April 26, 1951
To the Congress of the United States:
I recommend that the Congress extend for two years the Defense Production Act of 1950, which is now scheduled to expire on June 30, 1951. I also recommend that the Act be strengthened in certain respects.
The Defense Production Act was enacted in September, 1950--two months after the communist attack on free Korea had made clear the peril in which all free nations stand. It was a legislative expression of the national resolve to meet the worldwide communist threat with a vast increase in our military and economic strength.
The Act provides the basic authority for our defense mobilization program. It contains specific provisions for expanding production and for maintaining economic stability--the two essentials of the defense program.
Since last summer, we have made a strong beginning in getting defense production started, and we have laid the basis for an effective program to stabilize prices and the cost of living.
We have doubled the number of men in our active Armed Forces since last June. We have nearly doubled the rate of production of military planes during the past year. Monthly deliveries of military equipment and supplies have doubled since last June. In Europe, we have joined our associates in the North Atlantic Treaty in establishing a unified defense force, to be made up of units from the Treaty countries, under the command of General Eisenhower. The Mutual Defense Assistance Program has been stepped up substantially, and other free nations, particularly in Europe, are rapidly enlarging their defense establishments, as we are.
Since last summer, we have taken initial actions in the fields of taxes, credit controls, price and wage controls, and other measures necessary to stop inflation and keep it stopped.
No one should deceive himself, however, by assuming that we can now relax our strenuous efforts. Quite the opposite is true. What we have done so far consists essentially of laying a solid basis for future effort.
The major impact of the military build-up on our economy is still to come. Our planned expansion of defense production will not reach its peak for at least a year--and the inflationary pressures brought on by the defense effort likewise have not yet reached their peak.
The blunt fact is that the hardest part of the job still lies ahead. Nothing could be more foolhardy than to slacken the intensity of our defense mobilization effort just because we have gotten off to a good start.
When the Congress passed the Defense Production Act and when it passed the military appropriations acts, it clearly intended that we should proceed with all speed to strengthen ourselves and join in strengthening the forces of freedom throughout the world. I have heard no voice raised in favor of turning back before the job is finished.
The full range of powers included in the Defense Production Act will be needed-and needed badly--until we are "over the hump" in our defense mobilization program. We hope that will be about two years from now--always assuming that world war is avoided. All our plans must recognize, of course, that while we hope we can influence the actions of aggressors, we cannot control them--we hope we can prevent general war, but there is no way we can be sure.
For at least the next two years we shall be driving urgently forward in our defense mobilization program. Therefore, it is of the greatest importance that the Defense Production Act be extended for that period.
Defense Production
Titles I, II, and III of the Act relate to production.
Since June, 1950, the Government has placed orders for planes, tanks, guns, and other military equipment, facilities, and supplies in the amount of over 26 billion dollars. As yet, only a small part of these orders have been filled and the goods delivered. Furthermore, over 58 billion dollars more in orders have yet to be placed before the end of June, 1952.
This is a tough production program because we must build our strength as rapidly as we can. The world situation could explode at any time, and we must make every day count.
Consequently, the Government is using extensively the powers granted in the Defense Production Act to divert materials and plants from less important to more important uses. Under these powers, important metals, chemicals, and other materials--including such basic materials as steel, copper, and aluminum--are being controlled and channeled to the places they are most needed.
For the next year, at least, it is obvious that controls over materials will have to become tighter and tighter, as more and more of them will be diverted to essential production. Consequently, the allocations and priorities systems authorized in the Defense Production Act will be even more necessary than they are now.
There is much more to our production program, however, than simply diverting scarce materials and converting existing plants to defense production. As a Nation, we are expanding our ability to produce minerals and fuels; we are building new factories and transportation facilities--we are enlarging the economic capacity of the country, so that, in time, we shall be able to support a high level of military strength, resume our progress in raising living standards, and be stronger for meeting any new military demands.
For example, the capacity of the steel industry, which was 100 million tons a year last June, will be expanded, within two years, to at least 117 million tons a year. The aluminum industry had a capacity last June of 750,000 tons a year; by 1953 it should rise to 1,300,000 tons. The electric power capacity of the nation--67,500,000 kilowatts at the beginning of this year--is being rapidly increased; we need to add at least 22,000,000 more kilowatts in the next three years.
The Defense Production Act carries powers under which the Government is helping to build new plants and finance additional output. The Government is making or guaranteeing loans to private businessmen. It is buying some critical materials and equipment--particularly imported materials-and reselling them to private businessmen. It is also supporting the development of new domestic and foreign sources of supply for vital materials. These powers will have to be used to an increasing extent as our defense production expands.
In addition to these production aids under the Defense Production Act, under the Revenue Act of 1950 the Government is allowing businessmen, in certain cases, to write off part of the cost of new plants and equipment needed in the defense effort more rapidly than the usual depreciation periods under the tax laws. Some 5 billion dollars worth of new plant construction is being encouraged in this way.
Even with the existing production aids, it may not be possible to obtain the supplies and equipment needed unless the Government is given one power to help expand defense production which it does not now have. That is the general power, which was used extensively and successfully in World War II, to build defense plants. At the present time, with some exceptions, whether or not defense plants are built depends finally upon the decision of private businessmen. Certainly if private businessmen can and will build all the necessary facilities, without excessive cost to the taxpayers, that is preferable. But first and foremost, the Government must have the authority to obtain essential production.
To help expand defense production, the Government also needs the power to give special financial aid to high cost producers in order to obtain essential production from them without increasing price ceilings. Such "differential" subsidies were used very successfully in World War II, and saved American consumers and taxpayers many millions of dollars, because it was much cheaper to subsidize some high cost producers than to raise prices on the entire production of the commodities affected.
In summary, to accomplish our defense production goals, the Defense Production Act should be extended and strengthened, and adequate funds to carry out its provisions should be authorized.
