Mr. WOLCOTT. In this morning's paper there appears a very interesting article in respect to civilian allocation. It starts off by saying:

O. P. M. officials believe that the swiftly mounting impact of priorities in diverting strategic material away from nondefense factories "will assume perfectly appalling proportions before many weeks," resulting, according to some estimates, in the shut-down of from 5,000 to 6,000 factories and the displacement of well over one million workers before the end of the year.

Now, what are you going to do, in exercising this theory of civilian allocation, to prevent the closing of between five and six thousand factories and the unemployment of over a million workers which, of course, would result in the dislocation of our entire economy if it were carried to its logical conclusion.

Mr. HENDERSON. It probably would result and might even amount to what took place in England when they made their change-over from the civilian to the military, of upwards of 20 to 25 percent unemployment in some industries.

Mr. WOLCOTT. Is that going to be the way you are going to control prices, by shifting of purchasing power?

Mr. HENDERSON. The particular item you read has nothing to do with the price-making authority that is asked for in this bill.

Mr. WOLCOTT. But the condition exists, if I am correct in what I am getting at, if this bill is enacted to give you this power, plus the power that the Office of Production Management has and the power that you now have under the defense acts, together with the power which the President seeks over private property and several other acts which I will not take the time to mention, but with which you are familiar; and as an economist do you think that creates about 100 percent managed economy?

Mr. HENDERSON. No.

Mr. WOLCOTT. What is there left for the individual to manage? Mr. HENDERSON. Well, I would presume that he would be managing his individual business, if he has an individual business. There is the greatest amount of reliance on individual management.

Mr. WOLCOTT. If his business happens to be of a character that is supplying civilian needs and nondefense needs, then he comes within the category of the five or six thousand industries which, according to the Office of Production Management, might fold up. We have the duty and responsibility in Congress, in addition to providing for the defense of this Nation against enemies from without to provide against the unwarranted, useless, and abnormal assumption of control over the national economy, and that is why I am asking you these questions as to what power you will exercise if we pass this bill, together with those which have already been vested in the President, and if that will not constitute about 100 percent managed economy to the ultimate possible destruction of private enterprise.

Mr. HENDERSON. I cannot agree that that is 100 percent managed economy because I have studied 100 percent managed economies and there is a tremendous difference between them. What you describe is the organization of a country to treat of an emergency, the same kind of organization that has always taken place in times of emergency in democratic countries.

Mr. WOLCOTT. Possibly we would have some emergency created by the enactment of this act which would be a much greater emergency than confronts us at the present time, and that is what we must guard against.

Mr. HENDERSON. This is the democratic approach to prevent the chaos that otherwise would result.

Mr. WOLCOTT. I will state my position very frankly, that I do not think that it profits the United States very much to protect any foreign country of the Stalin brand of democracy if in doing so we destroy the American form of government.

Mr. HENDERSON. I would agree with that 100 percent.

Mr. WOLCOTT. And that is our responsibility.

Mr. HENDERSON. That is right, and I think we are both very serious in our efforts to assume it.

Now, let me point out, if I may, in connection with the discussion up to date, that we have a level of 160 for industrial production at the present time by reason of this greatly augmented military account, which has been responsible for a certain amount of the increase. Due to the lack of balance that exists it is no longer possible to go ahead with as high a level in the civilian economy; but even if you had the reduction that would take place by 5,000 plants closing and by 1,000,000 men being put out of employment you would still have a higher level of business activity than existed prior to the time the defense program was created.

Mr. WOLCOTT. How would you bring that about?

Mr. HENDERSON. I think it is not a case of bringing it about; when the defense program started the level of industrial production was down around 105, as I recall, and it has increased about 55 percent; by now probably more. What has been taking place is the diversion and yet there is still the unemployment that you are talking

about.

You asked me about the orderly procedure that would take place. Now, many of the 5,000 plants, assuming that story has the statistics and accuracy to back it up and I have no reason to doubt it -are making civilian goods; most of them are making civilian durable goods, which have claims to these materials. It stands to reason that a great deal of that grew out of the greatly augmented purchasing power, which is going to result from this increased level of activity at 160 and there will be even more purchasing power for those articles. The necessity for control of these prices becomes increasingly evident as the demand for the supplies increases, increasing the amount of purchasing power, and with the decrease of supplies in the civilian account you have all of the elements that are needed for an inflation spiral. So, I think you have the necessity for control and I further think this is the democratic approach to it, because otherwise you let the forces of chaos, these artificial conditions, take charge and instead of moving into things in a democratic manner you surrender to them.

