Mr. MILLS. Do you think, or do you have any idea, that the cotton market could ever get out of bounds as long as we have a year's supply of cotton ahead before we even harvest a bale this fall? Do you think there would be much inflation in the cotton market?

Mr. HENDERSON. Do you remember the experience in the last war? Mr. MILLS. We had some folks across the ocean to whom we shipped some cotton then.

Mr. HENDERSON. Let me put it this way. We are using, we said, about 10,500,000 bales of cotton now at the cotton mills. That is the rate at which it is being used, and a lot of mills are sold up for quite a long time. That means that a lot of that available cotton is already pledged for the manufacturers. So you have a very small supply in the market at the present time. That is an ideal situation for any short traders who can tie that up.

Mr. MILLS. You noticed a day or so ago the action taken in the House in freezing enormous quantities of cotton and wheat; and that, of course, will have an inflationary effect upon the cotton market, will it not?

Mr. HENDERSON. If it is maintained.

Mr. MILLS. That will likely bring about an unreasonable price?
Mr. HENDERSON. My guess is it would not help it any.

Mr. MILLS. What do you mean by that?

Mr. HENDERSON. As far as the problem of price administration is concerned.

Mr. MILLS. Mr. Henderson, there is some fear on the part of certain farmers with reference to this legislation, and some of my questions have been directed toward bringing out certain features in the legislation and possibly alleviating some of the fears that they have.

Mr. HENDERSON. I think anyone who has been in a depressed situation, particularly in a low-income group, and who sees the prospect of price control, has a right to be interested, and definitely so. I think they have a right to be alarmed lest that price fixing do them an unwarranted amount of harm. That seems to me particularly true when a group gets its income within a small length of time and the trading goes on over the whole year. I think they have cause for alarm and good reason for asking if they know what is likely to happen to them. Do you not?

Mr. MILLS. Possibly so; yes.

Mr. Henderson, do you think that a 25-cent price on cotton would be an undesirable price, as far as being a resulting factor on inflation might be concerned?

Mr. HENDERSON. Do you mean 25 cents for cotton, with all other things where they are now

Mr. MILLS. No.

Mr. HENDERSON. Or 25 cents for cotton with a 40-percent increase. in the price level, which is what it would be?

Mr. MILLS. That is what I am asking you.

Mr. HENDERSON. On a rough calculation, if cotton were 18 cents and went to 25 cents, that is about 40 percent. That would put the index at 142, and there was no period during the whole of the twenties or since that we have been within 25 percent of that.

Mr. MILLS. Let me ask you this question: Do we not sometimes dwell a little bit too much on the cost of living and the cost of the raw products?

Mr. HENDERSON. Yes. I think there is a distinction to be made which is very important. The actual increase the farmer would get, for example, might be very small, but due to the percentage increase that occurs as it goes along through the middlemen to the factories, by the time it gets to the consumers it represents a very heavy increase.

We had one of those instances in N. R. A. We undertook to calculate the effect of a small increase in wages on the cost of a work shirt, and as I remember it, it took about 8 cents increase on a shirt to get 1-cent increase in labor.

Mr. MILLS. Let me give you these figures on this particular point. Mr. HENDERSON. May I make one more point?

Mr. MILLS. Yes.

Mr. HENDERSON. That is the reason why England and Canada are trying the subsidy method rather than letting prices rise to prevent the necessity for having an increase in income.

Mr. MILLS. When a farmer walks into a store and buys a pair of overalls for a dollar, actually only 15 percent of that total amount represents the cost of the raw product, whereas in the case of the work shirt for which he pays a dollar, only 9 percent represents the cost of the raw product, and so on down the list. That is a very small proportion of the total cost, and if labor also represents a very small proportion of the cost, what makes up all these enormous percentages left over? Mr. HENDERSON. There is rent, return on capital, commissions, transportation, utility service, and the like.

Mr. MILLS. It seems to me that possibly we might place aside price control and start talking about controlling some of the factors that make up the cost of living. I am not being facetious about that; I have thought seriously about it for a long time.

I believe you said that under this bill it will be possible to control profits.

Mr. HENDERSON. No; I did not say it would be possible to control profits; I said just the contrary.

Mr. MILLS. Then I did not quite get your answer.

Mr. HENDERSON. What I said was that the control of profits would have to run to a control of prices and costs of each individual producer, and in a price ceiling you do not attempt to do that. You attempt to fix a uniform price for the product.

Mr. MILLS. The reason I ask you that question is that we propose to fix the commodity prices but do not propose to fix the cost of labor, so in this legislation it may be impossible to fix profits. I am wondering if, aside from all these other factors, you have discussed, which contribute to inflation, we have anything in this bill to even justify con sideration by the House, from the viewpoint of trying to control information.

Mr. Henderson, what do you think of the experience in the last war, and that of England and Canada and the rest of the countries in commodity price control? They seem to do a pretty good job, whether voluntary or by compulsion, in controlling profits and wage schedules.

Mr. HENDERSON. They control profits in the English economy by stiff taxation rates.

Mr. MILLS. Let me give you some figures I have obtained from the National City Bank bulletin on the question of profits, and see whether you agree with me that something has to be done to control profits if we are going to control the cost of living.

