlenecks is more quickly productive thanexpansion of facilities which cannot be fully utilized for some timeto come. For example, expansion of retail store capacity in a com-munity already fairly adequately served in this respect merely lowersthe degree of utilization of that type of capacity and contributes littleto total output. As another example, expansion of any type of finalprocessing capacity, over and above what can be supplied with mate-rials, is relatively unproductive. On the other hand, increased sup-plies of certain machine tools will remove an important productionbottleneck.

(6) In general, expansion of domestic productive capacity shouldnot be pushed when there is a safe and economical alternative ofutilizing similar idle facilities in friendly countries abroad. Suchutilization can avoid unnecessary drains on scarce resources to buildfacilities here, while at the same time helping to strengthen theeconomies of those countries.

(c) One purpose of the increase of general civilian supplies is tomake possible the relaxation of irksome and costly controls, and tohelp in curbing inflation. Easing of shortages of cost-of-living items,which give rise to cumulative inflationary pressure, should presumablybe rated high in this category. The need, however, is primarily for

81


larger capacity to produce the basic materials going into such itemsrather than for larger final processing capacity.

(d) Easing of materials shortages which severely restrict oppor-tunities for small business is desirable, wherever feasible.

Expansion objectives in specific industries

Progress has been made in recent months toward resolving the broadpicture of prospective production requirements into objectives and pro-grams for the expansion of capacity for specific products. A brief examina-tion of some of the most important of these objectives and programs willindicate the pattern of expansion which is taking shape, its impact oncurrent shortages and subsequent contribution to supplies, and some ofthe necessary interrelations among programs.

Although a substantial part of the contemplated expansion representsdefinite business plans and projects, with various types of Government assist-ance already approved or pending, the goals are still not finally establishedin most cases, and much remains to be done in firming-up and schedulingindividual expansion projects.

Apart from the expansion of capacity for making finished munitions—discussed at an earlier point—the expansion programs which have beenformulated and set in motion are mainly designed to meet the urgent needfor larger supplies of metals and other basic materials, energy sources, andtransportation.

Steel, copper, and aluminum occupy a special role in the programmingof production expansion. All are in short supply, particularly the last two,and all have such pervasive and important uses throughout the economythat now, as in World War II, their allocation through the ControlledMaterials Plan is the main basis for production controls. . These three metals,however, by no means represent the only areas of major shortage whereaccelerated expansion is needed. Important expansion programs are beingformulated and put into effect in such fields as petroleum production andrefining, electric power, transportation, chemicals, and metalworking.

In the light of these programs, it is evident that the pattern of plantand equipment expenditures will show quite a sharp break with the past.The impact of Government programs in aid of facilities expansion will fallprimarily in certain industries where there is a clear need for acceleratedexpansion. Investment in iron and steel, petroleum products, chemicals,transportation, and electric and gas utility facilities accounts for roughlytwo-thirds of the outlays for which tax amortization certificates of necessityhave been requested, and about the same proportion of the amount of cer-tificates thus far granted. (See table 7, page 102.) The magnitude ofexpansion goals suggests investment in these industries, over the next 2 or 3years, running considerably above the 1950 rate of 8 to 8*/2 billion dollars.Capacity expansion in machinery, nonferrous metals, ordnance, pulp and


paper, and a number of other important industries also is being activelystimulated, and is absorbing an increasing share of resources.

With a large step-up in the rate of expansion and investment in thesemajor fields, and with the supply of materials inadequate for any greatincrease in over-all plant and equipment outlays, investment in fields oflower priority must clearly fall considerably short of the 1950 level, andstill farther below the levels originally contemplated in business plans for1951 as reported in surveys made earlier this year. To make the higher-priority expansions possible, it is necessary to restrain the investment out-lays of other lines of business, notably trade and recreational services, foodprocessing, apparel, and a variety of manufacturing industries where capa-city is already reasonably in line with the supplies of material which can bemade available to those industries under shortage conditions.

Iron and steel. The programs in this area involve ore mining and trans-portation facilities, coke ovens, blast furnaces and steel furnaces, and stillother related types of investment such as refractories plants. There aredifficult problems of keeping the various interrelated programs in step so thatcapacity at all stages can be utilized as fully as possible.

The expansion under way in the steel industry is expected to increasetotal ingot capacity to nearly 120 million tons by the end of 1952, comparedwith 107 million tons at present. This program will require 2 to 3 percent ofthe supply of steel and about the same proportion of the copper supply overthis period. It will involve private investment outlays of about 4 billiondollars, which represent not only a large increase over the pre-Korean rateof investment in this industry, but also a sizeable part of total prospectiveoutlays for industrial facilities.

To accomplish this expansion in the time proposed will tax the ability ofproducers of specialized heavy equipment and components. Full util-ization of the expanded steelmaking capacity will also mean increaseddemand for metallic materials and fuel. It is hoped to meet this de-mand by taking advantage of recent technical improvements whichincrease the effective capacity of blast furnaces, by expanded direct useof high-grade imported ores in open-hearth steel furnaces, by increasingore production and imports, and by collecting more scrap.

Increased scrap collections, and increased use of Lake Superior high-grade ores, are both only temporary contributions to the supply of mate-rials. By 1953, an estimated 150 million short tons a year of iron ore will berequired, compared with 123 million in 1951. To meet this requirement,it will be necessary to step up the rate of production at the Lake Superiormines, which will hasten the depletion of that source. Increased dependenceon imported ores over the longer run appears inevitable. New mines inVenezuela and Liberia will furnish substantial amounts of ore before 1953,and Labrador is expected to become an important source by about 1956.Beneficiation of low-grade taconite ores is not expected to contribute sub-

83


stantially to total supply for some years. To provide for efficient use of newore sources in supplying our major inland steel production areas in the faceof a decline in Lake Superior ore supply, initiation of the St. LawrenceSeaway project is an urgent need.

With a sufficient supply of materials to support full utilization of theplanned steelmaking capacity, the output of finished steel mill products,which rose from 74 million tons in 1950 to an annual rate of about 82million in the first half of 1951, could rise by 4 or 5 million tons in eachof the next 2 years.

Military and atomic energy requirements for finished steel under pres-ent programs are expected to reach by about mid-195 2 a peak annual rateat least 12 million tons higher than in 1950, and 5 to 6 million tons higherthan in the first half of 1951. Since the supply of steel can grow by onlyabout the same amounts, total nonmilitary uses of steel must be held downto about the 1950 level through most of 1952 at least. In some specificshapes of steel, such as structural shapes and plates, there are much moreserious stringencies than the over-all figures disclose.

The use of steel in machinery and equipment for expansion, conversion,and upkeep of productive facilities has increased considerably above 1950levels, and cannot be reduced much during the next year or two if ourindustrial build-up objectives are to be met. Even after allowance for anexpected reduction in the amount of steel going into inventories, it appearsthat substantially less steel will be available than in 1950 and early 1951for consumer durable goods and the less essential types of construction.Substantial cuts have already been made in most of these uses.

With adjustments of this character, the shortage of steel need not signif-icantly impair the maintenance and build-up of our national security duringthe next few years. If national defense programs continue in subsequentyears at levels now contemplated, the squeeze on consumer durable goodsand nondefense construction should begin to relax by 1953; and continua-tion of steel capacity expansion at a more moderate rate thereafter shouldmake possible a fairly rapid return to free use of steel. Expansion offinished steel output to about 90 million tons in the next few years—whichwould require full utilization of about 120 million tons of ingot-producingcapacity—would support continued economic growth, residential and pub-lic contraction on at least as large a scale as in 1950, and the satisfactionof normal demands for consumer durable goods.

Aluminum. The expansion program proposed by the Defense MineralsAdministration calls for increasing primary aluminum production by775,000 ingot tons, or 108 percent, from the 1950 level of 719,000 tons.This would mean a total output objective of 1,494,000 tons by the endof 1953, to be achieved mainly by construction of new capacity. Re-activation of existing stand-by plants will provide 79,000 tons ofthe increase, and 62,000 tons will come from improvements increasing


output at facilities now in operation. The capital outlays involved areestimated at over 750 million dollars, compared with very small invest-ments in such facilities in the postwar period. Approximately half of thisexpansion program is already assigned to aluminum companies, with taxamortization approved.

The expansion of aluminum capacity is given further support by Govern-ment contracts guaranteeing a 5-year market for the output of specified newfacilities.

More than two-thirds of the aluminum capacity expansion is planned forthe Gulf Southwest states, and will use electricity generated from naturalgas. Because of the need to bring this production in speedily, these loca-tions near the gas fields have been desirable. However, for longer-rangeadditions to capacity, cheaper aluminum can be produced by means ofhydroelectric power, which may be developed in large quantities and at lowcost on the Columbia and St. Lawrence Rivers and at Canadian andAlaskan sites.

Imports of aluminum from Canada are expected to furnish 15 to 20percent of the supply of primary metal this year; but any enlargement ofimports must await the further expansion of production facilities.^

Our direct national security needs for aluminum accounted for less thanone-tenth of requirements in 1950, but will take about half the supply in1952. With the contemplated expansion program and the requirementsentailed in the present defense program, including the strategic stockpile,civilian use of aluminum will have to be restricted until 1953, but can expandthereafter along a growth trend rising at the rate of 5 percent a year from1950. This trend projection appears conservative in the light of the pastrate of increase in aluminum use. Any over-supply appears unlikely in viewof the known opportunities for extensive and economical substitution ofaluminum for copper, a metal which seems likely to remain in short supplyfor an indefinite period. Substitution for steel is also important, especiallyin military uses.

Under full mobilization at any time in the near future, military require-ments for aluminum would increase greatly, and would force a much moredrastic cutback in civilian use.

Copper. In contrast to steel and aluminum, the possibilities for in-creasing our supplies of copper are severely limited. It is estimated that by1953 the total supply available to this country, including imports, can beincreased by only 15 percent over 1950, and then only by carrying for-ward investment programs both in this country and abroad, and by pur-chases above present ceiling prices. The contemplated investment in do-mestic copper mines, amounting to about 250 million dollars, will hardlymore than stave off an actual decline of production arising from depletion.By 1953, it is hoped to increase imports, which in 1950 accounted for about40 percent of our supply of new copper, by at least one-fourth above the1950 level.

85


On the basis of the current partial mobilization program, and a cur-tailment of copper use in consumer durable goods by 40 percent from thehigh level of the first half of 1950, supplies of copper might be balancedwith requirements for the next few years. However, the need for addi-tional supplies is acute if any allowance is to be made for growth in civilianuse, and much more acute should full mobilization become necessary.The latter eventuality would require extremely severe restriction of civiliandemand.

Over the longer run, the most promising solution of our copper problemlies in the development of adequate substitutes in both civilian and militaryuses. Aluminum is the most promising substitute; but no relief from thatsource is in sight until after 1953, even under presently planned defenseprograms.

Petroleum and refined products. The program formulated by the Petro-leum Administration for Defense calls for a 15 percent increase in domesticproducing and refining capacity in the 3-year period 1951 to 1953. Thisis designed to leave modest margins of spare capacity by 1953, assumingno curtailment of imports, and allowing for a roughly doubled militarydemand plus a continued increase in civilian demand.

The program is aimed at achieving a larger margin of capacity in crudeproduction than in refining, because of our present partial dependenceon crude imports, and because it is difficult to gauge accurately in advancethe success of exploratory drilling operations in actually developing newproduction. A much larger margin is to be provided in the case of facili-ties for special components needed for aircraft fuel, to provide forneeds during the first year of a possible war while still further expansionof such facilities would be in progress.

To achieve the projected capacity increases, it would appear that theinvestment outlays of the petroleum industry would run moderately higherduring the next three years than in either 1949 or 1950, even in the absenceof further cost increases. The difficulty and expense of exploratory drillingare gradually increasing, which implies a rising cost of maintaining thegrowth of oil production capacity and proven reserves.

The petroleum expansion program involves a large drain on criticalmaterials, especially steel. Including oil and gas production, refining,transportation, storage, and marketing facilities, the expansion programswill require nearly 10 percent of the entire prospective supply of steelover the next 3 years.

A full-scale war, or continued political difficulties in the Middle East,might result indirectly in a sharp reduction of our imports, now furnishingabout an eighth of our supply. Even with present imports, war require-ments would be so substantial that civilian rationing would immediatelybecome necessary. Between 1941 and 1944, civilian consumption wasreduced by about 12 percent under rationing. Since any great reduction

86


in civilian use of petroleum products would interfere with maintenanceof transportation services, heating, and industrial production, the capacityexpansion now planned appears to be an essential precaution.

Electric power. Power demand, as measured by the seasonal peak load,increased 60 percent between December 1945 and December 1950. De-spite a large building program during these years, the reserve margin isnow less than 10 percent. The presently proposed expansion would providefor meeting the expected December 1953 peak load with the 15 percent re-serve margin which is considered adequate. The reserve position in certainregions of the country, especially the Pacific Northwest and parts of theSoutheast, is much more critical than nationwide estimates show.

The proposed program calls for a 40 percent increase of electric utilitygenerating capacity—from 70 to 97 million kilowatts—during the 3-yearperiod 1951 to 1953. A significant part of this expansion is needed forexpanded production of light metals and radioactive materials for nationalsecurity purposes. The total outlays for generating plants and associatedtransmission and other facilities are estimated at 11 to 12 billion dollars.Most of this will be spent by private utility companies, whose outlays areexpected to run roughly a third higher, on an average yearly basis, thanin 1949 and 1950.

This electric utility expansion program would take, during the 3 years1951 to 1953, about 2J/2 percent of the total supply of steel, 6 percent of thesupply of aluminum, and 17 percent of the supply of copper. The relativelyheavy demands which the power expansion program places on basic andscarce materials and critical equipment items indicate the need for periodicre-evaluation of the various segments of the program, to make certain thatthe more essential projects get the right of way. However, the funda-mental and indispensable role of electric power in the economy, especiallythe wide variety of its uses, means that a deficiency of electric power wouldpose a serious threat to the whole production expansion program.

Although power requirements would not be very much greater under fullmobilization than under the presently planned defense programs, wartimeexperience here and abroad has demonstrated the extreme practical diffi-culties of curtailing less essential uses. _.-—

Other programs. In addition to these large and basic programs, thereare numerous others which, though of less general importance in Americanindustry, are vital at specific points.

One of the needed materials is manganese, necessary in the steel indus-try. At present, nine-tenths of our supply of metallurgical manganese isimported. The expected increases in domestic production and importsduring the next 2 or 3 years will satisfy our metallurgical requirements butwill not permit stockpile objectives to be met in full. Substantial additionalsupplies might be made available after 1953 from low-grade ore depositsand small mines, and particularly from the wide application of technological

87


improvements in the recovery of manganese from slags. These processes,now in the experimental pilot-project stage, appear very promising.

Sulfur, in the form of sulfuric acid, is essential in a wide range of indus-tries, including fertilizers, petroleum, chemicals, paints, and iron and steel.In other forms, it is used in pulp manufacture and other processes. Theproposed expansion program is designed to increase sulfur supply by about700,000 long tons, or 12 percent over the 1950 domestic output, by theend of 1953. The cost of this program may run in the neighborhood of20 million dollars, on a portion of which application has been made fortax amortization assistance. Domestic demand alone, at present prices,would probably increase considerably more than the proposed expansionof output. A balancing of supply with domestic and essential export needswill call for wider use of conservation and recovery methods, and theexpansion of production of sulfur from pyrites, both here and abroad.

A plan to cope with the shortage of sulfur throughout the free world byvoluntary international allocations has just been worked out by the Inter-national Materials Conference, which recently announced such allocationplans for molybdenum and tungsten as well.

Nitrogen is essential for fertilizers, industrial explosives, and other indus-trial uses, and—especially in full-scale war—for military explosives. Theexpansion program proposed by the National Production Authority calls forincreasing domestic production capacity for synthetic ammonia from 1.6million tons of nitrogen content at present to about 2.3 million by the endof 1953. Of this increase, 0.2 million could be achieved by reactivation ofa relatively high-cost Army reserve plant. The proposed expansion wouldinvolve capital outlays of about 130 million dollars.

With this program, the requirements as estimated by the National Pro-duction Authority could be met during the period 1951 to 1953 under the

presently planned mobilization program. Further expansion of supply, toabout 2.5 million tons by the end of 1953, would be needed, however, ifenough nitrate fertilizer were to be made available to produce feed to keepmeat production at present levels without further drawing upon grainreserves. An all-out war would give rise to a heavy additional demand fornitrogen for the manufacture of explosives.

IMPACT OF THE SECURITY PROGRAM ON CONSUMPTION STANDARDS

While the defense effort is being pushed to peak levels, important changesin composition of consumer goods production will take place, although totalconsumption will probably be relatively stable near the present level, whichis about 12 percent above that of 1946.

In this respect, the period will be considerably different from the earlyphases of the World War II mobilization period. Consumption rose 8 per-cent between 1940 and 1941, and increased in all subsequent years except1942. A brief review of the war and postwar period will reveal notable


CHART 19

CHANGES IN PERSONALCONSUMPTION EXPENDITURES1st HALF OF 1951 PRICESTotal consumption expenditures, in constant dollars, haveincreased 12 percent since 1946, with expenditures fordurables rising 40 percent.BILLIONS OF DOLLARS250

200 -

150 -

BILLIONS OF DOLLARS250

- 200

too -

SOURCE- COUNCIL OF ECONOMIC ADVISERS.

progress in raising standards of consumption throughout the population overthe last 10 years, and indicates that a period of slower progress, or evencurtailments in consumer goods in the next year or two, would still leaveus well off as a nation. (See chart 19.)

The growth of consumption, 1940 to 1944

By 1940, the output of consumption goods had risen by 40 percent fromthe depth of the depression, although there were still substantial numbersunemployed. Relatively large additions were made in stocks of automobilesand durable household goods in consumers' hands; in 1940, 3.7 million auto-mobiles, 2.7 million electric refrigerators, and 1.6 million washing machineswere purchased. As shown in chart 20, per capita consumption of non-durable goods and services in 1940 was about 20 percent below presentlevels. As the war progressed, per capita consumption of nondurablegoods and services rose in every successive year, though due to difficulties ofmeasurement the estimates may overstate the actual increase. Despite largeshipments of food to our Allies abroad, the diet of the American familyimproved a great deal. While the production of metal-using consumer


appliances was virtually eliminated after 1941, purchases of furniture andother types of consumer durable goods increased.

Not only did per capita consumption of most goods and services riseduring the war, but the output of the American economy was more broadlydistributed among all segments of the population. Depressed areas prac-tically disappeared, and migration from regions of lower productivity andlower employment helped to raise the living standards of the neediestgroups. Economic opportunities for the underprivileged were enlarged.Vastly expanded employment opportunities allowed the number of per-sons contributing to family income to increase, thus helping to raise theincome of many families at the lower end of the income scale.

Between 1941 and 1944, there was a marked improvement in the rela-tive status of the lower income segments of the population, particularlyfamilies of two or more. As shown in table 43 the average income of the twofifths of families (excluding single person households) at the bottom ofthe income scale increased by nearly 50 percent from 1941 to 1944, afterallowance for price changes. This compares with a 28 percent increasefor all income groups, and an increase of 19 percent for the top fifthof families. Rationing was a further factor improving the ability of thelower income groups to compete for consumption goods during the warperiod.

TABLE 4.—Changes in the distribution of family income, before taxes, 1941 to 1944 *

Families rankedfrom lowest tohighest income

All families..

Lowest fifthSecond fifthThird fifth. .Fourth fifthTop fifth..

Families and singlepersons

Percentage of totalmoney income

1941

100.0

3.59.1

15.322.549.6

1944

100.0

3.610.116.323.047.0

Families of two or more

Percentage of totalmoney income

1941

100.0

3.99.6

15.622.148.8

1944

100.0

4.511.016.622.545.4

Average money income(first half of 1951 prices)

1941

$4,085

7961,9603,1874,5149,968

1944

$5,227

1,1772,8744,3385,882

11, 867

Percentageincrease in

income.1941 to

1944

28

4847363019

* Includes family allowances and pay of armed forces living at home.Sources: Council of Economic Advisers (1941) and National Bureau of Economic Research (1944).

Consumption in the postwar period

The standard of living is largely determined by the current flow of non-durable goods and services, and the stock of housing and durable equipment.In the postwar period, it has been raised largely through an increasedflow of services and large additions to the supply of homes, auto-mobiles, and household appliances. (See chart 21.) The per capitaconsumption of nondurable goods apparently reached a peak in 1946,


CHART 20

PER CAPITA CONSUMPTION EXPENDITURES1st HALF OF 1951 PRICESReal per capita consumption rose throughout most of the warand postwar period. In 1950, it was nearly one-third higherthan in 1940.

DOLLARS1,400

1,200

1,000

800

600

400

200

0

- ' V;

vv.

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1940

DOLLARS800

600

400

200

O

DOLLARS

TOTAL PER CAPITA CONSUMPTION FXPFwniTURFS

$v;</

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-

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1,400

1,200

1,000

800

600

400

200

0

41 42 43 44 45 46 47 48 49 50

DOLLARS

PER CAPITA EXPENDITURESFOR DURABLE GOODS AND SERVICES

~

«• »•

• \

\

40

DURABLE + +GOODS V^^— " —

V-- — '*••••

1 | | 1 1 1 1 1 1

^ ^^ — 7"""

^X****-^NONOURABLE GOODS""

><r> —--'"""PER CAPITA EXPENDITURES

FOR NONDURABLE GOODS AND FOOD1 1 1 1 1 1 i I I 1

800

600

400

200

0

42 44 46 48 50 40 42 44 46 48 50



and has since declined somewhat, although it is doubtful whether theestimates fully reflect the degree of product improvement which hasoccurred since the war. On the other hand, the per capita consumptionof services has moved steadily upward since 1946, as it did during WorldWar II. (See chart 20.)

The average rate of construction of new nonfarm dwelling units was onlyabout 300,000 units annually during the period 1942 to 1945, includingmany of temporary types, and the production of automobiles and othermajor appliances was severely restricted. Thus, at the end of the war, therewas an urgent need for new housing and improvement of existing housing;a high percentage of automobiles on the road were near the end of theiruseful life; and stocks of other appliances were being depleted. Notableprogress has since been made in remedying these deficiencies. In 1950,only 5.6 percent of families were living doubled up with other families,compared with 6.8 percent in 1940 and 8.6 percent in 1946. Automobileownership has significantly expanded. In 1940, there was a car for every4.8 persons; by the end of the war, there was only one car for every 5.4persons; at present there are about 3.7 persons per car. Twenty-eightmillion homes had washing machines at the beginning of this year, com-pared with only 13^2 million in 1939; and the number of homes with elec-tric refrigerators has almost tripled. Most homes now have a radio, andalmost one in four has television.

The more nearly equal distribution of income which was attained duringthe war has been largely preserved during the postwar period. Althoughstatistics on the distribution of income are not entirely comparable forthe prewar, war and postwar periods, the evidence is fairly clear that thepostwar distribution is less concentrated than the prewar distribution. Ap-proximate stability in the distribution of income since 1946 is indicated byboth of the main bodies of available data—the Census Bureau's CurrentPopulation Reports on Consumer Income and the Federal Reserve Board'sSurveys of Consumer Finances. The distribution of income for postwaryears is shown in table 5.

TABLE 5.—Distribution of income in the postwar period

All farpjly units

Lowest fifth -Second fifthThird fifthFourth fifth .Top fifth

Percentage

1946

100

4H162247

of total mor

1948

100

4H162247

ley income

1950*

100

4H162346

1 Includes single-person families.2 Preliminary.Sources: Survey of Consumer Finances, Board of Governors of the Federal Reserve System (1946, 1950)

and Council of Economic Advisers, based on data from Bureau of the Census (1948). . . _ ' " '

92


CHART 21

PRODUCTION OF SELECTEDCONSUMER DURABLE GOODSCutbacks in civilian production of 30 percent from first half of I960rates would permit passenger car output of almost 5 million unitsper year, and household appliance production near 1949 levels.

MILLIONS OF UNITS10

5 -

10

10

ELECTRIC WASHERS

ELECTRIC REFRIGERATORS

[771

ELECTRIC AND GAS RANGES

1940 1948 1949 1950 1st 2ndHalf^/1950

MILLIONS OF UNITS10

- 5

10

10

SOURCES: AUTOMOBILE MANUFACTURERS'ASSOCIATION, MCGRAW-HILL PUBLISHING COMPANY,AND DEPARTMENT OF COMMERCE.

93


Consumption during the period of the new defense build-up

If the production goals outlined in previous sections are realized, therewill still be opportunity for further increases in some types of output forconsumers during the next year or two. The output of many types ofnondurable consumer goods and services can be expanded, while the pro-duction of housing and of durable goods is expected to be sufficient to takecare of the population growth and some replacement. Exact estimates ofthe degree of expansion which will take place in the output of nondurablegoods, or of curtailments in durable goods, are of course impossible. In thefirst place, projections included here assume that targets for defense produc-tion will be met, although many factors may accelerate or retard progresstoward these targets. Secondly, the extent to which total output can beincreased depends on the willingness of more people to enter the laborforce; on willingness to work longer hours; and on some unforeseeablefactors, such as the influence of weather conditions on crops and the avail-ability of imported raw materials. Further, it is impossible to anticipatein detail the policy decisions which will distribute the burden of necessarycuts among consumption, private investment, exports, and public programs.

Making such assumptions as seem reasonable for all these factors, itappears that per capita consumption of food can be maintained at levelsas high or higher than in 1950, as can consumption of clothing, shoes, andother nondurable goods. The output of many types of services can besubstantially increased, as during World War II. On the whole, it seemslikely that increased demands for nondurable goods and services will drawforth moderate increases in output, despite the diversion of material andmanpower to defense industries. Those types of consumer output whichwill be adversely affected by the resource needs of the security programsare housing and consumer durable goods, including automobiles, householdappliances, and television and radio sets.

Credit restrictions on new housing have been established with the objectof reducing construction to an annual rate of 850,000 nonfarm dwellingunits (a level which may be substantially exceeded in 1951, because of thebacklog of commitments existing at the beginning of the year). The 850,000new units would provide dwellings for the expected 400,000 to 500,000increase in new families each year, with a substantial margin for retire-ment of substandard units, abnormal demands in defense areas, and otherneeds. Thus, while additions to housing may not always be of the mostdesirable types from the standpoint of meeting the needs of a defenseeconomy, the quantity of new housing, together with improvement ofexisting structures, insures that housing accommodations will not deterio-rate during the period of defense build-up.

However, more attention needs to be concentrated, not only upon properlocation, but also upon proper pricing relative to the need. Much more

94


of the housing should be built to sell or rent within the means of defenseworkers. This involves, among other things, a larger volume of low-rentpublicly financed housing.

The outlook for metal supplies indicates that the needs of defense pro-curement and essential investment will not require, by the end of this year,a greater reduction in the use of scarce metals in consumer durable goodsthan 30 to 40 percent, measured against the first half of 1950. Afteradjustment for the effects of the Chrysler strike in early 1950, a cut of thisorder would permit the production of passenger cars at an annual rate of4^2 to 5 million units, compared with an estimated 5J/2 million this year,6.7 million in 1950, and 5.1 million in 1949.

The effect of cuts in the supply of metals for major items of householdequipment, ranging from 30 to 40 percent of the first half of 1950 rate,is shown in chart 21. The estimates are largely illustrative, since numerousfactors could influence actual production levels in addition to the cur-rent allocation of materials. However, it can be seen that a 30 percentcutback would permit output near the levels of 1949 for electric refrig-erators, electric and gas ranges, and electric washers. In terms of expe-rience prior to 1950, this is a very high level of production. Maintenanceof supplies at these levels would be more than adequate to equip newdwellings and to permit normal retirements of over-age units.

In summary, the output of consumer goods will be adequate to main-tain high consumption levels in the United States under present defenseprograms, but at the cost of a greater labor effort, and some sacrifice ofleisure time. Consumers will not, however, be able to translate all of theirincreases in money income into additional consumption. Some goods willbe produced in quantities inadequate to meet demand, and some degreeof quality deterioration may take place. The variety and attractiveness ofsome goods will suffer, as substitutes are used and skilled labor becomesmore scarce.

For most families, only some inconvenience is involved in meeting ournational objectives. For others, however, there will be real hardship.Even in normal times, many groups of the population hardly participate inwhat we like to regard as the American standard of living. In 1950, asshown in table 6, 28 percent of the families had incomes below $2,000, aftertaxes, and an additional 18 percent had incomes between $2,000 and $3,000,after taxes. While these income groups contain relatively large proportionsof single-person families and of farm families with non-money income, itis obvious that very large groups still live in relative poverty.

95


TABLE 6.—Distribution of families by income level, before and after Federal incometax* 1950

Money income

All families ....

Under $1,000$1,000 to $1.999 .$2,000 to $2,999$3,000 to $3,999$4,000 to $4,999$5,000 to $7,499 -_.$7,500 to $9,999 *•>$10,000 and over

Before tax

Percentageof families

100.0

11.515.215.617.912.717.74.84.4

Percentageof money

income

100.0

1.25.79.7

15.614,226.310.416.9

After tax

Percentageof families

100.0

11.616.417.719.713.614.34.02.7

Percentageof moneyincome

100.0

1.46.8

12.318.816.623.49.5

11.2

J Families include single-person families. Income tax liabilities have been estimated from data onfamily income and composition.

NOTE.—Detail may not add to totals due to rounding. Figures in this table are not comparable withthose shown in table 10, page 132, which are based on a distribution by spending units rather than familyunits.

Source: 1951 Survey of Consumer Finances, Board of Governors of the Federal Keserve System.

Some of the poorer groups of the population have already benefited bythe defense effort. The competition for labor will create better employ-ment opportunities, and in some families, working wives will augment thefamily income in the coming period. The defense effort properly givesrelatively more income to those who can work longer hours or take jobs inhigher-paying defense industries. Changes in income distribution areinevitable in a time of economic readjustment.

On the other hand, a spiraling process of general price and wage increasesentails a general redistribution of earning power, which cannot be justifiedby the need to get out more production or to change its composition.This process leaves behind those groups who are not in a position totake jobs or to obtain wage increases, such as retired persons, annuitants,disabled veterans depending on pensions, and all other fixed income groups.This is particularly unfortunate because fixed income recipients are dispro-portionately concentrated in the lower income brackets. Between early1950 and early 1951, when personal income rose by about 13 percent,half the population did not obtain any increase in income. In fact, 18percent had decreases in income.

These considerations point to the need for a firm policy of price andwage stabilization. But the fact that there are difficult problems involvedin distributing the burdens of a defense program does not by any meansimply that much greater cuts could not be made in civilian output thanare now contemplated. Durable consumer goods production could be cutto a minor fraction of its present rate, and the output of nondurable goodsand services reduced substantially without damage to health or morale,if the international situation required. By contrast, the degree of sacrificeassociated with our present objectives appears relatively minor.


III. Economic Policies for Defense

PRIME IMPORTANCE OF ECONOMIC PROGRAMMING

In the Council's December 1950 Annual Report to the President, entitled"The Economics of National Defense", and in its January 1951 AnnualEconomic Review, the need for programming of requirements and supplieswas emphasized. Although substantial progress has since been made bythe defense agencies toward this programming operation, the Council feelscalled upon once again to emphasize its vital importance.

"Programming", as we use the term, does not mean the central planningcharacteristic of the economic operations of some other countries. It meanssimply that, in a defense emergency, the Government is necessarily affectingthe whole economy in so many important ways that it has the high responsi-bility to see to it that these various operations are harmonious and guidedby a vigilant logic.

Such a programming operation involves four main tasks.First of all, it involves the application of an economic strategy, which fits

together insofar as feasible the various major parts of the national effort.The military build-up, the stockpiling effort, the measures for interna-tional aid, the actions to build up our own industrial facilities, and thesteps designed to limit civilian consumption, do not exist in separate worlds.They must all be conducted at the same time within the American economy,and in the aggregate they are limited and conditioned by our economicresources. Thus, there must be a continuing effort to keep these variousmajor parts of the effort in balance, although the relative size of these dif-ferent parts may vary from time to time, depending upon the workinghypothesis as to whether we are engaged in a long drawn out struggle ormoving quickly toward an ultimate crisis. This first phase of the program-ming operation might be called the clear defining of major goals, and thetesting of their feasibility one against the other.

Second, the programming operation involves a continuing determinationof how these major goals are to be reached. What part can be accom-plished through expanding supplies? What part needs to be accomplishedthrough reducing demand? In this aspect, programming involves the con-stant testing of various economic policies and detailed actions in terms of thebasic objectives which they are designed to achieve.

This aspect of programing involves both production and stabilization.The two are interconnected, and success in both is essential for success

97


in either. In one sense, the ultimate aim is production. The products ofindustry, not their price tags, fill the armories and commissaries of ourArmed Forces. Yet in large measure the stability of the price and incomestructures conditions the will and capacity to produce. Without stability,production is disrupted and serious incentive-sapping inequities crop up.It is just as true, particularly for a protracted effort, that genuine stabili-zation requires expanding production. Stabilization means holding demandas closely as feasible to the supply of available goods, and this can bedone more easily if the supply increases.

While production and stabilization efforts are complementary, there canbe some points of conflict between them. If production were the onlyobjective, we might make extensive use of price and wage increases asincentives, but this would destroy stabilization. Conversely, rigid and single-minded price and wage stabilization, or tax and credit programs directedexclusively to a narrow anti-inflation objective, might cripple essentialdefense and civilian production. The harmonizing of production andstabilization is part of the programming task.

Third, programming involves scheduling and timing. Not only mustthe major goals be defined with such clarity as is attainable, but inaddition the relative speed at which these various major goals are to beattained must be borne in mind. Otherwise, vast and unnecessary disloca-tions in production and employment could be caused by cutting back onsome things faster than others are increased; or damage to the defense effortcould result from not cutting back on some things fast enough to satisfymilitary and related requirements.

Fourth, programming involves a reasonably complete and continuoussynthesis or inventory at one central point of all the important facts aboutthe progress of the whole effort, so that those concerned with policy mayhave immediate access to what is happening as a guide to what needs to bedone. Without this opportunity to look at the whole picture as it evolves,great disparities or deficiencies could arise without being detected inadvance.

Programming, in short, is nothing more nor less than the application ofsound and tested business methods to the business of national defense, whichis the biggest business that we are now undertaking, and by far the mostvital. The progress thus far made in programming, while encouraging,should be carried further. And because it is at the core of the wholeeffort, energy and determination should be concentrated upon it even morethan upon important segmental operations of production or stabilization.For, in the final analysis, production and stabilization actions must beguided by this kind of programming.

While the Government must lead in this programming effort, its successdepends very heavily, as the Council has frequently said, upon voluntarycooperation. The detailed measures to increase production, to control


prices and wages, to restrain credit, and to stimulate saving, can be greatlyfacilitated through the constructive cooperation of unions, farm organiza-tions, business and consumer groups, and local governments. Such coopera-tion may best be achieved if each group has an opportunity to participatein the programming action which gives meaning and direction to all of theseother efforts.

THE PRODUCTION EFFORT

A year ago, the nation's security program was absorbing about 6 percentof the economy's total production. Under present plans, the figure isexpected to approach 20 percent a year hence. This assumes that totalproduction, which has increased 10 percent during the past year, can beincreased at least another 5 percent during the coming year. The in-crease in total production from the first half of 1950 to the first halfof 1951 has made it possible to increase outlays for national security, forfacilities expansion, and for civilian consumption all at the same time.Without such an increase in total production, it would have been neces-sary to curtail business investment and consumption by about one-tenthfrom the present level. A further curtailment of one-tenth would be neces-sary if the scheduled increases in national security programs during the nextyear had to be met without a further increase in production. A rise of 5percent in total output over the next year should make it possible, not onlyto meet the scheduled 30 billion dollars increase in national security expendi-tures during the next year, but also to add to capacity in at least some of themost essential industries, and to avoid a reduction in consumption.

To meet the national security objectives, it is essential that the goalsoutlined in Part II of this Report be attained, and that economic programsand policies be shaped to this purpose. These goals may be summarized asfollows:

1. An increase in total output of 5 percent, or better, from themiddle of 1951 to the middle of 1952.

2. An increase of something like 4 percent in total man-hoursof work over this period. Most of this increase should resultfrom expansion of the labor force by l/2 to 2 million. Some lengthen-ing of the workweek will be necessary in some industries. Increasedlabor productivity should make an additional contribution of some 2percent to expansion of total output.

3. Expansion of productive capacity in such basic industries as ironand steel, aluminum, chemicals, fuels, energy, and transportationfacilities, requiring outlays of 20 to 30 billion dollars during thenext 2 years. In addition, expansion of specialized facilities for militaryproduction will come to about 7 billion dollars.

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4. Effective development and utilization ot foreign as well as domes-tic resources of basic raw materials, and their allocation in line withcomparative urgency of demand.

5. Restrictions on many types of consumption, business investment,and Government spending.

Industrial production aids

To promote the acceleration and redirection of production, the Govern-ment has in the past year, under the authority of the Defense ProductionAct and related legislation, taken action to guide the flow of materials; toaid some producers in financing their expansions of both working capitaland fixed investment; to reduce the risks and enhance the prospective leveland stability of earnings of some producers; to promote the wider andprompter adoption of new technology; and to broaden the participationin defense-related production by business enterprises both large and small.Some of the production aids are being applied abroad as well as at home,to enable friendly nations to increase their contribution to the commoncause.

Materials controls. The most common limiting obstacle to productionhas been the relatively scarce supply of certain materials, mainly metals.This will continue, and control of materials flow is increasingly the key tothe redirection of production.

In the initial year of the defense effort, while the drain on materials fornational security was still small, a series of partial controls over key materialswas instituted. They began with a limitation on accumulation of inven-tories. This was quickly followed by the granting of a general priorityfor defense production orders, later supplemented by grants of specificlimited priority assistance to certain defense-supporting production andcapacity-expansion programs. At the same time, the use of certain scarcematerials, such as aluminum, in less essential products was curtailed byrestriction orders. Conservation of scarce materials and the use of substi-tutes were promoted by controls over product specifications (e. g., for con-tainers). Some uses of scarce materials were prohibited outright, and afew materials in shortest supply were placed under complete allocation.

The National Production Authority has been able to stave off a repeti-tion of the breakdown of the priority system which occurred during WorldWar II. To meet the increasing stringency of materials supplies, it is nowachieving a transition to the comprehensive allocation and scheduling ofkey metals use through the Controlled Materials Plan.

Department of Defense programs for facilities expansion. A basic prob-lem in this area of production is expansion of capacity, since the aim is toprovide a wide enough margin to permit a quick step-up in the event ofall-out war. A core policy underlying defense procurement is to balance

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deliveries of end items with needs for equipping the active forces for theinitial phases of mobilization. Preparation for possible full mobilizationrequirements is to take the form of quickly expansible production, ratherthan large reserve stocks of military end items. The Department of Defenseis now carrying out a facilities expansion program involving primarily thepurchase, conversion, and modernization of production equipment in bothprivately-operated and Government-operated industrial plants. Funds aregenerally authorized only when privately-financed expansion cannot be ob-tained, even with one or more of the Federal aids provided in the DefenseProduction Act and the Revenue Act of 1950.

Steps have been taken to meet the particular administrative issues andsubsequent settlements posed by this program. Problems arise particu-larly where Government-owned and privately-owned equipment andstructures are locally integrated in such a way as to make severance im-practicable. During World War II, numerous additions to privately-owned facilities, which were financed by the services, proved to be relativelyuseless in the postwar period. The inevitable result was that, when thesupply contracts were terminated, the Government faced the problem ofdisposal with no bargaining position. The only feasible prospective pur-chaser was the owner of the facility, and the cost of dismantling exceededthe best obtainable offer to purchase.

These problems will not be as serious under the present defense program asduring and after World War II. Nevertheless, to protect the Government'sirrterest and bargaining power more adequately, the Department of Defensehas adopted a new policy on facilities contracts. Nonseverable facilities ofsuch a nature as not to be disposable to third parties must in general belocated on Government-owned or Government-controlled land, exceptwhere (1) the contractor agrees to purchase the facilities on expiration ofthe contract at actual depreciated cost, or (2) the estimated useful life ofthe facilities will not extend beyond the expiration of the contract.

Financial assistance through loan guarantees and direct loans. The pro-gram for loan guarantees by Government procurement agencies, admin-istered through the Federal Reserve System under authority of the DefenseProduction Act, is designed primarily to aid producers otherwise hamperedby lack of working capital. Where aid is required for the financing of fixedinvestment or developmental work, the Defense Production Act also author-izes direct Government loans (including participation in and guaranteeof private bank loans).

The amount of financial assistance extended under these programs isshown in table 7. About three-fourths of the total direct loan assistance,including participation by the Reconstruction Finance Corporation, hasgone to expansion of the production and initial processing of basic materials.

IQI


TABLE 7.—Summary of tax amortization necessity certificates, and direct loans andloan guarantees under Defense Production Act, by type of production, throughJune 1951

[Millions of dollars]

Type of production

Total

Basic materials production and fabrica-tion, total

Iron and steelChemicals - .Petroleum productsPulp and paper

Nonferrous ore mining ._Iron ore miningCoal and coke -. -Refractories _ _TextilesCement and concrete productsOther

Finished products, totalAircraftMachinery and componentsElectric and electronic equipmentOrdnance, tanks, guns, and ammuni-

tionAutomotive and tractor equipment

and componentsOther

Transportation and storage - _. -Public utilitiesMiscellaneous

Certificates of necessity for taxamortization

Proposedinvest-ment

7,562

5,0572,391

65853737237224514611768534849

796301265104

63

559

1,036523150

Tax amor-tizationallowed

5,199

3,5211,699

3674162212921641149657283333

56921218278

48

417

752256101

Percentageratio of

tax amor-tization

allowed toproposed

investment

69

7071567760786778828452696771716975

77

7482724968

Directloans

(includingsupple-mental

RFC par-ticipation)

116

878413

8248

104

1

2

2

2

Loan guar-antees

656

0)(J)

(00)

i(0

8i

I'1 Not available.2 Less than $500,000.NOTE.—Detail will not necessarily add to totals because of rounding.

Data for necessity certificates and direct loans are cumulative through June 25; the loan guar-antee figure is cumulative through June 30.

Source: Defense Production Administration and Board of Governors of the Federal Reserve System.

The Reconstruction Finance Corporation, under its own authority, hasalso made additional loans of about 95 million dollars during the 12 monthsending June 30, 1951, to aid the expansion of defense production facilities.These are not included in table 7.

Encouragement of supply through purchase contracts. Governmentprocurement contracts are being used to promote the expansion of produc-tion in three different ways.

First, the negotiation of a long-term contract providing some protectionagainst the risk of market collapse is an important aid to expanded produc-tion, applicable primarily in the case of staple raw materials which can bestored. Such contracts have been used in procurement for the strategicstockpile here and abroad, and under the Defense Production Act have alsobeen extended to the purchase of materials for direct use in production. Asomewhat similar principle underlies the Government program of pool

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orders for machine tools, which is designed to secure the fullest utilizationof tool-making capacity by encouraging subcontracting and more efficientscheduling of output.

Second, procurement contracts may, under the Defense Production Act,properly make provision for Government payment of part or all of the costsof developmental or research work or facilities expansion necessary forthe fulfillment of the contract.

Third, the placing of procurement contracts can be an important aid tothe expansion of production by enlisting the resources of small or new pro-ducers, who otherwise might be left idle and unproductive. In this way, thenecessity of devoting scarce resources to costly and time-consuming facilitiesexpansion can be reduced. This is discussed more fully in a later section onsmall-business aspects of production aids.

Tax amortization. The most important and most broadly applied aid tofacilities expansion in the current mobilization effort is the granting of cer-tificates of necessity, under the Revenue Act of 1950, which permit aproducer to charge off for tax purposes part or all of the cost of certifiednew production facilities over a 5-year period. Table 7 gives a summaryof the operations of this program.

At the outset of the mobilization program, speed was of the essence, andcertificates of necessity were granted with the objective of getting theexpansion of needed facilities under way as rapidly as possible. At thepresent time, a careful review and reappraisal of the program is beingundertaken in the light of expansion progress and goals.

The tax amortization program is designed to provide, where necessary,an incentive to proceed rapidly with facilities expansion and conversionrequired in our industrial build-up. It offers the producer earlier recoveryof his investment, thus providing some protection against unusual uncer-tainty regarding the economic life of the new facilities. The certificateholder gets a substantial reduction in income and excess-profits tax liabili-ties during the initial 5 years. This helps him not only because some taxliabilities are deferred, thus improving his short-term financial position andcredit-worthiness, but also because some of the deferred taxes may never haveto be paid at all, in the event that tax rates are lower after the initial 5years, or in the event that the taxpayer's earnings position puts him in alower tax bracket in that later period.

Wear and tear and obsolescence of facilities represent, of course, a genuineelement of capital cost, which is properly recognized in determining fairprices in the negotiation and renegotiation of procurement contracts.Under present circumstances, such costs may be abnormally high in thecase of special-purpose facilities needed for peak military output. Theseprice determinations should be made separately from the granting ofamortization for tax purposes.

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In view of the varying degrees of necessity for assistance, a wide latitudefor administrative discretion in operating this program is essential. The5-year write-off privilege has in nearly all cases been allowed on only apart of the new investment, varying according to type of facilities, as shownin table 7. The issue of a certificate of necessity, in itself, has not beenrecognized by the Economic Stabilization Agency as establishing an allow-able amortization cost factor in the adjustment of price ceilings.

The direct cost of the program to the Government, including tax revenueforegone and, in some cases, higher prices paid on procurement items,is only a fraction of the amount of the certificates issued. A possible offsetto these direct costs arises to the extent that total investment and taxableincomes are increased by the tax amortization program.

Regardless of the ultimate effect of the program on tax collections, theimportant thing is to assure that it will play its proper role in relation toalternative devices, and that it be so administered as to make the Govern-ment's contribution as effective and economical as possible.

No one is in a position to say how much of the investment receiving thistype of aid would have taken place in the absence of the necessity-certificateprogram. It seems reasonably evident, however, that the use of certificateshas been of important assistance in expediting investment in the desiredlines. This conclusion is based partly on scattered statements of producersto the effect that their expansion projects have been contingent on thisassistance. In part, it is based on the rate of plant and equipment invest-ment since the program was authorized.

Choice of alternative production aids. Proper use of the various availabledevices for stimulating high-priority investment calls for expert and ob-jective judgment. The best means of assistance to use in a given case is notnecessarily the one preferred by the applicant, nor the one found administra-tively most convenient. It is important to minimize the ultimate public costinvolved, and to tailor the assistance given in individual cases insofar asfeasible to the factors actually limiting the ability and willingness of busi-ness to expand. Although it may be appropriate, in some cases, to grantboth tax amortization and additional assistance in other forms, such asdirect loans, the tax amortization privilege is not properly to be regarded asa badge of preferred status to be given on a blanket basis or as a prerequisiteto other assistance. In many cases, the promotion of expansion is moreproperly left to alternative devices. In the case of long-lived facilities ofnormal peacetime types, where presumptive usefulness does not dependdirectly on the operation of a high-gear defense program, long-term Govern-ment loans or loan guarantees often provide sufficient aid and incentive.These devices provide financial aid, where necessary, while also providingfor ultimate full recovery of principal and interest. In another category ofcases, the chief deterrent to adequate expansion is uncertainty as to long-run prices and markets, although the product is a staple and durable mate-

104


rial. Many cases in this category involve production of commodities boughtby the Government for stockpile and other defense purposes, and this intro-duces an important factor of uncertainty into market prospects. In suchcases, long-term purchase commitments are an appropriate device for thestimulation of the necessary investment.

The alternative to private investment, with Government aid, is construc-tion of industrial facilities by the Government. While this plan wasextensively used in World War II, it is less extensively needed now, becausethe emergency is less acute, and because business is now in far better positionto do the preponderance of the necessary expansion job. Nonetheless,public authority to construct certain industrial facilities, subject to appro-priate safeguards, is a highly desirable reserve power. When uncertaintyas to the utilization of the expanded facilities after the emergency isextreme, the cost of inducing private construction may be too great. Insome other instances, private assent to undertake the job may not beattainable with sufficient speed no matter what the available inducement.There may also be some cases where the inducement to private constructionmay cost the Government far less if the reserve power to proceed by othermethods is available.

Technological assistance and conservation of materials. Coupled withassistance on the market and financial side, there is need for increasinglyactive pursuit of technological development and materials conservation.The search is being intensified for new industrial techniques, which willsave scarce materials vital to defense by utilizing them more carefullyor by substituting more plentiful materials for them, or which will de-velop new sources of supply. In other instances, new processes or prod-ucts will have similar beneficial results. For example, the minerals develop-ment program is being carried forward vigorously in the hope of discoveringnew ore sources and new metallurgical processes, which would enable lowergrade ores to be utilized.

Research and experimental programs, for instance in synthetic liquidfuels, in the use of lower grade woods, or in more efficient processes in thesteel industry, whether carried on under public or private auspices, shouldnot be slackened, for they may result in large savings of relatively scarcematerials. All such Government programs, to the degree feasible, are beingredirected toward defense needs, particularly for the long pull, in whichincreasing shortages of many critical minerals, metals, and other items,including some agricultural items, threaten to limit our security and eco-nomic growth. This is true of such programs as those of the Bureau ofMines, the Bureau of Standards, and the Agricultural Research Adminis-tration. Certain programs intimately connected with defense may properlybe financed by defense appropriations.

Perhaps more significant for the short run, and also of great importancefor the longer period ahead, is the further application of direct materials

105


conservation measures. Specific limitations have already been placed onthe use of such scarce items as tin for containers. Percentage cutbacks inthe permitted use of various scarce metals have stimulated substitution andother forms of conservation.

The interagency Conservation Coordinating Committee has takensteps to encourage conservation of critical materials, and to relieve pressureon inadequate plant facilities through standardization, simplification, andsubstitution. The program for conservation in construction, which includesdimensional coordination, standardization of structural elements, and grad-ual unification of building codes, can result in substantial savings of ma-terials and labor now going into construction. Projects to provide substitutesand conserve the use of scarce materials are well advanced. Promisingcommunity-wide conservation activities in industrial plants are being spon-sored, and individual companies are furthering this kind of work in theirown plants.

Similar conservation activities in World War II brought substantial sav-ings in scarce materials, equipment, and inventories. After the war, how-ever, many practices involving standardization and other forms of materialsconservation were dropped. The chance for recapturing and extendingthese gains now exists, and can be accomplished by means of energetic coop-eration between industry and Government.

During World War II the Office of Production Research and Develop-ment helped greatly by directing and coordinating scientific and engineeringresearch to strengthen war production, making fullest use of existing researchfacilities. The solution of numerous critical technical production problems,including those involving substitute materials or new processes or products,was hastened by this service.

Preoccupation with immediate defense requirements should not cause usto overlook longer range requirements. This is especially true of naturalresources development policies and programs necessary for maintenanceand expansion of a strong, enduring resource base. The Materials PolicyCommission, appointed by the President last January, is giving carefulstudy to the national and international aspects of these problems. In partic-ular, basic data, investigation, and survey programs should be sustained asa basis for future resources development.

Small business participation in production. The many thousands ofsmaller producing enterprises furnish a substantial part of total output, andhave an even more than commensurate importance in terms of the preser-vation of competitive opportunity and individual initiative. In a situationwhich calls for the fullest practicable utilization of our resources, it isessential that the small business sector of the economy be encouraged tomake its full contribution.

106


The firm policy underlying military procurement is that qualified smallbusiness concerns must be given an opportunity to participate in militaryprocurement and to find a proper place either at the prime contract level,or at the subcontract level, whichever enables them to make their best con-tribution to the defense effort.

Many of the major items of military equipment, such as aircraft, tanks,heavy guns, and aircraft carriers, cannot possibly be supplied directly bysmall manufacturers, although small business concerns can and do makemany of the parts going into such equipment. While small business firmshave received only about 22 percent of military prime contracts, they havereceived about 40 percent of the contracts for those items which small busi-ness can produce. The extent of subcontracting to small firms is indicatedby a recent study of Air Force prime contracts which showed that 75 percentof the resulting subcontracts went to such concerns.

At best, however, the shift to a defense economy tends to make the com-petitive position of small firms more difficult. Items of military procurementare generally required quickly and in large quantities, which gives anadvantage to the larger and better known suppliers. Small firms generallyare also less well equipped to finance expanded production, and to formulateand present applications for Government assistance in such expansion.Moreover, when materials become scarce, the small firm is often at adisadvantage in retaining its sources of supply or finding others.

Another important factor, often overlooked, is that the types of industrywhich expand most in a mobilization phase are characterized by relativelylarge business units. The present pattern of expansion consequently offersless opportunity to small business than would arise from a uniform across-the-board expansion of all types of output. This point is evidenced bytable 8, which brings out the lesser relative importance of smaller firms inthose types of manufacturing which predominate in the defense build-up.

TABLE 8.—Importance of small business in selected defense-related industries

Industry

All manufacturing industries

Machinery (except electrical) _ _ • _ _Chemicals and allied productsPrimary metal industries. _ _ __ _ _Electrical machinery, equipment and suppliesProducts of petroleum and coal __. . _Ordnance and accessoriesTransportation equipment

Percentage oftotal employeesworking in firmswith fewer than500 employees,March 1948 »

41

36291917141310

1 Employees include those with taxable wages under the old-age and survivors' insurance program forfanuary-March 1948.

Source: Federal Security Agency.

