Harry S. Truman photo

Excerpts From Annual Message: The President' s Economic Report to the Congress

January 14, 1948

To the Congress of the United States:

In my first Economic Report to the Congress, presented a year ago in accordance with the provisions of the Employment Act of 1946, I foresaw a bright prospect for the year 1947. In large measure that prospect has been fulfilled.

However, my Midyear Report recorded the fact that agricultural prospects had become less favorable, that certain price adjustments were not proceeding satisfactorily, and that the need for foreign aid would probably be greater and more prolonged than had been anticipated. During the six months since that report, the country has maintained a high level of prosperity but on a wave of inflation which has already caused serious hardship and presents grave concern for the future.

In this second annual Economic Report, I shall set forth the difficulties of the situation by which the Nation is confronted as it enters 1948. At the same time, [ have great confidence in our ability to surmount these difficulties and to show another year of splendid achievement for the welfare of our own people and the meeting of our responsibilities in the family of nations.


The year 1947 has afforded a new demonstration of the tremendous productivity of the United States when our natural resources, our accumulated capital, and our able and enterprising labor force are used at high levels of activity. Looked at from another point of view, the year has revealed the previously unmeasured size of the profitable market which is furnished when nearly 60 million workers are steadily employed with modern equipment and organization. With high pay rolls and relatively few work stoppages and with a new high record in farm income, most of the people were able to enjoy a level of consumption far above prewar standards. We were able also to satisfy many of the wants for durable consumers' goods whose production had been curtailed during the war and to extend the conveniences of life and modest luxuries to a larger percentage of our homes than had ever shared them in the past. In addition, we were able to provide aid to war-torn and distressed countries abroad.

The main features of last year's economic activity may be summarized as follows:


Employment during 1947 made a new record, passing the mark of 60 million civilian jobs in June and, even with seasonal dips, averaging about 58 million for the whole year. This was almost 3 million more than in 1946 and about 10.5 million more than in 1940. Unemployment was even lower than in 1946, and reached what is probably the practical minimum.

Production measured as total physical output of goods was about 7 percent above 1946 and 76 percent above the 1935-39 average. A slight drop in agricultural production was more than offset by larger production in manufacturing, minerals, construction, transportation, and public utilities. The first Economic Report set up as an objective for 1947 a total output of goods and services about 5 percent above 1946. This goal was not quite reached. The increased output of goods was partly offset by a decline in services.

Productivity per man-hour increased slightly over 1946. In manufacturing, production increased somewhat more than numbers employed. Output of the average farm worker declined somewhat because of bad weather conditions but remained far above prewar levels.

Consumer income after taxes reached a new high in 1947. It was running at the annual rate of $1,264 per capita in the last quarter of 1947, compared with a rate of $1,074 in the first quarter of 1946. However, the rapid rise in prices caused the purchasing power of the consumer's dollar income to decline by nearly 8 percent during the same period. This did most injury to people with low incomes and moderate fixed incomes. Total spending for consumption was maintained by reduction in the rate of current saving, drawing on past savings, and the rise of consumer credit to a new peak of 13.3 billion dollars at the end of 1947.

Business investment and income throughout 1947 remained consistently above the level of any previous year. Investment in plant, equipment, and increased inventories amounted to over 25 billion dollars contrasted with 21 billion dollars in 1946. Some part of this increase reflected higher prices. Dividend payments reached a new high although corporations retained five-eighths of their profits after taxes to plow back into the business. Retained corporate earnings were double those of the war years and four times those of 1929. Flotation of securities, mostly of fixed-interest types, provided 4 billion dollars of new capital as against 3.3 billion in 1946. Commercial bank loans to business increased about 4.2 billion dollars in 1947, with credit expanding so rapidly in the last half year as to cause grave concern as to its inflationary effect.

Housing units completed in 1947 were nearly double the number in 1946, but high costs raised the question whether this rate could be continued.

Exports of goods and services ran at the annual rate of 20 billion dollars in the early part of the year but declined later. Imports were much less than exports resulting in an export surplus of more than 11 billion dollars for the year. The ability of foreign countries to finance imports declined in the latter part of the year and the future of our international balance will depend in considerable measure on the size of Government aid and private credits extended.

Government expenditures were reduced to 41.3 billion dollars in the calendar year 1947, leaving a balance of cash receipts of 5.6 billion dollars which was used primarily to reduce bank holdings of Federal debt. This was a counterinflationary factor during a year of mounting inflation.

The Nation's Economic Budget for the second half of 1947 indicates a gross national production at an annual rate of 237 billion dollars, contrasted with about 204 billion for 1946. Investment for construction, equipment, and inventories increased by 24 percent over 1946, and net foreign investments increased by 83 percent, while consumer expenditures increased by only 14 percent. The increase in consumer expenditures was 3.5 billion dollars more than the increase in their incomes. The continuance of such a relationship would not enable consumers to absorb, with their current incomes, the output of a maximum employment economy when the extraordinary volume of business reequipment, net exports, and the use of credit level off at more permanently sustainable rates. The relationships within the Nation's Economic Budget permitted maximum employment and high production through 1947 but did not include all the adjustments required for permanent prosperity and growth.

The maintenance and stabilization of such a high level of production and consumption will require proper adjustment among money, price, and income relationships. While changes in price and income relationships during the past year have not disrupted activity in any serious way as yet, they have brought us progressively into a more unstable situation. As we enter the new year, the American people are keenly aware that inflation is the dominant problem in our economic affairs.


At the time of the first Economic Report a year ago, I warned against the danger of advancing prices, which would undermine our structure of national prosperity. I strongly urged businessmen to bring prices into line with the requirements of a stabilized economy. I called upon workers to limit their demands for wage increases to those situations where wages were substandard or where wage increases would not necessitate higher prices. I called for the holding of public works down to the minimum of necessity and called upon procurement agencies to avoid practices that would stimulate price increases.

Prices in the first quarter of 1947 continued the upward trend of the last quarter of 1946. In its first-quarter review to me, the Council of Economic Advisers stressed the fact that the faster rate at which prices were beginning to move up constituted a serious danger. During the following weeks, I emphasized in several public statements the need for all groups in the business world to adopt policies and follow practices which would halt this inflationary trend.

There then followed several months of a remarkably stable price level. One cannot say how far this was due to the voluntary action of the many businessmen who deliberately withheld price advances and in a few cases reduced prices, or to what extent the cessation of price increases was the result of the widespread resistance of retail merchants to higher wholesale prices or was due to the spread of a generally more cautious attitude among businessmen and individual consumers.

Although the upward movement of prices had apparently been checked when I presented my Midyear Economic Report, I warned that there were strong new inflationary forces. I endeavored again to impress businessmen with the great need for price stability and I again asked labor to refrain from demands for such wage increases as would require price advances. Unfortunately, even as the Midyear Report was presented, unfavorable developments in agriculture, industry, and the international situation started changes in incomes and prices quite different from those recommended in my first Economic Report. Businessmen were in the main finding it easy to pass added costs on in price advances of like or greater amount.

Since June, wholesale prices have risen at an annual rate of 20 percent and consumer prices at an annual rate of about 12 percent. Retail food prices have risen at an annual rate of about 15 percent. Rent, since the modification of rent control, has been rising at an annual rate of about 13 percent. At the wholesale level, textiles during the second half of 1947 were rising at an annual rate of 12 percent, fuel and lighting 36 percent, and building materials 18 percent.

Wages, too, were moving up. Wage earners had in the first half of the year sought to obtain increases in rates that would maintain their take-home pay at or near the wartime level and thus enable them to buy the enlarged product of goods and services that a high-production peacetime economy could turn out. Wage advances during 1947 kept up generally with the cost of living trend during the year but did not gain the ground lost when price increases exceeded wage increases in 1946. The renewed rise in the cost of living during the second half of 1947 brought demands for further wage increases. At the end of the year there was a continuing prospect of a fruitless and dangerous spiraling of prices and wages.

Profits were substantially above the 1946 level, and remained high through the year as increased costs were covered, and in many cases exceeded, by higher prices. Corporate profits before taxes rose to 28 billion dollars, contrasted with 21 billion in 1946, and profits after taxes rose to 17 billion dollars, compared with 12.5 billion in 1946. Corporate earnings after taxes represented about 9.5 percent on net worth, and 5.5 percent on sales. Unincorporated non-farm enterprises earned 23.5 billion dollars before taxes, an increase of 2.5 billion. Total business income before taxes increased by 22 percent during the year. Net farm income before taxes rose from 15.2 billion dollars in 1946 to 18.3 billion in 1947.

The record of prices, wages and profits during 1947 shows how they fed upon one another in a developing process of inflation. In spite of the heartening production record of the year, this inflationary trend was profoundly disturbing. It not only produced great inequities among our people, but also created the danger of a serious setback.

The purposes of the Employment Act are beginning to meet their first real test. Unless we as a nation show an ability to impose restraints upon ourselves and to utilize the machinery of our representative government to devise well-considered regulatory measures, we stand in great danger that runaway prices, overextended credit, and unbalanced developments will lead to an economic recession. We cannot be sure that such a recession would not be severe and recovery slow and painful.


The first objective for 1948 must be to halt the inflationary trend. On November 17, I recommended to the Congress a ten-point program for this purpose. Every point in that program is essential.

The nature of the inflation from which we are suffering arises in part from the total excess of buying power over the available supply of goods and in part from relative scarcities at strategic points in the economy which give impetus to particular price-wage spirals.

To deal with these two phases of inflation, my ten-point program divides into three main parts. First, it proposes appropriate restraints upon business credit and consumer credit and commodity speculation. Second, to deal with the scarcities at strategic spots in the economy, it calls for authority to allocate to their most efficient and necessary uses those scarce commodities and services which enter basically into the cost of living or industrial production. And third, it calls for the extension and strengthening of rent control, and for authority to impose rationing and price control on a highly selective basis on items of outstanding importance to industrial production or to the cost of living so that these powers may be used promptly to protect the public if other measures prove inadequate.

As I have made clear in a statement on December 29, the three points in my ten point program which were enacted in the special session of the Congress are necessary but insufficient. The other seven points are needed, needed badly, and needed promptly.

This program, which the situation requires, does not lessen the need for voluntary restraint. This applies both to those who price goods and those who buy goods. No program undertaken by the Government can succeed unless it is accompanied by public cooperation based upon a realization of common dangers and common objectives.

Taxes at present are providing revenues substantially larger than expenditures. It is important to maintain this favorable balance as long as the inflationary trend continues. However, certain adjustments need to be made immediately in order to protect those in the lower income groups hit hardest by inflation.

Our second main objective for 1948 should be to maintain maximum employment, achieve maximum production, and adjust the price-income structure so as to stop the inflationary spiral without production cutbacks or extensive unemployment.

More production this year will help in combating inflation, but there is no possibility of enough additional production this year to overcome inflation without other measures. In fact, if these other measures are not undertaken, inflation may cause such disruption of our economy as to drive production and employment downward.

With healthy adjustments in our economy achieved during the year, our employment objective should be to absorb in useful work the net increase of 700,000 additional people in the labor force. This would mean an average of nearly 59 million jobs for the year as a whole, contrasted with about 58 million as the year's average for 1947.

Our objective for production should be to increase the total output of goods and services by some 3 percent above 1947.