In 1940 the defense industries increased their percentage of profit over 1939, after deducting depreciation, interest, taxes, and other charges and reserves, and paid dividends of 63.2 percent.

These are not my figures. The nondefense industries, for the same period, had an increase of 6.1 percent.

Unclassified industries, which I understand represent a combination of both defense and nondefense commodities, obtained an increase of 17.6 percent; mining and quarrying, 13.6 percent; transportation, 89.1 percent, and public utilities, 5.5 percent.

Of course, there is some justification for the transportation increase, above all the others. But, to say the least, the excess-profits tax which we had on the statute books which affected this income of 1940, regardless of how much was taken, does not seem to have taken enough to have prevented these enormous profits or these increases being made over and above the amount paid in taxes. Would not these enormous profits and these increases over and above anything paid in taxes contribute in a large degree to an inflationary rise?

Mr. HENDERSON. Let me say this: In a number of those industries with which we have been dealing in the last year, the price itself has not increased. The profits represent a lowered unit cost in many of those industries.

If those profits are paid out in the way of dividends, they do increase the danger of inflation, but if they are used for expansion and the like, they merely add to the difficulties of price control.

Mr. MILLS. If these profits are paid out in dividends or used in purchasing equipment and expanding plants and they are not used to build reserves, would not that contribute to this increased producing rule?

Mr. HENDERSON. That is right, and they are a very proper subject for taxation.

Mr. MILLS. Should not the control of profits be included in any effort to fix the cost of living or to regulate inflation?

Mr. HENDERSON. There again I am troubled by the word "control," as I am in connection with wages, because I think of control as the direct regulatory measure we have before us. Are you familiar with my testimony before the Ways and Means Committee?

Mr. MILLS. Yes; I read it.

Mr. HENDERSON. I think that that is an answer to your question. I think it is a proper subject for taxation, yes.

Mr. MILLS. Mr. Chairman, I ask permission to insert this table in the record.

Mr. HENDERSON. I think the rates of profit you will find for the first 6 months of 1941 are even more substantial than those.

Mr. MILLS. I was just going to make that statement. We are spending at the rate of about $1,000,000,000 a month in 1941?

Mr. HENDERSON. No.
Mr. MILLS. Less than that?

Mr. HENDERSON. Yes.

Mr. MILLS. About $6,000,000,000 a year?

Mr. HENDERSON. Yes.

Mr. MILLS. This year we will possibly spend fifteen to eighteen to twenty billion dollars on defense, will we not?

Mr. HENDERSON. Yes.

Mr. MILLS. I believe you made that statement?
Mr. HENDERSON. Yes.

Mr. MILLS. And these profits are likely to show a greater increase for 1941 over 1940, than they did in 1940 over 1939?

Mr. HENDERSON. No; the increase will not be proportionate, because the increase represented going from a low level of production to a high level of production. Take the case of the steel companies, where you see it most accurately reflected. Their increase in profits came from the increased business and the lowered unit cost, neither of which will take place this year, because the steel industry is up to. or close to, capacity.

Mr. MILLS. Was it in 1940?

Mr. HENDERSON. No.

Mr. MILLS. Well, there would be that much difference.

Mr. HENDERSON. There would be some difference. But there is a bigger tax rate.

Mr. MILLS. Ten percent.

Mr. HENDERSON. Well, the amount that will be available as profit. if we assume a continuance of present production, would be just about the same maybe a little more, since it will be the difference between the rate of operation last year and this.

Mr. MILLS. This list that I quoted from includes net profits of 2,590 leading corporations, representing 93.7 percent of all corporate income in 1939 and 89.2 percent of all corporate income in 1940.

I have another bit of information on net profits in the first half of 1940 and of net profits in the first half of 1941, also taken from the National City Bank Bulletin. It is quite interesting to note here that of 19 automobile-equipment concerns reporting, the percentage increase in profit in the first half of 1941 over 1940 was 32.6 percent. That of 10 railway-equipment concerns, the increase in profit for the same period was 37.4 percent. That of 4 office-equipment concerns, the increase in profit over the same period was 40.4 percent, and so on.

The only industry filing reports with the National City Bank that failed to show an increase in profits in the first half of 1941 over 1940 was the petroleum-products industry, which showed a 4.1 percent decrease in profits. All the others showed an increase.

The 304 corporations reporting reported an average increase in profits for the first half of 1941 over 1940 of 20.4 percent; that is, net profits after depreciation, interest, taxes, and other charges-reserves-but before dividends.

Mr. Chairman, May I insert this in the record?
The CHAIRMAN. Without objection.

The net profits of 2,590 leading corporations reported after depreciation, interest, taxes, and other charges and reserves but before dividends. Represents 93.7 percent of all corporate income in 1939 and 89.2 percent of all corporate income in 1940.

Source: National City Bank Bulletin, April 1941.

TABLE 35.-Profits of leading corporations for the half year1

Net profits are as reported, after depreciation, interest, taxes, and other charges and reserves, but before dividends. The National City Bank of New York Bulletin, August 1941.

2 Before certain charges.

Mr. MILLS. It seemed to me, after I saw those figures, that possibly our tax system was not taking out of the purchasing power of the country enough of these excess profits going in from the defense program. That prompted my questions.

You do not, however recommend that in this legislation we consider the question of regulating profits? Mr. HENDERSON. No.