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It should be noted that the figures in table 8 measure the relative im-portance of smaller firms in terms of employment. In terms of amountsof capital invested, these same smaller firms represented considerably lowerpercentages of the respective industry totals.

The above considerations partly explain why3 even with legislation andpolicies directed to promotion of small business participation, larger firmshave received the preponderance of the direct Government orders andassistance. For example, the manufacturing firms with fewer than 500employees had received only about one-fifth of the amount of prime mili-tary procurement contracts, as noted above, and about one-ninth of theamount of certified tax amortization. Allowance should be made for thefact that much of the defense work of small business is done on subcontracts.

Government policy in assisting small business involves administrativeaction on many fronts—procurement placement, materials allocation,financing, and technical and informational services.

Definite steps have been taken by the Defense Production Administrationto insure greater participation by small business in the prime contract andsubcontract awards. An Executive Committee for Small Business has beenorganized to develop procurement policies which will form the basis ofinstructions to the contracting officers in the field. The development ofregional offices in the National Production Authority, for the purpose ofworking with contracting officers in the field, is expected to aid small busi-ness in obtaining both prime contracts and subcontracts. The procurementagencies have also taken definite steps to bring qualified small business pro-ducers into the defense effort. These steps include: placing small businessspecialists in procurement offices to find and put into use small firms' facil-ities; development of procurement procedures to encourage prime con-tractors to subcontract to small firms as much as possible; and disseminationof information to small firms, as well as others, concerning Governmentneeds and the manner in which both prime and subcontract business can beobtained.

In the administration of materials controls, a special effort is being madeto counteract the handicaps facing small firms. In general, small-quantityrequests for controlled materials are processed earlier, and approved for alarger percentage of the amounts requested, than the large-quantity applica-tions. Priorities and allocations to warehouse distributors have also helpedto maintain a flow of materials to the small producers who depend on suchdistributors.

Probably the most important help to small business in the present situa-tion is the activity of business itself, and of local and regional developmentgroups, in mobilizing information on small business resources and opportu-nities. In many areas this type of private initiative is showing notableresults, in aiding Government agencies to broaden the base of the defenseproduction effort and to avoid unnecessary dislocations of employment.

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Defense production aids and regional development

The requirements of speed and long range security in the defense mobiliza-tion mean that customary economic factors governing the location of pro-ductive facilities have to be modified in certain cases. As was pointed outin the Council's Review of 6 months ago, two general types of dispersionappear desirable: the avoidance of over-concentration of industrial facilitieswithin individual industrial and labor market areas, and the regional decen-tralization which looks toward the further development of cores of economicstrength in the less developed regions.

Federal aids for the expansion of industrial facilities, and also the awardingof defense contracts and subcontracts3 are important instruments for guidingthe location of new facilities as well as related manpower and services.Table 9 compares for the major regions of the country the impact of thedefense program, as indicated by approved tax amortization certificates andmilitary prime contracts, with the regional distribution of industrial activitiesin 1947.

TABLE 9.—Regional impact of the defense program, compared to regionaleconomic activities in 1947

[Percentages of United States totals]

Region

United States

New England - _Middle AtlanticEast North CentralWest North CentralSouth AtlanticEast South CentralWest South CentralMountainPacific

Tax amorti-zation cer-

tificates ap-proved as ofMay 7, 1951

100.0

7.824.821 62.08 47.0

18.15 84.5

Expendituresfor new

plant andequipment

in 1947

100.0

7.622.332.74.4

11.54.08.01.38.2

Militaryprime con-tracts July1950-March

19511

100.0

10.426.926.36.16 31.52.8

719 0

Value addedby manu-facture in

1947

100.0

10.626.034 64.29 23.73.9

96 9

i Excludes small and certain other kinds of contracts. Contracts usually cite address of contractor'smain office, which may not be located in the same region in which the work will actually be done.Moreover, a considerable, but unknown, portion of prime contracts are subcontracted out to firms whichmay be located in other regions. Therefore, the above data should be used with greatest care.

Sources: Department of Commerce and Defense Production Administration.

To date,, no satisfactory means has been found for screening defense plantexpansion and defense contracts for their locational desirability. To dothis would require that workable standards or criteria be developed, againstwhich to judge each particular defense plant or contract decision. Becauseof the enormous variety of economic and security factors having locationalsignificance, any such standards would have to be flexible and at the sametime be administratively feasible.

A checklist of points to be taken into account would include: planneddispersal of industrial facilities and activities for security reasons as deter-mined by the National Security Resources Board, the Office of Defense

109


Mobilization, the Department of Defense, the Federal Civil Defense Admin-istration, and other appropriate agencies; fullest possible utilization ofmanpower, particularly in those areas and categories of skill, industry, sex,or age where under-utilization is prevalent; maximum utilization of existingand potential natural resources, plant, and equipment; extent of disruptionto established patterns of living and of housing and community facilitiesand services; to the extent possible, the solution or amelioration of under-lying economic and social problems such as chronic underemployment,lack of industrial diversification, overcrowding of population, and substand-ard housing; and, of course most important, speed and efficiency in gettingthe needed defense work done. Many defense production facilities andactivities do not admit of much choice in location. Those which do,however, should be located in the light of criteria worked out along thelines suggested above.

Certain large public developments, having both regional and nationalsignificance, are greatly needed for their contribution to national securityand economic growth several years from now. Notable among these is theSt. Lawrence seaway and power project which, when finished, will furnish1,880,000 kilowatts of electric power capacity, to be divided equally be-tween Canada and this country, and will provide a major water route toGreat Lakes ports for the shipment of Labrador iron ore and other items.Although this project will not help until it is completed several yearsfrom now, the decision has to be taken soon if we are to have the powerand the iron ore even then, when both will be more urgently needed thanat the present time.

The outlook for severe shortage of electric power continues in severalparts of the country, most seriously in the Pacific Northwest. Beginningof new projects planned and budgeted for this year, and now being consid-ered by Congress, cannot be put off without delaying the time at whichever-increasing demands for power in that region may be met underconditions of adequate reserves.

It will be necessary also to assure that the construction of necessary powertransmission lines be carried on in step with the construction of new gen-erating capacity. In line with traditional public power policy, the FederalGovernment should be in a position to deliver power from its dams topublicly and cooperatively owned utilities, to insure that users get electricityat low developmental rates. This means essentially the authority to buildtransmission lines to load centers, and to negotiate suitable contracts fortransmission over privately owned lines.

Aids to agricultural production

As Part II of this Review indicated, our national security program re-quires a continuing expansion of total agricultural production, with much

HO


larger increases for some crops than for others. This expansion must beaccomplished with a smaller labor force on farms, and with shortages ofsome materials which are essential to farm production and to foodprocessing.

The farm labor force dropped from 9.6 million persons in 1939 to 7.5million in 1950. Further decreases are in prospect, as farm workers takehigher paid jobs in defense industries. With a declining labor force onfarms, output of agricultural products has been maintained only by thegreatly increased use of fertilizers, insecticides and pesticides, farmmachinery, electricity, and other labor-saving materials and supplies. Stillfurther use of these will be required for additional increases in output. Spe-cifically, it is essential to increase nitrogen production capacity substantiallyand quickly; to give high priorities to agricultural needs for machinery andspare parts; to increase substantially the output of insecticides and pesticides;and to assist farmers to obtain essential labor during peak seasonal needs.

Rural electrification has helped to increase farm output. The presentshortage of copper and power prevents the full development of the ruralelectrification program. Nevertheless, it will be prudent to supply neces-sary material and power to those projects which are of the greatest impor-tance in increasing farm output.

We must continue to emphasize conservation and development measures,designed to maintain the productivity of our farm land and to increasethe yield of crops. Land reclamation projects, now nearing completion,will add to our farm output. With a heavy demand for lumber and woodpulp, we should proceed with the rapid construction of forest access roads,especially in the West.

These efforts are needed to assure a sustained expansion of farm outputover a period of several years. The immediate supplies of farm productsare adequate. Per capita food supplies in 1951—52 are expected to beslightly larger than those of last year. The current wheat harvest is run-ning better than had been previously expected and according to the July 10crop report, crop prospects are generally good. Meat and other livestockproducts are in strong demand, and some production increases would bedesirable. But this would require more feed. Thus, the principal im-mediate problem is that of increasing our supplies of corn and other feeds.With good weather, a start may be made toward replenishing reservesduring the coming year.

Studies are under way to determine guides for agricultural productionin 1952. National, State, and county Agricultural Mobilization Commit-tees are cooperating in this work, and will carry on an intensive educationalprogram to inform farmers of these guides, and to help them make neededadjustments to keep output and requirements in balance.

Ill


Manpower build-up

Comparing the first half of 1950 with the first half of 1951, the totallabor force expanded by about 1% million. We have nearly reached ourarmed forces goal and have maintained our civilian labor force near thepre-Korea level. Employment in civilian industry is about 1.6 millionabove the pre-Korea average. Unemployment was drawn down from anaverage of 3.9 million to 2.1 million during the first half of 1951. To date,there has been no evidence of a general manpower shortage. Neitheremployment nor hours of work have shown significant increases duringthe past half year.

During the next half year, we should add about 2 million additionalworkers to our defense production. About 1 million of these would haveto be drawn from persons not now in the labor force. Others must becomea part of the defense effort through the conversion of civilian goods indus-tries to defense production; still others must change from their present jobsto industries working on defense orders. Securing these additions andshifts may prove difficult.

Shortages in scientific and health professions, and of workers trainedin skills required by some of the defense industries, exist and willincrease. Thus, although it would be inappropriate to recommend nowmanpower policies for a general manpower shortage, it is important totake such actions as are feasible to meet the specialized problems of skillshortages and shortages within particular labor market areas. The situationis particularly critical where both types coincide.

While we cannot afford to be complacent about our manpower resources,we should not go to the other extreme of being unduly alarmed about possi-ble future difficulties. We should time our efforts to encourage the en-trance of workers into the labor force, so that the new entrants will findthat jobs are available for them. We should not increase hours indis-criminately, without considering whether this would interfere with the verynecessary training of additional workers to help in the long-run job ofdefense production. The Interagency Manpower Committee, whichadvises the Director of Defense Mobilization, has issued a statement dealingwith problems involved in lengthening the workweek. We must plan ourmanpower program in such a way that we provide for the needs of thenext year, and at the same time lay the foundation to meet the contingencyof full mobilization if that should become necessary.

The Council concurs in the view that the manpower program shouldbe voluntary. Compulsion, particularly for a long drawn out effort, isundesirable.

Various agencies of the Government are taking action to deal with dif-ferent aspects of the manpower problem under their usual powers. TheDepartment of Labor has been using its clearance machinery for out-of-area recruitment with increased frequency. The Department is also en-

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couraging employers to relax unnecessary hiring specifications on age limits,sex, experience, and physical requirements.

The Wage Stabilization Board has adopted a policy which recognizesthat some wage increases may be necessary in rare and unusual cases, toenable employers in essential industries to recruit and maintain an adequatelabor force.

Regional and area labor-management committees, established by theSecretary of Labor, are expected to play an extremely important role inthe labor market areas in which significant defense manpower problemsexist or impend, advising and assisting community action. The com-mittees offer advice principally on three categories of problems—elimi-nation of wasteful turnover; bringing about the fullest use of local laborsupply in a given geographic area in order to minimize immigration oflabor, and thus reduce the strain on community facilities; and identifyingunused plant capacity and local pools of labor, which might be utilized indefense production.

While these devices have been established to develop manpower policyand to coordinate activities, we are still in the "tooling-up" stage. It isnecessary now to move forward with a manpower program involving fourmain measures.

One important step is the improvement of the present program designedto prevent area labor shortages, and to relieve those that have already devel-oped or may develop. On the preventive side, the availability of laborsupply and of related housing and community facilities and services shouldbe given greater weight in the locating of new defense plants, and in thechanneling of defense contracts and subcontracts. This should be part of animproved system for taking economic and security locational factors intoaccount. Where the shortages cannot be relieved sufficiently by suchmeasures, and where additional workers have to be brought in, causingovercrowding, high turnover, and inefficiency generally, a programof aid for housing and community facilities and services will prove helpful.Recommendations for additional forms of indirect and, if necessary, directFederal aid for facilities and services as well as housing have been presentedto Congress in the Defense Housing and Community Facilities and Servicesbill.

A second step in the manpower program today should be toward furtherconservation and development of essential professions and skills. Sincewe are faced with an emergency which may last for many years, it obvi-ously is necessary to begin now the education and training of profes-sional and scientific personnel in those physical and social sciences inwhich the supply will be most seriously short two or more years fromnow. These include virtually all of the major health professions, such asdoctors, dentists, and nurses; many types of scientists and engineers; and agrowing number of skilled trades, particularly in the metalworking and


electrical trades. There are also serious shortages of farm labor and elemen-tary school teachers. To meet these problems requires, among other things,joint action of military and civilian authorities to share the existing supplyof key personnel to assure optimum distribution. It requires additionaladvisory services to employers, to help increase the productivity of theirworkers. It requires also the expansion of the long-term supply of scarceprofessions and skills, through expanded education and training. A programof Federal aid to medical education and nursing training is particularlyneeded. Efforts to redirect on-the-job training programs and public schoolvocational education toward defense needs should be intensified. Theapprentice training program should also be enlarged.

The third step should be the development of better statistics, to showmore clearly the manpower situation, both from the demand and the supplysides. This requires more definite and detailed manpower requirementsdata, derived from specific production programs. These data should notonly show total needs, but also should indicate the type of workers needed,the skills which will be required, and the location of the need. There isroom also for more specific information concerning the number of workersin our economy who are trained in particular skills, and the number ofpersons not presently in the labor force who could become available forwork.

The fourth step is the development of manpower data for the total freeworld effort, and of programs to improve the use of manpower by thecooperating countries. A major contribution could be made to total freeworld production if greater effort were devoted, especially in WesternEurope, to improving the utilization and productivity of manpower throughfacilitating the mobility of labor, work training, and similar measures,although the major scope for increasing productivity in many countrieslies in improving capital equipment and productive techniques.

International production and resources policies

The problems of production, conservation, and distribution of goods arenot merely problems of the United States economy. They involve thewhole free world. The need for an integrated use of free world resourcesshould be a major factor in determining the best course to pursue in manymatters which we customarily think of as "domestic."

The raw materials problem. Because the shortage of raw materials is amain factor limiting the growth in output of finished goods in the worldtoday, these shortages are one of the most important economic problemsfacing the free world. The solution of this problem along internationallines requires cooperation among the countries of the free world, to increaseproduction and availability of materials in short supply, and to assuretheir most effective use. To meet this problem, an International Materials

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Conference was set up early this year, consisting of a central group andseven commodity committees concerned with sulfur, cotton and cottonlinters, tungsten and molybdenum, manganese, nickel, and cobalt, pulpand paper, wool, and copper, lead, and zinc. The countries participatingin the Conference account for 80 to 90 percent of the producing and con-suming interests of the free world in the commodities concerned. Outsidethe International Materials Conference, the United States has met withother countries to consider problems of the international distribution oftin and rubber.

These committees have obtained information on past and near-termfuture production and requirements. They have studied, and in somecases already recommended to governments, measures for increasing pro-duction and conserving supplies. In most cases, these measures alone willnot suffice to close the gap in supplies. The committees have thereforealso undertaken to work out acceptable procedures for equitable distributionof current supplies. Agreement has been reached among the governmentsconcerned on specific third quarter allocations of sulfur, tungsten, andmolybdenum. An emergency allocation of newsprint has also been recom-mended, to meet certain specially urgent needs. With respect to the othercommodities, allocation measures are still under study. Many problemsremain to be solved. There is a tendency for each country to press forallocation of commodities over the supply of which it has no control, and toresist allocation of commodities which it does control. The problems ofincreasing supply, limiting consumption, and securing equitable interna-tional distribution are complex. They involve questions of the treatment ofstockpile requirements, definition of defense requirements, and the impactsupon prices, normal trading arrangements, and future market positions.

One of the major factors hindering international agreement is the back-ground of surpluses and relatively low prices of primary materials betweenthe two world wars, and a consequent uncertainty on the part of produc-ing countries as to the duration of high demand for these materials. Becauseof this uncertainty, there is some reluctance to accept measures which wouldreduce the demand for, or the prices of, these commodities. Similarly, thereis reluctance to increase production. Some producing countries fear that theexpanded output may become surplus after the period of rapid build-up infree world defenses has ended.

While this lack of confidence in the future demand for raw materials isquite natural, in view of the depressed raw materials prices during the inter-war decades, shortages were appearing in several of the major raw materialseven before the current defense program. The period shortly before theKorean outbreak was the first time in a long period that there was any testof the adequacy of the free world's raw material supplies to support simul-taneous high levels of production in all the industrial countries. It shouldbe borne in mind that, during the war and early postwar years, Europe's


demand for raw materials had been below the levels corresponding to fullproduction, and that in 1949, after a considerable recovery in WesternEuropean and Japanese production, there was a temporary slump in UnitedStates raw material purchases. With the resumption of the upward trendduring the first half of 1950 in the United States as well as in Western Europeand Japan, there was some evidence that the long term demand-supplysituation for some of these commodities is favorable to producers. Ex-panded production appears necessary to support long-term growth, aswell as current emergency demands.

In cases where fear of the future makes producers reluctant to expandproduction, and makes their governments reluctant to take price-restrainingaction, the Council believes that serious consideration should be given toproviding producers of selected materials both here and abroad with someform of assurance limiting market declines for restricted periods in thefuture. During the past two decades, our farm price support policies havedemonstrated that assurance as to minimum prices can be effective instimulating increased production. In the present emergency, the Govern-ment has offered to purchase at a price below the present market all domes-tically produced tungsten concentrates which cannot be sold elsewhere,until a specified quantity is obtained or until July 1, 1956, whichever occursfirst. Besides providing for the needs of future growth, the assurance givenby devices of this general character may favorably influence the attitudes ofother countries in present negotiations.

We could probably get better price terms during the present defenseperiod if the market risk factor could be taken out of the producers' price.Minimum prices and long-term contracts at reasonable prices stand anexcellent chance of providing a good investment for the United States, sincethe goods involved are storable.

Other measures to further the expansion of world production have beendiscussed in the Second Quarterly Report of the Director of DefenseMobilization.

It is clearly not enough to secure increased production of essential im-ports. It is also necessary to maintain our access to them. Duringthe past half year, there have been difficulties in obtaining a number ofessential imported commodities, owing to the fact that their prices in worldmarkets have risen above domestic price ceilings. In some cases, wherethe material is not an important part of the cost of the goods in which it isused, it will be possible to meet the problem by exempting the commodityfrom price control. In other cases, it would be desirable for the Govern-ment to purchase imported articles and resell them at domestic ceilingprices. Such purchase and resale operations, however, require legislativeauthority and provision of the necessary funds.

Export control and allocations policy. It was pointed out in Part II ofthis Review that our security requires that goods be made available to meet

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certain important foreign as well as domestic uses. In a situation wheremany goods will be in short supply, this requires a mechanism for makinggoods available for essential exports. At the same time, a mechanism isrequired for restraining less essential exports of scarce goods. The controlinstruments for restraining and for assisting exports are now available.Export controls are exercised under the authority of the Export Control Actof 1949. This Act was recently renewed until June 30, 1953. The meansfor providing positive assistance to exports are priorities and allocations,exercised under the Defense Production Act of 1950.

To provide policy guidance for the mechanisms for restraining or assist-ing exports, the Director of Defense Mobilization has recently set forththe general principles which should govern the export or retention ofscarce supplies. His statement lays down specific guides, without at-tempting to rate the separate priorities, as objectives to be pursued by reg-ulatory agencies in the United States Government. Allocations should bemade in such a manner that supplies contribute most to military productionand other aspects of mobilization, essential civilian requirements in thefree world, lessened dependence of the free nations upon supplies from theSoviet bloc, and prevention of political deterioration in areas essential to thecombined strength of the free world.

After requirements of high essentiality have been met, the allocation ofremaining supplies should take into account the effects upon the respectivecivilian economies of the broad contribution which each area or countrymakes toward common defense, including direct military production, in-creased political and economic strength, and control of inflation of worldprices. Individual countries differ widely in their ability to make such con-tributions; the objective should be an equitable distribution of the burdens.These principles help carry out the recommendations adopted last winter bythe Economic and Social Council of the United Nations, and the moredetailed agreements reached subsequently by the Foreign Ministers of theAmerican Republics.

To carry out these principles effectively, estimates of essential foreignas well as domestic requirements are needed. Without such estimates, pro-duction needs cannot be properly gauged, and the need for curtailing non-essential uses cannot be properly evaluated. At present, fairly firm esti-mates of Western European requirements are available, largely because ofknowledge obtained in the three years of operation of the European Re-covery Program. But greater progress is needed in evaluating the specificrequirements of other countries, to which three-quarters of our exports go.This evaluation is in some respects more difficult than in the cases of theWestern European countries, owing to the fact that less information isavailable. But this fact increases the need to study such requirementsmore closely.

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Foreign aid. The ability of the Western European nations to undertakelarge and rapid expansion of their defense establishments is partly a politi-cal question, but it has important economic aspects. These arise from thefact that expansion of their defense production, besides requiring enlarge-ment of total production, will severely limit the goods available for domesticconsumption and investment and to some extent their exports. Thesecountries cannot build up their stock of military equipment unaided, withinthe time required by their planned increases in troop strength. This ispartly because of technical factors relating to the kinds of goods they areequipped to produce, but also because the required curtailment of consump-tion and investment would be too great. The populations of most of thesecountries have been under constant economic and psychological pressurefor more than a decade. Rapid and steady progress had brought recoverywithin their grasp, just at the time when the need for a rapid rebuilding ofdefenses became clear. In all of these countries the narrow margin ofreserve economic strength, and in some of them political and social tensions,limit the degree to which they can subject themselves to renewed strainswithout undermining their economic strength or even their political stability.

In the economically underdeveloped countries, there is a serious andchronic deficiency in total production. Their living standards are farlower than those of the industrial countries of the world, and in most casesthere had been little if any improvement between World War II and theKorean outbreak. Some countries had even suffered a further deteriora-tion of living standards. This situation, combined with intensified nation-alism, and in some cases with problems arising from newly won indepen-dence, has led to increased tension and political as well as economicinstability.

Our policy regarding aid to other countries should be considered againstthis background, modified by the effects of recent world economicdevelopments.

In this connection, the sharp rise in world prices and demand followingthe Korean outbreak has had effects of major significance. The rise of rawmaterial prices has been much greater than that of finished goods prices.Broadly speaking, there has been some redistribution of income from coun-tries which are substantial net importers of raw materials to countries whichare substantial net exporters of such materials. In many of the raw materialproducing countries, a great expansion of income has occurred in the exportindustries. These countries are undergoing an expansion not only of moneyincomes, but also in most cases of real national incomes. The effect of worldeconomic developments in the past year has been to reduce the need forexternal financial assistance of many of these countries, although there areimportant exceptions, notably India. The prospect is that their main con-cern will be the availability of essential imports, rather than the meansof paying for them. It should be realized, however, that a portion of

118


their increased earnings will accrue to foreign owners rather than to theexporting countries themselves; that the distribution of the remainingbenefits as between the underdeveloped countries bears little relation tothe relative intensity of their economic needs; and that the internal inflations.which in some cases are accompanying the large increases in export incomemay have disruptive and dangerous economic and social effects.

In countries dependent on imports for a major portion of their raw mate-rials, such as most of the Western European countries and Japan, the rapidrise of import prices has meant a pushing up of costs. Where export priceshave risen less, as is typical in these countries, it has also substantially offsetthe effects of increased production on the volume of goods available fordomestic use. It will be recalled that, when hostilities broke out in Korea,production in Western Europe had largely recovered and was increasing inJapan as well, although a need for adequate foreign markets still persistedand there continued to be some competitive weakness. The first economiceffect of the Korean outbreak and the boom in the United States economicactivity was to increase the dollar earnings of many foreign countries, includ-ing many industrial countries. In some quarters, this was taken as anindication that their dollar problems were ended. So far as some of therearming industrial countries are concerned, however, the initial improve-ment in their balance of payments positions is somewhat deceptive as anindication of the fundamental effect of rearmament, and the increase intheir holdings of gold and dollar assets may be even more so. As wasindicated by the Council last January, there were reasons for thinkingthat the improvement in the balance of payments positions of the countriesbuilding up their defenses might be temporary. The prices they had topay for necessary imports were rising more rapidly than their export prices.Moreover, it seemed clear that when the expansion of their defense pro-duction got under way on a large scale, it would press hard upon theirresources, making necessary an increase in the quantity of their importsand limiting their ability to export, while at the same time subjecting themto inflationary pressure.

In the past half year, these difficulties have been materializing. Themore rapid rise of import than of export prices has been a major factor inwidening Western Europe's trade deficit, which had previously been declin-ing steadily, from an annual rate of 3 billion dollars in the last quarter of1950 to more than 5 billion in the first quarter of 1951. At the same time,various European countries in the North Atlantic Treaty Organizationhave increased their planned rate of defense expenditures from approxi-mately 4.5 billion dollars a year prior to Korea to almost 8 billion in 1951,and higher spending rates are projected for subsequent periods. Thus,the rapid expansion of free world defenses is increasing the demands uponthe resources of Western European countries, and is again making it difficult

119


for them to meet their essential requirements without outside aid. Thisis true despite the continuing growth in Western European production.

Because of the strains of increased defense needs, and the political andeconomic problems they create, the President has requested the Congressto authorize and appropriate 8.5 billion dollars for foreign aid for the fiscalyear 1952, a much larger sum than would otherwise have been required.Of this total, 6.3 billion dollars is intended to finance the procurement ofmilitary end-items for shipment abroad, and 2.2 billion is for economic aid inthe form of grants. The major portion of both military and economic aid isfor Western Europe. A build-up of Western Europe's defensive strengthto the necessary size and with the necessary speed cannot be achieved solelythrough military production in the Western European countries. It re-quires the shipment of large amounts of military production from theUnited States. Economic aid is equally necessary. Without it WesternEurope would either be unable to build up its own defense production onthe scale and in the time required to deter and to resist aggression, or wouldbe under severe internal economic pressure which would threaten its sta-bility or its power to sustain a long-run defensive effort. Technical assist-ance and aid for specific projects to economically underdeveloped countriesare necessary to assist in increasing their economic strength. This aid willalso have the effect of helping to expand the production of scarce materialsneeded by the free world. Such aid will be financed partly by grants andpartly by Export-Import Bank loans. To permit the Export-Import Bankto perform its role, the President has recommended an expansion of itslending authority by 1 billion dollars.

THE STABILIZATION EFFORT

The nature of inflation

Stated most simply, inflation develops when there is a general excess ofdemand over supply at current prices. But this statement does not pene-trate very deeply into the manner in which inflation is generated or howit affects the economic and social structure. A fundamental feature ofthe inflationary process is its uneven impact upon prices and incomes. Whileprices and incomes rise on the average, they do not rise uniformly. Manyincomes do not rise at all. Those whose incomes outrun the price rise mayeven benefit from the inflation. But the many millions who are unable toadvance their money incomes, or who are holding fixed dollar assets, areinjured. Under some circumstances, a moderate rise in the general levelof prices and wages stimulates production; but when resources are beingintensively used, this stimulus is not likely to be needed. And in a periodwhen a rapid shift toward defense production is required, those activitieswhich may be stimulated by such a rise may well be nonessential. More-over, one price or wage increase which may provide a desirable incen-

120


tive often leads to other price and wage increases, and initiates an infla-tionary spiral. Spiraling inflation does not create wealth but only changesits distribution, not on the basis of one's contribution to output, but on thebasis of one's strength and bargaining position in the complex of marketforces.

Thus inflation destroys the existing balance among the various groupsin our economy. It generates a hectic inter-group scramble to maintainor improve one's position, in which speculation thrives, hoarding is en-couraged, and social strife is stimulated. It creates inequities, disorganizesmarkets, disrupts production, raises the costs of the security program, andimpairs the motive to save. Such a process is bad at all times. It is intoler-able when the need is to concentrate all energies on national security.

Since a rise in prices reflects the gap between supply and demand, ithas been said that price rises are only the result and not a cause of

CHART 22

CONSUMER INCOME AND DEMAND,AND PRICE INCREASESConsumption in real terms is almost the same as a year ago, but becauseof higher prices the cost of goods and services consumed has increasedabout 7.5 percent.

BILLIONS OF DOLLARS*

300


300

200 — — 200

100 — — 100

1951

I/EXPENDITURE DUE TO PRICE INCREASE SINCE 2ND QUARTER I960.

SOURCES: DEPARTMENT OF COMMERCE* AND COUNCIL OF ECONOMIC ADVISERS.

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inflation, and that it is futile to "suppress" inflation by controlling prices.This is a misleading oversimplification. For through the dynamicinteraction of prices, incomes, and spending, price increases are not onlyend results of the inflationary process, they are integral moving parts ofthe inflationary mechanism. A price rise creating the expectation offurther price rises stimulates the demand of buyers, and thus helps to bringabout anticipated price rises. This raises the income of sellers, leads todemands for higher wages, and thus further stimulates inflationary pressure.

Properly stated, the problem of stabilization policy is to seek out andcontain the sources of inflationary pressure wherever they exist. Thesources of such pressure usually are diverse. A rise in the ratio of privatespending to production available for private buying may result from adiversion of production into national security programs without a com-mensurate diversion of incomes into higher taxes or savings. Privatespending, even without an increase in incomes, may also result from areduction of savings out of current income, from the spending of pastsavings, or from credit expansion. A rise in incomes in turn may be theconsequence of rising prices, and then, in a secondary movement of thespiral, cause further price rises. In shaping and adjusting the stabilizationprogram, it is essential that these sources of inflationary pressure be com-prehensively identified, and their relative importance properly assessed.Only by this means can we find the take-hold points for policies adequateand effective in a particular situation.

Appraisal of prospective inflationary pressures

Previously in this Review, the Council traced the trends within theeconomy during the 12 months following the Korean outbreak. It pointedout that, while there were two buying waves set off by events in Korea, theinflationary trend resulted from demand, backed by ability to buy, expand-ing more rapidly than production. As more spendable dollars becameavailable in ratio to the available volume of goods, prices rose; and, in turn,price increases were among the factors producing further increases in otherincomes.

Comparing the second quarter of 1950 with the same quarter of 1951,the total wage and salary bill increased by 26.7 billion dollars. Farm pricesand noncorporate business income also rose, contributing to an expansionof total personal income of about 33 billion dollars (all annual rates).Some of this increase in income was absorbed by taxes, partly in consequenceof the increase in personal tax rates on October 1, 1950; but despite thesehigher rates, spendable income after taxes advanced 25 billion dollars oralmost 13 percent. (See appendix table B-9.) During the same period,prices increased, partly because of demand in general rising faster than sup-plies, partly because of cost and price raising in anticipation of expectedshortages and controls. It is estimated that consumers in the second quarter

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CHART 23

PRIVATE INVESTMENT ANDITS FINANCING

While the rate of real investment expanded by about 25 percentfrom second quarter of I960 to the second quarter of 1951,expenditures in current prices rose by more than one-third.BILLIONS OF DOLLARS*

75

50

25

2nd Qtr.

TOTAL FUNDSAVAILABLE FOR

INVESTMENT*

UNDISTRIBUTEDCORPORATE

PROFITS

CAPITALCONSUMPTION

ALLOWANCES-^ I


75TOTAL GROSS

PRIVATEr DOMESTICINVESTMENT

FINANCINGFROM PAST

INTERNALSAVING AND

EXTERNALSOURCES

PHYSICALINVESTMENT

IN 2NDQUARTER 1950

PRICES

50

25

3rd Qtr.

1950

st Qtr. 2nd Qtr.

1951

SEASONALLY ADJUSTED ANNUAL RATES

•ÎNCLUDES INVENTORY VALUATION ADJUSTMENT AND CAPITAL CONSUMPTION ALLOWANCES ON NONCORPORATECAPITAL, INCLUDING RESIDENCES

SOURCE? DEPARTMENT OF COMMERCE AND COUNCIL OF ECONOMIC ADVISERS

of 1951 were spending (at an annual rate) 15 to 20 billion dollars moreon account of the increase in prices since Korea. Allowing for price changes,the net effect of the expansion of incomes was to raise consumers' realbuying power by less than 5 percent above the level before Korea. (Seechart 22 and appendix table B-10.)

During the same period, as chart 23 shows, the increase in businessdemand for capital goods and for inventory accumulation was a very impor-tant factor in the rise in aggregate demand. This business demand alsooutran supplies and drove up prices. In consequence, while the rate ofreal investment was expanded by about 25 percent, the expenditures incurrent prices rose by one-third.

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At the same time, while the national security program expanded ratherslowly during its first months, the rate of deliveries for the defense programwas almost twice as high in the second quarter of 1951 as in the first fewweeks after Korea. Total public outlays for goods and services were 40percent higher in real terms, but due to price increases were about 53 per-cent higher in current dollars.

In appraising the prospect for further inflationary pressures, main con-sideration must be given to likely trends in spending, in funds available forspending, and in lines of supply.

(1) The national security program, as now scheduled, calls for an in-crease of defense outlays (even assuming no further rise in prices) whichwould bring the annual rate of spending by the middle of 1952 to about30 billion dollars higher than the present annual rate. In contrast, totaloutput is expected to increase by about 15 billion during the same period.The Council's analysis of prospective inflationary pressures is based on thecarrying out of this program at presently planned levels.

(2) During the second quarter of this year, total gross private domesticinvestment was at an annual rate of 64 billion dollars. Even subtractingthe 14 billion dollars which went for inventory accumulation, about 37billion dollars at an annual rate was applied to business and farm con-struction and equipment, and almost 11 billion to residential construction.Despite recent and prospective increases in taxes, the current and prospec-tive earnings and financial position of most business concerns could support astill higher level of plant and equipment investment, and businessmen reportplans for such an increase.

(3) The expansion of output shown to be desirable and feasible in PartII of this Review will entail increased employment and longer hours. Evenunder an effective wage and price stabilization program, which is assumedin this analysis, there will have to be some increases in wage rates to correctinequities, to draw workers into defense work, and to provide reasonable in-centives. The incomes of unincorporated businesses and of self-employedprofessional people may fluctuate for some time, but the level by themiddle of 1952 is likely to be higher than it is now. Preliminary cropreports indicate that farm production goals envisaging a 5 percent risein output will be met. Farm income will rise substantially in 1951, andis expected to remain at higher levels in 1952. Taking all of these com-ponents together, it is a reasonable though very rough estimate that, ifdefense schedules and essential business investment needs are met, the totalof personal incomes may expand by 15 to 20 billion dollars (annual rate)between now and the middle of next year. Over a sweep of time as long asa year, regardless of variations from quarter to quarter, it seems ex-tremely likely that such an increase in personal incomes distributed broadlyamong almost all income groups would translate itself into a desire in theaggregate to spend more money. Even if one-third of the additional

124


income went into taxes and savings and only two-thirds were translatedinto efforts to spend it, there would be an increase in consumers' âbilityand desire to spend by about 10 to 15 billion dollars.

The three main factors of demand which have just been listed mustnow be measured against the realistic estimate of a possible increase intotal production of 5 percent or better during the next 12 months. Suchan increase in total production, which would amount to about 15 billiondollars, compares with a projected increase in security programs of 30billion dollars. This indicates the need to curtail civilian demand,whether for investment or consumption, by a considerable amount. Invest-ment could be substantially reduced by a sharp decline in the rate ofinventory accumulation. Curtailment of residential construction as wellas of nonessential business construction and equipment purchases needsto be continued. With such reductions in investment, it should becomepossible to maintain consumer supply in the aggregate approximately atpresent levels. Thus, it becomes clear that under the impact of the secur-ity program there will be a swelling of personal incomes and demand withouta commensurate increase in consumer goods supply. This discrepancy willbe sufficient to generate, and in all probability will generate, a renewal ofstrong inflationary pressures which will require a rounded containmentprogram.

There may be a wide margin of error in these estimates. While theyare based on fundamental aspects of an economy in a state of partial mobil-ization, other circumstances could alter the timing of intermediate events.For example, the rate of saving is very volatile. If people believe thatthere will be no serious scarcities and that prices will be held, they arelikely to refrain from extraordinary buying. Under such circumstances,business may wish to liquidate accumulated inventories. In that event,the expansion of the security program may be offset or more than offsetfor a while by a temporary contraction in private demand. If, on the otherhand, some new evidence of international tension should develop, anotherwave of scare buying by consumers and business could put additionalpressures on prices.

No one can appraise all of these variables, which might accent a short-range movement in either direction. But national economic policy shouldbe geared fundamentally to the strong undercurrent of basic factors. Thesebasic factors underscore so heavily the prospect for more inflationary pres-sures, at some time well within the next year, that national economic policyshould be on guard against this paramount danger.

The strategy of stabilization

The essence of sound stabilization policy in the present period is theintegration of a combination of policy instruments. No single line of de-fense against inflation will do the job. Instead we must have a defense in

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depth. As a matter of fact, at least five major lines of defense againstinflation already have been erected and now must be maintained. Giventhe size of the inflation problem in prospect, the battle will not be won atany one of these lines alone. Moreover,, strong support of stabilizationat any one of them assumes an effective combination of policy instruments.

1. The most fundamental cause of inflation we are facing is that a risingdefense effort leads to the creation of additional incomes, without a cor-responding increase in the supply of civilian goods. Therefore, the mostfundamental approach to economic stabilization consists in an effort tooffset some of the rise in incomes by additional taxes. This brings dispos-able income into closer correspondence with available civilian supply.

Taxation of corporate profits also is important, not only because it isprerequisite for effective wage stabilization, but also because it reducesfunds for business spending.

There is, however, no workable tax program which in itself could qualifyas a sufficient anti-inflation policy at the present time. Exclusive relianceon tax increases as a means of checking inflation might call for suchdrastic increases when Government expenditures were near their peak thatwork and management incentives might be seriously damaged. Withoutsimultaneous price and wage controls, moreover, drastic tax increases mightbe shifted forward to prices, or might lead to demands for compensatingwage and other income rises. In this case, the tax measures would belargely self-defeating.

2. Another source of inflationary pressures is additions to purchasingpower through the use of credit. The effect of higher taxes in reducingbusiness and consumer spending out of income can be offset in part ormore than offset by spending financed with credit. Therefore, a policyof credit restraint is a necessary complement of proper tax policy. Oneapproach to credit restraint is by general measures, such as open marketoperations, discount rates and reserve requirements, designed to restrictthe over-all supply and availability of credit, and by voluntary creditrestraint programs. The effects of such measures, however, do not dis-criminate sufficiently between essential and less essential activities. Generalcredit restraint must therefore be supplemented by selective credit regula-tions, applicable to fields where credit practices are standardized, such asthe financing of consumer goods, especially durables, residential and com-mercial construction, securities listed on the stock exchanges, and com-modities traded on futures markets.

3. In the case of business spending, an effective method of enforcingrestraint is the direct control of production of goods available for purchase.Limitation orders and allocations of such basic materials are designed pri-marily to assure that scarce resources are made available to highest priorityuse. In addition, these measures limit business investment for less essentialpurposes, and thereby contribute to economic stabilization.

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4. In the case of the consumer, if tax increases cannot be expected tobear the whole burden of closing the income gap, then obviously there is anurgent need for doing everything possible to limit the increase in spendingout of rising disposable incomes. The fourth line of defense which we mustreinforce is that of saving. We seek two things: first, to encourage positivesaving out of current income; second, to discourage and restrict so-calledconsumer "dissaving/' whether the latter takes the form of expenditures outof past savings or of consumer credit expansion.

5. Our final line of defense against inflation consists of price and wagecontrols. Such controls reinforce the other phases of stabilization strategyalready outlined. In the first place, both wage and price controls restrainthe growth of incomes before taxes, thus reducing the job of income absorp-tion through taxation. The continuance of price and wage controls asincome-restraining devices was one of the basic assumptions of the fore-going analysis of prospective inflationary pressures. If business prices,farm prices, and wages were allowed to spiral upward, each would addto incomes, and each would provide additional impetus for the others.It is not possible to estimate the magnitude which such dynamic incomegeneration might attain in any given period, since this would depend uponthe speed with which the changes interacted. But it is a process which,with the present volume of liquid assets in the economy, could easily reachdangerous proportions. Only an effective, simultaneous policy of price andwage stabilization can give assurance against the creation of such an infla-tionary spiral, arising either from the price or the wage side.

Thus price and wage controls support the other elements of stabilizationstrategy. Conversely, price and wage controls would be doomed unless tax-ation, credit controls, and savings programs, hold the inflationary pressuredown to manageable proportions. Only if we use a variety of policiesin complementary fashion can we hope to do the job which should bedone, with justice to all of our interrelated objectives.

Tax policy

In a period of defense mobilization, taxation is more than a means offinancing the necessary expansion of governmental outlays. It is also apositive instrument of Government economic policy. In fact, it is one ofthe most serviceable policy instruments to be used at the present time.

On the basis of the previous analysis of the short-range and long-rangeobjectives of the defense mobilization effort, we may conclude that the pri-mary requisites for an adequate tax program for the period ahead are asfollows: (1) it should at least provide sufficient revenue to cover the costof the national security programs, so that a further growth in the publicdebt will not be necessary; (2) it should make a substantial contribution toeconomic stabilization; and (3) it should conform to the general principlethat the tax burden should at all times be imposed in accordance with the

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ability of individual taxpayers to bear it, and in a manner which will pre-serve work and production incentives.

The January 1951 Economic Report was emphatic in stating that theexisting legislation is far from adequate in terms of the financial require-ments of the mobilization effort, notwithstanding the enactment by the lastCongress of two revenue-raising measures with a combined yield of 9 to 10billion dollars a year at present income levels. New tax legislation has beenunder active consideration by the present Congress since February, when thePresident, in a special tax message, called for early enactment of higher taxrates to yield at least 10 billion dollars annually, and for the enactment laterof the additional amounts needed to keep the defense program on a pay-as-we-go basis. As passed by the House of Representatives, the tax bill fallsabout 3 billion dollars short of the amount called for by the President; andthe increases will become effective at later dates than recommended.Unless the bill is revised upward and passed within the immediate future,it will probably fail to cover the fiscal year 1952 budget deficit^ and will notadequately support the stabilization program.

The tax increases proposed by the President, together with those en-acted by the last Congress, are in conformity with the tax policy requi-sites set forth above. They will satisfy immediate revenue requirements,while preserving adequate work and production incentives. They willoperate to limit spending in those income ranges where the bulk ofspending is done, while distributing the burden in reasonable accord withability to pay.

The budgetary outlook and the need for heavier taxes. Difficulties arisein a period such as the present in deciding how large a revenue program iswarranted on the basis of the budgetary outlook. There are more uncer-tainties than usual in estimating, on the expenditure side, the rate of accel-eration of Federal spending, and, on the receipts side, the extent of theincrease in revenues in response to changes in personal and business in-comes. A further consideration is that Government expenditure programsgenerate demands for goods and services several months in advance ofthe actual disbursement of Federal funds. Holders of Government con-tracts must order materials and equipment and hire labor before theycan begin to produce. Final payments are not made by the procurementagencies until it is certified that the terms of the contract have been met,which is usually dependent upon actual delivery or verified work in place,including the accumulation of inventories. It is estimated that the amountof net accounts payable by the Federal Government to business concernsas a result of work done or in process was over 2 billion dollars at the closeof the fiscal year 1951. These payables are of significance in assessing therelation of formal budgetary balance to the growth of inflationary pressures.

The budget surplus of 3% billion dollars in the fiscal year just endedis a source of gratification, but we cannot be complacent on this score.

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The surplus is the product not only of the higher tax rates which becameeffective in the latter half of calendar year 1950, but also of the inflationof prices and incomes since Korea. The fact that a limited inflation maycreate the appearance of budgetary strength is a paradox inherent in theinflationary process.

The budgetary outlook is for rising receipts, but for more rapidly risingexpenditures. In the absence of new tax legislation, the tendency will befor expenditures to exceed receipts by increasing amounts during the fiscalyears 1952 and 1953. The quarterly movement of budget receipts andexpenditures and the public debt is shown in chart 24 for the period sincethe beginning of 1950.

Military expenditures, including military end-items shipped to our allies,were at an annual rate of about 29 billion dollars during April-June ofthis year. By the same quarter of next year, they are expected to rise to anannual rate of between 50 and 55 billion dollars, according to currentbudget expenditure estimates. The advance in the rate of total budgetspending during the same period will be larger than the increase in militaryexpenditures, due in part to the expansion in the atomic energy programand in various defense production activities.

With present taxes and the scheduled increases in expenditures, it isestimated that the deficit will rise to an annual rate (seasonally adjusted)in excess of 15 billion dollars by the end of the current fiscal year, comparedwith about a 2-billion-dollar rate in the quarter just closed. This estimatemakes liberal allowance for the effect of increasing national income on taxrevenues. With Federal expenditures for the fiscal year 1953 expected tototal between 80 and 90 billion dollars, compared with the fiscal 1952estimate of 68 billion, an even larger deficit rate is indicated for that year.

As was emphasized when the 10-billion-dollar program was first pre-sented, it is a minimum program which, if speedily enacted, would meetthe immediate revenue needs. The tax bill passed by the House of Repre-sentatives, which is estimated to yield about 7 billion dollars in a full year ofoperation, will not satisfy pay-as-we-go requirements. With the effectivedates provided in the House bill, the yield will be only 4% billion dollarsin the fiscal year 1952.

Taxation as an instrument of economic stabilization. The major contri-bution of taxation to economic stabilization is through its direct and indirecteffects on spending. Under the assumptions made with respect to thevarious factors which will determine the trend of production, income, andexpenditures, a rise in personal income of 15 to 20 billion dollars was indi-cated for the period a year hence. Considerably more than the 10-billion-dollar tax program would be needed to absorb the additional spendingwhich would be created by a growth in income of this magnitude. Theeffect of additional revenue changes on the "inflationary gap" will ordinarilybe much less than doilar-for-dollar. A part of the tax increase will be paid

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CHART 24

FEDERAL BUDGET RECEIPTS EXPENDITURES,AND THE PUBLIC DEBTThe large budget surplus in the f i rst quarter of 1951, when heavyincome tax payments fell due, was followed by a budget de f ic i t inthe second quarter. The public debt was reduced by about 2 b i l -lion dol lars during the year ended June 30, 1951.


15

10

QUARTERLY TOTALS

NET BUDGET RECEIPTS

-6M BUDGET EXPENDITURES

2 31950


260

255

250

END OF QUARTER

DEBT

I I2 3 4

1950CALENDAR YEARS


15

10

1951


260

255

250

1 9 5 1

SOURCE: TREASURY DEPARTMENT.

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out of idle savings, for example, rather than out of funds that would other-wise be spent. To the extent that this occurs, the anti-inflationary effectsare less direct than when active funds are tapped; nevertheless, the effectsshould not be disregarded. If the same amount of funds had to be suppliedby Government borrowing, debt management and credit control problemswould tend to be aggravated.

The President's February tax message recommended an immediate in-crease in personal income taxes to bring in 4 billion dollars annually inadditional revenue, increases in selective excise taxes to yield an additional3 billion dollars, and an increase in corporate income taxes to yield 3 billiondollars. The first two of these recommendations would have a direct impacton the growth of consumer spending power, either through a reduction inthe disposable income of individuals (i. e., the amount of income availableto individuals after payment of personal taxes) or through the absorptionof purchasing power as money is spent on goods and services subject toFederal excises. The increases in excises would also tend to divert somespending away from those taxable items which require for their productionraw materials which are expected to be in particularly short supply.

The proposed increases in corporate taxes will contribute to stabilization,through a reduction in dividend payments, and by curtailing the supplyof funds available for corporate spending or investing. The increases arealso needed because excessively high profits after taxes increase pressure forwage increases of a size and character that would not be consistent withover-all stabilization objectives.

Relation to consumer spending. Some evidence as to the probable anti-inflationary effectiveness of last year's increase in the individual income tax,and of the increase in the individual income tax and excises included inthe 10-billion-dollar tax proposal, can be obtained from an analysis ofthe indicated source of the additional tax payments by broad incomegroups. It is important to know the extent to which the additional pay-ments will come from those income groups which normally account forthe bulk of the spending in consumer markets. While this is not the solecriterion for appraising the tax proposals, nor even the most important ofthe several criteria which must be applied, it is a means of gauging theprobable effect on consumer spending.

The results of this analysis are summarized in table 10.At money income levels in prospect for the fiscal year 1952, the income

range between $3,000 and $7,500 a year will include about half of all spend-ing units, and somewhat more than half of total money income before taxes.This is the broad middle income range where higher taxes, if properly dis-tributed, can yield significant amounts of additional revenue and result ina nearly equivalent reduction in consumer spending, without making seriousinroads upon essential living standards. Much of the saving in this incomerange" takes the form of insurance commitments and mortgage repayments.


TABLE 10.—Actual and proposed increases in individual income and excise taxes, byincome group, estimated for fiscal year 1952

(Percentage distribution]

Item

Actual and proposed increases since Korea in individ-ual income and excise taxes _ .. . _

Spending units.. _Money income before taxesConsumption expenditures (assuming "normal" spend-

ing habits) .

All incomegroups

100100100

100

Annual money income

Under$3,000

104115

21

$3,000 to$7,600

534954

56

Over$7,500

371031

23

EXPLANATORY NOTE.—The distribution of spending units and money income before taxesis based upon the distribution in the 1950 Survey of Consumer Finances sponsored by theBoard of Governors of the Federal Reserve System. The upward shift in spending unitsfrom 1949, which is the year covered by the 1950 Survey, to the fiscal year 1952, wasestimated under the assumption that the projected rise in total income was distributed pro-

estimated distribution of the actual and proposed increases in individual income andexcise taxes was calculated as follows: (1) The increases in the individual income taxwere obtained by adjusting the average Federal income tax liability, expressed as a per-centage of money income in each income class in 1949, for the rate changes in theRevenue Act of 1950 and for the further advance proposed by the Treasury; (2) theproposed increases in excise taxes were distributed partly on the basis of the distributionof consumption expenditures and partly on the basis of detailed information on expendi-ture patterns for commodities covered in the Treasury's tax proposals. In view of thelimited current information about family size and composition, taxpaying status, andconsumption expenditures, it was not possible to make refined adjustments for the taxchanges at each income level. Nevertheless, it is believed that the results shown inthe table are adequate for use in terms of broad income groupings.

There is no comparable taxpaying capacity in the income group below$3,000, even though this group will include approximately two-fifths of allspending units, because the surplus of income over minimum living costsis very small for this group. The price rise has already brought serioushardship to many families in this group, particularly to those near thebottom of the scale, who are often dependent upon fixed incomes such aspensions and insurance payments.

At the other end of the income scale are single persons and families earn-ing more than $7,500 a year. Only one-tenth of the spending units areestimated to come within this highest income group, but they will receive31 percent of total money income before taxes. The highest tenth ofthe population will account for an estimated 50 percent of the total Fed-eral income liability under the rates in effect before last year's revenuelegislation. This group is responsible for the bulk of the net personal savingin the economy, and for almost one-fourth of total consumer spending.Additional tax levies on these persons will come partly out of reducedsavings, but families with incomes in the lowest part of this range will beobliged to limit their consumption expenditures.

The significance of the estimates in the table is to show that more thanone-half of the combined total of increases in the individual tax enacted lastfall and increases in the individual income and excise taxes proposed by thePresident, will come from the broad middle range where the contribution to

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economic stabilization would be especially helpful. Approximately one-tenth of the increases (mostly in the form of steeper excises) will come fromthe group under $3,000, and less than two-fifths from the group over $7,500.

The preceding estimates of the tax distribution do not, however, allowfor the corporate income and excess profits taxes, which account for 40to 45 percent of the total actual and proposed increases since Korea. Thesetaxes are likely to have a more than proportionate effect, in relation toincome, on the group over $7,500, because of the concentration of stockownership in this income range. Ordinarily, increases in the corporatetaxes tend to reduce dividend payments and retained profits. To someextent, they also affect prices and costs, although this effect would beespecially limited in a period of price control.

Relation of tax increases to rising incomes. The impact of personalincome tax increases on individual taxpayers is greatly affected by whethertheir incomes are rising, standing still, or falling. The same defense effortwhich requires heavier taxes is also creating larger incomes and profits.Despite the heavier personal income taxes provided by the Revenue Actof 1950, there have been large increases since the Korean outbreak inpersonal incomes after payment of taxes. Comparing the first half of1950 with the same period this year, we find that disposable personal incomerose from 197 to 220 billion dollars.

The rise in personal income after taxes is expected to continue. It wasestimated above that, under the impact of the increase in production andin national security spending, personal incomes may rise by 15 to 20 bil-lion dollars over the next year, and disposable income by 2 to 3 billiondollars less than this amount, allowing for present tax rates. Such a rise indisposable income would be several times larger than the proposed increaseof 4 billion dollars in the individual income tax, and about twice as large asthe proposed increase of 7 billion dollars in the individual income tax andthe excises combined. For the population as a whole, therefore, these taxeswould not prevent a further rise in disposable income.

