America at War
REMEDIES TO PREVENT ALL-OUT PRICE INCREASE
By ROBERT A. TAFT, United States Senator from Ohio
Before dinner of the Economists' National Committee on Monetary Policy, Hotel Commodore, New York,January 15, 1942
Vital Speeches of the Day, Vol. VII, pp. 229-232.
IT is a pleasure for me to come before the members of your committee, and testify to the importance of the work which you have been doing. During the three years I have been in the Senate, your members and your representatives have been most helpful to the government of the United States through your scientific study of the difficult problems of currency and finance. This study has been interpreted to us in publications and in testimony before committees, and it has always been well presented and on the side of sound fiscal policy. Sometimes it has had an effect on government action, and sometimes not.
I am convinced, however, that a non-partisan organization, interested only in the scientific solution of economic problems, is of the greatest value to Congress. No Congressman and no Senator can possibly be an expert on the hundreds of questions which he must consider and decide. Even if a Senator were an expert, few other Senators would consider him to be such. On the other hand, a research organization, particularly in technical fields of economics, commands a real respect and has a real influence on the decisions which are reached. Furthermore, the material which your committee has supplied and can supply in the future is of the greatest value to any member of Congress who desires to present an argument, in committee or on the floor, against the many unsound economic and monetary proposals which are constantly welling up from the maelstrom of democratic thinking.
1. The Problems of War Threaten an Economic Revolution
You are perhaps considering from time to time the question whether your committee should continue in time of war. It seems to me that you can be of even greater value under war conditions, and that a sound handling of economic problems and finance is even more essential now than it ever has been. Whatever doubt there may be about the wisdom of criticizing military action, there can be no doubt about the wisdom in a democracy in time of war of complete discussion of every fiscal and monetary question. The economic dangers growing out of the war are infinitely greater than those which existed before the war. The failure to handle them correctly may lead much more rapidly and more certainly to national disaster.
We are in the midst of a great world war. Success in that war is essential to our very existence, and to the continuation of the American democratic system which was established by our forefathers and which has guided thisnation for a hundred and fifty years. The American people are determined that our success in this war shall be certain and complete. Because war has become mechanized, the carrying on of a successful war involves a much more complete economic revolution than we have ever faced before. It is necessary that more than half of our total production be devoted to war purposes, just as soon as such a result can be brought about. We hope to bring it about in the fiscal year 1943, certainly in 1944. The peacetime industries of this country must be transformed into war production. The amount of material and articles produced for the civilian population must necessarily decline. Men and women must get on with less income and a lower standard of living than they have enjoyed even in depression periods.
And this is not merely a temporary change. It is likely to last for at least five years, for I do not see how we can count on a war shorter than five years. It is difficult to see how we can attack Japan successfully until the two-ocean navy and a three-ocean air force are ready, and that is not likely to be before 1945. It is difficult to see how we can transfer a great army to Europe, and begin an attack on Germany itself until 1945. If everything goes according to plan, therefore, five years is not an unreasonable time. While the American people are determined to carry this war to a conclusion, I do not think they quite realize as yet how the life of every individual will be changed and made harder by the tremendous cost of war and by the reduction in civilian supply.
All kinds of extraordinary problems will result from thiswar effort. While we cannot avoid hardship and inconvenience, we can alleviate the difficulties to some extent by sound administration and intelligent government control. Never have careful planning and effective administration been so necessary. Never has it been so necessary to lay aside personal interest and personal prejudice.
2. The Threat of Price Increase.
The most obvious immediate result of the war program is an increase in prices. The deficit for the last six months has been 7 billion dollars. The debt today is 65 billion dollars. Under the President's budget that deficit will increase to 18 billion for the year ending the first of July. During the ensuing fiscal year, even after the levying of 9 billion dollars in additional taxes, the deficit is estimated at 42 billion dollars. This means that the government will pay out, directly and indirectly, vast sums of money to all the men and women working in the munition plants and all the othergovernment agencies, with which they can go out and buy everything produced in the United States if they can find it. Of course part of the money paid out will be raised in taxes; part will be obtained from the savings of the people, but it is vain to hope that we can avoid the direct sale of billions of dollars of government bonds to the banks. In spite of a very efficient defense bond campaign and the increase of interest, the banks in the calendar year 1941 increased their holdings of government bonds by five billion dollars. To that extent the government simply created purchasing power out of thin air to purchase goods which are not available for sale in sufficient quantity to the civilian population of the United States. Such a condition is bound to force prices up.
