To the Congress of the United States:
When my first Economic Report was presented to the Congress on January 8, 1947, the Nation was turning from the economic controls of wartime to a free economy. Now, 6 months later, it is appropriate that we consider carefully what success we have had in meeting the problems of that process, what difficulties lie ahead, and what action should now be taken. It is for this reason that I transmit to the Congress this Midyear Economic Report.
I. FOREWORD AND SUMMARY
Americans today live in a richer and more productive economy, and are enjoying its benefits more equitably, than ever before in peacetime history.
At midpoint in the year 1947, we have surpassed previous high records of civilian production, and are now producing goods and services at a rate of 225 billion dollars annually. Month by month there has been talk of recession; month by month recession has failed to materialize. In June we reached a level of 60 million civilian jobs, regarded by many as impossible of attainment. Our standard of living is exceptionally high, and purchasing power has thus far been adequate to absorb completely the enormous production of American farms, mines, and factories. Farm income has attained a record level. The financial position of business is strong. A healthy slowing down in inventory accumulation has taken place. Business investment in plants and equipment has increased this year, even above the record highs of last year. Management and labor have cooperated in maintaining industrial peace, and a wide range of important collective bargaining agreements have been signed without widespread strikes. With a slight reduction in the workweek, productivity is on the increase.
The credit for this magnificent record is shared by American farmers, who exerted great efforts to plant and reap bumper crops; by workers, who stayed on the job and increased their productivity; by businessmen, who overcame many shortages and established new records in the production of more and better goods; and by leaders of industry and labor who strove for industrial peace in the face of serious difficulties.
The unprecedented prosperity of our Nation must not be a cause for idle self-congratulation. We must remember that full employment at a high price level is being sustained at present by the reconversion demands of business and the backlog demands of consumers, by extensive use of savings and credit, and by an extraordinary excess of exports over imports. These are temporary props to our economic system. As they weaken, we shall need to make many basic readjustments to complete the transition to a permanently stable and maximum-level peacetime economy.
These adjustments take time to accomplish in our free, enormous, and complex economic system. They must be made before the lack of them produces serious unemployment and business decline. Adjustment through recession or depression is tragic, costly, and wasteful. Moderate adjustments, made in time, can accomplish more than drastic measures in a crisis produced by delay or neglect.
Price and income adjustments stand foremost in need of attention.
Industrial and agricultural prices.--Prices increased sharply in the second half of 1946, increased more slowly in the first quarter of 1947, and then leveled off in the second quarter. This leveling off reflected some catching up of supply with immediate demand, an increase of consumer resistance, and the encouraging response of many businessmen to the Government's price advice, which they recognized to be in their own long-range interest.
This improvement in the price situation should not blind us to further need for price reductions in some cases. In other cases, there is need to hold the price line in the face of recent developments which revive some fears of another upswing of inflation.
There are many areas where price reductions still are necessary to check current or prospective declines in demand and to provide outlets for increased production. In the numerous instances where profit margins permit, or where future profits would be better protected by assuring larger volume through lower prices, business should make these adjustments now.
At the beginning of this year, the prospect for abundant crops gave promise that the price increases in farm and food products would be checked. Although there was a leveling off in food prices in the second quarter of this year, bad weather, extensive floods, and unexpectedly urgent foreign need have caused some further price increase in food and farm products in recent weeks. There are fears of a short corn crop, but no general or 'present scarcity of farm and food products as a whole.
Although most farmers cannot voluntarily reduce their prices because they do not make price decisions, we are not entirely without recourse in the farm situation. We may still obtain a total agricultural output as large as last year. But in view of the existing uncertainty in the farm outlook, it is the duty of food growers, processors, and the Government to keep the public currently informed of the real facts concerning our food supply. Unfounded fear of food shortages should not be allowed to lead to speculation, hoarding, and unnecessary buying. We should all realize, too, that any slight inconveniences or momentary shortages that may develop are the consequence primarily of the high incomes and standard of living most of us are enjoying today.
Wages and salaries.--Although the moderate and peaceful wage adjustments during the first half of the year improved the position of many wage earners, the majority of consumers were not directly benefited. Because of increases in the cost of living, the purchasing power of total consumers' incomes is no higher than at the beginning of the year.
In some cases wage increases are still needed to attain workable relations in the wage and salary structure, and to alleviate hardship due to wages which are substandard or which have risen substantially less than the increase in the cost of living.
Except for such special circumstances, wage increases should be related to general trends in productivity and not made on a basis which forces price increases or prevents price reductions needed to assure sale of increasing supplies.
With the wage adjustments already made and those still needed in special wage areas, it follows that the patterns of workable price relations ultimately arrived at will be on a somewhat higher price level than would otherwise have come about. However, this is not a justification for pyramiding wage price increases or failing to make price reductions whenever and wherever possible.