This point can be developed further by referring to some illustrativecalculations of the effect on particular taxpayers of the proposed income taxincreases, taking different assumptions as to changes in their current dollarincomes. When ranked by size of income, the middlemost spending unitin this country had an annual money income of approximately $3,000 inthe period just before the start of fighting in Korea. By the first half of1952, the average consumer undoubtedly will have a substantially higher in-come; on the basis of the projections presented in this Report, which allowfor wage rate changes, longer working hours, new entrants into the laborforce, and other prospective changes, the average family income would be15 to 20 percent higher than in the second quarter of 1950. A family of fourwith a $3,000 income would have paid $54 in Federal income taxes beforeKorea. If we assume a 15 percent rise in income, this family would have


$3,450 before payment of taxes and, under the proposed rate increases, its taxliability would rise to $175 (compared with $121 under the rates in effectbefore Korea). The family's income after taxes, therefore, would be $3,275,or $329 more than what it had before Korea when both income and taxeswere lower. In other words, the assumed rise of 15 percent in income beforetaxes would mean a rise of 11.2 percent in income after taxes for this family.If a rise of 20 percent is assumed, the indicated rise in income after taxes is15.2 percent. If we take a married person with two dependents who was atthe $4,000 level before Korea, the increase in income after taxes would be10.0 percent with a 15 percent rise in income and 14.1 percent with a 20percent rise.

While, on the average, income after personal taxes will probably riseunder the impact of the defense program, even with the proposed individualincome tax increases, many families with relatively fixed incomes will haveno alternative but to adjust to a lower level. Even when disposable incomerises, this does not necessarily mean an improvement in the individual'sreal income position and in his standard of living. In measuring realincome, price rises must be taken into account.

Impact of heavier taxes. It is always easy to find reasons why taxesshould not be raised, or why they should be raised in a different mannerthan that proposed. Recent months have provided no exception in thisrespect. The statements of witnesses before the House Committee onWays and Means reflect sharply divergent views, with virtually everyfeature of the proposed tax program being severely criticized by somegroup or other, often for very different reasons.

Among the matters over which concern has been expressed is the ques-tion of whether the tax proposals are consistent with the need to preserveadequate work and management incentives. This is an important con-sideration, since our production planning and economic control programsrest on the assumption that further increases in total output will be possiblein the months ahead as more workers are drawn into the labor force, theworkweek lengthened, and productivity continues to rise. Will these ave-nues for increased production be closed if the tax proposals are enacted?

Under the proposal for the individual income tax, the actual tax lia-bility at any given money income level would generally be lower than underthe highest wartime rates. This results because of higher personal anddependency exemptions than during the war, and because of the adoption ofincome splitting in 1948 which gave substantial benefits to married persons,particularly in the higher income brackets. Whatever evidence is avail-able suggests that considerably higher wartime rates would have beenpossible in the United States, without any serious damage to work andinvestment incentives. It would seem, therefore, that the proposed ratesare wholly consistent with the need to attract new entrants into the laborforce, to provide sufficient inducements to earn more pay by working

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longer hours, and to encourage necessary investment and entrepreneurialundertakings.

Incentive questions also arise under the corporation and excess profitstaxes. The rates proposed for the regular corporate income tax are con-siderably higher than the peak wartime rates; on the other hand, both therates under the excess profits tax proposal and the proposed maximumeffective rate limitation of 70 percent are below the peak wartime levels.Moreover, the accelerated amortization provisions ease the impact of theserates on businesses undertaking defense-related facilities expansion. Per-haps these rate comparisons, however, are less important than other consid-erations, such as the large number of profit opportunities in a high produc-tion defense economy, the relatively low business risks that are ordinarilyinvolved, and the generally satisfactory level of business profits that wouldprevail even after full allowance for the proposed tax increases.

It is important to realize that the economic decisions of businesses andindividual workers are always tempered by psychological factors. Whentaxpayers are convinced of the necessity and fairness of a particular taxprogram, they will be more ready to carry the heavier tax load and to worklonger and harder and invest more time and capital, even though an in-creased share of additional earnings must be paid in taxes.

Another set of questions about the 10-billion-dollar tax program revolvesaround the general point as to how closely taxes are approaching the limitof what workers and business can bear. If the ratio of all Federal, State,and local taxes combined to national income were taken as a measure ofthe tax burden, it would appear that the present burden would be about thesame as that reached during World War II. Such a comparison, however,provides a highly misleading measure of the real economic burden in thetwo periods. The economic burden is more accurately measured by theproportion of total national production diverted to war or defense purposes,and by the aggregate volume of goods and services remaining for civilianpurposes, since taxes finance but do not create this burden.

At the peak of the war, the military program took 45 percent of the grossnational product, or somewhat over twice the maximum percentage whichwill be required for the defense mobilization program as now conceived.With the present program and the projected increase in production, it isestimated that about 1,330 dollars of goods and services per capita will beavailable for personal consumption during the first half of 1952, comparedwith 1,130 dollars (measured in today's prices) during the years 1943 to1945. With a far lower economic burden at present than during the war,we are paying about the same proportion of our national income in taxes.The significance of this fact is that our present tax policy represents adecision to face the burden on a current basis, which is desirable for apartial and possibly protracted mobilization.

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The ratio of taxes to income is a general measure of the extent towhich the Government, through the use of fiscal measures, has taken stepsto curtail private spending and thereby reduce inflationary dangers. Themore closely such spending is brought into line with available supplies, thebetter the opportunities for achieving an equitable sharing of the economicburden.

The economic burden of a prolonged defense mobilization effort is notdetermined by the method of financing. If the size of the tax bite islowered through borrowing, there will be more liquid asset accumulation,but not any more goods and services for consumers to buy; and the require-ments for debt service and debt retirement will be increased in the post-emergency period when those who are now in the armed forces will sharewith the rest in paying the necessary taxes.

While a tax-income ratio which is higher than at present by the amountof the 10-billion-dollar tax proposal will not mean any heavier economicburden for the country as a whole, it must be recognized that the taxincreases may nevertheless bear heavily upon families living on fixedincomes. Such families, together with low-income families generally, are,however, also the groups which would be hardest hit by an inflationaryprice rise which the tax increase will aid in preventing. The earlier com-parison of the proposed tax increases with the projected aggregate risein income shows that enactment of the tax proposals will not prevent themajority of families and single individuals from ending up with largerdisposable incomes in terms of current dollar amounts, although notnecessarily in terms of actual purchasing power.

Curtailment of less essential Federal spending

Full attention should continue to be given to the possibility of furthersavings in budget expenditures, since such savings will contribute to thepay-as-we-go objective and aid the stabilization program. Soon after thestart of fighting in Korea, the President took steps to curtail Federal spend-ing for less essential public works and other programs, and to review allbudget requests against the more exacting criteria which must be appliedin an emergency period. These steps have resulted in important savings.

Some of the reductions which have already been made will not be fullyreflected in expenditures until the fiscal year 1953 or later. This is true,for example, of the reductions in authorizations for rural electrificationloans, and grants to States for hospital construction. The expendituresin the 1952 Budget for these programs will be made almost wholly fromfunds obligated in prior years. In the case of some other constructionprograms, it has been necessary to bring about a significant shift of emphasisto projects which are vitally important to the national security effort.

National security programs, veterans' benefits, and interest on the publicdebt account for more than 85 percent of all Federal expenditures in the

136


fiscal year 1952. A large part of the remaining expenditures are for suchprograms as public assistance grants, price support activities, mortgagepurchases by the FNMA, and grants for public roads; programs of thesetypes are fixed by law and are not subject to budgetary or appropriationcontrol in any single year. It is readily apparent that very large reductionsin expenditures are not possible in the absence of legislation requiring majorcurtailments in programs specifically prescribed by law.

While economy should be practiced, it should be true economy. Theshort-sighted stripping down of essential services, such as educational andhealth services would be inconsistent with building our economic strength.That strength depends upon human resources even more than upon plant.

State and local participation in the stabilization program

During World War II a special effort was made by State and localgovernments to conduct their own financial affairs in such a manner thatthey supported, or at least did not counteract, the national stabilizationprogram. Organizations representing these governments formulatedspecific policy recommendations to guide State and local actions, and theserecommendations were extensively applied in the day-to-day operationsof government.

Once again it has become important that State and local governmentsfollow policies consistent with national needs and objectives. To the extentfeasible, these governments should restrict new and regular expenditureprograms to activities which will best promote national defense and security.Whenever State and local tax revenues exceed immediate needs, the surplusshould be used in ways which will both harmonize with efforts to restraininflation and reduce the future financial problems of the State and localgovernments. Debt financing should, of course, be held to a minimum, anddebt repayment should be encouraged. As described in the section on debtmanagement and credit policy, State and local governments are alreadycooperating in the Voluntary Credit Restraint Program.

Credit policy

The significant rise in the general price level, since the outbreak ofhostilities in Korea, has been accompanied by a rapid expansion in privatecredit, particularly bank loans. The loans of all commercial banks increasedby more than 9^2 billion dollars in the 9-month period ending March 31,1951. The sharp expansion in loans was halted in April and May, whenthe combined loan increase for the 2 months amounted to about 100 milliondollars. At that time of the year, there is usually a seasonal downturn inbusiness loans.

As we enter the second half of 1951, a new upsurge in bank loans maybe at hand, partly because of the seasonal requirements of some indus-

137


tries, and partly because of the growing needs of expanding defense pro-duction. If we can strengthen the restraints upon prices, inventoryaccumulations, new housing construction, and the output of some non-essential durable goods, the total demand for loans may abate, even thoughloans to expand defense production will increase. But at this time, thereare no signs of that abatement. The problem of restraining bank creditappears to be again very real.

In shaping our credit control measures, it is essential that we assess thecredit expansion problem accurately, and adopt restraint policies designedto meet the specific requirements of the present national emergency.

The primary cause of the inflation in the past year has been the unprece-dented rush for goods by business and consumers, generally in anticipationof the effects of the expanding national security program. This extensivedemand for goods has been financed in several ways. It has been financedout of expanding current incomes, by the liquidation of savings out of pastincome, and by credit expansion. Financing by credit expansion has beenfacilitated by the large amounts of Government securities held by financialinstitutions, and by the fact that these institutions could sell their holdingsto the Federal Reserve System to obtain loanable funds. Accordingly, amore stringent policy of general credit restraint on the part of the FederalReserve would have tended to reduce the total amount of purchases bymaking it somewhat more difficult to finance a portion of these purchases.But in view of the alternative methods of financing available, it is evidentthat any feasible Federal Reserve policy would only have tempered theover-all demand for goods, and would not have curbed it sufficiently tohave prevented much of the rise in prices which has occurred.

In the current national emergency, measures of general credit restraintmust be supplemented by selective measures. General credit measures donot distinguish between essential borrowing and nonessential borrowing.The fact that some credit extension serves a useful purpose in helping usto reach our defense goal as rapidly as possible, while other credit extensionis less useful or even harmful, makes it necessary to use credit controls asselectively as possible. Selective controls, such as those imposed on con-sumer credit, real estate credit, and credit for security markets have adirect impact on nonessential credit extension, and so have a continuedusefulness in the mobilization period. General credit controls reach toareas not touched by selective credit measures.

Outside the area of selective credit controls, direct controls over theproduction of goods also reduce the demand for credit by curtailing thegoods which are available for purchase with borrowed or other funds. Se-lective means of restraining credit expansion must always be supplementedby direct controls of materials. Many firms can pay for much or all of theirinvestment in plant and equipment without borrowing. Withholding of

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credit from some firms, while others were able to resort to other means offinance, would not assure the balanced growth of production required bymobilization.

Selective credit controls. Because of the need of curtailing credit forsome purposes, while funds have had to be made available for other pur-poses—and sometimes in increasing amounts—credit policy has made useof several selective controls. These controls are intended to restrict creditfor the purchase of certain kinds of goods, especially those the output ofwhicE must be curtailed to help divert scarce materials to production forthe security programs. Such controls help to keep demand more nearlyin balance with smaller supplies. They also limit somewhat the expansionof the money supply which accompanies lending by commercial banks,and to that extent hold down the rise in spending pressures.

The first step in applying selective control was the tightening in July1950, at the request of the President^ of the terms of residential mort-gages guaranteed or insured by Government agencies. In October, underauthority derived from the Defense Production Act, the Federal Re-serve Board, with the concurrence of the Housing and Home Finance Ad-ministration, imposed regulations on conventional mortgages on new one-and two-family houses. At the same time, the terms of Government in-sured or guaranteed mortgages on similar houses, both old and new, werebrought into conformity with the Board's regulations. In January 1951,the Board's regulations and a comparable tightening of Government termswere extended to three- and four-family houses and apartments. In Feb-ruary, the Board also applied regulations on loans for most new com-mercial construction.

The selective control of residential mortgage credit was intended, withthe complement of restrictions on the use of some materials used in con-struction, to reduce new housing starts during 1951 about one-third belowthe record level of 1950. Results at first were disappointing. New startsin January 1951, including public housing units, which are not subject tothese controls, were nearly 10 percent above January 1950. A large back-log of financing commitments had been entered into, before the Octobercontrols became effective. This, along with the continued availabilityof building materials, and the desire of builders to undertake as muchconstruction as possible before materials controls could have a real im-pact, have been largely responsible for delaying the effect of this selectivecontrol. In the second quarter of 1951, however, housing starts were about25 percent below the level of the same period last year, and it now appearsprobable that some progress toward the announced goal of curtailment isbeing achieved.

In September 1950, also under the authority provided by the DefenseProduction Act, the Federal Reserve Board placed regulations on instal-

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ment loans for the purchase of automobiles and certain other consumerdurables. The terms of the regulations were stiffened in October. Thepurpose of these regulations is similar to that of the controls on housing andcommercial construction credit. The consumer instalment credit regula-tions were, however, more immediately effective. Total instalment credit,which had expanded about 10 percent during the third quarter of 1950,was held to a rise of less than 1 percent during the fourth quarter. Duringthe first half of 1951, instalment credit outstanding declined about 600million dollars, or 4.5 percent, compared with a rise of 1.2 billion dollarsduring the same period of 1950. The drop in total instalment creditreflects not only the effect of the regulations, but also the influence of otherfactors which have caused consumer demand to subside somewhat from thehigh levels reached after Korea.

The authority of the Board of Governors to regulate mortgage creditwould be more effective, if expanded to cover old houses. Mortgagesguaranteed or insured by Government agencies on both new and old housesare already subject to terms comparable to those of the Federal ReserveBoard's regulations, which under the present law apply to new units only.The restraint of conventional borrowing for the purchase of old houseswould not, of course, assist in directing materials to defense production;but it would help to check inflation. Furthermore, funds to make thehigher down payments required on new houses are often obtained by sellingold houses under very liberal credit terms.

It is desirable that Congress provide authority for placing margin re-quirements on speculative trading in commodity futures. Such legislationwould further strengthen credit policy in combating inflation. It wouldapply to commodity markets a principle of regulation imposed more than15 years ago on the securities markets.

Voluntary credit restraint program. On March 9 of this year, avoluntary credit restraint program, including the major financial institu-tions throughout the Nation, was instituted by the Board of Governorsof the Federal Reserve System, pursuant to Section 708 of the DefenseProduction Act. A statement of principles to be used by all lenders as aguide in distinguishing between essential and nonessential loans has beendistributed to all of the participants in the program. The test for desirablelending in the present national emergency was declared to be whethera particular loan would commensurately increase or maintain production,processing, and distribution of essential goods and services.

A National Committee, under the direction of a member of the Boardof Governors of the Federal Reserve System, has been established as ageneral supervisory body, as well as some 40 regional committees coveringall sections of the country. The statement of principles of the programserves as an over-all guide to lending institutions in their lending activities.

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In cases, however, in which lending institutions are doubtful as to whethera particular loan request can be granted within the framework of the pro-gram, the regional committees stand ready to act as the ultimate judge.

The continuing effort to make the program of voluntary credit restraintmore effective should receive the full and active support of private andGovernment lenders. Voluntary restraints have the selectivity so necessaryduring the mobilization period. In order that the campaign of voluntarycontrol may be as effective as possible, it is necessary that the lendingpolicies of Government agencies continue to be kept in conformity withthose of private institutions. It is also essential that the voluntary creditcontrol committee be guided at all times by the production goals set bymobilization agencies.

Lending activities of Government agencies. At the same time thatGovernment insured or guaranteed residential mortgages were tightened,other Government owned or sponsored lending agencies were requested toreorient their lending policies to the needs of defense. New programs ofdefense financing have provided credit for the expansion of defense pro-duction, whenever needed funds have not been obtainable from privatesources. Credit for purposes not related to military or essential civilianoutput has been curtailed.

As has been observed in the discussion of the voluntary credit controlprogram, it is necessary that the lending policies of Government agenciesadhere to the guides established for private lending agencies, if the volun-tary program is to work effectively. This requires that the various Gov-ernment agencies continue to scrutinize their lending activities with theutmost care.

Reserve requirements. Early this year, the Board of Governors of theFederal Reserve System raised the reserve requirements of member banks2 percentage points against net demand deposits, and 1 percentage pointagainst time deposits. This action raised the reserve requirements of mem-ber banks to the full limit authorized by statute, except for an additional 2percentage points which may be imposed on net demand deposits held bycentral reserve city banks—New York and Chicago.

Additional authority to control bank reserves would be a valuable meansto restrict credit under several possible conditions. Any such new authorityover reserves should be adaptable to meet varying circumstances. It is alsoimperative that any additional requirements for bank reserves imposed bythe Federal Reserve should be such that they do not have a disruptive effecton the market for Government securities.

The report of the President's Committee on Credit Policy recommendedthat, as an emergency measure, legislation be sought to empower the Fed-eral Reserve authorities for a limited period to impose additional reserverequirements. The report suggested that two plans had the greatestpromise, namely: (1) the loan expansion reserve plan and (2) the primaryreserve plan with a Government securities feature, which provides for addi-

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tional required reserves with the option, under conditions to be prescribedby regulation, of holding the additional reserves in the form of cash orGovernment securities.

The report of the President's Committee also recommended that, in viewof the emergency, any additional reserve requirements should apply to allinsured banks; and that the feasibility of permitting non-member insuredbanks to hold the additional reserves in balances with their correspond-ents should be explored. Broadening of the authority in this manner wouldincrease its effectiveness, and would avoid placing on member banks a dis-proportionate share of the burden of checking inflation.

We believe these recommendations should be adopted.Use of executive authority. The authority exists under emergency

legislation for the President by executive order to put a positive limit onthe volume of loans which may be made. These powers are availableshould the situation with respect to credit expansion become critical.

Debt management

The policies and operations of the Treasury, in the management of thepublic debt, have a significant bearing on the stability and well-being of theNation's economy. The successful merging of revenue measures andborrowing programs, in such a way as to make the most effective contribu-tion to the productive powers of the Nation, is one of the most difficult andmost important problems on the domestic front.

A weapon of great importance for keeping inflationary forces undercontrol is a debt management program which is directed toward placingthe largest possible proportion of Government securities in the hands ofnonbank investors, and reducing the proportion held by the commercialbanking system. In the last half of the calendar year 1950, nonbankholdings of Government securities reached an all-time peak, while holdingsof the commercial banking system declined to a new postwar low. Thiswas accomplished despite the fact that the over-all decline in the amountof public debt outstanding was less than 1 billion dollars during thisperiod. The policy of reducing bank holdings of Government securitieswas aided during the first 6 months of 1951 by the existence of a budgetsurplus. Because of the prompt action of the Congress in enacting twonew revenue-producing measures within a few months after the outbreakof aggression in Korea, the Federal Government operated with a budgetsurplus during the first year of mobilization. Receipts during the fiscalyear which ended on June 30, 1951, exceeded expenditures by 3 5/2 billiondollars. The surplus from January through June 1951 was, in fact, 4.1billion dollars. A part of this surplus was used to reduce the amount oftotal debt outstanding; and a large part of this reduction occurred in theholdings of the banking system.

Unfortunately, it will not be possible in the period ahead to continue toreduce the total amount of debt outstanding. In the absence of new tax

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legislation, the budget of the Federal Government for the current fiscalyear would show a deficit of about 10 billion dollars.

In this situation, the most that the Treasury can hope to do is to continueto emphasize its program of shifting holdings of Government securities outof the banking system into the hands of nonbank investors. This objectivecan be furthered by continued careful attention to the sources of fundsavailable for investment in Government securities; and a continuation ofthe program of carefully selecting new and refunding issues of securitieswhich are suitable to the needs of the various investor classes.

An important measure in carrying out this policy is the savings bondprogram. The Treasury has carried on an intensified payroll savings cam-paign—to reach the expanding incomes of consumers and so draw infla-tionary funds from the spending stream—since shortly after the presentdisturbed international situation was forced upon us. The Secretary ofthe Treasury announced just a few days ago that a Nation-wide savingsbond drive would get under way commencing on Labor Day.

Since the Federal Government operated with a budget surplus for thefiscal year 1951 as a whole, all of the debt operations of the Treasuryduring the year were, on net balance, refunding operations. They were ofconsiderable significance, and in the first half of 1951 varied in character.

At the request of the Treasury, the Congress enacted legislation whichpermits holders of maturing Series E bonds to maintain their investmentin these bonds and continue to earn interest on their face amounts for upto 10 additional years. This is an important step in providing an incentivefor individuals to maintain the savings which they hold in this form.

On March 4, 1951, the Treasury announced that it would exchange aportion of its outstanding long-term marketable bonds for a new non-marketable issue. A new investment series of 2% percent, 24-29 yearnonmarketable bonds was offered in exchange for the outstanding 2l/2percent marketable bonds of June 15 and December 15, 1967-72. Nearly13.6 billion dollars of the outstanding amount of 19.7 billion dollars ofthe two marketable issues was exchanged for the new nonmarketable issue.

The Treasury also announced, on May 14, 1951, a new series of Treasurysavings notes, and the discontinuance of the sale of old Series D savingsnotes. The new notes are similar to the old series, except that the interestreturn will run from 1.44 percent, if the notes are held for 6 months orless, to 1.88 percent if the notes are held for the full 3-year term. Thiscompares with 0.98 percent for 6 months, and 1.40 percent for 3 years, onthe old issue.

In June, another large refunding operation was carried through. An of-fer was made to exchange the 1.6 billion dollars of 2% percent partiallytax-exempt Treasury bonds called for redemption on June 15, and the 8.4billion dollars of 1*4 percent Treasury notes maturing July 1, into 9y2

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month, 1% percent certificates of indebtedness. More than 9.5 billiondollars, or nearly 95 percent, of the maturing issues were exchanged forthe new security.

In the first week of the new fiscal year, the Treasury started a "newmoney" borrowing program by asking for tenders on its weekly Treasurybill offering, in an amount 200 million dollars in excess of the maturingissue. Already 800 million dollars of "new money" has been borrowedin this fashion. There will continue to be deficit financing in the periodahead. The exact amount depends upon the magnitude and nature ofthe new taxes provided by the Congress. But in any event the amountwill be substantial. Its successful financing will require a confident andstable condition in the market for Government securities.

On July 12, the Secretary of the Treasury announced the first largerefunding operation of the current fiscal year. An 11-month, 1% percentcertificate of indebtedness was offered in exchange for the 5.4 billiondollars of 1*4 percent notes maturing on August 1.

Price policy

Earlier in Part II of this Review, the Council indicated why price con-trol is an essential feature of an effective stabilization program, particularlyduring the early stages of the very large defense build-up. We alsoexpressed the view that the economic outlook does not now justify the aban-donment or weakening of price control. But price control, and other meas-ures, should be geared to the kind of mobilization which we are now under-taking, its likely duration, and its probable impact upon the economy. Theproblem is to find the most practical kind of price control for the situationnow confronting us.

Progress of price stabilization to date. There have been three stages inthe progress of price stabilization thus far: (1) the initial period, when majorreliance was placed on voluntary restraint, in combination with generalmeasures to reduce demand; (2) the imposition of direct, mandatory con-trols by the issuance of the general freeze in late January; and (3) the subse-quent "interim" period of adjustment.

With the passage of the Defense Production Act, the task was begunof organizing an Economic Stabilization Agency and Office of Price Stabili-zation to be ready if direct controls should later prove to be required.Prior to the issuance of the General Ceiling Price Regulation in late January,the Government had increased taxes, imposed credit restrictions, and estab-lished a number of controls over the flow of scarce and essential materials.Moreover, business, labor, farmers, and consumers had repeatedly beenurged to exercise restraint in their buying and selling, and in their price andwage policies. Price increases of raw materials and commodities at whole-sale, which got under way in the summer of 1950, were checked near the endof the third quarter as the Communists were driven back in Korea. For

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6 weeks before the blow from the Chinese, the wholesale price indexadvanced very slowly. The course of prices of basic raw materials hadchanged from an upward rush to a series of fluctuations.

The Chinese intervention in late November created a new situation, andmade positive the necessity for intensified mobilization efforts. It also setinto motion a new wave of price increases. Several direct actions weretaken to curb price advances. Efforts were redoubled to provide anadequate staff for the Office of Price Stabilization. Meanwhile, a set ofVoluntary Pricing Standards was announced; meetings were held with pro-ducers of a number of basic industrial commodities to explore ways of sta-bilizing prices in those fields; and several hundred large firms were requestedto give prior notice of intended price increases. Earlier, the first price ceil-ing regulation had been issued, controlling manufacturers' prices of newautomobiles. The great difficulties encountered in building up staff ham-pered and delayed the development of more effective price control.

In spite of the conscientious efforts of many sellers to comply with the vol-untary standards, the price increases continued apace. In response to thissituation, and in spite of a still short-handed staff, the Office of Price Sta-bilization in late January issued the General Ceiling Price Regulation freez-ing most domestic prices. There were some major gaps in the coverage ofthis regulation, required by the farm provisions of the Defense Produc-tion Act and by the complexities of applying a freeze-type regulationto all kinds of markets. A companion regulation freezing wages and sal-aries was issued simultaneously, as required by the Defense Production Act.This action was in sharp contrast to the development of price control inWorld War II, which began with selective controls and subsequently cul-minated in the General Maximum Price Regulation some 14 monthslater, with wages remaining uncontrolled for several months more.

A general price freeze, however, cannot be more than a stopgap measure.The third stage in the evolution of price stabilization has therefore beenthe effort to introduce necessary flexibility.

During the past five months, four broad areas of activity may be distin-guished : (1) the issuance of margin-type regulations for most commoditiessold at retail, and many sold at wholesale; (2) the development of "interim"regulations calling for new ceiling prices to be computed by adding to pre-Korea prices the subsequent increases in costs of labor and materials (butnot including overhead cost increases) with a view to the restoration ofpre-Korea gross seller margins for most manufacturers, and at the sametime providing for rollbacks of prices which had advanced excessively; (3)the institution of a group of regulations covering specific commodities, at theprimary market level, and largely in dollars-and-cents terms—e. g., soybeans,scrap metals, hides and skins, cotton, cocoa, coffee, and wool; and (4) theissuance of the beef regulation, the first tailored regulation setting dollars-

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and-cents ceilings from the primary to the consumer level with more suchregulations to come.

The establishment of margin-type regulations at retail and wholesale wasdesigned to relieve distributors of the squeeze created by the lag betweenprices and replacement costs, establishing a more normal margin structure byrolling back excessive margins, and preparing a firm foundation, particularlyin the case of food, for the future development of dollars-and-cents priceceilings. Margin-type regulations permit the pass-through of cost increasesinto retail prices; likewise, they require retail prices to be reduced when costshave been reduced. The effectiveness of a margin regulation at retail inmaintaining stable prices depends on the effectiveness with which suppliers'prices are stabilized. The structure of the plan is strongly influenced by con-siderations of practicality. Thus the maintenance of dollars-and-centsgross margins would lead to less price increase than the percentage mark-upformula. However, specified dollars-and-cents mark-ups, like dollars-and-cents price ceilings, are workable only in highly standardized commodityareas where changes in products are infrequent, which rules out their use ina major sector of the broad market territory covered by the present whole-sale and retail regulations.

Another major step has been the program to reprice manufactured goods.The general manufacturers' formula, in essence, sets new ceiling prices bypermitting manufacturers to add to their pre-Korea prices only increases inlabor and material costs occurring after July 1, 1950. The regulations alsoprovide that cost increases after specified dates shall not be included. Inthe case of labor increases, the cutoff date is March 15; in the case ofmaterials, the dates vary. Since one manufacturer's price is frequentlyanother manufacturer's cost, the intention is to require recalculation totake account of the changes in costs brought about by the first calculationsunder the manufacturers' regulations themselves. The manufacturers'formula would require rollbacks, where prices being charged were in excessof the ceiling prices as computed under the formula. The effective date ofthe manufacturers' regulations has been postponed, pending the renewalof the Defense Production Act.

At the time of the price freeze, many cost-price and interprice relation-ships were untenable from any continuing point of view. Price relation-ships are rarely, if ever, in complete equilibrium, but the wide variationsin the rates of different price increases prior to the price freeze had greatlydistorted earlier, more normal relationships. The distortions involvedserious inequities among businesses. Much more important for the futureof the economy, many of the distortions had to be corrected if goods wereto continue to move through the markets in the large volume requiredfor a high employment economy in general and a defense economy inparticular. Much of the effort reflected in the price orders thus far issuedto modify the general price freeze has been directed to reestablishing tenable

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relationships among relative prices. By combining some adjustmentsupward with some rollbacks, the general purpose has been to correctinequities and disparities with a minimum impact on the general pricelevel. Once this interim action has been completed, it should be possibleto hold firmly the great majority of prices without further adjustment.

Upon completion of its "interim" phase, the price-control effort shouldlook to the development of a program geared to future requirements.The time is a particularly appropriate one, therefore, for considering whatthe central principles of such a program should be.

Principles for further price control. Generally speaking, stability of thegeneral price level is a desirable objective. The exceptions to this rule occur(a) after a severe deflation when a general upward movement of the pricestructure is a necessary component of economic recovery, and (b) in aperiod-when general downward price adjustments are needed to maintainmaximum employment and production.

Since the Korean outbreak, neither of these extreme situations has oc-curred, and neither is foreseeable in the near future. A general upwardmovement has not been and is not now needed3 because, broadly speaking,profits have supplied ample funds and incentives to sustain a level of busi-ness investment even higher than would be desirable. A general downwardmovement of prices, while very desirable from the viewpoint of consumers,would not be consistent with the business sentiment required for a vigorousexpansion of production, especially in those commodities where rising costshave caught up with rising prices. Price stability is conducive to defenseplanning and to business planning. Also, the erratic behavior of consumersis minimized if they anticipate price stability.

After the general price freeze in late January, no further price actionwould have been urgent if price stabilization were the only objective to besought. But price stability cannot be the only objective, since we cannotdisregard other vital objectives such as equity and reasonable balance in theprice structure and the maintenance and expansion of necessary production.These objectives depend upon some flexibility, even under stabilization.Consequently, in the period ahead, the question is not whether the patternof ceiling prices will need to be modified, but rather how it should bemodified and under what circumstances.

Formulae to allow prices in general to rise after a price freeze would beneeded only if the freeze worked general hardship or inequity or operatedupon the financial position or intentions of wide segments of business in amanner inconsistent with necessary productive expansion and fair returnsupon investment and effort. Only if this happened or threatened wouldother objectives outweigh the gains to be derived from general price stabilityin a defense emergency. Since this contingency has not arisen and is not aforeseeable prospect, the problem now is not to devise formulae for general

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price increases, but rather to take steps which modify the price freeze atthose points where modification is urgent.

These modifications, however, should not allow the exceptions to obscurethe general rule that the price line in the main should be held. Althoughsome price increases are needed to restore balance or to provide incentivesand encourage production, the argument that they are needed for thispurpose is often pushed too far. Price stability, in the main, achieves equit-able results and encourages production, by discouraging inventory specula-tion and thus tending to increase the output of final goods; by facilitatingthe system of priorities and allocations; by spurring cost reduction tech-niques; and by reducing the causes of labor disputes.

Some specific prices may have to be adjusted for reasons of fairness orin order to increase the flow of production of specific commodities, in whichan expansion is particularly desired to promote the defense effort. A num-ber of these price adjustments will relate to goods purchased by the armedforces, and will be made in the process of contract negotiation. Some ofthem, however, may be required in other goods as well. It may be necessaryto upset old cost-price relationships which have been in relatively stableequilibrium, in order to achieve the dynamic result of expanding particularlines of production.

Finally, incentives to efficiency must be adequate to assure that resourceswill produce the maximum total volume of production. Under the priceadjustments, efficient firms should be rewarded, not penalized. Treatingall producers of a commodity as a unit should be helpful in this respect.In a few industries, notably some of the mineral industries, it may be soimportant to expand that special encouragement must be given to high-costproducers. Such encouragement should be given through carefully designedsubsidies for increased production rather than through price increases.

The incentives argument always has an appeal, and in some cases quitevalidly so. But reasonable incentives do not require realization of the high-est profit aspirations that anyone might be able to make good on in a freemarket under inflationary pressures. Nor should price be regarded as theretarding factor, in those situations where necessary production is in factretarded by other conditions such as unavailability of materials or man-power. There are many instances where more careful programming, andmore effective and expeditious allocations to the right places, will do farmore to break bottlenecks in production than price increases, and with lessdanger to the structure of inflation control. In the main, price increases toprovide incentives cannot be a general rule if there is to be effective stabili-zation. Such increases should be processed as special cases.

There will be pressures to raise other prices, particularly as various costsget out of line. Thus, a wage increase that is not accompanied by anequal or greater increase in productivity gives rise to pressure for upwardprice adjustments. It is clear that if prices are to be stabilized, wages must


be stabilize^ also. However, it does not follow that every increase in costs,whether of labor or other factors, must be followed by an increase inprices. If the upward spiral is not to continue indefinitely, it is importantthat this not happen.

If an industry, despite increases in costs, still has funds and incentivesadequate or more than adequate to bring forth desirable production, priceadjustments upward are in the main unnecessary. The absorption ofincreases in costs without price increases is a large part of the history of ourindustrial and technological progress, and is particularly important during aperiod when general price stabilization is essential. On the other hand, thedenial of price increases to an industry or business which has not experiencedcost increases may nonetheless be injurious to the defense program and thenational economy, if that particular industry or business genuinely needsmore incentives to do its job.

This does not mean that business costs are irrelevant to price policy; itdoes mean that the adjustment of prices upward or downward on an arbi-trary basis in response to cost changes, without consideration of the over-allfinancial position of the industry or business after taking account of thesechanges, is much too narrow an approach to the basic issues underlyingprice adjustments under price control. The more appropriate approachis to take account of cost factors along with other relevant factors.

The machine tool industry is perhaps a good example of a case where theapplication of a cost formula did not provide adjustments needed in viewof the vast expansion now required of that industry. The problem was metby the issuance of a special price regulation for machine tools, providing aliberal basis for the calculation of price adjustments.

The allowance of price adjustments on a more or less automatic basisto cover changes in costs is sometimes likened to cost-of-living adjustmentsin wages. But the resemblance is only superficial. Gost-of-living adjust-ments do not of themselves permit any increase in real wages; they simplyrecognize that price inflation is neither an equitable way of reducing wagesnor conducive to high morale. Such cost-of-living adjustments are notinconsistent with other restraints which prevent wages from rising as theywould rise in a free market under defense conditions which make labor veryscarce. In contrast, the allowance of price adjustments on a more or lessautomatic basis, to cover changes in costs, regardless of profit margins, wouldprobably tend to push profits higher and higher in ratio to other incomes,and would reject the principle of absorption of some cost increases whichhas been typical of American business progress.

To be sure, wages affect business costs, and consequently business pricescannot be stabilized if wages and farm prices move upward without restraint.This is one reason why an effective stabilization program must deal withwages as well as business prices. Nonetheless, stabilization efforts mustmove forward in each sector of the economy simultaneously, instead of

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each sector waiting for some other sector to be completely stabilized first.A sound stabilization program should not permit further price increasesto result automatically from cost increases, but instead should determinewhether the cost increases are of a magnitude to impair adequate earningsrelated to production needs and incentives.

The foundations for this approach have been laid in the EconomicStabilization Administrator's letter of April 21 to the Director of PriceStabilization, outlining a longer-range price policy. This letter directs theprice control agency, as a general rule after the completion of "interim"adjustments, not to permit any general increase in ceiling prices for anyindustry unless its present rate of profits before taxes is below 85 percent ofits profits in the three best years in the period 1946 to 1949, adjusted forchanges in net worth. This formula is based on the present excess profitslaw. The directive also ensures that future cost increases will be absorbedto a reasonable extent, and will not automatically form the basis for futureprice increases.

The Council is not in a position to evaluate whether this formula is correctin detail, or whether the profit level set forth in this formula is necessarilythe most desirable one. The formula does, however, offer the prospectof putting price control on a more sustainable basis under current and fore-seeable conditions. Since the formula is on an "industry" basis, it needsto be accompanied by standards permitting individual manufacturers toreceive relief where they need it in line with production objectives orconsiderations of equity. Initial action has been taken in this direction.

As part of the transition from the interim stage of price stabilizationjust indicated, regulations tailored to the needs and complexities of differentindustries should be developed as rapidly as possible. This will have theadded advantage of permitting more effective compliance and enforcement.In particular, it is necessary to develop many more dollars-and-centsceilings, especially at the consumer level.

Thus, the Council feels that price policy should now focus upon holdingthe line in general, while specific energies should be dedicated to the swiftworking out of adjustments in those limited situations where additionalproduction incentives are required and cannot otherwise be achieved, orwhere elementary fairness requires adjustments in limited instances. Whilesome rollbacks may be essential, and while some other actions may beneeded for equitable reasons, they should not be allowed to divert energyfrom the policy of holding the price line in general. This policy would inthe judgment of the Council commend itself to the public and serve theneeds of the kind of defense mobilization now under way.

A coordinated relationship between price and production controls isnecessary to assure that they do not work at cross purposes. Productioncontrols should be used to facilitate stabilization. During World War II,a serious problem was the dropping of low-priced lines and their upgrad-

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ing to higher price lines. This was particularly troublesome in appareland house furnishings. Up to now, the problem in these fields has beenthe large rise in prices generally, rather than the dropping of low-pricedlines. However, this problem may appear first in consumer durablegoods, with heavy cuts in civilian uses scheduled for steel, copper, andaluminum. This problem bears close watching. The need for such coordi-nation has been recognized in a directive of January 26, 1951 issued bythe Director of Defense Mobilization, which instructs the productionagencies to cooperate with the OPS in ensuring an adequate supply ofessential and low priced consumer goods.

One of the most inflationary sectors of the United States price structuresince the Korean outbreak has been the extreme rise in basic imported rawmaterials. Basic raw materials form the group whose prices are most sensi-tive to changes in demand. It is obvious that, as long as these are free tomove, they are a source of great difficulty in holding the price line, and inkeeping down the cost of the defense effort. At present, most of'theseprices are below the peaks reached early this year. However, as long asworld-wide demand for these products continues greater than normalbecause of the mounting defense program of the free world, there is alwaysthe possibility that they will resume their upward flight.

In the case of these commodities, we are faced with a real dilemma.We can put rigorous control on their prices when sold in the United States.But if we do so, we run the risk that the domestic level will be enoughbelow the world level to prevent us from obtaining an adequate supply.If we follow rising world prices, we introduce a major factor of instabilityinto our economy. Ideally, international allocation at reasonable priceswould achieve effective stabilization, and assure the free nations of a fairshare of these basic commodities. These problems are being discussed at anumber of international conferences, with a view to arriving at the bestmethods of handling these problems. The international allocation agree-ments recently arrived at for tungsten and molybdenum include priceprovisions.

Meanwhile, in two cases, tin and natural rubber, the United States Gov-ernment has taken over the importing function. Prices of these commod-ities have declined, in part because of the more orderly buying proce-dures, in part also because of the lower levels of current United Statespurchasing. In the event, however, that international agreements cannotbe arrived at, and the price rise of imported materials is resumed, it may benecessary to use subsidies in some cases to prevent unfavorable repercussionson the domestic price levels.

Subsidies and food prices

The major function of price in a free economy is to induce the produc-tion of the goods desired by the people, in the volume they demand and are


willing to pay for. When, as at present, circumstances require that pricesbe put under control, one of the major principles determining price policyis the achievement of maximum production, particularly of goods mostneeded for the defense program. Another method of stimulating produc-tion, which is an alternative to higher prices, is for the Government to paythe producer a subsidy in addition to the price he receives from his cus-tomers. The funds to pay subsidies come out of Government revenues, thatis, out of taxes instead of out of prices. In some kinds of situations, thegranting of subsidies is preferable as a production stimulant to permittingprice increases, while in other kinds of situations subsidies are undesirable.

The clear occasion for the use of subsidies to induce needed productionis where it is necessary to secure supplies from high-cost sources of pro-duction, which will not respond to the price offer which is bringing the bulkof the needed output into the market. Where the high-cost producer can beclearly identified, and it is therefore possible to determine the differentialin price which is required to cover his extra cost, the subsidy payment is notonly permissible, but it is an excellent method to obtain additional sup-plies. If a piarket price of $1.00 per unit is high enough to lead to theproduction and sale of 1 million units of a necessary commodity, butthe production of an additional 100,000 units would require a price of$1.25, there is no justification in a period of emergency for permittinga demand for 1,100,000 units to bring about a market price of $1.25 forthe entire supply, if it is possible to pay the extra 25 cents only to those whoare burdened by the higher cost.

The need for use of subsidies to minimize market price increases becomesmore acute as the pressure of demand upon scarce supplies builds up, andas increasingly high-cost sources of additional supply have to be tapped.

The principle of differential subsidies to marginal supplies is particularlyapplicable, and it should be applied freely^ in the case of minerals. High-cost mines can be brought into production in most mining fields if a higherprice is paid. Current output, yielding a satisfactory profit at currentprices, will continue without an increase in price, and the mine operatorshould not be given windfall profits because the national need for additionalsupplies in an emergency period compels the payment of higher pricesfor additional supplies. The high-cost production can be identified, theamount of additional payment therefor can be determined, and it shouldbe paid in the form of a subsidy while the general market price is held.

The same policy is proper in the case of imported commodities, both min-erals and other goods. Where higher-cost imported goods must supple-ment the domestic supply of the same commodities in order to meet essentialrequirements, the domestic price should be held and subsidies in the neces-sary amount should be paid to the importer. The high-cost supplier is, insuch a case, easily identified, and the necessary differential is readily deter-mined. The policy may well be extended further with respect to some

I52


imported goods, where they constitute the entire supply and are importantelements of cost. In order to limit the effect upon the cost of domesticproduction into which foreign materials enter, it is sound policy in somecases for the Government to fix a low price on the sale of imported materialsand to absorb the loss. These policies were applied in many cases duringWorld War II.

The question has also arisen as to whether subsidies should now be usedgenerally to hold down the price of food, by making payments to farmers inlieu of price increases which otherwise might be necessary to obtain anadequate volume of farm production.

First of all in this connection, it is necessary to say something about farmprices and incomes in general, and about the national policy of farm parityand farm price supports.

There has been some tendency in recent years to misinterpret the trendof farm prices and farm incomes. Farm prices are more volatile thanmany other prices, and respond more sensitively to market changes. Whilethey have at times moved upward more rapidly than other prices, they tendto move downward much more rapidly whenever any softening occurs inthe general economic situation. Farm income declined much more rapidlythan other major incomes in the 1949 recession, and even though farmincome has risen substantially in the past year, a case can hardly be madethat, by sound criteria, farm income as a whole is high in comparisonwith other incomes, although there are exceptions in the case of some farmcommodities.

This being the case, there would seem to be no reason to tamper funda-mentally with the parity principle, even in the course of the stabilizationeffort. Even in that effort, a fair relationship among groups should bemaintained, and the parity principle does not operate to confer unjustbenefits upon farmers as a whole.

Insofar as farm prices rise above parity, they can be subjected to controlsthe same as other prices, except where this is prevented by special legisla-tion. The Council does not favor such special exemptions.

This brings us to the view that the maintenance of the parity principle,and of the customary farm price support program, is not inconsistent witheffective stabilization on a fair basis. Parity prices of farm products riseand fall with the index of prices paid by farmers. If nonfarm prices areheld, the parity index can rise only to the extent that there are increases inprices of feeds and other farm products bought by farmers. Insofar as theprice of food to the consumer is determined by many other factors besidesthe price paid to the farmer, the effort to stabilize the consumer's food pricescannot be limited to a consideration of farm prices.

Since the stabilization effort should be permitted to control farm priceswhen they shoot above parity, the only sound basis for refraining from suchcontrol would be if higher prices are necessary to stimulate an adequate

153


volume of farm production. The case for subsidies, therefore, must reston the ground that it is better to hold the farm price line and pay subsidiesto stimulate the needed production. There was such a program of foodsubsidies during World War II, applying particularly to meat and dairyproducts, which involved payments of about 4 billion dollars. Therationale of this program was that it was necessary to prevent the spirallingeffect upon wages and other costs of production if higher prices were paidfor these food commodities in order to bring about the necessary volumeof supplies. The record made a good case for the argument that the costof the food subsidies was very much less than the cost in higher prices toconsumers would have been, if market prices had been relied upon to bringforth the necessary goods.

However, a uniform subsidy, paid to all producers of a commodity ingeneral use, should not be hastily substituted for a rise in price as anincentive to adequate production for a period of partial mobilization aslong as now is in contemplation. It is more appropriate to an emergencysituation of seemingly more defined length, and when the pressure on sup-plies is more similar to the World War II situation than is now the case.

At this time, it would not be prudent to embark upon a program to paygeneral food subsidies. There is now no marked deficiency in the supplyof foods. The necessary increase in food production requires the liberalfulfillment of the needs of farmers for machinery, fertilizer, and labor.Supplying these needs, which we have ranked as equal with any of thedemands of the defense program, is under present circumstances sounderthan a general program of subsidy payment. Under changed circum-stances, it would be appropriate to consider general food subsidies. TheCouncil's analysis points to the danger of renewed and increased inflation-ary pressures. The recent floods are a reminder that food supplies are nevercertain. As the President said in his Message of April 26 to the Congress:"If we find that we cannot hold the line on food prices with powers recom-mended here, we shall need to consider legislation authorizing the use ofother devices, including limited food subsidies, to prevent necessary priceincreases from being reflected in rises in the cost of living."

Wage policy

Discussion of wage stabilization policy should differentiate clearly amongthree main aspects of the wage problem. These three aspects are: wagesas an incentive and reward to workers for their efforts and as a factor inthe movement of manpower; wages as a factor in consumer purchasingpower; and wages as a major element in business costs. The difficult prob-lem of wage stabilization is to achieve a wage policy which will permit wagesto perform their function as incentive an/i reward for production and treatworkers fairly, while holding to a minimum the contribution of wages tohigher prices. Wage increases may contribute to rising prices in two ways,

154


by adding to consumer spending power and by adding to business costs.In considering wages as incentive and reward to workers, and as a factor

in consumer purchasing power, it should be remembered that there arethree distinct approaches to holding down consumer demand: (1) preventincomes from rising, (2) siphon off income through taxation, and (3) en-courage larger savings. All three are needed in a stabilization pro-gram. The problem of wage stabilization is sometimes discussed as ifthe first of these approaches were the only one available to hold down thedemand of workers for consumer goods to the supplies available. But thisimposes an impossible burden on wage policy, for it might follow that thereshould be no increase in the total of real wages during the next year or so,since consumer supplies cannot be increased appreciably due to the defenseeffort. Such a wage policy would be unattainable in fact, and insup-portable even if it could be attained. With the employed growing innumber, and with hours increasing in some industries, such a policy wouldrequire both a reduction in wage rates and a reduction in the real earningsof the average employee. This would be incompatible with the concept ofwages as an incentive and reward to workers, or with fairness or industrialpeace. In an expanding economy, it would result in other types of incomemoving forward while individual wages were reduced. It would representa decision that, if a large portion of total income throughout the economymust go into savings to prevent inflation, only an unduly small fraction ofthis saving opportunity should accrue to wage earners. And such an un-workable policy, as applied to wages, would be compounded by the factthat increased personal income taxes cut heavily into take-home pay inany event.

Consequently, the essence of sound wage stabilization is to place consid-erable restraint upon swelling wage incomes, but not to impose suchrestraints as would disregard the function of wages as a reward and incentivefor employees.

For the kind of partial mobilization period which now confronts us, themajor elements in a sound wage stabilization policy seem to be the following:

First, Government action under current conditions should be directedtoward restraining wage increases of the magnitude which an economy oper-ating at such high levels of production could afford, if the defense outputwere not so great as to cut into rising standards of living.

Second, wage adjustments should be approvable at regular intervals tocover past increases in the cost of living. Maintenance of real wages duringinflation cannot in fairness be disallowed. It is unlikely that any freegovernment can successfully hold wages rigid if it is not successful in hold-ing the line on the cost of living; and insofar as that line is held, theso-called "escalation" of wages is reduced to minor significance. As acorollary of this, however, it should be frankly recognized that "escalation"

155


of wages does become one of the moving factors in the spiral of inflation ifthe cost of living is not substantially stabilized; and, therefore, holdingthe line on the cost of living is essential to stabilization on the wage sideas well as on the price side,

Third, a more difficult problem is presented as to whether wage increasesshould be permitted to reflect increases in productivity. Many workers, forexample, those paid on a piece-rate basis, already receive higher wages whentheir productivity increases. Farmers and businesses receive higher incomesas their productivity increases. Neither production nor morale would befurthered, if large segments of workers were denied a return for theircontribution, and they do make a very real contribution, to increasedproductivity.

However, if no restrictions whatsoever were placed upon wage in-creases based upon "productivity", wage stabilization would become almostimpossible. Wage increases of any size might be negotiated and denomi-nated as "productivity gains". Such gains, first obtained in particularsectors of the economy, would under a stabilization program tend to becomegeneralized throughout the economy. Restraints need to be put on wageincreases of excessive magnitude, because if such large wage increasesbecame a general pattern, they would build up excessive inflationary pres-sure on the consumer side. In addition, while they might not require priceincreases in some strongly situated industries, they would when generalizedrequire price increases in many other industries. Thus, in allowing pro-ductivity gains, certain safeguards merit consideration. In the first place,some limits should be set upon the size of these arrangements, and effortshould be made to relate them to realistic appraisal of the amount oflowered unit labor costs. In the second place, more leadership and effortshould be directed, not only toward providing just reward for increasedproductivity, but also toward doing everything possible to achieve increasedproductivity. Both labor and management can make great contributionstoward this end. The Government may legitimately encourage them todo so, when the national need is imperative, and when the Governmentin the course of a wage stabilization program is being asked to allowincentives toward this end. In the third place, so long as there cannot bea general expansion of consumer goods, a policy of allowing productivitygains should be combined with efforts to stimulate voluntary plans fortranslating at least a portion of these increments of income into savingsrather than into immediate spending. The possibilities along this line havebeen very inadequately explored, and much more vigor should be directedtoward them.

Fourth, the wage freeze of January 25 generated a wide variety of in-equities, many of which have not yet been eliminated. Obviously, theWage Stabilization Board should seek to define types of inequities so thatsuch situations can be dealt with promptly under uniform general policies.

156


However, not all cases of hardship or inequity can be anticipated by generalregulations. If the mandate of Congress is to be followed, there mustcontinue to be some independent appraisal, unless the claims of hardshipor inequity are to be summarily dismissed.

Fifth, fringe benefits, such as private pension plans, should not be treatedin the same category as wage increases, because they do not result in anincrease in take-home pay, and consequently do not enlarge the immediatespending stream. They have the advantage of providing scope for collec-tive bargaining, which is limited in other respects under a stabilizationprogram. However, while fringe benefits do not add immediately toinflationary pressures on the consumer side, they are not generally neededto stimulate production, and, consequently, they should be held within arange where they do not add sufficiently to business costs to require priceincreases. This requires consideration, not only of whether a particularbusiness can grant fringe benefits without cost increases, but also whetherthe general business area into which these fringe benefits are likely toexpand quickly if started in one place can absorb them without priceincreases.

A wage policy along these general lines would cause total wage incomesto rise moderately during the next year or two, during a period when goodsavailable for consumer use cannot be increased substantially because of thesize of the defense program. But this disparity, if it is not permitted tobecome excessive through too loose a wage policy, should be correctedthrough appropriate tax policy and through inducements to voluntarysaving. To try to handle the whole problem through an excessively restric-tive wage policy would lose more by way of production incentives andworker morale than it would gain by way of stabilization. A balance mustbe struck between production and stabilization objectives, between necessaryrestraint and necessary incentives.

There remains to be considered the question of whether a wage policyalong these general lines would be consistent with reasonable price stability.The answer to this question calls for analyzing separately the differentphases of wage policy. Productivity increases, surrounded by the generalsafeguards suggested above, and held in the neighborhood of the averageproductivity gain for the economy as a whole, should be capable of absorptionwithout price increases in most industries. That is the meaning of a genuineproductivity gain. Fringe benefits, as has been indicated, should be held toa size that can be covered by business earnings without price increases; if thecost of private pension plans and similar devices needs to be passed on to thegeneral consumer, then it would be better to finance such protection throughtaxes and embody it in the public social security system. Cost of living ad-justments are required for reasons of fairness, whether or not they involveprice increases; but if the cost of living line is held, this problem should notbe substantial. In the case of wage adjustments to correct inequities and


substandards of living, or draw manpower into essential production, theseactions need to be taken whether or not they necessitate price increases. Inthese instances, if properly administered, the necessity for the wage increasesto help the economy to function efficiently outweighs the desirability of abso-lute and inflexible price stability. In general, if price increases are grantedonly where earnings are inadequate to stimulate production, and are notgranted automatically whenever certain cost increases occur, the pursuitof the general wage policy indicated above would be consistent with theachievement of the price stabilization policy previously discussed.