Our third main objective for 1948 should be to establish firmer foundations for the long-range growth and prosperity of our economy in the years ahead.


The economic growth and stability of the United States cannot be achieved by dealing with problems merely from day to day. We must have a sufficiently long-time perspective to do also those things which require some time for their planning and organization.

Our total annual national production has increased since 1939 by 53 percent. We cannot expect such rapid advance within the next 10 years because we are now at a fuller use of our resources than we were in 1939. Yet we should within 10 years be able to increase our annual national output by 35 percent. Progress at this rate would bring the per capita real income of our people to 27 percent above the level of 1947 and 80 percent above the level of 1937.

But our record of periodic depressions in the past warns us that we cannot have stabilized prosperity at this rate of progress without carefully considered and well directed efforts.

The Nation's long-range economic programs should be geared to three major purposes: conserving and developing our natural resources and capital equipment, enabling our human resources to become fully productive and thus provide richer and more satisfying lives, and improving our economic institutions and practices so as to utilize free enterprise and representative government effectively toward maximum production and sustained general prosperity.

Development of natural resources and capital equipment

Development of natural resources in land, water power, minerals, and forests requires that we make up as soon as possible for the lapses in many of these efforts during the pressures of war and postwar reconversion. Wise conservation and development efforts are now all the more needed because in many respects these resources were subjected to excessive drains to supply wartime production.

One-half of the Nation's crop and pasture land needs to be put under improved soil management. Programs for flood control and power need to be expanded. Further construction of multipurpose dams and related facilities is desirable. Our sustained yield of saw timber should be doubled. With regard to minerals for industrial and strategic purposes, we need increased emphasis upon research, development of substitutes, and importation and stockpiling.

There are areas of the country which, for a combination of reasons, have been underdeveloped or retarded economically. We must push regional development through improved agricultural methods and land use, further industrial expansion and diversification, and lifting the levels of health and education.

All of our resource development activities will require the alert interest of the people, vigorous private enterprise, and a wise pooling of the efforts of Federal, State, and local governments.

Our business plant and equipment need to be expanded to sustain continuous maximum employment and production. We shall require more capacity in steel, petroleum, coke, electricity, and other industries.

We can rely mainly upon business for this expansion, if business adjusts its plans to an economy of continuous maximum production instead of adjusting its plans to an economy of recurrent low resource utilization.

Government has the responsibility of providing favorable conditions for adequate and well-balanced private investment in productive facilities, with prudent use of Government initiative when private resources lag. Both private and public policy must, however, impose restraints on boom time overdevelopment and overcapitalization.

In transportation, at least 45 percent of our highways leading into cities need to be rebuilt within 10 years, financial aid to airlines should be continued, railroad consolidation should be carried out with increasing vigor, and national policies should recognize the need for protecting the credit of the railroads.

Urban redevelopment and housing afford an immense challenge. The blight and deterioration of our cities have created grave problems of municipal taxation and management, and have damped the rate of investment in rebuilding. This problem is closely related to the inadequacy and instability of house production. As a start toward the objective of a decent standard of American housing within 10 years and for the release of investment opportunities over a decade of as much as 75 billion dollars--mostly private funds--in urban redevelopment, there should be prompt enactment of comprehensive housing and urban redevelopment legislation.

Development of human resources and productivity

Within 10 years, maximum employment will mean 64 million jobs or more.

To raise the individual to the highest practical level of productivity, and to provide an outlet for the increasing part of the labor force which technological changes may displace from the mass-production industries or from agriculture, we need improved services in education, health, and social security.

For education, the first step, which should not be deferred, is to provide Federal aid for elementary and secondary education to help remedy the deplorable shortages and the maldistribution of school facilities and teachers. At present, our ten poorest States are spending about $64 annually for each school child, while our ten wealthiest States are spending about $177. Federal aid should be given not only to this educational effort but also to research work both in basic principles of natural and social science and in their practical application.

Our health standards are not being met because of the inability of millions of families to purchase adequate medical care with their incomes, and also because of the great disparities in the resources of different areas of the country available for investment in hospitals and other health services. We need a comprehensive national health program, including prepaid health insurance and aid to hospitals and health centers.

Social security, both in its unemployment insurance and its old-age insurance aspects, should be increased and its coverage should be made more general.

Development of institutions and practices for a high-production economy

We have learned from experience that the capacity to produce does not alone assure continuous maximum employment. The distribution of purchasing power determines whether there will be enough funds available to provide adequate investment for maximum production and enough buying 'power to absorb the output.

Industrial price-wage-profit policies, arrived at without compulsion in a free, competitive economy, play an important part in preserving or destroying balance in our economy. In those areas where businessmen and workers make conscious decisions about prices, wages, and profits, we must seek through education and understanding to adjust these decisions ever more closely to the broad needs of the whole economy.

At the same time, the adaptability of the economy to changing circumstances requires the maintenance of active competition which, through amendment and improved enforcement of the antitrust laws, must be preserved where it exists and revived where it has languished. Collusive monopolistic practices must be eradicated and the trend toward concentration of economic power reversed.

For balanced expansion, our economy requires a larger flow of income to consumers. Comparing 1939 with today in dollars of constant purchasing power, annual expenditures for producers' durable equipment have increased by 170 percent, while annual consumers' expenditures have increased by only 48 percent. When the export surplus and business retooling and the use of savings and credit level off or are reduced, we shall need more consumer income to sustain maximum production.

More consumer income must be accompanied by better income distribution. In 1946, the lowest-income fifth of our families had an average annual income before taxes of only $835. The second fifth had an average annual income of only about $2,000. The top fifth had an average annual income of almost $9,000.

Agricultural and food policy throughout the decade ahead should be based on the expanding needs of a maximum production economy. With improvements in the incomes and living standards of wage earners, and with continued concentration upon improving nutrition, our agricultural output should within 10 years reach a level about 10 percent above the present level. This would mean a crop output about 25 percent, and a livestock output nearly 50 percent, above prewar levels.

Soil conservation activities should be intensified. Capital investment per farm worker will need to be increased, and there is need for three times as many tractors on farms as before the war. There are 2 or 3 million farmers with too little land or whose land is too poor or whose equipment is inadequate.

We shall continue to need the farm programs that have been developed to advise farmers in adjusting their production patterns to the changing patterns of demand, and to offset in some degree the special hazards affecting their industry through crop insurance and price support for major farm commodities.

Tax policy for the long run should have two major elements: first, a level of revenue above expenditures in all except depression years which will permit systematic reduction of the public debt; and, second, a tax structure which will promote stabilized prosperity through adjustment of particular taxes to stimulate or to check consumer expenditure or business expenditure as circumstances require.

Debt management policies should be so conducted that appropriate restraints on bank credit can be applied without abandoning or impairing the sound principle of Government price support of bonds which the people have bought as an expression of their faith in the Government's financial security.

Our international economic relations should be such as to aid in the restoration of Europe under the European Recovery Program. We are now seeking, and should seek always, to negotiate with other nations better standards for the conduct of world trade so that each country may be facilitated in producing the things which it can produce best and buying the things which can be produced more economically elsewhere. In a framework of increasing world prosperity, our country can move forward most confidently to meet the problems of our domestic economy.


In spite of some disappointments on the supply side and serious inflationary distortions on the demand side during 1947, we enter 1948 on a high tide of economic activity and with prospects for another prosperous year if we handle our economic affairs wisely and firmly. The Employment Act calls upon the President at the opening of each year not merely to review current trends but also to state what levels of employment, production, and purchasing power during the ensuing year are needed to carry out the policy declared in the act and to recommend measures by which these objectives may be attained. These two requirements will be met in this section.

We face in the months and years immediately ahead a test of whether we have the foresight and courage to safeguard our economy against a return to the devastating sequence of boom and depression. If we are to complete safely the transition from a war economy to a stable peacetime economy and clear the way for the great progress which lies within our reach, we must, promptly, take vigorous measures to check the course of inflation which now has the economy in its grip.



Employment objective

The American economy is now operating at a level of employment which may be regarded as a practical maximum. It is estimated that the labor force will increase by about 700,000 persons during 1948. If we provide them as well as the present labor force with opportunities to work, this would mean an average civilian employment of almost 59 million for the coming year.

Production objective

This labor force will have at its disposal expanded and improved capital equipment and there should in general be a better flow of raw materials. During the past year, business expended 23 billion dollars for plant and equipment, approximately one-half of which represents a net addition in excess of wear and tear and obsolescence. Since there are still some shortages of materials, particularly in metals, some of the new plant and equipment may begin operating at the expense of somewhat less production in older plants.

It should be our objective to open up most of these bottlenecks in the course of 1948, with the use of new capacity to produce materials and components which are now scarce. Assuming that new capital equipment and other efficiency factors raise nonagricultural productivity somewhat more than 2 percent, our objective should be to increase the output of goods and services in this sector of the economy to a level somewhat more than 3 percent above 1947.

For farm production, the Department of Agriculture has announced production goals for this year which call for an increase of 3 percent in the acreage of crops. Reduced feed supplies, however, will inevitably cause some decrease in the output of livestock and livestock products. Balancing this against a possible increase in crop production, it appears doubtful that total agricultural production this year can surpass that of 1947.

For the economy as a whole, an increase of total output by about 3 percent above 1947 is a feasible objective. To reach this objective will require skillful management, the maintenance of good labor-management relations, and some improvements in the geographical distribution of labor.

Purchasing power objective

Our purchasing power objective for 1948 should be to effect the economic adjustments which are necessary to afford adequate protection against increasing inflation. The view has been expressed that the only cure for inflation and the only means of providing maximum real purchasing power is more production. Certainly the continuation of full employment and the removal of impediments to maximum production will provide the surest long-run remedy for scarcity prices and the exploitation of monopolistic situations. But we cannot increase industrial and agricultural production enough within the next few months to catch up fully with market demands or to surmount the inflationary dangers of the coming year.

Weather will be a major determining factor in our farm output. The reduction in the corn crop of 1947 has required drastic revision of livestock producers' operations and makes it certain that supplies of meat, poultry, and dairy products will be less abundant in 1948 than in 1947.

On the industrial side also, the inability to re-equip producers and to fill pipe lines, while simultaneously turning out enough consumers' goods for all the demands of a fully employed population and providing needed foreign aid, will result in some relative shortages during 1948. The basic shortages in coke, in steel, and other metals, in petroleum and petroleum transport facilities, and in railway cars and motive power will not fully be made up during 1948.

This leads to the conclusion that, even were our employment and production goals for 1948 fully realized, this would not of itself meet our purchasing-power objective nor substantially dispel the need for other affirmative anti-inflation measures. More than this, we face the danger that the continuance of maximum employment and production will be impossible unless we achieve the necessary purchasing-power adjustments in the price-wage-profit structure. When a price-wage spiral breeds business uncertainty and impairs confidence, employment and production go down instead of up.

The affirmative measures which I have proposed to the special session of the Congress, and which I shall here reaffirm, are not a substitute for more production, but rather constitute the only assurance of maintaining high and increasing production.


It is well established that a substantial excess of Government receipts over expenditures is counter-inflationary.

The Federal agencies will have to make cash .payments to the public in calendar year 1948 of over 40 billion dollars. This is about 1 billion dollars less than cash payments to the public in calendar year 1947. It includes proposed expenditures under new legislation, mainly foreign aid, of about 3 billion dollars. (These figures and those below represent cash payments and receipts and apply to the calendar year. They differ in both respects from the conventional Federal Budget.)