In the interest of those whose income has remained substandard, it is imperative that legislation be enacted to extend the coverage of the Fair Labor Standards Act, to increase the minimum wage level to at least 65 cents an hour, and to enlarge social-security benefit payments in view of the higher cost of living.
Under the recent wage settlement in the coal mining industry, the wages of coal miners occupy a place near the top of the wage structure. The earnings of the coal miners under the new contract must be judged in the light of the character of their work and the labor needs of the industry. There has been exaggeration of the size of this adjustment compared with the adjustments previously made in many other industries. Every effort should be made to absorb the cost increases in the coal mining industry and the industries indirectly affected, through increased productivity and through reduction in profit margins.
The increases that have already been made in coal prices are contributing to inflationary pressures. We have a right to expect that, as operating adjustments toward maximum efficiency are made and present shortages are overcome, the price of coal will be restored to a lower level, thus easing the cost situation for industrial, railway, and domestic users. Meanwhile, pyramiding of price advances by coal distributors is wholly unjustified.
Similarly, increases in the price of steel would have a widespread inflationary effect. Steel companies should exercise extraordinary caution at this stage of our reconversion effort to see that increases in coal prices or other costs are offset as fully as possible through the savings of continuous and high-level operation. Recent favorable earnings should permit the absorption of an extraordinary cost over a short period in order to stabilize prosperity for the longer run.
In no case should the particular wage increases in the mining industry be made the basis for wage demands in other fields governed by different circumstances.
It is in the interest of steady expansion of the economy that, with the aid of collective bargaining, prices and wages be brought in line with general productivity trends.
Housing and other construction.--Although housing construction has been higher in 1947 than in 1946, it lags far behind the real needs of our people for homes. A much higher volume of housing output will be needed to help sustain maximum employment when temporarily sustaining forces-such as the huge net export balance, high investments in reconversion, and an abnormal rate of inventory accumulation-begin to decline or decline further.
The needed stimulus to more housing construction, and also to industrial and commercial construction, depends largely upon lower prices. Housing costs can and should be substantially lowered through the efforts of material suppliers, builders, and workers.
Of utmost importance is immediate enactment of the comprehensive housing program which I have previously recommended to the present Congress. Without such a law, housing is seriously handicapped.
Public construction for the time being should be held to moderate amounts consistent with essential needs.
The foreign aid program.--The United States has indicated its readiness to consider further aid toward reconstruction in Europe if the foreign countries themselves present a plan that makes such help truly effective. We must continue to help other countries help themselves, until the reconstruction of their own economies reaches the point where they are able to pay their way by exchange of goods and services. The possibility of additional foreign aid programs makes it all the more necessary to appraise the impact of exports on the domestic economy during the last 6 months. A large excess of exports over imports occurring at a time of inflationary pressure has created some strain on the economy. But this strain is of moderate proportions and will be of temporary duration. Our exports have not necessitated undue denial at home, where our standards of living are much higher than before the war.
These exports for the aid of other countries are directed toward the winning of the peace--they are at the core of this Nation's foreign policy.
The responsibilities of government.--Economic adjustment to changing conditions is, in a free enterprise economy, accomplished largely through a multitude of voluntary decisions by business management, farmers, and labor. Wise and farsighted policy by these groups is necessary to assure the satisfactory operation of our economic system. Government must, however, at all times exert its complementary influence.
Legislative action on minimum wages, on social security and on housing, as already indicated, forms part of the immediate responsibility of government.
In addition, the recent uncertainties arising in four fields--uncertainties as to the effect of the crop situation upon food prices, the effect of the coal mine settlement upon industrial prices, the trend of housing costs and house production, and the whole matter of foreign economic policy--have a vital bearing upon the immediate fiscal policies of the Government. The developments in these areas mean that the inflationary factors in the economy may become stronger.
Tax reduction now would add to inflationary pressures and would also prevent the debt reduction which should be carried out in prosperous times to strengthen the Nation's financial position against future contingencies. A policy of restraint at the present time will enable the Government to use fiscal measures effectively should the time come when they might be needed to lend support to the economy.
The sound financial policies that the Government has been following have been vindicated by every test of experience. These policies should not be abandoned nor weakened.
The Employment Act of 1946 contemplated that prompt attention would be given to the maintenance of maximum prosperity in all its phases--employment, production, and purchasing power.
This midyear report, unlike the first Economic Report in January, deals only with problems requiring immediate attention. It is a check-up on the extent to which we have thus far achieved the goals we set in January.
Many of the short-range recommendations made in January have not yet been adopted-especially those requiring legislation. The fact that this delay has not yet produced bad results is no reason for further delay. Waiting until bad results appear means that action is too late to be fully effective.