Economic Stabilization
Titles IV, V, and VI of the Defense Production Act relate to stabilization.
It will be a tough job to accomplish the production goals of our defense effort. It will, in many respects, be even harder to prevent our defense effort from resulting in skyrocketing prices--with increased defense costs, disruption of production, and hardship for millions of families.
For the next two or three years, the economy will be running at forced draft. Industrial production and employment will be reaching new records. People will be working longer hours, many at overtime pay. Farmers will be producing and selling more crops. All of this will mean higher incomes--more money available for people to spend. At the same time, much of our manpower and plant capacity will be diverted to building defense plants and producing military goods--leaving that much less civilian goods for people to buy.
More money to spend than there are goods to buy--that creates the so-called "inflationary gap." Without an effective stabilization program, the excess spending power could be translated into higher and higher prices.
If we are successful in preventing another world war, at the end of two or three years we should be able to close the inflationary gap by producing enough civilian goods to match the buying power of businesses and consumers. This can be done when our expenditures for military purposes and for new plants will have leveled off--and the vastly increased productive power of the country can be devoted in greater proportion to civilian goods.
But in the meantime, until we are "over the hump," we face an extremely difficult problem in stopping inflation.
Fortunately, we are now in a relatively good position to prepare for the tough period ahead. After the Korean invasion, and again after the Chinese intervention, there were speculative buying rushes by businessmen and consumers which, coupled with the expansion of defense orders, resulted in prices surging upward. The wholesale price index rose 16 percent from June 27, 1950, to February 6, 1951. The index of consumer prices rose 8 percent from June 15, 1950, to February 15, 1951.
Now, however, tax, credit, and price and wage control actions have taken hold. Production has increased substantially, and the buying wave has--at least for the time being--died down. Consequently, the upward rush of prices has been checked. The wholesale price index rose only 0.5 percent between February 6 and April 17, 1951. The latest consumer's price index figures, those of March 15, show a rise of only 0.4 percent in the month following February 15--the first full month of price control. We have made a good beginning and we must now go on to achieve more complete stabilization.
We are now having something of a "breathing spell." But it will not last. This fall and winter the economy will be hit by the full impact of military production. Supplies of civilian goods will be reduced while larger production, employment and military spending will be putting still greater buying power in the hands of the public.
Inflationary pressures, which are serious now, will be critical then. We must therefore use the present period to get prepared for the hard problems which lie ahead. The present "breathing spell" is a fortunate occurrence-it gives us a chance to get hold of the price structure and build a set of controls which will hold firm. This opportunity will not come again. We must not waste it. The Executive agencies will do their utmost with the powers they have and the Congress will need to enact additional legislation.
In taking action now, our simple, central goal must be to bring the rise in prices and the cost of living to a halt--and hold the line. It will take strong and determined measures to do that.
1. Most important of all, we must increase taxes quickly and adequately--paying for Government expenditures as we go, through a fair tax program. This will spread the cost of defense equitably and help stop the inflationary spiral.
2. We must increase personal savings-dollars saved now are subtracted from the buying power pushing prices upward, and will be available later when more consumer goods will be produced.
3. We must reduce borrowing and buying on credit for non-defense purposes--by consumers and businessmen--since borrowed money adds to the pressure on prices.
4. We must have fair ceilings on prices, including the prices of farm products, and on rents, in order to stabilize the cost of living during the defense period, to hold down the cost of the defense program to the taxpayers, and to prevent profiteering.
5. We must stabilize wages and salaries at fair levels, to restrain excessive consumer demand and to prevent rising business costs from forcing price increases.
This is an anti-inflation program that will work. It includes measures to absorb excess purchasing power, and measures to stop prices and costs from jumping upward. This .program will work if all these measures are employed to support and reinforce one another. We must fight inflation on every front and with every possible weapon if we are to succeed.
Taxes
A large Federal deficit would be a powerful inflationary force, because the Government would be pouring more money into the economy than it was taking from it. The effects would be multiplied in a period of rising expenditures, when Government orders and the private borrowing and spending which they stimulate exceed the actual budget expenditure figures.
An effective stabilization program requires that we hold Federal expenditures to the minimum necessary for national security and a strong Nation. The January budget reflects such a policy, and I know the Congress will apply the same standard in reviewing it.
An effective stabilization program also requires that taxes be high enough at least to balance the budget.
The Federal Government will show a surplus for the current fiscal year, ending on June 30. This is a good record. But, unfortunately it does not mean we are on a pay-as-we-go basis. During the present quarter and from here on out, until taxes are raised, we will be operating at a deficit. The latest figures show that to balance the budget as defense outlays continue to rise will require the Congress to enact during this year at least the 10 billion dollars in additional taxes I have recommended.
The people of our country are going to have to pay for the defense program sometime; the sensible thing to do is for us to pay for it as we go, through fair taxes.
Savings
This is also the sensible time to put every possible dollar into savings. Every additional dollar saved helps hold down the cost of living, and puts aside money that will be available later on, when consumer goods are again plentiful.
During World War II, the American people invested unprecedented amounts in savings bonds, thus withdrawing billions of dollars which otherwise would have pushed prices upward during the war; after the war those savings helped many a family. It is vital again now to encourage savings-through payroll savings plans and other regular methods of savings bond purchase, and through encouraging people to hold on to their savings bonds as they come due, and thereby earn more interest.
The most effective way of all to assure adequate saving is to provide convincing assurance to savers that inflation will not cut down the value of their savings. This is one of the many reasons why we need to increase taxes and to extend and strengthen present economic stabilization legislation.
Credit Controls
Credit controls, like taxation and savings, attack inflation at the source, by reducing purchasing power which would otherwise be directly used to bid up the prices of goods.