Over 40 percent of the total is required for defense and for veterans. Most of the remainder represents expenditures to carry out the provisions of existing law and to meet the Government's commitments, such as interest payments on the public debt, refund of taxes, loans to foreign governments, social security payments, and expenditures under previously authorized contracts.

On the basis of receipts from present taxes and of expected payments, the excess of receipts over expenditures for calendar year 1948 will be substantial. With inflationary pressures a major threat to the stability of the American economy, no action should be taken now to reduce this excess.

But while waging war against inflation, we should not neglect the casualties. Certain tax changes now will help those millions of families whose disposable incomes have lagged more and more behind the increased cost of living during the past year and a half. I therefore propose that the Congress enact legislation extending a cost-of-living tax credit of $40 for each taxpayer and each dependent.

To offset this decrease in government revenues, corporate taxes should be increased sufficiently to yield an equivalent amount. Corporations were given early relief after the war in very substantial amount through repeal of the excess profits tax. While present corporate income taxes are very high by all prewar standards, they have permitted both high business activity and an unexampled addition to capital investment. An increase in corporate taxes would not cause production to fall below the highest output that available materials, capacity, and labor will permit. It would, however, have an anti-inflationary effect which would wholly or in large degree offset the inflationary influence of the reduction in individual income taxes.

Any net change one way or the other in the effect of these tax revisions upon inflation is outweighed by the manifest equity of the revisions proposed. In any event, these equitable adjustments will not interfere with success in our anti-inflationary efforts if the other anti-inflationary measures which I shall now discuss are promptly adopted and vigorously applied.


In the process of inflation, one of the most potentially dangerous sources of excessive demand is the expansion of credit. This applies to consumer credit, commercial credit, real estate credit, and credit on securities.

I again recommend that the power of the Board of Governors of the Federal Reserve System to regulate consumer credit be restored. Even under the controls which existed, and which expired only on November 1, 1947, the volume of instalment consumer credit outstanding had increased from 4 billion dollars on January 1, 1947, to 5.5 billion dollars on November 1. Since the lapse of control, and due only partly to seasonal influences, the rate of increase has moved sharply ahead. A further rapid expansion at this time can only contribute to inflationary price increases.

Also dangerous is the mounting volume of mortgage debt, urban and rural. The longer-run interest of the people requires careful consideration of the present financing policies of both private and governmental agencies.

More dangerous than the expansion of consumer credit is the over-rapid expansion of commercial loans by banks. During the first half of 1947, commercial credit expanded only moderately, but during the second half it rose at an annual rate of almost 10 billion dollars, a much more than seasonal increase. This increase coincided with the upsurge of inflationary developments.

The increase of bank credit was both a result and a further source of inflationary pressure. The increase in bank loans reflected a growing demand for funds that arose from a variety of sources. In adapting their operations to a rising cost and price structure, business firms needed a larger volume of credit for working capital, and borrowed additional amounts to maintain and expand expenditures on plant and equipment. Farmers increased their borrowing to purchase real estate and to acquire farm machinery and finance other capital improvements. Increased consumer buying of durable goods, payments for the purchase and modernization of homes, and outlays to meet current living expenses were financed in part by expanded bank loans.

When demand from other sources is already pressing against the price structure, the injection of large amounts of bank created funds to support business, real estate, and consumer expenditures necessarily contributes to further inflation. The impact of this additional supply of money is felt first, of course, in those markets in which the borrowers are direct participants. But as the funds are used by the borrowers to purchase the goods and services they want, they become part of an enlarged general income stream. As other temporary sources of demand decline, the expansion of bank credit could potentially keep the inflationary trend rising and interfere with the gradual transition to a stable situation. Among the strategic points at which to curb the inflation movement, none is potentially more powerful than the restriction of bank credit.

The control of bank credit is not a simple task, nor is it free from dangers. Unwisely exercised, it could overplay its role and precipitate an undue liquidation of credit and a lowering of economic activity. Furthermore, the problem is complicated by the relation of credit to the administration of the public debt. Limitation of the amount of commercial lending would probably be accompanied by higher interest rates. Except as special devices may be introduced which can partially insulate the public debt, two unfortunate developments might take place: a decline in the value of Government bonds held by the public, and an increase in the cost of servicing the debt as refunding takes place. But these difficulties can be surmounted through the wise exercise of restraints upon excessive bank credit.

In view of their central relation to the control of inflation, current proposals for credit control, especially those which have been presented by the Board of Governors of the Federal Reserve System for the increase of bank reserve requirements, should be given close study by the Congress, and legislation should be enacted of a sufficiently comprehensive character to make available all the powers that may be needed.

Within the last fortnight the leaders of our commercial banking system have taken positive organized action to secure the curtailment of inflationary expansion of bank credit by their members. I commend this farsighted action. If they succeed in this voluntary effort, they will be curtailing credit at the points where it is most likely to exercise inflationary influence and further general action might not be required.

As part of our program for restraining excessive credit expansion, the Federal bank supervisory agencies have already announced policies designed to confine extension of private bank credit to legitimate production requirements. The credit standards of the Government lending agencies have also been reviewed with the objective of checking inflationary influences from this source. It is essential that the major Government credit agencies in making direct loans and in guaranteeing private loans shall pursue policies consistent with a national anti-inflationary policy.


While the credit controls and budget policies discussed above are essential instruments for halting the inflationary trend, there have arisen specific situations which, in all probability, cannot be dealt with adequately by these measures.

The most important of these special situations is the shortage of grains and the related mounting price of food. In the case of meat, for example, the shortage will almost certainly be greater next spring. The use of credit and budgetary controls to the point where they could halt the rise of meat prices would probably cause widespread unemployment. Depriving people of their livelihood in order to cause a decline in the cost of food is obviously not an acceptable alternative. Nor is it an acceptable alternative to let mounting prices ration the short supply at the expense of millions of families of modest income.

In meeting this situation, consumer rationing of selected commodities would not only relieve the demand pressure, but would also provide for a more equitable distribution of the available supply. There should also exist limited powers of price control to be used for combating rising prices at those points where they bear most disastrously upon the cost of living. I have already recommended to the Congress that such powers be authorized. It is also necessary to authorize, and to use if necessary on a selective basis, price control of a few vital industrial products that are in short supply, since we have had ample demonstration that these areas of shortage are also a focal point of spreading inflation.

There should also be set up powers for dealing with the distribution of basic industrial and agricultural products where scarcity threatens to impede production or raise prices unduly. These should not subject business firms to a detailed plan of operation prescribed by the control agency, but merely provide a check on such distribution of scarce supplies as is found to be impeding domestic production, defeating the purposes of the foreign aid program, or working inequities as between legitimate users of the scarce commodity.

In areas where price control might be employed, its workability might be impaired by excessive wage increases. I therefore repeat my recommendation to the Congress that authority should be granted to prevent wage increases where such action is necessary to maintain any price ceiling that may be established. This is a power which should be restricted in its use, and might not need to be used at all. Its existence would not supersede the general practice of fixing wages by voluntary agreement, nor would it relieve labor of any of the responsibility it now bears for moderation in wage demands to help curb inflationary pressures.

I also repeat my recommendation that rent control be continued and strengthened. Nothing could be more disastrous to the standard of living of millions of people, or better calculated to initiate another spiral of wages and prices, than the continuation of the sharp increases in rents now under way. This is particularly true because relaxation of rent control could not effect a rapid increase in the supply of housing.

The measure enacted by the Congress toward the end of its recent session extended the Export Control Act, and also extended the authority to allocate transportation facilities and equipment. In addition, it authorized measures to increase the production of food in non-European foreign countries and to encourage conservation practices in this country. While these steps are desirable, they constitute only a small part of an effective anti-inflation program.

The same measure also provided for voluntary agreements among businessmen, relating to the allocation of transportation facilities and scarce commodities and relating also to the regulation of speculative trading on commodity exchanges. While I have stressed many times that certain types of appropriate voluntary action are important, the experience reviewed in this Report, and the facts which it sets forth, demonstrate conclusively that governmental action along the lines that I have recommended is absolutely essential.


The need for some government controls does not lessen the need for voluntary restraint. Only with the voluntary cooperation of the American people can any controls be made to work effectively, and the more effective voluntary restraint becomes, the less will controls be needed.

I have already urged consumers to restrict their purchases of scarce products. The Federal Government is deferring many public works projects and following procurement policies designed to minimize their effect upon price increases. I urge State and local governments to do likewise. Businessmen should defer expansion that does not immediately augment production. They should also strive to maintain inventories at the lowest efficient working levels.

The campaign to sell savings bonds will be intensified. Voluntary savings of all types should be encouraged. The new bond buyers and millions of loyal Americans who enabled their country to finance the war are assured that the power which their Government possesses to maintain the value of their bonds will be exercised wherever necessary.

Most important of all, businessmen should hold the line against price increases and reduce prices wherever they can, foregoing a quick and dangerous excessive profit in favor of long-run stability. And labor should be moderate in its wage demands, mindful of recent experience which demonstrates the impossibility of registering real gains in an inflationary spiral.

I cannot too strongly emphasize that every self-imposed voluntary restraint, in the making of purchases, in the setting of prices, and in the demand for wages, contributes to the restoration of economic stability and prolonged prosperity. But to the extent that the result is not achieved by these means, it is essential that proper agencies of Government be given and that they use powers to restore the balance.

When an inflation is in progress, there is no way of predicting when it will break of its own accord. One can only be certain that, if permitted to run its own course, it will break with destructive force. How serious or prolonged such a situation would be in the current instance cannot be foretold. Whatever its character, if a depression occurs, it will be far more costly in human welfare and will involve the Government in far more pervasive intervention in the economic life of the country than the measures which are necessary to prevent it. I therefore urge that the Congress consider with the utmost speed the nature of the problem which we have to meet and adopt the measures that are appropriate to its solution.


While striving to overcome the inflation of today, we cannot safely neglect the problems of tomorrow. No great nation lives for the moment alone. In restraining the excessive demand which is now apparent, we must not cripple the market for an expanding output of American industry and agriculture. Our whole history shows that unless we go forward we shall slip backward. Our economy should be stable, but nonetheless it must continue to grow.

We cannot set aside long-range considerations while we deal with the immediate task of combating inflation. The Employment Act requires that we set objectives for the needed levels of employment, production, and purchasing power. Such objectives require that we look ahead and appraise our economic potentials in the perspective of long-range economic growth.

The best way to realize the growth that we can achieve is to look at what we have recently done. The Nation's Economic Budget has already been used in this Report as a summary device to depict the present state of our economy. In table II, it is used to show the enormous strides that we have made since just before World War II, with the figures adjusted to allow for price changes.

No one can fail to be impressed by the fact that, within 8 years, our annual national product has increased by about 53 percent measured in constant prices. Some part of this increase is explained by the fact that our economy in 1939 was not running at maximum employment or production. The relentless pressure of the war speeded up certain economic developments. The American people hold a profound conviction that our war-time production record furnishes a significant demonstration of what we can do with maximum employment and effective economic policies.

