Special Message to the Congress: The President's Midyear Economic Report
To the Congress of the United States:
Our economic problems in this country are now based mainly upon world problems. Our economic tasks are heavy because of the weight of our world responsibility.
To succeed in our economic job at home, we must understand fully our job in world affairs.
This job is plain. By every means within our power, we must continue the search for a just and lasting peace among all peoples.
We do not seek this peace through the medium of war. We do not seek it through appeasement. And we do not seek it alone. We seek this peace through the international cooperation of all who want sincerely to join in the effort. On these terms, the door into a friendly association of nations is open to all.
But the door is not open to aggression and conquest. To prevent that, the combined strength of the free peoples must be made so great that no aggressor will be able to destroy freedom in the world.
The security of the free world is not a matter of guns alone. It requires also economic, political, and moral strength. The defense program of the United States embraces all of these.
In the next days and weeks, the Congress will decide the future of this comprehensive defense program.
In its consideration of military appropriations, the Congress will decide whether we as a nation are going to achieve adequate security in the next few years.
In its consideration of the Mutual Security Program, it will decide whether we will continue to join boldly in marshalling the whole strength of the free world in a common resistance to communist aggression.
In its consideration of the Defense Production Act, it will decide whether we will channel our resources effectively to meet the demands of national security.
In its consideration of that Act and of revenue legislation, it will decide whether the line will be held against inflation.
Throughout the past year, we have been going through the transition from a normal peacetime economy to a defense economy. Military production is increasing, and sclerites are now becoming firm. The expansion of the basic economy, to support the defense program, is moving forward, and additional expansion goals for specific industries are being set. The pattern of economic controls required by the defense program has been generally established.
Where we go from here depends on the decisions made by the Congress.
We can drive ahead on the course of the present defense program, or we can retreat.
The safety and welfare of our country require that we drive ahead.
This Economic Report is therefore a discussion of the kind of defense build-up which we are now undertaking, and which I propose we continue to undertake. It is also an analysis of the measures which have been taken, or must be taken, to strengthen and stabilize the economy to support that build-up.
We are engaged in a long-term effort. The need for military strength did not begin with the Korean war. Nor will it end when and if the fighting in Korea ceases.
The need for building strength was undergoing an urgent review before the attack of June 25 on the Republic of Korea. That event precipitated a quick and clear national decision to enlarge our military strength rapidly. This course should have--and, though no doubt in smaller measure, would have--been taken anyway.
We must be ever-mindful that the Soviet imperialists are relentlessly pursuing a long-range plan. Their tactics change, but their strategy is clear and persistent. That strategy is to probe for weak spots in the strength or morale of the free people, and, if a weak spot can be found, to strike another blow.
Whatever happens in Korea, we must take into account what is happening in Iran, on the borders of Yugoslavia, in Indo-China, and, most of all, what we know to be going on inside the Soviet Union itself. The main danger to world peace comes from the Soviet rulers, from the growing military force at their disposal, and from their proved willingness to use aggression to gain their ends. The military build-up of the Soviet Union, which has been continuing since 1945, has no other purpose than to blackmail the free world into submission to communist domination. Or, if the free world lacks strength or determination to prevent it, the purpose is to overrun its members one by one.
This is the central threat to our country, and to every free country in the world. We cannot have peace unless this threat is overcome. That is the purpose of our defense program.
This sustained effort on our part is something new in history. Free men have always been willing to take up arms, and to do their utmost, in a supreme crisis. But never before have free men in such large numbers acted together in advance, to prevent a supreme crisis. Never before on so vast a scale have free men assumed great risks voluntarily, so that even greater risks may not descend upon them involuntarily. Never before has there been so deep and widespread in the hearts of mankind the feeling that the price of peace is the willingness to fight for justice.
This is an effort of great hope and promise. It is a practical means by which we can bring to reality the great vision of world peace under law. But this effort--like any enterprise on a grand scale--will succeed only if we put into it the resources, the sweat and toil, the unremitting force of will, that it requires.