The Council is fully aware of the difficult administrative and policy issueswhich have thus far prevented the development and enunciation of arounded wage policy. The thorny issues confronting the Wage StabilizationBoard should not be minimized.

Allowing for this, the Council feels that the further clarification of wagepolicies, toward which the Wage Stabilization Board is moving, is in thebest interests of labor, management, and the general public. It would pro-tect workers from the popular misimpression that wage stabilization is beingundermined whenever there are departures from early regulations whichwere not intended to be a complete or durable wage policy. It would affordmanagement a greater sense of stability regarding the general contours ofwage developments than is possible so long as each major case tends to beconstrued by a part of the public as a new wage policy outside of anycentral frame of reference. It would be helpful to the informed public byproviding a complete statement of wage policies just as soon as it can beformulated.

Such a statement would not deprive the Wage Board of its ability tohandle new and hard cases on a pragmatic basis. It would not stultifycollective bargaining, but on the contrary might make clearer the ambitswithin which collective bargaining can make a great contribution to thedefense effort. It might even leave more play for collective bargainingthan is now the case, by highlighting a few ground rules consistent withstabilization. The development of such a statement would not evenprevent changes in wage policies, whenever new experience or alteredconditions dictated the need. In a full-scale war, wage stabilization maycommand a degree of public support which permits each new case to behandled on a purely ad hoc basis. But wage stabilization in a partial mobil-ization does not automatically command that degree of public support. Itcan win that support only if it makes clear to the public at large the under-lying reasons for what it is doing, and the soundness of these reasons interms of the well-being of the economy as a whole. In the judgment of theCouncil, there is no way, short of a rounded and defined statement on wagepolicies, to accomplish this vital objective.

158


Savings programs

The degree of inflationary pressure that results from an excess of dis-posable income over the available volume of goods depends largely on therate of voluntary personal saving. In general, the higher the rate of sav-ing, the less the inflationary pressure. The form in which accumulationsof personal savings are held is also important. If savings are invested inhomes or in the physical assets of businesses, they become a source ofdemand much as if they had been spent on consumer goods.

The fraction of his income that an individual will save depends onvarious personal and social factors. Judging from past experience, if theproper atmosphere of price stability is maintained, campaigns to promoteadditional saving can have considerable effect in increasing the savingsof certain groups and, accordingly, the total amount of saving. The rateof saving is also increased by shortages of some goods and by various kindsof direct controls. A higher rate of personal savings which results fromthis cause does not in itself reduce inflationary pressure; it merely measuresor reflects the success of the controls. It is particularly important thatsuch savings be converted into savings bonds or similar assets to hold downtheir future inflationary potential.

Some types of assets are more liquid than others; and it is desirablethat as large a part of additions to saving as possible be converted intothose types of financial assets which are least likely to be converted intodemand for goods in the short run. Savings bonds are an especially suit-able form of investment for this purpose, particularly since there is anincentive—in the form of a gradually increasing effective rate of interest—to hold these bonds to maturity. The campaign to promote the sale ofUnited States savings bonds to individuals, particularly through payrolldeduction plans, should be accordingly broadened and intensified. Bondcampaigns add to total saving, and serve to convert holdings of money intoless liquid assets.

Credit controls, by holding down the growth of consumer credit, can con-tribute to a high net rate of personal saving. Moreover, repayments ofpreviously incurred debt also contribute, since a decrease in the volumeof total consumer credit is made possible in most cases by less spendingout of current income, that is, by positive saving.

The world-wide problem of inflation and stabilization

It was pointed out early in this Review that, in the past year, the priceinflation generated by the rise in world demand has gone much further inmost other countries than in the United States. (This fact is shown intable 11 and in appendix table B-27.) In Western European countriesincreases in wholesale prices since the Korean outbreak are, in 13 out of 16cases, 20 percent or more, and in 7 they are 30 percent or more. Thiscontrasts with 16 percent in the United States. Because the economies of

159


TABLE 11.—Range of wholesale price increases in foreign countries since June 19501

Range of percentage increases

O t o 910 to 1920 to 29..30 to 3940 and over

Number of countries in range

Total

91312102

WesternEurope

1267

All other

811632

1 To the latest date for which data are available.Source: Appendix table B-27.

these countries have been under great strain, and because in some of themthe political and social situation is tense, inflation raises not only the ques-tion of equitable distribution of the economic burden of defense; it alsoraises the grave question of the ability of their governments to carrythrough the needed defense programs and maintain political stability.Similar questions affecting political stability and the security of the freeworld also arise from the acute inflations in some of the countries outsideWestern Europe. ,

This whole complex of questions is one of our major national securityproblems. The President's request for economic aid for foreign countriesis designed to take it into account. The foreign aid program, however, canalleviate only the worst of the strains on the economies of countries receiv-ing aid. Even with it, these countries will remain subject to intenseinflationary pressures. In many of them, the rise in domestic prices hassubstantially exceeded the rise in the prices of the goods they trade inworld markets, indicating that a considerable element of the inflationhas been of domestic origin, even though it may have been set off byevents which occurred outside. But in many other countries, the pressurecomes mainly from world prices which they are powerless, individually, tocontrol by purely domestic policies. It should be realized that in manycountries, for example most of those in Western Europe, the value of mer-chandise imports or exports prior to the post-Korean price rise amountedto between one-fifth and two-fifths of their gross national products. Thiscontrasts with less than 4 percent in the United States, where the influenceof prices for foreign-traded goods is much less important.

The main burden of dealing with these pressures must fall upon the indi-vidual countries themselves. In Western Europe, the problem is particu-larly difficult because, in nearly all cases, the monetary inflation has beenaccompanied by a deterioration in the terms of trade which tends to reducethe supply of goods available for domestic use. Nearly all the WesternEuropean countries have taken action to restrict credit. In many ofthem tax revenues (including local government and social insurance taxes)already amount to about one-third of gross national product, contrasted

160


with about one-quarter in the United States. In some other cases, taxadministration constitutes so serious a problem that tax increases of a typewhich would not raise the cost of living and set off new wage demandsmight be ineffective,, and the governments concerned are not in a positionto solve the problem of administration quickly. These are the very coun-tries which have suffered sustained and progressive declines in the value ofmoney over a long period of time and in which, consequently, the publicwillingness to save (in forms other than goods) is weakest and the reactionof expectations of price rises is quickest.

In view of this difficult situation, plus the fact that the basic problem isa general excess of world demand over supply, anti-inflationary action byall free nations is desirable. The knowledge that other nations were engag-ing in similar action would give each nation greater confidence that its ownefforts would not be futile. The United States can greatly assist in thesuccess of such a free world effort. As by far the largest single consumerof the world's production and the major importer of world-traded goods,we can exert great influence upon inflationary pressures. If we do not,only limited success can be attained by other nations. Thus, internationalconsiderations greatly reinforce the already strong domestic need forvigorous anti-inflationary action. In addition to action by example, theUnited States should exert its influence through international organiza-tions, and in any other ways it properly can, to persuade others to takevigorous anti-inflationary action.

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IV. Detailed Economic Developments Duringthe First Half of 1951

After general control of prices and wages was ordered on January 26,1951, the forces of the free market were limited in dominating and directingthe course of the economy. While consumers and businessmen have beenbut little restricted as yet in making their own choices as to the volume anddirection of their expenditures and investments, their decisions as to employ-ment, production^ and investment are no longer based upon the expectednormal effects of free market forces.

THE EXPANDING ECONOMY

The measurement of the economy's production, in money terms, is foundin the estimate of the gross national product, which is the sum of expendi-tures for personal consumption, for private domestic investment, for govern-ment purchases of goods and services, and for net foreign investment. Allof these items being money figures directly affected by changes in prices,they must be recalculated in constant prices in order to derive an index ofthe volume of goods and services actually produced.

In the second half of 1950, rising prices and rapidly increasing produc-tion combined to accelerate the rapid increase in gross national productwhich accompanied the recovery from the recession of 1949. In the secondquarter of 1950, gross national product in current prices rose to the recordlevel of a seasonally adjusted annual rate of 275 billion dollars. In the thirdquarter, it sprang upward to 287 billion, and in the fourth quarter to 304billion. The rise in the first quarter of 1951 was almost equally rapid, to319 billion, and the estimate for the second quarter is 329 billion. (Seeappendix table B-l.)

About three-fifths of the increase in gross national product in the firstquarter of 1951 was due to price changes. The real growth in the economyin that period was about 2 percent. The estimated increase of about 10billion dollars in the annual rate of gross national product in the secondquarter requires much smaller adjustment, price changes having beenmuch less rapid, and a real growth in the neighborhood of 3 percent isindicated. (See appendix table B-3.)

162


CHART 25

CIVILIAN LABOR FORCESince mid I960,the civilian labor force has not increased,largely becausemen were being drawn into the armed forces. Nonagricultural employmenthas increased 2.1 million from the first half of 1950 to the first half of1951, while-agricultural employment has declined.



20-

10

30

20

10

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

1948 1949 1950 1951

Unemployment, as a percent of civilian labor force,fallowed a decliningtrend from the February 1950 high of 7.6 percent to a postwar lowof 2.6 percent in May 1951.

PERCENT10

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UNEMPLOYMENTAS PERCENT OF CIVILIAN

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1949 1950 195)

163


THE LABOR FORGE

Employment

There has been a considerable increase in employment and in the numberof persons in our labor force since the Korean outbreak. In the firsthalf of 1951, the total labor force, including the armed services, averagedabout 1*4 million higher than in the first half of 1950. Only about /a per-cent more of the population 14 years old and over were in the labor force inthe first half of this year than in the first half of 1950. (See chart 25 andappendix table B-ll.)

Civilian employment averaged 60.2 million in the first half of 1951 andreached a level of 61.8 million in June, which represents an increase of300,000 workers over June 1950. Since January of this year, due mainlyto the seasonal increases characteristic of agricultural employment, civilianemployment has increased 2.8 million.

Nonagricultural employment, after expanding rapidly in the last halfof 1950, has been relatively stable. At an average level of 53.4 millionduring the first 6 months of 1951, nonagricultural employment was2.1 million higher than during the same period a year before. It is now at alevel of 53.8 million workers, having increased 800,000 in the first 2months of the year, after which it remained steady. The rise from Januaryto June was largely the result of a seasonal increase in construction.

Despite the increased demand for food and fibers, agricultural employ-ment has continued its long-run decline, averaging 500,000 lower duringthe first half of 1951 than in the comparable period a year before. In Juneabout 8.0 million persons were engaged in farm work, this being a periodof high seasonal farm employment. However, this level is more than amillion lower than in June 1950.

The build-up of the armed services was the most significant developmentaffecting the labor market during the first half of 1951. Although the totallabor force expanded substantially because of continued increases in thearmed forces, the civilian labor force averaged 62.3 million during the firsthalf of 1951—about the same as in the first half of 1950.

Despite the new labor market demands arising from mobilization, thereis not now a general manpower shortage, although a few important labormarket areas are tight. The most pressing manpower problem arises outof shortages that prevail in certain key, skilled occupations, notably thosein metal-working industries. There are also serious shortages within theprofessions of doctors, dentists, and nurses, and many kinds of scientistsand engineers.

Manufacturing employment averaged 1.7 million higher during the first6 months of 1951 than in the first 6 months of 1950, both durable and non-durable goods industries showing increases. The larger increase was duringthe second half of 1950. The smaller gains this year, which brought total

164


CHART 26

CHANGES IN NONAGRICULTURAL

EMPLOYMENTThe largest increases in employment during the past year werein durable goods manufacturing, in contract construction, andin government. Employment increased much less in nondurablegoods industries and in finance and service, and declined in mining.

PERCENT CHANGE, JUNE I960 TO JUNE 1951-5 0 +5 -HO +15

DURABLE GOODSMANUFACTURING

CONTRACT CONSTRUCTION

GOVERNMENT

TRANSPORTATION ANDPUBLIC UTILITIES

FINANCE AND SERVICE

NONDURABLE GOODSMANUFACTURING

TRADE

MINING

SOURCE: DEPARTMENT OF LABOR.

manufacturing employment to a level of 15.9 million persons in June, havebeen almost entirely confined to industries manufacturing durables. Em-ployment in contract construction during the first half of 1951 was 360,000higher than a year ago, and employment was up the same amount in trade.Government employment exceeded the level during the comparable periodlast year by 425,000. (See appendix table B-12 and chart 26.)

There was a considerable lengthening of the average workweek duringthe second half of 1950. During early 1951, however, changes became veryirregular. From June 1950, the average workweek in manufacturing indus-tries increased from 40.5 hours to 41.4 in December, and then dropped to 41.0in January. During the first half of 1951 it remained close to that level.Hours in duarble and nondurable manufacturing showed contrary trends.

165


While average hours in durable manufacturing varied between 41.5 and42.0 a week during the first half of 1951, indicating that a considerableamount of overtime was being worked, hours in nondurable manufacturingdeclined from 40.2 hours a week in January 1951 to 39.4 during June. (Seeappendix table B-13.)

In contrast to the overtime scheduled in some industries, about 9.8 mil-lion persons were working less than 35 hours a week in February 1951.However, the majority of these were employed part-time through choice.Only about 1.1 million persons with full-time jobs were on reduced workschedules because of economic factors. Pointing up the vast improvementin the general labor market situation over the past year, the proportion inthis part-time group who were working shorter hours because of cutbacksresulting from declines in business activity dropped to 46 percent in Feb-ruary of 1951 from 61 percent in November and 80 percent in February1950. On the other hand, roughly 40 percent of the group working part-time in February 1951 because of economic reasons were on reduced hoursbecause of material shortages, compared with around 10 percent in the sameperiod of 1950.

Unemployment

The increase in employment in the first half of this year over the first halfof 1950 was made possible primarily through a reduction of unemploymentrather than by net additions to the civilian labor force. During the first6 months of last year, unemployment averaged almost 3.9 million. Itaveraged only slightly over 2 million during the first 6 months of this year,a reduction of almost 2 million in the number of unemployed. In May1951, unemployment at 1.6 million had reached its lowest postwar level.There was, however, a seasonal increase in June, mostly students huntingfor summer jobs, which brought the total number of persons unemployedto almost 2 million. (See chart 25 and appendix table B-l 1.)

There have been some instances of unemployment resulting fromconversion to defense production, although to date none has developedon a large scale. In most cases, displaced workers have had no difficultyin finding other jobs. With unemployment at its present low level, andnew jobs continuing to open up, conversion unemployment should notreach serious proportions.

In addition to the decline in unemployment from the first half of1950 to the first half of 1951, there have been important changes inthe duration of unemployment. In June 1950, the average duration ofunemployment for those persons who reported they were unemployed at thetime of the survey was 12 weeks. In June 1951, the average durationwas 8 weeks. In the first half of 1950, about 37 percent of the unemployedreported that they had been without work for 4 weeks or less; in the firsthalf of 1951, almost 50 percent of the unemployed had been without

166


work for 4 weeks or less. The "hard core" of unemployment also de-clined: in the first half of 1950, 11.6 percent had been without work for26 weeks or more, but in the first half of 1951, less than 8 percent hadbeen without work that long.

Unemployment compensation claims reflected the drop in unemploy-ment. From a weekly average of around 245,000 initial claims in June 1950,they dropped to about 195,000 in June 1951. Total weeks of unemploy-ment claimed dropped by almost 40 percent from June 1950 to June1951. In June 1950, they averaged about 1,565,000 a week, but in June1951 the weekly average was around 945,000.

PRODUCTION

The total output of goods and services (i. e., the gross national productcorrected for changes in prices) reached record postwar levels in the firsthalf of 1951, and was about equal to the peak war year of 1944. (Seechart 13, page 61.)

CHART 27

INDUSTRIAL PRODUCTION

After rising sharply throughout 1950, the total index ofindustrial production was stationary from April through Juneof this year.INDEX, 1935-39 s 100300

250 ~

200 -

150 -

INDEX, 1935-39 * 100

300

- 250

200

- 150

«nn I i i i i i \J F M A M J J A S O N D J F M A M J J A S O N O J F M A M J J A S O N D J F M A M J

too

1948 1949 1950 1951

SOURCE: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.

167


Industrial production

The index of industrial production, which was 199 in June 1950 (1935-39=100), four points higher than the highest level reached in 1948,dropped to 196 in July, and then advanced rapidly as business was invig-orated by the pressures of semimobilization policies. It reached 218 inDecember; and in January 1951 the advance to 221 marked continuedsubstantial progress in economic expansion. After remaining at thatlevel in February, the index rose to 222 in March and to 223 in April, whereit remained for 3 months. (See appendix table B-17 and chart 27.)

The stability of industrial production since March reflects a combina-tion of three factors affecting various industries. Some industries hadreached practical capacity, and could expand only slowly. Some wereaffected by restrictions on the use of metals. Finally, some industrieswere unable to find markets for greater output.

Table 12 compares the May output of several industries with peaksreached since the beginning of 1950. The particular industries listed intable 12 were selected because trade comments suggest that the decline inoutput in these cases probably was due to the inventory situation or to aweakness in current demand rather than to a shortage of raw materials.

TABLE 12.—Output of selected industries, May 1951 compared with 1950—51 peak

[1935-39=100, adjusted for seasonal variation]

Industry

Furniture _ - - _ -Cotton consumptionRayon deliveries - - - _ _ _Carpet wool consumptionApparel wool consumptionShoesConfectioneryMalt liquor _ -WhiskyCigars _ -BitnTTifnniis fÔ^lAnthracite coal

May 1951

175163378

U38U57

110U28

15711710512681

1950-51 peak

Index

198175397228179133158185178127151108

Month

October 1950 _ .March 1950December 1950 . _October 1950October 1950September 1950August 1950January 1950March 1950. _._March 1950January 1950March 1950

Percentagedecline

from peakto May

1951

11.66.94.8

39.512.317.319.015.134.317.316.625.0

i April 1951 data.Source: Board of Governors of the Federal Reserve System.

Irregular increases were registered in the durable goods sector throughthe first quarter of this year. The expansion occurred chiefly in thoseindustries producing directly or indirectly for the defense program. Pro-ducers of machinery continued to increase their output sharply. Theiron and steel industry produced at record levels while continuing to addto productive capacity. Production of two other basic metals—aluminumand copper—increased. In the first quarter of this year, primary pro-duction of aluminum was about 12 percent above the average for 1950.The industry produced at the full capacity of active plants, and productivecapacity was being increased through reactivation of plants used in the

168


last war as well as through new investment. Output of refined coppershowed a limited increase, with production 2 percent higher than in 1950.The aircraft and shipbuilding industries continued to expand rapidly.Freight car production increased from a level of 5,700 cars in Decemberto about 7,000 in March. In the second quarter, the volume of productionhad reached the level of current capacity in some of the basic industries.Output of machinery, of nonferrous metals, and of iron and steel hasremained about stable since March.

Consumers' durable goods production generally has fallen considerablysince the beginning of 1951. In the first quarter, most consumer durablegoods industries, although at a high level of production, were below thepeak levels of output of the second half of 1950, when the upsurge ofconsumer demand pushed production to record highs. In the secondquarter, there were cutbacks in the output of most major products, thelargest decline being in television sets.

The total output of nondurable goods has declined somewhat since thebeginning of the year. There has been a steady rise in the output of chemi-cals and allied products, largely synthetic rubber and industrial chemicals,under the impetus of defense needs. Output of textiles, however, hasfallen, in part as a result of strikes in the industry in the spring, and alsobecause of easing of consumer demand.

Average output of minerals in the first half of 1951 showed a small risefrom the second half of 1950. Crude petroleum production has beenat record levels, with output at over 6,000,000 barrels a day since earlyApril. The mining of iron, copper, and zinc has also increased.

Output of electric power has been well above last year, but in thesecond quarter of 1951 the margin of increase over 1950 fell below thatof the first part of the year.

Agricultural production

Domestic supplies of foods in the coming year will probably be atleast as great as those of last year and fully adequate to meet normalrequirements. The problem is the unusually high demand for meats andother relatively expensive foods. A further increase above the alreadyhigh levels of meat production would either reduce our feed supplies orrequire an expansion of feed production.

The July 10 crop report indicates that prospects for 1951 crops improvedgreatly since the previous month. The total planted acreage is thelargest since 1933, and present indications are that yields may be amongthe largest in recent years. The wheat crop is expected to be well over1 billion bushels, and greater than the crop of last year. The corn pros-pects are especially good, present indications pointing to a crop of 3.3billion bushels compared to 3.1 billion bushels last year. Cotton acre-age this year is 58 percent greater than last year's small acreage, and isalmost a million acres more than called for in the agricultural guides.

169


Services

Personal expenditures (corrected for price changes) for services roseabout ll/2 percent from the second half of 1950 to the first half of 1951.This compares with an increase of over 2 percent from the first to thesecond half of 1950. (See appendix table B-3.)

PRICES

The year 1951 opened on a floodtide of price increases resulting fromheavy buying that followed the Chinese intervention. The rise was almostas rapid as that which occurred in July, following the first outbreak inKorea, and it spread more generally through the price structure. To haltthe upsurge, a general price freeze was imposed on January 26. By mid-February, prices had leveled off; and while there were moderate up-trends in some markets and downtrends in others, they remained re-markably stable for the next 2/2 months. In the second quarter, someeasing in prices developed as consumer spending dipped moderately andas businessmen became concerned about the rate of accumulation ofinventories.

Since Korea, the major movements in prices have been as follows: fromJune to the issuance of the General Ceiling Price Regulation in January,consumers' prices rose 6.6 percent; the monthly index of wholesale pricesrose 14.5 percent; the daily price index of 28 "sensitive" primary marketcommodities rose 45.8 percent. From the issuance of GCPR to midyear,wholesale prices rose 0.9 percent, and prices of primary market commod-ities showed a net drop of 11.8 percent; and from January to May, con-sumers' prices rose 2.1 percent.

The inauguration of controls

Between mid-December and mid-February the average price increasefor the 28 basic commodities covered in the daily primary market price indexwas 9 percent. During the same period, the all-commodity wholesale priceindex rose 5 percent. Among its components, wholesale farm prices in-creased 8 percent, wholesale foods 5 percent, and wholesale industrial prices3 percent. The consumers' price index rose almost 3 percent betweenDecember 15 and February 15. (See charts 28 and 30.)

The pace of price inflation during December and January forced thedecision for an early price freeze. The General Ceiling Price Regulation,although containing certain exemptions, primarily in the case of farmcommodities, froze most prices in the economy at the highest levels at whichdeliveries had been made between December 19 and January 25. As thefirst general step since Korea in a mandatory control program (automobileshad been controlled earlier), GCPR was unprecedentedly broad in itscoverage.

170


While the institution of price controls was a major factor in halting therise in prices in February, there were other important factors at work: theimprovement in the military situation in Korea; the delay in cutting backthe production of consumer durable goods, and the consequent continuingample supply of civilian goods; the record Government cash surplusduring the first quarter; and the credit restrictions.

Since January, the Office of Price Stabilization has been mainly con-cerned with building an organization and with shifting away from thestop-gap freeze to regulations designed to iron out the more serious distor-tions and inequities which were frozen into the price structure by GGPR.

Wholesale prices under controls

Although most prices were frozen late in January, the price advancecontinued until mid-February, primarily because of increases in the areasleft uncontrolled, mainly agricultural products. But the control of otherprices exerted a stabilizing effect on these prices also. (See appendixtable B-25.)

TABLE 13.—Changes in wholesale prices

Commodity group

All commodities

Farm productsGrains ._ -Livestock,.

Foods _ -Meats

Other than farm products and foods .Hides and leather productsTextile productsFuel and lighting materialsMetals and metal products - ._ _Building materials _ _ _ _ _ _Chemicals and allied productsHousefurnishing goods..-Miscellaneous

Percentage change

Korean out-break to Gen-

eral CeilingPrice Regu-

lation i

+14.5

+17.1+10.2+12.7+12.4+8.3

+14.5+28.6+30.3+2.9+9.1

+11.9+26.2+18.9+24.1

General Ceil-ing Price

Regulation toJune 1951 »

+0.9

+2.3-4.3+5.8+2.3+5.3+.1

-1.8-.3

+1.0+.4-.2

—1.1+2.6

—.5

Koreanoutbreak toJune 1951 1

+15.5

+19.7+5/5

+19.2+14.9+14.1+14.7+26.3+29.8+3.9+9.5

+11.6+24.8+ 22.1+23.5

i June 1950 used for date of Korean outbreak, and January 1951 used for General Ceiling Price Regulation.Source: Department of Labor. (See appendix table B-25.)

Wholesale prices of farm products, more volatile than other domesticprices during the first half of 1951, rose 8 percent between December andFebruary as livestock prices increased sharply. Eventually, with livestockprices up even more but grains down, farm prices reached a peak one-halfpercent higher in March. Their course then became uneven but slightlydownward, and at midyear they were at a level 2.3 percent above that ofJanuary. (See chart 28 and table 13.)

Farm prices rose somewhat more than nonfarm prices immediatelyfollowing GGPR because farm products below parity in price are exemptfrom price control under the Defense Production Act when sold in raw

171


CHART 28

WHOLESALE PRICESWholesale prices reached a peak in the first quarter. In the secondquarter, farm and industrial prices declined with the larger drop infarm prices; food prices fluctuated within a moderate range.

I N D E X , 1926 = 100220

200

140 -

120 -

100J F M A M J J A S O N D J F M A M J J A S O N O J F M A M J J A S O N D J F M A M J J /

I N D E X . 1 9 2 6 «100220

*- 200

- 180

- 160

- 140

- 120

100

1948 1949 1950 1951

INCREASE

PERCENTAGE CHANGES

DECREASE

ALL COMMODITIES

FARM PRODUCTS

FOODS

OTHER THAN FARMPRODUCTS AND FOODS(INDUSTRIAL PRODUCTS)

_!/PRELIMINARY ESTIMATES BY COUNCIL OF ECONOMIC ADVISERS, EXCEPT FOR TOTAL.

SOURCE: DEPARTMENT OF LABOR (EXCEPT AS NOTED).

172


or unprocessed form. At the time GCPR was issued, most of the majorfarm commodities, with the exception of cotton, wool, soybeans, andlivestock, were selling below their parity prices. Furthermore, pricesof farm commodities selling above parity were not included in theGCPR, pending the issuance of special regulations. As a practical matter,the freeze technique of price control is not a very workable or effectiveone for most farm marketings. Accordingly, OPS has applied specificdollars-and-cents ceilings at the farm level on several commodities whereeffective control is particularly required. The more important actionshave affected cotton, wool, and soybeans. Control of producers' priceshas been approximated in the case of cattle where average buying priceshave been established for beef packers.

In their relation to parity, farm prices moved over a wide range inthe first half of 1951. After reaching an all-time high of 313 (1910-14=100) in February, the Department of Agriculture's index of pricesreceived by farmers dropped by June to 301. The index of prices paid byfarmers meanwhile rose gradually during the first 4 months of the year andremained unchanged during May and June. The parity ratio relating tothese two indexes, which moved above 100 immediately after the Koreanoutbreak, reached a post-Korean peak of 113 in February and by June haddeclined to 106. (See appendix table B-26.) There were wide variationsamong commodities. Thus, beef cattle, wool, cotton, and lambs continuedwell above parity. Rice, butterfat, and hogs were very close to parity.Some farm commodities were considerably below it.

Wholesale food prices registered a net increase of 4.1 percent in thefirst half of 1951 and at midyear were 2.3 percent above their GCPRlevel. They reached a high in February about 5 percent above the Decem-ber level, and have not regained that point since. Wholesale meat prices—the single most important and, from the point of view of control, the mostcritical element in the food group—jumped 9 percent between Decemberand February, but thereafter fluctuated in a relatively narrow range.

The markets which the wholesale index covers contain several produc-tion and distribution levels, and since the price controls now developed areroughly adapted to particular levels, there is no single pattern of controlsin the "wholesale food" area. For those foods which move directly fromthe farmer to the consumer without processing, what is said above aboutthe control of farm prices applies. With the exception of those processingindustries which have since been removed from GCPR and subjected toother regulations, food processing is subject to the general freeze, withprovision for a dollars-and-cents pass-through of any increases in farmprices which were below parity at the time of the freeze. Among theexceptions, the selling prices of beef packers have, since May, been sub-ject to dollars-and-cents ceilings. In addition, producers of nonseasonal(mostly dry) groceries are to be subject to the General Manufacturers'

173


CHART 29

WHOLESALE PRICESOF INDUSTRIAL PRODUCTSIndustrial prices reached a peak in the first quarter. In the secondquarter declines occurred in prices of textiles, chemicals, hides andleather, and building materials. Metal prices generally stayed atabout their ceilings.I N D E X , 1 9 2 6 = 1 0 0250

225 -

200 -

I N D E X , 1926 > I O O250

- 225

- 200

125

J F M A M J J A S O N D J

1948O N D J F M A M J J A S O N D J F M A M j l /

100

1949 1950 1951

250

225 -

200

125 -

100

250

- 225

- 200

- 125

J F M A M J J A S O N D J F M A M J J A S O N D | J F M A M J J A S O N D] J F M A M J V

1948 1949 1950 1951

•M- ALL COMMODITIES OTHER THAN FARM PRODUCTS AND FOODS.

.!/PRELIMINARY ESTIMATES BY COUNCIL OF ECONOMIC ADVISERS.

SOURCE.DEPARTMENT OF LABOR (EXCEPT AS NOTED).

100

174


Regulation when it goes into effect. Wholesale food distribution, still partlyunder GCPR, is now subject to a few dollars-and-cents ceilings, the majorcase being that of beef. The principal technique of control at this level sinceApril, however, has been that of fixed percentage mark-ups as specified byOPS. Such margins, which approximate those established by OP A duringWorld War II, are differentiated by type of wholesaler.

Industrial prices in the first half of 1951, while following the same patternas the other wholesale price groups, have been the least volatile. Theyrose 3 percent between December and February, and rose fractionallyin March. Thereafter, they were in a slow and steady decline, drop-ping about 1 percent during the second quarter. Among the industrialcommodity groups, the prices of metals and metal products have beenextremely stable throughout the half year. Building materials and fuel andlighting materials rose moderately in the first quarter and declined slightlyin the second; textile and allied products rose briskly during the first quarterand have dropped moderately since; and chemicals and allied products havebeen subject to considerable price fluctuations—mainly because of varia-tions in prices of fats and oils. (See chart 29.)

The general price behavior of raw materials is more clearly indicatedby the limited daily index of primary market commodities than by the over-all wholesale index, because the latter covers successive processing anddistributive levels. Just as the daily index far outstripped the other measuresof price inflation from last June to February^ so it has been the mostemphatic in recording the downward tone of prices since that time. SinceFebruary 16, the prices of the 28 "sensitive" primary market commoditieshave dropped on the average about 15 percent.

The pattern of price control of manufactured commodities was to beset by the General Manufacturers' Regulation, issued in late April, and wasto have been effective in July. This pattern was followed in similar regula-tions which have been issued for the machinery, cotton and wool textiles,apparel, and shoe manufacturing industries. The objective of these regu-lations is, by sweeping action, to remove the principal distortions andinequities of the general freeze by restoring the same relationships betweenmanufacturers' costs for labor and manufacturing materials on the onehand, and, on the other, the prices which existed in the pre-Korea baseperiod. However, at midyear the application of these regulations wassuspended, pending renewal of the Defense Production Act.

Consumers3 prices under controls

In the three months ended February 15, consumers' prices rose at anaverage rate of 1.4 percent monthly. As with the other price indexes,the trend of the consumers' price index changed at this point. From mid-February to mid-March, it advanced 0.4 percent; from March to April,there was virtually no change; and in May consumers' prices again rose0.4 percent, mainly as the result of seasonal movements in some fresh

175


CHART 30

CONSUMERS' PRICESConsumers' prices continued to reach new record levels in thefirst half of 1951, but since the institution of price controls,the rise has been very moderate. Rents maintained theirpostwar rate of increase.INDEX, 1935-39 = 100

240

220 -

200 ~

180 -

160 -

140 -

120

100

INDEX, 1935-39 » 100

240

- 220

200

- -180

- J60

- »40

- 120

J F M A M J J A S O N O J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

1948 1949 1950 1951

100

PERCENTAGE CHANGES

DECREASE INCREASE

ALL ITEMS

FOOD

APPAREL

RENT

KOREAN OUTBREAK TO GCPR

|; 2.1 ] QGPR TO MAY I9SI

KOREAN OUTBREAK TO MAY 19 SI

-^PERCENTAGE CHANGE TO JUNE 1951


176


fruit and vegetable prices. On May 15, consumers' prices as a wholewere 2.1 percent higher than they were in January before the generalfreeze. (See table 14.) Retail food prices, which had dipped slightly inApril, were 2.5 percent above the January level; apparel prices were up 2.8percent; and housefurnishings prices were up 2.5 percent. Rents in Maywere 1.7 percent higher than in January; there was little change in thecharges to consumers for fuel and public utilities. Preliminary estimatesindicate that from May 15 to June 15 retail food prices declined 0.4 percent.(See chart 30 and appendix table B-24.)

TABLE 14.—Changes in consumers' prices

Item

All items _

FoodApparel _ _ _RentFuel, electricity, and refrigerationHousefurnishings _Miscellaneous..-

Percentage change

Koreanoutbreak

to GeneralCeiling PriceRegulation »

+6.6

+9.3+7.5+1.8+3.0

+12.2+4.9

GeneralCeiling

Price Regu-lation to

May 1951 1

+2.1

+2.5+2.8+1.7+.2

+2.5+1.8

Koreanoutbreak toMay 1951 »

+8.9

+12.0+10.5+3.4+3.2

+15.0+6.7

1 June 15, 1950, used for date of Korean outbreak, and January 15, 1951, used for Gen-eral Ceiling Price Regulation.

Source: Department of Labor. (See appendix table B-24.)

Retail trade in the first half of 1951, and particularly in the secondquarter, was marked by the most aggressive merchandising since the Koreanoutbreak. Retailers, especially in the consumers* durable goods area,resorted more extensively to liberal discount and trade-in policies and toclearance sales in order to move their heavy inventories. Much of such"effective" price reduction, it should be noted, is not fully reflected bythe consumers' price index. The most dramatic instance of aggressivemerchandising was the price war among New York City department stores,touched off in late May by a decision of the United States Supreme Court,which opened a big hole in the State price maintenance laws. In NewYork City where, before this episode, department store sales had approxi-mated 1950 levels, sales jumped to 25 percent above the preceding year'slevel in the first week of the "war" and continued to show a considerablebulge during the first half of June even after the price slashing had largelysubsided.

By midyear, most sectors of retail trade had been withdrawn from theGeneral Ceiling Price Regulation and were in most cases subject to pricecontrols of the percentage mark-up variety. This was true of the majorityof goods that may be roughly characterized as the "department storetype/' of most dry groceries and some perishable foods at retail, and of

177


restaurant prices. Beef was the only major retail commodity subject to adollars-and-cents ceiling. Most building materials, farm implements, retailservices, and some other categories were still subject to the December 19-January 25 freeze prescribed by GGPR.

WAGES

The first half of 1951 saw an abatement of the most rapid up-ward movement of wages and salaries in the postwar period. Laborincome (wages, salaries, and other labor income), which reached the annualrate of 158 billion dollars in the final quarter of 1950 after rising 16 billionin 6 months, rose over 10 billion to a rate of 168.5 billion in the secondquarter of 1951.

The customary indicators of wage earnings show a slow-down in the rateof increase. From July to December 1950, average hourly earnings inmanufacturing increased by over 8 cents an hour; from January to June1951, they increased by almost 5 cents an hour, with earnings in durablegoods industries advancing by 5% cents an hour. (See chart 31 and ap-pendix table B-14.) While hourly earnings in all manufacturing industriescontinue to rise, in real terms (as measured by changes in the consumers'price index) they increased by only l/2 cents between January and June1951. Real hourly earnings in durable goods industries rose almost 2 centswhile real earnings in nondurable goods remained constant.

The rate of increase in weekly earnings was also slower in 1951. Averageweekly earnings in all manufacturing industries increased by almost$4.70 between July and December 1950, but by about $1.70 betweenJanuary and June 1951. Weekly earnings of workers in durable goodsmanufacturing increased by almost $3.00 during the first half of 1951,chiefly as a result of wage rate increases. Earnings of workers in non-durable goods manufacturing rose by only 10 cents during the same period;the reason was the drop of almost 1 hour in average weekly hours during1951, which largely offset wage increases. (See appendix table B-15.)Real weekly earnings rose by about 25 cents in all manufacturing betweenJanuary and June 1951. In terms of real wages, weekly earnings in durablegoods industries were more than $1.40 higher in June than in January1951, but real weekly earnings in nondurable goods industries dropped by$1.20 between January and June.

Wage stabilization

The pattern of wage negotiations during the first half of 1951 was greatlyinfluenced by the actions of the Wage Stabilization Board. Almost everywage negotiation was conducted with an eye toward the Board's regulatoryactions, whether the regulations had already been issued or were merelyanticipated.

178


CHART 31

WAGES AND HOURSALL MANUFACTURING INDUSTRIESAverage hourly earnings for all manufactur ing industriesrose throughout 1950 and thus far in 1951. Since January,the average workweek has decreased. Average w e e k l yearnings increased very sl ightly.DOLLARS (PRODUCTION AND RELATED WORKERS) DOLLARS1.65

1.60 —

1.65

1,60

J F M A M J J A S O N D J F M A M J


179


During the period immediately preceding the wage freeze, an unusuallyhigh number of wage settlements took place. It is estimated that at least600,000 manufacturing workers and probably twice that number in non-manufacturing and government employment received increases duringthe month before the freeze. In many instances, formal reopening datesor termination dates were advanced in order to negotiate settlementsbefore the anticipated freeze. The terms of the settlements varied con-siderably; in some cases provisions for future adjustments in the form ofcost-of-living escalator clauses or deferred increases were included in thecontracts.

On January 26, 1951, the Economic Stabilization Administrator issuedGeneral Wage Stabilization Regulation No. 1, which froze wages, salaries,and other compensation at the level prevailing on January 25 and providedthat no wage rate at a higher level could be paid without prior approvalof the Wage Stabilization Board. Following the issuance of Regulation No.1, the Board issued a series of clarifying regulations which (1) exemptedfrom the freeze agreements reached before January 25 which were to takeeffect within 15 days; (2) exempted actions raising wage rates in order tocomply with minimum wage regulations; (3) exempted employees of non-Federal government units from Federal wage controls; and (4) clarifiedthe status of merit increases and incentive pay under wage stabilization.

On February 27, the Economic Stabilization Administrator issuedGeneral Regulation No. 6. It provides that those workers who had notyet received wage increases of 10 percent over the level of January 15,1950, may be permitted increases in wage and fringe benefits up to 10percent. For the purpose of determining whether the increases alreadyreceived by workers equal 10 percent, fringe benefits negotiated prior toJanuary 25, 1951, are to be excluded. The Regulation also directs thatconsideration be given to granting wage increases in "rare and unusual"cases (those in which wage incentives are needed to attract labor todefense industry) and in situations where inequities exist. RegulationNo. 8, which was issued on March 1, provides that cost-of-living clausescontained in contracts executed on or before January 25, 1951, will b§allowed to continue in operation even if the 10 percent limitation is ex-ceeded as a result. The Board has also issued a regulation pertaining tothe establishment of wage scales in new plants, and so-called "tandemwage increases" which occur when wage rates in one type of work orplant consistently follow a pattern established elsewhere. These regula-tions are modified by two others. Wage increases granted to employeesof religious, charitable, and educational institutions are permitted withoutWage Board approval. The Board also in effect exempted the majority offarm workers from wage controls by providing that farm wages may beincreased up to a level of 95 cents an hour without Board approval.

180


The Economic Stabilization Administrator has established a five-manboard of public members to develop a stabilization policy affecting compen-sation of executive, administrative, professional, and certain sales and super-visory employees. In general, the authority of the board extends to thesalaries of employees who are exempt from the overtime-work provisionsof the Fair Labor Standards Act.

The Wage Stabilization Board has been confronted with a series of majorcases in which both employers and employees agreed to wage increasesand then petitioned the Wage Stabilization Board for approval.

In the first, and one of the most significant of wage cases, the WageStabilization Board decided in mid-May to allow the meat-packing workers a9-cent increase, of which the major part was in excess of the 10-percentformula. These workers had received wage increases of 11 cents an hourduring 1950. The Board held that it would not be fair to penalize the par-ties to the agreement because they used a broad form of reopening clauserather than a cost-of-living provision. Later an additional 2 cents wasallowed for bracket adjustments.

In late May and in June, the Board made several important deci-sions. In early June, the Board gave the go-ahead signal for increasesprovided in productivity or "annual improvement" clauses in contractstypical of the automobile industry, by ruling that payment of a sched-uled 4-cent increase would be permissible even when it exceeded the10 percent ceiling, if the increase could be granted without an accom-panying price increase. Most automobile companies announced thattheir workers would receive the increase. On June 7, an over-ceilingwage increase of 15 percent was approved for Atlantic Coast shipbuildingworkers on the grounds that shipbuilding wage rates were abnormallylow in the base period. On June 28, an increase of 9 cents an hour was ap-proved for 44,000 Westinghouse workers under the "tandem" provision.In this case, the standard for the 9-cent increase had been set by theGeneral Electric Company in March.

Work stoppages

Both the number of work stoppages beginning during the first 5 monthsof 1951 and the number of workers involved were higher than in thecomparable period of 1950. However, man-days of idleness resultingfrom stoppages were considerably less during this period in 1951 than in1950. From January through May 1951, there were about 8.8 millionman-days of idleness or 0.23 percent of estimated working time in all indus-tries. During the same period in 1950, idleness amounted to 0.62 percentof working time, or about 21.7 million man-days were lost as the result ofwork stoppages.

181


PROFITS

After rising steadily through 1950 and reaching unprecedented levels inthe first quarter of 1951, the trend of profits was moderately downwardin the second quarter. In the second quarter of 1951, corporate bookprofits before taxes (not adjusted for inventory valuation) were runningat an estimated annual rate of 48.5 billion dollars, compared with 37.5

CHART 32

CORPORATE PROFITSCorporate profits before taxes reached an all-time peak in the first quarterand declined moderately in the second quarter of this year. Profits aftertaxes have declined since the fourth quarter of I950;reflecting thefull effects of the new tax rates.


60


60

20 -

10 -

- 20

10

1948* SEASONALLY ADJUSTED ANNUAL RATES.

•^ NO ALLOWANCE FOR INVENTORY VALUATION ADJUSTMENT.• PRELIMINARY ESTIMATES BY COUNCIL OF ECONOMIC ADVISERS.

SOURCE: DEPARTMENT OF COMMERCE (EXCEPT AS NOTED).

1951

billion a year earlier and with the peak rate of 51.8 billion in the firstquarter of 1951. (See chart 32.)

There was a somewhat sharper decline in corporate profits after taxes,since they reflected the full effects of the higher corporate taxes passedin 1950. In the second quarter of 1951, corporate profits after taxes (not

182


adjusted for inventory valuation) were running at an estimated annualrate of 22.0 billion dollars compared with 20.6 billion a year earlier, andwith the peak rate of 27.8 billion in the fourth quarter of 1950. Thesecond quarter profits after taxes represented almost 4.5 percent on sales andover 9 J4 percent on net worth compared with almost 5 percent and almost9.5 percent, respectively, a year ago.

The net income of nonagricultural unincorporated business and the pro-fessions has since mid-1950 moved in a much less regular fashion thancorporate profits. After reaching a peak in the third quarter of 1950, thenet income of this group declined in the fourth quarter and then rose againto a new peak in the first quarter of 1951. It declined sharply in the secondquarter, when it was running at an estimated 24.0 billion dollars before taxes(not adjusted for inventory valuation). This compares with 22.9 billion ayear earlier and with the peak rate of 27.3 billion in the first quarter of 1951.

The net income of farm proprietors moved steadily and sharply upwardsince the Korean outbreak in response to the higher level of farm pricesand increased marketings. In the second quarter of 1951, net incomeof farm proprietors before taxes was at an estimated annual rate of 17.1billion dollars, compared with 12.2 billion a year ago, a rise of 4.9 bil-lion or 40 percent. The peak had been reached in the second quarter of1948, when farm income was at an annual rate of 18.6 billion dollars.

The shifting trends in the economy which marked most of the last 6months and the differential impact of the growing security program werereflected in the divergent profit trends by industries. During the firstquarter of 1951, substantial increases in profits before taxes were re-ported by the following manufacturing industries: fabricated metal prod-ucts, machinery, paper and allied products, chemicals, and petroleum.The largest declines were reported by producers of electrical machinery,transportation equipment, and motor vehicles and parts.

From first quarter data, it appears that small manufacturers (those withassets less than 1 million), fared relatively as well as large concerns on abefore-tax basis, but somewhat better on an after-tax basis. In general,the excess profits tax now in effect has a greater impact on larger than uponsmaller firms.

The current rate of profits provides, in general, ample inducement toexpand output and capacity. In spite of the large increase in corporatetaxes, the current level of profits continues to be almost as large a source offunds as in any previous period. In the first half of 1951, the net avail-ability of funds from profits after allowing for corporate taxes and changesin the cost of replacing inventories was at an annual rate of 16.9 bil-lion dollars, compared with 17.0 billion in the first half of 1950, and with18.3 billion in the second half. (Appendix tables B-34 through B-38 givedetails on profits.)

183


MONEY AND CREDITMoney supply

Total money supply, including Government deposits with Federal Reservebanks and commercial and savings banks, which had increased 0.8 billiondollars during the first half of 1950, and 5.9 billion during the second half,or a total of about 4 percent for the year, rose only about 0.3 billion duringthe first half of 1951. The expansion of loans and investments of the entirebanking system, including Federal Reserve bank holdings of Governmentsecurities, which had the effect of lifting the money supply, was in partoffset by other factors, mainly a substantial gold outflow during the firstquarter. (See appendix table B-30.)

In the first quarter of 1951, the privately-held supply of money (ad-justed demand and time deposits, including those of governments otherthan Federal, and currency outside of banks) declined from 176.9 billiondollars to 172.5 billion. The weekly index of wholesale prices rose from177.0 to 183.9 in the same period, and the index of consumers' pricesadvanced from 178.8 in mid-December to 184.5 in mid-March. Both thedrop in money supply and the rise in consumers' prices were exceptionallyrapid.

The opposite direction of changes in money supply and changes inprices in the first quarter of 1951 was an illustration of the uncertainrelationship between the two in short periods. This phenomenon appearedrepeatedly in quarter-year and half-year periods between July 1946 andJuly 1950. At the close of 1947, money supply was 170.0 billion dollarsand it stood below that level throughout the ensuing 8 months of inflationaryprice advance. In the meantime, the index of wholesale prices rose from163.2 to 169.8, and the index of consumers' prices advanced from 167.5to 175.2.

A decline in the privately-held money supply is a characteristic of thefirst quarter of the year, particularly since World War II. The con-centration of income tax payments in the first quarter has required heavytransfer from private deposits in banks to Treasury account. In the first3 months of 1951, when Federal cash receipts exceeded expenditures by6.9 billion dollars, the reduction in private bank deposits was exception-ally heavy.

With the conclusion of March tax payments, the privately-held moneysupply began to increase, rising by about 0.8 billion dollars in April, 0.4 bil-lion in May, and 0.7 billion in June. Price advances, which had persisted inthe first quarter despite the decrease in money supply, gave way to relativestability in price after March, during a period when the money supplyexpanded.

Credit

During the first half of 1951 the major kinds of private credit out-standing, after 6 months in which all had been carried upward, were


subject to a complex of forces that resulted in widely divergent changes.Credit restraints, direct controls of prices, wages, and materials, the risingcredit needs of defense industries, seasonal factors, and the subsidenceof anticipatory demand were responsible for changes in the pace and evenin the direction of movement of the several classes of credit.

Total loans of commercial banks rose nearly 3 billion dollars, or about5 percent, between December 1950 and June 1951, compared with 1.8

CHART 33

BANK LOANS AND INVESTMENTSAt midyear 1951, total commercial bank loans and investments were aboutat the December I960 level. A decline in bank holdings of U.S.Government securities during the first six months of 1951 was offsetby an increase in loans and investment in other securities.BILLIONS OF DOLLARS150


50

25

1948 1949 I960END OF MONTH

SOURCE•• BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.

25

195!

billion dollars, or 4 percent, during the same period a year before. Dur-ing the second half of 1950, total loans expanded 7.4 billion, or about 16percent. However, total earnings assets of commercial banks showed nochange between the end of 1950 and mid-1951, as the growth of loans and amoderate increase in investment in other securities were offset by a declinein holdings of Government obligations. (See chart 33 and appendix tableB-29.)

The changes in total bank loans since Korea largely reflected the be-havior of commercial and industrial loans. Business loans declined

185


CHART 34

CONSUMER CREDIT

Consumer credit outstanding declined during the first half of1951 almost as much as it had expanded during the first halfof 1950. Both charge accounts and instalment credit havedropped since December 1950.BILLIONS OF DOLLARS

25

20

15

10

TOTAL CONSUMER CREDIT

VOTHER CONSUMER CREDIT

BILLIONS OF DOLLARS

25

20

15

10

J F M A M J J A S O N o l j F M A M J J A S O N o l j F M A M J J A S O N D l j F M A M j i /

1948 1949 1950 1951END OF MONTH

SOURCE: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (EXCEPT AS NOTED).

about 100 million dollars, or less than 1 percent, during the first half of1950; jumped nearly 5 billion dollars, or 30 percent, during the secondhalf; and rose nearly 2 billion, or about 8 percent, during the first halfof 1951.

Seasonal declines are usual during the first 6 months of the year, andnormally attain their maximum rate during the second quarter. Therewas no seasonal fall during the first half of 1951, as a whole, because in-creased borrowing, especially by defense industries, more than offset theeffect of seasonal repayments. Business loans expanded during the firstquarter, declined slightly between March and May, and resumed theirclimb in June.

Outstanding farm mortgage loans of all lenders, which had risen about 8percent during 1950, continued to increase during the first half of 1951,though at a somewhat reduced rate. Nonfarm residential mortgage creditcontinued to rise during the first months of 1951, at a rate greater than thatof the same period of 1950, but substantially under that of the second half

186


of 1950. Credit restrictions have operated to slow down the rate of growth,and the current trend would keep the total for the year well below the 20percent expansion of 7.8 billion dollars during 1950.

In contrast with other forms of private credit, consumer credit out-standing showed a net decline in the first 6 months of 1951. During thefirst half of 1950, consumer credit outstanding expanded 0.9 billion dollars,or 5 percent; during the second half it soared 2.4 billion or nearly 14percent; between December 1950 and June 1951, it dropped about 0.9billion or 4.5 percent. The difference in the direction of movement ofconsumer credit, comparing the first half of 1950 with the first half of 1951,is largely accounted for by the 1.2 billion dollar expansion of instalmentcredit during the former period and the 0.6 billion contraction during thelater. (See chart 34 and appendix table B-28.)

FLOW OF GOODS AND PURCHASING POWER

The substantial increase in the volume of production in the first half of1951 lifted national income from the seasonally adjusted annual rate of 253billion in the second half of 1950 to 274 billion in the first half of 1951.(See appendix table B-6.)

Among the constituent elements of national income, the one contributingmost to the rise was compensation of employees, which increased froman annual rate of 165.2 billion in the final quarter of 1950 to 172.1billion in the first quarter of 1951, and to 177.1 billion in the second quarter.The increase in private payrolls was from 130.3 billion to 138.0 billion, andto this there was added an increase from 7.6 billion to 8.4 billion insupplementary income from enlarged social security benefits and fromexpanding private pension programs. The largest proportionate increasewas in government payrolls, which expanded from an annual rate of 24.8billion to 28.0 billion during the half-year as a result of the growth of themilitary forces and of civilian employment by the Federal Governmentunder the defense program.

Corporate profits have been discussed above. After adjustment for theincrease in costs of goods in inventories, but before deduction for incometaxes, corporate profits increased from an annual rate of 42.2 billionin the fourth quarter to 42.9 billion in the first quarter. For the secondquarter-year, they are estimated at an annual rate of 46 billion.

The other large constituent elements in national income are income offarm proprietors and professional and unincorporated business incomes.Income of the latter group increased from an annual rate of 23.0 billiondollars in the fourth quarter to a rate of 24.1 billion in the first quarter,but it is estimated that it declined to 23.7 billion in the second quarter.Income of farm proprietors continued its advance which began followingthe Korean outbreak, rising from an annual rate of 15.0 billion in the secondhalf of 1950 to 16.8 billion in the first half of 1951.

I87


Personal income

Personal income, the principal elements of which are wages and salaries,interest, profits of unincorporated businesses, corporate dividends, and gov-ernment payments of social security and other benefits, increased from anannual rate of 238.5 billion dollars in the closing quarter of 1950 to 244.1billion in the first quarter of this year, and to 250.0 billion in the secondquarter. Personal taxes, which must be deducted from personal income inorder to determine the volume of disposable personal income, have increasedgreatly as the higher tax rates have become fully effective. In the first halfof 1951, they rose to an annual rate of 26.9 billion dollars, compared withan annual rate of 21.6 billion in the second half of 1950. The increase inFederal personal income taxes was from an annual rate of 18.9 billion toa rate of 24.1 billion. Notwithstanding this larger burden of incometaxes, disposable personal income climbed from an annual rate of 215.2billion dollars in the last quarter of 1950 to 217.5 billion in the first quarterof 1951, and to 222.8 billion in the second quarter. (See chart 35 andappendix tables B-7 through B-10.)