It does not seem to me and I seem to be making a speech, if you will forgive me, because I have thought about this for many, many months-it does not seem there is a likelihood of failure of democratic processes if we adopt this approach in times of emergency. It seems to me that what we are doing is to organize our democratic forces, to organize our manpower and our intelligence in setting up standards for doing the things that have to be done. I think that what is happening now, it may be said, results from our failure to raise our sights from the lack of proper planning and management, and I think

we are going to pay dearly for that. But I do not believe that, by recourse to a price control act or by means of priority or conservation, whether it was through the legislative approach or through the executive approach, we would have abandoned democratic methods. I think we would have augmented them because we would be preventing the things that are going to take place. When workers are thrown out of employment they are going to raise a question concerning things you have just been talking about, of why they should be thrown out of work in order to protect the people across the sea.

Now, a democracy moves very, very slowly and sometimes in a cumbersome way but when it does move it moves under the force of public opinion; it moves under the standard of getting things done. It seems to me that the most democratic approach is to take charge of a situation under standards that can be fully supported.

Mr. WOLCOTT. Do you not think, also, that it is better to approach the problem by using democratic machinery which has already been established rather than to manufacture new machinery, which is subject, at least, to criticism on the ground that it is not democratic? That brings me to a very important part of the discussion. I do not know whether you want me to go into that at this time, or not, Mr. Chairman.

The CHAIRMAN. Go ahead.

Mr. WOLCOTT. You have said that we should not take a laissez faire attitude, and I think we all agree to that. We are all attempting to solve this problem, and some may suggest other methods than those that have been advanced. I think, in view of that, in determining whether we have assumed a laissez faire attitude in respect of the consideration and thought we have given to it, we should go back to fundamentals and determine what is involved in inflation and what are the influences which create purchasing power out of proportion to the availability of goods. I think, however, before we go into that discussion, and preceding it, we should say, and I think you are in agreement with it, that there should be a close relationship between fiscal and monetary policies and between the saving program and the tax problem.

Mr. HENDERSON. That is correct.

Mr. WOLCOTT. You are of the opinion that the control of prices alone will not prevent inflation?

Mr. HENDERSON. Yes, sir; I am of the firm opinion that the control of prices alone will not do that, and that there must be taken into account the fiscal and monetary policies. I further believe that we will have to go much further in this whole program than we have gone to date.

Mr. WOLCOTT. In the study which you made of price control abroad, you have this to say in that respect:

A successful price policy presupposes an appropriate fiscal and monetary policy. Prices cannot be prevented for long from rising if the community's disposable money income (i. e., the money income minus taxes and voluntary savings) is increased at a faster rate than the supply of consumers' goods. În Britain and Canada, government spokesmen and practice have stressed the importance of this relationship between price policy and fiscal and monetary policy. Even in Germany, price control probably would not have been successful unless these other policies had provided an deqauate basis for its operation. The experience of Japan provides an example of the failure of rigid price control in the face of inadequate fiscal and monetary controls over an expanding national money income.

64300-41-pt. 1——13

So that, of equal importance with price control is the control of the sources of credit and the control of the velocity of credit. Do you agree with that?

Mr. HENDERSON. Yes, sir.

Mr. WOLCOTT. Perhaps, I cannot go much further. I want to call your attention to some of those things which I think influence the volume of credit and the velocity of credit: First, we have Government spending, excess reserves, interest rates, increased volume of currency, remonetization of silver, the gold and silver purchase policy, expansion of purchasing power by expanding pay rolls, use of direct obligations of the United States as security for issues of reserve notes, the President's authority to issue $3,000,000,000 of greenbacks, the influence of taxes, and the influence of the sterilization of gold and silver so they cannot be used as a basis for credit.

The CHAIRMAN. As the members of the committee may desire to answer the roll call in the House, we will recess until 2:30 o'clock this afternoon.

(Thereupon, the committee stood in recess until 2:30 o'clock of this

day.)

AFTERNOON SESSION

The committee resumed its session, pursuant to the recess order. at 2:30 o'clock p. m., Hon. William B. Steagall (chairman) presiding. The CHAIRMAN. The committee will come to order. You may proceed with your examination, Mr. Wolcott.