I do not regard a reasonable price increase as a tremendous evil, but facing the program that we do, if no restraint is exercised, the increase is likely to be 200 or 300 or 400% by the time that program is carried out. In addition to that, there are some other elements of inflation resulting indirectly from the government program. Bank loans to others than the government have increased about four billion dollars during the year 1941, and outstanding instalments credit has also increased.
A great increase in prices necessarily produces hardship of all kinds. I have supported the price control bill, although I would be its most bitter opponent in time of peace, because I believe a run-away price situation will create unthought-of hardship for nearly everyone, and will certainly cause the greatest dissatisfaction with the conduct of the war. It will discriminate against labor, for it is obvious that wages do not rise as fast as commodity prices. Commodity prices are much more liquid and more liable to violent fluctuation. Wages are ordinarily fixed for a year.
Obviously people with fixed salaries suffer even more. Professors and employees of universities, government officials, and thousands of others can be reduced to penury by a tripling of prices. The very existence of endowed institutions is at stake, and their usefulness in the education of youth and the protection of health, welfare and education.
Price increases are never uniform, and result in a complete distortion of all the relationships between different groups and different persons. Of course after the war the more prices get out of line, the more they get into adjustments different from the normal, the more violent the reaction will be, and the more likely we are to plunge into a depression with its unemployment and hardship. I believe we should, as far as possible, hold the present relationships in prices, and not create a distorted position which must result in suffering for every class of people in the United States.
No one can properly object to being deprived of those articles whose production interferes with the war effort. No one can object to a reduction in his own net income. But certainly it seems unnecessary that every family should have imposed upon it further difficulties of every kind because of an uncontrolled rise in prices.
3. Remedies to Prevent All-out Price Increase
Undoubtedly there are a considerable number of remedies which ought to be insisted upon. We need not accept as gospel the President's belief that we must borrow 60 billion dollars in two years, and create the tremendous pressure on prices which that policy involves.
The deficit can be reduced, first, by reducing expenses. Ninety per cent of the people believe that further cuts should be made in non-defense expenditures; that institutions like the W.P.A., the C.C.C, and the N.Y.A. may after a short time be suspended for the duration of the war. But theamount involved is not large compared to the huge expenditures for war purposes. The administration, regardless of appropriations, should make a determined effort to hold war expenses down by sound business practices and the elimination of waste.
There are some who feel that we should pay our way as we go, and levy taxes for the full amount of the war program. They point out that we will have a national income of more than 100 billion dollars, and that since the people can only find articles to buy costing 50 billion dollars, they might as well pay the other 50 billion dollars in taxes, without any reduction of their standard of living. However, the problem is not quite as simple as that. Any system of taxation which will take all the surplus income of one person, will take a great deal more than the surplus income of many others, and it will not take nearly all the surplus income of still others. We must give some weight to established scales of living and to obligations which may have been assumed by the taxpayer. If we imposed a maximum income on all individuals, we would have to declare a moratorium on debts and insurance premiums and rent payments. Carried to its logical conclusion, this policy would reduce every family in the land to an income of $1500, which is approximately the average. It would cause a social revolution, and, in my opinion, it would completely hamstring the war effort.
Nor can we interpret into taxation any principle of reducing every man's standard of living by 30%, which is what may be approximately required. Furthermore, in spite of their determination to win the war, few people are willing to face at one time today the real sacrifices they will ultimately have to make, and this unwillingness is naturally interpreted into the viewpoint of their representatives in Congress. It always takes time to work out the system, and when expenditures are rapidly increasing, taxation lags behind. The collection of any tax based on net income is almost a year behind the enactment of the statute. The tax problem is not simple or easy. Yet I do believe we should levy taxes to the very limit, and take the cost of the war as far as possible out of that current income artificially created by the war measures of the government.
That is one of the unpleasant jobs of the President and Congress. Everyone agrees in principle that taxes should be heavy. Everyone maintains by violent argument that the taxes proposed for himself are out of all proportion to those proposed for others. For years the country has gone on the theory that the cost of government could be paid by the wealthy and the large corporations. Last year we found that that was not true. Today if we confiscated the entire income of individuals over and above an annual return of $10,000, I estimate that we would only secure about 3 billion dollars more than we are now securing. Of course after one or two years it is likely that even this excess income would disappear. Even the President's plan calls for nine billion dollars of additional taxes. If taxes are only ten per cent of the national income, they can probably be secured from the wealthy alone, but when they run up to thirty or forty per cent, the only possible way to get the money is to tax everybody in the country through a general sales tax or a general withholding tax, supplemented, of course, by net income taxes. It is quite true that the larger a man's income, the greater percentage of that income can be taken without undue sacrifice by him; but it is also true that every family in the United States must recognize the obligation to reduce its income.