Personal consumption expenditures

Consumers' spending in the first half of 1951 repeated the phenomenonappearing in the second half of 1950, when spirited buying had little con-nection with changes in personal income and when, in the closing monthsof the period, the decline in the volume of buying was contrary to the direc-tion of change in income. In each instance, a wave of buying inducedby emotional response to events outside the field of income, buying power,and markets brought about changes in prices which no forecast of incomechanges could have indicated. In each case, the behavior of consumersgenerated forces of inflation which did not disappear when the surge ofbuying subsided.

In July 1950, it was the original outbreak in Korea which touched offheavy consumer buying, largely directed to consumer durable goods whichpeople believed might become very scarce when production was channeledinto military equipment. The second surprising surge of consumer buying(seasonally adjusted) reached its crest in January, after a holiday seasonof only moderately vigorous buying and more than 5 weeks after the Chineseattack in Korea. It was probably due to popular disillusionment aboutthe prospect of an early end to fighting in Korea following serious setbacksto United Nations' forces.

The index of department store sales, seasonally adjusted (1935-39= 100),rose from 290 in May 1950 to 362 in July, and, after receding, climbed tothe same level in January. The upward jump, equally vigorous in eachincident, was each time followed by a sharp decline. The continuedappearance on merchants' shelves of abundant stocks of goods in eachperiod allayed consumers' fears of shortages, but the course of decline in

188


CHART 35

PERSONAL INCOME

Personal income in the second quarter of this year was 33billion dollars higher than in the same period last year. Allcomponents of income increased, with the exception oftransfer payments.

BILLIONS OF DOLLARS*BILLIONS OF DOLLARS*250

200 -

150 -

100 -

250

- 200

- 150

(SALARIES, WAGES, AND OTHER LABOR INCOME)

- 100

* SEASONALLY ADJUSTED ANNUAL RATES

•I/OTHER INCOME CONSISTS OF RENTS,INTEREST, AND DIVIDENDS.

^PRELIMINARY ESTIMATES BY COUNCIL OF ECONOMIC ADVISERS.



buying was more rapid in 1951 than in 1950. The department store indexfell to 291 in October and to 290 in November, after the July peak. Afterthe January rush to 362, it fell to 291 in March. The general price controlorder issued late in January, and the simultaneous improvement of themilitary situation in Korea, were important factors in dissipating thepopular mood which had led to buying in anticipation of higher prices andshortages of goods.

Brief as was the January buying surge, it lifted the volume of personalconsumption expenditures in the first quarter of 1951 to the record levelof 208.5 billion dollars (annual rate), compared with 205.7 billion in thefinal quarter of 1950. The ensuing lull reflected a quiet market but nota receding market. The level of consumption expenditures was estimatedto be at an annual rate of 202.6 billion in the second quarter of the year.(See appendix tables B-4 and B-9.)

Personal saving

In the estimates of national income, the figure of personal saving differsfrom all others in that it is not estimated directly, but is a residual figurewhich cannot be checked against direct information until later. Theprincipal uses to which personal saving is put are additions to liquid assetssuch as cash, bank deposits, and Government bonds; additions to othersecurities; increases in private insurance reserves; investment in homes;net repayments of indebtedness; and increases in the physical assets ofpersonal businesses and farms.

Current estimates of personal saving, being residual figures of relativelysmall size, are disproportionately distorted by small percentage errors inthe estimates of the very large items of disposable personal income, andconsumers' expenditures. They must be used with caution in an analysisof the economic situation and in formulating national economic policies.

The estimate of personal saving at the seasonally adjusted annual rateof 9.3 billion dollars in the first quarter places it well below the postwarpeak of 16.8 billion in the last quarter of 1950. In the second quarterof the year, personal income increased and, as the higher tax rates werenot great enough to match the increase in income, consumers' disposableincome also increased. The estimated decline in personal consumptionexpenditures left a residual amount of personal saving of 19.8 billion dollars(annual rate). (See appendix table B-9.)

While the estimate of the extraordinarily large increase in personalsaving in the second quarter of 1951 must be accepted with reserve, theimportance of the conditions underlying the estimate must not be under-valued. Even with relative stability in wage rates in coming months,the operation of the defense program will bring about a steady increasein personal income, only a part of which will be taken by increased taxation.If in the same period the limitations upon the supply of consumers' goods

stable prices combine to hold down consumers' expenditures, there

190


will inevitably be an increase in personal saving. This was the situationwhich, with the added influence of rationing, accounted for the enormoussaving during World War II. The present defense program will not affectconsumer buying in the same degree, but it will undoubtedly lead to asubstantial increase in saving.

TABLE 15.—Liquid savings by individuals *

[Billions of dollars,~not seasonally adjusted]

Type of saving

Currency and bank depositsSavings and loan associations _ _ - _ _ _ _Private insurance reservesSecurities:

United States savings bonds _ _Other U. S. GovernmentState and local governments _Corporate and other

Liquidation of debt:Residential mortgage debtOther debt

Total liquid saving

1950, firstquarter |

-0.8.4

1.1

.5

.4

.2

.3

— 1.3.5

1.3

1951, firstquarter

-2.2.3

1.1

— 3.4

-, 1.7

—1.5.8

Q

i Includes saving of unincorporated businesses, trust and pension funds, and nonprofit institutions.NOTE.—Detail will not necessarily add to totals because of rounding.Source: Securitiesland Exchange Commission.

During the first quarter of 1951, the latest period for which data areavailable, liquid saving by individuals decreased about 0.8 billion dollars,compared with an increase of about 1.3 billion during the first quarterof 1950. As is shown in table 15, the principal factor in the decline wasan unusually large drop in holdings of currency and bank deposits, reflectingheavy payments of personal income taxes.

BUSINESS INVESTMENT AND FINANCE

During the first half of 1951, gross private domestic investment in con-struction, equipment, and additions to inventory rose to the all-time recordlevel of 62 billion dollars at a seasonally adjusted annual rate. This wasan increase of 40 percent from the first half of 1950 and 15 percent fromthe second half. (See chart 36 and also appendix table B-5.)

These increases were more rapid than the growth of total national out-put. In the second quarter of 1951, gross private domestic investmentabsorbed 19 percent of gross national product, compared with 17 percenta year earlier.

Most of the increase in total investment over the past year was accountedfor by increases in purchases of producers' equipment and by faster accu-mulation of business inventories. Residential construction outlays in thefirst half of 1951 were at substantially the first half of 1950 level, whileother construction rose 20 percent.

At midyear 1951, outlays for plant and equipment were still rising underthe impetus of a general demand for facilities expansion and the selective

191


CHART 36

BUSINESS INVESTMENT

Gross private domestic investment,already at a recordlevel just before Korea,has since risen rapidly. Equipmentpurchases and additions to inventory are at very high levels.BILLIONS OF DOLLARS* BILLIONS OF DOLLARS*

70

NET CHANGE IN IBUSINESS INVENTORIES

20 - .

10 -

- 20

- 10

-10

"SEASONALLY ADJUSTED A N N U A L R A T E S .

^PRELIMINARY ESTIMATES BY COUNCIL OF ECONOMIC A D V I S E R S .

SOURCE DEPARTMENT OF COMMERCE (EXCEPT AS NOTED).

-10

1951

192


stimulus of some urgently needed expansion programs. Inventory accu-mulation had not been halted, but housing construction was falling off,partly as a result of credit restrictions.

Plant and equipment

Nonfarm business expenditures for new plant and equipment have con-tinued on a rapidly rising trend during the past 12 months. In the secondquarter of 1951, the total volume of these outlays was at a new high, nearlyone-third above the corresponding quarter of 1950. (See appendix tablesB-5 and B-20.)

There have been marked differences in the behavior of the differentmajor types of plant and equipment investment since Korea. Althoughthe desire to expand and improve facilities has been intense in all sectors,the greatest acceleration has occurred in outlays for industrial facilities.In manufacturing, the outlays in the second quarter of 1951 were 74 per-cent higher than a year earlier, and in transportation facilities, 50 percenthigher. In the trade, service, communications, and miscellaneous group,the increase was 23 percent. These changes reflect, in part, the effect ofselective controls and aids designed to give priority to the expansions closelyrelated to urgent defense needs, which lie largely in the industrial, transportand utility fields. Investment in electric utility expansion showed only amoderate increase, but this may be accounted for by the longer timerequired for building the heavy equipment needed for expansion in thatfield, as well as by severe shortages of copper and aluminum and the limitedcapacity of equipment producers. Furthermore, investment in electricutilities has been at a high level since World War II.

The emphasis on capacity expansion resulting from demands of thedefense program is also shown in the fact that an increased proportionof plant and equipment outlays is going for plant construction. On thebasis of sample surveys of expansion plans, and also the expansion goalsfor some specific defense-related industries discussed in Part II, it isevident that the increase of industrial capacity is proceeding considerablyfaster than it did during the prosperous period between World War IIand mid-1950.

The remainder of 1951 is likely to show a continuation of the trendto more selective industrial expansion and some decline in investmentoutlays in the trade and service field as the impact of materials shortagesand controls increases. A survey of investment expectations made bythe Securities and Exchange Commission and the Department of Com-merce during the second quarter of 1951 suggests a third-quarter levelof total nonfarm plant and equipment outlays about equal to that of thesecond quarter, and 36 percent higher than in the third quarter of 1950.

Nonfarm inventories

Unusually rapid accumulation of inventories has prevailed since last fall.During the third quarter of 1950, the initial post-Korean buying rush de-


pleted nonfarm inventories at an annual rate of 1.8 billion dollars. But asproduction spurted ahead, inventories were built up rapidly. Stimulatedby the large rise in demand and prices, and haunted by the fears ofshortages, business generally placed large orders to ensure an uninter-rupted flow of supply. In the fourth quarter, inventories were beingaccumulated at the very high annual rate of 10.6 billion dollars.

During the first half of 1951, and especially during the second quarter,much of the accumulation was involuntary in character as sales failed tomeet expectations. The rate of accumulation dropped to 8.1 billion dollarsduring the first quarter of 1951, but rose again to 13.2 billion duringthe second quarter of 1951. An "excess" of inventories developed in con-sumer goods at the retail level, particularly in consumer durable goods,where the fears of shortage had been greatest. But this situation did notbring about a decline in total output, as it had done in 1949. The rapidgrowth of the national security program forestalled this. By June 1951,inventories were being readjusted in many areas to bring them in line withthe current rate of sales.

Since the Korean outbreak, the book value of inventories in manufac-turing and trade, seasonally adjusted, has risen at a record rate. By May1951, the book value amounted to 69.9 billion dollars compared with 54.2billion in June 1950, a rise of nearly 30 percent. Well over one-half of thisrise reflected replacement of inventories at higher prices and less than halfreflected physical accumulation.

Retail inventories grew at about the same rate as those in manufactur-ing, rising 30 percent from June 1950 to May 1951, while manufacturinginventories rose 29 percent. However, there were significant differencesin trends. Durable goods inventories of retailers rose about 41 percent,while those of manufacturers advanced about 32 percent. On the otherhand, retail inventories of nondurable goods advanced about 23 percentwhile manufacturers' inventories rose about 28 percent.

Retailers bought heavily in consumer durable items in anticipation of themuch sharper impact of the defense program upon that area. Since pro-duction of consumer durable goods was maintained much longer than antic-ipated, and there was some falling off in sales in the second quarter,inventory accumulation of these items took place.

While there was a substantial increase in manufacturers' inventoriesfrom May 1950 to May 1951, most of it was in purchased materials andgoods in process. Finished goods inventories rose 14 percent, mainly inthe first half of 1951. The rise in purchased materials and goods inprocess was 43 percent, but the bulk of this accumulation took place in thesecond half of 1950. The rise in the first half of 1951 has been muchslower, in part because of the stabilization of prices, in part also becauseof the restrictions on inventory accumulation of essential materials insti-tuted by the National Production Authority. Inventories of goods in processhave continued to grow steadily.

194


The ratio of inventories to sales a year ago was somewhat lower than inmost previous periods. It declined further during the summer as salesexpanded. But by the end of the year, it was higher than in June. ByApril of this year, it had advanced to about the 1949 level, which was thehighest ratio of the postwar period but well below most prewar levels.In May, the ratio dropped slightly because of an improvement in the man-ufacturers' inventory sales ratio. The retail inventory-sales ratio showedthe greatest rise and is currently well above any previous postwar figure.(See appendix tables B-21, B-22, and B-23.)

Construction

Total new construction activity in the first half of 1951, including bothprivate and public, has been at a record level of about 32 billion dollarson a seasonally adjusted annual rate basis. This exceeds the rate inthe first half of 1950 by nearly 20 percent, and that of the second half of1950 by about 8 percent. (See appendix table B-19.)

A major part of these increases reflects higher construction costs. Thecost increases, especially prominent in lumber and in plumbing and heat-ing items, average about 12 percent from the first half of 1950 to thefirst half of 1951.

The rising trend of construction outlays was halted in the spring ofthis year, and by June the seasonally adjusted rate of total construction hadfallen back below the January level. In recent months private construc-tion—accounting for about 70 percent of the total—has been droppingsubstantially, while public construction has declined only slightly.

Over the past year, construction has come increasingly under the director indirect influence of Government controls. A Presidential directive ofJuly 1950 ordering the tightening of FHA and veterans' housing creditterms was followed by Regulation X; prohibitions on certain typesof recreational construction; the imposition of priorities on materials foressential defense use; limitation orders on the use of specific scarce materialsincluding copper and aluminum; a permit system on commercial con-struction; the licensing of all projects using more than 25 tons of steel;and the application, beginning in July 1951, of the Controlled MaterialsPlan to the use of steel, copper, and aluminum.

Controls have helped to curtail new private residential building and cer-tain types of recreational and commercial construction, especially dur-ing the past few months. It is to be expected that increasing prioritydemands for materials, particularly steel, and more comprehensive and ef-fective controls over their use, will bring further curtailment of these andother types of construction not urgently needed for defense.

The most striking change in the first half of 1951 has been the increas-ingly sharp fall in new private housing expenditures, on a seasonally ad-justed basis, from a February high. In the first 6 months of this year,an estimated 575,300 total new nonfarm dwelling units were started,

195


including both private and public, about 17 percent less than in the cor-responding period of 1950. This number was swollen by an abnormallylarge number of publicly financed starts in June, when local housingauthorities rushed to get as many units as possible under way before theend of the fiscal year, lest the Congress drastically curtail the publichousing program for fiscal year 1952.

The recent downward movement indicates that the backlog of housingconstruction commitments made before the credit control restriction pro-gram went into effect has been largely worked off, and that the credit regu-lations are increasingly showing their effect. Increasing difficulties ingetting scarce building supply items, and the requirement that buildingof units with more than 2,500 square feet be authorized by NPA, willfurther retard the rate of new construction in this field. Even so, it isprobable that total housing starts for 1951 will run somewhat above theoriginal objective of 800,000 to 850,000.

Private industrial construction, under the impact of the defense build-upand the very high level of business activity, shot up by more than 50 percent,on a seasonally adjusted basis, during the first 6 months of 1951. Theaverage rate of outlays in that category during that period was more thandouble the average rate during the first half of 1950, and about 50 percentabove the rate during the second half of 1950. In view of the very largeindustry plans for facilities expansion for the remainder of 1951, and somelarge private and public programs extending into subsequent years, itappears certain that private industrial construction will remain at a highlevel and probably rise somewhat further.

New public construction in the first 6 months of 1951 was running about30 percent higher than in the corresponding period of 1950. In additionto the rapid step-up in military and naval construction, there have beenincreases in most of the other categories, especially residential and nonresi-dential building. Highway construction outlays are moderately higherthan a year ago.

Corporate finance

During the first half of 1951, corporations used a record volume offunds to finance expansion of their fixed and working capital. Total usesof funds amounted to 21 billion dollars, 50 percent above the first half of1950. About 30 percent of the total was for inventory financing. Therise in the book value of corporate inventories during the first 6 months ofthe year amounted to about 6.5 billion dollars, compared with a 1.5 billiondollar increase in the corresponding period of 1950. The financing ofplant and equipment took about 3 billion dollars more than during thefirst half of 1950. (See chart 37 and appendix table B-39.)

More than half of the additions to capital was financed with funds frominternal sources. Corporate retained earnings amounted to about 6.5 billiondollars during the first half of the year, 1.4 billion larger than during the


CHART 37

SOURCES AND USES OF CORPORATE FUNDSIn the f i rst half of 1951, corporate expansion of f ixed and workingcapital totaled a record 21 billion dollars, with about half financedout of retained earnings and other internal sources.

SOURCES

RETAINEDEARNINGS

DEPRECIATION

RESERVES

OTHER SOURCES

USES

PLANT AND

EQUIPMENT

OUTLAYS

CHANGE IN

INVENTORIES

OTHER USES

BILLIONS OF DOLLARS

5 10 15

%&&%&^

±1 PROFIT ESTIMATES FOR 2ND QUARTER 1931 BY COUNCIL OF ECONOMIC ADVISERS.NOTE: EXCLUDES FINANCIAL CORPORATIONS.

SOURCES: DEPARTMENT OF COMMERCE ESTIMATES BASED ON SECURITIES AND EXCHANGECOMMISSION AND OTHER FINANCIAL DATA (EXCEPT AS NOTED).

corresponding period of last year despite the increase in corporate taxrates and moderately larger dividend disbursements. A rise in deprecia-tion allowances partially reflected accelerated amortization of some types offacilities begun in 1950.

Although corporations did not resort to external financing to the sameextent as during the second half of 1950, nonetheless they continued to ex-pand their bank borrowings and trade and mortgage debt substantially.Whereas there is usually some contraction of corporate indebtedness tobanks during the first 6 months of the year, this year corporations expandedtheir borrowings by 2 billion dollars. The expansion of bank loans to cor-

197


porations during the whole of 1950 was 2.5 billion dollars. The total in-crease in trade and mortgage debt was more than three times as large asthat during the first half of 1950. On the other hand, the volume of fundsobtained from the securities markets was only moderately larger thanduring the first half of 1950.

INTERNATIONAL DEVELOPMENTS

During the late months of 1950 and the first half of 1951, the first world-wide economic impact of the Korean outbreak began to weaken. The rapidincreases in the quantity of United States imports of industrial productsand in the market prices of raw material imports tapered off, and in somecases there were declines. At the same time, the effects of freeworld rearmament asserted themselves in other nations. Foreign demandfor United States exports increased rapidly; the foreign trade positions ofmost other countries that are rearming stopped improving and in somecases began to deteriorate; and the extent of price rises in most other coun-

CHART 38

EXPORTS AND IMPORTSOF GOODS AND SERVICESDuring the past year, rapidly rising exports have increasedthe United States export surplus.BILLIONS OF 'DOLLARS*25


25

EXPORTS OF GOODSAND SERVICES^

IMPORTS OF GOODSAND SERVICES-*'

10 -:

5 -

- 10

- 5

* ANNUAL RATES

y INCLUDES INCOME ON INVESTMENTS.

2/ PRELIMINARY ESTIMATES BY COUNCIL OF ECONOMIC ADVISERS.



tries surpassed the rise in the United States. (See appendix tables B-40through B-47 for detailed statistics on international transactions.)

These shifting influences were reflected in the international transactionsof the United States, through a rise of about 4.3 billion dollars in the annualrate of exports of goods and services from the second half of 1950 tothe first half of 1951, and a moderation of the rise in imports of goods andservices. The increase of these imports by an annual rate of 1.7 billiondollars resulted from a large rise in the first quarter of 1951, followedby a leveling off in the second quarter. As a result of these changes, theexport surplus rose from an annual rate of 1.5 billion dollars in thesecond half of 1950 to an estimated 4.1 billion in the first half of 1951. Theniost significant part of this expansion occurred from the first to the secondquarter of 1951, when the surplus rose from an annual rate of 2.3 billion dol-lars to one estimated at 5.8 billion, the highest level since the widespreadtightening of import restrictions and the currency devaluations in 1949.These changes are shown in table 16 and chart 38.

TABLE 16.—United States exports and imports of goods and services

[Billions of dollars]

Period

194619471948 _.19491950 . .

Annual rates:1950— First half _. . .

Second half

1951— First half2

Exports ofgoods andservices *

14.719 817.016 014.4

13.615.3

19.6

Imports ofgoods andservices 1

7.08 3

10.39 6

12.1

10.513.8

15.5

Surplus ofexports

7.811 56.76 42 3

3.11.5

4.1

1 Includes income on foreign investments.2 Estimates based on incomplete data; by Council of Economic Advisers.NOTE.—Detail will not necessarily add to totals because of rounding.Source: Department of Commerce, except as noted.

These shifts in our international goods and services transactions werealmost wholly the result of changed transactions in goods. The rise in thedollar value of merchandise imports, which had begun with our economicrecovery well before the outbreak of hostilities in Korea but had beensharply accentuated after it, continued during the first quarter of the year,when both the physical quantity and the dollar value of imports surpassedprevious peaks. In the second quarter, however, this rise came to a halt.The halt was the foreign trade counterpart of the leveling off of consumerbuying which characterized the United States private economy quite gen-erally during the first half of this year.

Most of the rise in the dollar value of merchandise imports reflectedprice increases. During the early months of this year, prices of many of

199


bur major imports were stabilized by controls or market forces, and somehave declined. Prices of rubber, tin, and wool fell by 19, 40, and 70 percent,respectively, from their post-Korean peaks, although at midyear they werestill far above their pre-Korean levels. Despite these declines, however, aver-age prices of imported goods actually received in this country were still risingin April, the latest date for which import price figures are available. (Seechart 39.) It was a reduction in the quantity of imports that caused theirdollar value to stop rising.

CHART 39

PRICES OF IMPORTSAverage prices of imports continued rising,despite declinesin current market prices for some major imports.

CRUDE FOODSTUFFS s> f%

«. / CRUDE*X ^•<»~S MATERIALS

^*:%

•~-^•

INDEX, SefTEMBgft 1200

180

I60

I40

I20

(00

80

-'ACSO INCLUDES MANUFACTURED FOODSTUFFS AND FINISHED MANUFACTURES, NOT SHOWN ON THIS CHART.

SOURCE* DEPARTMENT OF COMMERCE.

S O N O J F M A M J J A S O N O J F M A M J

INDEX, SEPTEMBER 1949 = 100

200

ISO

160

I40

120

lOO

80

In contrast to the behavior of imports, the dollar value of our mer-chandise exports rose rapidly in February, March, and April. This risewas more the result of growing physical quantities than of the rise in exportprices. Part of the increase in the quantity of exports was attributableto increased shipments of military equipment to Western Europe under theMutual Defense Assistance Program, but most of it was the result ofgenerally increased demand for United States goods of all kinds on thepart of those foreign countries which had higher incomes and more amplesupplies of dollar exchange. Partly because of these more ample dollar

200


supplies and partly because of fear of shortages and price rises, foreignimport restrictions have been considerably relaxed since mid-1950, par-ticularly in the Western Hemisphere and Asia, and in some cases importsfrom the United States have been directly encouraged. Thus, to a con-siderable extent the rise in foreign demand had the same basic anticipatorycharacter as the post-Korean rise in domestic demand.

The increase in import prices since the first half of 1950 has far exceededthe rise in export prices, as table 17 shows. Although in actual dollarvalues our merchandise imports in the first half of 1951 were at a rate55 percent higher than in the first half of 1950, they were only 15 percenthigher in terms of average quantity. In the case of exports, the rise in quan-tity was 28 percent.

TABLE 17.—Index of average prices in United States foreign trade*

[First half of 1950=100]

Period

1950— Third quarterF ourth quarter

1951— First quarterSecond quarter 2

Importprices

110120

131136

Exportprices

102109

115119

Ratio ofimport to ex-port prices

108109

114114

1 Figures represent average unit values of recorded merchandise trade.2 Estimates based on incomplete data; by Council of Economic Advisers.Source: Department of Commerce, except as noted.

With the stepping up of programs to strengthen national defense, con-trols over exports in short supply were again imposed. These controlshave been intensified in recent months. To limit the drain on domesticresources and to distribute the limited quantities available among theimporting countries in accordance with essential needs, quantitative exportceilings have been established for copper, aluminum, zinc, iron and steelscrap, hides and skins, cotton, sugar, inedible molasses, bronze, hard bristles,diamonds, cattle and horse hair, lead, nickel, petroleum oils and greases,iron and steel products, tinplate, wool, and a number of other products.

The strain of our increased domestic demand on free world supplies wasconsiderably alleviated by increased domestic production of several impor-tant materials that we import. From the first half of 1950 to the firsthalf of 1951, we doubled our production of synthetic rubber and raisedour production of aluminum and crude petroleum by over 20 percentin each case. We also increased exports of coal to Western Europeand increased our shipments of wheat to India from 93,000 long tons inthe fourth quarter of 1950 to 152,000 and over 500,000 long tons, re-spectively, in the first and the second quarters of this year.

Increased exports of military end-items were accompanied by an expan-sion of military aid to foreign countries. Economic aid to the UnitedKingdom and to Ireland under the European Recovery Program wassuspended early in the year^ but economic aid to other countries was

201


increased slightly. As a result mainly of increased military aid, total netGovernment financing of foreign transactions rose from an annual rate of4.0 billion dollars in the second half of 1950 to one of 4.7 billion in thefirst half of 1951. In the second quarter of 1951 it was less than thetotal United States export surplus, which, as has already been noted, ex-panded rapidly from the first to the second quarter. This was a reversalof the relation between aid and the export surplus which had prevailedsince mid-1949, when our export surplus was less than our foreign aid.

From mid-1949 to the first quarter of 1951, there was a large outflow ofgold and dollar assets from the United States to other countries. Theoutflow was particularly heavy during the third quarter of 1950 when,in addition to a virtual disappearance of our export surplus, there was alarge but short-lived speculative outflow of United States private capital.(See appendix table B-40.) Gold and dollar assets were being accumulatedby foreign countries, largely by the sterling area and Canada, but also by anumber of countries in Latin America and Southeast Asia, at an annualrate of 4.3 billion dollars in the 9 months after mid-1950. This accumu-lation abated to a rate of about 3.0 billion dollars in the first quarter of1951, but at the end of March it was sharply cut, and in the secondquarter of the year it amounted to an annual rate of only about 200 milliondollars.

While United States demand for imports abated, Western Europeancountries began to feel the effect of free world rearmament and thestrain upon their resources which it will involve. Increased import priceswere accompanied by purchases of larger quantities of imported goods,partly to replenish reduced inventories and partly in anticipation of in-creased requirements of their own expanding defense programs. Theresulting rapid rise of imports, combined with some reduction of exports,enlarged Western Europe's trade deficit from an annual rate of over3 billion dollars in the last quarter of 1950 to one of more than 5 billiondollars in the first quarter of this year. As table 18 below indicates, thiswas a reversal of an improvement which had been occurring since 1949.

TABLE 18.—Foreign merchandise trade of Western Europe with rest of world1

[Billions of United States dollars]

Period

1948 . _ .19491950 . — .Annual rates:

, 1950— First quarterSecond quarterThird quarterFourth quarter

1951— First quarter

Imports 2

13.512.811.4

10.911.410.812.414.4

Exports

6.97 37.5

6.56.87.59.49.1

Excess ofimports

6.65 53 9

4.44.63 33.05.3

1 Trade of metropolitan countries participating in European Recovery Program with all nonparticipatingcountries.2 Imports are on a c. i. f. basis.

Source: Economic Cooperation Administration.

202


An even more dramatic effect of the past year's economic developmentsand a more universal and potentially dangerous one was the setting off ofa world-wide price inflation. The magnitude of the price rises which haveoccurred in various foreign countries was indicated in table 11, page 160.This table shows that most countries of the world have suffered increasesin wholesale prices greater than the United States, in some cases fargreater. The actual increases and the annual rates of increase are shownin appendix table B-27. Countries depending largely upon imports fortheir raw materials and exporting manufactured goods were generallyaffected by rises in both import and export prices. In most of them importprices rose more, restricting the quantity of goods available for theirdomestic use. This was the case in most of the countries of Western Europeand in Japan. In the case of the countries exporting primarily raw ma-terials, the main causal factor in their inflations has been the increase ofexport prices. This has brought about an expansion of incomes which hasspread through their whole economies. In contrast to the situation inthe raw material importing countries, export prices have risen more rapidlythan import prices and there has consequently been a rise of national in-come in physical as well as money terms. The inflations in some of thesecases may nevertheless be disruptive in their internal economic and socialeffects.

GOVERNMENT FISCAL OPERATIONS

Net budget receipts of the Treasury, which exclude the payments oftaxes for Federal Old-Age and Survivors' Insurance and refunds of receipts,were 29.7 billion dollars in the first half of 1951. (See table 19.) Thiswas the largest amount ever collected in a 6-month period. Budgetexpenditures were 25.6 billion, leaving a surplus of 4.1 billion in the firsthalf year. There had been a small deficit in the preceding 6 months,so that the budget surplus for the fiscal year ended June 30, 19515 was3.5 billion dollars.

TABLE 19.—Federal budget receipts and expenditures, the General Fund balance, andthe public debt


Item

Federal budget accounts:Net receipts - - - - ~Expenditures

Surplus (-}-) or deficit ( — )

General Fund balance *Public debt outstanding * ..

Calendar year 1950

Total

37.838.3

-.4

4.2256.7

First half

19.419.2

+.2

5.5257.4

Second half

18.5, 19.1

-.6

4.2256.7

Calendaryear 1951,first half

29.725.6

+4.1

7.4255.3

i End of period.Source: Treasury Department.

203


CHART 40

FEDERAL CASH RECEIPTS FROMAND PAYMENTS TO THE PUBLIC

Total cash receipts were considerably larger than paymentsduring the first half of 1951,resulting in a near-recordcash surplus.BILLIONS OF DOLLARS*70 |

60

50

40

30

20

10

0

60

50

40

30

20

10

0

•HO

0

-10

BILLIONS OF DOLLARS*170

CASH RECEIPTS

-OTHER CASH RECEIPTS

•INCOME AND

PROFITS TAXES

CASH PAYMENTS

^Jlsw^

-OTHER CASH

PAYMENTS

-MILITARY AND

INTERNATIONAL

CASH SURPLUS (+) OR DEFICIT (-)

1st Half

I9602nd Half

I960

VTES.

1st Half

1951

60

50

40

30

20

10

0

60

50

40

30

20

10

0

•HO

0

-10

SOURCES.TREASURY DEPARTMENT AND BUREAU OF THE BUDGET.

204


The public debt declined from 256.7 billion dollars at the end of De-cember 1950 to 255.3 billion at the end of June 1951. During this sameperiod, there was a substantial increase in the Treasury's General Fundbalance from 4.2 billion to 7.4 billion. (See tables B-31 and B-32 forchanges in the kinds of Government securities outstanding and in thedistribution of ownership.)

There are large amounts of both receipts and expenditures, principallyin the Old-Age and Survivors' Insurance and other trust funds, which arenot included in the conventional budget accounts. They have an importanteffect upon the economy because they represent an actual flow of fundsbeing paid into or withdrawn from the Treasury. The consolidated cashtotals of receipts and payments are shown in tables 20 and 21. In the firsthalf of 1951, the excess of cash receipts was 6.9 billion dollars, or consid-erably more than the budget surplus. The cash surplus of 7.6 billion dollarsin fiscal 1951 compares with a cash deficit of 2.2 billion dollars in fiscal1950. Chart 40 shows Federal cash receipts and payments in terms ofseasonally adjusted annual rates.

Progress of spending for national security program

The largest changes on the expenditure side of the budget were asso-ciated with the national security program. As shown in table 20, cashpayments for the military services rose from 7.6 billion dollars in thesecond half of 1950 to 12.3 billion dollars in the first 6 months of thisyear. There was also an increase in outlays for international security andforeign relations, mostly due to the rise in expenditures for Mutual DefenseAssistance. The national security program includes, in addition, largerexpenditures for atomic energy, Defense Production Act activities, andother functions, but these are not shown separately in the table.

TABLE 20.—Federal cash payments to the public, by function


Function

Military services . _International security and foreign relationsVeterans' services and benefitsSocial security, welfare, and healthAgriculture and agricultural resourcesInterestOtherDeduction from Federal employees' salaries for retire-

mentClearing account for outstanding checks and telegraphic

reports _ _ _ _ _

Total Federal cash payments to the public

Calendar year 1950

Total

13.63.98.93.31.34.27.2

-.4

-.1

42.0

First half

6.02.15.91.51.22.13. 6

— 2

-.3

21.9

Secondhalf

7.61.83.01.8.1

2.13.6

-.2

+.3

20.1

Calendaryear 1951,first half *

12.32.53.02.2.4

2.13.4

-.2

(2)

25.7

i Estimates based on incomplete data.3 Less than 50 million dollars.Note.—Detail will not necessarily add to totals because of rounding.Source: Treasury Department and Bureau of the Budget.

205


Funds obligated by the military services were considerably larger thanthe actual amount of expenditures. A total of 48 billion dollars was obli-gated during the fiscal year 1951 for the military functions of the Depart-ment of Defense and for Mutual Defense Assistance. Expenditures forthese same categories amounted to about 20 billion dollars.

Cash payments by the Federal Government

Total cash payments to the public were 25.7 billion dollars in the firsthalf of this year. This was the highest rate of expenditures since the latterpart of 1945, when demobilization and reconversion expenses were heavy.

There have been major declines during the past twelve months in cashexpenditures for veterans' benefits, aids to agriculture, and unemploymentinsurance. The principal increases, apart from the national security pro-grams, have been in certain housing and home finance activities andsocial security benefits. In the latter case, the increases reflected theliberalization of benefits in accordance with the Social Security Act amend-ments approved in August 1950.

Cash receipts of the Federal Government

Gash receipts of 53.5 billion dollars in the fiscal year 1951 compare withthe previous high of about 50 billion dollars in the fiscal year 1945. Thisrecord volume of Federal receipts reflected the increase in incomes andprofits, and the increase in tax rates.

TABLE 21.—Federal cash receipts from the public, by source


Source

Direct taxes on individualsDirect taxes on corporationsEmployment taxes _ _Excises and customsSurplus property receipts.Deposits by States, unemployment insuranceVeterans' life insurance premiums- _ . _ _ - _ _ - _OtherLess* Refunds of receipts

Total Federal cash receipts other than borrowing.

Calendar year 1950

Total

19.29.93.48.6.2

1.2.5

1.5-2.2

42.4

First half

11.25.01.73.9.1.5.2.7

-1.8

21.5

Second half

8.05.01.74.8.1.6.2.8

-.3

20.9

Calendaryear 1951,first half i

16.49.12.24.5.2.7.3.9

-1.8

32.6

1 Estimates based on incomplete data.Note.—Detail will not necessarily add to totals because of rounding.Source: Treasury Department and Bureau of the Budget.

As shown by the estimates in tables 21 and 22, Federal cash receipts weresubstantially higher in the first half of 1951 than in the last 6 months of 1950,even after adjustment for seasonal factors.

206


State and local government finances

Both the receipts and payments of the State and local governmentsincreased during the first 6 months of 1951. The estimated rise in receiptswas somewhat larger than the rise in payments, with the result that thesmall deficit incurred by these governments in the previous period wasvirtually eliminated. These trends are shown in table 22.

TABLE 22.—Government cash receipts from and payments to the public

[Billions of dollars, seasonally adjusted annual rates]

Receipt or payment

Cash receipts:Federal . . _ _State and local

Total cash receipts

Cash payments:FederalState and local

Total cash payments

Surplus (+) or deficit (-):FederalState and local _ . .

Total, surplus (+) or deficit (— )

Calendar year 1950

Total

42.418.3

60.8

42.019.3

61.4

+.3-1.0

-.6

First half

41.717.6

59.3

43.719.0

62.6

-2.1-1.4

-3.4

Second half

43.219.1

62.3

40.519.7

60.2

+2.6-.6

+2.1

Calendaryear 1951,first half i

59.320.2

79.5

51.520.3

71.8

+7.8

+7.7

i Estimates based on incomplete data.Note.—Detail will not necessarily add to totals because of rounding.Source: See appendix table A-5.

The increase in receipts was chiefly the result of the expansion of thetax base brought about by the general rise in business activity. While anumber of new taxes have been adopted by States and localities so far in1951, and rates of many existing taxes have been raised, relatively few ofthese changes became effective during the first 6 months of the year. Therise in expenditures, which is due to higher materials costs and wage rates,as well as to a continued growth in regular governmental programs, hascaused more and more attention to be given to possible ways of adding torevenues. (Appendix tables A-5 through A-8 give details of governmentfinance.)

THE NATION'S ECONOMIC BUDGET

Table 23, the Nation's Economic Budget, shows the receipts and ex-penditures of major economic sectors for 1950, by half years, and the firsthalf of this year. All estimates are seasonally adjusted annual rates. Asshown in this table, the outstanding economic development of the secondhalf of 1950, compared with the first half, was the growth in private incomesand expenditures, particularly business investment, while government cashpayments declined. The most significant single factor was the rise in private

207


TABLE 23.—The Nation's Economic Budget, calendar years 1950-51


Economic group

CONSUMERS

Disposable income arisingfrom current production

Government transfers and netinterest payments

Disposable personal income..Consumption expenditures.

Personal net saving (+)..

BUSINESS

Retained receiptsGross private domestic in-

vestmentExcess of receipts (+)

or investment (— )

INTEENATIONAL

Cash loans abroadNet foreign investment

Excess of receipts (+)or investment (— )

GOVERNMENT

Tax payments or liabilities .Adjustment to cash basis

Cash receipts from the public^.Purchases of goods and

servicesGovernment transfers

Cash payments to the public* -Excess of receipts (-}-)

or payments (— )_

ADJUSTMENTS

For receipts relating togross national product

Other adjustments

Gross national product.

1950, first half

Re-ceipts

175.1

88.8

197.4

29.4

—.8

64.4—5.1

69.S

+1.0+4.9

269.7

Ex-pendi-tures

~~I86.~7~

44.0

— 1.6

40.721.9

62.6

269.7

Excessof re-ceipts

•(+) orex-

pendi-tures(-)

+10.7

—14.6

+1.4

-3.4

+1.0+4.9

1950, second half

Re-ceipts

195.5

15.8

211.2

30.0

./

75.1—12.8

68.8

-5.0+18.9

295.6

Ex-pendi-tures

2(XJ.~4~

53.8

-3.0

44.315 9

60.2

295.6

Excessof re-ceipts(+)or

ex-pendi-tures(-)

+10.7

-28.8

+3.1

+2.1

-5.0+18.9

1951, first half1

Re-ceipts

203 8

16.4

220.2

30.6

.3

88.4-8.9

79.6

+1.0+6.7

323.8

Ex-pendi-tures

"205.T

61.8

-.9

57.214.6

71.8

323.8


ex-pendi-tures(-)

+14-6

-SI. 2

+1.2

+7.7

+1.0+6.7

1 Estimates based on incomplete data; second quarter by Council of Economic Advisers.2 Consolidated cash^statement (including trust accounts) for Federal, State, and local governments.NOTE.—Items relating to current production of goods and services are shown in roman type. Transfer

payments and receipts and subtotals including them are in italics; they are not included in the gross nationalproduct.

Detail will not necessarily add to totals because of rounding.Source: See appendix A.

business investment, which increased by 10 billion dollars over the level ofthe first half of the year. Consumer expenditures increased by more than13 billion dollars, about equal to the rise in disposable income.

From the second half of 1950 to the first half of 1951, the expansion ingovernment expenditures was almost as large as that of business andconsumers combined. Consumer expenditures rose by less than income^

208


which raised personal saving to the highest level for any half-year sincethe war. Business investment continued to rise from the last half of 1950,but at a more moderate rate than last year. A large part of the increasewas in inventories, a substantial portion of the increment reflecting anunexpected decline in demand on the part of consumers. Business receiptsdid not change greatly, since higher taxes more than offset gains in corpo-rate profits before tax. Consequently, the excess of business expendituresover receipts rose from the already exceptional levels of 1950.

While the rise in personal saving offset in part the increase in fundsneeded by business to finance increased investment expenditures, there wasa net inflationary impetus arising from the private sectors of the economyin the first half of this year. However, the rise in the government surplushelped to restrain inflationary tendencies. Gash receipts rose from a season-ally adjusted annual rate of 62 billion dollars to almost 80 billion from thesecond half of 1950 to the first half of 1951, and the cash surplus expandedfrom 2 billion to 8 billion. While this change resulted in part from highercorporate and personal incomes, it also reflected higher taxes, and for thatreason helped to restrain inflationary forces.

209



Appendix AStatistical Tables Relating to the Nation's

Economic Budget

CONTENTSPage

A-l. The Nation's Economic Budget, calendar years 1950-51.... 215A-2. Consumer account, calendar years 1950-51 216A-3. Business account, calendar years 1950-51 216A-4. International account, calendar years 1950-51 217A-5. Government account (Federal, State, and local), calendar

years 1950-51 218A-6. Federal cash receipts from the public other than borrowing,

calendar years 1950-51 219A-7. Federal cash payments to the public by function, calendar

years 1950-51 219A-8. Federal cash payments to the public by type of recipient and

transaction, calendar years 1950-51 220

211



The Nation's Economic Budget

The Nation's Economic Budget provides a comprehensive view of nation-al economic activity by major economic groups: consumers, business, gov-ernment, and "international." The receipts and expenditures of thesegroups and the net addition to or absorption of saving for the first and sec-ond halves of calendar year 1950 and the first half of 1951 are shown intable A-l.

Column 1 indicates the major flow of receipts or income. Receipts aredivided into two categories: income from current production and receiptsof transfers and interest. The total of incomes from current production(shown in roman type and adjusted for the statistical discrepancy betweentotal receipts and expenditures) equals current output, or the gross na-tional product.

Expenditures for current output and government transfer payments areshown in column 2. The gross national product comprises only the ex-penditures for current output. Government expenditures lor goods andservices (i. e., expenditures for current output) plus government transferpayments equal government cash payments.

Government cash transfers, on the expenditures side in column 2, areshown as receipts by consumers and by foreign countries and internationalinstitutions in column 1. The sum of these transfer receipts is approxi-mately equal to government transfer payments in the accompanying table.Some discrepancy is due to the use of somewhat different bases for measure-ment of various components of receipts and payments. For example,government interest payments are recorded on a cash basis; interest receiptsof consumers are recorded on a net accrual basis and include interest paidby government corporations. The difference resulting from the twomethods of estimating is included in the adjustment item (line 20).

Column 3 shows the excess of receipts ( + ) or expenditures (—) for thevarious accounts: personal net saving, the government cash surplus ordeficit, the excess of international receipts or investment, and the excessof gross investment over business receipts. The total excess of receipts insome accounts must equal the total excess of expenditures in others, sincenational income and product are conceptually equal. Personal net saving,for example, which represents an excess of receipts, must be matched by anexcess of investment by business or by a government deficit, or both.(Also, the adjustments made in column 1 must be carried over into column3 in order to complete the balance between the positive and negative items.)

While the summary table on the Nation's Economic Budget gives a com-prehensive view of recent economic changes, additional detail on receipts

213


and expenditures is needed for analytical purposes, as is shown in the tablesthat follow. More complete statistics for recent years on national incomeand product and their components will be published in a National IncomeSupplement to the "Survey of Current Business," July 1951. Data relatingto the cash budget of the Federal Government is from the Budget of theUnited States. The Council's Economic Review of January 1950, ap-pendix A, contains a more extended discussion of the Nation's EconomicBudget and the following tables.

214


TABLE A-l.—The Nation's Economic Budget, calendar years 1950-51

[Billions of dollars, seasonally adjusted annual rates!

Economic group

CONSUMERS

Disposable income arisingfrom current production..

Government transfers and netinterest payments

Disposable personal income. .Consumption expenditures.

Personal net saving (+)-

BUSINESS

Retained receiptsGross private domestic in-

vestmentExcess of receipts (+)

or investment (—}

INTERNATIONAL

Cash loans abroadNet foreign investment

Excess of receipts (+)or investment ( — )

GOVERNMENT

Tax payments or liabilitiesAdjustment to cash basis

Cash receipts from the public.Purchases of goods and

services _ _Government transfers

Cash payments to the publicExcess of receipts (+)

or payments ( — )

ADJUSTMENTS

For receipts relating to grossnational product 2

Other adjustments 3

Gross n a t i o n alproduct

1950, first half

Re-ceipts

175.1

act) <a

197.4

29.4

— ,2

64.4-5.1

69.8

+1.0+4-9

269.7

Ex-pendi-tures

~~I86.~7~

44.0

-1.6

40.721.9

62 6

_ _

269.7


ex-pendi-tures(-)

+10.7

-14.6

+1.4

—8.4

+1.0+4.9

1950, second half

Re-ceipts

199.5

16.8

211.2

30.0

,1

75.1-12.8

62.3

-5.0+12.9

295.6

Ex-pendi-tures

-- -

200.4

53.8

—3.0

44.316 9

60 2

295.6


ex-pendi-tures(-)

+10.7

-23.8

+8.1

+2.1

-5.0+12.9

1951, first half *

Re-ceipts

203.8

16. 4

220.2

30.6

.3

88.4-8.9

79.6

+1.0+6.7

323.8

Ex-pendi-tures

"205~6~

61.8

-.9

57.214.6

71.8

323.8


ex-pendi-tures(-)

+14.6

-31.2

+1.2

+7.7

+1.0+6.7

i Estimates based on incomplete data; second quarter by Council of Economic Advisers.a These adjustments bring the estimates on the receipts side into agreement with those on the expenditures

side of the accounts. They include the statistical discrepancy less "subsidies less current surplus of govern-ment enterprises." The statistical discrepancy represents the difference between the two independent esti-mates of gross national product: income received from current output and expenditures for this output."Subsidies less current surplus of government enterprises" are included in national income, but not in thegross national product.

3 "Other adjustments" are net and are the amount necessary for balancing the excess of receipts (+) withthe excess of expenditures (—). They are required because some items of government cash payments areeither not recorded in private receipts at all (such as purchases of existing assets), or they are recorded in adifferent time period from that in which payment is made. Government cash receipts also include someitems not deducted from private incomes, or deducted in a different period.

NOTE.—Items relating to current production of goods and services are shown in roman type. Transferpayments and receipts and subtotals including them are in italics; they are not included in the gross nationalproduct.

Detail will not necessarily add to totals because of rounding.Sources: Based on the national income and product statistics of the Department of Commerce and on

Federal cash receipts from and payments to the public estimated by the Bureau of the Budget and theTreasury Department. See also footnote 1.

215


TABLE A-2.—Consumer account, calendar years 1950—51


Receipts or expenditures

Personal income arising from current production of goods and services:Wage and salary receipts and other labor income . _ . _Farm proprietors' income _ _ . _Business and professional income 2

Dividends .Private interest and rental incomeBusiness transfer payments .. _

Total - -

Plus:Net interest paid by governmentDividend on National Service Life InsuranceOther government transfers to individuals

Equals* Total personal incomeLess: Personal tax and nontax payments --

Equals: Disposable personal incomeLess: Personal consumption expenditures *._

Equals: Personal net saving (-}-)ADDENDUM

Personal income arising from current productionLess: Personal tax and nontax payments - - - - ._ _

Equals: Disposable income arising from current production

Total

146.413.722.39.2

13.4.8

205.8

4.72.7

11.6

224.720.5

204.3193.6

+10.7

205.820.5

185. 3

1950

Firsthalf

138.712.421.58.1

13.0.7

194.4

4.75.3

12.3

216.719.3

197.4186.7

+10.7

194.419.3

175.1

Secondhalf

154.215.023.110.213.8

.8

217.1

4.7.2

10.9

232.821.6

211.2200.4

+10.7

217.121.6

195.5

1951,first

half i

166.216.823.99.2

13.8.8

230.7

4.8.3

11.3

247.026.9

220.2205.6

+14.6

230.726.9

203.8

1 Estimates based on incomplete data; second quarter by Council of Economic Advisers.2 Includes adjustment for inventory valuation.• For detail, see appendix table B-4.NOTE.—Detail will not necessarily add to totals because of rounding.

TABLE A—3.—Business account, calendar years 1950—51


Receipts or investment

Corporate profits before tax

Less: Corporate tax liability * . _Dividend payments

Equals: Corporate undistributed profits

Plus* Capital consumption allowances 3

Corporate inventory valuation adjustment *__

Equals: Retained business receipts from current production

Less: Gross private domestic investment 8

Construction _Residential (nonfarm)_._Other private construction

Producers' durable equipment.. _ _Change in inventories

Equals: Excess of receipts (+) or investment (— )

Total

41.4

18.69.2

13.6

21.2—5.1

29.7

48.9

22.112.69 5

22 54 3

—19 2

1950

Firsthalf

34.7

15.68.1

11.0

20.4—2.0

29 4

44.0

20 811 89 0

20 23 1

—14 6

Secondhalf

48.0

21.510.2

16.2

22.0—8.2

30.0

53.8

23.413.410 024 85 6

—23 8

1951,firsthalf i

50.2

27.59.2

13.5

22.8-5.7

30.6

61.8

23 011 811 227 011 8

—31 2

1 Estimates based on incomplete data; second quarter by Council of Economic Advisers.2 Federal and State corporate income and excess profits taxes.3 Includes capital consumption allowances on noncorporate capital, including residences.4 The adjustment measures the excess of the value of the change in the volume of nonfarm business inven-

tories, valued at average prices during the period, over the change in the book value.« For additional detail, see appendix table B-5.NOTE.—Detail will not necessarily add to totals because of rounding.

216


TABLE A—4.—International account, calendar years 1950—51

[Billions of dollars, annual rates]

Receipts or investment

U. S. Government cash long-term loans (net)2

Plus: Cash payments to International Monetary Fund and Interna-tional Bank 3 . _ _ •

Equals: U. S. Government cash loan transfers (foreign re-ceipts)

Surplus of exports of goods and services

Less: Net unilateral transfers: •Government8. ._ _ _Private

Equals: Net foreign investment _ _ _

Excess of receipts (-{-) or investment (— )

Total

0.2o

-.12 3

4.1.5

-2.3

+2.2

1950

Firsthalf

0.3

-.5

-.2

3.1

4.3.5

-1.6

+1.4

Secondhalf

0.1

.1

1.5

4.0.5

-3.0

+3.1

1951,first

half*

0.3

(4)

.3

4.1

4.5.4

g

+1.2

1 Estimates based on incomplete data; second quarter by Council of Economic Advisers.2 Includes only cash withdrawals under loan agreements. Does not include noncash transactions such

as lend-lease and surplus property credits.*In I960, the International Monetary Fund returned 262 million dollars in cash to the U. S. Treasury in

exchange for United States notes.4 Less than 50 million dollars.• Net unilateral transfers are included with Government or private expenditures for goods and services. For

example, remittances (gifts) made by American citizens to relatives or charitable groups abroad are includedwith consumer expenditures. Government aid in the form of grants is included in Government purchasesof goods and services. Thus, net unilateral transfers must be deducted from the export surplus to avoiddouble counting.

6 Unilateral aid included in appendix table A-8 is on a Daily Treasury Statement basis and is gross.NOTE.—Detail will not necessarily add to totals because of rounding.

217


TABLE A—5.—Government account (Federal, State, and local), calendar years 1950—51l


Receipts or expenditures

Receipts:Tax and nontax payments or liabilities:3

Federal _ .State and local

TotalAdjustment to cash basis:

Noncash receipts *Excess of cash receipts over tax liabilities or payments *

Cash receipts from the public

Expenditures:Purchases of goods and services:

FederalState a n d local . _ _ _ _

Total

Other government payments:Transfers to individuals - -Cash interest payments to public 6 - . _ - _ .Loans to foreign governments and subscriptions to Internation-

al Bank and International Monetary Fund (net) 7

All other « — _ _

Total

Cash payments to the public

Cash surplus (+) or deficit (—) . _ _ _ _

ADDENDUMFederal:

Cash receiptsCash payments

Surplus (-{-) or deficit (— )

State and local:Cash receipts _ -Cash payments

Surplus (+) or deficit (— ) _ __ _

Total

50 519.4

69 9

—1 3—7.8

60.8

22 819.7

42 5

14 34.2

-.1.5

18.9

61.4

— 6

42 442.0

+ 3

18.319 3

— 1.0

1950

Firsthalf

45 718.7

64 4

—1 4—3.8

59 3

21 419 2

40 7

17 64.2

—.2.4

21.9

62.6

—3.4

41 743.7

—2.1

17.619.0

— 1.4

Secondhalf

55 219.9

75.1

—1 3—11.6

62.3

24 220 0

44 3

11.14.2

.1

.5

15.9

60.2

+2.1

43 240.5

+2.6

19.119.7

-.6

1951,first

half 2

67 421.0

88 4

—1 5—7.4

79.5

36 021.2

57 2

11.64.2

.3—1.5

14.6

71.8

+7.7

59 351.5

+7.8

20.220.3

-.1

1 This table reconciles cash receipts and payments to the public with estimates of government receiptsand expenditures included in the national income and product accounts. Cash receipts or paymentsrepresent the consolidated cash accounts of the Federal Government, including the trust funds, and State-local governments. All intragovernmental transactions are excluded. The receipts of government corpora-tions and the Post Office are offset against expenditures and the net expenditure included as a cash payment.SJrants-in-aid to State and local governments are included as a cash payment of the Federal Governmentand not included as either a receipt or payment of the States or localities.