A good deal has been done since last June * to curtail the expansion of consumer and real estate credit. Higher down payments and quicker payment of balances are being required of buyers of new houses, automobiles, household appliances, and other durable goods. These credit controls are already showing good results--for example, the amount of credit outstanding to buyers of automobiles, which had risen steadily since 1945, has declined every month since last October and total installment credit dropped by about half a billion dollars in the first three months of this year. The provisions in the Defense Production Act authorizing such credit controls need to be extended; furthermore, we need the authority to control credit terms on the sale of existing houses, as well as new ones.
We are in a less favorable situation regarding bank credit to businessmen. Bank loans have risen, week after week, almost without interruption. Many of these loans are necessary-for example, loans to businessmen to expand defense production. But it is very important to cut down on unnecessary loans. Non-essential business investments should be deferred because they compete for scarce materials and manpower.
Several steps have been taken to dampen bank credit expansion. The discount rates of the Federal Reserve banks have been raised. The Federal Reserve Board has increased the reserve requirements of member banks almost to the legal maximum. The Treasury has offered long-term nonmarketable bonds in exchange for long-term marketable bonds, in order to cut down the supply of securities that might be used for credit expansion. In addition, the Federal Reserve Board has recently requested all banks and other lenders to cut down on their non-essential lending. Government lending agencies are already applying strict standards in screening and limiting their loans.
It is not yet clear whether further actions will be needed, but we should obviously be prepared to take them. The Government has certain emergency powers it can use to place direct controls over bank lending, if that proves to be necessary. In addition, I believe that the Federal Reserve Board should be given authority by the Congress to impose additional requirements for bank reserves. I expect to transmit specific recommendations on this subject to the Congress in the near future.
Furthermore, I recommend that the Congress authorize the control of margins for Speculation on commodity futures markets. Whenever the speculative fever hits these markets, we should be able to dampen it promptly with reasonable requirements for minimum margins. This is the same kind of authority which the Federal Reserve Board now exercises in respect to the stock markets
Price and Wage Controls
Price and wage controls do not cure the basic cause of inflation--the inflationary gap between the supply of goods and the volume of buying power.
The cure can come about only by closing the gap--through tax, saving, and credit programs which reduce the demand for goods, on the one hand, and production programs which increase the supply, on the other. But until the inflationary gap is dosed through these measures, price and wage controls are indispensable in checking the price rises which otherwise would result. At the present time, it is clear that these controls must be maintained and strengthened.
On January 26, a general ceiling price regulation was issued, freezing most prices at the highest level they had reached in the previous four weeks. At the same time, a similar regulation stopped, for the time being, further wage increases.
Both the price and wage freezes of January were intended as emergency measures to hold down price and wage increases temporarily, until more workable regulations could be developed and the staff assembled to put them into effect. These January regulations were a necessary step. But, inevitably, they froze all sorts of distortions and inequities into the price and wage structure.
They left some sellers operating at a loss, and others making excessive profits. They caught many retailers in an unfavorable position as against their wholesalers; many wholesalers as against manufacturers; many manufacturers as against raw materials producers. They caught many workers in the process of negotiating for wage adjustments which other workers had already obtained.
Many of these kinks in the price-wage structure have to be ironed out in order to achieve a situation which is fair and reasonable enough to hold firm against the new inflationary pressures we expect. Necessarily, there will continue to be some differences in the impact of price and wage regulations as among individuals or firms; these will be minimized, but they are inevitable if we are to have real stabilization.
In the case of prices, the Office of Price Stabilization has been moving ahead with the adjustment process since the January freeze. Adjustments have been completed for many products and industries, but not for all. Roll-backs from January prices have been required on a number of raw materials and finished products. More roll-backs are planned. In other cases, some price increases will have to be allowed where sellers are caught unfairly between high costs and low prices. But these increases must be held to the minimum that will result in adequate production and reasonable returns. The upward spiraling of prices which is involved in translating cost increases into price increases must be prevented.
The Office of Price Stabilization expects to complete this adjustment process in the near future, and to have then a firm structure of price control with prices on the average very dose to the January level. This adjusted price structure is the line we propose to hold against the new inflationary pressures which we foresee.
The Office of Price Stabilization will move as rapidly as is administratively feasible to apply a general standard of not permitting price increases in any industry when the level of profits for that industry is more than 85% of its average profits for the best three of four years 1946-1949.
This standard is roughly the same as that used in the excess profits tax law, and is fair and reasonable during a time of national emergency. Corporate profits are now running at the all-time record rate of 48 billion dollars a year--more than 14 billion dollars higher than in 1948, and about 20 billion dollars higher than in 1949. There is clearly room for cost absorption in profits such as these.
In addition, the Office of Price Stabilization has been directed to work out specific dollars and cents ceilings on individual commodities wherever possible. This is of vital importance both as a means of checking unwarranted price increases and in order that the buying public may know the legal price and help enforce it.
In the case of wages, unfortunately, the process of changing over from the wage freeze to a fair longer-run wage stabilization program was interrupted by the split-up of the Wage Stabilization Board in February. In the absence of a Board, only slow progress has been made toward establishing fair and workable wage stabilization policies.
Within the last week, however, I have issued an Executive Order re-establishing the Wage Stabilization Board. The further development of fair wage stabilization policies for the longer run should now go rapidly forward. In formulating such policies, many factors will have to be weighed, including changes in the cost of living, substandards of living, and cases of hardship or inequity. At the same time, it is obvious that workers will have to forego substantial increases in wages which would be permissible if the danger of inflation were not so great--just as businessmen and farmers will have to forego substantial increases in income for the same reason.
The Defense Production Act has special provisions regarding ceilings on farm products. It prohibits setting price ceilings on agricultural commodities below either the parity price or the highest price attained in the May 24--June 24, 1950, period, whichever is higher. This provision has led to considerable misunderstanding; it has often been said to prevent price ceilings on farm products. This is, of course, not so. Prices of several of the major farm products, including meats, cotton, and wool, are above the legal minimums and consequently are subject to price ceilings. For example, a dollars-and-cents ceiling has been placed on cotton at the producer level.