Our immediate plans must be flexible, as we constantly review our progress in the light of changing conditions. Right now, for example, we are reviewing our immediate goals for military strength, and it is quite possible that we shall have to raise them in several important respects.
But our fundamental course is unaltered. The free world must build the strength-moral, economic, and military--that is needed to deter aggression or, if aggression comes, to defeat it.
The greatest weakness we could disclose would be vacillation or lack of determination. To win in the contest between justice and aggression, the purposes of free men must be clear and persistent.
We must avoid shifting from one extreme of policy to another with every new development--either international or domestic-when such developments do not alter the fundamental situation.
Immediately after the initial Korean aggression, there were some extremists both in military and economic affairs. In military affairs, these extremists wanted immediately a 10-million-man armed force and a 100-billion-dollar-a-year military budget. In economic affairs, there were some extremists who wanted to freeze the whole economy in a strait jacket of controls more extensive than anything attempted during World War II.
Fortunately, the saving common sense of the American people avoided these extremes. We embarked upon a substantial build-up of our military strength, but without going on a total war footing. We started upon an economic mobilization program which bore a sensible relationship to the size of our defense effort and the likelihood of its long duration. This economic mobilization included measures to expand production and to control inflation. But it wisely did not attempt to mix full economic mobilization with partial military mobilization. That would have gotten our great productive economy all out of joint. It would have made us weaker, not stronger.
Today, extremists are pulling in a diametrically opposite direction. At the first signs of a let-down of the conflict in Korea, they have commenced to clamor for a reduction in our defense program. On the economic front, as soon as there is a slight softening of inflationary pressures, these extremists are ready to discard the whole structure of inflationary controls or shoot it full of holes.
If we were now to heed these extremists, it would be an even more costly mistake than to have heeded the extremists of a year ago. We have no reason to believe that the events in Korea have fundamentally changed the basic Soviet intentions. The events at home have not removed the need to expand our economic strength, or to overcome the basic inflationary danger
We must press on to build our defenses.
We must press on to strengthen the other free nations.
We must press on to expand production and prevent inflation.
Only by pressing forward can we make the vision of peace among all men a lasting reality.
BUILDING OUR DEFENSES
Our defense program is designed to create substantial armed forces, ready for action, plus the ability to enlarge those forces very rapidly if the need arises. We have almost reached our first goal of 3 1/2 million men and women on active duty. But in the case of many types of weapons, we have months and years of hard effort ahead, before we will have produced enough modern equipment for our active forces, for helping to equip our allies, and for the reserve stocks we need.
We have accomplished large increases in military production since the Korean invasion. Deliveries of hard goods--such as aircraft, tanks, weapons, and ammunitions--have more than tripled. Nevertheless, military output as a whole has moved up somewhat more slowly than scheduled. This has been due partly to some shortages, such as in machine tools. We have been "tooling up" thus far, but this stage is now well advanced. From this point forward, every effort must be exerted to catch up with production schedules and keep abreast of them.
In the cause of national safety, these schedules must be met.
Our total security program costs have now reached an annual rate of more than 35 billion dollars. In terms of constant prices, this is almost twice the level of a year ago, and 50 percent above the level of 6 months ago. These costs are scheduled to increase to an annual rate of more than 50 billion dollars by the end of this year, and to nearly 65 billion by the middle of 1952. The proportion of the Nation's total output devoted to security purposes, which was about 6 percent before Korea and is about 11 percent at present, will rise to approximately 15 percent by the end of 1951, and will approach 20 percent by a year from now.
These outlays cover pay and subsistence for our military forces, deliveries of military goods to our own forces and our allies, economic aid to other free nations, and other security expenditures. More than 85 percent of the total for the present fiscal year is allotted to building up the military strength of this country. This includes the sums to be spent on our military establishment, the atomic energy program, stockpiling, and other domestic security programs.
The major part of the scheduled increase of almost 30 billion dollars in the annual rate of security expenditures from the middle of this year to the middle of 1952 will involve procurement of aircraft, weapons, tanks, and other military end items, and some of the specialized equipment used in their production. Within the next 12 months, hard goods deliveries are scheduled to rise from a monthly rate of about 1 billion dollars to about three times that amount. During the same period, aircraft deliveries are to be tripled, and the tank-automotive program increased to four times the present rate of deliveries.