2 Estimates based on incomplete data.3 Personal and indirect business tax payments, corporation tax liabilities (including excess profits tax

liabilities), and contributions for social insurance.* Consists of deductions from government employees' salaries for retirement funds, and government con-

tributions to retirement funds, National Service Life Insurance and U. S. Government Life Insurance funds.5 Includes excess of corporation tax receipts over liabilities and excess of personal tax receipts over pay-

ments. Negative figure indicates excess of tax liabilities over cash receipts. Cash receipts also include someitems of miscellaneous receipts not included in tax and nontax payments, such as receipts from sales of sur-plus property.

8 Does not agree with net interest paid by government (appendix table A-2) which is on a net accrualbasis and includes interest paid by government corporations.

7 See appendix table A-4, International account.8 Includes all other cash payments less noncash payments for goods and services. Other cash payments

include net payments by government corporations (except capital formation), net prepayments (deliveriesin advance of payments being subtracted), and the excess of checks paid over checks issued. Noncashpurchases of goods and services include deductions from government employees' salaries for retirement fundsand the government contribution to such funds.

NOTE.—Detail will not necessarily add to totals because of rounding.

218


TABLE A-6.—Federal cash receipts from the public other than borrowing, calendar years 1950-51


Cash receipts

Direct taxes o n individuals _ _ _ _Direct taxes on corporationsEmployment taxesExcises and customsSurplus property receiptsDeposits by States, unemployment insurance . _ ._ _ .Veterans' life insurance premiumsOtherLess: Refunds of receipts

Total Federal cash receipts from the public

1950

Total

19.29.93.48.6.2

1.2.5

1.5-2.2

42.4

Firsthalf

18.79.93.48.6.3

1.1.5

1.3-2.2

41.7

Secondhalf

19.79.93.58.8.1

1.3.4

1.6-2.2

43.2

1951,first

halfi

26.917.24.19.2.3

1.4.6

1.9-2.3

59.3

* Estimates are based on incomplete data and exclude the effects of proposed tax legislation.NOTE.—Detail will not necessarily add to totals because of rounding.

TABLE A—7.—Federal cash payments to the public by function, calendar years 1950—51


Function

Military services _International security and foreign relationsVeterans' services and benefits .Social security welfare and healthAgriculture and agricultural resources _ _InterestOther . . . .- _Deduction from Federal employees' salaries for retirementClearing account for outstanding checks and telegraphic reports


Total

13.63.98.90 O

1.34.27.2

—.4—.1

42.0

1950

Firsthalf

12.04.1

11.73.12.44.27.2

-.4-.7

43.7

Secondhalf

15.33.76.33.6.2

4.27.2

-.4.5

40.5

1951,first

halfi

24.65.06.14.5.7

4.26.9-.4-.1

51.5

i Estimates based on incomplete data.NOTE.—Detail will not necessarily add to totals because of rounding.

219


TABLE A-8.—Federal cash payments to the public by type of recipient and transaction, calendaryears 1950-51


Cash payments

Direct cash payments for goods and services, excluding militaryservices: J

Payments to individuals for services rendered:Civilian wages and salaries (excluding Post Office):

Federal 3

Grants- and loans-in-aid for performance of specified serv-ices, net * --

Total

Payments to business for goods and services:Public works:

Federal -Orants-in-aid and loans for public works

Other goods and services 8

Payments to foreign countries and international institutionsfor goods and services -

Total

Loans and transfer payments to individuals:Social insurance and public assistance:

Federal employees' retirement benefit paymentsOld-age and disability benefit paymentsUnemployment insurance benefit paymentsOrants-in-aid for public assistance-

Readjustment benefits, pensions, and other payments to veterans 6..Loans to home owners, net - -Interest 8_. ._Other •

Total

Loans, Investments, subsidies and other transfers to business andagriculture:

Farmers:Price support, net (including supply program) __International Wheat AgreementOther loans and direct subsidies to farmers

Business:Home mortgage purchases from financial institutionsLoans, netDirect subsidy payments

Subsidy arising from the postal deficit _Interest 8 . - - _

Total

Loans and transfer payments to foreign countries and internationalinstitutions:

European Recovery Program loans and grants _Other loans (net withdrawals)Other grants 10

Subscriptions to the International Bank and Monetary Fund (netcash withdrawals)

Total

Military services — cash payments for goods and services n ._

Clearing account for outstanding checks and telegraphic reports


Total

2.6

.9

3.5

1.7.6.8

.1

3.2

.31.31.51 17.7

—.21.3.7

13.5-

(7).1.7

.4(7)(7

62.9

4 8

2.9(7)1 1

—.3

3 8

13.3

—.1

42 0

1950

Firsthalf

2.7

.9

3.6

1.7.5.5

.1

2.7

.31.12.01 i

10.5—.21.2.3

16.3

1.0.1.8

.4

.1(7)

63.0

6 0

3.4.1

1.0

—.5

4 o

11.7

— .7

43 7

Secondhalf

2.6

.9

3.5

1.7.7

1.0

.2

3.7

.31.5.9

1 24.9

—.31.31 1

10.8

—1.0.16

.4—.1(7)

62 9

3 5

2.4—.11 2

3 6

15.0

.5

40 5

1951,first

half*

2.8

1.0

3.7

1.9.6

1.1

.1

3.7

32 2.9

1 25.2

(7)1.3

— 2

10.9

—.6.1.8

.4(7)(7)

.62.9

4.3

2.6.2

2 1

(7)

4 9

24.0

— 1

51 5

See footnotes on following page.

220


i Estimates based on incomplete data; second quarter by Council of Economic Advisers.• Differs from the national-income concept of "government purchases of goods and services" by exclud-

ing, in addition to military services, farm price-support expenditures, and unilateral aid to foreign coun-tries. Grants to States and localities for public works, here included as a Federal expenditure, would beincluded in the national income accounts as a State and local expenditure. There are other less signifi-cant differences between the two concepts.' Excludes payroll deductions for Federal employees' retirement.4 Includes all grants-in-aid and loans to public bodies for purposes other than public works and public

assistance. Includes, in addition, one-third of Federal expenditures for veterans' tuition, books, andsupplies.

8 This figure is obtained as a residual by deducting all other expenditures from total cash payments tothe public. Owing to the fact that data are incomplete for fiscal year 1951, the residual is subject to ahigh marein of error.

• Includes cashing of terminal If ave bonds, retired pay of military personnel, and National Service andGovernment life insurance refunds and benefits in addition to veterans' pensions and readjustmentbenefits. Includes only one-third of payments for veterans' tuition, books, and supplies.7 Less than .50 million dollars.

s Includes a small amount of interest on tax refunds in addition to interest on the public debt. Interestpaid to business includes over 100 million dollars of interest paid each year by the Federal Governmentto State and local governments. Interest in appendix table A-2 is net, and is on an accrual rather than acash basis; it includes interest paid by State and local governments and by Government corporations.

• During the period shown, represents in large part some of the transactions of the Federal Home LoanBanks.

10 Includes expenditures for the Mutual Defense Assistance Program.11 Excludes retired pay and redemption of Armed Forces leave bonds which are included above as pay-

ments to veterans.Note.—Detail will not necessarily add to totals because of rounding.

221



Appendix B

Statistical Tables Relating to Employment,Production, and Purchasing Power

CONTENTSNational income or expenditure: Page

B-l. Gross national product or expenditure, 1929-51. . . 225B-2. Gross national product or expenditure in 1939 prices, 1929-50 226B-3. Gross national product or expenditure in first half of 1951 prices,

1929-51 227B-4. Personal consumption expenditures, 1929-51 228B-5. Gross private domestic investment, 1929-51 229B-6. National income by distributive shares, 1929-51 230B-7. Personal income, 1929-51 231B-8. Relation of national income and personal income, 1929-51 232B-9. Disposition of personal income, 1929-51 233B-10. Total and per capita disposable personal income in current and first

half of 1951 prices, 1929-51 234Employment and wages:

B—11. Labor force, employment, and unemployment, 1929—51 235B—12. Number of wage and salary workers in nonagricultural establishments,

1929-51 236B—13. Average weekly hours in selected industries, 1929-51 237B-14. Average hourly earnings in selected industries, 1929-51 238B-15. Average gross weekly earnings in selected industries, 1929—51 239

Production and business activity:B-16. Physical production index of goods and selected services, 1929-51 . . . . 240B-17. Industrial production index, 1929-51 241B-18. Percentage changes in production and consumption of selected com-

modities, United States and other free world, 1939 to 1950 242B-19. New construction activity, 1929-51 243B-20. Business expenditures for new plant and equipment, 1929-51 244B-21. Inventories and sales in manufacturing and trade, 1939-51 245B-22. Manufacturers' inventories by stage of fabrication and as ratios to

sales, 1946-51 246B—23. Sales, stocks, and outstanding orders at 296 department stores,

1939-51 247Prices:

B-24. Consumers' price index, 1929-51 248B-25. Wholesale price index, 1929-51 249B-26. Indexes of prices received and prices paid by farmers, and parity ratio,

1929-51 250B-27. Percentage increases in wholesale prices in the United States and

foreign countries since June 1950 .... 251

223


Money, banking, and credit: PageB-28. Consumer credit outstanding, 1929-51 252B-29. Loans and investments of all commercial banks and weekly reporting

member banks, 1929-51 253B-30. Deposits and currency, 1929-51 254B-31. Estimated ownership of Federal securities, 1939-51 255B-32. United States Government debt—volume and kind of securities,

1929-51 256B-33. Bond yields and interest rates, selected years, 1929-51 257

Corporate profits and finance:B-34. Profits before and after tax, all private corporations, 1929-51 258B-35. Sales and profits of large manufacturing corporations, 1939-51 259B-36. Relation of profits before and after taxes to stockholders' equity,

private manufacturing corporations, by industry group, 1949-51... 260B-37. Relation of profits before and after taxes to sales, private manufactur-

ing corporations, by industry group, 1949-51 261B-38. Relation of profits before and after taxes to stockholders' equity and to

sales, all private manufacturing corporations, by size class, 1949-51. 262B-39. Sources and uses of corporate funds, 1947-51 263

International transactions:B-40. International transactions of the United States, 1948-51 264B—41. United States Government grants, other unilateral transfers, and loans

to foreign countries, 1948-51 265B-42. United States merchandise export surplus, by area, 1936-38 quarterly

average and 1947-51 266B-43. United States merchandise exports, including reexports, by area,

1936-38 quarterly average and 1947-51 267B-44. Indexes of quantity and unit value of United States domestic mer-

chandise exports, by economic class, 1936-38 quarterly average and1947-51 268

B—45. United States general merchandise imports, by area, 1936—38 quar-terly average and 1947-51 269

B—46. United States merchandise imports for consumption, by economicclass, 1936-38 quarterly average and 1947-51 270

B—47. Indexes of quantity and unit value of United States merchandise im-ports for consumption, by economic class, 1936-38 quarterly averageand 1947-51 271

Summary:B-48. Changes in selected economic series since 1939 and 1950 272

224


Statistical Tables Relating to Employment,Production, and Purchasing Power

TABLE B-l.—Gross national product or expenditure, 1929-51


Period

1929

19301931193219331934 _

1935 •19361937 .1938 _..1939

194019411942 . . . .19431944

19451946194719481949

1950

1950— First halfSecond half

1951— First baif i _ _

1950— First quarterSecond quarterThird quarter..Fourth quarter . _ _

1951 — First quarterSecond quarter * .

Grossnationalproduct

103.8

90.975.958.355.864.9

72.282.590.284.791.3

101.4126.4161.6194.3213.7

215.2211.1233.3259. 0257.3

282.6

Personalconsump-

tion ex-penditures

78.8

70.861.249.246.351.9

56.262.567.164.567.5

72.182.391.2

102.2111.6

123.1146.9165.6177.9180.2

193.6

Grossprivate

domesticinvestment

15.8

10.25.4.9

1.32.8

6.18.3

11.46.39.9

13.918.310.95.77.7

10.728.730.242.733.0

48.9

Net foreigninvestment

0.8

.7

.2

.2

.2

.4

—.1-.1

.11.1.9

1.51.1

-.2-2.2-2.1

-1.44.68.91.9.5

-2.3

Govern-ment purchases of-

goods andservices

8.5

9.29.28.18.09.8

9.911.711.612.813.1

13.924.759.788.696.5

82.830.928.636.643.6

42.5

Seasonally adjusted annual rates

269.7295. 6

323.8

264.4275.0287.4303.7

318.5329.0

186.7200.4

205.6

184.7188.7202.5198.4

208.2203.0

44.053.8

61.8

40.147.947.360.2

59.664.0

-1.6-3.0

-.9

-1.7-1.6-3.2-2.7

-2.3.5

40.744.3

57.2

41.340.140.847.8

52.961.5

i Estimates based on incomplete data; second quarter by Council of Economic Advisers.

NOTE.—The figures beginning with 1948 are based on the revised series of national income and productof the Department of Commerce. For detail, see the "National Income Supplement to the Survey ofCurrent Business," July 1951.

Detail will not necessarily add to totals because of rounding.

Source: Department of Commerce (except as noted).

225


TABLE B-2.—Gross national product or expenditure in 1939prices, 1929-50l

[Billions of dollars, 1939 prices]

Period

1929

1930193119321933.1934

19351936-193719381939

19401941194219431944

19451946194719481949 .

1950

Totalgrossna-

tionalprod-uct

85.9

78.172.361.961.567.9

73.983.987.984.091.3

100.0115.5129.7145.7156.9

153.4138.4138.6143.5143.5

154.3

Personal consumptionexpenditures

Total

62.2

58.656.651.851.154.0

57.262.865.063.967.5

71.376.675.878.081.1

86.395.798.3

100.3102 9

108.7

Dur-able

goods

8.0

6.45.33.93.84.4

5.46.67.05.76.7

7.78.95.75.04.6

5.310.412.312.612 9

15.5

Non-dur-able

goods

29.1

27.727.525.224.927.0

28.631.832.933.435.3

37.140.141.342.644.5

47.950.249.549.7504

51.7

Serv-ices

25.1

24.523.922.722.422.6

23.224.425.124.825.5

26.527.628.830.432.0

33.235.236.438.039.6

41.6

Gross private domesticinvestment

Total

14.9

10.15.91.11.63.5

6.79.3

11.46.39.9

13.717.19.35.46.6

8.320.319.322.717.8

24.8

Newcon-

struc-tion

7.4

5.43.82.11.51.7

2.23.13.83.34.9

5.46.13.31.92.0

2.66.06.98.07.9

9.4

Pro-duc-er?'dur-able

equip-ment

6.1

4.83.31.92.02.7

3.64.85.53.94.6

6.07.24.43.65.1

6.79.9

11.812.611.6

13.2

Changein

busi-ness

inven-tories

1.5

-.2-1.1-3.0-1.8-.8

.91.42.1

-1.0.4

2.33.81.6-.1-.5

-1.04.4.6

2.1-1.7

2.2

Netfor-eignin-

vest-ment

0.8

.6

.3

.2

.1

.3

-.12

!i1.0.9

1.2.7

-.4-2.1-2.2

-1.82.74.81.4.6

Government pur-chases of goods

and services

Total

7.9

8.79.48.98.7

10.1

10.111.911.412.713.1

13.821.145.064.371.3

60.619.616.119.222.2

20.8

Fed-eral

1.3

1.51.61.72.33.1

3.04.94.45.35.2

6.113.838.358.265.4

54.612.88.5

10.913.0

11.0

Stateandlocal

6.6

7.37.87.26.47.0

7.17.16.97.47.9

7.77.36.7 |6.16.0

6.06.87.68.29.2

9.8

Pri-vategrossna-

tion'1!prod-uct 2

81.5

73.567.757.456.562.0

67.676.480.976.483.7

92.1108.2116.5125.3133.0

129.7125.6128.8133.7133.2

143.8

1 See "Survey of Current Business," January 1951, and the National Income Supplement to the "Survey,"July 1951, for explanation of conversion of estimates in current prices to those in 1939 prices.

2 Total gross national product less compensation of general government employees.NOTE.—Detail will not necessarily add to totals because of rounding.Source: Department of Commerce.

226


TABLE B-3.—Gross national product or expenditure in fast half of 1951 prices, 1929-51l

[Billions of dollars, first half of 1951 prices]

Period

1929

19301931 _193219331934

19351936193719381939 - - -

1940 - -19411942.19431944

19451946194719481949

1950


1951— First half

1950— First quarter.Second quarterThird quarterFourth quarter

1951— First quarterSecond quarter

Totalgrossna-

tionalprod-uct

166.3

149 5139.6118.5116.4128.5

142.7161. 1170.8163.5178.7

195. 9228.4261.1294.2316.7

307.0270 3269 1278.5278 3

300.2

Personal consump-tion expenditures

1H

117.5

110.2106.497.295.9

101.9

108.1119.4123.6121.7128.6

136.1146.7144.6148.5154.4

164.7183.0187 5190.7195.5

206.3

be

32fi

16.1

12.910.67.97.78.9

10.813.314.111.513.5

15.417.911.410.09.3

10.620.824.725.225.9

31.0

bJOcu

I162.8

59.659.254.453.858.2

61.668.771.072.176.0

80.086.489.091.895.9

103.1108.1106.8107.2108.8

111 4

'>&38.6

37.736.634.934.434.8

35.737.438.538.139.1

40.742.444.246.749.2

51.054.156.058.360.8

63.9

Gross private do-mestic investment

1e

32.5

21.314.23.53.35.8

14.818.324.813.921.8

29.536.720.611.312.9

16.341. tf39.347.237.0

52.6

|o

i5?

18.6

13.79.75.33.74.2

5.57.89.58.4

12.3

13.615.48.34.85.0

6.6-15.2'

17.320.119.8

23.7

•',fr I

<o303t-3"g•a £"to O.

®s.§*•aO$_t

PH

11.1

8.85.93.53.64.9

6.58.8

10.07.28.4

10.913.18.06.79.3

J2.218.021.523.021.2

24.1)«~i 5

.a1§ ccS-c•°2eg•- t>obx>§£3O

2.8

-1.2-1.4-5.3-4.0-3.3

2.81.75.3

-1.71.1

5.08.24.3-.2

-1.4

-2.58.4f4.1

-4.0

4.8

Netfor-eignin-

.vestment

-0.6

-.7-1.2-1.2-1.4-.9

-2.1-2.4-2.1

(3)5

-LO-2.9-7.1-7.6

-7.33.07.3

-1.1-2.5

-3.9

Government pur-chase? of goods

and services

*03

£

16.9

18.720.219.018.621.7

21.925.824.527.628.3

29.846.098.8

141.5157.0

133.342.735.041.748.3

45.2

Federal

3ofr

2.9

3.23.53.65.06.8

6.710.79.7

11.711.4

13.530.484.5

128.5144.3

120.428.218.824.128.6

24.3

K*»

llo pOJ4-»

~3.2 *.»-> 0>08

fc

(2)

(2)(2)(2)(2)(2)

(2)(2)(2)(2)2.8

4.824.780.1

126. 2141.7

118.824.915. 317.520.7

19.3

iiCQ

14.0

15.516.715.413.614.9

15.215.114.815.916.9

16.315.614.313.012.7

12.914.516.217.619.7

20.9


293.6306.8

323.8

288.0299.1301.0312.6

319.1328.5

203.2209.5

205.6

202.2204.2213. 1205.7

208.5202.6

28.833.2

29.2

28.628.936.230.2

31.626.9

111.2111.7

110.8

111.1111.3112.7110.7

111.6109.9

63.264.6

65.6

62.564.064.264.8

65.365.8

49.656.0

61.8

44.954.250.061.9

59.863.8

23.024.4

23.1

22.723.424.624.2

23.922.2

22.425.8

27.0

21,. 023.726. 125.6

26.627.4

4.25.7

11.8

1.27.1

— . 712.1

9.314.2

-3.8-4.2

-.9

-4.2-3.5—4 6-3.9

-2.3.5

44.645.7

57.2

45.144.042 548.9

53.161.6

23.625.0

36.1

24.123.121.928.1

32.040.1

18.020.6

31.8

17.818.117.523.6

27.935.7

21.020.7

21.2

21.020.920.620.8

21.121.4

' Estimates based on preliminary data. These estimate? represent a rough conversion of the Departmentof Commerce series in 1939 prices. (See appendix table B-2.) This was done by major components, usingthe implicit price indexes for the first half of 1951 as a base. Although it would have been preferable to rede-flate the series by minor component?, this would not substantially change the results except possibly forthe war years, and for the series on changes in business inventories.

2 Not available.3 Less than 50 million dollars.



Source: Council of Economic Advisers.

227


TABLE B-4.—Personal consumption expenditures, 1929-51


Period

1929

193019311932 _19331934.

1935 .1936193719381939 -

19401941194219431944 .

1945 . . .1946194719481949

I960- -

1950— First half.Second half

1951— First half 4

1950— First quarter _Second quarter _Third quarterFourth quarter

1951 — First quarterSecond quarter 4

Totalex-

pendi-tures

78.8

70.861.249.246.351.9

56.262.567.164.567.5

72.182.391.2

102.2111.6

123.1146.9165.6177.9180.2

193.6

Durable goods

Total

9.4

7.35.63.73.54.3

5.26.47.05.86.7

7.99.87.16.87.1

8.516.621.422.923.9

29.2

Auto-mo-bilesand

parts

3.2

2.21.6.9

1.01.4

1.92.32.41.62.1

2.73.3.7.8.9

1.14.26.67.59.4

12.2

Other

6.1

5.14.02.82.52.9

3.34.14.64.14.6

5.16.46.46.06.2

7.412.414.815.414.5

17.0

Nondurable goods

Total

37.7

34.129.022.722.326.7

29.432.935.234.035.3

37.644.052.961.067.1

74.985.895.1

100.998.7

102.3

Food'

19.7

18.114.811.411.514.3

16.318.520.019.019.3

20.724.430.535.338.9

43.050.356.659.758.6

60.9

Cloth-ing 2

9.2

7.96.85.04.65.6

5.96.56.76.67.0

7.48.8

11.013.715.3

17.118.619.120.118.9

18.8

Other

8.9

8.17.46.46.26.9

7.27.98.68.48.9

9.510.811.411.912.9

14.816.919.421.121.2

22.6

Services

Total

31.7

29.526.622.820.620.9

21.723.324.924.725.5

26.628.531.234.437.4

39.744.549.154.157.6

62.1

Hous-ing*

11.4

11.010.29.07.87.5

7.67.98.48.78.9

9.29.9

10.611.111.7

12.213.014.616.518.1

19.9

Other

20.2

18.516.413.812.713.4

14.115.416.516.016.5

17.418.720.623.325.7

27.531.434.537.639.5

42.2

Seasonally adjusted annual rates "

186. 7200.4

205.6

184.7188.7202.5198.4

208.2203.0

26.431.8

29.2

26.326.634.329. -1

31.527.0

10.913.6

12.0

10.411.414.312.9

12.511.5

15.618.3

17.2

15.915.220.016.5

19.015.5

99.4105.2

110.8

98.4100.4105.5104.9

111.5110.0

59.262.6

67.0

58.759.762.662.7

67.067.0

18.219.4

19.8

17.918.519.619.2

20.419.2

22.023.2

24.0

21.822.223.323.0

24.123.8

60.863.4

65.6

60.161.662.764.0

65.266.0

19.520.3

21.0

19.319.720.120.5

20.921.2

41.443.0

44.6

40.841.942.643.5

44.344.8

1 Includes alcoholic beverages.2 Includes shoes and standard clothing issued to military personnel.3 Includes imputed rental value of owner-occupied dwellings.« Estimates based on incomplete data; second quarter by Council of Economic Advisers.




228


TABLE B-5.—Gross private domestic investment, 7929-57


Period

1929

19301931193219331934

19351936198719381939

19401941194219431944

1945194619471948 . . _...1949

1950

1950— 1st half2d half

1951— 1st half 8

1950— 1st quarter....2d quarter...3d quarter4th quarter ...

1951— 1st quarter....2d quarter *__

Totalgrosspri-vate

domes-tic

invest-ment

15.8

10.25.4.9

1.32.8

6.18.3

11.46.39.9

13.918.310.95.77.7

30.728.730.242.733.0

48.9

Nonfarm producers'plant and equipment

Total i

9.8

7.64.62.52.33.1

3.85.26.64.75.7

7.49.35.84.66.3

8.715.520.323.422.0

25.6

Equip-ment2

5.6

4.32.81.61.62.2

2.93.94.73.44.0

5.36.64.13.54.7

6.310.714.616.715.6

18.8• • • ' &

Con-struetion i •

4.2

3.41.81.0.7.9

1.01.31.91.41.7

2.12.71.71.11.6

2.4- 4.8

5.76.76.4

6.8

Farm equipment andconstruction

Total 4

1.1

.9

.5

.3

.3

.4

.6

.81.0.8.8

1.01.31.0.9

1.2

1.42.43.84.64.7

4.8

Equip-ment

0.8

.7

.4

.3

.3

.3

.5

.6

.8

.6

.6

.81.0.7.6.9

1.1-1.6

2.53.23.4

3.6

Con-struc-tion

0.3

.2

.1O0

.1

.2

.2

.2

.2

.2

.3

.3

.3

.3

.3

.91.31.41.3

1.2' , .1

Resi-dential

con-struc-tion(non-

farm)! *

2.8

1.412.5.3

.71.11.41.52.7

3.03.41.81 0.8

1 14.06.3868.3

12.6

Otherpri-vatecon-struc-tion •

0.5

.5

.4

.2

.1

.1

.1

.1

.2

.2

.2

.2

.3

.1(7).1

.2

.6

.71.01.3

1.5

Net change in busi-ness inventories

Total

1.6

-.3-1.4-2.6-1.6-1.1

.91.02.3

-1.0.4

2.33.92.1-.9-.8

-.76.1-.85.0

-3.2

4.3

Non-farmafter

revalu-ation

adjust-ment

1.8

(7)-1.7-2.6-1.3

'.2

.42.11.8

-1.1.3

2.03.4.8

-.5-.3

-.66.31.43.7

-2.5

3.6

Farm

-0.3

-.2.3

°,-1.3

.5-1.1

.5

.1

.1

.2

.51.3

-.4-.5

-.1-.2

-2.21.3-.7

.8


44.053.8

61.8

40.147.947.360.2

59.664.0

23.028.2

31.0

22.024.027.528.9

30.431.6

16.820.9

22.8

15.817.820.521.3

22.423.2

6.27.2

8.2

6.26.27.07.5

8.18.4

4.65.0

5.4

4.34.85.24.8

5.35.5

3.43.8

4.2

3.13.64.03.7

4.14.3

1.21.2

1.2

1.21.21.21.1

1.21.2

11.813.4

11.8

11.212.413.713.1

12.910.7

1.51.6

1.8

1.51.51.51.6

1.71.9

3.15.6

11.8

1.15.1-.711.8

9.314.3

2.84.4

10.6

1.14.4

-1.810 6

8.113.2

.41.2

1.2

(7)

i!i1.2

1.21.1

i Items for 1945 and earlier years are not comparable with those for later years, nor with figures shown inappendix tables B-19 and B-20.

3 Total producers' durable equipment less "farm machinery and equipment" and farmers' purchases of"tractors" and "business motor vehicles." These figures assume that farmers purchase 85 and 15 percent,respectively, of all tractors and motor vehicles used for productive purposes.

3 Industrial buildings, public utilities, gas- and oil-well drilling, warehouses, office and loft buildings,stores, restaurants, and garages. Includes hotel construction prior to 1946 only.

4 Farm construction (residential and nonresidential) plus "farm machinery and equipment" and farmers'purchases of "tractors" and "business motor vehicles." (See footnote 2.)

5 IncI udes construction of hotels, tourist cabins, motor courts, and dormitories since 1946 only.fl Includes religious, educational, social and recreational, hospital and institutional, miscellaneous non-

residential, and all other private.' Less than 50 million dollars.• Estimates based on incomplete data; second quarter by Council of Economic Advisers.

NOTE.—The figures beginning with 1948 are based on the revised scries of national iocome and productof the Department of Commerce. For detail, see the "National Income Supplement to the Survey ofCurrent Business," July 1951.

Detail will not necessarily add to totals because of rounding.Source: Department of Commerce (except as noted).

229


TABLE B-6.—National income by distributive shares, 1929-51


Period

1929

19301931193219331934

19351936 - -193719381939

19401941 _..194219431944

19451946194719481949

1950


1951— First half *

1950— First quarter _ _Second quarter _Third quarterFourth quarter _

1951 — First quarterSecond quarter 8 .. ..

Totalnation-

alin-

come1

87.4

75.058.941.739.648.6

56.864.773.667.472.5

81.3103.8137.1169.7183.8

182.7180.3198.7223.5216.7

239.0

Com-pen-

sationof em-ploy-ees2

50.8

46.539.530.829.334.1

37.142.747.744.747.8

51.864.384.9

109.2121.2

123.0117.1128.0140.2139.9

153. 3

Business and pro-fessional incomeand inventory

valuationadjustment

Total

8.3

7.05.33.22.94.3

5.06.16.66.36.8

7.79.6

12.615.017.2

18.720.619.822.120.9

22.3

In-come

ofunin-corpo-ratedenter-prises

8.1

6.34.72.93.44.3

5.06.26.76.16.9

7.810.212.915.117.2

18.822.421.322.520.3

23.8

In-ven-toryvalu-ation

ad-just-ment

0.1

.8

.6

.3-.5-.1

-.1t(«).2

—.2

-.1-.6-.4

-!l

-.1-1.8-1.5-.4

. ( >

-1.6

In-come

offarmpro-prie-tors

5,7

3.92.91.72.32.3

4.93.95.64.44.5

4.96.9

10.511.811.8

12.514.815.617.713.0

13.7

Ren-tal income

ofper-sons

5.8

4.83.62.52.02.1

2.32.73.13.33.5

3.64.35.46.16.5

6.36.67.17.57.5

8.0

Corporate profitsand inventory

valuationadjustment

Total

10.3

6.61.6

-2.0-2.0

1.1

3.04.96.24.35.8

9.214.619.924.324.0

19.218.324.731.730.5

36.2

Corpo-rateprof-its

beforetax «

9.8

3.3-.8

-3.0.2

1.7

3.25.76.23.36.5

9.317.221.125.124.3

19.723.530.533.828.3

41.4

In-ven-toryvalu-ationad-

just-ment

0.5

3.32.41.0

-2.1-.6

-.2-.7(4)1.0-.7

-.1-2.6-1.2-.8-.3

-.6-5.2-5.8-2.1

4.1

-5.1

Netinter-

est

6.5

6.25.95.45.04.8

4.54.54.44.34.2

4.14.13.93.43.1

3.02.93.54.34.9

5.4


225.0253.0

273.6

219.3230.6245.8260.1

269.4277.8

145.4161.2

174.6

142.2148.6157.3165.2

172.1177.1

21.523.1

23.9

21.121.923 223.0

24.123.7

22.125.6

25.6

21.322.926.424.8

27.324.0

-.6-2.5

-1.8

-.2-1.0-3.2-1.8

-3.2-.3

12.415.0

16.8

12.512.214.315.8

16.417.1

7.88.2

8.2

7.87.88.18.4

8.38.2

32.639.8

44.4

30.534.837.442.2

42.946.0

34.748.0

50.2

31.937.545.750.3

51.848.5

-2.0-8.2

-5.7

-1.4-2.7-8.3-8.2

-8.9-2.5

5.25.6

5.6

5.25.35.55.6

5.65.7

1 National income is the total net income earned in production by individuals and businesses. The con-cept of national income currently used differs from the concept of gross national product in that it excludesdepreciation charges and other allowances for business and institutional consumption of durable capitalgoods, and indirect business taxes.

2 Includes wage and salary receipts and other labor income (see appendix table B-7), and employerand employee contributions for social insurance (see appendix table B-8).

* See appendix table B-34 for corporate tax liability (Federal and State income and excess profits taxes)and corporate profits after taxes.

4 L*'ss than 50 million dollars.« Estimates based on incomplete data; second quarter by Council of Economic Advisers.

NOTE.—The figures beginning with 1948 are based on the revised series of national income and productof the Department of Commerce. For detail, see the "National Income Supplement to the Survey of Cur-rent Business," July 1951.



230


TABLE B-7.—Personal income, 1929-51


Perio-1

1929

19301931193219331934

19351936193719381939 . . .

19401941..194219431944

19451946194719481949

1950


1951— First half «

1950— First quarterSecond quarter...Third quarterFourth quarter. _.

1951— First quarterSecond quarter 5_.

Totalpersonalincome

85.1

76.264.849.346.653.2

59.968.474.068.372.6

78.395.3

122.7150. 3165.9

171.9177.7191.0209.5205.1

224.7

Salaries,wages,

and otherlabor

income 1

50.5

46.339.230.529.033.8

36.842.145.942.845.7

49.561.581.4

104.5116.2

116.9111.1122.3134. 9134.2

146.4

Proprie-tors' and

rentalincome J

19.7

15.711.87.47.28.7

12.112.615.414.014.7

16.320.828.432.835.5

37.542.042.447.341.4

44.0

Dividendsand

personalinterestincome 3

13.3

12.611. 19.18.28.6

8.610.110.38.79.2

9.49.99.7

10.010.6

11.413.214.516.017.1

19.3

Transferpayments

1.5

1.52.72.22.12.2

2.43.52.42.83.0

3.13.13.23.03.6

6.211.411.811.312.4

15.1

Nonagri-culturalpersonalincome *

76.8

70.060.146.243.049.5

53.462.866.562 166.3

71.586.1

109.4135.2150.5

155.7158.8170.8187.1187.6

206.6

Agri-culturalincome

8.3

6.24.73.13. 63.7

6.55.67.56.26.3

6.89.2

13.315.115.4

16.218.920.222.417.5

18.1


216.7232.8

247.0

216.3217.1227.3238.3

244.1250.0

138.7154.1

166.2

135.6141.8150.3157.9

163.8168.5

41.646.4

48.9

41.441.845.647.2

48.849.0

18.020.5

19.6

17.618.419.621.4

19.220.0

18.411.8

12.4

21.715.011.811.9

12.312.5

200.0213.1

225.8

199.5200.6208.5217.7

223.2228.5

16.619.8

21.2

16.816.518.820.6

20.921.5

1 Differs from "compensation of employees" in appendix table B-6, in that it excludes employer andemployee contributions to social insurance. Includes wage and salary receipts and other labor income-compensation for injuries, employer contributions to private pension and welfare funds, pay of militaryreservists not on full-time active duty (pay for full-time active duty included in military wages and sal-aries), directors' fees, jury and witness fees, compensation of prison inmates, Government payments toenemy prisoners of war, marriage fees to justices of the peace, and merchant marine war-risk life and injuryclaims.

2 See appendix table B-6, for major components.3 See appendix table B-34, for dividend payments.* Nonagrictiltural income is personal income exclusive of net income of unincorporated farm enterprises

farm wages, agricultural net rents, agricultural net interest, and net dividends paid by agriculturacorporations.

fi Estimates based on incomplete data; second quarter by Council of Economic Advisers.NOTE.—The figures beginning with 1948 are based on the revised series of national income and product

of the Department of Commerce. For detail, see the "National Income Supplement to the Survey of Cur-rent Business," July 1951.



231


TABLE B-8.—Relation of national income and personal income, 1929—51


Period

1929

1930 . .1931193219331934

19351936193719381939 ,.

1940 _1941194219431944

1945 . .1946194719481949— „

1950

I960— First halfSecond half

1951 — First half *

1950 — First quarterSecond quarterThird quarterFourth quarter __ _ .

1951— First quarter.Second quarter 8_ _ _ _

Nation-al

income

87 4

75.068.941.739.648.6

56.864 773.667.472.5

81.3103.8137.1169.7183.8

132.7180.3198.7223.5216.7

239.0

Less:

Corpo-rate

profitsand in-

ven-toryvalu-ation

adjust-ment

10 3

6.61.6

-2.0-2.0

1.1

3.04.96.24.35.8

9.214.619.924.324.0

19.218.324.731.730.5

36.2

Contri-butions

tosocialinsur-ance

0 2

.3

.3

.3

.3

.3

.3

.61.82.02.1

2.32.83.54.55.2

6.16.05.75.25.7

7.0

Excessof

wageac-

crualsoverdis-

burse-ments

0.2-.2

0)0)(00)0)

0)

Plus:

Gov-ern-rrenttrans-

ferpay-

ments

0.9

1.02.01.41.51.6

1.82.91.92.42.5

2.72.62.72.53.1

5.610.911.110.511.6

14.3

Netinter-

estpaidby

gov-ern-

ment

1.0

.0

.1

.1

.2

.2

.11

.2

.2

.2

.3

.3

.52.12.8

3.74.44.44.54.6

4.7

Divi-dends

5.8

5.54.12.62.12.6

2.94.64.73.23.8

4.04.54.34.54.7

4.76.86.67.37.6

9.2

Busi-ness

trans-fer

pay-ments

0.6

.5,6.7.7.6

.6

.6

.6

.4

.5

.4

.5

.5

.5

.5

,5.6.7.7.7

.8

Equals:Per-

sonalincome

85.1

76.264.849.346.653.2

59.968.474.068.372.6

78.395.3

122.7150.3165.9

171.9177.7191.0209.5205.1

224.7


225.0253.0

273.6

219.3230.6245.8260.1

269.4277.8

32.639.8

44.4

30.534.837.442.2

42.946.0

6.77.2

8.4

6.66.87.07.4

8.38.6

0)(0

0)

0)0)

88

17.611.1

11.6

21.014.211.011.1

11.511.7

4.74,7

4.8

4.74,74.74.7

4.84,8

8.110.2

9.2

7.88.49.4

11.1

8.89.5

.7

.8

.8

.7

.7

.8

.8

.8

.8

216.7232.8

247.0

216.3217.1227.3238.3

244.1250.0

1 Less than 50 million dollars.« Estimates based on incomplete data; second quarter by Council of Economic Advisers.

NOTE.--The figures beginning with 1948 are based on the revised series of national income and productof the Department of Commerce. For detail, see the "National Income Supplement to the Survey ofCurrent Business," July 1951.



232


TABLE B-9.—Disposition of personal income, 1929-51


Period

1929

19301931 . -193219331934

19351936193719381939 . .

19401941194219431944

19451946 .19471948. _1949

1950

1950— First half .Second half ... _ _ ~

1951— First half i_. _ . . . .

1950— First quarter-Second quarter... _.Third quarterFourth quarter

1951— Frst quarter .. ..Second quarter * .

Personalincome

85.1

76264.849 346.653.2

59.968.474.068.372.6

78.395.3

122.7150.3165.9

171.9177.7191. 0209.5205.1

224.7

Less:Personaltax andnontax

payments

2.6

2.51.91.51.51.6

1.92.32.92.92.4

2.63.36.0

17.818.9

20 9is. 821.521.118.6

20.5

Equals:Disposa-

blepersonalincome

82.5

73.763.047.845.251.6

58.066.171.165.570.2

75.792.0

116.7132 4147.0

151.1158.9169. 5188.4186.4

204.3

Less:Personal

con-sumptionexpendi-

tures

78.8

70.861.249.246.351.9

56.262.567.164.567.5

72.182.391.2

102.2111.6

123.1146.9165. 6177.9180.2

193.6

Equals:Personal

netsaving

3.7

2.91.8

-1.4-1.2-.2

1.83.63.91.02.7

3.79 8

25.630.235.4

28.012.03.9

10.56.3

10.7

Netsaving aspercentof dis-posablepersonalincome

4.5

3.92.9

-2.9-2.7-.4

3.15.45.51.53.8

4.910.721.922.824.1

18.57.62.35.63.4

5.2


216.7232.8

247.0

216.3217.1227.3238.3

244.1250.0

19.321.6

26.9

19.019 520.223.1

26.627.2

197.4211.2

220.2

197. 3197.5207.1215.2

217.5222.8

186.7200.4

205.6

184.7188.7202.5198.4

208.2203.0

10.710.7

14.6

12.58.94.6

16.8

9.319.8

5.45.1

6.6

6.34.52.27.8

4.38.9

i Estimates based on incomplete data; second quarter by Council of Economic Advisers.NOTE.—The figures beginning with 1948 are based on the revised series of national income and product of

the Department of Commerce. For detail, see the "National Income Supplement to the Survey of CurrentBusiness," July 1951.



233


TABLE B—10.— Total and per capita disposable personal income in current and fast half of 1951prices, 1929-51

Period

1929

19301931193219331934

19351936 _-.1937 _.._19381939— _

19401941 . .194219431944

1945.19461947 _ . .19481949 .

1950

1 950— First half _ __.Second half


1950— First quarterSecond quarterThird quarter.Fourth quarter

1951— First quarter-.Second quarter 3_

Total disposablepersonal income(billions of dollars)

Currentprices

82.5

73.763.047.845.251.6

58.066.171.165.570.2

75.792.0

116.7132. 4147.0

151.1158.9169.5188.4186.4

204.3

First halfof!951prices 1

123.9

115.9110.795.694.8

102.0

112.0126.1130.7123.1133.2

142.0162.5184.1191.6203.0

201.2196.4191.1201.5202.0

217. 8

Per capita disposableincome (dollars)

Currentprices

678

599508383360408

456516552505536

573690866968

1,062

1,0801,1241.1761,2851,250

1,347

First halfof 1951prices l

1,017

942892766755807

880985

1,015948

1,018

1,0751,2181,3651,4011,467

1,4381, 3891,3261,3741,354

1,436


197.4211.2

220.2

197.3197.5207.1215.2

217.5222.8

214.8220.7

220.2

215.6214.0217.8223.5

217.7222.6

1, 3071,387

1,434

1,3081, 3051,3621,409

1,4181,447

1,4221,449

1,434

1,4291,4141, 4321,463

1,4191,445

Population(thousands)2

121, 770

123,077124. 040124. 840125. 579126, 374

127, 250128,053128. 825129. 825130, 880

132, 114133, 377134, 831136, 719138, 390

139, 934141,398144,129146. 621149, 149

151, 689

151,038152,317

153, 594

150,847151,390152,068152, 774

153,396154,010

1 Dollar estimates in current prices divided by an over-all price index for personal consumption expend!tures. This price index was based on Department of Commerce data shifted from a 1939 base.

2 Estimated population of continental United States including armed forces overseas; annual data as ofJuly 1 and quarterly and semiannual data as of middle of period.

s Estim.tes based on incomplete data; second quarter by Council of Economic Advisers.NOTE.—The figures beginning with 1948 are based on the revised series of national income and product of

the Department of Commerce. For detail, see the "National Income Supplement to the Survey of CurrentBusiness," July 1951.

Sources: Department of Commerce and Council of Economic Advisers.

234


TABLE B-ll.—Labor force, employment, and unemployment, 1929-51

Period

Monthly average:1929

1930 -. -.193119321933 -_-1934

19351936193719381939

1940 — _1941194219431944

19451946194719481949

1950


1951— First half

1950 — JanuaryFebruaryMarchAprilMay _JuneJuly _AueustSeptemberOctoberNovember ..December

1951 — JanuaryFebruaryMarchAprilMayJune -

Totallaborforce

(includ-ing

armedforces) *

Armedforces i

Civilian labor force

Totalcivilianlaborforce

Employment a

Total Agri-cultural

Nonagri-cultural

Unem-ploy-ment

Thousands of persons, 14 years of age and over

49, 440

50, 08050. 68051, 25051, 84052, 490

53, 14053, 74054, 32054. 95055,600

56. 03057, 38060. 23064. 41065, 890

65, 14060. 82061,60862. 74863, 571

64,599

63. 77665, 422

(3)

62, 83563. 00363, 02163, 51364. 10866,17765. 74266, 20465. 02065. 43865. 45364, 674

00(3)(3)

(3)(3)(3)

260

260260250250260

270300320340370

390M703. 8208,870

11, 260

11, 2803,3001,4401.3061,466

1,500

1.347. 1, 653

(3)

1,4081,3661, 3461.3301,3201,3111,3151.3371.4531.7341,9412,136

8(')(3)(3)(3)

49, 180

49.82050, 42051, 00051, 59052, 230

52, 87053, 44054.00054, 61055,230

55. 64055. 91056. 41055. 54054, 630

53,86057, 52060.10861,44262, 105

63, 099

62, 42963,769

62,254

61,42761. 63761. 67562. 18362. 78864. 86664. 42764. 86763. 56763. 70463, 51262, 538

61. 51461.31362. 32561. 78962. 80363, 783

47, 630

45. 48042. 40038. 94038, 76040,890

42, 26044,41046, 30044.22045, 750

47, 52050. 35053, 75054, 47053, 960

52,82055. 25058, 02759, 37858, 710

59, 957

58, 55561, 358

60, 189

56, 94756. 95357. 55158. 66859. 73161. 48261.21462, 36761,22661. 76461. 27160, 308

59,01058. 90560. 17960. 04461. 19361, 803

10, 450

10. 34010. 29010, 17010, 0909,900

10, 11010, 0009.8209,6909,610

9,5409,1009.2509,0808,950

8,5808.3208,2667,9738,026

7,507

7,2337,781

6,744

6,1986.2236.6757,1958,0629.0468,4408.1607.8118.4917, 5516,234

6.0185,9306.3936,6457,4408,035

37, 180

35. 14032,11028. 77028, 67030, 990

32, 15034,41036, 48034, 53036, 140

37.98041.25044. 50045. 39045, 010

44. 24046. 93049, 76151.40550,684

52, 450

51, 32253, 578

53, 446

50. 74950. 73050, 87751.47351, 66952. 43652. 77454. 20753.41553. 27353. 72154, 075

52. 99352. 97653, 78553. 40053. 75353,768

1,550

4,3408.020

12. 06012.83011, 340

10. 6109,0307,700

10, 3909,480

8,1205. 5602.6601,070

670

1.0402.2702.1422.0643,395

3,142

3,8742,410

2,065

4,4804,6844.1233.5153.0573.3843.2132,5002,3411,9402,2402,229

2,5032,4072,1471.7441,6091,980

Unem-ploy-ment

as per-cent oftotal

civilianlaborforce

3.2

8.7I 15.9

23.624.921.7

20.116.914.3

! 19.017.2

14.69.94.71.91.2

1.93.93.63.45.5

5.0

6-23.8

3.3

7.37.66.75.74.95.25.03.93.73.03.53.6

4.13.93.42.82.63.1

1 Data for 1940-50 exclude about 150,000 members of the armed forces who were outside the continentalUnited States in 1940 and who were therefore not enumerated iti the 1940 census. This figure is deducted bythe Census Bureau from its current estimates for comparability with 1940 data.

2 Includes part-time workers and those who had jobs but were not at work for such reasons as vacation,illness, bad weather, temporary lay-off, and industrial disputes.

3 Not available. \

NOTE.—Labor force data are based on a survey made during the week which includes the 8th of the month.Detail will not necessarily add to totals because of rounding.Sources: Department of Labor (1929-39) and Department of Commerce (1940-51).

235


TABLE B—12.—Number of wage and salary workers in nonagricultural establishments, 1929—51l

[Thousands of employees]

Period


19301931...19321933.1934

1935 .19361937.19381939

194019411942 .1943.1944

1945...1946194719481949

1950

1950-First halfSecond half—

1951— First half < _ _ _ _

1950— JanuaryFebruaryMarchAprilMayJuneJulyAugust _SeptemberOctoberNovemberDecember

1951 — JanuaryFebruaryMarchApril *May <June 4

Totalwageand

salarywork-

ers

31, 041

29, 14326. 38323. 37723. 46625, 699

26. 79228. 80230. 71828. 90230, 287

32, 03136, 16439. 69742, 04241, 480

40, 06941, 41243, 37144, 20143, 006

44, 124

42. 71045, 538

45, 841

42, 12541, 66142, 29542. 92643', 31143, 94544. 09645.08045. 68445, 89845, 87346, 595

45. 24645,39045, 85045,96046, 19146,410

Manufacturing

Total

10, 534

9,4018,0216,7977,2588,346

8,9079.653

10. 6069,253

10, 078

10, 78012. 97415.05117,38117, 111

15, 30214, 46115, 24715. 28614, 146

14,884

14,22015, 549

15,902

13, 98013. 99714, 10314, 16214. 41314, 6K614, 77715, 45015,68515. 82715, 76515, 789

15, 78415. 97816,02215, 92815,83915,864

Dur-able

goods

C)

(')(»)(')(')(')

(*)

8(3)

4,683

5,3376,9458.804

11,07710, 858

9,0797,7398,3738,3157,465

8,008

7,5688,449

8,914

7,3427.3247,4187,5487,8097,9647,9788,2948,4238, 6188,6648,717

8,7428,8778,9698,9778, 9598,960

Non-dura-

blegoods

0

C)(')(8)(')(»)(8)(»)(3)(3)

5,394

5,4436.0286.2476,3046,253

6.2226,7226.8746,9706,681

6,876

6,6537,100

6,988

6,6386.6736,6856.6146,6046.7026.7997. 1567,2627,2097.1017,072

7,0427,1017,0536, 9516,8806,904

Min-ing

1,078

1,000864722735874

888937

1,006882845

916947983917883

826852943981932

904

870939

921

«861«595

938939940946922950946939938937

932930924910912917

Con-tractcon-

struc-tion

1,497

1, 3721,214

970809862

9121,1451,1121. 0551,150

1,2941.7902.1701, 5671,094

1,1321,6611.9822.1652,156

2,318

2.0702,565

2,429

1,9191.8611.<W72.0762.2452,4142. 5322.6292. 6262,6312,5712,403

2,2812.2282.3262,4722. 5922,674

Trans-porta-tionand

publicutili-ties

3, 907

3,6753.2432. 8042.6592,736

2,7712. 9563,1142.8402,912

3.0133.2483,4333. 6193,798

3,8724,0234,1224,1513,977

4,010

3,9034,117

4,117

3.8693. 8113.8733,9283,8854,0234,0624.1204.1394,1324,1234,125

4,0724,0824,1124,1324,1394,164

Trade*

6,401

6,0645,5314.9074.99Q5,552

5,6926.0766, 5436. 4536,612

6,9407.4167,3337.1897,260

7,5228,6029, 1969.4919,438

9,524

9,2819,766

9,640

9,2469,1529.2069. 3469.3269.4119.3909,4749,6419, 7529,896

10, 443

9. 5929. 5549,7139.6189.6709,695

Fi-nance

1,431

.398

.333,270,225,247

,262.313,355.347,382

,419,462,440,401,374

,394,586,641,716

1,763

1,812

1,7971,827

1,860

1,7721,7771,7911.8031,8121.8271,8311, 8371,8271,8211,8201,828

1,8311,8391,8541,8651,8751,893

Serv-ice »

3,127

3.0842,9132 6«22.6142,784

2, 8833,0603. 2333,1963,321

3,4773.7053,8573.9193,934

4.0554,6214, 7F64.7994,782

4,761

4,7464,776

4,728

4,7014,6964.7084,7574.7904.8264.8414,8274.8164,7574,7234,694

4.6664,6574,6824. 7434,7874,830

Gov-ern-

ment(Fed-eral,

State,and

local)

3,066

3,1493,2643 2253.1673,298

3,4773 6623.7493 8763,987

4.1924.6225.4316.0496,026

5.9675.6075,4545,6135,811

5,910

5,8225,998

6,245

5,7775,7425, 7695,9155,9005,8325.7415,7936.0046,0396,0376,376

6,0836,1226,2176.2926,3776,373

i Includes all full- and part-time wage and salary workers in nonagricultural establishments who workedor received pay during the pay period ending nearest the 15th of the month. Excludes proprietors, self-employed persons, domestic servants, and personnel of the armed forces. Not comparable with estimatesof nonagricultural employment of the civilian labor force reported by the Department of Commerce(appendix table B-11) which include proprietors, self-employed persons, and domestic servants, whichcount persons as employed when they are not at work because of industrial disputes, bad weather, or tem-porary lay-offs, and which are based on an enumeration of population, whereas the estimates in this tableare based on reports from employing establishments.

* Data for the trade and service divisions, beginning with 1939, are not comparable with data shown forearlier years because of the shift of the automotive repair service industry from the trade to the servicedivision.

* Not available.« Estimates based on incomplete data.» Data reflect work stoppages in bituminous coal mining.NOTE.—Detail will not necessarily add to totals because of rounding.Adjustments have been made to levels indicated by data of unemployment insurance agencies and the

Bureau of Old-Age and Survivors Insurance through 1947, and have been carried forward from 1947 bench-mark levels, thereby providing consistent series.

Source: Department of Labor.

236


TABLE B-13.—Average weekly hours in selected industries, 1929-51

Period


19301931 . .193219331934 . . .