In recent years, a number of attempts have been made by private and public research agencies to measure the growth that lies ahead if we are successful in maintaining maximum levels of economic activity. These studies recognize that foresight is not perfect and that our knowledge of technological trends and economic relationships is still limited. Further improvements in these measurements are needed. But even now, they can serve to furnish us at least with some broad outlines of our prospects and problems.

Ten years from now, if we maintain maximum employment, we should reach a level of nearly 64 million jobs. This allows for population growth. It also allows for withdrawal from the labor force of some women to their homes and for longer school attendance of some of our young people.

Output per man-hour for our economy as a whole has increased by approximately 2 percent annually in recent decades. The war brought many technological advances which have not yet been adopted fully by peacetime industry. Assuming even the very conservative estimate of 2 percent annual increase in productivity, and allowing for population growth, maximum production 10 years hence would mean an increase of about 35 percent in our total output of goods and services if average weekly hours of work remain unchanged. This would mean per capita disposable income about 80 percent above the level of 1937 and 27 percent above the level of 1947 in terms of constant dollars. Some part of this possible increase may, of course, be taken in the form of increased leisure.


Billions of dollars, first half of 1947 prices
Calendar year 1939 Calendar year 1947 1
Excess Excess
(+) or (+) or Percent
Re- Expend- deficit Re- Expend- deficit increase
Accounts ceipts itures (--) ceipts itures (--) 1939-47
Disposable income 112.5 171.0 52
Expenditures 108.2 160.2 48
Saving (+) +4.3 +10.8 151
Undistributed profits and
reserves 13.1 17.1 31
Gross private domestic
New construction 7.4 10.2 38
Producers' durable equipment 6.4 17.3 170
Net change in inventories .6 2.1 250

Total 14.4 29.6 106
Excess of receipts (+) or investment (--) --1.3 --12.5 862
Net foreign investment 1.3 8.4 546
Excess of receipts (+) or
investment (--) --1.3 --8.4 546
Government (Federal, State, and local):
Cash receipts from the public 27.0 59.4 119
Cash payments to the public 31.7 53.6 69
Excess of receipts (+) or
payments (-) --4.7 +5.8
Adjustments to arrive at gross
national product --5.1 --8.1 +3.0 --21.2 --25.5 +4.3

Total gross national
product 147.5 147.5 0 226.3 226.3 0 55

1 Estimates based on incomplete data.

We have within our reach an economic environment that would make it unnecessary for masses of people to be undernourished or ill-housed, to work in obsolete plants and shops, or to lack essential medical care, social security or education. No one would need to go without adequate rest and vacation after hard work. Attainment of these economic objectives would afford ever-increasing opportunities for individual initiative and greatly strengthen the cherished free institutions of American life.

But these gains will not come by accident. They would not be registered in an economy characterized by a period of idle or wasted resources after any period when for a few years we attain full utilization of our plant and labor force, or in an economy running at only three-quarter capacity even in "fairly good times." The attainment of our objectives will depend upon the best efforts of industry, agriculture, and labor, working with sympathetic understanding of one another's problems and of the common good. It will depend on a clear appreciation of maladjustments in the relationships among production, prices, and purchasing power; it will depend upon the willingness of all concerned to make necessary adjustments, and upon vigorous and forward looking government.


In the perspective of balanced economic expansion for the future, our first attention should be concentrated upon our productive resources, developed and potential, and the ways in which these resources are utilized. Since the beginning of the war, we have been forced to forego at many points development of our basic natural resources and the essential maintenance and improvement of our capital facilities.

Improvement of the country's natural resources and its capital equipment is a cooperative effort. Private groups and individuals, State and local governments, as well as the Federal Government, are challenged by the task. An expanding base of natural resources and capital equipment is necessary for the realization of increasing production and a rising standard of living.

Natural resources

Land. To meet the needs of a population of perhaps 175 to 185 million persons by 1975 living in an economic environment of sustained maximum employment and Production with a considerable volume of agricultural exports, would require an increase of about 30 percent in agricultural production. It would also require a substantial shift in the pattern of agricultural land use to meet changes in demand.

The yield of present cropland can be enlarged by improvements in plant breeding, increased use of machinery, supplemental irrigation, increased use of fertilizers, and more efficient marketing. To some extent, we can also increase production by adding to cropland through drainage, clearing, and irrigation.

Erosion of top soil and depletion of soil fertility are becoming more and more serious. About 60 million acres now cultivated should be used for grass and trees. Despite significant progress in soil conservation in recent years, half the Nation's cropland and pasture still needs to be put under improved soil management practices as rapidly as possible. Expanded research, education, and demonstration programs are required. We need a Nation-wide program for increased application of fertilizers to depleted soils.

About half our acreage of farm pastures and rangeland has been impaired seriously by overgrazing, fires, and other abuses. Large tracts of land which should be ranges have been plowed for wheat. Higher levels of meat consumption can be met only if individual farmers and stockmen who own two-thirds of the country's range-land adopt better grazing practices. The 300 million acres of western grazing land controlled by the Federal Government, much of it organized in grazing districts, is being improved, but a large part of it requires further rehabilitation.

Water. Bound up as they are with land uses, water resources should be developed and controlled as an integral part of a broader national and regional resources-development program. Expanding programs are needed to prevent floods, provide for navigation, furnish urgently needed power, promote recreation, control pollution, conserve fish and wildlife, and maintain and improve underground and surface water supplies needed for agriculture and other uses.

An impressive example of the interrelated nature of water and land resources is provided by large multiple purpose dams and accompanying watershed programs. Such integrated programs should be stepped up, as soon as economic conditions permit, in a number of our larger river basins.

Forests. The estimated 461 million acres of private and public commercial forest land in the country ultimately will grow all the timber products we are likely to need, provided they are well managed. The problem is most acute in saw timber. Our present saw-timber stand is less than half that in 1909, and is poorly distributed and deteriorating in quality and size. Better forest practices would provide the greatest assurance of adequate supplies for the future. Achievement of better practices may be furthered by strengthening and expanding technical and other assistance to private forest landowners, including farmers. In addition, multipurpose development of the national forests and other Federal forest land should be pushed to help meet national needs.

Minerals. Ample supplies of all essential minerals are vital to an expanding economy and for the Nation's security. Those minerals with which we are well endowed, such as coal and phosphates, should be mined and utilized efficiently. Those minerals for which we depend on foreign sources, such as tin, antimony, chromite, and strategic mica, will continue to require stockpiling and intensive search for substitutes and alternative sources of supply. Finally, those minerals for which we depend partially on foreign sources, such as zinc, lead, copper, and, increasingly, high-grade iron ore, call for policies which emphasize stepping up the rate of discovery, improving mining methods, and developing commercial processes for the utilization of low-grade ores. For petroleum, new techniques and sources of supply from coal, natural gas, and oil shale will have to be increasingly relied upon to prevent the reserve situation from deteriorating and to meet the rapidly growing demand.

Regional development. Some large regions in the country possess the basic raw materials, population, and locational advantages to support a much higher standard of living, but are below the national average in material well-being. They require large-scale developmental efforts both for their own benefit and to contribute in larger measure to the national welfare. The objective should be to narrow such differentials by raising productivity and incomes in the lagging regions, particularly through improvement in agricultural methods and land uses, further industrial expansion and diversification, and lifting education and health levels.

In recent years, large parts of the West have been growing, in terms of per capita income and production, at rates well in excess of national averages, but they are so meagerly equipped with capital and population that they may accurately be termed underdeveloped. Programs for the development of these regions are practical and productive, and should be continued.

The Territory of Alaska furnishes a special case. Because of its resources and its strategic location as our last northwest frontier, a concerted and expanded effort on the part of public and private agencies and individuals for the rapid economic and social development of Alaska is required.

Regional development requires integrated programs of business, labor, agriculture, and all levels of Government. The Council of Economic Advisers, in cooperation with other agencies of the Government, is studying this problem.


Billions of 1929 dollars, average Percentage of gross national
annual rate product
Gross Replace- Net Gross Replace- Net
Decade outlays ment expansion outlays ment expansion
1869-78 0.48 0.27 0.20 4.6 2.7 1.9
1879-88 1.03 .58 .45 5. 3 3.0 2.3
1889-98 1.42 1.03 .40 5.3 3.8 1.5
1899-1908 2.58 1.54 1.04 6.2 3.7 2.5
1909-18 3.88 2.52 1.36 7.0 4.5 2.4
1919--28 5.48 3.88 1.60 7.0 5. 0 2.0
1929-38 4.77 4.47 .30 5.9 5.5 .4

Source: Simon Kuznets, National Product Since 1869, National Bureau of Economic Research, New York, 1946.

Business plant and equipment

Productive capacity. A growing economy requires balanced expansion of our capacity to turn out consumer goods and crude and semi-finished materials and equipment.

For the greater part of the last two decades, business expansion has been irregular. In the worst depression years of the 30's, outlays were insufficient even for normal replacement. Table 12, which covers producers' durable equipment, shows how the rate of expansion varied from decade to decade before the war.

New stimulus to business investment came with the defense program of 1940-41. But during the war, though certain critical facilities were expanded, we had to curtail many lines of civilian goods and expansion of all facilities not contributing to war production. After 15 years of depression and wartime restriction, productive capacity was highly unbalanced and generally inadequate to meet the peacetime demand. The high rate of investment in new equipment during the past 2 years reflects in part the efforts of producers to make up the deficiencies.

In some industries, present capacity appears adequate for the near future. In others, such as electric power and petroleum refining, expansion of capacity is substantial and is likely to continue for a considerable period until a better balance between demands and capacity has been reached. In a few industries, net capacity expansion during 1947 was less than that required annually to sustain maximum production and employment.

The best available studies indicate that to attain the levels of employment and output we hope to reach, we shall need substantial increases in the output of such basic commodities as steel, petroleum products, coke, and electricity. For these industries, the needed increases during the next 10 years range from 20 to 50 percent. Though such studies make no claim to precision, the only reasonable expectation is that continued high-level production will require large increases of capacity in the industries mentioned and in many others.

Chart 12 gives the historical perspective of expansion of capacity relative to output in several important industries. The tightness of present capacity is apparent. Potential stringencies are even greater than might appear from the chart. For example, if either freight cars or steel were more plentiful, demand for many other commodities would increase, disclosing further deficiencies in capacity. In fact, there are some industries where present capacity is inadequate for current output, providing less elbow room than management considers desirable for continuously efficient operation, satisfactory servicing of the market, and emergencies. Dependable reserve capacity of electric power generating facilities, for example, is normally at least 15 percent of peak load for any system. Near the end of 1947, it dropped to below 1 percent for the United States as a whole; in most areas no reserve capacity was available and in some areas acute shortages exist.

The needed capacities for various industries are related. There is no point in having capacity to make more automobiles unless we have capacity to supply steel and other materials. The output of steel is limited by supplies of coke, scrap, steel furnace capacity, blast furnace capacity, finishing capacity, and rail transportation.

The same principle applies to the development of raw-material-producing and raw material-consuming industries. There is a serious question, in particular, whether our capacity to produce fuels and energy is being expanded fast enough to meet the fuel and energy demands indicated by expansion in other lines.

If the whole level of output is to rise steadily and rapidly with minimum waste of capacity, the balancing of expansion in different industries calls for considerably more thorough study than it has been given in the past.