Measured by costs and by the strain on the economy, this is a large program. But it is a minimum program measured against the need, and is well within our capacity. The accompanying Review by the Council of Economic Advisers reveals in detail that, with wise policies, our economy can support this effort and yet remain sound and grow stronger. Compared with the rise of almost 30 billion dollars in security outlays scheduled for the coming 12 months, we expanded such outlays by about 75 billion dollars (in terms of present prices) in the first year of our participation in World War II. The program as now scheduled is not expected to absorb at its peak more than about one-fifth of our total output, compared with almost half in 1944. A year from now the program is expected to require about 11 million men and women directly or indirectly engaged in defense, contrasted with about 25 million at the peak of World War II.
We cannot now be sure what our production needs will be beyond that. If further aggression does not occur, we hope to be able, within two or three years, to level off our defense program, and to move on to a maintenance basis. At present, however, our principal concern is not with maintaining military strength. Our principal concern is to build up military strength in the first place.
We have been moving toward interim goals for Army, Navy, and Air Force strength. It now appears, as we review our strategic situation in the light of world events, that these goals may need to be raised, whether or not we have an armistice in Korea. The strategic and military studies needed for such decisions have not been completed; if it is indeed necessary to raise our sights, I shall later submit to the Congress requests for the additional funds required.
Regardless of the need to lift our goals for the active military forces, we must move full speed ahead toward our present goals.
STRENGTHENING THE OTHER FREE NATIONS
The defenses of the free nations are inseparable. Our defenses are bound up with the defenses of other free countries in every way--strategically, economically, morally-and their defenses are bound up with ours. Due partly to historic events since the turn of the century, the United States has greater economic strength and potential military power than any other nation. But with only 10 percent of the free world's population, and only a fraction of its natural resources, our difficulties would be enormous if we were cut off from the rest of the free world.
Western Europe, together with Turkey, has a population 80 percent greater than ours, with a high proportion of skilled workers. It produces one-third of the steel of the free world, one-fifth of the aluminum, and nearly one-half of the coal. Moreover, areas outside the United States--in many cases the economically underdeveloped countries-produce about 43 percent of the free world's crude petroleum and about half of its iron ore. They produce about 70 to 80 percent of its lead, zinc, tungsten, and rubber supply, and virtually all of its cobalt, manganese, nickel, tin, and wool. We are vitally dependent upon imports for many of these products.
It would be a military disaster to us if these resources fell under hostile domination.
But it is not only in terms of the possibility of world conflict that we should view this problem. If we establish a secure peace, our prosperity will be linked with that of other nations. The economic upbuilding of one part of the world benefits also the other parts. As standards of production and of living rise in one area, this provides more markets for the products of other areas--and expanding production and markets are the lifeblood of economic progress.
The moral aspects of this issue are even more important than the economic. The great need of the twentieth century is to achieve a steadily improving morality to keep pace with growing technology. We must cooperate with the rest of the free world because the future progress of the free world is indivisible. Even if we could prosper in a world where others did not, we could not live at peace in that kind of world.
The people of the United States should ever bear in mind the sobering obligation to live up to the responsibility which our strength imposes. The past four decades have been marked by two world-wide wars to resist aggression. In these previous wars, many of those now allied with us poured out more blood, and more treasure relative to their resources, than we did. They emerged from those fearful struggles for survival with economic handicaps which have lasted for a generation and longer. On the other hand, the United States, because of geographic and other factors, did not suffer such destruction.
At the end of World War II, the other free nations set about to repair the ruin they had suffered. The Western European countries, mainly through their own efforts, but with vital assistance from us, made a remarkable recovery. Their industrial production has by now mounted above prewar levels by about 40 percent, and their total production by more than 15 percent. On a per capita basis, the increase in their total production has been more than 5 percent above prewar levels.