19351936-.193719381939

1940194119421943 _ .1944

19451946194719481949

1950

1950— First halfSecond half. _

1951— First half *.._

1950 — JanuaryFebruaryMarchAprilMay.. .JuneJulyAugustSeptember- _.OctoberNovember. . .December

1951— JanuaryFebruaryMarchApril *May<June *

Manufacturing

Total

44.2

42.140.538.338.134.6

36.639.238.635.637.7

38.140.642.944.945.2

43.440.440.440.139.2

40.5

39.941.1

40.9

39.739.739.739.739.940.540.541.241.041.341.141.4

41.040. fl41.141.040.740.8

Durablegoods

0)

0)0)32.634.833.9

37.341.040.035.038.0

39.342.145.146.646.6

44.140.240.640.539.5

41.2

40.541.8

41.8

40.040140.240.740.841.341.141.841.742.141.842.2

41.541.641.942.041.741.9

Non-durablegoods

0)

0)0)41.940.035.1

36.137.737.436.137.4

37.038.940.342.543.1

42.340.540.139.638.8

39.7

39.140.2

89.8

39.439.339.238.538.939.539.840.540.140.340.340.5

40.240.040.039.639.339.4

Bitumi-nouscoal

mining

38.4

33.528.327.229.527.0

26.428.827.923.527.1

28.131.132.936.643.4

42.341.640.738.032.6

35.0

32.336.1

34.5

«24.5»25.4

39.236.034.134.734.635.535.536.136.438.5

37.634.133.634.033.4(0

Build-ingcon-

struc-tion

0)

0)0)0)

&•30.132.833.432.132.6

33.134.836.438.439.6

39.038.137.6

»37.336.7

36.3

35.437.1

36.4

34.833.734.535.636.537.036.937.636.737.437.336.7

36.735.335.836.837. 60)

Class Isteamrail-

roads

44.8

43.141.138.938.840.4

41.142-543.242.543.4

44.045.646.948.749.1

48.545.946.346.143.5

40.8

40.541.0

0)

39.839.841.639.940.241.939.442.740.541.841.440.0

42.241.242.00)0)(')

Tele-phone

0)

0)0)(00)0)

0)0)38.838.939.1

39.540.140.541.942.3

(2)39.437.439.238.5

38.9

38.739.1

38.9

38.538.638.538.738.939.139.439.339.639.438.039.1

38.939.238.938.738.9(0

Whole-sale

trade

0)

0)0)(00)V1)

0)0)100)0)

88(0

0)(')41.040.940.7

40.7

40.440.9

40.7

40.640.340.340.140.440.640.940.940.740.940.841.2

40.840.640.640.740.9(0

Retailtrade

0)

0)i1)0)0)0)

o880)0)0)0)0)

0)0)40.340.340.4

40.5

40.440.6

40.0

40.440.440.340.240.440.941.241.140.440.340.040.7

40.340.139.740.039.90)

Hotels(year-

round)

(0

(00)

8(0

80)<ro0)

0)0)0)0)0)

0)0)45.244.344.2

43.9

43.943.9

43.4

43.943.843.844.044.143.843.844.043.844.043.743.9

43.443.243.343.543.4

'(')

> Not available.* Average for year not available because new series was started in April 1945. Beginning with June 1949

data relate to nonsupervisory employees only.* Not strictly comparable with previous data.4 Estimates based on incomplete data.* Data reflect work stoppages, or 3-day workweek.

NOTE.—Data are for production workers in manufacturing and mining, hourly-rated employees in rail-roads, and for nonsupcrvisory employees in other industries. Data are for payroll periods ending closest tothe middle of the month except in railroads whore monthly data are used.

Adjustments have been made to levels indicated by data of unemployment insurance agencies and theBureau of Old-Age and Survivors Insurance through 1947, and have been carried forward from 1947 bench-mark levels, thereby providing consistent series.

The half-year data are straight arithmetic averages of the monthly figures and not strictly comparablewith the annual averages which have been weighted by data on man-hours.


237


TABLE B-14.—Average hourly earnings in selected industries, 1929—51

Period

Monthly average:1929 ' _ _ _

1P30193119.°.219331934 _.

1935193619?719381939

194Q19 H1942 . _19431944 _ .

1945 .1946194719481949

1950

1950— First hn IfSecond half...

1951— First half «...

1950 — JanuaryFebruaryMarchAprilMayJuneJulyAugust _SeptemberOctoberNovember...December

1951— January.FebruaryMarchApril 8...May 6June 8

Manufacturing

Total

$0. 566

.552

.515

.446

.442

.532

.550

.5G6

.624

.627

.633

.661

.729

.853om

1.019

1. 0231.0861. 2371 3501.401

1. 465

1.4321.494

1.576

1.4181.4201.4241.4341.4421.4531.4621.4641.4791.5011.5141.543

1.5551.5611.5711.5791.5861.604

Dura-ble

goods

(8)

(2)(2)

$0 497.472. 556

.577

. 58^

.674

.686

.698

.724

.808

.9471. 0591.117

1.1111. l.r>61.2921.4101.469

1.537

1. 4971.570

1.655

1. 4851.4831.4861.4991.5091.5221.5331.5391.5621.5771.5871.619

1.6301.6391.6541.6601.6641.685

Non-durablegoods

(')

(2)(2)

$0. 420.427.515

.530

.529

.577

.584

.582

.602

.640

.723

.803

.861

.9041.0151.1711. 2781. 325

1,378

1.3541.399

1.467

1.3431.3501. 3531.3551.3581. 3051.3751.3741.3791.4041.4191.443

1.4561.4581.4601.4661.4761.488

Bitumi-nouscoal

mining

$0. 681

.684

.647

.520

.501

.673

.745

.794

.8-F6

.878

.886

.883

.993

.059

.139

.186

.240

.401

. 6361.8981,941

2.010

1.9912.016

2.186

1.9331.9622.0092.0222.0052.0152.0142.0012.0262.0222. 0132.020

2.0382.2192.2222.2342.219(2)

Build-in? con-

struc-tion

(2)

(2>(2)(2)(2)

$0. 795

.815

.824

.903

.90S

.932

.9581.0101.1481. 2521.319

1.3791.4731.681

« 1.8481.935

2. 031

1.9002. 065

2.161

1.9761.9881.9951.9861.9981.9952.0062.0212.0672.0822.0932.120

2.1352.1572.1632.1702.182(2)

Class Istrainrail-

roads

$0.636

.644

.651

.600

. 595

.602

.651

.659

.676

.712

.714

.717

.751

.824

.897

.938

.9421.1161.1701. 3091.419

« 1. 549

« 1. 5448 1. 554

(2)

1.5501.5671.5321.5461.5361.5321.5531.5331.5601.5441.5611.575

1.6081.6871.702(2)

8

TVle-phone

(2)

(2)

§8(2)(2)

$0. 774.816.822

.827

.820

.843

.870

.911

0)1.1241.1971.2481.345

1.398

1.3821. 414

1.455

1.3801.3911.3761.3811.3811.3861.3951.3921.4091.4261.4221.440

1.4501.4691.4531.4501.451(2)

Whole-sale

trade

(2)

(2)

8(2)(2)

(2)

8(2)(2)(2)(2)(2)(2)(2)

8$1. 268

1. 3591. 414

1.483

1. 4561.508

1.567

1.4321.4461.4531.4661.4631.4761.4941.4891.4971.5081.5191.541

1.5551.5671.5671.5751.573(2)

"Retailtrade

(2)

(2)(2)(2)(2)(2)

(2)(2^

(2)(2)(2)

(2)(2)(2)(2)(2)

(2)(2)

$1.0091.0881.137

1.176

.156

.194

.241

.153

.145

.148

.156

.162

.175

.189

.192

.200

.199

.198

.187

.237

. 236

.233

.248

.253(2)

Hotels(year-

round)!

f2)

(2)

8888(2)

(2)(2)(2)(2)(2)

(2)(«>

$0. 650.7n9.743

.771

.758

.784

.806

.753

.765

.755

.756

.756

.761

.765

.771

.783

.788

.795

.801

.804

.811

.801

.806

.806(2)

nents only; additional value of room, board, uniforms, and tips not included.3 Not available.* Not available. Series beginning April 1945 includes only employees subject to provisions of the Fair

Labor Standards Act and is not comparable with preceding series which includes all employees. BeginningJune 1949, data relate to nonsupervisory employees.

4 Not strictly comparable with previous data.5 Preliminary average; does not include any retroactive wage payments.• Estimates based on incomplete data.NOTE.—Data are for production workers in manufacturing and mining, hourly-rated employees in rail-

roads, and for all nonsupervisory employees in other industries. Data are for payroll periods ending closestto the middle of the month except in railroads where monthly data are used.

Adjustments have been made to levels indicated by data of unemployment insurance agencies and theBureau of Old-Age and Survivors Insurance through 1947, and have been carried forward from 1947 bench-mark levels, thereby providing consistent series.



238


TABLE B-l 5.—Average gross weekly earnings in selected industries > 1929-51

Period


193019311932..19331934

19351936, _193719.181939

194019411942...19431944

19451946194719481949

1950 —

1950-First halfSecond half..

1951— First half e...

1950 — January ._FebruaryMarchAprilMav .JuneJulyAugustSeptemberOctoberNovemberDecember

1951 — JanuaryFebruaryMarchAprilsMay 6

June 6

Manufacturing

Total

$25. 03

23.2520.8717.0516.7318.40

20.1321.7824.0522.3023.86

25.2029 5836. 6543.1446.08

44.3943.8249.9754. 1454.92

59.33

57.0861.38

64.48

56.2956.3750.5356.9357.5458.8559.2160.3260.6461.9962.2363. 88

63.7663.8464.5764.7464.5565.44

Dura-ble

goods

$27. 22

24.7721.2816.2116.4318.87

21. 5224.0426.9124.0126.50

28.4434.0442.7349. 3052.07

49.0546.4952.4657. 1158.03

63.32

60.6865.59

69.14

59.4059.4759.7461.0161.5762.8663.0164.3365.1466.3966. 3468.32

67.6568.1869. 3069.7269. 3970.60

Non-durablegoods

$22.93

21.8420.5017.5716.8918.05

19.1119. 9121.5321.0521.78

22.2724 9229.1334.1237.12

38.2941.1446.9650.6151.41

54.71

52.9956.32

58.32

52.9153.0653. 0452.1752.8353.9254.7355.6555.3056.5857.1958.44

58.5358.3258. 4058.0558.0158.63

Bitumi-nouscoal

mining

$25. 72

22.2117.6913.9114.4718.10

19.5822.7123.8420.8023.88

24.7130.8635. 0241.6251.27

52.2558.0366. 5972.1263. 28

70.35

64.5072.78

75.417 47. 36i 49. 83

78.7572.7968.3769.9269. 6871.0471.9272.9973.2777.77

76.6375.6774. 6675.9674.11(2)

Build-ing con

struc-tion

(2)

(2)(2)(2)(2)

$22. 97

24.5127.0130.1429.1930.39

31.7035.1441.8048.1352.18

53. 7356.2463.30

< 68. 8570.95

73.73

70.3476.60

78.77

68.7667.0068.8370.7072.9373.8274.0275.9975.8677.8778.0777.80

78.3576.1477.4479.8682.04(2)

Class Isteamrail-

roads

$28.49

27.7626.7623.3423. 0924.32

26.7628.0129.2030.2630. 99

31.5534.2538.6543.6846.06

45.6951.2254.1760.3461.73

8 63. 20

s 62. 57« 63. 67

(2)

61.6962.3763.7361.6961.7564.1961.1965.4663.1864.5464.6363.00

67.8669.5071.48(2)(2)(a)

Tele-phone

(2)

(2)(2)(2)

8§

$29. 8131.5331.94

32.4432.7433. 9736.3038.39

(3)44.0444.7748.9251.78

54.38

53.5255.33

56.61

53.1353.6952.9853.4453.7254.1954.9654.7155.8056.1854.0456.30

56. 4157.5856.5256.1256.44(2)

Whole-sale

trade

(')

(2)(2)(2)(2)(2)

8(')(2)(2)

(2)(2)(2)0)(2)

(2)(2)

$51. 9955.5857.55

60.36

58. 8061.68

63.82

58.1458.2758.5658.7959.1159.9361.1060.9060.9361.6861.9863.49

63. 4463.6263. 6264.1064.34(2)

Retailtrade

(2)

(')(2)(2)

8(2)(2)(2)

8(2)(2)1?!

$40. 6643.8545.93

47.63

46.7648.50

49.65

46.5846.2646.2646.4746.9448.0848.9948.9948.4848. 3247.9248.31

49.8549.5648.9549.9249.99(a)

Hotels(year-

round) *

(*)

8(2)(2)(2)

(3)(2)(2)

8(')(2)(2)(2)(2)

(')0)

$29. 3631.4132.84

33.85

33.2634.38

34.93

33.0633.5133.0733.2633.3433.3333.5133.9234.3034.6734.7435.16

34.8935.0434. 6835.0834.98(»)

1 Money payments only; additional value of room, board, uniforms, and tips not included.8 Not available.* Not available. Series beginning April 1945 includes only employees subject to provisions of the Fair

Labor Standards Act and is not com parable with preceding series which includes all employees. BeginningJune 1949, data relate to nonsupervisory employees.

4 Not strictly comparable with previous data.« Preliminary average; does not include any retroactive wage payments.fl Estimates based on incomplete data.7 Data reflect work stoppages, or 3-day workweek.

NOTE.—Data are for production workers in manufacturing and mining, hourly-rated employees in rail-roads, and for all nonsupervisory employees in other industries. Data are for payroll periods ending closestto the middle of the month except in railroads where monthly data are used.

Adjustments have been made to levels indicated by data of unemployment insurance agencies and theBureau of Old-Age and Survivors Insurance through 1947. and have been carried forward from 1947 bench-mark levels, thereby providing consistent series.



239


TABLE B-16.—Physical production index of goods and selected services, 1929—51

[1935-39=100 i]

Period

Weights: »TotalNonagricultural

1929

19301931193219331934 - -

1935193619371938 _-. _ _1939

19401941194219431944

1945194619471948 _ _1949

1950


1951— First half «

Production of goods

Totalpro-

ductionof goods

100.0

110

9584687274

8799

11093

109

122153184205201

178161174183174

194

8(3)

Agri-cultural

pro-duction

19.5

97

951041019379

9685

108105106

110114128125130

129134129141140

138

(4)(4)

(4)

Nonagrictiltural production

Total

78.0100.0

113

9579606773

8510311190

110

125162197225218

190168185193182

208

198218

230

Indus-trial

produc-tion

65.681.6

110

9175586975

8710311389

109

125162199239235

203170187192176

200

189211

222

Con-struc-tion

9.011.1

157

132109685059

70102103103121

1271621689561

63115133157166

196

194200

202

Electricand gasutilities

5.87.2

88

8784767781

8797

104100111

123141158183191

187188214243248

276

269283

306

Production ofselected services

Trans-por-

tation

nT

10489737683

8810111095

106

117146185220230

217198208209190

212

203221

243

Tele-phoneand

telegraph

no106101918486

9098

102102108

115126135143147

158182196207212

220

.8(3)

1 All half-year data have been seasonally adjusted except the electric and gas utilities for which no satis-factory adjustment factor is available.2 Computed from the Department of Commerce national income data. The weight factors are percent-ages of the national income for each industry to the total for the 5 industries. The agriculture weightexcludes net rents paid by landlords living on farms, imputed rents, and subsidy payments. The weightfor construction has been adjusted to include force account and other construction done outside of the con-tract construction industry, the weights for other industry groups to exclude such construction. Manu-facturers and minerals of the industrial production index were weighted into the total indexes separatelybut only the total industrial production index is shown here. See appendix table B-17 for the individualcomponents of the index of industrial production.

3 Not available.* Because of the extreme seasonal nature of agricultural crop production, only an annual index has been

computed.s Estimates based on incomplete data.NOTE.—A composite index of production of goods and services has not been compiled because of the

inadequate data for measuring the production of services. The only service production data used were fortransportation and for communications by telephone and telegraph. Data for measuring such servicesas wholesale and retail trade, finance, insurance, real estate, Government, and communication other thantelephone and telegraph were inadequate for separate indexes and for an index for all services other thantransportation, telephone, and telegraph.

Sources: Based on the following data:Agricultural production: Department of Agriculture index'of farm output which measures the physica

volume of farm production for human use.Industrial production: Federal Reserve index of industrial production.Construction: Department of Commerce value of new construction activity deflated by their index of

construction costs and converted into relatives with 1935-39 as 100.Electric and gas utilities: Based on the following series: Electric power produced by utilities as reported

by the Federal Power Commission, and sales'of manufactured and mixed gas to consumers as reported bythe American Gas Association. The two series are converted into relatives with the average for the period1935-39 as 100. The relative series are combined into an index with electric power given a weight of 85and gas 15, the respective percentages of the revenues of each of the utilities to the total revenues producedby both in the base period 1935-39.

Transportation: Department of Commerce index of transportation;Telephone and telegraph: Based on Department of Labor production indexes for 1935-49 and on a series

of Works Progress, Administration for 1929-34. These indexes are for class A telephone carriers and theprincipal wire-telegraph and ocean-cable carriers which file annual reports with the Federal Communica-tions Commission.

240


TABLE B-17.—Industrial production index, 192Q-51

[1935-39=100, adjusted for seasonal variation]

PeriodTotal

industrialproduction

Manufactures

Total Durable NondurableMinerals


19301931193219331934

19351936193719381939

19401941194219431944

19451946194719481949

1950

1950—First half....Second half..

1951—First half»...

1950—JanuaryFebruary—MarchAprilMayJuneJulyAugustSeptember-OctoberNovember...December. _.

1951—JanuaryFebruaryMarchAprilMayiJune*

110

9175586975

8710311389

109

125162199239235

203170187192176

200

189211

222

183180187190195199196209211216215218

221221222223223223

110

9074576874

8710411387109

126168212258252

214177194198183

209

198220

233

192192194199204208206218220225224229

231232234234233

132

9867415465

8310812278109

139201279300353

274192220225202

237

220254

274

209207211222231237235247251261260268

268271277278276277

93

8479707981

9010010695109

115142158176171

166165172177168

187

181193

199

179180181180181184181195194196195197

201201199198198197

107

93806776

11297106

117125129132140

137134149165135

148

138158

163

130118144140145151144159163166160157

164158158164165167

i Estimates based on incomplete data.Source: Board of Governors of the Federal Reserve System.

241


Table B-18.—Percentage changes in production and consumption of selected commodities, UnitedStates and other free world, 7939 to 1950

[Percent]

Commodity

Commodities in which United States is substantiallyself-sufficient:

Bread grains 'Coarse grains 3 5 _ __ _.Cotton 3

Fats and oils 8 . _ _ _ . . .Fertilizer (nitrogenous)Lumber.. . . . .Meat8

Sulfur — native

Commodities of which United States has substantialimports:

Aluminum... . .Cobalt •Copper9

Coffee (green) 3 _ _.Iron ore .Lead9

Manganese ore _ .Newsprint-Nickel 9

PetroleumRubber: Natural and synthetic-

Natural only __ _.Sugar (raw equivalent)Tin9 __Tungsten 9

Wood pulp (mechanical and chemical) ...Wool 3

Zinc9

Production

UnitedStates

+27+34-24+64

+402+43+47

+148

+340+560+25

+90+4

+343+4

+561° + 47, 500

+24

+15+74-26+6

Other freeworld

+11+14+10-9

+52-50+3

-31

+59+-6g-8

-20-18+31+10+14

+172+89+85+35

-+437

+14+9

+14

Consumption *

UnitedStates

+5+39

'+547+30

7+237+59

7+33+158

+560+266+1087+53

+96+123+144+64+50+91

7+1127 +227+26

+57+80+75

7+71+60

Other freeworld 2

87-32+11

7+57(<)(«)

+50

+17-20-40-14-7

-20-15

(«)-35+91

7+797+74

+1-35

(4)(4)

7+22-8

1 Apparent consumption, i. e., production plus imports minus exports, except as noted in footnote 7.2 Estimated.» Change from 1935/36 to 1939/40 average to 1950/51.4 Not available.• Barley, corn, and oats.8 Change from 193-V36 to 1938/39 average to 1950/51. Oil-content basis. Includes butter and peanuts.7 Represents estimated actual rather than apparent consumption.« Change from 1937/38 to 1941/42 average to 1950/51.9 Production represents metal content of mine production.10 This very high percentage results from the low absolute level of production of synthetic rubber in

1939.Source: Compiled by the Department of State.

242


TABLE B-19.—New construction activity, 1929-51

[Value put in place, millions of dollars]

Period

1929

19301931 .193219331934 _ _

1935193619371938 _ . .1939

194019411942. _.19431944

1945 .1946 _194719481949

1950

1950— First half.Second half

1951 First half

1950 — JanuaryFebruaryMarch ___A prilMay _ _June _July .August .SeptemberOctoberNovember _December

1951 — JanuaryFebiuaryMarch _AprilMay__ __ _June

Totalnewcon-

struc-tion

10, 793

8,7416,4273,5382,8793,720

4,2326,4976.9996,9808,198

8,68211,95714,0758 3015,259

5, 63312,00016, 62721,57222, 584

27,902

Private construction

Totalpri-

vate1

8,307

5,8833,7681,6761,2311,509

1,9992,9813,9033, 5604,389

5,0546,2063,4151,9792,186

3,2359,638

13,13116,66516, 181

20, 789

Resi-den-tial

build-ing

(non-farm)

3,625

2,0751,565

630470625

1,0101,5651,8751,9902,680

2.9853,5101,715

885815

1,1004,0156,3108,5808,267

12,600

Non-resi-den-tial

build-ing

(non-farm)

2,694

2,0031,099

502406456

472713

1,085764786

1,0251,482

635233351

1,0203,3413,1423,6213,228

3,777

Otherpri-vate2

1,988

1,8051,104

544355428

517703943806923

1,0441,2141,065

8611,020

1,1152,2823,6794,4644,686

4,412

Public construction

Totalpublic

2,486

2,8582,6591,8621,6482,211

2, 2333,5163,0963,4203,809

3,6285, 751

10, 6606, 3223,073

2,3982, 3623,4964,9076,403

7,113

Mili-taryand

naval

19

2940343647

37293762

125

3851,6205,0162,550

837

690188204158137

177

Non-resi-den-tial

build-ing

659

660612415230363

328701550672970

6151,6463,6852,0101,361

937354599

1,3012,068

2,402

High-ways

1,266

1,5161, 355

958847

1,000

8451,3621,2261,4211,381

1,3021,066

734446362

398895

1,5141,8562,129

2,350

Otherpub-lic'

542

653652455535801

1,0231,4241,2831,2651,333

1,3261,4191.2251,316

513

373925

1,1791,5922,069

2,184


26,54229, 262

30, 756

25, 14025, 76426. 64027. 00026,91627, 79228.16428. 88429, 53229.74829,97629, 268

30, 01230, 86432. 06431. 74030.21629, 640

19, 57622, 002

21, 796

18, 14419, 18819, 32019, 71620. 24420. 84421.61222, 08022, 32022, 32021.99621, 684

21.90022. 89622. 99222, 15220, 65220,184

11, 79413, 406

11, 798

10,48811, 54411,55612. 00012.31212.86413. 48813. 81213, 93213. 60812, 93612, 660

12, 58813. 23612. 93611,89210. 3089,828

3,3664,188

5,228

3. 2523.3243.2883,3243,4803.5283,6723,8043,9964, 3204,6444,692

4,7405,0285,2565,4125,4845,448

4,4164,408

4,770

4.4044,3204,4764,3924,4524,4524,4524,4644,3924,3924,4164,332

4,5724, 6324,8004.8484,8604,908

6,9667,260

8,960

6.9966.5767, 3207,2846.6726,9486. 5526.8047.2127,4287,9807,584

8,1127,9689.0729,5889,5649,456

124230

728

156132120120108108108168216276288324

432468576792

1,0321,068

2,2222,582

3,326

2.1002,1962,1842,1962, 3642.2922,1602.2562.5082.7722,8802,916

3,0603, 0003,2043,5043,6123,576

2.4102,290

2,430

2, 4602.0762,8202, 7362.0042,3642,2562, 3042,3762,1722,5202,112

2.3282,1722,8082,7002,3282,244

2,2102,158

2,476

2,2802.1722.1962,2322,1962, 1842,0282.0762,1122.2082,2922,232

2.2922,3282,4842,5922,5922,568

1 Excludes construction expenditures for crude petroleum and natural-gas drilling, and therefore does notagree with the new construction expenditures included in the gross national product.2 Includes public utility, farm, and other private construction, not separately sh »wn.

3 Includes residential, sewer and water, miscellaneous public service enterprises, conservation and develop-ment, and all other public construction not separately shown.

Sources: Department of Commerce and Department of Labor.

243


TABLE B-20.—Business expenditures for new plant and equipment, 1929-51


Period

1929

193019311932 .19331934

19351936 -_19371938 -.-1939

19401941 .194219431944

19451946194719481949

1950


1951— First half*

1950— First quarterSecond QuarterThird quarterFourth quarter

1951 — First quarterSecond quarter •Third quarter *. . .

Total i

9,165

7,6104,7122,6082,1373,080

3,7385,0776,7304,5205,200

6,4908,1906,1104,5305,210

6,63012,04016, 18019, 23018,120

18,560

Manufacturing and mining

Total

3,596

2,5411,435

930992

1,460

1,7902,4503,3301,8302,310

3,1404,0803,1702,6102,890

3,6506,4708,1509,1407,990

8,900

Manu-factur-

ing

(')

(«)

88(3)(3)(3)0)1,930

2,5803,4002,7602, 2502,390

3,2105,9107,4608,3407,250

8,220

Mining

(')

(*)(')(3)(3)(3)

0)(')(')(8)380

560680410360500

440560690800740

680

Transportation

Rail-.road

840

865360164101218

166306525238280

440560540460580

550570910

1,3201,350

1,140

Other

(4)

(4)

88(4)(4)(4)(4)280

390340260190280

320660800700520

440

Electricand gasutilities

(«)

(4)(4)(4)(4)(4)

(4)(4)(4)(4)

480

550710680540490

6301,0401,9002,6803,140

3,170

Com-mercial

andmiscel-

laneous *

4,729

4,2042,9171,5141,0441,402

1,7822,3212,8752,4521,850

1,9802,4901,470

730970

1,4803,3004,4305,3905,120

4,920

Annual rates, not adjusted for seasonal variation

16,06021, 080

23,180

14, 80017,31018, 80023,330

20,65025,70025, 610

7,38010, 440

12, 210

6,6808,0808,910

11, 950

10, 55013, 86013, 960

6,7709,680

11, 400

6,1007,4408,190

11, 160

9,82012, 97013, 100

610760

810

580640720790

730890860

1,0601,210

1,490

9301,1901,1401,280

1,2101,7701,660

340540

530

320360490580

500560610

2,8203,510

3,410

2,6103, 0303,2803,740

3,0103,8104,010

4,4605,380

5,540

4,2604,6504,9805.780

5,3805,7005,470

1 Excludes agriculture and outlays charged to current account.* Commercial and miscellaneous include trade, service, finance, and communication for all years shown.

Prior to 1939, miscellaneous also included transportation other than railroad, and electric and gas utilitieswhich are not available separately for these years.1 Not available separately for years prior to 1939.

< Included in commercial and miscellaneous prior to 1939.»Estimates for second and third quarters of 1951 are based on anticipated capital expenditures reported

by business in a survey made during May and early June.NOTE.—These figures do not agree with those shown in column 2 of appendix table B-5 and included in

the gross national product estimates of the Department of Commerce, principally because the latter covercertain equipment and construction outlays charged to current expense. Figures for 1929-44 are FederalReserve Board estimates based on Securities and Exchange Commission and other data.

Detail will not necessarily add to totals because figures are rounded to the nearest 10 million dollars.Sources: Securities and Exchange Commission and Department of Commerce (except as noted).

244


TABLE B-21.—Inventories and sales in manufacturing and tradet 1939-51

[Adjusted for seasonal variation]

Period

1939 .

19401941194219431944

19451946194719481949

1950—.

1950: First half....Second half.

1951: First half*..

1950: JanuaryFebruary.-.MarchAprilMayJune . ..JulyAugustSeptember. .OctoberNovember, .December. _.

1951: JanuaryFebruary ...March *April*May*

Total manufacturingand trade

Millions ofdollars

Inven

tori

es *

20, 172

22,18428, 77231,01331,14330, 887

30, 57142, 38950, 79456, 75651, 608

61, 569

54,24161,569

69,926

52, 02451, 82552, 48452,90553, 55354, 24]53, 24354,49656,40458,66060, 26961, 569

63.38864, 42466. 45468, 47669, 926

OT

£m

11,109

12, 52016,41219, 24022,37224,084

24.18127, 57633, 58137, 00334, 857

39, 615

36, 72442, 498

45, 203

34, 24435, 30536, 59935, 64538, 65239, 89641, 98245, 27542, 14241,82141,31842. 452

46, 65545. 35645,19643, 54645, 261

Ra

tio

o

f av

erag

ein

ve

nto

rie

s to

mo

nth

ly s

ales

*

1.73

1.681.531.601.361.30

1.271.291.411.461.56

1.38

1.431.34

1.45

1.511.471.431.481.38.35.28.19.32.38.44.44

.34

.411.451. 551.53

Manufacturing

Millions ofdollars

Inven

tori

es >

11,465

12, 81916, 96019, 28720,09819, 507

18,39024. 49828,92032, 27628, 879

34, 061

30,02834, 061

38,824

29. 03528,99029, 07329.38429. 65930, 02829. 83029, 85830, 73231, 77033, 00734, 061

34, 92835, 47436.41537, 84938, 824

CQ

5,100

5,8528,168

10. 42512. 82213, 788

12,88312,61715, 91817, 81116, 666

19, 574

17, 87421, 337

23,063

16,21616, 87717, 79717,20619, 30919, 83820,26922, 95621, 15421, 24621,11221, 284

23,16622, 64623. 39922, 38923, 715

Ra

tio

of

aver

age

inv

en

tori

es

tom

on

thly

sal

es '

2.11

2.061.781.771.611.45

1.481.661.711.721.85

1.54

1.641.46

1.57

1.791.721.631.701.531.501.481.301.431.471.531.58

1.491.551.541.601.62

Wholesale trade

Millions ofdollars

Inven

tori

es *

3,175

3,3254,1823, 8583.6843,980

4,6386,6658,6539,5119,031

10, 754

9.49310, 754

11,988

8,9919, 0359,1299,3849.4789,4939,2889,5629,879

10, 19310, 47510,754

11,03811, 13311,39711, 65111, 988

«832,505

2,8023,6204,0124,2734,561

4,9836.6017,7548,3557,509

8,354

7,6529,019

9,581

7,1737, 3277,6777,3598,0168,3599,0139,6378,8558.8168,8198,974

10, 1829,6359,4739,1329,481

<U Ob£+>03t* •«03 M W^ O3 en

Ra

tio

o

f ai

inv

en

tori

mo

nth

ly s

al

1.21

1.161.031.02.86.86

.82

.811.031.091.23

1.14

1.201.10

1.18

1.261.231.181.261.181.131.04.98

1.101.141.171.18

1.071.151.191.261.25

Retail trade

Millions ofdollars

Inven

tori

es *

5,532

6,0407,6307,8687,3617,400

7,54311,22613, 22114,96913,698

16,754

14,72016, 754

19, 114

13, 99813,80014,28214, 13814.41614, 72014, 12515,07615,79316, 69716, 78716, 754

17, 42217, 81718, 64218, 97619, 114

e»

8a3,504

3,8664,6244,8035,2776,735

6,3158,3589,909

10.83710, 682

11,687

11,19812, 142

12, 559

10, 85511, 10111,12511, 08011,32711,69912, 70012,68212, 13311, 75911,38712,194

13,30713, 07512. 32412. 02512, 065

Ra

tio

o

f av

erag

ein

ve

nto

rie

s to

mo

nth

ly s

ales

*

1.53

1.471.461.711.381.31

1.201.111.221.321.34

1.28

1.261.29

1.44

1.281.251.261.281.261.251.141.151.271.381.471.38

1.281.351.481.561.58

1 Book value, end of period.* Monthly average shown for year and half-year and total for month.* Average inventories based on centered averages of end-of-period figures.* Estimates based on incomplete data.

NOTE.—The inventory figures in this table do not agree with the estimates of "change in businessinventories" included in the gross national product since they cover only manufacturing and trade ratherthan all business, and show inventories in terms of current book value without adjustment for revaluation.

Source: Department of Commerce.

245


TABLE B—22.—Manufacturers' inventories by stage of fabrication and as ratios to sales, 1946-51

[Not adjusted for seasonal variation]

Period

194619471948 .1949

1950

1950— First half ....Seconci half. .

1951— First half*...

1950— JanuaryFebruaryMarchAprilMayJuneJulyAugust _.September...OctoberNovember...December

1951— JanuaryFebruaryMarch 2

April *May *

Total manufac-turing ,

Book value ofinventories atend of period

(billions ofdollars)

Mate-rialsand

goodsin

process

17 419 720.817.7

22.6

18.022.6

25.6

17.817 817.817.817.918.018.519.019.820.721.622 6

23.624.124.725.325.6

Fin-ishedgoods

7.29.3

11.611.3

11.8

11.811.6

13.2

11.511 411.411.411.611.811.310.710.710.811 311.6

11.711.712.012 513.2

Durable goods industries



Mate-rialsand

goodsin

process

8.810.110.98.9

11.4

9.411.4

13.3

8.99.09.09 19.39.49.59.7

10 010.310.811.4

11.812.112.512.913.3

Fin-ishedgoods

2.73.74.54.4

4.3

4.64.3

5.1

.55

.6

.6

.64.64 44.14.04.14.24.3

4.44.64.64.85.1

Ratio of aver-age inventories

to monthlysales *

Mate-rialsand

goodsin

process

1.581 511.411.44

1.11

1.171.06

1.15

1.341.321.121.191 091.031.19.97

1.04.98

1.101.09

1.141.211.061.181.20

Fin-ishedgoods

0.50.52.56.68

.51

.58

.44

.43

.66

.66

.56

.60

.55

.51

.57

.43

.43

.39

.43

.42

.43

.46

.40

.44

.46

Nondurable goods industries



Mate-rialsand

goodsin

process

8.69.79.98.7

11.3

8.711.3

12.2

8.98.88.88.78.78.79.09.39.7

10 410.811.3

11.811 912.212.412.2

Fin-ishedgoods

4.55.67 17.0

7.2

7.27.2

8.1

7.06 96.86.86.97.26.96.66.66.77.17.2

7.37.27.47.78.1

Ratio of aver-age inventories

to monthlysales i

Mate-rialsand

goodsin

process

0.94.95.94.93

.85

.88

.83

.98

.94

.94

.84

.92

.85

.83

.82

.71

.79

.81

.91

.95

.911.00.94

1.061.02

Fin-ishedgoods

0.48.54.60.73

.63

.70

.58

.61

.75

.73

.65

.71

.67

.68

.65

.52

.55

.54

.59

.62

.57

.61

.57

.65

.65

1 Average inventories based on centered averages of end-of-period figures.2 Estimates based on incomplete data.NOTE.—Detail will not necessarily add to totals because of rounding.

Source: Department of Commerce.

246


TABLE B-23.—Sales, stocks, and outstanding orders at 296 department stores, 1939-51

Period


1940194119421943.1944

19451946194719481949

1950



195Q — JanuaryFebruaryMarch _.AprilMay -JuneJulyAusustSeptemberOctober .NovemberDecember

1951 — JanuaryFebruaryMarchAprilMay

Reported data(millions of dollars) *

Sales(total formonth)

128

136156179204227

255318337352333

347

298396

324

256247320318330317292331370361403616

337286347313338

Stocks(end ofmonth)

344

353419699509535

563715826912862

941

8721,011

1,149

788854920930906833789918

1,0291.1691,203

957

9941,0941,2181,2461,195

Out-standing

orders(end ofmonth)

(2)

108194263530560

729909552465350

466

333600

483

390393326271248369693755702593442412

658656467339293

Derived data(millions of dollars) !

Receipts(total

formonth)

130

137165182203226

256344338356331

361

305416

372

255313386328306244248460481501437370

374386471341287

Neworders

(total formonth)

(2)

(2)170192223236

269327336335331

370

317423

348

348316319273283365572522428392286340

620384282213241

Ratio

Stocksto sales

2.69

2.602.693.352. 502.36

2.212.252.452.592.59

2.71

2.932.55

3.55

3.083.462.882.922.752.632.702.772.783.242.991.55

2.953.833.513.983.54

Ordersto sales

(2)

0.791.241.472.602.47

2.862.861.641.321.05

1.34

1.121.52

1.49

1.521.591.02.85.75

1.162.372.281.901.641.10.67

1.952.291.351.08.87

Ordersto stocks

(2)

0.31.46.44

1.041.05

1.291.27.67.51.41

% .50

.38

.59

.42

.49

.46

.35

.29

.27

.44

.88

.82

.68

.51

.37

.43

.66

.60

.38

.27

.25

1 Not adjusted for seasonal variation.2 Not available.3 Average of data for first 5 months.NOTE.—These figures are not estimates for all department stores in the United States. Figures for sales,

stocks, and outstanding orders are based on actual reports from the 296 stores. Receipts of goods are de-rived from the reported figures on sales and stocks. New orders are derived from estimates of receipts andreported figures on outstanding orders.

Semiannual and annual data on receipts and new orders cannot be derived directly from the monthlyaverages of sales, stocks, and outstanding orders.

Source: Board of Governors of the Federal Reserve System.

247


TABLE B-24.—Consumers* price index, 1929-51

For moderate-income families in large cities

[1935-39=100]

Period

1929 . _

1930 . . .193119321933 . .1934 _ _

19351936193719381939 . . . . . _

1940 „- —19411942 -.19431944 - -

194519461947 - -19481949 .- .

1950


1951— First half 1 _

1950 — January 15 .February 15March 15...April 15May 15June 15July 15August 15 . _September 15October 15November 15December 15

1951 — January 15. _ . ._February 15March 15April 15May 15June 15 .

Allitems

122 5

119 4108.797 692 495.7

98 199 1

102 7100 899 4

100 2105 2116 6123 7125 7

128 6139 5159 6171.9170 2

171 9

168 8175.1

184.0

168 2167 9168.4168 5169 3170.2172 0173 4174 6175.6176 4178.8

181.5183 8184.5184.6185 4(2)

Food

132.5

126 0103.986 584 193.7

100 4101 3105 397 895 2

96 6105 5123 9138 0136 1

139 1159 6193 8210.2201 9

204 5

198 0211.0

225.7

196 0194 9196. 6197 3199 8203.1208.2209 9210 0210.6210.8216.3

221.9226 0226.2225 7227 4

3 226. 8

Apparel

115 3

112 7102.690 887 996.1

96 897 6

102 8102 2100 5

101 7106 3124 2129 7138 8

145 9160 2185 8198 0190 1

187 7

184 9190.5

202.2

185 0184 9185.1184 9184 7184.6184 5185 7189 8193. 0194 3195.5

198 5202 0203 1203 6204 01 (a)

Rent

141.4

137.5130.3116 9100 794.4

94 296 4

100 9104 1104 3

104.6106 4108 8108 7109.1

109 5110 1113 6121.2126 4

131 0

130 1132.0

134.5

129 4129 7129.8130 1130 6130.9131.3131.6131 8132.0132.5132.9

133. 2134 0134.7135 1135 4(2)

Fuel,elec-

tricity,and re-friger-ation

112 5

111 4108.9103 4100 0101.4

100 7100 2100 299 999 0

99 7102 2105 4107 7109 8

110 3112 4121 1133 9137 5

140 6

139 8141.4

143.8

140 0140 1140 3140 3138 8139.1139 4140 2141 2142 0142 5142.8

143 3143 9144 2144 0143 6(2)

House-fur-

nish-ings

111.7

108 998.085 484 292.8

94 896 3

104 3103 3101 3

100 5107 3122 2125 6136 4

145 8159 2184 4195. 8189 0

190 2

185 1195.4

210.4

184 7185 2185.3185 4185 0184 8186 1189 1194 2198 7201 1203.2

207 4209 7210 7211 8212 6

(2)

Miscel-laneous

104.6

105.1104.1101 798 497.9

98 198 7

101.0101 5100.7

101 1104 0110 9115 8121 3

124.1128 8139 9149.9154 6

156 5

154 9158.0

163.8

155 1155. 1155.0154 7155 1154.6155. 2156.8157 8158 3159 2160.6

162.1163 2164.3164.6165 0(2)

i Estimates based on data available through May 15, except for food.8 Not available.1 Estimate based on a survey of 8 cities.


248


TABLE #-25.—Wholesale price index, 1929-51

[1926=100]

Period

Monthly average:1929 . .

1930193119321933 . .1934

19351936193719381939

1940.—1941194219431944 . .

19451946194719481949

1950


1951— First half1

1950 — January „FebruaryMarchApril .MayJuneJulyAugust _SeptemberOctoberNovemberDecember

1951 — January ..February.. . ..MarchApril. .May.June * _

All

com

mod

itie

s95.3

86.473.064 865.974.9

80.080 886.378.677.1

78.687.398.8

103 1104.0

105.8121.1152.1165.1155.0

161.5

153.8169 2

182.6

151.4152.8152.7152 8155 9157 3162 9166.4169.5169.1171.7175 3

180.1183.6184.0183.6182.9181.7

1

&

104.9

88.364.848.251.465.3

76.880 986.468.565 3

67.7Of) A

105.9122 6123.3

128.2148.9181.2188.3165.5

170.4

160.5180 5

200.2

154.7159 1159. 4159. 3164 7165 9176 0177 6180 4177.8183.7187 4

194.2202.6203 8202.5199.6198.6

&

99.9

90.574.661.060.570.5

83.782. 185.573.670 4

71.382.799.6

106.0104.9

106 2130.7168.7179.1161.4

166.2

157.4175.0

186.0

154.8156.7155. 5155.3159 9162.4171 4174.6177.2172.5175.2179 0

182.2187.6186 6185.8187.3186.3

3e91.6

85.275.070 271.278.4

77.979 685.381.781.3

83.089 095.596.998.5

99.7109.5135.2151.0147.3

153.2

146.8159.7

171.5

145.8146.0146.1146 3147 6148 7151 6155.5159 2161.5163.7166 7

170.3171.8172 4172 3171.7170.5

0

Jh•e sC'O* £o<

B

109.1

100.086.172 980.986.6

89.695 4

104.692.895.6

100.8108.3117.7117.5116.7

118.1137.2182.4188.8180.4

191.9

180.2204 1

234.3

179.3179.0179.6179.4181 0182 6187 2195.6203 0208.6211.5218 7

234.8238 2236 2233.3232.6230.6

ther tl

1

He90.4

80.366.354.964.872.9

70.971.576.366.769.7

73.884.896.997.498.4

100.1116.3141.7149.8140.4

148.0

137.2158.6

180.8

138.5138.2137.3136.4136 1136 fl142 6149.5158 3163.1166.8171 4

178.2181. 1183 2182 8181.9177 6

ian far

1If•2-S9|"3S3

PM

83.0

78.567.570.366.373.3

73.576 277.676.573.1

71.776.278.580.883.0

84.090.1

108.7134.2131.7

133.2

131. 6134 9

137.8

131.0131.5131.5130.9131 9132 6133 5134 2134 9135.3135.7135 7

136.4138. 1138 6138.1137.5137.8

mproc

3*%11•2 ft

«

100.5

92.184.580.279.886.9

86.487.095.795.794.4

95.899.4

103.8103.8103.8

104.7115.5145.0163.6170.2

173.6

169.4177.9

188.4

168.5168 7168.6168.8169 9171 9172 4174 4176 7178.6180 4184.9

187.5188 1188 8189 0188.8188.2

Lucts aj

Bui

ldin

g m

ater

ials

95.4

89.979.271.477.086.2

85.386.795.290.390 5

94.8103.2110.2111.4115.5

117.8132.6179.7199.1193.4

206.0

195.6216.5

227.4

191.6192.8194.2194.8198 1202 1207 2213.9219 7218.9217 8221 4

226.1228.1228 5228 5227.8225.6

ad fooc

Ch

em

ica

ls

an

dal

lied

prod

ucts

94.0

88.779.373.972.175.3

79.078.782.677.076.0

77.084.495.594.995.2

95.2101.4127.3135.7118.6

122.7

115.7129.5

145.9

115.3115.0116.2117.0116 4114 5118 1122.5128 7132.2135.7139 6

144.5147.3146 4147.9146.4142.9

Is

Ho

use

furn

ish

ing

good

s

94.3

92.784.975 175.881.5

80.681 789.786.886 3

88.594.3

102.4102 7104.3

104.5111.6131.1144.5145.3

153.2

145.8160.4

178.0

144.9145.2145.5145.8146 6146 9148 7153.9lf>9 2163. 8166 9170 2

174.7175.4178 8180 1180.0179.3

Mis

cella

neou

s

82.6

77 769.864 462 569.7

68.370 577 873.374 8

77.382 089.792 293.6

94 7100 3115.5120 5112.3

120.9

112.1130 0

142.3

110.0110 0110.7112 6114 7114 7119 0124 3127 4131.3137 6140 5

142.4142 7142 5142 7141.7141.7

i Estimates based on incomplete data.Source: Department of Labor.

249


TABLE B-26.—Indexes of prices received and prices paid by farmers, and parity ratio, 1929-51

[1910-14=100]

Period Pricesreceived

Prices paid(including in-terest, taxes,

and wagerates)

Parityratio *

Monthly average:1929 -

1930.193119321933 -1934

1935,..1936.-193719381939 —

19401941 __1942.19431944

194519461947 —19481949.....

1950

1950—First halfSecond half

1951—First half

1950—January 15February 15 _ _March 15April 15May 15..June 15July 15Aujrust 15September 15.October 15November 15_December 15. .

1951—January 15February 15 _ _March 15April 15May 15 _.June 15 _-

148

12587657090

1091141229795

100123158

21922196

22062234

275285249

256

241272

306

235237237241247247263267272268276286

300313311309305301

160

151130112109120

124124131124122

124132151170182

189207239259250

255

250260

280

248248250250253254256257260261263265

272276280283283283

67586475

937877

8193105113108

109113115110100

100

96105

110

959695

97103104105103105108

110113111109108106

i Ratio of prices received to prices paid (including interest, taxes, and wage rates).a Includes subsidy payments between October 1943 and June 1946.

Source: Department of Agriculture.

250


TABLE B-27.—Percentage increases in wholesale prices in the United States and foreign countriessince June 1950

Country

Percentage increasefrom June 1950 to

latest date

Actual Annualrate

Latest date

United States

Africa and Near East:AlgeriaEgyptIranIraq __IsraelLebanon _Morocco _TunisiaUnion of South Africa

Western European countries:Austria 1 _BelgiumDenmarkFranceGermany (Federal Republic)*..Greece _IrelandItaly.. _NetherlandsNorwayPortugal. _Spain.Sweden _Switzerland- __.TurkeyUnited Kingdom

Latin America:Argentina *BrazilChileCosta Rica __ _Cuba < _ _ _Dominican RepublicEl SalvadorGuatemalaMexico _ _ _ _ _NicaraguaPeru _ _ ._Venezuela. _ _ _

Pacific and Far East:AustraliaIndia..__ _Indochina.Japan.New ZealandPhilippinesThailand _

Other:CanadaFinland

16 16

61

June 1951

February 1951April 1951May 1951April 1951February 1951May 1951April 1951March 1951May 1951

May 1951May 1951May 1951May 1951April 1951May 1951April 1951April 1951April 1951June 1951April 1951April 1951April 1951May 1951March 1951May 1951

November 1950April 1951February 1951May 1951February 1951May 1951December 1950May 1951May 1951December 1950May 1951May 1951

March 1951May 1951April 1951April 1951December 1950May 1951March 1951

May 1951May 1951

1 Covers basic materials only.2 Covers producers' prices of industrial products.* Cost-of-living figures.«Retail food figures.NOTE.—-For many countries, figures are for capital or principal city only.Sources: International Monetary Fund and United States Economic Cooperation Administration.

251


TABLE B-28.—Consumer credit outstanding, 1929-51


End of period

1929 ..

1930 -193119321933 .1934 — .

1935 .1936—193719381939. .

1940194119421943. .1944

1945...1946194719481949

1950

1950 — JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptember.OctoberNovemberDecember ._ _ __

1951 — JanuaryFebruary ._MarchApril *May 3June 3

Totalconsumer

credit

6,252

5,5704,6363,4933,4393,846

4,7735,9336, 5136,1287,031

8,1638,8265,6924,6004,976

5,6278,677

11,86214,36616,809

20,097

16,36816, 15916,33816,63917,07717,65118,29518, 84219,32919, 39819, 40520,097

19, 93719, 53319,37919,12319, 18419,200

Instalment credit

Total

3,158

2,6882,2041, 5181,5881,860

2,6223,5183,9603,5954,424

5,4175,8873,0482,0012,061

2,3644,0006,4348,600

10,890

13,459

10,83610,88411, 07711, 32211,66712, 10512, 59813,00913, 34413,38913, 30613,459

13, 25213,07312,97612,90512, 91312,900

Automobilesale credit

1,318

928637322459576

9401,2891,384

9701,267

1,7291,942

482175200

227544

1,1511,9613,144

4,126

3,1793,2563,3553,4703,6003,7903,9944,1074,2134,2274,1754,126

4,0563,9903,9463,9343,9774,000

Other »

1,840

1,7601,5671,1961,1291,284

1,6822,2292,5762,6253,157

3,6883,9452,5661,8261,861

2, 1373,4565,2836,6397,746

9,333

7,6577,6287,7227,8528,0678,3158,6048,9029,1319,1629,1319,333

9,1969,0839,0308,9718,9368,900

Chargeaccounts

1,749

1,6111,3811,1141,0811,203

1,2921,4191,4591,4871,544

1,6501,7641,5131,4981,758

1,9813,0543,6123,8543,909

4,239

3,5063,2333,2113,2413,2903,3923,5273,6363,7413,7033,7394,239

4,2484,0103,9383,7443,7903,800

Otherconsumer

credit 2

1,345

1,2711,051

861770783

859996

1,0941,0461,063

1,0961,1751,1311,1011,157

1,2821,6231,8161,9122,010

2,399

2,0262,0422,0502,0762,1202,1542,1702,1972,2442,3062,3602,399

2,4372,4502,4652,4742,4812,500

i Includes other sale credit and loans, including repair and modernization loans insured by Federal Hous-ing Administration.

* Includes loans by pawnbrokers, service credit, and single-payment loans under $3,000 made by com-mercial banks. The single-payment loan item was revised in November 1950 to exclude loans over $3,000.See Federal Reserve Bulletin for November 1950, pp. 1465-1466.

* Estimates based on incomplete data; June by Council of Economic Advisers.


Source: Board of Governors of the Federal Reserve System (except as noted).

252


TABLE B-29.—Loans and investments of all commercial banks and weekly reporting member banks,1929-51*


End of period s

1929— June4

1930— June* _1931— June*1932— June *1933— June* _1934— June *

1935_june *1936193719381939

194019411942 -19431944

194519461947194g1949

1950

1950 — January _ _ .FebruaryMarch _. _.April -May _ _JuneJuly . .AugustSeptember _ .OctoberNovember _December. _

1951 — JanuaryFebruary . . ._MarchApril ..MayJune *_„, , -.,_, _ _

All commercial banks

Totalloansand

invest-ments

49.4

48.944.936.130.432.7

34.639.538.338.740.7

43.950.767.485.1

105.5

124.0114.0116.3114.3120.2

126.7

121.2120.6120.3120.3121.2121.8122.3123.3123.6124.5125.4126.7

125.1125.0125.7125.4125.1126.6

Loans

35.7

34.529.221.816.315.7

14.916.417.116.417.2

18.821.719.219.121.6

26.131.138.142.543.0

52.2

42.943.143.743.844.144.8'46.047.348.949.951.552.2

52.753.554.454.454.555.0

Investments

Total

13.7

14.415.714.314.017.0

19.723.121.222.323.4

25.129.048.266.083.9

97.982.978.271.877.2

74.4

78.377.576.676.577.177.076.376.074.674.673.974.4

72.371.571.371.070.671.6

U. 8. Gov-ernmentobliga-tions

4.9

5.06.06.27.5

10.3

12.715.314.215.116.3

17.821.841.459.877.6

90.674.869.262.667.0

62.0

68.067.165.865.566.165.865.064.262.562.561.762.0

60.059.158.858.558.159.0

Othersecuri-

ties

8.7

9.49.78.16.56.7

7.07.87.17.27.1

7.47.26.86.16.3

7.38.19.09.2

10.2

12.4

10.310.410.811.011.011.211.411.812.112.112.112.4

12.412.412.612.612.512.6

Weekly reportingmember banks

Totalloans(net)

16.7

17.014.711.38.98.5

8.29.29.48.48.8

9.411.410.310.813.0

15.9819.4

23.325.624.9

31.4

24.524.724.925.025.025.626.427.328.529.430.631.4

31.532.232.732.732.432.9

Commer-cial, indus-trial, andagricul-

turalloans 3

(5)

(»)(8)(8)(6)(8)

(«)(«)

5.14.24,7

5.37.16.36.46.5

7.2« 11.3

14,615.613.9

17.9

13.913.813.813.413.413.614.014.715.716.517.117.9

18.118.719.219.219.019.2

i Excludes mutual savings banks.* For all commercial banks last reporting date within period; for weekly reporting member banks, report-

ing date nearest end of period.• Includes open-market paper.4 June data are used because complete end-of-year data prior to 1936 are not available for United States

Government obligations.* Not available prior to May 12,1937, when the loan classification was revised.• Series revised to extend coverage. Previous figures not strictly comparable.f Estimates for all commercial banks based on incomplete data; by Council of Economic Advisers.NOTE.—Detail will not necessarily add to totals because of rounding.Source: Board of Governors of the Federal Reserve System (except as noted).