Prices paid to farmers for some farm commodities, however, are below parity. These prices cannot be controlled, under the present law, until they rise to the parity level. This has led to some proposals to change the law to permit price ceilings to be placed on farm products below parity levels. I do not believe such proposals are justified under present circumstances. The parity principle, which is the basis for our agricultural laws, is the best guide we now have available to judge what is a fair return to farmers.
I do believe, however, that for price control purposes, the parity price for each commodity prevailing at the start of its normal marketing season should be applied throughout the balance of the marketing season, just as is the case in most of our agricultural price support programs. I recommend that the Defense Production Act be amended to provide for this. Under this amendment, the parity price will continue to be a minimum standard for each price ceiling. The amendment will, however, substantially improve the administration of price control on food products and will forestall the inflationary effects of frequent changes in the computation of the parity price of individual farm commodities.
The current outlook is for stable food prices, at least for some months to come. However, if we find that we cannot hold the line on food prices with the powers recommended here, we shall need to consider legislation authorizing the use of other devices, including limited food subsidies to prevent necessary farm price increases from being reflected in rises in the cost of living. Such subsidies were very successful in World War II, and saved consumers and taxpayers far more than they cost. The stabilization agencies are keeping close watch on the areas where need for these subsidies may develop, and the Congress will be kept informed.
Price controls will be successful only if buyers and sellers are well informed about what the law and regulations require. The Office of Price Stabilization is now doing its best to inform them. But there is need also for tough and aggressive enforcement action against the small minority who would willfully violate the law. The Defense Production Act needs to be strengthened in a number of respects to tighten up the Government's enforcement powers. For example, the courts should be given authority to impose higher civil penalties for violations than the law now permits.
Rent Control
A serious deficiency in the present stabilization structure is the absence of an effective rent control law. For millions of families with low or moderate income, rent accounts for as much as 15 percent or more of the total family budget. If costs of living are to be stabilized, it is obvious that increases in rents must be stopped and the line held, just as with other prices.
There is still in effect a rent control law, due to expire on June 30. We are fortunate that this law is still on the books. But it is entirely inadequate to help meet the inflationary pressures which will confront us in the coming months.
The present law was enacted before the Korean outbreak as a last step in the liquidation of the rent controls left over from the war. About 6.7 million housing units are still under Federal control, compared to 16 million housing units under control at the peak of the World War II rent control program. In addition, one State and one municipality have control measures of their own.
Before the Korean outbreak, it was contemplated that Federal control would be removed from these last remaining units by June 30, 1951, at the latest. Since Korea, however, reactivation of military camps and other installations in various parts of the country has placed great pressures on nearby housing accommodations and in a number of instances has brought a shocking increase in rents. This has become a heavy and totally unjustified burden on many men in service. In some communities where rents have been decontrolled, servicemen's rents have risen as much as 100%. In some defense areas, also, expansion of production facilities by private industry and by the military services or the Atomic Energy Commission has begun to send rents soaring. Over the nation as a whole, the volume of new housing-which was helping to relieve the housing shortage and the pressure on rent levels--has had to be sharply curtailed.
All of these circumstances call for new rent legislation. The Government should have power to establish rent controls in any community where they are needed to stabilize the situation, stop profiteering, and hold down living costs. Of course, if State and local action results in holding rents to reasonable levels, the Federal Government would not act.
In addition to the control of rents on residential housing, an effective stabilization program in this period requires that the Government be able to control business rents. Rents are an important part of the cost of doing business at wholesale and retail levels. With the high levels of business activity, sales and warehouse space has been at a premium for many months. Business rents are rising in many cities and further sharp increases are threatened in the coming months. Unless controls are authorized, many businesses, particularly small firms, will face rent and hence cost increases, which will either drive them out of business or require a break in price ceilings.
The keystone of our stabilization program is to share fairly the necessary burdens imposed by the defense effort. We can do this best by holding the cost of living stable, by preventing profiteering by anyone, and by paying for our military needs through higher taxes. A rounded stabilization program, such as I have outlined, can accomplish these ends.
Summary of Proposed Changes in the Defense Production Act
In this message, I have discussed the more important of the amendments which I believe should be made in the Defense Production Act at this time. Others will be presented to the Congressional Committees by appropriate officials of the Executive Branch.
In summary, the more important amendments to the Act which I now recommend would:
1. Extend the life of the Act for two years, until June 30, 1953.
2. Authorize the Government to build and operate defense plants, where necessary, to produce essential materials and equipment.
3. Permit the use of differential subsidies to obtain essential production from high-cost sources of supply without increasing price ceilings.
4. Provide for controls over credit on existing housing, and regulation of speculative trading on commodity exchanges.
5. Allow the parity price for each farm commodity as of the beginning of its marketing season to be used for price control purposes throughout the marketing season.
6. Provide stronger means to enforce price control regulations.
7. Authorize effective control over both residential and commercial rents, wherever needed to stabilize the cost of living and the cost of doing business.
If, as we proceed with the defense mobilization program, it becomes evident that we need further legislative action to assure that our goals are met, I shall make further recommendations to the Congress.
While the Congress is considering these proposals and enacting those which it deems desirable, the Executive Branch will continue to use vigorously the range of powers it has now. In the course of its forthcoming deliberations, the Congress will have available to it for consideration all of the experience and information which the Executive agencies can provide.
We are engaged in a historic effort to hold together all of the free peoples of the world in the face of the greatest danger ever confronting them. As a leader in that effort, we must demonstrate to the whole world that the founding fathers were wise in their faith that our Government of divided powers would never suffer disunity or frustrate necessary action in time of peril. The Executive Branch and the Congress are both responsive to the American people-and the needs of the people are now both clear and imperative.
HARRY S. TRUMAN
NOTE: For the statement by the President upon signing the Defense Production Act Amendments, see Item 176.