This increase in production was greatly facilitated by economic aid from the United States. In the three years after 1947, our foreign economic aid to Western Europe totaled about 11 billion dollars. Over the same period, the total annual output of these aided countries expanded by about 45 billion dollars.
Even with these increases in production, these nations could not notably advance their standards of living. This was because they had to allot so much of their resources to the rebuilding of productive capital equipment. In most instances, living standards did not begin to equal or surpass prewar levels until a year before the Korean outbreak. And just when hope was bright, the new turn in the international situation required these nations to redivert more of their resources to defense purposes. Our European North Atlantic Treaty partners are doubling their military production in the course of one year, and many of them are committed to continuing large increases in the future. Their defense expenditures are being raised from less than 5 percent of their combined total output in 1949, and about 5 1/4 percent in 1950, to about 7 1/2 percent in 1951.
This is not as large an increase in defense outlays as we are making. But the total economic situation in these other countries is very different from ours. Compared with the period just before World War II, the goods and services now available to the people in our country, for purposes other than defense, have risen about 50 percent per capita in real terms. In contrast with our situation, our European North Atlantic Treaty partners now have available goods and services, for purposes other than defense, less than 10 percent more per capita than in the period just before World War II. This problem is even more clearly revealed by another comparison. In the United States, total output per person, even after deducting output for military purposes, is estimated at nearly $2,000 for 1951. Among our European North Atlantic Treaty partners, the figure is estimated at less than one-third as high as ours. Allowing for shortcomings of international income comparisons, this difference is striking.
Under these circumstances, these countries are obviously limited in the amount of resources they can rapidly divert to defense purposes, without undermining their economic and political stability, and thus playing into the hands of communist minorities.
All of these factors have been taken into account, in the development of our program to help strengthen the other free nations.
For this purpose, I have recommended appropriations of 8.5 billion dollars for fiscal 1952. Of this amount, 6.3 billion dollars are to provide military assistance to other nations of the free world where increased military strength is needed to combat or forestall communist aggression or subversion. Such assistance will consist primarily of planes, tanks, guns, and other military weapons which must be produced in the United States because they cannot be produced abroad within the required time. While the largest portion of this aid will go toward filling the equipment needs of our partners in the North Atlantic Treaty, substantial quantities are also destined for countries in the Near East, Far East, and Latin America.
The remaining 2.2 billion dollars would consist of economic aid. Over half of this amount would go to Western Europe, in order to create the kind of economic strength which is necessary to support an increased European rearmament effort, and to do this without sacrificing the political and social stability required for security over the long run. This assistance will permit the diversion of men, materials, and facilities from civilian to military production, and aid the expansion of total production. Elsewhere in the world, where the problem is more economic than military, such assistance will help the peoples to combat the poverty, disease, and illiteracy on which communist subversion thrives. It will contribute, moreover, to a substantial expansion in the production of basic materials, particularly strategic materials, which are essential to the economic and military strength of the free world.
In addition to the materials and equipment provided under the Mutual Security Program, we are giving positive assistance, where necessary, to the export of goods which represent the essential requirements of the other free nations, and are paid for by them. And these exports will be considerably larger than non-military supplies which we finance.
The magnitude of the proposed security program, including foreign assistance, is well within the capacity of our productive resources. Proposed outlays for assistance to the other free nations over the next year comes to less than 15 percent of our total security program, and to only about 2 percent of our estimated total output during this period. We can carry forward both the domestic and the foreign aspects of our total security program, and still maintain domestic consumption and business investment at high levels.
The determination of the size and scope of the aid program which we should undertake this year has resulted from the same kind of careful preparation which has gone into the development of our scheduled expansion of United States military forces. It is in fact an integral part of our over-all security program.
For example, the military assistance I have recommended will make possible a rapid build-up in Western Europe of trained forces equipped with modern weapons. The existence of such forces is essential to the security of the United States. The cost to us of supplying equipment through our aid program is only a fraction of the cost of raising a comparable force ourselves.