Modernization of facilities. The amount of business capital required is only partly measured in terms of scaling up capacity to meet enlarged demands. As table 12 indicates, a large and increasing share of outlays for business equipment is devoted to replacement. The rate at which this renewal and improvement proceeds is set not so much by physical wear and tear as by the profitability of setting up facilities of new types, or for new kinds of products, or at new locations. Industrial equipment and structures are often obsolete long before they are worn out.

In deciding upon replacement, business has not felt it could afford to substitute new types of equipment for old as rapidly as the pace of technological advance would make possible. This lag was accentuated during the war. At its close the progress of industrial and business technology had accumulated a reservoir of potentially profitable opportunities for modernization. If still more rapid technical advances are made and if prospective production economics justify the costs of accelerated modernization, both business investment and the rate of increase of productivity will exceed past rates.

Programs and responsibilities. In a period of far-reaching economic change, an adequate investment program of expansion and modernization taxes the vision and initiative of business management. This is especially true of the long-range planning of business expansion in a manner which preserves proper relationships among the productive capacities of various industries.

In a free enterprise system, business investment rests on profit expectations, which in turn reflect the outlook for consumer spending, costs of production and investment, availability of improved techniques, availability of funds, and the degree of uncertainty and risk involved in gauging these and other factors. The investment "program" is essentially the sum of a great many private programs--privately planned, financed, and executed. Government investment and operation, in special cases such as hydroelectric power and atomic energy development, clearly serve the public interest. More generally, the Government can help to develop a favorable climate which will encourage business to adopt adequate investment programs.

As the task of making up obvious war accumulated deficiencies in productive capacity is completed, and as inflation is reduced, increasing attention will have to be given to fostering favorable conditions for balanced expansion and for aggressive development of new fields of investment. The most essential condition is continued acceptance and determined implementation of the national policy laid down in the Employment Act of 1946. A policy of sustained maximum production requires that the actions of business, labor and Government be based on broad agreement as to our over, all economic goals and on a reasonable degree of assurance that appropriate action will be taken to achieve them.


In our far-flung economy, transportation needs are so obviously related to the development of natural resources and industrial production that the people long ago undertook through their Government to encourage and in many cases to participate in the building of extensive transportation facilities.

Shipping. Maintenance of a healthy shipbuilding industry, capable of rapid expansion, and the continued operation of an efficient and competitive merchant marine, are not only necessary to national security but are also essential elements in the achievement of a continued high level of employment in the United States. Except for a few ships which are urgently needed now, construction of new vessels can well be deferred until inflationary demands have eased and materials are more readily available. Our present needs for shipping should be met basically by the use of existing war built vessels. Meanwhile, the shipbuilding industry, by virtue of repair and conversion of war-built ships, is operating at levels considerably above the prewar average.

Highways. In the field of highway transportation, the Congress more than 30 years ago created what is now the Public Roads Administration. At that time, the Congress gave top priority to the problem of getting the farmers out of the mud--providing access to our agricultural resources and to markets for these resources. Although substantial progress has been made in this direction, much remains to be accomplished. In addition, major tasks before us are the efficient maintenance of rural roads, and their reconstruction as age or increased traffic dictate.

The second objective, making it possible to get to and from cities, was well on the way to attainment before the war, but we have lost ground in the last 7 or 8 years. Costs of maintaining many of our highways are so high that it is more economical to rebuild them. Maintenance and traffic records indicate that within 10 years at least 45 percent of existing highways will have to be rebuilt.

A third task, providing adequate facilities for intra-city traffic and healthy urban growth, is one we have hardly begun to tackle. The Congress has recognized the national importance of this problem by authorizing the expenditure of 125 million dollars per year out of the 500 million dollars Federal-aid funds for building through arteries in cities. This is an important undertaking and deserves continued attention.

Air transportation. The Government has undertaken a program of financial aid to air lines through mail payments under which rates of payment are related to the operating income and operating expenditures of the air lines and to the volume of the mail and the value of the service. Those charged with the administration of this program are constantly testing its effectiveness.

Government aid is most effective when it stimulates the resourcefulness and inventiveness of private enterprise in developing and applying technological advances in aviation.

The Government has also expedited the construction of necessary airports by sharing costs of construction of many publicly owned fields. The Federal Airport Act of 1946 authorized Federal expenditures aggregating 500 million dollars over 7 years. While that program is being completed, growing experience will furnish a basis for further decision as to the pattern of the aviation network which national prosperity requires and how far it is desirable to go in multiplying air lines and in furnishing to a multitude of communities air transportation facilities with their accompanying burdens of maintenance costs.

Railroads. A most urgent national problem in the field of domestic transportation is the maintenance of an expanding and efficient railroad service. Large earnings of the war period permitted the more prosperous lines to fortify their financial position and brought about the financial rehabilitation of many railroads which for years had been in receivership. These great improvements in their financial position are rapidly being dissipated by the effects of inflation, and the railroads will benefit as greatly as any part of our business institutions from a successful effort to end the inflationary movement.

It is in the national interest to insure the continuance of efficient rail transportation. Consolidation of facilities, though it has shown but little progress after nearly 30 years of study and effort, offers such possibilities of convenience and economy that it should be steadily pursued. We can be optimistic about technical improvements helping to offset the rising costs of wages and goods if management and labor are alert to the opportunities which their introduction offers. The need must be recognized to protect the credit of the roads in order to enable them to finance the heavy expenditures which are necessarily involved in these technical changes.

Urban redevelopment

Approximately three-quarters of our population and three-quarters of our wealth are now essentially urban. Our cities, both large and small, make up an integral part of the productive plant that we need for maximum growth. Improved planning and redevelopment of these cities will not only enhance their physical usefulness as facilities for manufacturing and commerce, but will also increase workers' productivity in a living environment more conducive to good health and high morale.

When land is assembled in suitable blocks to facilitate economic redevelopment, extremely large investment opportunities become available. The construction industry will be called upon to supply management, labor to supply skills, and manufacturers to supply building materials and all the products and services which go into residences, schools, factories, offices, stores, and the other elements which constitute the communities of today. Moderate government outlays in redevelopment of urban areas will provide large investment opportunities for private capital. It has been estimated that over the next decade as much as 75 billion dollars-mostly private investment--could profitably be employed in these redeveloped areas. This is in addition to general urban public works.

It is none too early for basic planning of land acquisition and the working out of financial arrangements for urban redevelopment. This will permit rapid progress when there is less pressure on certain materials in short supply, and when additional investment opportunities will aid in maintaining maximum levels of employment and production.

The present acute housing shortage requires a large amount of new construction in outlying areas before we can engage in slum clearance and urban redevelopment on the large scale that will be needed. Some of this suburban construction needs to be located in whole new communities with adequate provision for municipal services, commercial facilities, and available employment opportunities. These need to be carefully integrated with better planning of our present urban areas. Otherwise urban congestion will be aggravated and local governments, both central and suburban, will be faced with ever-mounting costs.

Private enterprise and local initiative alone cannot rebuild and modernize our cities. Private developers lack both the resources and the legal powers to acquire land in large enough blocks to permit sound profitable redevelopment. Local governments are obtaining powers of land assembly but lack financial powers to undertake the task on the scale needed to encourage private investment and to permit cleared land to be made available at economically feasible prices.

Local governments should take the initiative in providing for site assembly and for area planning, and for streets, schools, and water, sewer, and other connected facilities. State governments should provide enabling and fiscal legislation. Under existing State powers, some worthy redevelopment projects have been undertaken, but most informed sentiment is in general agreement that some Federal aid is also required. The Federal Government is also concerned with highways, airports, Federal buildings, and other facilities as well as with slum clearance and low-rent housing.

I again urge that the Congress consider Federal aid to urban redevelopment along the general lines I have previously recommended.


We must maintain residential construction at much higher than present levels in order to eliminate the quantitative shortage and also to replace urban slums and rural shacks with an American standard of housing within a reasonable period of time.

From the viewpoint of economic stabilization, there is a compelling reason for maintaining residential construction at consistently high levels. In the past, the volume of housing production has fluctuated more violently than any other major segment of economic activity. This is shown in chart 13. The instability of housing has contributed significantly to the instability of the economy as a whole, and stabilizing residential construction would be a powerful factor in helping to stabilize the general economy. The importance of housing in the national economy is shown in chart 14.

A reasonably steady flow of house production, starting at a high level and increasing gradually from year to year, is essential during the next decade. Taking account of our growing population, the urgent desirability of replacing substandard units as rapidly as possible, and the amounts of home building that will help to maintain maximum employment for the economy as a whole, we need an average of more than a million new urban dwelling units a year for the next 10 years. The needs of rural areas are also great.

During 1947, more than 850,000 new permanent nonfarm dwelling units were started, and conversion and temporary units brought the total to more than 900,000. Measured by volume and allowing for shortages of materials and the unusual strength of competing demands, this was a good start for a 10-year program. But the record cannot be measured by volume alone. When examination is made of the relationship between the cost of this housing and our income structure, it is clearly apparent that most of the housing is being built for families in the higher income brackets. To the extent that families of low and middle income are being served, the high cost is placing an excessive financial strain upon them.

The cost of housing has been getting further and further out of line with incomes. Only a small minority of our families can afford to purchase new houses of satisfactory size and quality. This is true despite the fact that we have maximum employment and a high national income, and a better income distribution than we had before the war. Unless housing costs drop, the volume of private residential construction will almost certainly decline in coming years, placing new difficulties in the way of our maintaining maximum employment. The poor adjustment of housing costs to income in the 1920's is precisely what caused a sharp and increasing decline in homebuilding which commenced four full years before the general depression to which it contributed.

Industry and labor and local governments need to bend ever-increasing efforts toward the abolition of obsolete practices and restrictions. Many of these restrictions have developed as protective devices for individuals or organizations caught in the insecurity of an industry subject to wide fluctuations. The fluctuations have caused the restrictions far more than the restrictions have caused the fluctuations. Only an affirmative program for stabilizing housing construction can clear the way for the elimination of restrictions, reduction in costs, and adequate provision of housing.

Even the minimum housing program required embraces a number of items. These include research and experimentation to devise better building techniques and concerted efforts to modernize building codes; land assembly programs as an aid to housing; the use of Federal insurance to stimulate longer term investment with lower financing charges both for home ownership and for rental housing; special forms of insurance to amplify the interest in large-scale projects already being shown by builders and institutional investors who have the resources to lay the foundation for the reorganization of the housing industry along more modern lines; and the provision of publicly-aided housing in urban and rural areas--on both a rental and home ownership basis--for families of low income.

On several occasions, I have recommended the enactment of comprehensive, long-range housing legislation. Postponement of this action represents postponement of attention to a problem of utmost economic importance.


Even with modern factories, fertile fields, abundant sources of power and raw materials, and smoothly flowing arteries of commerce, the growth of our economy will depend ultimately upon the men and women whose mental and physical energies constitute its greatest wealth. We have learned that those programs which make people healthier and more secure also make them more efficient. In this light, the educational and health and social security programs which were once thought of as purely "social" take on a deep economic significance.

Size and composition of the labor force

Our total population, now about 145 million, will continue to grow for a number of decades at a rate exceeding prewar estimates. This is due to an unusually high rate of marriages and births during and since the war together with a steadily declining death rate. As a result of population growth and plentiful job opportunities, the labor force, and particularly the employed segment of the labor force, has expanded during and after the war. Civilian employment is now 6 percent higher than the war peak and 26 percent above the 1939 level.