To the Congress of the United States:
I recommend that the Congress extend for two years the Defense Production Act of 1950, which is now scheduled to expire on June 30, 1951. I also recommend that the Act be strengthened in certain respects.
The Defense Production Act was enacted in September, 1950--two months after the communist attack on free Korea had made clear the peril in which all free nations stand. It was a legislative expression of the national resolve to meet the worldwide communist threat with a vast increase in our military and economic strength.
The Act provides the basic authority for our defense mobilization program. It contains specific provisions for expanding production and for maintaining economic stability--the two essentials of the defense program.
Since last summer, we have made a strong beginning in getting defense production started, and we have laid the basis for an effective program to stabilize prices and the cost of living.
We have doubled the number of men in our active Armed Forces since last June. We have nearly doubled the rate of production of military planes during the past year. Monthly deliveries of military equipment and supplies have doubled since last June. In Europe, we have joined our associates in the North Atlantic Treaty in establishing a unified defense force, to be made up of units from the Treaty countries, under the command of General Eisenhower. The Mutual Defense Assistance Program has been stepped up substantially, and other free nations, particularly in Europe, are rapidly enlarging their defense establishments, as we are.
Since last summer, we have taken initial actions in the fields of taxes, credit controls, price and wage controls, and other measures necessary to stop inflation and keep it stopped.
No one should deceive himself, however, by assuming that we can now relax our strenuous efforts. Quite the opposite is true. What we have done so far consists essentially of laying a solid basis for future effort.
The major impact of the military build-up on our economy is still to come. Our planned expansion of defense production will not reach its peak for at least a year--and the inflationary pressures brought on by the defense effort likewise have not yet reached their peak.
The blunt fact is that the hardest part of the job still lies ahead. Nothing could be more foolhardy than to slacken the intensity of our defense mobilization effort just because we have gotten off to a good start.
When the Congress passed the Defense Production Act and when it passed the military appropriations acts, it clearly intended that we should proceed with all speed to strengthen ourselves and join in strengthening the forces of freedom throughout the world. I have heard no voice raised in favor of turning back before the job is finished.
The full range of powers included in the Defense Production Act will be needed-and needed badly--until we are "over the hump" in our defense mobilization program. We hope that will be about two years from now--always assuming that world war is avoided. All our plans must recognize, of course, that while we hope we can influence the actions of aggressors, we cannot control them--we hope we can prevent general war, but there is no way we can be sure.
For at least the next two years we shall be driving urgently forward in our defense mobilization program. Therefore, it is of the greatest importance that the Defense Production Act be extended for that period.
Defense Production
Titles I, II, and III of the Act relate to production.
Since June, 1950, the Government has placed orders for planes, tanks, guns, and other military equipment, facilities, and supplies in the amount of over 26 billion dollars. As yet, only a small part of these orders have been filled and the goods delivered. Furthermore, over 58 billion dollars more in orders have yet to be placed before the end of June, 1952.
This is a tough production program because we must build our strength as rapidly as we can. The world situation could explode at any time, and we must make every day count.
Consequently, the Government is using extensively the powers granted in the Defense Production Act to divert materials and plants from less important to more important uses. Under these powers, important metals, chemicals, and other materials--including such basic materials as steel, copper, and aluminum--are being controlled and channeled to the places they are most needed.
For the next year, at least, it is obvious that controls over materials will have to become tighter and tighter, as more and more of them will be diverted to essential production. Consequently, the allocations and priorities systems authorized in the Defense Production Act will be even more necessary than they are now.
There is much more to our production program, however, than simply diverting scarce materials and converting existing plants to defense production. As a Nation, we are expanding our ability to produce minerals and fuels; we are building new factories and transportation facilities--we are enlarging the economic capacity of the country, so that, in time, we shall be able to support a high level of military strength, resume our progress in raising living standards, and be stronger for meeting any new military demands.
For example, the capacity of the steel industry, which was 100 million tons a year last June, will be expanded, within two years, to at least 117 million tons a year. The aluminum industry had a capacity last June of 750,000 tons a year; by 1953 it should rise to 1,300,000 tons. The electric power capacity of the nation--67,500,000 kilowatts at the beginning of this year--is being rapidly increased; we need to add at least 22,000,000 more kilowatts in the next three years.
The Defense Production Act carries powers under which the Government is helping to build new plants and finance additional output. The Government is making or guaranteeing loans to private businessmen. It is buying some critical materials and equipment--particularly imported materials-and reselling them to private businessmen. It is also supporting the development of new domestic and foreign sources of supply for vital materials. These powers will have to be used to an increasing extent as our defense production expands.
In addition to these production aids under the Defense Production Act, under the Revenue Act of 1950 the Government is allowing businessmen, in certain cases, to write off part of the cost of new plants and equipment needed in the defense effort more rapidly than the usual depreciation periods under the tax laws. Some 5 billion dollars worth of new plant construction is being encouraged in this way.
Even with the existing production aids, it may not be possible to obtain the supplies and equipment needed unless the Government is given one power to help expand defense production which it does not now have. That is the general power, which was used extensively and successfully in World War II, to build defense plants. At the present time, with some exceptions, whether or not defense plants are built depends finally upon the decision of private businessmen. Certainly if private businessmen can and will build all the necessary facilities, without excessive cost to the taxpayers, that is preferable. But first and foremost, the Government must have the authority to obtain essential production.
To help expand defense production, the Government also needs the power to give special financial aid to high cost producers in order to obtain essential production from them without increasing price ceilings. Such "differential" subsidies were used very successfully in World War II, and saved American consumers and taxpayers many millions of dollars, because it was much cheaper to subsidize some high cost producers than to raise prices on the entire production of the commodities affected.
In summary, to accomplish our defense production goals, the Defense Production Act should be extended and strengthened, and adequate funds to carry out its provisions should be authorized.