The value of our aid programs, however, is far broader and more significant than simply a good investment in security. These programs will mean that free men, in many countries, will be able to stand up against the threats, the lies, the subversion of communist aggression. They will be able to defend themselves against bullets--and they will be able to combat communism's allies of poverty and hunger and sickness.
That is why our military and economic aid programs are as essential and as urgent as any part of the work we are doing to build up the defenses of freedom.
As we move forward with this program, we must continuously review and, if necessary, revise it to assure maximum results. We must be sure in the conduct of this program that other nations do their full share. We are challenged by the hard task of a new kind of cooperation, based upon a new kind of international situation. We must face these problems of the future realistically and courageously.
EXPANDING AND STABILIZING THE ECONOMY
During the past year, the growth of production in the American economy has been very large. During the second quarter of 1950, our total output was at an annual rate of about 300 billion dollars, measured in today's prices. During the second quarter of 1951, measured in the same prices, our total output rose to an annual rate of 330 billion dollars, or a real gain of 30 billion. This gain far exceeded the increased outlays for national defense. Our economy is stronger now than it was when the defense build-up stared.
This growth in our productive power was not achieved without considerable inflation, partly because the measures for controlling inflation took time to enact and get into operation. But since these measures have been in full swing, we have continued to expand total output without inflation. That is a salient fact about economic developments since the early part of this year.
We are now in a position where, if the Congress enacts adequate legislation, we can continue to enlarge our defense efforts, to expand our productive capacity, and to hold inflation in check. I emphasize that our success in these matters will depend on a series of legislative measures which the Congress is now considering. If the Congress enacts sound and strong legislation, as I earnestly hope it will, we can achieve our goals.
Our production goals
The Council of Economic Advisers estimates that we have the ability to increase our total output by at least 5 percent within a year's time. This goal is practicable, and we should strive to surpass it. Expansion of output will make it possible to carry forward our security program with less strain upon our economy. It will make it easier to raise necessary tax revenues, and to restrain inflation. It will offer the prospect of reducing irksome controls in due course, if the international situation does not worsen. Increasing our basic productive capacity will place us in a stronger position to mobilize fully and quickly if that necessity should be forced upon us.
Manpower is our prime productive resource. Within a year, through various programs for the voluntary mobilization of our manpower resources, as well as through population growth, we should expand our total labor force by 1 1/2 to 2 million persons. This expansion is entirely possible, and with it there should be no general manpower shortage, although there will be shortages in certain skilled trades, and in some industries longer hours will be needed.
A major obstacle to the further expansion of production is the shortage of capacity in a number of key industries. It is not possible to expand capacity in all directions at once. We must concentrate on assuring adequate capacity for military equipment, and on basic materials, transportation, and power. We must postpone those types of investment which add least to our productive strength. We must relate our own expansion of capacity to the capacity available in other countries, and to total potential supplies of basic materials.
A number of basic expansion programs have been prepared by the defense agencies, and are now going forward under continuing review. In steel, the program calls for an increase of capacity from 107 million ingot tons annually now to nearly 120 million tons by the end of 1952. The aluminum program is planned to more than double our 1950 rate of output by the end of 1953. The proposed electric power program looks toward a 40 percent increase of generating capacity by the end of 1953.
These are only examples. Large-scale investment in tools and equipment for factory, farm, and transport must be continued for several years, at or near the peak levels which have recently been reached. We must, for a time, limit investment in nonessentials--as we are doing. But we must be very careful in deciding what can be postponed and what cannot. The strategy of a prolonged partial mobilization requires a much broader production base than the strategy of total war.
For example, it is now more urgent than before that we begin at once certain developmental projects--like the St. Lawrence seaway and power project--which will not be completed for several years, but which are especially needed in a defense economy. Furthermore, we must resume, as soon as we can, some of the programs which can only temporarily be curtailed without ultimate sacrifice of economic power. For example, the expansion of educational and health facilities, of long-range resource development and housing, as contemplated before the emergency, must be resumed in time to avoid serious impairment of our national strength.