I thoroughly commend Secretary Morgenthau's effort to sell defense bonds, and draw his necessary borrowings as far as possible from the savings of the people. The spending ofmoney derived from savings is not inflationary, but it does increase the national debt, and creates a danger which I shall discuss later. There is a good deal of talk of forced savings. I have never been able to see the value of such a procedure. If that money can be taken without reducing excessively the money a family needs to spend for current needs, then it seems to me it should be taken in the form of taxes. Any forced saving plan increases the national debt and then calls upon the government for a large repayment of its debt immediately after the war, perhaps at a time when repayment would be most inconvenient.
There are other measures which might be taken to reduce inflation. The increase of bank loans should be carefully watched, and reserve requirements increased if necessary. Instalment credit will probably decline in any event. In some fields production can be increased, but I have never seen that that would remove the danger of rising prices, because it would not reduce the government deficit, and would create as much more purchasing power as it satisfies demand.
Because these measures are all inadequate, I have favored the passage of a price control act. Of course if we are to stabilize prices, it must be accompanied by a policy of stabilizing wages and stabilizing the price of farm commodities as well as that of other commodities. In my opinion, prices can be successfully fixed, as they were in the first World War, without any direct legal authority to fix wages. Wages move more slowly than prices. Of course prices must be adjusted upward as wages are adjust upward, but in the first World War we did fix prices without fixing wages. I do not feel that we could give legal authority to a price administrator to fix wages. Wages are not a commodity, and the methods dealing with wages are completely different. An administrator could not be given power to fix wages unless he could also prohibit strikes. I would be loath to take that step, but if it were taken, it should be taken through special agencies dealing with labor, providing all the necessary machinery of conciliation, mediation and arbitration. But one thing is certain—the government agencies dealing with labor must recognize their obligation to stabilize wages as far as they legally can, or a spiral of increasing prices and wages will continue. And the same principle applies to agriculture and the farmer. The Department of Agriculture and the Department of Labor must cooperate with the Price Administrator. No one could be more anxious than I to protect every legal right guaranteed by our Constitution when it is not really necessary for the progress of the war. But there is only one way to win this war, and that is to subordinate the interests of all individuals and of all groups to the policies which are essential. We cannot have business as usual. We cannot have reform as usual. We cannot yield to the farm bloc, or the labor bloc, or any other bloc, and hope to give this nation the force required for success.
The President has just announced the coordination of all procurement and manufacturing activities under a single administrator, with an Advisory Council. He has finally come to the form of organization which was so successful during the first World War, and we can all join in commending that step. In June, 1940, nineteen months ago, I introduced an amendment to the military bill providing exactly this organization, a War Resources Administration with a single head and an Advisory Council. I have introduced two bills since that time to accomplish the same purpose. All of them have been rejected by the administration. If the plan had been adopted when first proposed, our present situation might be very different. Even now I believe the organization should be definitely authorized by statute. So also in the field of commodity control, a similar organization should be adopted. Prices cannot be fixed by fiat alone. Today the function of fixing prices is vested in one man. The function of ordering priorities is vested in another. Questions of civilian supply are under the Office of Production Management. The purchase and sale of commodities rests with the Federal Loan Administrator and the Secretary of Agriculture. Many other controls over agricultural commodities are vested in the Secretary of Agriculture. There should be a Commodity Control Administration with a single head and an Advisory Council, on which should be represented the Price Administrator, the Director of Priorities, the Federal Loan Administrator, the Secretary of Agriculture, and perhaps other departments of the government. This whole field is distinct from that of the production of war supplies, but it must be coordinated if one department is not to nullify the action of another, and there should be a single administrator.
4. Danger of Tremendous Debt After the War
No matter how efficiently the fiscal policy of the government is administered—and I am not very hopeful of that efficiency—we are coming out of the war with a tremendous debt. The President's estimate is a public debt of 110 billion dollars by July 1, 1943. The war may well last three or four years beyond that time, so that we should certainly anticipate a debt of 150 or 200 billion dollars.
Our troubles are not over with the end of the war. The entire productive property in the United States, outside of homes and farms, is estimated at somewhere between 150 and 200 billion dollars. The debt will be a first mortgage on that earning property for the full amount of its value. To put it another way, there are now stocks and bonds out in the hands of the public for approximately 200 billion dollars' worth of earning property. After the war we will have created 200 billion dollars' worth of government bonds, without adding materially to the property in existence. In short, there will be 400 billion dollars' worth of tickets out for 200 billion dollars' worth of property. It is the old problem of over-capitalization.