Economic Stabilization
Titles IV, V, and VI of the Defense Production Act relate to stabilization.
It will be a tough job to accomplish the production goals of our defense effort. It will, in many respects, be even harder to prevent our defense effort from resulting in skyrocketing prices--with increased defense costs, disruption of production, and hardship for millions of families.
For the next two or three years, the economy will be running at forced draft. Industrial production and employment will be reaching new records. People will be working longer hours, many at overtime pay. Farmers will be producing and selling more crops. All of this will mean higher incomes--more money available for people to spend. At the same time, much of our manpower and plant capacity will be diverted to building defense plants and producing military goods--leaving that much less civilian goods for people to buy.
More money to spend than there are goods to buy--that creates the so-called "inflationary gap." Without an effective stabilization program, the excess spending power could be translated into higher and higher prices.
If we are successful in preventing another world war, at the end of two or three years we should be able to close the inflationary gap by producing enough civilian goods to match the buying power of businesses and consumers. This can be done when our expenditures for military purposes and for new plants will have leveled off--and the vastly increased productive power of the country can be devoted in greater proportion to civilian goods.
But in the meantime, until we are "over the hump," we face an extremely difficult problem in stopping inflation.
Fortunately, we are now in a relatively good position to prepare for the tough period ahead. After the Korean invasion, and again after the Chinese intervention, there were speculative buying rushes by businessmen and consumers which, coupled with the expansion of defense orders, resulted in prices surging upward. The wholesale price index rose 16 percent from June 27, 1950, to February 6, 1951. The index of consumer prices rose 8 percent from June 15, 1950, to February 15, 1951.
Now, however, tax, credit, and price and wage control actions have taken hold. Production has increased substantially, and the buying wave has--at least for the time being--died down. Consequently, the upward rush of prices has been checked. The wholesale price index rose only 0.5 percent between February 6 and April 17, 1951. The latest consumer's price index figures, those of March 15, show a rise of only 0.4 percent in the month following February 15--the first full month of price control. We have made a good beginning and we must now go on to achieve more complete stabilization.
We are now having something of a "breathing spell." But it will not last. This fall and winter the economy will be hit by the full impact of military production. Supplies of civilian goods will be reduced while larger production, employment and military spending will be putting still greater buying power in the hands of the public.
Inflationary pressures, which are serious now, will be critical then. We must therefore use the present period to get prepared for the hard problems which lie ahead. The present "breathing spell" is a fortunate occurrence-it gives us a chance to get hold of the price structure and build a set of controls which will hold firm. This opportunity will not come again. We must not waste it. The Executive agencies will do their utmost with the powers they have and the Congress will need to enact additional legislation.
In taking action now, our simple, central goal must be to bring the rise in prices and the cost of living to a halt--and hold the line. It will take strong and determined measures to do that.
1. Most important of all, we must increase taxes quickly and adequately--paying for Government expenditures as we go, through a fair tax program. This will spread the cost of defense equitably and help stop the inflationary spiral.
2. We must increase personal savings-dollars saved now are subtracted from the buying power pushing prices upward, and will be available later when more consumer goods will be produced.
3. We must reduce borrowing and buying on credit for non-defense purposes--by consumers and businessmen--since borrowed money adds to the pressure on prices.
4. We must have fair ceilings on prices, including the prices of farm products, and on rents, in order to stabilize the cost of living during the defense period, to hold down the cost of the defense program to the taxpayers, and to prevent profiteering.
5. We must stabilize wages and salaries at fair levels, to restrain excessive consumer demand and to prevent rising business costs from forcing price increases.
This is an anti-inflation program that will work. It includes measures to absorb excess purchasing power, and measures to stop prices and costs from jumping upward. This .program will work if all these measures are employed to support and reinforce one another. We must fight inflation on every front and with every possible weapon if we are to succeed.
Taxes
A large Federal deficit would be a powerful inflationary force, because the Government would be pouring more money into the economy than it was taking from it. The effects would be multiplied in a period of rising expenditures, when Government orders and the private borrowing and spending which they stimulate exceed the actual budget expenditure figures.
An effective stabilization program requires that we hold Federal expenditures to the minimum necessary for national security and a strong Nation. The January budget reflects such a policy, and I know the Congress will apply the same standard in reviewing it.
An effective stabilization program also requires that taxes be high enough at least to balance the budget.
The Federal Government will show a surplus for the current fiscal year, ending on June 30. This is a good record. But, unfortunately it does not mean we are on a pay-as-we-go basis. During the present quarter and from here on out, until taxes are raised, we will be operating at a deficit. The latest figures show that to balance the budget as defense outlays continue to rise will require the Congress to enact during this year at least the 10 billion dollars in additional taxes I have recommended.
The people of our country are going to have to pay for the defense program sometime; the sensible thing to do is for us to pay for it as we go, through fair taxes.
Savings
This is also the sensible time to put every possible dollar into savings. Every additional dollar saved helps hold down the cost of living, and puts aside money that will be available later on, when consumer goods are again plentiful.
During World War II, the American people invested unprecedented amounts in savings bonds, thus withdrawing billions of dollars which otherwise would have pushed prices upward during the war; after the war those savings helped many a family. It is vital again now to encourage savings-through payroll savings plans and other regular methods of savings bond purchase, and through encouraging people to hold on to their savings bonds as they come due, and thereby earn more interest.
The most effective way of all to assure adequate saving is to provide convincing assurance to savers that inflation will not cut down the value of their savings. This is one of the many reasons why we need to increase taxes and to extend and strengthen present economic stabilization legislation.
Credit Controls
Credit controls, like taxation and savings, attack inflation at the source, by reducing purchasing power which would otherwise be directly used to bid up the prices of goods.