This is why we need a production advance on a very broad front. This means more than the expansion of capacity and the improvement of tools in a few select areas. It means the application of business acumen and labor skills in a joint effort throughout the whole economy. It means the joinder of new science and new technology with the industrial machine. It means drawing upon all the resources, material and moral, which reside within our system of enterprise and government.
To encourage the necessary expansion of our productive capacity, the Government is allocating scarce materials, and extending special aids through direct loans, government guarantee of private loans, commitments to purchase, and rapid amortization of facilities for tax purposes. These aids are becoming increasingly effective, in connection with specific expansion programs.
The authority for these production programs, with the exception of tax amortization, is included in the Defense Production Act. Renewal of this authority is urgently needed in order to achieve our production goals. Adequate funds are also required. In addition, the defense agencies should be given certain additional production powers, such as the authority to construct defense plants where this is essential to the mobilization effort.
Our stabilization goals
After the Korean outbreak, a wave of inflation swept over most countries. It was less serious in the United States than in some other places. But even here, it raised living costs by 9 percent, and wholesale prices by 16 percent. This inflation encouraged speculation, and put heavy burdens on many of our people. Those fortunate enough to have rising incomes were able to maintain their living standards. But more than half the families of the Nation had no income gains between early 1950 and early 1951, and almost one-fifth suffered actual declines.
During the past few months, there has been relative price stability. Wholesale prices are now somewhat below the peak levels of last March. Consumer prices are no longer soaring, although they rose slightly from February to May.
The easing of the inflationary pressure since spring has been due partly to larger civilian supply. It has also reflected higher taxes, credit restraints, and the application of price and wage controls early this year. Moreover, as the military situation proved, many consumers switched from frantic buying to cautious buying, while businesses felt that some inventories were excessive, and curtailed their orders.
These recent developments have led some people to think that the inflationary trend is ended. This is a dangerous assumption. We cannot accept it as a guide to national policy.
The fundamental fact is that we must increase the annual rate of national security expenditures by about 30 billion dollars during the next year. In order to produce more airplanes, tanks, and other munitions, we must continue the cutbacks which have been made in the production of consumer and investment goods, and possibly make some further cuts.
While total consumer supplies cannot be expected to rise significantly, incomes will continue to grow, because total production and employment will and must continue to expand. It is estimated that, by a year from now, personal incomes before taxes, measured at an annual rate, may rise to a level 15 to 20 billion dollars above the current annual rate. If taxes and savings are not sufficiently increased, there would thus be a growing disparity between the incomes which people would desire to spend and the supply of consumer goods. This disparity represents the inflationary gap. If controls were to be relaxed, the inflationary gap would be greater--probably very much greater. The price-wage spiral would again be set in motion.
Inflation stimulates the production of many nonessential goods, thus pulling resources away from essential production. It favors some groups at the expense of others. It lifts the cost of national defense, and shifts the burden toward those least able to bear it. Inflation impairs the value of peoples' savings, and undermines their willingness to save.
Winning the battle against inflation is an essential element in our struggle for peace. The battle cannot be won by using only one of the weapons available to us. Stabilization depends upon a combination of measures, each of which reinforces the others.
There is no more important single measure for combatting inflation, under present circumstances, than the maintenance of a balanced budget. The substantial increases in taxes adopted by the Congress since the Korean outbreak have helped to stabilize the economy and aided in halting the price rise. The public approval of these tax increases has demonstrated that the American people are ready to pay the price of protecting our way of life.
Government expenditures for national security have risen from an annual rate of 18 billion dollars (in present prices) before the Korean outbreak to a current rate of about 35 billion dollars. It has been pointed out that the annual rate of these outlays is scheduled to increase by about 30 billion dollars within the next 12 months. This increase, even when accompanied by economy in other expenditures, is bound to result in growing deficits under present tax legislation.
To put our security program on a pay-as-we-go basis, and to reduce the inflationary pressure which this program will generate, we need an increase in taxes of at least 10 billion dollars this year.
Such an increase in taxes, though heavy, would not interfere with needed work and production incentives. It would be consistent with maintenance of a good standard of living, and an equitable distribution of spendable income. It would aid substantially in the stabilization of prices. It would ease the problems of managing the huge national debt.