Mr. HENDERSON. Mr. Chairman, before we resume, may I make a suggestion: We were discussing yesterday the question of why wages were not included in the price bill, and I took occasion to refer several times to the English experience and the English policy in relation to the handling of the matter of wage fixing. I did not know at that time that the British Treasury had issued a white paper on price stabilization and industrial policy. It has just come to my hands today as it appears in the Financial News, issue of July 23, 1941. It bears directly and pertinently on this discussion, and I think it might be well to have it introduced in the record. I would like to have that permission, if I may.

The CHAIRMAN. How long is it?

Mr. HENDERSON. It would run about a column and a quarter of this paper here.

Mr. PATMAN. Does that mean the fixing of wages?

Mr. HENDERSON. Yes, sir; and it recites the success of voluntary wage-fixing machinery in determining what the Government may do. Mr. PATMAN. But they have power to compel if the voluntary method is not satisfactory, have they not?

Mr. HENDERSON. That is correct.

I believe that under the war

powers they have that authority.

The CHAIRMAN. Without objection, the matter will be inserted in the record at this point.

Mr. CRAWFORD. I have read that white paper, and I think it should go in the record.

(The matter referred to is as follows:)

VOLUNTARY WAGE-FIXING MACHINERY TO STAY-WHITE PAPER ON PRICE STABILISATION AND INDUSTRIAL POLICY

Treasury policy on "Price Stabilisation and Industrial Policy" is the subject of a White Paper issued yesterday, following a statement in the House of Commons by Sir Kingsley Wood, Chancelor of the Exchequer.

The White Paper sets out, in clear and simple terms, considerations bearing upon Treasury policy, but it does not, in general, add to previous declarations by the Chancelor. Some interesting comments on the wage position, however, are worth stressing. The White Paper states that while the Government will continue to avoid modifications of the machinery for wage negotiations, and will leave voluntary organizations and wage tribunals free to reach decisions in accordance with relevant facts, such bodies "must bear in mind that the policy of price stabilisation will be made impossible and increases of wage rates will defeat their own object unless regulated in a manner that makes it possible to keep inflationary tendencies under control."

* * *

ECONOMIC CONSIDERATIONS

Below is the full text of the White Paper:

There is evidence that the Government policy of stabilising prices, designed to avoid the evils of inflation, is not generally understood; it may be well, therefore, to restate the considerations bearing upon this policy.

Our shipping difficulties and the diversion of manpower, machinery and factory space to the production of war materials have already greatly reduced the supply of goods for civilian consumption. The existence of stocks allowed some easement, but only for a time, and it is clear that not only must luxuries be cut out, but also there must be a reduction in the consumption of goods which in peacetime had almost come to be regarded as necessaries.

This curtailment is inevitable whatever money wages, salaries or profits are paid out. Increases in wages or other incomes would not make more goods available. Such increases would not raise the general standard of living; they would merely tend to send up prices and to denude the shops, making it difficult to secure a fair distribution of the limited supply of goods. Those with the least amount of money or least able to spend time in shopping and standing in queues would suffer most.

CHECKING THE "VICIOUS SPIRAL"

The beginning of the "vicious spiral" of inflation is found in increased prices; these force a demand for increased wages which is generally followed by a further increase in prices and so on, indefinitely. It has always been found impossible to check inflation when it has gone beyond a certain stage Consequently it is of the first importance to check it at the beginning.

By creating insecurity and confusion it would impede our productive effort, give great opportunities to the profiteer and impose hardship on those who were not lucky enough to secure a share in the general advance of money incomes. People in receipt of old-age pensions, insurance benefits, or small fixed incomes would be able to buy less of the necessaries of life. At the same time the money costs of running the war would rise and the Government, unable to raise new taxes sufficiently quickly, would have to issue fresh money, which would further inflame the disease.

When the Chancelor of the Exchequer introduced his budget this year, it was estimated that people would in 1941-42 have incomes amounting (after the deduction of taxation and saving at the then existing levels) to £500 millions in excess of the value of goods available for purchase.

MEASURES TAKEN BY GOVERNMENT

To prevent this excess of spendable money leading to a rise in the prices of necessaries and to bring about an equitable distribution of the limited available supplies of consumers' goods, three main methods have been adopted:

(1) Severe additional direct taxes have been imposed, which should have the effect of restricting the expenditure of those most able to bear the burden.

(2) Rationing of foodstuffs and of clothing has been introduced to conserve supplies and to insure a fair distribution.

(3) A policy of price control has been adopted through the Prices of Goods Act, now extended by the goods and services (price control) bill, through the exercise of direct price-fixing powers and through the grant of subsidies.