A good deal has been done since last June * to curtail the expansion of consumer and real estate credit. Higher down payments and quicker payment of balances are being required of buyers of new houses, automobiles, household appliances, and other durable goods. These credit controls are already showing good results--for example, the amount of credit outstanding to buyers of automobiles, which had risen steadily since 1945, has declined every month since last October and total installment credit dropped by about half a billion dollars in the first three months of this year. The provisions in the Defense Production Act authorizing such credit controls need to be extended; furthermore, we need the authority to control credit terms on the sale of existing houses, as well as new ones.
We are in a less favorable situation regarding bank credit to businessmen. Bank loans have risen, week after week, almost without interruption. Many of these loans are necessary-for example, loans to businessmen to expand defense production. But it is very important to cut down on unnecessary loans. Non-essential business investments should be deferred because they compete for scarce materials and manpower.
Several steps have been taken to dampen bank credit expansion. The discount rates of the Federal Reserve banks have been raised. The Federal Reserve Board has increased the reserve requirements of member banks almost to the legal maximum. The Treasury has offered long-term nonmarketable bonds in exchange for long-term marketable bonds, in order to cut down the supply of securities that might be used for credit expansion. In addition, the Federal Reserve Board has recently requested all banks and other lenders to cut down on their non-essential lending. Government lending agencies are already applying strict standards in screening and limiting their loans.
It is not yet clear whether further actions will be needed, but we should obviously be prepared to take them. The Government has certain emergency powers it can use to place direct controls over bank lending, if that proves to be necessary. In addition, I believe that the Federal Reserve Board should be given authority by the Congress to impose additional requirements for bank reserves. I expect to transmit specific recommendations on this subject to the Congress in the near future.
Furthermore, I recommend that the Congress authorize the control of margins for Speculation on commodity futures markets. Whenever the speculative fever hits these markets, we should be able to dampen it promptly with reasonable requirements for minimum margins. This is the same kind of authority which the Federal Reserve Board now exercises in respect to the stock markets
Price and Wage Controls
Price and wage controls do not cure the basic cause of inflation--the inflationary gap between the supply of goods and the volume of buying power.
The cure can come about only by closing the gap--through tax, saving, and credit programs which reduce the demand for goods, on the one hand, and production programs which increase the supply, on the other. But until the inflationary gap is dosed through these measures, price and wage controls are indispensable in checking the price rises which otherwise would result. At the present time, it is clear that these controls must be maintained and strengthened.
On January 26, a general ceiling price regulation was issued, freezing most prices at the highest level they had reached in the previous four weeks. At the same time, a similar regulation stopped, for the time being, further wage increases.
Both the price and wage freezes of January were intended as emergency measures to hold down price and wage increases temporarily, until more workable regulations could be developed and the staff assembled to put them into effect. These January regulations were a necessary step. But, inevitably, they froze all sorts of distortions and inequities into the price and wage structure.
They left some sellers operating at a loss, and others making excessive profits. They caught many retailers in an unfavorable position as against their wholesalers; many wholesalers as against manufacturers; many manufacturers as against raw materials producers. They caught many workers in the process of negotiating for wage adjustments which other workers had already obtained.
Many of these kinks in the price-wage structure have to be ironed out in order to achieve a situation which is fair and reasonable enough to hold firm against the new inflationary pressures we expect. Necessarily, there will continue to be some differences in the impact of price and wage regulations as among individuals or firms; these will be minimized, but they are inevitable if we are to have real stabilization.
In the case of prices, the Office of Price Stabilization has been moving ahead with the adjustment process since the January freeze. Adjustments have been completed for many products and industries, but not for all. Roll-backs from January prices have been required on a number of raw materials and finished products. More roll-backs are planned. In other cases, some price increases will have to be allowed where sellers are caught unfairly between high costs and low prices. But these increases must be held to the minimum that will result in adequate production and reasonable returns. The upward spiraling of prices which is involved in translating cost increases into price increases must be prevented.
The Office of Price Stabilization expects to complete this adjustment process in the near future, and to have then a firm structure of price control with prices on the average very dose to the January level. This adjusted price structure is the line we propose to hold against the new inflationary pressures which we foresee.
The Office of Price Stabilization will move as rapidly as is administratively feasible to apply a general standard of not permitting price increases in any industry when the level of profits for that industry is more than 85% of its average profits for the best three of four years 1946-1949.
This standard is roughly the same as that used in the excess profits tax law, and is fair and reasonable during a time of national emergency. Corporate profits are now running at the all-time record rate of 48 billion dollars a year--more than 14 billion dollars higher than in 1948, and about 20 billion dollars higher than in 1949. There is clearly room for cost absorption in profits such as these.
In addition, the Office of Price Stabilization has been directed to work out specific dollars and cents ceilings on individual commodities wherever possible. This is of vital importance both as a means of checking unwarranted price increases and in order that the buying public may know the legal price and help enforce it.
In the case of wages, unfortunately, the process of changing over from the wage freeze to a fair longer-run wage stabilization program was interrupted by the split-up of the Wage Stabilization Board in February. In the absence of a Board, only slow progress has been made toward establishing fair and workable wage stabilization policies.
Within the last week, however, I have issued an Executive Order re-establishing the Wage Stabilization Board. The further development of fair wage stabilization policies for the longer run should now go rapidly forward. In formulating such policies, many factors will have to be weighed, including changes in the cost of living, substandards of living, and cases of hardship or inequity. At the same time, it is obvious that workers will have to forego substantial increases in wages which would be permissible if the danger of inflation were not so great--just as businessmen and farmers will have to forego substantial increases in income for the same reason.
The Defense Production Act has special provisions regarding ceilings on farm products. It prohibits setting price ceilings on agricultural commodities below either the parity price or the highest price attained in the May 24--June 24, 1950, period, whichever is higher. This provision has led to considerable misunderstanding; it has often been said to prevent price ceilings on farm products. This is, of course, not so. Prices of several of the major farm products, including meats, cotton, and wool, are above the legal minimums and consequently are subject to price ceilings. For example, a dollars-and-cents ceiling has been placed on cotton at the producer level.
