inadequate housing facilities. Housing shortages as the cause of a high percentage of labor turn-over in the last war have been studied in great detail. Workers moved from one defense area to another in search of decent living quarters at reasonable rents, and the time spent in migration was a total loss to the war effort. Unless there is a ceiling over rents, workers will continue to move to new areas in search of reasonable rentals. They may not be informed about equally bad rental conditions in the area to which they migrate, and the immediate grievance will encourage them to leave. High labor turn-over represents a waste of manpower which must be avoided if there is to be an efficient functioning of the defense program.

Moreover, all this movement does not add a single unit to the available housing supply in defense areas. If anything, exorbitant rentals may, for a time at least, restrict the rental housing market. Workers hesitate before they pay the unreasonable rent demanded and, in some instances, houses remain unoccupied. Any such restriction of the rental market in a defense area, even if it is only temporary, is a direct impediment to the smooth working of the defense program.

INCREASED RENTS AND COSTS OF OPERATION

Some price increases may be justified as necessary because of increased costs of production. This reasoning has little bearing upon rent increases since most of the cost of continuing to provide existing dwellings has already been incurred. Capital and interest charges and real-estate taxes are, in the main, fixed. Costs of maintenance and services, if any are furnished, are the chief items which may vary. Rent increases now taking effect are for the most part unrelated to greater costs of maintenance or service; indeed, all too frequently such rent increases are accompanied by diminished services. Under the circumstances, the rent increase appears to be simple profiteering, taking advantage of the shortage brought about by the national emergency to increase the price of a basic necessity. Tenants are particularly resentful of rent increases imposed upon them when to their knowledge there have been no additional costs of operation.

VOLUNTARY CONTROL

Attempts have been made to stabilize rents in defense areas through persuasion. Federal officials have been joined by local authorities in condemning undue rent increases. The dangers to the price structure and to civilian morale which may result from these increases have been elaborated upon in the press and on the radio. Local fair-rent committees have been established to put the pressure of public opinion behind a voluntary mediation of the more exorbitant increases. The difficulty about a voluntary program of rent stabilization is that it tends to work to the disadvantage of those patriotic landlords who have not used the national emergency to enrich themselves. Even the landlord who, after tenant complaint, accepts the mediation of a fair-rent committee is in reality less favored than the adamant landlord who refuses to agree to the recommendations of such a committee. In practice, voluntary rent control amounts to haphazard enforcement. Some tenants succeed in getting their rents reduced; others do not. Voluntary control, when it has the backing of public opinion, may succeed temporarily in restraining an upward trend in some defense areas. Some success has been achieved. But voluntary measures lack the authority to reverse unfavorable trends. Only a control having the authority of law can move into those areas in which it has been demonstrated that voluntary measures are insufficient. While the Rent Section of the Price Division has worked vigorously in aiding in the organization of fair-rent committees in various defense areas, it believes that these are only a temporary expedient.

STATE CONTROL

It has been suggested that the regulation of rents in defense areas be undertaken by the several States. This proposal has a number of practical disadvantages:

(1) Defense areas which need controls often cross State lines. The Charlestown, Ind. area includes Louisville, Ky.; the area about Fort Benning includes Columbus, Ga., and Phenix, Ala.; the industrial area of Moline, East Moline, Rock Island, and Davenport includes cities in Illinois and Iowa. Unless there is some uniformity across State lines, one portion of a defense area may be under regulation while another allows unlimited rent increases.

(2) The procedure involved in securing the enactment of State legislation to control rents is cumbersome and lengthy. Most State legislatures are no longer in session, and many of them will not meet again for 2 years. The calling of special sessions for the purpose of passing emergency rent control legislation is a dubious expedient. Long delays followed the introduction this year of emergency rent legislation in New York, Connecticut, California, New Jersey, and Pennsylvania. None of the legislatures has passed the bill. Reliance on State legislation is, therefore, impractical. It cannot be available in time to remedy promptly evils which already exist.

(3) Many States in which defense communities need rent regulation will under any circumstance either be unwilling or unable to finance the machinery of control. Exhorbitant rent increases during the national emergency are not merely local and State problems. Since high rents contribute to price spiraling, rents directly affect the interest of the national economy. Since rising rents in defense areas arouse discontent among workers, encourage needless migration, prevent the maintenance of a stable labor supply and the development of a high morale, the control of rents is a part of national defense.

The broad social and economic problems of defense areas have rightly been considered subjects of Federal concern during the national emergency. No one has questioned the desirability of Federal defense housing powers during this period. The need for rent control derives from the same problem-the Nationwide migration of defense workers and officers and enlisted men from one section of the country to another.

FEDERAL CONTROL

Federal control of rents in defense localities is the only realistic solution of the problem. Such control, in order to be effective, should provide for the right to investigate rental conditions in defense areas throughout the country, utilizing existing governmental research agencies. Since conditions vary greatly from one locality to another, each defense rental area would have to be considered on the basis of surveys conducted on the spot in cooperation with the best informed local authorities. The investigations would determine the prevalence of the increases as well as their amounts in specific areas.