Long-range economic programs will also be required. They embrace resource and regional development, health and welfare, antimonopoly programs, stabilization devices, and many other undertakings essential to the full realization of our superb economic potential. The first Economic Report indicated the range of these 'programs, and studies are now under way to make them ready for presentation by next year.
We must adjust our minds to the fact that we are living in a 225 billion dollar economy; that our free system has become today, and tomorrow must continue to be, the richest and most powerful productive machine ever devised by the minds and hands of man. Our task is to create for the functioning of this great productive force an environment in which it can operate smoothly at capacity. Thus far we have avoided the economic misfortunes which followed World War I and then culminated in a disastrous depression in 1929. Today we are wiser, more experienced, infinitely more blessed with material riches, more united as a people, stronger as a nation. If, calmly and realistically, we assess our strong points and our weaknesses and boldly take necessary steps in time, we can place the high production and the high employment that we have today on a firm foundation of enduring prosperity and peace.
II. FROM WAR TO PEACE
LESSONS FROM 1919--21
At the end of World War I, the traditional reluctance of the American people to accept restraints by Government on their business decisions and their personal choices brought about the immediate abandonment of wartime controls. Production, employment, and national income, after a brief lag, bounded forward, but with such faulty internal adjustments that prosperity was short-lived. In less than 2 years a sharp recession ensued. Although industry recovered promptly from this recession, agriculture was seriously depressed and was by no means securely adjusted when industry again suffered collapse in 1929.
The failure of the prosperity of 1919-20 to continue was due to maladjustments growing out of an unrestrained market. Credit was freed of wartime controls, resulting in a surging demand from business, eager to exploit the glittering profit opportunities of the day. Also consumers, who had been unable to buy many articles during the war, had incomes of unexampled size further bolstered by wartime savings, creating a demand for many types of goods far greater than the markets could supply. There was an intensive foreign demand, resulting in a temporary increase in the value of exports.
Prices in this free market skyrocketed far above wartime levels, which, under the limited price controls of that period, were already very high. Between the armistice in 1918 and May 1920 wholesale commodity prices rose about 23 percent to a point 148 percent above the prewar level. Retail prices outstripped the increase in consumers' incomes so far that consumer buying fell sharply, labor controversies increased, inventories became financial nightmares, orders were canceled, and the price structure collapsed. Then came a sharp drop in 'production and employment.
The factors which during World War I led to the difficult conditions of postwar transition were present in aggravated degree in World War II. Diversion of national productive power to war uses was much greater. Expansion of money and credit was severalfold larger. War incomes went to a larger proportion of the people and over a period more than twice as long. Requirements for new industrial equipment were far greater. A much more effective control of prices established a relatively low level from which postwar inflation could spring. The problem of changing from the controlled economy of wartime to the traditional American economy of free enterprise, which the Nation did not solve successfully after World War I, was far more serious when World War II came to a close in a devastated world.
THE APPROACH TO POSTWAR READJUSTMENT
We were, however, determined to effect both physical and economic reconversion with less waste and on a better stabilized basis than the record shows for the 1920's and the 1930's. This determination was reflected not merely in the words and actions of individuals and organizations but also in Government policies and programs. It was registered with clarity and force in the Employment Act of 1946. As we looked forward toward making that act effective in realizing the high purposes which it set forth, we had occasion to be much gratified by the proofs afforded since V-J day of the great productive power and financial resources of our economy. The shift from war production to the production of civilian goods and services was carried through so rapidly that prompt employment was given to the labor force, rapidly expanded by the return of millions of veterans. Unemployment never approached the magnitude that many experts were predicting.
Economic phases of reconversion, however, presented greater difficulties than the physical or technological ones. The American people were united in their determination to return to free enterprise and to discontinue wartime controls as rapidly as possible, but there was no clear and certain standard or formula by which timing and method could be determined. Many economic controls were progressively discarded in the year following the Japanese surrender. Price control was materially reduced and in the fall of 1946 was finally discontinued except for a few commodities and rents.
Claims made by the advocates of early decontrol, that OPA prices had retarded production and that it would promptly catch up with demand after the removal of the controls, were not fully borne out by developments. Production, with important exceptions, did not increase as rapidly in the first few months after decontrol as in the last few months before decontrol.
In the face of this failure of production to respond more sensitively to the freeing of market demand, the abundant purchasing power of both consumers and business buyers met a sharp response in soaring prices. The price index of food products at wholesale jumped 28 percent in a single week in October when price control was ended on meats, fats and oils, and other foods. Though it reacted promptly, it has not since then approached the previous level. Wholesale prices of goods other than farm and food products, which had risen about 5 percent during the first half of 1946, climbed by the end of the year to 24 percent above the level of 12 months earlier. Retail prices, though their changes are ordinarily more sluggish, moved upward almost as much as wholesale prices. The index of consumers' prices of goods and services rose 15 percent between June and December, even though rents, which were kept under control, remained stable.