One result of the war has been to increase the employment of teen-age workers, and of men and women in the older age groups. The exacting economic demands of modern employment, no less than social considerations, should impel us gradually to reverse this trend. Educational and retirement programs thus influence the optimum use of our labor force.

While these considerations should increasingly determine the size of the labor force, there is the further question of its quality. The progress of industrialization has led to the use of more complicated equipment although much of it is more automatic in its operation. This reduces both the physical exertion and the need for manual skill of operatives generally. At the same time, it increases the proportional demand for engineers and supervisors of higher technical training. And while many operatives have their task reduced to a simple routine, they assume new responsibilities for the proper handling of expensive machinery.

As members of labor unions voting on strike action and other union issues, and as citizens reacting to economic policies and candidates for office, they need a higher degree of economic and civic education. The general requirements of intellectual competence are steadily moving upward.

Moreover, the progress of modern technology, both industrial and agricultural, means that a smaller proportion of the population is required in manufacturing and farming and more people are available for the service callings and professions, where even higher levels of training are required. This trend is reinforced because some of these areas will suffer from shortages of trained personnel for some time to come-teaching, medicine, and nursing being the chief examples.

The adjustment of the labor force to the changing character of our economy thus commences with the problem of education.

Education for the modern economy

With a higher average of competence required by our economy, the most urgent educational problems now center in the elementary and secondary schools. It is here that boys and girls receive their basic training and prepare themselves to absorb more specialized training.

The number of children of school age is increasing far more rapidly than had been estimated before the war. In 1940, there were 27.6 million children between the ages of 6 and 17; by 1955 there will be more than 33.3 million. By 1955, school enrollment should be more than one-third above the 1940 level.

In the face of this need, our educational plant is desperately inadequate. State school officials report minimum needs for 7.5 billion dollars of capital outlays for elementary and secondary schools--twice as great as total construction expenditures for all levels of education during the decade of the 20's. Due largely to low salaries, the number of trained teachers is not keeping up with the increasing need. These shortages in plant and personnel are much more serious in some regions than in others. While the 10 States with the highest per capita incomes are spending about $177 annually for each school child, the 10 States with the lowest per capita income are spending only about $64.

This maldistribution of educational opportunities is both result and cause of differences in wealth and income in the several areas. Some of the States that are paying least per capita for education are devoting a higher percentage of their total revenues to educational purposes than others with higher per capita outlays. Federal aid to elementary and secondary education should contribute to that equalization of opportunity in various parts of the country which will fit our youth for living and working in the kind of economy that we shall have when they are grown.

A large proportion of the young people who are now crowding the elementary schools will progress through high school and enter college after 1955. They will replace the veterans who are now in college. Compared with an enrollment of 1.4 million when the war started and a current enrollment of 2.4 million, we should now plan for an enrollment by 1960 of 4 to 5 million students in an expanded and improved system of higher education.

I urge the Congress to consider a comprehensive program of Federal aid to education and to enact immediately assistance to elementary and secondary schools.


The expansion of national output, as well as national security, depends increasingly upon scientific accomplishments. Before the war, we drew heavily upon the basic discoveries of scholars all over the world. The war impeded this free flow of knowledge from other lands, and destroyed much of it at the source. During recent decades our own progress in industrial and agricultural research has been tremendous, but we cannot afford to rest on our laurels. There is need for enlarged research, both in basic principles of physical, biological, and social science, and also in their practical application.

Part of the expansion required to meet a reasonable goal of research development will occur as part of the long-range growth of our economy. Considerable growth in industrial research may be counted on. Existing universities and research institutes will continue to make important contributions. But it is clear that the required expansion in research into scientific principles and their application will be impossible without a comprehensive program in which Federal aid should play a part.

Good health and productivity

Study of health records affords another example of the connection between the economic objective of maximum production and the humanitarian objective of improved well-being. With the labor force at its present size, the annual cost of illness, long-term disability and accidents is about 3,500,000 man-years. A part of this loss arises from improper working conditions. Occupational diseases and industrial accidents also take their toll. An even greater charge upon productivity are the millions of people who are physically substandard without being disabled. Inadequate diet is impairing the strength of too many workers. Our goal should be the establishment of safe working conditions and an increase in the physical standards of the whole population.

This problem has economic aspects, not only because health standards below the maximum attainable reduce productivity, but also because the lifting of these standards requires economic measures which remove the incapacity of many communities to support and of millions of individuals to purchase adequate medical care.

On these grounds, I again urge the Congress to enact a comprehensive national health program of the character I have already recommended.

Security and productivity

Job security. No matter how stable a particular business, industry, or region may be, it can rarely avoid unemployment in the event of a serious depression. A national policy of vigorously promoting maximum employment will be the longest step toward the sense of individual security which is conducive to high productivity.

There is no substitute for this national policy, but it should be supplemented with planning by individual firms and industries for the stabilization of their own activities. Wage security plans have been proposed, and a report on this subject is being prepared by the Council of Economic Advisers. Training programs, an adequate and efficient public employment service, and other improvements of the labor market can all play their part. For those who will be temporarily unemployed despite our best efforts, unemployment compensation should be increased in amount and duration, and extended in coverage.

Maximum production must be based upon proof that it is not self-defeating. Only by providing alternative jobs for those who suffer displacement, and by ironing out the fluctuations in business, can we convince both labor and industry that restrictive tendencies are unnecessary for them as well as hurtful to the economy as a whole.

Old-age security. The retirement problem has economic as well as social aspects. Those who have withdrawn from productive activity because of age continue to require goods and services, and to make expenditures which flow into the general income stream. A systematic national program which provides for regularity and certainty in the basic income of those who have retired is a more efficient economic policy than the haphazard treatment of this problem which preceded the establishment of old-age insurance. Such a system has the further advantage that it helps to regularize the saving habits of workers during their productive years.

There are now more than 10 million people in the United States, about 8 percent of the total population, who have reached the age of 65. By 1960, about 15 million people, or about 9 percent of the population, will have reached that age. Our systems of protection against the economic hazards of old age and dependency are inadequate. There are now some 17 million jobs in which workers cannot build up wage credits for old-age retirement. The coverage of old-age and survivors' insurance should be extended, and benefits should be adjusted upward with a higher limit upon earnings which may be received after retirement without loss of benefits.

A lowering of the retirement age will be feasible in future years as we attain the levels of national output that sustained maximum employment and production will bring. At the same time, industry should provide opportunities for the efficient employment of those older people who are able and willing to work although they have earned the right to retire.

Public assistance. The social insurances are supplemented by public-assistance programs financed by States with the aid of Federal grants. The public-assistance programs are now more significant, both in terms of the number of people aided and in terms of total expenditures, than the social insurances. About 4 million people now depend on public assistance, in part because existing social insurances, particularly old age and survivors' insurance, are deficient and because there is no national health insurance program. Expansion of social insurance will decrease the need for public assistance expenditures, but those who must still rely on public assistance should receive adequate payments. The Federal Government should make grants to States to help them finance general-assistance payments, and all public-assistance grants should take account of variations in the ability of the States to finance adequate assistance programs.

Freedom from discrimination. Maximum employment and production cannot be maintained when men and women are discriminated against because of race or color, creed or national origin. An effective system which will assure fair employment practices should be established.

Fiscal aspects of benefit programs

The whole question of benefits cannot be divorced from the question of the cost of the payments and how these costs are borne. It is of paramount importance to bear in mind that the costs of unemployment, old age, and sickness are borne by the community whether social security measures exist or not. Social security measures involve a change in the distribution of money, goods, and services among consumers only to the extent that the existence of the measures diverts additional funds to the support of the aided groups. This diversion does occur, but the additional funds are far less than the total volume of benefits provided under the programs.

Nevertheless, the fact that wage earners' risks are met under social security measures through payments derived from taxes rather than directly from private sources in itself has economic implications. The social insurances are now financed by employees' contributions and employers' payroll taxes; the public assistance payments are financed from general revenues. Employees' payroll taxes place a heavy drain upon mass purchasing power while the employers' share of these taxes adds to costs of production. In financing an expanded social-insurance program, these economic aspects should be considered.


Preceding sections have discussed the means by which our natural resources, our capital equipment, and our human resources may be developed to support a maximum level of well-being. But the ability to produce will not alone assure economic stability and growth. Recurrent periods of recession or depression have led to the realization that maximum resource utilization depends upon many adjustments within our complex economy. It is necessary for us to apply systematic forward thinking to the shaping of our economic institutions and the practices of the men and women whose behavior determines how those institutions will in fact operate.

The problem of progressively improving these institutions, policies, and practices so as to attain balanced growth of the economy divides naturally into four main parts: first, in the industrial area we need price-wage profit policies which maintain balance between the output of industry and the ability of consumers to buy that output. Second, in the agricultural area, we need balance between city and farm income and between farm and industrial prices. Third, the fiscal policies of the Government, such as taxation and debt management, need to be so contrived as to afford maximum incentives to production and to improve the balance within the economic system generally. And fourth, we must strike a wise balance between our internal economic activities and our international trade.

Industrial price-wage-profit policies

The national purpose of maximum employment, production, and purchasing power enunciated in the Employment Act of 1946 includes a declaration "to foster and promote free competitive enterprise and the general welfare." Discussion of industrial pricewage-profit policies may therefore quite properly begin with the problem of maintaining a truly competitive system of free enterprise.

Maintenance of competition. To operate effectively without a high degree of Government intervention, a free enterprise economy must adjust itself to changing conditions through appropriate movements of prices, costs, and production. In a very vital way this depends on the maintenance of fair competitive rivalry among business enterprises. This is recognized in the long-standing policy embodied in the antitrust laws, the central purpose of which is to prevent monopolistic control of markets, and, in the words of the author of the Sherman Act, to gain for the people the advantage of "the natural competition of increasing production."

Unregulated private monopoly tends to undermine independent enterprises and to create exaggerated extremes of wealth and power within the country. Strong monopoly elements are likely to retard seriously the cost-price-output adjustments necessary to economic stability with full employment. For these reasons, as well as for the other counts against unregulated monopoly, there must be a strong and continuing pressure by the Government to keep alive the competitive characteristics of the business system. If this were not to be done, we should have to look forward, first, to a great increase of private monopolistic control of American business, and thereafter, since this would be intolerable, to a great increase in the public regulation of business activity, if not actual public operation in some fields.

In considering the character of competition in the future, it is impossible to ignore the tremendous changes which have occurred in the organization of business control over the past 50 or 60 years. From a situation in which industry was typically organized on a small scale basis, we have arrived at a situation in which there exist corporations of gigantic size. In many industries one, two, three or four companies control a major fraction of production. In many areas of industry, modern technology requires that firms be of a very considerable size. The best opinion is, however, that the largest enterprises in many industries are larger than is necessary to secure the benefits of technical efficiency. In the future amendment and enforcement of the antitrust laws, the principle should be followed of checking the further excessive concentration of industrial control and, by protecting the position of smaller competing enterprises, of reversing the past trend toward concentration.