When a critical situation is revealed, the Government should have the power to curb further increases or to restore previous rent levels in any area where they are manifestly exhorbitant. Authority should also be granted to delimit the areas in which controls may be imposed, as well as the types of housing accommodations and rental groups subject to regulation.

Such measures should safeguard the interests of tenants and those landlords who have refrained from demanding undue rent increases. Controls should only bring within bounds landlords who have exacted a profiteering rental during a period of national emergency.

THE ACTIVITIES OF THE PRICE STABILIZATION DIVISION AND THE OFFICE OF PRICE ADMINISTRATION AND CIVILIAN SUPPLY

I. INTRODUCTION

War and heavy military expenditure always carry the threat of disastrous inflation. This in turn interferes with the effectiveness of the programs and brings in its wake widespread dislocations and misery. The President at the initiation of the defense program established a division in the Advisory Commission to the Council of National Defense charged with the responsibility of preventing inflation. During the past 14 months the Office of Price Administration and Civilian Supply and its predecessor, the Price Stabilization Division of the National Defense Advisory Commission, have endeavored to discharge this duty by preventing or checking price increases on particular commodities, encouraging expansion of supply, and by cooperation with the Treasury in recommendations for tax programs. In this work the Price Division has utilized the powers delegated to it by the President-largely powers of recommendation. It has endeavored to accomplish the objective by measures which disturb as little as possible established business relationships, practices, and channels of trade. Conferences with businessmen in order to obtain technical information and to discuss the probable results of alternative courses of action have been typical procedure. Businessmen have continuously been encouraged to stabilize the'r own prices by individual action. Formal ceiling prices have been established only in instances of failure or inability of business itself to stabilize prices.

Until recently the Division, concentrating on situations of basic importance or extreme speculative activity, has been able to restrict the number and degree of price increases to a tolerable minimum, even though it has not attempted to impose sanctions. There have been, however, prominent instances where voluntary stabilization has failed. More important, conditions have changed rapidly within the past few months and will continue to change in succeeding months. The pressure on the price system has become too great for voluntary measures.

Prices of many commodities would have gone much higher in the past 14 months in the absence of the activities of the Price Division. But at present there is no doubt that prices of many goods on which formal ceilings currently exist will break through these ceilings in the near future if the Office of Price Administration and Civilian Supply is not given adequate power. And finally there is no doubt that prices of many other goods, more difficult to control by the methods now open to the Price Division, will rise markedly in the next few months unless adequate powers are given to control them.

IMPORTANCE IN THE FIRST STAGES OF PRICE CONTROL IN BASIC MATERIALS

The major task of the Price Division and the Office of Price Administration and Civilian Supply in the first 14 months was to prevent inflation of prices of basic materials. This is where the defense program first exerted pressure and hence where inflation starts. In devising means of carrying out this important duty the Office had to be prompt and practical. The rapid rush of events did not permit long deliberation of the action needed. Almost from the inception of this work it has been necessary to come to grips with and act expeditiously on particular price increases which threatened to start the spiral of inflation on its destructive

course.

From the beginning expansion of supply was emphasized as the best regulator of prices, the best preventive of unnecessary dislocations that would be occasioned by shortage, and an effective agent for promoting morale by reducing unemployment and diminishing the amount of sacrifice necessary for the defense effort. The other principal methods used to control prices have been efforts to influence buying and selling practices of private business and of government, informal price ceilings achieved by suggestions, requests, or warnings to business firms or by

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understandings with individual firms, and formal price ceilings established by the Division through issuance of schedules of maximum prices.

Until recently the Division has achieved a substantial measure of success in preventing marked price increases in basic materials. The success attained by vigilant and skillful use of the methods mentioned above is due in large part to the existence of several favorable factors. Substantial expansion of domestic output-both from previously unused capacity and from increased capacity-has been possible in many industries, as indicated in table 13.

TABLE 13.—Expansion in United States industrial production (unadjusted), June 1940 to June 1941 [1935-39=100]

Machinery.

Nonferrous metals.
Automobiles.
Chemicals

Leather and prod

ucts.

Textiles and products..

June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. April May June

Combined index... 121 118 120

Manufactures

122 118

120

Durable manufac

tures

134

127

128

129

129

135

130 131

141

23

112

104

111

114

110

88

101

70

110

91

105

1 Preliminary.

Source: Federal Reserve indexes.

In some materials, such as copper, lead, bauxite, wool, hides, and rubber, supplies have been further augmented by increased importation. Many potential and actual price increases reflected merely unnecessary forward buying and attempts to build inventories or tendencies to deliberate profiteering, rather than the existence of real shortages. The attitude of many businessmen has been one of approval and cooperation in the work of preventing inflation, especially where profits were growing substantially because of a combination of moderate price increases and lowered costs resulting from marked expansion in volume of operations.