253


TABLE B-30.—Deposits and currency, 1929-51


End of period >

1929

1930193119321933—1934

1935193619371938 _1939

1940194119421943—1944

19451946194719481949

1950

1950— JanuaryFebruaryMarchAprilMayJune, .,. , ,JulyAugustSeptemberOctoberNovemberDecember . .

1951 — JanuaryFebruaryMarchAprilMayJune V . „.. , ~ - , . , -

Total de-posits andcurrency

54,742

53,57248,37945,37042, 55148,106

52, 72657, 59556, 78159,87864,733

71,12979, 098

100,500123, 391151, 428

176,378167, 500172, 330172, 693173, 851

180, 574

173, 600172, 800172, 400172, 500173,000174, 715174, 400175, 500176, 400176, 300177, 400180, 574

178, 800178, 900179,900179,800179, 100180,900

U. S. Gov-ernmentdeposits/

187

324518516

1,0191,836

1,4531,235

9661,8121,480

1,1212,7629,201

11,00321, 203

25, 5853,4962,3223,5744,070

3,657

3,9004,6005,3004,1003,8004,7514,1004,5004,8003,5003,5003,657

3,6004,7007,4006,5005,4006,500

Deposits adjusted and currency (privately heldmoney supply) *

Total

54, 555

53,24847,86144,85441,53246,270

51, 27356,36055, 81558,06663,253

70,00876, 33691,299

112, 388130,225

150,793164,004170,008169, 119169, 781

176, 917

169, 700168,200167, 100168,400169, 200169, 964170, 200171,000171, 600172, 800173, 900176, 917

175, 200174, 200172, 500173,300173, 700174, 400

Currencyoutsidebanks

3,557

3,6054,4704,6694.7824,655

4,9175,5165,6385,7756,401

7,3259,615

13,94618,83723,505

26,49026, 73026, 47626,07925, 415

25, 398

24, 50024, 70024,60024,60024, 70025, 18524,40024, 50024,50024,60024,90025,398

24,60024,60024,40024,60024,90025,000

Adjusteddemanddeposits *

22,809

20,96717, 41215,72815, 03518, 459

22. 11525; 48323,95925,98629,793

34,94538,99248, 92260, 80366,930

75, 85183,31487, 12185,52085,750

92, 272

86, 40084,50083,20084,30085,00085,04086,50087, 40088,00089,20090,30092, 272

91,60090,60089, 00089, 50089, 50089,900

Timedeposits '

28, 189

28,67625,97924,45721, 71523,156

24, 24125, 36126, 21826, 30527,059

27, 73827,72928,43132, 74839,790

48, 45253,96056, 41157,52058, 616

59, 247

58,70059,00059, 30059, 50059, 50059, 73959,40059, 10059,00059, 00058,70059, 247

59,00059,00059, 10059,20059, 30059,500

1 Last reporting date during the period.* Includes United States Government deposits at Federal Reserve Banks and commercial and savings

banks, and, beginning with 1938, includes United States Treasurer's time deposits, open account.«Includes deposits and currency held by State and local governments.4 Includes demand deposits, other than interbank and United States Government, less cash items in

process of collection.'«Includes deposits in commercial banks, mutual savings banks, and Postal Savings System, but excludes

interbank deposits.«Estimates based on incomplete data; by Council of Economic Advisers.NOTE.—Detail will not necessarily add to totals because of rounding.Source: Board of Governors of the Federal Reserve System (except as noted).

254


TABLE B-31.—Estimated ownership of Federal securities, 1939-51

[Billions of dollars—par values1]

End of period

1939 .

19401941194219431944

19451946194719481949

1950

1950 — January.. _ _FebruaryMarch . .AprilMayJune. _ _ _ _ ._JulyAugustSeptemberOctoberNovember . _ _December.-

1951 — JanuaryFebruaryMarchAprilMay? _June 7

Gross debt and guaranteed obligations outstanding

Total*

47.6

50.964.3

112.5170.1232.1

278.7259.5257.0252.9257.2

256.7

256.9256.4255.7255.7256.4257.4257. 6257.9257.2257.0257.1256.7

256.1256.0255.0254.7255.1255.3

Held byU.S.

Govern-ment

agenciesand trust

funds

6.5

7.69.5

12.216.921.7

27.030.934.437.339.4

39.2

39.038.437.637.337.437.838.038.138.939.039.239.2

39.639.739.839.940.341.0

Held by public

Totalheld bypublic

41.1

43.354.7

100.2153.2210.5

251.6228.6222.6215.5217.8

217.5

217.9218.0218.1218.4219.0219.5219.6219.8218.4217.9217.9217.5

216.6216.2215.2214.9214.8214.3

Stateand localgovern-ments 8

0.4

.5

.71.02.14.3

6.56.37.37.98.0

7.8

8.08.08.48.48.38.28.38.38.28.18.17.8

7.87.97.97.98.08.0

Com-mercialbanks4

15.9

17.321.441.159.977.7

90.874.568.762.566.8

61.8

67.466.464.965.265.865.664.664.162.262.261.561.8

59.858.957.858.557.958.5

FederalReservebanks

2.5

2.22.36.2

11.518.8

24.323.322.623.318.9

20.8

17.817.717.617.817.418.318.018.419.619.319.720.8

21.521.922.922.722.523.0

Nonbankprivatecorpo-rations

andassocia-tions «

12.2

12.816.828.242.056.8

66.460.568.856.558.0

60.5

58.459.260.660.260.660.361.361.661.261.261.560.5

60.860.960.259.460.258.8

Indi-viduals6

10.1

10.613.623.737.652.9

63.763.865.365.466.2

66.7

66.366.666. 666.867.067.267.467.467.367.267.266.7

66.666.766.466.366.266.0

1 United States savings bonds, series A-D, E, and F, are included at current redemption values.2 Securities issued or guaranteed by the United States Government, excluding guaranteed securities

held by the Treasury.3 Includes trust, sinking, and investment funds of State and local governments and their agencies, andTerritories and possessions.

< Includes commercial banks, trust companies, and stock savings banks in the United States and inTerritories and possessions; excludes securities held in trust departments.

6 Includes insurance companies, mutual savings banks, savings and loan associations, nonprofit institu-tions, corporate pension trust funds, dealers and brokers and foreign accounts in this country. Beginningwith December 1946 the foreign accounts include investments by the International Bank for Reconstruc-tion and Development and the International Monetary Fund hi special non-interest-bearing notes issuedby the United States Government. Beginning with June 30,1947, includes holdings of Federal land banks.

6 Includes partnerships and personal trust accounts.f Estimates based on incomplete data; by Council of Economic Advisers.NOTE.—Detail will not necessarily add to totals because of rounding.Source: Treasury Department (except as noted).

255


TABLE B-32.—United States Government debt—volume and kind of securities, 1929-51


End of period

1929

19301931193219331934

193519361937 —19381939

19401941194219431944.

194519461947 _1948-1949

1950

1950 — January _ _ .FebruaryMarchAprilMayJune .. _July _ .AugustSeptemberOctoberNovemberDecember

1951 — January _FebruaryMarchApril . . . .MayJune _

Grosspublic

debt andguaran-

teedissues i

16.3

16.017.820.824.031.5

35.139.141.944.447.6

50.964.3

112.5170.1232.1

278.7259.5257.0252.9257.2

256.7

256.9256.4255.7255.7256.4257.4257.6257.9257.2257.0257.1256.7

256.1256.0255.0254.7255. 1255.3

Interest-bearing public debt

Marketable publicissues

Short-term

issues'

3.3

2.92.85.97.5

11.1

14.212.512.59.87.7

7.58.0

27.047.169.9

78.257.147.745.950.2

58.3

49.949.851.551.652.052.452.252.256.956.055.958.3

57.457.457.457.457.458.9

Treasurybonds

11.3

11.313.513.414.715.4

14.319.520.524.026.9

28.033.449.367.991.6

120.4119.3117.9111.4104.8

94.0

104.8104.8102.8102.8102.8102.8102.8102.896.796.796.794.0

94.094.094.080.580.578.8

Nonmarketablepublic issues

UnitedStates

savingsbonds

0.2.5

1.01.42.2

3.26.1

15.027.440.4

48.249.852.155.156.7

58.0

57.057.257.357.457.5

' 57.557.657.557.458.058.058.0

58.057.857.857.757.657.6

Treas-ury

tax andsavings

notes

2.56.48.69.8

8.25.75.44.67.6

8.6

7.98.08.08.18.38.58.68.98.99.08.98.6

8.78.78.38.18.27.8

Specialissues 3

0.6

.8

.4

.4

.4

.6

.7

.62.23.24.2

5.47.09.0

12.716.3

20.024.629.031.733.9

33.7

33.532.932.131.881.932.432.532.733.433.533.733.7

34.033.933.533.634.034.7

Nonin-terest

bearingdebt

0.3

.3

.3

.4

.4

.5

1.0.7.6.5.6

.6

.5

.91.41.8

2.41.52.72.22.1

2.4

2.02.02.22.22.22.22.12.12.22.22.22.4

2.42.62.42.42.42.4

Fullyguar-

anteedsecuri-

ties

0.23.1

4.54.74.65.05.7

5.96.34.34.21.5

.6

.3

.1

.1(*)

(<)

(<)(<)<)

?34)3*)«)

(4)8(*)

8i Total includes Postal Savings bonds, depositary bonds. Armed Forces leave bonds, and Treasury

investment bonds, not shown separately.* Includes Treasury bills, certificates of indebtedness, and Treasury notes.3 Issued to United States investment accounts; these accounts also held 6.3 billion dollars of public market-

able and nonmarketable issues on June 30,1951.* Less than 50 million dollars.Source: Treasury Department.

256


TABLE B-33.—Bond yields and interest rates, selected years, 1929-51

[Percent per annum]

Period

Average:19291933193519371939

19411943

1945194619471948 . ...1949

I960

1950 — First quarterSecond quarterThird quarterFourth quarter

1951 — First quarterSecond quarter

United States Governmentsecurity yields— New York

3-monthTreas-ury

bills i

(3)0.515.137.447.023

.103

.373

.375

.375

.5941.0401.102

1.218

1.118.166.233.353

.400

.532

9-12monthissues 2

(4)(4)(«)(«)(*)

(4)0.75

.81

.82

.881.141.14

1.26

1.141.191.271.44

1.671.84

Taxablebonds

15 yearsand over

(8)(5)0)

8(«)2.47

2.372.192.252.442.31

2.32

2.242.312.342.38

2.422.61

CorporateAaa

bonds(Moody's)

4.734.493.603.263.01

2.772.73

2.622.532.612.822.66

2.62

2.582.612.632.67

2.702.90

Averageof ratescharged

by bankson short-

termloans-selectedcities

(')(6)(6)(6)2.1

2.02.6

2.22.12.12.52.7

2.7

2.602.682.632.84

3.023.07

Primecommer-

cialpaper,

months-NewYork

5.851.73.76.94.59

.54

.69

.75

.811.031.441.48

1.45

1.311.311.471.71

1.962.20

Bankersaccept-ances.

90days-NewYork

5.03.63.13.43.44

.44

.44

.44

.61

.871.111.12

1.15

1.061.061.181.31

1.511.63

FederalReserveBank

discountrate —NewYork

5.162.561.501.331.00

1.00U.OO

n.oo'1.00

1.001.341.50

1.59

1.50.60.61.75

.75

.75

i Rate on new issues within period.3 Includes certificates of indebtedness, when outstanding in proper maturity range, and selected note and

bond issues.3 Treasury bills were first issued in December 1929.< Not available before August 1942.«Taxable bonds in this classification were first issued in March 1941.« Not available on same basis.7 From October 30,1942, to April 24, 1946, a preferential rate of 0.50 percent was in effect for advances

secured by Government securities maturing or callable hi one year or less.Sources: Treasury Department, Moody's Investors Service, and Board of Governors of the Federal

Reserve System.

257


TABLE B-34.—Profits before and after tax, all private corporations, 1929-51


Period

1929

19301931 . . -193219331934

19351936193719381939

19401941194219431944

19451946194719481949

1950

I960— First half ..Second half

1951— First half » . - -

1950 — First quarter _Second quarter . -_Third quarterFourth quarter

1951— First quarterSecond quarter *

Corporateprofitsbefore

tax

9.8

3.3-.8

-3.0.2

1.7

3.25.76.23.36.5

9.317.221.125.124.3

19.723.630.533.828.3

41.4

Corporatetax

liability 1

1.4

.8

.5

.4

.5

.7

1.01.41.51.01.5

2.97.8

11.714.413.5

11.29.6

11.913.011.0

18.6

Corporate profits after tax

Total

8.4

2.5-1.3-3.4-.41.0

2.34.34.72.35.0

6.49.49.4

10.610.8

8.513.918.520.717.3

22.8

Dividendpayments

5.8

5.54.12.62.12.6

2.94.64.73.23.8

4.04.54.34.54.7

4.75.86.67.37.6

9.2

Undis-tributedprofits

2.6

-3.0-5.4-6.0-2.4-1.6

-.6-.3

W -.91.2

2.44.95.16.26.1

3.88.1

12.013.69.7

13.6


34.748.0

50.2

31.937.545.750.3

51.848.6

15.621.5

27.5

14.416.920.522.5

28.526.5

19.026.5

22.6

17.520.625.227.8

23.322.0

8.110.2

9.2

7.88.49.4

11.1

8.89.5

11.016.2

13.5

9.712.215.816.7

14.512.5

i Federal and State corporate income and excess profits taxes.» Minus 8 million dollars.' Estimates based on incomplete data; 1951 by Council of Economic Advisers.NOTE.—No allowance has been made for inventory valuation adjustment. See appendix table B-6 for

profits before tax and inventory valuation adjustment.Detail will not necessarily add to totals because of rounding.Source: Department of Commerce (except as noted).

258


TABLE B—35.—Sales and prof ts of large manufacturing corporations, 1939—51


Period

1939

19401941194219431944 ..

1945—19461947 ..1948 _1949

1950


1950 — First quarterSecond quarterThird quarter. _Fourth quarter

1951 — First quarter 2

Durable goods industries(106 corporations) »

Sales

6,748

8,75012,80615, 36220,63322,085

18, 16112, 38719, 50223, 59123,914

29, 240

Profits

Before taxes

734

1,2262,1752,3262, 3892,192

1,288607

2,3123,1073,192

5,191

After taxes

597

830982782755726

574295

1,3551,8361,888

2,540

Nondurable goods industries(94 corporations) *

Sales

3,843

4,2575,4856,4087,6078,263

8,3718,940

11, 31313, 36412,790

14,710

Profits

Before taxes

476

617980

1,0691,2931,339

1,1331,4261,7872,2081,843

2,701

After taxes

400

443538438506520

555968

1,1671,4741,211

1,510

Totals for period, not adjusted for seasonal variation

13, 20016, 039

6,0047,1967,8518,188

8,375

2,1363,055

8961,2401,4031,652

1,381

1,1871,353

494693777576

530

6,7048,005

3,2513,4533,9394,066

4,280

1,0851,615

504681782833

840

660850

307353468382

368

1 See Federal Reserve Bulletin, June 1949, and subsequent issues, for similar data for the following indus-try groups: primary metals and products, machinery, automobiles and equipment, foods and kindredproducts, chemicals and allied products, and petroleum refining.

2 Estimates based on incomplete data.

NOTE.—Detail will not necessarily add to totals because of rounding

Source: Compiled by the Board of Governors of the Federal Reserve System and based on publishedreports of various industrial corporations.

259


TABLE B-36.—Relation of profits before and after taxes to stockholders' equity, private manu-facturing corporations, by industry group, 1949-51

Industry group

All private manufacturing corporations .

Food... .Tobacco manufactures .Textile mill productsApparel and finished textilesLumber and wood products ..

Furniture and fixturesPaper and allied productsPrinting and publishing (except newspapers).Chemicals and allied productsProducts of petroleum and coal

Rubber products _Leather and leather productsStone, clay, and glass productsPrimary nonferrous metal industries-Primary iron and steel industries

Fabricated metal productsMachinery (except electrical and transporta-

tion) , _ _Electrical machineryTransportation equipment (except motor ve-

hicles)Motor vehicles and parts

Instruments; photographic and optical goods;watches and clocks

Miscellaneous manufacturing (including ord-nance) ._

All private manufacturing corporations-

FoodTobacco manufactures..Textile m ill productsApparel and finished textiles _Lumber and wood products.. . .

Furniture and fixturesPaper and allied products.. .Printing and publishing (except newspapers).Chemicals and allied productsProducts of petroleum and coal

Rubber products-Leather and leather products . .Stone, clay, and glass productsPrimary nonferrous metal industriesPrimary iron and steel industries

Fabricated metal products.Machinery (except electrical and transporta-

tion) ...Electrical machineryTransportation equipment (except motor

vehicles) .Motor vehicles and parts

Instruments; photographic and optical goods;watches and clocks ..

Miscellaneous manufacturing (including ord-nance)

Percentage ratioôf profits (annual rate) to stockholders'equity

1949total

1950

Total Firstquarter

Secondquarter

Thirdquarter

Fourthquarter

1951,first

quarter

Before Federal taxes

18.6

19.520.213.013.214.2

14.717.319.021.215.2

13.611.021.313.017.0

17.7

19.232.3

12.637.7

19.9

12.5

27.9

22.221.322.918.129.6

27.128.520.132.619.3

31.019.333.125.528.2

29.1

25.941.6

18.953.2

30.9

22.7

19.6

15.616.418.011.616.8

15.620.820.425.212.8

14.810.820.416.020.0

18.4

18.429.2

12.039.2

20.8

10.0

24.8

20.419.217.210.428.4

23.623.216.828.416.8

21.212.832.422.026.8

24.8

24.431.2

17.655.2

26.0

14.8

31.2

28.825. 226.026.438.0

29.228.824.036.420.4

38.025.239.226.829.2

34.0

26.841.2

19.258.8

33.2

29.6

35.6

23.624.429.623.634.4

39.240.419.240.026.8

47.628.039.636.436.4

38.0

33.662.4

26.858.4

43.2

35.6

32.8

20.820.429.622.034.0

34.444.021.640.823.2

43.222.436.432.034.8

37.6

34.847.2

19.646.0

33.6

34.8

After Federal taxes

11.6

11.812.67.67.59.1

8.210.711.413.211.9

8.76.2

13.18.1

10.0

10.4

11.613.6

7.822.1

12.1

7.2

15.4

12.311.512.710.117.5

15.216.211.517.813.9

16.910.917.715.014.3

16.0

14.120.9

10.025.3

16.7

12.3

12.0

9.210.010.86.4

10.4

8.412.812.815.610.0

9.66.4

12.410.411.6

11.2

10.817.2

7.222.8

12.8

5.2

15.6

12.412.010.45.2

18.0

15.214.49.6

17.613.2

13.67.2

20.014.816.0

15.6

14.818.4

10.432.4

16.0

8.4

17.6

16.413.214.416.422.8

16.016.414.420.814.0

22.414.822.016.015.2

19.2

14.822.0

10.028.8

18.8

16.8

16.4

11.610.814.812.018.4

20.420.89.6

17.218.0

21.615.216.019.214.0

17.6

15.625.2

12.416.8

19.2

18.4

14.8

10.09.6

14.411.617.2

16.018.410.017.214.4

18.810.816.016.013.6

17.6

15.218.4

9.217.2

14.4

16.4

Sources: Federal Trade Commission and Securities and Exchange Commission.

260


TABLE B-37.—Relation of profits before and after taxe$ to sales, private manufacturing corporations,by industry group, 1949-51

Industry group

All private manufacturing corporations.

FoodTobacco manufacturers _ _Textile mill productsApparel and finished textilesLumber and wood products

Furniture and fixtures _Paper and allied productsPrinting and publishing (except newspapers).Chemicals and allied productsProducts of petroleum and coal

Rubber'products _Leather and leather productsStone, clay, and glass productsPrimary nonferrous metal industriesPrimary iron and steel industries


tion)Electrical machineryTransportation equipment (except motor

vehicles)Motor vehicles and parts

Instruments; photographic and optical goods;watches and clocks . _

Miscellaneous manufacturing (includingordnance)

All private manufacturing corporations-

Food.Tobacco manufacturesTextile mill products - . .Apparel and finished textilesLumber and wood products

Furniture and fixturesPaper and allied products.. ..Printing and publishing (except newspapers).Chemicals and allied productsProducts of petroleum and coal

Rubber products _Leather and leather products . -Stone, clay, and glass productsPrimary nonferrous metal industriesPrimary iron and steel industries


tion)Electrical machinery _ . _.Transportation equipment (except motor

vehicles)Motor vehicles and parts _ _ . ..

Instruments; photographic and optical goods;watches and clocks

Miscellaneous manufacturing (includingordnance) . . „, ,^

Profits in cents per dollar of sales

1949total

1950

Total Firstquarter

Secondquarter

Thirdquarter

Fourthquarter

1951,first

quarter

Before Federal taxes

9.3

5.58.27.03.79.2

5.910.67.4

13.212.0

5.93.9

13.911.111.1

8.7

10.69.3

6.313.5

11.6

6.2

12.8

6.19.0

10.55.0

15.9

9.015.47.9

18.814.9

10.66.5

18.817.315.5

12.4

13.314.3

8.917.5

15.9

10.4

10.1

4.87.49.03.5

11.2

5.912.38.5

15.610.7

6.64.2

14.113.512.7

9.7

10.711.3

6.215.3

12.6

5.5

11.8

5.68.18.93.3

15.2

8.413.66.8

17.113.5

7.84.9

18.915.915.1

11.4

12.611.7

8.617.8

14.3

7.7

13.5

7.510.111.46.3

18.6

9.515.69.4

20.515.2

11.47.4

20.517.115.7

13.0

13.614.0

9.318.0

16.8

12.5

14.9

6.310.012.26.0

17.2

11.418.97.0

21.119.1

14.78.7

20.521.117.8

14.4

15.618.6

10.818.3

18.7

13.7

13.5

5.49.1

11.95.4

17.7

10.519.88.3

20.916.5

13.06.9

19.718.216.5

14.5

15.015.1

7.914.0

16.0

13.8

After Federal taxes

5.8

3.35.14.12.15.9

3.36.54.58.29.4

3.82.28.66.96.5

5.1

6.45.7

3.97.9

7.0

3.6

7.1

3.44.95.82.89.4

5.18.84.5

10.310.7

5.83.7

10.110.27.9

6.8

7.37.2

4.78.3

8.6

5.6

6.2

2.84.65.41.97.1

3.27.55.49.68.2

4.22.58.68.57.5

5.9

6.46.7

3.78.9

7.7

2.9

7.4

3.45.05.21.69.7

5.48.43.8

10.610.7

5.02.7

11.710.59.0

7.1

7.77.0

5.110.5

8.9

4.5

7.6

4.35.46.53.9

11.1

5.39.05.6

11.710.5

6.64.3

11.610.28.2

7.3

7.67.5

4.S8.8

9.4

7.0

6.9

3.04.46.13.19.2

6.09.73.59.2

13.0

6.64.78.3

11.16.9

6.7

7.37.5

5.05.3

8.4

7.0

6.1

2.64.35.72.89.1

4.98.33.98.8

10.2

5.73.38.59.06.4

6.7

6.65.9

3.75.2

6.9

6.6


26l


TABLE B-38.—Relation of profits before and after taxes to stockholders' equity and to sales,all private manufacturing corporations, by size class, 1949-51

Assets elass(thousands of dollars)

All sizes1 to 249250 to 9991.000 to 4,9995,000 to 99,999 ._109,000 and over

All sizes1 to 249250 to 9991 000 to 4,9996,009 to 99,999 . . .100,000 and over _

All sizes .1 to 249250 to 999.1,000 to 4,9995,000 to 99,999100,000 and over .

All sizes1 to 249250 to 9991,000 to 4,999 . .5,000 to 99,999 _106,000 ana over

1949total

1950

Total Firstquarter

Secondquarter

Thirdquarter

Fourthquarter

1951,first

quarter

Ratio of profits before Federal taxes (annual rate) to stockholders' equity

18.69.8

14.115.417.726.8

27.917.123.525.227.729.5

19.68.8

13.217.218.421.6

24.815.221.221.623.627.2

31.226.430.428.831.232.0

35.616.828.432.836.836.8

32.823.628.833.234.432.0

Profits before Federal taxes in cents per dollar of sales

9.32.65.26.59.0

11.8

12.84.37.99.5

12.515.5

10.12.55.17.39.5

12.8

11.84.27.48.5

11.314.4

13.56.29.8

10.313.316.0

14.93.88.7

11.014.918.2

13.55.48.8

10.913.815.4

Ratio of profits after Federal taxes (annual rate) to stockholders' equity

11.64.97.88.9

10.913.5

15.410.513.214.015.216.4

12.04.07.2

10.011.213.6

15.69.6

12.813.214.817.2

17.619.218.816.417.217.6

16.48.0

14.016.017.616.4

14.814.414.815.615.214.4

Profits after Federal taxes in cents per dollar of sales

5.81.32.93.85.57.6

7.12.64.45.2fl.98.6

6.21.12.74.25.88.1

7.42.74.45.27.09.2

7.64.56.05.97.48.9

6.91.94.35.47.18.2

6.13.34.55.26.07.0


262


TABLE B-39.—Sources and uses of corporate funds, 1947-51l


Source or use of funds

Uses:Plant and equipment outlaysInventories (change in book value) _ .Change in customer receivablesCash and U. 8. Government securitiesOther current assets

Total uses

Sources:Internal:

Retained profits and depletion allowances.Depreciation allowances

Total internal sources

External:Change in trade debtChange in Federal income tax liability. --Other current liabilitiesChange in bank loansChange hi mortgagesNet new issues

Total external sources

Total sources

Discrepancy (sources less uses)

1947

15.07.17.61.0

—.1

30.6

11.66.2

16.8

4.42.31.02.6.6

4.4

15.3

32.3

1.7

1948

17.44.24.21.9

(4)

27.7

12.86.2

19.0

1.1.5

(4)1.1.8

5.9

9.4

28.4

.7

1949

16.1-4.3-.63.0

—.2

14.0

9.17.0

16.1

-2.2-2.0—.1

—1.9.7

5.3

-.2

15.9

1.9

1950

17.27.6

10.05.0.5

40.3

13.07.5

20.5

5.97.21.02.5.8

3.7

21.1

41.6

1.3

19

Firsthalf »

7.31.52.72.0

2

13.7

5.23.8

9.0

.62.0.4

-.4.3

2.3

5.2

14.2

.5

50

Secondhalf*

9.96.17.33.0.3

26.6

7.83.7

11.5

5.35.2.6

2.9.5

1.4

15.9

27.4

.8

1951,first

half2 3

10.56.53.01.0

21.0

6.54.4

10.9

2.41.6.5

2.01.02.7

10.2

21.1

.1

i Excludes banks and insurance companies.3 Not adjusted for seasonal variation.3 Preliminary estimates based on incomplete data; by Council of Economic Advisers.4 Less than 50 million dollars.


Sources: Department of Commerce estimates based on Securities and Exchange Commission and otherfinancial data (except as noted).

263


TABLE B-40.— International transactions of the United States, 1948-51


Type of transaction

Exports of goods and services:Recorded goodsOther goods l

Total goodsServices _ _ _ _ _ _ _Income on in vestments _--

Total exports

Imports of goods and services:Recorded goodsOther goods *

Total goodsServices _ _ _Income on in vestments. __

Total imports

Surplus of exports of goodsand services:

Recorded goodsOther goods * _ _

Total goodsServicesIncome on investments. _ _

Total surplus of exports _

Means of financing surplus ofexports of goods and serv-ices: *

Liquidation of gold anddollar assets by foreigncountries , _ __„_

Dollar disbursements by:International Mone-

tary FundInternational Bank.__

United States Govern-ment sources: *

Unilateral transfers.. _Long- and short-term

loansUnited States private

sources:"RemittancfisLong- and short-term

capital 5

Total means of fi-nancing

Errors and omissions

1948total

12, 653693

13, 3462,2461,375

16,967

7,124698

7,8222,162

284

10,268

5,529-5

5,52484

1,091

6,699

780

203176

4,157

886

678

856

7,736-1, 037

1949total

12,051286

12,3372,2321,405

15,974

6,622444

7,0662,184

353

9,603

5,429-158

5,27148

1,052

6,371

-60

9938

5,321

647

522

589

7,156-785

1950

Total

10,273385

10,6582,0241,743

14, 425

8,852463

9,3152,376

437

12,128

1,421-78

1,343-3521,306

2,297

-3, 645

-2037

4,120

164

481

1,316

2,453-156

Firstquarter

2,36673

2,439455363

3,257

1,88971

1,96049476

2,530

4772

479-39287

727

-459

-1217

1,023

82

123

42

816-89

Secondquarter

2,510105

2,615526385

3,526

1,93176

2,007577125

2,709

57929

608-51260

817

-679

11

1,122

39

124

182

79918

Thirdquarter

2,45147

2,498519477

3,494

2,390143

2,53375190

3,374

61-96

-35-232

387

120

-1, 544

—82

865

37

107

836

295-175

Fourthquarter

2,947159

3,106524518

4,148

2,642173

2,815554146

3,515

305-14

291-30372

633

-963

7

1,110

6

127

256

54390

1951

Firstquarter1

3,32979

3,408590443

4,441

3,029170

3,19958983

3,871

300-91

2091

360

570

-745

-1016

1,040

57

110

186

654-84

Secondquarter 1

4,100130

4,230665455

5,350

2,950150

3,10070595

3,900

1,150-20

1,130-40360

1,450

-55

1,220

50

100

190,

1,505-55

» Estimates ba«ed on incomplete data; second quarter by Council of Economic Advisers.J Includes goods sold to or bought from other countries that have not been shipped from or into theUnited States customs area, and other adjustments.3 All figures for means of financing are on a net basis.4 For detail, see appendix table B-41.

& Excludes purchases or sales of obligations issued by the International Bank for Reconstruction andDevelopment.


264


TABLE B-41.—United States Government grants, other unilateral transfers, and loans to foreigncountries, 1948-51


Type of aid

Unilateral payments:Military aid programs:

Mutual defense assistanceprogram

Greek-Turkish aid. ..Chinese aid

EGA programs:European Recovery Program.Other

Army Civilian Supply Program *.Point Four assistancePhilippine Rehabilitation Act...Interim aid and post-UNRRA ._International Refugee Organiza-

tion and other United Nationsrelief organizations

Other

Total unilateral paymentsLess: Unilateral receipts

Equals: Net unilateral pay-ments .

Long-term loans and investments:United Kingdom loan. _.EGA programsExport-Import Bank loans _.Surplus property credits, in-

cluding ship salesRaw-materiaFcredits to occupied

areasUnited Nations building loanOther

Total long-term loans andinvestments .. _.

Less: Repayments

Equals: Net long-term loansand in vestments .

Outflow of short-term capital (net)

Total net unilateral payments,loans and investments

1948

34971

1,39796

1,468

130627

117107

4 362'205

4,157

300476454

168

639

1,416443

973

-87

5,043

1949

17144

3,73092

1,082

2032

104157

5 585264

5,321

428163

30

262012

679205

474

173

5,968

Total

516625

2,719114500

7166

84122

4 295175

4,120

163193

2

28226

414287

127

37

4,284

Firstquar-ter

5352

75445

1221

39

2339

1 06542

1,023

5650

2

6112

12751

76

6

1,105

1950

Secondquar-ter

6612

(3)

82944

1381

27

2333

1,17351

1,122

3058

2152

11697

19

20

1,161

Thirdquar-

ter

140g1

5469

1134

34

2425

90439

865

4941

131

9559

36

1

902

Fourthquar-ter

30572

59016

1271

66

1425

1 15343

1,110

2844

31

7680

—4

10

1,116

19

Firstquar-ter^

3223

(3)

595277514

1437

1 07838

1,040

3983

32

12760

67

-10

1,097

51

Secondquar-ter i

(2)(2)(3)

(2)(2)

0)(2)

(2)

(2)(2)

(2)(2)

1,220

(2)(2)

(2)

8(5)(2)

50

1,270

i Estimates based on incomplete data: second quarter by Council of Economic Advisers.» Not available.* Less than 500 thousand dollars.< Includes disbursements by EGA from funds appropriated under the Army Civilian Supply Program,Source: Department of Commerce (except as noted).

265


TABLE B-42.—United States merchandise export surplus, by area, 1936-38 quarterly averageand 1947-51

Period

Quarterly average:1936-381947194819491950S

1949— First quarterSecond quarterThird quarterFourth quarter

1950 — First quarterSecond quarterThird quarter »Fourth quarter «


Second quarter *

Quarterly average:1936-38194719481949 . .I960'


1950 — First quarterSecond quarterThird quarter 3Fourth quarter 3


Totalmer-

chandiseexportsurplus

Canada 1Other

WesternHemi-sphere

ERPcoun-tries*

OtherEurope Asia 2

Australiaand

OceaniaAfrica

Millions of dollars

1192,3961,3821,357

355

1,5491,7751,218

888

47757961

305

3001,150

2724688

10214

94188125

2

rj

5129

93(8)

-7449215114

-73

17516010912

-8723

-209-21

-219(•)

1301,150

802808405

9101,000

668656

537520265301

301(6)

27316

-13

81321

-12-10-12-17

-1(6)

-61312183238

-39

283291218160

9717

-83-189

-121(8)

1341-318

-16

20112513

-12-14-17-22

-38(fi)

151239871

-33

601127041

-38-7

-57-28

-47(8)

Percentage of total

100100100100100

100100100100

100100100100

100

22.710.36.47.53.9

6.110.610.3

• 2

-1.58.83.33.0

31.0

-5.918.715.68.4

-20.6

11.39.08.91.4

-18.24.0

-342. 6-6.9

-73.0

109.248.058.059.5

114.1

58.756.354.873.9

112.689.8

434.498.7

100.3

1.73.0.1.4

-3.7

.5

.7

.2

.1

-2.5-1.7

-19.7-5.6

-.3

-51.313.013.217.5

-11.0

18.316.417.918.0

20.32.9

-136. 1-62.0

-40.3

10.91.7-.21.3

-4.5

1.3.6

2.11.5

-2.5-2.4

-27.9-7.2

-12.7

12.65.17.15.2

-9.3

3.96.35.74.6

-8.0-1.2

-93.4-9.2

-15.7

1 Includes Newfoundland and Labrador.2 Turkey is included with ERP countries and excluded from Asia. Exports to and imports from Ger-

many are included with those of ERP countries, and, in the postwar period, relate almost wholly to tradewith the three western zones.

3 Data by area exclude, while total exports include, "special category" exports. For this reason, the exportor import surplus by area will not add to the total export surplus in these periods. For the amount of"special category" exports, see table B-43, footnote 3.

* Estimates based on incomplete data; by Council of Economic Advisers.«Not available.

NOTE.—Detail will not necessarily add to totals because of rounding. See also footnote 3.


266


TABLE B-43.—United States merchandise exports, including reexports, by area, 1936—38 quarterlyaverage and 1947-51

Period

Quarterly average:1936-3819471948. _ _19491950S

1949— First quarter _.Second quarterThird quarterFourth quarter

1950— First quarterSecond quarterThird quarter 3Fourth quarter 8

1951— First quarter 3Second quarter *

Quarterly average:1936-381947 -.194819491950 5


1950— First quarterSecond quarterThird quarter 3Fourth quarter 8

1951— First quarter 3

TotalexDorts

includingreexports

Canada lOther

WesternHemi-sphere

ERPcountries2

OtherEurope Asia 2

Australiaand

OceaniaAfrica

Millions of dollars

7423,8353, 1643,0132,568

3,3383,3762,6952,643

2.3662,5102,4512,947

3,3294,100

115528486490504

472571473444

397530505583

622(5)

1361,017

841725703

837740671653

640668706797

863(5)

2821,3241,0461,019

720

1,1601,190

843884

777763587756

815(s)

31118494134.

42463539

33353733

62(5)

122561507534370

611593483448

399381334365

471(s)

2380384936

54504744

37383038

44(fi)

3220519615590

163186142130

849679

103

120(5)

Percentage of total

100100100100100

100100100100

100100100100

100

15.513.815.416.319.6

14.116.917.616.8

16.821.120.619.8

18.7

18.326.526.624.127.4

25.121.924.924.7

27.026.628.827.0

25.9

38.034.533.133.828.0

34.835.231.333.4

32.830.423.925.7

24.5

4.23.11.51.41.3

1.31.41.31.5

1.41.41.51.1

1.9

16.414.616.017.714.4

18.317.617.917.0

16.915.213.612.4

14.1

3.12.11.21.61.4

1.61.51.71.7

1.61.51.21.3

1.3

4.35.36.25.13.5

4.95.55.34.9

3.63.83.23.5

3.6

1 Includes Newfoundland and Labrador.8 Turkey is included with ERP countries and excluded from Asia. Exports to Germany are included

with those of ERP countries and, in the postwar period, relate almost wholly to exports to the three westernzones.

8 Data by area exclude, while total exports include, "special category" exports. For this reason, ex-ports by area will not add to total exports hi these periods. "Special category" exports amounted to 173million dollars in the third quarter of 1950, 272 million in the fourth quarter, and 333 million in the firstquarter of 1951.

4 Estimates based upon incomplete data; by Council of Economic Advisers.5 Not available.NOTE.—Data hi this table cover all merchandise, including reexports, shipped from the United States

customs area to foreign countries, including, in 1947 to 1951, goods destined to United States armed forcesabroad for distribution in occupied areas as civilian supplies.

Detail will not necessarily add to totals because of rounding. See also footnote 3.Source: Department of Commerce (except as noted).

267


TABLE B—44.—Indexes of quantity and unit value of United States domestic merchandise exports,by economic class, 1936—38 quarterly average and 1947—51

[1936-38=100]

Period

Quarterly average:1936-381947194819491950

1949— First quarterSecond quarterThird quarter _.Fourth quarter







Totaldomesticexports

Crudematerials

Crudefoodstuffs i

Manufac-tured

foodstuffs iSemiman-ufactures

Finishedmanufac-

tures

Quantity indexes

100275214219193

233243200201

181194184209

222261

100123100126128

12915593

125

125143112128

112(3)

1,00397362435287

495438440368

284271264325

454(3)

100478350297237

317366235271

213250224230

247(3)

100203144150127

162167144128

121126125135

131(')

100332257250225

264269236229

207220220251

277(3)

Unit value indexes

100188200186180

194188182179

177175180191

202210

100195223212220

216212212208

206212226245

263(3)

100248255225193

233233216214

196190192196

203(3)

100218223177151

191175175163

151142162169

185(3)

100169184174170

184179165164

164166168184

203(3)

100182193184179

190186181177

179175177187

195(3)

i Export indexes of crude and manufactured foodstuffs, particularly those of unit value in 1950, are in-fluenced by sales of large quantities of food products at prices considerably below market quotations.Such exports include sales from Government-owned surplus and shipments on which subsidies were paidby the Department of Agriculture.

* Estimates based on incomplete data; by Council of Economic Advisers. For unit value, April usedas indicative of entire quarter.

3 Not available.

NOTE.—The indexes of quantity are a measure of the volume of trade after the influence on value ofchanges in average prices has been eliminated. The indexes of unit value provide a measure of change inthe average prices at which trade transactions are reported in official foreign trade statistics, includingchange in average prices that result from changes in the commodity composition of trade. The indexesfor 1947 to 1951 are based on data which include goods destined to the United States armed forces abroadfor distribution to civilians hi occupied areas.


268


TABLE B-45.—United States general merchandise imports, by area, 1936-38 quarterly averageand 1947-51

Period

Quarterly average:1936-3819471948 _1949 .I960


1950—First quarterSecond quarterThird quarterFourth quarter

1951— First quarter.Second quarter 3

Quarterly average:1936-38.1947194819491950

1949— First quarterSecond quarter.. ._ _Third quarter _.Fourth quarter

I960— First quarter.Second quarter..Third quarterFourth quarter

1951— First quarter

Totalgeneral

im-ports

Can-ada i

OtherWesternHemi-sphere

ERPcoun-tries

OtherEu-rope

Asia aAus-traliaand

OceaniaAfrica

Millions of dollars

6221,4391,7811,6562,213

1,7891,6011,4781,755

1,8891,9312,3902,642

3,0292,950

88282398388490

378383348442

404479503574

529<«)

143568626611776

662580562641

727645915818

1,082(«)

152174244211315

250190175228

240243322455

514(4)

3045483547

34333338

45454950

63(4)

183249324296409

328302265288

302364417554

592(<)

1039413152

34392231

49524760

82(<)

17829884

123

103747289

122103136131

167(4)

Percentage of total

100100100100100

100100100100

100100100100

100

14.119.622.323.422.1

21.123.923.525.2

21.424.821.021.7

17.5

23.039.535.136.935.1

37.036.238.036.5

38.533.438.331.0

35.7

24.412.113.712.714.2

14.011.911.813.0

12.712.613.517.2

17.0

4.83.12.72.12.1

1.92.12.22.2

2.42.32.11.9

2.1

29.417.318.217.918.5

18.318.917.916.4

16.018.917.421.0

19.5

1.62.72.31.92.3

1.92.41.51.8

2.62.72.02.3

2.7

2.75.75.55.15.6

5.84.64.95.1

6.55.35.75.0

5.5

*Includes Newfoundland and Labrador.»Turkey is included with ERP countries and excluded from Asia. Imports from Germany are included

with those of ERP countries and, in the postwar period, relate almost wholly to imports from the threewestern zones.

3 Estimates based on incomplete data; by Council of Economic Advisers.* Not available.

NOTE.—Data in this table cover all merchandise received in the United States customs area from foreigncountries. General imports include merchandise entered immediately upon arrival into merchandisingchannels, plus entries into bonded customs warehouses.



269


TABI*E B-46.—United States merchandise imports for consumption, by economic class, 1936-38quarterly average and 1947—51

Period



1950 — First quarterSecond quarterThird quarter .._Fourth quarter - . _

1951— -First quarterSecond quarter *

Quarterly average:1936-381947. .194819491950

1949 — First quarter -Second quarterThird quarter _._Fourth quarter

1950— First quarter _Second quarter . -Third quarterFourth quarter

1951 — First quarter

Totalimportsfor con-

sumption

Crudematerials

Crudefoodstuffs

Manufac-tured

foodstuffsSemimanu-

facturesFinishedmanufac-

tures

Millions of dollars

6151,4161,7731,6482,186

1,7571,5901,5011,744

1,8731,9082,3492,614

2,9572,850

190441537463617

503449424478

536516635781

925(2)

85254318333437

340302287403

423347516463

642(3)

95164183185224

182198194167

185213275224

256(2)

126311408355531

396336306381

417481544683

664(2)

120246327311376

336305290315

312352378462

470(2)

Percentage of total

100100100100100

100100100100

100100100100

100

30.931.130.328.128.2

28.628.228.227.4

28.627.027.029.9

31.3

13.817.917.920.220.0

19.419.019.123.1

22.618.222.017.7

21.7

15.411.610.311.210.2

10.412.512.99.6

9.9ll.fi11.78.6

8.7

20.522.023.021.524.3

22.521.120.421.8

22.325.223.226.1

22.5

19.517.418.418.917.2

19.119.219.318.1

16.718.416.117.7

15.9

* Estimates based on incomplete data; by Council of Economic Advisers.2 Not available.NOTE.—Imports for consumption include merchandise entered immediately upon arrival into merchan-

dising or consumption channels, plus withdrawals from bonded customs warehouses for consumption.Detail will not necessarily add to totals because of rounding.Source: Department of Commerce (except as noted).

270


TABLE B-47.—Indexes of quantity and unit value of United States merchandise imports forconsumption, bv economic class, 1936—38 quarterly average and 1947—51

[1936-38=1001

Period

Quarterly average:1936-3819471948 . . _1949_.._1950

1949 — First quarterSecond quarter .Third quarterFourth quarter

1950 — First quarterSecond quarter. .. ..Third quarterFourth quarter

1951 — First quarterSecond quarter * . _ .

Quarterly average:1936-381947194819491950 . . . . .

1949 — First quarterSecond quarter.Third quarterFourth quarter _


1951 — First quarterSecond quarter *

Totalimports forconsump-

tion

Crudematerials

Crudefoodstuffs

Manufac-tured food-

stuffs

Semi-manufac-

tures

Finishedmanufac-

tures

Quantity indexes

100108123120146

121116111131

137136154158

163158

100129139125152

129118116136

152140156161

161(2)

10096

109119113

121116104135

12194

125111

149(2)

100839197

117

9310510088

98113143113

126(2)

100130149143219

140129130169

189213220247

225(2)

10084

103101125

1059894

106

107119125147

141(2)

Unit value indexes

100213235224243

235224220217

223229248270

295308

100180203195214

206200193185

185194215255

302(2)

100311343330454

330306324352

410433485491

508(2)

100208212202203

205199205201

199199203210

214(2)

100191217198193

225208187180

176179197220

234(2)

100245266258252

267261258249

245248253262

278(2)

i Estimates based on incomplete data; by Council of Economic Advisers. For unit value, April used asin dicative of entire quarter,

a Not available.NoTE.—The indexes of quantity are a measure of the volume of trade after the influence on value of changes

in average prices has been eliminated. The indexes of unit value provide a measure of change in the averageprices at which trade transactions arc reported in official foreign trade statistics, including changes in averageprices that result from changes in the commodity composition of trade.


271


TABLE B—48.—Changes in selected economic series since 1939 and 1950

Source:Ap-

pendixTableNo.

B-l....

B-3.._.

B-6

B-7- —

B-10...

B-11--

B-15...

B-16...

B-17...

B-19...

B-20...

B-21__.

B-24.,.

See foe

Economic series

Gross national product .Personal consumption expendi-

turesGross private domestic investment .Government purchases of goods

and services . .

Gross national product in first half of1951 prices _

Personal consumption expendi-tures

Gross private domestic investment -Government purchases of goods

and services... _ .

National incomeCompensation of employees

Personal incomeDisposal personable income _Personal net saving

Per capita disposable personal income:Current pricesFirst half of 1951 prices

Labor force, including armed forcesCivilian labor force

Employment _ _AgriculturalNonagri cultural. . . .

Unemployment

Average gross weekly earnings:Manufacturing

Durable goodsNondurable goods

Building construction ._

Physical production index of goodsAgriculturalNonagricultural. _

Industrial productionDurable manufacturesNondurable manufacturesMinerals

New constructionPrivate

Residential (nonfarm)NonresidentialOther private

Public ...

Business expenditures for new plantand equipment

Manufacturing

Inventories, end of periodManufacturing..Wholesale tradeRetail trade

SalesManufacturingWholesale traote .Retail trade

Consumers* price index: All itemsFoodApparelRentHousefurnishings.

ttnotes at end of table.

1939=100

1950

Total

310

287494

324

168

160241

160

330321

310291396

251141

11611413178

14533

249239251243

178130189

183217172140

340474470481478187

357426

305297339303357384333334

173215187126188

Firsthalf

295

277444

311

164

158228

158

310304

298281396

244140

11511312875

14241

239229243231

(3)(3)180

173202166130

324446440428478183

309351

269262299266331350305320

170208184125183

Secondhalf

324

297543

338

172

163257

161

349337

321301396

259142

11811513481

14825

257248259252

(3)(3)198

194233177149

357501500533478191

405502

305297339303383418360347

176222190127193

1951,firsthalf*

355

305624

437

181

160283

202

377365

340314541

268141

(3)11313270

14822

270261268259

(3)(3)209

204251183154

375497440665517235

446591

347339378346407452382358

185237201129208

Percentage increase *

1950, firsthalf, to

1951, firsthalf

20.1

10.140.5

40.5

10.3

1.224.6

28.3

21.620.1

14.011.636.4

9.7.8

(3)-.a2.8

-6.84.1

-46.7

12.913.910.112.0

(3)

0,217.524.59.9

18.1

15.911.3

.055.38.0

28.6

44.368.4

28.929.326.329.923.129.025.212.2

9.014.09.43.4

13.7

1950, sec-ond half,to 1951,

first half 2

9.5

2.614.9

29.1

5.5

-1.910.4

25.2

8.18.3

6.14.3

36.4

3.4-1.0

(3)-2.4-1.9

-13.3-.2

-14.3N

5.15.43.62.8

8'5.5

5.27.93.13.2

5.1-.9

-12.024. 88. 2

23.4

10.017.8

13.614.011.514.16.48.16.23.4

5.17.06.11.97.7

272


TABLE B-48.—Changes in selected economic series since 1939 and 1950—Continued

Source:Ap-

pendixTableNo.

B-25...

B-26...

B-28...

B-29...

B-34...

B-43...

B-45...

Economic series

Wholesale price index: All commod-ities . . .

Farm productsFoods.Other than farm products and

foods .

Prices received by farmersPrices paid by farmers (including in-

terest, taxes, and wage rates)

Consumer credit outstanding, end ofperiod _.

Instalment credit . .

Loans and investments of all com-mercial banks , end of period

LoansInvestments in U. S. Government

obligations

Corporate profits:Profits before tax..Profits after tax

Dividend paymentsUndistributed profits

Merchandise exports, including re-exports . _.

General merchandise imports

1939=100

1950

Total

209261236

188

269

209

286304

311303

380

637456242

1133

*346

*356

Firsthalf

199246224

181

254

205

251274

299260

404

534380213917

*329

*307

Secondhalf

219276249

196

286

213

286304

311303

380

738530268

1350

<364

4405

1951,firsthalf3

237307264

211

322

230

273292

311320

362

772452242

1125

4501

4481

Percentage increase *

1950, firsthalf, to

1951, firsthalf8

18.724.718.2

16.8

27.0

12.0

8.86.6

3.922.8

-10.3

44.718.913.622.7

52.3

56.5

1950, sec-ond half,to 1951,

first half «

7.910.96.3

7.4

12.5

7.7

-4.5-4.2

-.15.4

-4.8

4.6-14.7-9.8

-16.7

37.6

18.8

i Changes are computed from data as reported and therefore may differ slightly from changes computedfrom the indexes shown here.

> Estimates based on incomplete data.»Not available.41936-38 average=100.

273



Appendix CLists of Text Tables and Charts in the

Midyear Economic Report of the President

and the Economic Situation

at Midyear 1951

CONTENTS

G-l. List of text tables 277C-2. List of charts 278

275



C-l. List of Text TablesTableNo. page1. Changes in the major components of the gross national product, 1940 to 1944. 642. National security program: deliveries of military goods and other expendi-

tures 693. United States consumption and production of selected commodities as per-

centages of free world production 744. Changes in the distribution of family income, before taxes, 1941 to 1944.... 905. Distribution of income in the postwar period 926. Distribution of families by income level, before and after Federal income tax,

1950 967. Summary of tax amortization necessity certificates, and direct loans and loan

guarantees under Defense Production Act, by type of production, throughJune 1951 102

8. Importance of small business in selected defense-related industries 1079. Regional impact of the defense program, compared to regional economic

activities in 1947 10910. Actual and proposed increases in individual income and excise taxes, by

income groups, estimated for fiscal year 1952 13211. Range of wholesale price increases in foreign countries since June 1950 16012. Output of selected industries, May 1951 compared with 1950-51 peak 16813. Changes in wholesale prices 17114. Changes in consumers' prices 17715. Liquid saving by individuals 19116. United States exports and imports of goods and services 19917. Index of average prices in United States foreign trade 20118. Foreign merchandise trade of Western Europe with rest of world 20219. Federal budget receipts and expenditures, the General Fund balance, and the

public debt 20320. Federal cash payments to the public, by function 20521. Federal cash receipts from the public, by source 20622. Government cash receipts from and payments to the public 20723. The Nation's Economic Budget, calendar years 1950-51 208

277


C—2. List of ChartsChartNo. Page1. Gross national product and national security programs 52. Military expenditures as percent of gross national product 83. Per capita gross national product and military expenditures 94. Economic indicators 205. Production, spending, and prices since mid-1950 356. The expanding security program 457. Growth in production, 1940-44 528. Expansion of the labor force, 1940-44 549. Increases in labor input and output, 1940-44 55

10. Changes in labor input and output 5611. Changes in production 5712. Changes in the labor force 5913. Gross national product 6114. Changes in composition of gross national product since 1940, 1st half of 1951

prices 6515. Federal budget expenditures 7116. Military requirements for basic metals, percent of expected supply 7217. Gross private domestic investment, 1st half of 1951 prices 7618. Expansion in industrial capacity, 1939 to end of 1951 7919. Changes in personal consumption expenditures, 1st half of 1951 prices 8920. Per capita consumption expenditures, 1st half of 1951 prices 9121. Production of selected consumer durable goods 9322. Consumer income and demand, and price increases 12123. Private investment and its financing 12324. Federal budget receipts, expenditures, and the public debt 13025. Civilian labor force 16326. Changes in nonagricultural employment 16527. Industrial production 16728. Wholesale prices 17229. Wholesale prices of industrial products 17430. Consumers' prices 17631. Wages and hours, all manufacturing industries 17932. Corporate profits 18233. Bank loans and investments 18534. Consumer credit 18635. Personal income 18936. Business investment 19237. Sources and uses of corporate funds 19738. Exports and imports of goods and services 19839. Prices of imports 20040. Federal cash receipts from and payments to the public 204

278