Much of the adaptability of the American economy stems from the initiative and enterprise which give rise to small business concerns throughout the Nation. They should have the opportunity to develop and prosper. The existence of the antitrust laws, although not a sufficient basis for a healthy development of new enterprises, is an essential condition. Beyond this, we must insure that no artificial barriers to their growth exist either through the tax laws or otherwise, and in particular that credit suited and adequate to their needs is made available.

The present degree of concentration of economic power and the existence of other monopolistic elements pose very grave problems. It was in recognition of this fact that the Temporary National Economic Committee was set up in 1938 to engage in a far-reaching inquiry into business organization and practice. The central problems have not been altered by economic changes in the intervening years and it is important that in the light of the findings of the TNEC we move forward to a clear enunciation of public policy and a program of public action.

The problem of price policies. The effect upon prices of corporate bigness and collusive monopolistic practices is only one aspect of a much wider pricing problem. Many a business manager fears that the use of price reductions to expand his share of the market will merely result in retaliatory price changes by other firms. Business therefore has sought, as far as possible, to place the competition for markets which it must meet upon some other basis than price competition. The pricing system is thereby deprived of much of the elasticity needed to adjust relative changes in cost and demand.

Moreover, in the effort to realize profits through the ups and downs of business, prices and profit margins are geared to the expectation that full use of capacity is not a normal situation. This means that, in periods of high production, pricing policies and practices are followed that produce a level of profits designed to protect the individual company during future declines in business activity rather than to contribute to the prevention of such declines. Such policies are not conducive to the continued health of the business community because they act on the assumption that it will not continue.

The price mechanism may serve either to promote or to prevent a safe balance among prices, wages, and profits. The greater the success of four free enterprise system in maintaining this balance, the less need there will be for direct governmental intervention in the economic system. This imposes a heavy responsibility upon those business managers whose decisions importantly affect the levels of prices, wages, and profits. Management must recognize that sustained maximum production requires that gains in productivity be passed on through lower prices and better wages to the fullest extent consistent with adequate incentives to business enterprise.

The collective bargaining process to determine wages also .plays a vital part in the determination and maintenance of healthy price-wage-profit policies. It cannot fulfill its function if it is used merely as a test of the sheer force which one party or the other can exert in the pursuit of immediate self-interest. Collective bargaining must be based upon a better understanding of the long-range interests of management and labor in the context of the interests of the whole economy.

The greatest opportunity for bringing about economic betterment lies in achieving and maintaining a proper balance among prices, wages, and profits. One of the purposes of the Employment Act is to provide a new climate for pricing policies. The act contemplates that the combined resources of business, labor, agriculture, and the Government will be used to do away with business fluctuations of the violence known in the past. To determine what price and wage policies and practices are appropriate to this objective, a reexamination of the problem is necessary.

Therefore, I have instructed the Council of Economic Advisers to continue its work on this problem with the assistance of representatives of all groups concerned. The results of such a study should contribute to the development of sound legislative proposals. But its most important outcome should be a wider and deeper understanding on the part of the Government, business, labor, and consumer groups as to the price, wage and production policies and practices which will contribute most fully to the maintenance of high levels of consumption and investment. Markets and income distribution. During the postwar period, our economic balance has thus far been maintained in the sense that we are still operating at maximum levels of employment and very high levels of production. But the situation is precarious to the extent that the balance cannot be maintained indefinitely without changes in the current pattern of economic relationships.

The Nation's Economic Budget, in constant dollars, for 1939 and 1947, shown on page 55 of this Report, indicates changes in the relationships of the major components of the economy. At the present time, an unusually large proportion of the market demand for goods and services results from business investments, net exports, and Government outlays. These have attained a level relatively higher than consumer expenditures, compared with the prewar period. In terms of 1947 prices, annual expenditures for producers' durable equipment have increased by 170 percent, while annual consumers' expenditures have increased by only 48 percent above the prewar level.

We cannot regard the relationship between capital formation and consumption either in 1939 or in 1947 as a model for the future. Domestic capital formation in 1939 was not sufficient. On the other hand, we are now in the stage where the improvement and modernization of our national productive plant has a high priority claim on our resources. Nonetheless, after the most urgent deficiencies in our national plant have been overcome, and the extraordinary export surplus has been reduced, a very substantial increase, both absolute and relative, in individual consumption will be possible and necessary. Without this substantial increase in the general standard of living, we would not be able to sustain an expanding economy of full resource utilization.

The increases in consumer incomes and expenditures which have taken place over the last decade are the result not only of the general increase in national income, but also of significant changes in income distribution. On page 18 of this Report, estimates are presented which show the trend toward better distribution of family incomes. This trend needs to be continued if ready and constant markets are to be available for a potential increase of 35 percent in total output of goods and services within a decade. The trend should be continued also because there are still millions of families whose incomes are too low to provide a decent standard of living. A substantial part of our increasing productivity should be devoted to the betterment of these families.

An increase in full-time employment and in the number of employed persons per family were important elements contributing to creating equality of income during the past decade. But with maximum employment now virtually achieved, further increase in these factors can no longer be expected. Already, recent trends in the real incomes of individuals and families indicate that we are losing some of the gains registered before price inflation gained momentum in the middle of 1946. This price inflation presents in a new and aggravated form the old and unsolved problem of assuring continuous maximum production by maintaining the maximum real purchasing power which must go with it without relying too long upon the depletion of savings, extraordinary use of credit, and an abnormal export surplus.

Our central problem is to make gradual readjustments so that the conditions for permanent stability are reached without generating a recession of employment and business activity in the process.

Agricultural and food policies

The new farm problem. For two full decades after the first world war congressional and executive policy was dominated by "surpluses" and low prices for farm products. The trends in our economy since the start of World War II have changed basic conditions so markedly that the farm problem of today is not to dispose of surpluses but to get enough production to prevent inflated prices.

If we succeed in our efforts to maintain industrial stability, we can look forward to many years of large markets and agricultural prosperity. Farmers have a large stake in this endeavor. The farm problem today and in the foreseeable future should be stated in terms of a maximum production economy. Farm policies should aim at continuing expansion.

To achieve stabilized farm prosperity, there will need to be changes in the traditional patterns of farm production. Increased efficiency will be required to enlarge the total production of a farming industry which cannot be materially increased in acreage. The depletion of our soil resources during the war years calls urgently for the extension of conservation programs.

Needed levels of farm production. The greatly increased demand for food on the part of our civilian population was a remarkable feature of our wartime economy. This profound change in eating habits, founded upon higher and better distributed national income, has continued since VJ-day. In 1947, per capita food consumption was about 17 percent above the 1935-39 average. Among the items increasing more than the average were chickens and turkeys, 33 percent; eggs, 28 percent; meats, 24 percent: and fluid milk and cream, 18 percent.

In view of the growing population and expanding income, we should seek within a decade to raise agricultural production about 10 percent above present levels. This would mean that crop production would be about 25 percent, and livestock production nearly 50 percent, above prewar levels.

Increasing farm productivity. Achievement of the high objectives set for agriculture will require efficient use of resources. This means increasing emphasis upon research and education to improve technology. It will necessitate an increased capital investment per worker, to raise the individual's productivity about 50 percent above the prewar level. It will also mean using two or three times as much fertilizer as before the war, about three times as many tractors on farms, and more of other types of machinery and equipment.

There are still tremendous variations in the efficiency of farm manpower use. Many farms are well organized. But some 2 or 3 million are too small or have poor land or have inadequate buildings and equipment. There is need to increase the efficiency of labor on such farms, and to help some farmers and farm laborers find other, more profitable, employment. More adequate educational and financial aids should be provided for this purpose.

Security for agriculture and the farm market. Both farmers and consumers should be protected from the feast-and-famine cycle that the vagaries of nature impose from time to time on farm production. Technological progress will reduce this problem, but there will be continuing need for crop insurance and for storage programs for staples and marketing programs for perishables. Orderly marketing and the widest possible distribution of bumper crops call for educational and service work with industry and consumers in moving large supplies.

Great opportunities exist for further advances in marketing farm products through intensified research and through educational and service programs. From the farmer's standpoint, marketing improvements mean wider outlets and more adequate returns for his product. From the consumer's standpoint they mean both savings in costs of these products and better, more adequate, and more conveniently available supplies.

Commodity price supports are desirable as assurances against special dislocations which might arise in case of recession. I emphasize, however, the need for keeping support levels flexible. I am glad to note the effort currently being made by various groups, outside as well as inside the Government, to modernize and improve the parity formula.

I also realize the stake of many American farmers in maintaining a stable and satisfactory foreign market. Our farmers should continue to export substantial quantities of wheat, cotton, tobacco, rice, and fruit. Though export demands, especially for grain, are now at a high level, some of our more difficult long-term problems are in the foreign trade field.

Interdependence of farm and city. Maintaining an expanding demand for farm products depends not only on maximum employment for the whole economy, but also upon raising the incomes and living standards of those portions of the urban population who have suffered from excessively low incomes even in times of prosperity.

So long as 13 percent of our total families have incomes under $1,000 a year, and 28 percent have incomes under $2,000 a year, as is shown in table 3 on page 19, the dietary standards of these low-income families cannot comport with the true meaning of maximum production for agriculture. Studies made in 1941 indicated that the families and single individuals having incomes of $2,000 or more--enough to satisfy their food wants fairly liberally at the price level then prevailing-bought 60 percent more fruit, 25 percent more vegetables and meats and milk, and 10 percent more eggs than the average for the population as a whole. This means that minimum wage and other programs designed to encourage a better income balance throughout the wage-earning population should be regarded by the farm population as serving their interests also. The farmer is a prime beneficiary of well distributed prosperity.

High and stable levels of food consumption are essential to a prosperous agriculture. When demand is high there is little need for direct price supports. Programs to maintain food consumption can go far to prevent economic recessions, to maintain good markets for farmers, and to safeguard the diets and health of the public. Our agricultural and food program should therefore give increased emphasis to measures designed to protect the diets of such groups as school children and low-income families.

Just as the farmer sells to the city and depends upon urban prosperity, so also the products of industry are sold to farmers in larger quantities when there is farm prosperity.

The relatively low income of farmers before the war was proverbial. Its effects on the demand for industrial products are equally striking. This is shown in the following figures comparing per capita net income from farming of farm people with what they bought, in three significant years:

Farm income, per capita: 1929--$223; 1933--$90; 1947--about $725.

Farm implement sales: 1929--519 million dollars; 1933--177 million dollars; 1947-around 850 million dollars.

Mail-order sales: 1929--447 million dollars; 1933--220- million dollars; 1947--over 1,100 million dollars.

Feed and farm supply store sales: 1929-- 1,119 million dollars; 1933--463 million dollars; 1947--nearly 3 billion dollars.

Despite recent gains, the purchasing power of many farmers is low compared with that of nonfarm people. The average per capita income of farm people derived from all sources was $779 in 1946, while the income of nonfarm people was $1,288. This low average for farm people reflects, not low farm prices--prices were high--but the low productivity of many farmers.

The more widespread enjoyment of satisfactory incomes in farm areas will provide enormous new outlets for industrial products. As recently as 1945, only 58 percent of all rural homes had refrigerators or ice boxes; only 46 percent had electric irons, and only 28 percent had running water. Since then, the installation of these conveniences in farm homes has given businessmen and wage earners some conception of the large stake they have in the maintenance of farm prosperity and its extension to an ever increasing number of farm families. Electrification, particularly, is providing for farmers a vast range of labor-saving equipment and living conveniences and is creating an increasing market for industrial products.