Prices paid to farmers for some farm commodities, however, are below parity. These prices cannot be controlled, under the present law, until they rise to the parity level. This has led to some proposals to change the law to permit price ceilings to be placed on farm products below parity levels. I do not believe such proposals are justified under present circumstances. The parity principle, which is the basis for our agricultural laws, is the best guide we now have available to judge what is a fair return to farmers.
I do believe, however, that for price control purposes, the parity price for each commodity prevailing at the start of its normal marketing season should be applied throughout the balance of the marketing season, just as is the case in most of our agricultural price support programs. I recommend that the Defense Production Act be amended to provide for this. Under this amendment, the parity price will continue to be a minimum standard for each price ceiling. The amendment will, however, substantially improve the administration of price control on food products and will forestall the inflationary effects of frequent changes in the computation of the parity price of individual farm commodities.
The current outlook is for stable food prices, at least for some months to come. However, if we find that we cannot hold the line on food prices with the powers recommended here, we shall need to consider legislation authorizing the use of other devices, including limited food subsidies to prevent necessary farm price increases from being reflected in rises in the cost of living. Such subsidies were very successful in World War II, and saved consumers and taxpayers far more than they cost. The stabilization agencies are keeping close watch on the areas where need for these subsidies may develop, and the Congress will be kept informed.
Price controls will be successful only if buyers and sellers are well informed about what the law and regulations require. The Office of Price Stabilization is now doing its best to inform them. But there is need also for tough and aggressive enforcement action against the small minority who would willfully violate the law. The Defense Production Act needs to be strengthened in a number of respects to tighten up the Government's enforcement powers. For example, the courts should be given authority to impose higher civil penalties for violations than the law now permits.
Rent Control
A serious deficiency in the present stabilization structure is the absence of an effective rent control law. For millions of families with low or moderate income, rent accounts for as much as 15 percent or more of the total family budget. If costs of living are to be stabilized, it is obvious that increases in rents must be stopped and the line held, just as with other prices.
There is still in effect a rent control law, due to expire on June 30. We are fortunate that this law is still on the books. But it is entirely inadequate to help meet the inflationary pressures which will confront us in the coming months.
The present law was enacted before the Korean outbreak as a last step in the liquidation of the rent controls left over from the war. About 6.7 million housing units are still under Federal control, compared to 16 million housing units under control at the peak of the World War II rent control program. In addition, one State and one municipality have control measures of their own.
Before the Korean outbreak, it was contemplated that Federal control would be removed from these last remaining units by June 30, 1951, at the latest. Since Korea, however, reactivation of military camps and other installations in various parts of the country has placed great pressures on nearby housing accommodations and in a number of instances has brought a shocking increase in rents. This has become a heavy and totally unjustified burden on many men in service. In some communities where rents have been decontrolled, servicemen's rents have risen as much as 100%. In some defense areas, also, expansion of production facilities by private industry and by the military services or the Atomic Energy Commission has begun to send rents soaring. Over the nation as a whole, the volume of new housing-which was helping to relieve the housing shortage and the pressure on rent levels--has had to be sharply curtailed.
All of these circumstances call for new rent legislation. The Government should have power to establish rent controls in any community where they are needed to stabilize the situation, stop profiteering, and hold down living costs. Of course, if State and local action results in holding rents to reasonable levels, the Federal Government would not act.
In addition to the control of rents on residential housing, an effective stabilization program in this period requires that the Government be able to control business rents. Rents are an important part of the cost of doing business at wholesale and retail levels. With the high levels of business activity, sales and warehouse space has been at a premium for many months. Business rents are rising in many cities and further sharp increases are threatened in the coming months. Unless controls are authorized, many businesses, particularly small firms, will face rent and hence cost increases, which will either drive them out of business or require a break in price ceilings.
The keystone of our stabilization program is to share fairly the necessary burdens imposed by the defense effort. We can do this best by holding the cost of living stable, by preventing profiteering by anyone, and by paying for our military needs through higher taxes. A rounded stabilization program, such as I have outlined, can accomplish these ends.
Summary of Proposed Changes in the Defense Production Act
In this message, I have discussed the more important of the amendments which I believe should be made in the Defense Production Act at this time. Others will be presented to the Congressional Committees by appropriate officials of the Executive Branch.
In summary, the more important amendments to the Act which I now recommend would:
1. Extend the life of the Act for two years, until June 30, 1953.
2. Authorize the Government to build and operate defense plants, where necessary, to produce essential materials and equipment.
3. Permit the use of differential subsidies to obtain essential production from high-cost sources of supply without increasing price ceilings.
4. Provide for controls over credit on existing housing, and regulation of speculative trading on commodity exchanges.
5. Allow the parity price for each farm commodity as of the beginning of its marketing season to be used for price control purposes throughout the marketing season.
6. Provide stronger means to enforce price control regulations.
7. Authorize effective control over both residential and commercial rents, wherever needed to stabilize the cost of living and the cost of doing business.
If, as we proceed with the defense mobilization program, it becomes evident that we need further legislative action to assure that our goals are met, I shall make further recommendations to the Congress.
While the Congress is considering these proposals and enacting those which it deems desirable, the Executive Branch will continue to use vigorously the range of powers it has now. In the course of its forthcoming deliberations, the Congress will have available to it for consideration all of the experience and information which the Executive agencies can provide.
We are engaged in a historic effort to hold together all of the free peoples of the world in the face of the greatest danger ever confronting them. As a leader in that effort, we must demonstrate to the whole world that the founding fathers were wise in their faith that our Government of divided powers would never suffer disunity or frustrate necessary action in time of peril. The Executive Branch and the Congress are both responsive to the American people-and the needs of the people are now both clear and imperative.
HARRY S. TRUMAN
NOTE: For the statement by the President upon signing the Defense Production Act Amendments, see Item 176.