In short, prior to midwinter real shortages developed only in the case of a few commodities, most conspicuous of which were machine tools, zinc, suplhite pulp, and some drugs; and increases in costs on a per unit basis had scarcely begun to appear. During the late winter and spring of 1941, however, real shortages developed in many industries. Also, unit costs began to rise here and there as capacities were strained and ocean freights rose with increasing shipping shortages. These developments brought increasing pressure on prices which in turn necessitated the inauguration of formal ceiling price schedules and a multiplication of warnings, suggestions, and informal ceilings.

The success in limiting price advances in the basic materials was greatly facilitated by the fact that many of these commodities, such as the primary metals, are sold by only a few large corporations. Such companies, in general, have chosen to cooperate with the Office of Price Administration and Civilian Supply. Where, on the contrary, a commodity is sold by a large number of sellers, each rather inconspicuous and apt to feel that prices are made for him by the market, great difficulties have been encountered in obtaining stable prices. Even formal ceilings will not work unless there are prompt and effective measures to penalize those who do not conform. This fact in particular explains the relatively poor results in control of prices of scrap metals which are sold by hundreds and, in some cases, thousands of dealers.

FINISHED GOODS NOW BECOMING A PROBLEM

Prices of semifinished and finished goods have given little trouble during the past year. This situation is now changing rapidly. Every week brings more problems and more complaints of price advances in these areas.

A much more severe test of the ability of government to prevent inflation lies in the months ahead. During the first 11 months of the defense program the

Government spent only about $5,000,000,000 on defense. The total appropriations and contract authorizations for defense as of July 12, 1941, including the $5,000,000,000 already expended, amount to 47.1 billion dollars. Most of the remaining $40,000,000,000 is to be spent within a 2-year period. Defense spending, which has now reached about $1,000,000,000 per month, will rise steadily to a peak of $2,000,000,000 per month or more.

This enormous increase in expenditure, which will be partly translated into larger aggregates of wages, salaries, and dividend payments, cannot be matched by a corresponding proportional increase in output of all goods. Many basic industries and some others have already reached capacity operations. Expansion in capacity will occur, and both the Office of Price Administration and Civilian Supply and the Office of Production Management are working to this end. But bottlenecks in machine tools, skilled labor, and basic materials, to say nothing of other obstacles, will prevent an expansion in domestic capacity proportionate to increase in demand for goods. Imports may be reduced as a result of a more acute shortage of shipping. Although increased taxation is imperative to combat the grave threat of runaway inflation, it alone will not do the job, for taxation cannot be an effective instrument of apportioning demands for individual commodities to their respective supplies. Effective controls on the prices of many individual commodities are absolutely necessary to prevent inflation of these prices and its spread to many other commodities.

On the front of individual prices the task of control in succeeding months will lie in three areas: (1) The basic raw materials already under control, (2) many other raw materials where shortages will develop, and (3) a host of semifinished and finished goods where shortages are bound to occur as consumer incomes bound upward.

URGENCY OF ENFORCEMENT POWERS

A canvass of the heads of the several commodity sections of the Office of Price Administration and Civilian Supply indicates that within the next few months ceilings will be needed on 15 or 20 additional raw materials other than chemicals, on a considerable group of chemicals, and on a host of semifabricated and finished products made from the ever-widening list of materials with shortages. Also, prices of at least half of the commodities on which ceilings, formal or informal, now exist are almost sure to break through these ceilings in the next few months if effective powers of enforcement do not exist.

There are further reasons why control of individual prices in succeeding months cannot be effective unless the price-control agency is able to bring recalcitrant firms into line whether these represent a substantial or only a small part of an industry.

Without additional powers it may be possible to limit price increases to moderate amounts for some months hence in the case of commodities produced by a few large prominent corporations. This means some, although far from all, of the basic materials. If prices of these commodities are held down and profits of their producers limited to moderate amounts while the prices of semifinished goods made from them go sky high, obvious inequities are created. The same sort of unfairness would exist if prices of some other basic materials were not effectively controlled while those of one group were being successfully held down. Again, discrimination exists where the firm which respects maximum buying prices set by the Office of Price Administration and Civilian Supply loses materials to the chiseler who resells them. Unless prices of all commodities where inflation threatens can be controlled with equal effectiveness, and unless control is uniformly applied to all firms in an industry, inequities will occur.

In the second place, the attitude of businessmen toward prevention of price increases may change greatly in the next few months. With rising unit costs owing to extension of operations beyond the most economic rate, higher taxes, higher transport expense, higher labor costs, necessity of some use of substitute materials, and other factors, businessmen may think less of the nightmare of inflation and deflation. Other things will occupy their attention.

This change of attitude, which has already manifested itself in the past month, will produce more infractions of the ceiling prices. Infractions breed like maggots, unless they are effectively squashed. The history of prohibition and the history of National Recovery Administration both demonstrate that as violations increase, the respect for the Government and the willingness to comply diminish in more than proportionate measure.

The task of preventing severe inflation can only be achieved if every price increase is forestalled until it can be shown to be necessary to promote defense