Our economy is indivisible. Maximum production and purchasing power in the city and on the farm are inseparably connected. As shown by the relative instability and inadequacy of farm income in the past, and the impact of this upon the whole economy, the economic future of the country as a whole will require concentration upon these policies which will enable the farm population to share equitably in economic growth and in the improvement of living standards.

Taxation and debt management

Taxation. The first feature of our long-range tax policy must be the maintenance of tax revenue which, except in years of depression, will balance the Federal budget and provide a substantial surplus for debt retirement.

It is a remarkable feature of the postwar period that there has been so little fear of the effects upon the national credit or upon the national well-being of a public debt ten times as large as the debt which a dozen years ago was causing much uneasiness in the financial world. But although we have learned that an enormous public debt is not necessarily ruinous to public credit nor destructive of national prosperity, we should never forget that within it is a sleeping danger. If less propitious conditions arise within the economy, the public debt may indeed be found a serious burden upon the process of readjustment. Every consideration of prudence with respect to future problems of the national economy and of the national credit in critical circumstances requires a firm and sustained policy of reducing the public debt.

The second requirement of our long-range tax policy is that the tax rates and the character of the taxes be such as to help sustain prosperity. This cannot be done by a tax structure that remains the same regardless of changing economic circumstances. Lowering particular taxes on business may at one time be needed as a means of stimulating business expenditures when they are inclined to lag, but maintaining or advancing taxes at another time may be needed as a means of checking overexpansion or overcapitalization. These adaptations can be made without the injection of uncertainties into businessmen's calculations greater than those they are already accustomed to deal with. Similarly, the abatement of taxes on consumers or certain classes of consumers may at one time be important as a means of supporting their purchasing power, whereas at another time the maintenance or increase of taxes may be the most effective means of damping an inflationary tendency.

There is an obvious conflict between the desire of consumers to have taxes upon their incomes reduced and the desire of business to be relieved of taxes which figure in operating costs or which lessen the funds that they have for reinvestment and business expansion or that large incomes receivers have available to invest as equity capital. This conflict of private interests must, in the consideration of tax policy, be resolved by the Congress through adjustments which will promote the most prosperous and stable economy. There is no formula by which the best distribution of the tax burden can be determined. However, the lessons of wartime and early postwar experience seem to indicate that for the sustaining of an economy of maximum production and a market commensurate with this rate of production, more concern will need to be directed during the years just ahead toward easing the tax burden on the consumer than toward accelerating the rate of capital formation.

Debt management. The vast increase in the public debt has not created the difficulties that many people feared, partly because our national debt is owned by our own citizens, and partly because of the technical skill with which the debt has been managed jointly by the Treasury Department and the Federal Reserve System.

A most important part of our debt-management policy has been the program to support the market for Government securities. During the war period, when it was vitally necessary to maintain a market which would absorb vast issues of securities at low interest rates, the Federal Reserve stabilized the market through its open market operations in buying and selling short-term Government securities at low rates of interest. Now that it is no longer necessary for the Government to increase its debt, short-term interest rates have been permitted to rise. A decline has also been permitted in prices of bonds from the premium prices to which they had risen as a result of market demands in the early postwar period. No bonds, however, have been permitted to fall below 'par and it is the declared purpose to continue active support of Government bonds for the purpose of maintaining an orderly and stable market at a low level of long-term interest rates.

The established policy of supporting the market for Government securities makes it possible for banks to obtain additional reserves, on the basis of which to expand credit, by selling part of their large holdings of securities to the Federal Reserve. This policy, therefore, does not permit the Federal Reserve to make effective use of the traditional method of limiting inflationary movements in the economy by requiring banks to borrow in order to obtain additional reserves and by raising the discount rate charged on such borrowings. The result of such a policy would be an increase in general interest rates. If the rate of interest upon other investments rose, they would become more attractive than Government bonds, both to banks and to other investment holders, who would call upon the Federal Reserve banks to buy bonds. Any purchases by the Reserve System would offset the effects of the restrictive discount rate policy.

In the recent congressional hearings there have been proposals to solve this dilemma by abandoning the support policy and freeing the Federal Reserve banks to bring about an anti-inflationary contraction of credit by increasing the discount rate, as was done in 1920. No such change in policy should be considered. The financial world should rest easy that the investment market will not be subjected to the demoralization which swept over it in 1920 when the unsupported market for Government bonds fell about 20 percent below par.

Affirmation of a policy of supporting the Government bond market as a continuing program of the Government requires the use of other and less dangerous methods to restrain inflationary bank credit. Voluntary but effective restraint by the banks of inflationary bank credit expansion may prove adequate to the problem. If it does not, more direct action by the Federal Reserve banks will be required. Such actions as may be taken will not involve withdrawing support from the Government bond market.

International economic relations

The far-reaching effects of World War II upon the use of economic resources and upon the trade and business relations between nations will be felt for many years. The enormous destruction of the physical and organizational basis of production spread over most of Europe and parts of Asia, while elsewhere many new industries were developed and old ones stimulated. In the reconstruction process many alterations in the patterns of economic organization and trade relations are taking place. Great Britain is engaged in a difficult task of industrial and trade rehabilitation, while two other former leading industrial nations, Germany and Japan, are now thrust into minor roles.

The relative importance of the United States in the world economy has been greatly enhanced, partly because some of the older great nations have suffered adversity, but primarily because of our own increase in production. Although other nations fortunately possess most of the resources which they need for reconstruction, certain critical resources, such as food and machinery, which are needed to revitalize their productive energies, can be supplemented only by supplies from the United States and other countries of the Western Hemisphere. The program which I have asked Congress to authorize in order to assist European recovery over the next 4 years may make the difference between success and failure of world reconstruction.

The changing economic position of the other industrial nations is of great significance. During the war and its aftermath, many areas that formerly looked to these nations for industrial products have become intent upon their own industrial development. They cannot secure supplies sufficient to meet their increased requirements for capital goods from their traditional trade sources, and they are beckoning increasingly to American machine makers, to American capital, and to American skill in management and production.

A development which we cannot yet evaluate is the growth of the policy of state control of foreign trade in many countries. Because of critical shortages throughout the world there has been little relaxation of the wartime controls over exports, imports, and foreign exchange, and the course of action in some countries indicates a purpose to continue these controls. Our experience, however, shows that the difficulties of trade between a nation with state control and a nation with free enterprise can be surmounted and they can be expected to diminish as goods become more readily available in world markets.

Other developments bound to affect the course of trade are the occupation of Germany and Japan and the emergence of several new independent and self-governing states.

Against this background of new developments we can place the more familiar consideration of our own requirements. For some commodities we must have foreign markets or undertake a serious task of shifting our resources. A substantial part of agricultural and industrial employment is in production for export. On the other hand, our need for imports, especially of raw materials, will increase, notwithstanding our progress in the production of substitutes for such materials as natural rubber and silk, two of our most important prewar imports. The great enlargement in national production which has been portrayed in this Report requires a corresponding increase in those raw materials which come from abroad and in many other goods and services supplied by foreign countries. The heavy drain of war production upon our own natural resources must be remedied by a conservation policy supported by heavier imports, and the national security must be for titled by stockpiles of strategic materials which we do not produce at home.

Undeterred by the uncertainties arising from new political and economic conditions, this Government has been striving consistently to promote recovery and reconstruction efforts which would eventually contribute to mutually profitable and harmonious international economic relations. In addition to relief and reconstruction aid, we have supported within the framework of the United Nations a series of international organizations, such as the International Bank for Reconstruction and Development, the International Monetary Fund, and the Food and Agriculture Organization, to cope with the different categories of economic problems. This vast effort is now well advanced and many of these international organizations are already operating.

Still in process of creation is the International Trade Organization. The draft charter of this organization lays down a code of fair play in the international trade field. Nondiscriminatory and multilateral trade unhampered by high barriers, is the central aim of the proposed organization.

A major step toward this long-range goal is the General Agreement on Tariffs and Trade, recently concluded between ourselves and 22 other countries. This agreement reduces or eliminates 'preferences affecting a large part of our trade with the British Commonwealth. It provides for reductions of many tariffs and the maintenance of a low rate or free entry on other products. These concessions are protected by provisions designed to prevent participating countries from resorting to alternative means of restriction or discrimination. Like the proposed charter of the International Trade Organization, this agreement will help establish conditions under which world trade can flourish in less troubled times and under which the present reconstruction efforts can be carried forward.

The recovery of foreign production and ability to export, our own high demand for imports, and the international agreements to reduce obstacles to trade may be expected to help other countries buy our products in the future without depending upon the extraordinary financial assistance that is now required. Nevertheless, it is natural and desirable that we maintain some surplus of exports in the years ahead by the steady investment abroad of private capital. It is desirable both from our point of view and that of other countries that we, a country rich in capital, make some of our savings available to areas where capital is needed and where properly safeguarded private investments can earn a good return.


While it is most urgent now that we combat inflationary dangers, we cannot wait until the tide turns before considering affirmative measures that will be needed in the future. Economic conditions may turn rapidly, but the formulation, enactment, and initiation of economic and fiscal programs require a considerable amount of time. Prudence demands that we look ahead and prepare for tomorrow while we act for today.

In timing the adoption of measures for long-run prosperity we must give careful consideration to the following principles:

(1) Certain programs related to national security and foreign policy, to promotion of urgently needed production, and to protection of our natural and human resources against serious economic hazards must go ahead even though Government outlays for foreign or domestic programs contribute to the necessity of anti-inflationary measures.

(2) Certain adjustments, such as the increase in minimum wages and tax adjustments, are needed in order to mitigate the hardship imposed on those who are the hardest-hit victims of the inflationary price rise.

(3) Major parts of the proposed expansion in the social security program will be deflationary in the first period after inauguration. Therefore, there is no reason to postpone the adoption of these urgently needed measures.

(4) Federal, State, and local public works in general should still be deferred wherever feasible. We need, however, certain initial steps immediately to prepare these measures for future years. For instance, the Federal Government and State and local governments should be preparing drawings and specifications for public-works projects to be undertaken when needed. In my budget for the fiscal year 1949, I have included appropriation requests and estimated expenditures in amounts sufficient for the initial steps of new public works.

(5) When the inflationary pressure subsides, we should speed up the programs of resource development, transportation, and urban rehabilitation, and further expand the social security, health, and education programs.

Since our first experience with the Employment Act is occurring under conditions that give priority to measures needed to counteract inflation, we are given time to consider carefully the measures that will aid in meeting the threat of unemployment at some time in the future. But we must not fritter away the time thus granted us. We must not be complacent and believe that the job of employment stabilization has been solved. A boom carries in it the seeds of its own destruction. We must be prepared to act in time if we want to make good our promise and prove to the world as well as ourselves that an economic system of free institutions can be made to work steadily as well as efficiently.


Note: Sections II and III of this message have been omitted. They are similar in content and language to the annual economic reviews by the Council of Economic Advisers which were separated from the President's messages beginning in 1949. All charts have been omitted.

The complete message and report of the President (136 pp.) are printed in House Document 498 (Both Cong., 2d sess.).

Harry S. Truman, Excerpts From Annual Message: The President' s Economic Report to the Congress Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/229299

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