There are several ways in which it may be met. First, we can struggle on and try to make 200 billion dollars' worth of property pay a return on 400 billion. I do not know what the interest rate might be; probably not as low as it is today. The debt charges alone would be so great that they would force a tremendously burdensome system of taxation. We can struggle on as England has struggled on, paying the interest for centuries to come; but the American people are not so tolerant of bondholders who cause them a great burden of taxation. Furthermore, such taxes would operate as a check on all new enterprise, because the taxes on industry would be so great that few would find any incentive to risk their time or their money.
There are several alternatives. Probably the worst would be a complete inflation, of the German type, wiping out all debt and a great deal of property besides. That would redistribute property with a vengeance, but without the slightest basis of equity or justice. It would destroy all savings and all insurance policies, and for the time all business activity. Probably it would result in a socialization of all activity. Whether democratic government and socialism can exist together in the United States is at least doubtful. In my opinion it would be the very worst of all possible alternatives, but it is one that we will have to fight at every turn.
One element that concerns me somewhat is the fact that defense bonds are practically payable on demand. As the debt increases there is always danger of a loss of confidence.
There may be a rush for payment, which could only be met by the issue of currency. It would not take long for people to lose confidence in currency also. I believe that the practice of making bonds payable on demand should be terminated.
Another alternative is a partial and controlled inflation, somewhat similar to that by which the French franc was reduced from a value of twenty cents to a value of four cents, and stabilize at that point. That is not a pleasant prospect, but it would leave property ownership with some faint relation to what existed before the war. Perhaps there are other less unpleasant remedies. But we might as well face the fact that one way or another the tremendous cost of a world-wide war effort is going at least to cut in half the value of the property of those who own property in the United States today.
You economists have certainly a task before you—to work out and present a plan by which the United States can go through this tremendous travail, and come out with the system of private property and free enterprise still in existence, and in such a condition that the machine can be made to work. We have heard a good deal about the formation of plans for a new world order when the war is over. It is just as important that we have a definite and positive plan to assure full production and full employment in the United States when the war is over. There was something fundamentally wrong with the system which existed before 1929 and produced the depression of 1932. There has been something fundamentally wrong with the ten years since that time, which never solved the problem of unemployment until the God of War came to the assistance of the New Deal.
I am still convinced that the American economic system is the road to prosperity and happiness and higher standards of living. I am still convinced that it rests on private ownership of property, on proper incentive for ability and hard work and genius and daring. I am still convinced that a policy of excessive government spending and excessive government regulation and government ownership can only lead to ultimate disaster. And so I am concerned that during the war we should preserve all the fundamental and necessary features of our existing system, and that after the war we shall have developed a plan to make it work better than it has ever worked before.
I am equally convinced that that is the only way of retaining a true democracy. Whatever other democracies may be, the American democracy is founded on three great principles:on freedom of the individual, assured by the Bill of Rights; on freedom of local self-government, assured by the independence of the States; and on freedom from dictatorship in the federal government, assured by the independence of Congress and the courts. Many of the safeguards of that system must be abandoned during the war, but let us make clear to ourselves that we are giving them up willingly and consciously, for the sole purpose of winning the war; and let us be confident that when the war is over those liberties are reestablished without fundamental change.
Because these are our goals after the war, an organization like yours can be of the greatest value during the war, first in direct assistance to the soundness and efficiency of the war program itself, but also in protecting the basis of our American society. There should be constant vigilance to see that under cover of war, permanent changes are not made in the system we desire to reestablish. Many measures are proposed which are not in fact necessary for war. Hardly a project, no matter how dangerous or unreasonable, has been proposed during the past five years which has not reappeared today tagged with a defense label. Certainly it is a patriotic duty to sort out those which are helpful in the defense effort from those which are unnecessary and confusing, no matter how meritorious they may be.
Some of the problems which arise are legislative problems, but Congress has necessarily delegated to the Executive tremendous powers in every field of activity. An organization like your own should undertake to affect executive action just as much as legislative action. It should ascertain what plans are being made, and discuss those plans and your own solution with executive officials.
And so I say that today you have a greater task to perform than ever before. You have, first, to assist in making the war program efficient by arousing the people to the seriousness of the job and the necessity for unselfish cooperation. Second, you have the task of keeping the war effort along lines which will not, after the war, require any permanent change in the fundamentals of the American system. Third, you must assist in working out the plans by which the war burden itself shall not be unfairly and unjustly distributed. Finally, you have the tremendous and difficult task of developing a plan after the war which can restore unimpaired and more effective than ever before the American democracy, for which our boys are giving their lives on the battlefields of the world.