Personal incomes increased at a much slower rate. In the last quarter of 1946 these incomes were at a rate about 9 percent above that of 6 months earlier. The real purchasing power of consumers' current incomes had steadily declined, notwithstanding high employment and rising wage rates.
THE FIRST ECONOMIC REPORT
This was the situation at the time of my first Economic Report last January. In many respects the economic situation was good. Employment was at a very high level, and the labor-management controversies which caused many work stoppages in 1946 had quieted down. Profits of business were high, and new business investment was proceeding at a record rate. National credit was unimpaired, and we were showing our ability to manage the huge national debt. The banking structure and the monetary system were not under strain. There was no speculative color to the securities markets. The state of credit was good, although there was a rapid increase in consumers' credit. The export balance of foreign trade appeared too great to continue indefinitely, but it was evident that for the immediate future foreign demand for our goods would remain large.
At the same time it was clear that inflationary elements continued strong. Many prices were still rising under the influence of shortages and extraordinary backlog demands for consumer goods and capital goods not available during the war. Yet there was danger that deflationary forces might develop during the year. For example, it was clear that the exceptional rate of inventory accumulation would not long continue, that the backlog demands would be filled sooner or later, and that many consumers were using up past savings or resorting to credit in order to keep up with the cost of living. If prices should continue to move ahead of the current buying power of consumers and business, it was evident that trouble would develop in the economy.
Under the Employment Act of 1946 it was the obligation of the President, with the assistance of the Council of Economic Advisers, to propose policies to sustain a high level of production and employment. To that end, among the policies recommended in the first Economic Report, adjustments were urged to bring prices and current incomes of our people into better balance. The main approach to attain this balance, it was said, was to reduce prices rather than to increase incomes. Price reductions automatically benefit all buyers of goods for consumption or business purposes. Increases in incomes cannot be spread evenly in a free economy, and many incomes are increased slowly or not at all. The standard of living of large numbers of our people had already become seriously threatened by the price advances which had taken effect, while their incomes had not increased in step with those of others. Among them were millions of workers, people dependent upon fixed incomes, and teachers and other public servants.
It was recognized, of course, that here, as in all aspects of our involved and dynamic economy, there are many complications. The price reductions which benefit buyers of goods likewise reduce the incomes of producers of these goods. Price reduction was necessary, but it needed to be made with discrimination to avoid placing an inequitable share of the burden upon certain groups of producers and to preserve a level of business profit and farm returns adequate to sustain a high level of business investment and a healthy agriculture. Our economic problems are never simple; they are not subject to solution by a pat formula.
The positive method to determine prices is by Government mandate, but it involves complicated determinations and irritating restraints which Americans have tolerated only under stress of war. In response to an insistent demand by business, with wide public support, positive control of the prices of most goods was ended late in 1946. In the free economy, prices are made by the forces of the market place and the action of business management. The initial responsibility for many prices is that of the businessman who decides at what figure he will sell. In the first Economic Report each businessman was urged to take a broad view of the long-run problem and, in the interest of sustaining large markets, to reduce his prices insofar as costs permitted.
Labor, in turn, was advised to bear in mind the greater benefit of sustained employment as a result of prices in balance with workers' incomes, as compared with the immediate advantage of such wage increases at particular points as would distort the wage and price structure, stimulate inflation, and lead to business maladjustment and unemployment. It was noted, however, that increase in the money incomes of many workers was desirable where it would not contribute to further price advances. For many workers in the lagging parts of the wage structure, moreover, it would be appropriate to increase their incomes even though to do so would in some instances increase prices. Both workers and farmers were urged to contribute vigorously to larger production, the best preventive of price inflation.
Specific action by the Government itself, as proposed in the first Economic Report, was designed to continue, and skillfully to extend, lines of action already adopted. The major short-range recommendations for immediate Government action included:
1. The continuance of existing taxes upon business and individual incomes.
2. The reduction of the public debt as promptly as Treasury surplus funds became available.
3. The continuance of rent control and the enactment of a comprehensive housing program.
4. The raising of minimum wage rates and the extension of coverage.
5. Increases in social security benefits in view of the higher cost of living.
The Nation-wide reception to the first Economic Report was encouraging, although neither in the area of private adjustment nor congressional legislation have its recommendations met with adequate response. It is because further adjustments by the people and further governmental action both are needed that this review of the economic situation at midyear is being presented. It undertakes to evaluate developments which have taken place since January, to identify the major problems with which we are now confronted, and to project forward the lines along which preventive or corrective efforts should proceed. Ever-increasing benefits should flow from improvement in our means of measuring economic causes and results and through constant retesting of our means of dealing with these situations. These periodic reviews should promote increasing appreciation by the people and their Government of the value of the economic stabilization undertaking embodied in the Employment Act of 1946.
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HARRY S. TRUMAN