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FIRST EFFECT OF THE DEFENSE PROGRAM

The last half of 1940 told a totally different story. The inauguration of the defense program on a huge scale, coincident with large British buying, began to exert increasing pressure upon a wide range of commodity markets. A succession of tight situations developed as the armament program was stepped up; the supply of steel scrap was strained to maintain the record output of the steel industry;

CHART 76

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zinc smelters proved unable to keep up with the demand for zinc; large Army orders for construction of cantonments upset the lumber market in the late summer months, and the orders placed by the Quartermaster Corps for uniforms and other clothing, sheets, and blankets, heavy duck for tents, and denim for work clothing to equip the rapidly expanding Army brought heavy pressure on textile and clothing products.

At the same time, the increasing dislocation of world trade, the diversion of shipping from its accustomed runs, and, for some products, the exceedingly sharp

advance in shipping rates, resulted in a steady advance in the prices of basic imported raw materials. The full effect of these changes was not felt immediately, and actual increases in price of most imported goods during the latter part of 1940 were not spectacular, though prices of some individual products soared. It was evident, however, that the ground work for a sharper and more sustained movement was being laid.

THE 1941 PRICE RISE

With the turn of the year, the situation grew rapidly worse. Prices in speculative markets jumped violently. As shown on chart 76, sensitive commodities generally rose 25 percent in 41⁄2 months and on June 27 the Bureau of Labor Statistics daily index of spot prices of 28 basic products reached a peak at almost 150 percent of its level in August 1939. The move was as broad as it was sharp; it included all kinds of basic commodities, domestic as well as imported, agricultural as well as industrial. Among the exceptions were virgin copper and zinc, whose prices remained stable as a result of informal agreements between the industries and the Price Stabilization Division; steel scrap, the price of which was also formally fixed by the Office of Price Administration and Civilian Supply at levels slightly below those prevailing at the end of 1940; and steers, the price of which had advanced contraseasonally in late 1940. Table 12 compares the latest prices of these basic commodities with their levels before the war and also with quotations at the end of 1940.

But the advance was by no means confined to these basic commodities. It affected the entire field of wholesale markets. By the week ending July 5 the Bureau of Labor Statistics comprehensive index of the wholesale prices of nearly 900 commodities had advanced 17.6 percent since the outbreak of the war and fully 9.4 percent since the beginning of this year.

TABLE 12.-Changes in prices and indexes of 28 basic commodities
[August 1939 and December 1940 to date]

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The rise is the result of a number of factors. Expanding civilian demand as a result of rising employment and higher earnings began to be felt increasingly at the same time that the defense program was being stepped up rapidly. Operations in leading industries, like the steel industry, had reached virtually full capacity. Definite shortages of raw materials such as aluminum, zinc, and other basic metals, developed as practically the entire supply was needed for direct armament orders. There was a shift to scrap markets, as metals became scarce. A buying wave swept the markets as producers and dealers rushed to get command of limited supplies, and prices were bid up almost regardless of value. In such a situation price advances merely add to the cost of the defense program and of civilian goods, without inducing any addition to supplies.

It appears probable, moreover, that the upward move in prices is just beginning; there is no indication that even a temporary stopping point has been reached. The advance has been aggravated by speculation in many markets, but there is a more fundamental cause for the rise the development of genuine shortages in relation to demand for a growing list of commodities and advances in production costs in a considerable number of industries. In the absence of effective governmental controls, there is no natural corrective to the situation; prices left to themselves in wartime rise indefinitely.

A brief review of some particular market situations which are critical will indicate various types of price problems.

INDUSTRIAL MARKETS-WHOLESALE

Imports, shipping.—The problem of shipping, particularly as it affects imports, has become very acute in the past 6 months. The supply of available bottoms has been progressively curtailed as a result of losses at sea and the diversion of boats to routes of primary military importance. At the same time, shipping rates have been advancing steadily; thus, it now costs three times as much to bring sugar from Cuba to the United States as it did before the war. purely domestic products have been affected; thus, tanker rates for shipping fuel oil from the Gulf coast to the North Atlantic seaboard have been raised as much as 400 percent.

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Botanical drugs and essential oils.-Many botanical drugs and essential oils which are normally obtained from central Europe have become almost completely unobtainable and as a result their prices have skyrocketed. This is shown in chart 75. Thus, the current quotation for belladonna, which is used for eye examinations and other medical purposes, is 20 times above its level of August 1939. The price index for a group of essential oils computed by the Oil, Paint, and Drug Reporter has gone up almost 200 percent since August 1939.

Fats and oils.-The difficulty of obtaining imported fats and oils such as palm oil, copra, tung oil, and the like has increased the demand for domestic oils such as lard, cottonseed oil, and tallow. The extent of these increases is shown in chart 77. Thus, food fats other than butter and lard have almost doubled in price since the declaration of war in 1939 and the price of lard alone has more than doubled in the 6 months since December 1940. Uncontrolled speculation has further aggravated these situations as buyers have bid against each other in a race to lay in large stocks. The key importance of these oils and fats to the food, soap, and paint industries makes this problem particularly serious.

Strategic commodities. The program of building up adequate reserves of certain strategic materials such as rubber, tin, and manganese has proved exceedingly difficult and prices of some of these products have advanced very sharply. Thus, chrome ore was quoted at $21.50 a ton in August 1939 and is now selling for $39 a ton, a rise of more than 80 percent. More than half of the increase in this case is due to an advance of almost $10 in ocean freight rates from the Transvaal. Burlap. Imported products of importance to civilian consumers are even harder to obtain; for example, stocks of burlap, which is needed in great quantities to pack farm supplies such as fertilizer and potatoes, have fallen very low and apparently cannot be replenished at an adequate rate. Chart 74 shows that the price of burlap today is more than 13%1⁄2 cents, as compared with 5%1⁄2 cents in August 1939-a rise of about 150 percent. The cost of burlap bags has risen correspondingly and this in turn means higher prices for farm supplies and greater expense to the farmer.

Lumber. The average price of lumber has advanced 28 percent since the outbreak of the war. This was one of the first groups of products to be directly affected by the defense program. The sudden placing of large orders for lumber for cantonments in the late summer of 1940 resulted in raising the price of southern pine about 50 percent in 3 months, while quotations for Douglas fir jumped

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