We must also continue to pare down less essential or postponable public spending. This is another avenue toward a balanced budget and toward the control of inflation. The less urgent public activities of Federal, State, and local governments should be reduced or retarded, until the security build-up has passed its peak, or until our over-all productive power catches up with the increased burden imposed by the security program.
In a protracted period of partial mobilization, the distinction between defense and non-defense activities is not as clear as in a total war. The strategy of our current defense effort is not to build maximum defensive power at once. It is instead to build reasonable power, and to reinforce it with the underlying productive capacity and basic economic strength which will enable us to be ready for any problem of the future. That underlying strength, for the long pull, includes education and training, health services, development of natural resources, research, and scientific progress. We must strike a careful balance, not doing as much of all of these things as we ought to do in normal peacetime, but not doing so little as to weaken ourselves for the long pull.
The budget which I have submitted to the Congress for the current fiscal year represents a minimum program consistent with this policy. Further, the spending activities of the Government are under continuous review. Those which can be reduced without weakening the defense effort are being reduced. Those which can be redirected to make a further contribution to defense are being redirected.
Credit expansion contributed to the inflation of the past year. We must prevent it from adding to future inflationary pressures. In the current national emergency, when some types of credit extension are necessary in order to increase production of certain essential defense and civilian requirements, while other types of credit extension defeat the purpose of the mobilization program by permitting the expansion of production in unnecessary areas, it is essential to use credit controls as selectively as possible. General credit measures reach areas not touched by selective credit measures, but they do not discriminate between activities which should be supported, and those which need to be restrained. For this reason, effective measures of selective credit control, such as regulation of consumer and real estate credit, are needed. The legislative authority to impose them should not be impaired.
One important merit in the selective credit controls is that they may be loosened or tightened by prompt administrative action, in response to shifts in the economic situation. This flexibility would be destroyed, if the Congress by excessively detailed legislation were to narrow the range of administrative discretion within which the Board of Governors of the Federal Reserve System could operate in exercising selective credit controls. I recommend that the Congress avoid unwise limitations upon the use of an instrument which has clearly proved its worth.
I have recommended several times that the Congress authorize the placing of margin requirements on speculative trading in commodity futures. I repeat this recommendation now. Similar provisions for margin requirements in stock trading have proved very useful.
Authority to impose additional reserve requirements when needed would strengthen the Federal Reserve System's influence over credit conditions with minimum effects on the needs of debt management. I recommend that the Congress give careful consideration to the plans for accomplishing this purpose outlined in the attached Midyear Economic Review.
As a phase of the Government's credit policy, all major Federal lending and loan guarantee programs have been revised, to minimize their inflationary impact and to contribute most to the defense effort.
I am also glad to note that lending institutions throughout the country, and State and local governments, are cooperating in a voluntary credit restraint program which has been initiated by private financial institutions under the sponsorship of the Board of Governors of the Federal Reserve System.
Voluntary saving is an essential part of a well-rounded anti-inflationary program. Without a large volume of voluntary saving, taxes high enough to close the inflationary gap might reduce incentive and cramp production. Also, without a large volume of voluntary saving, only the most severe direct controls could prevent prices from being swept upward by a flood of demand.
In addition, voluntary saving serves other purposes in our economy. It provides a source of funds for investment. It adds to the family's sense of security for the future. When the time comes to make the transition from a defense economy to a peacetime economy, the prudent use of accrued savings will help to maintain demand and employment during the changeover period.
The Government savings bond program is very important in the effort to promote voluntary saving. The Treasury has carried on an intensified payroll savings drive since shortly after the outbreak of hostilities in Korea. Commencing on Labor Day, the Treasury will call upon all Americans to do their part in a full-scale savings bond campaign which will reach into every community and every home in the Nation. Because it is a voluntary program, this effort must be made in the last analysis not only by the Government, but also by every voice that can be heard throughout the country.
Consideration should be given to developing voluntary savings plans in connection with productivity wage increases. Such plans would help to keep these increases out of the inflationary stream. This would be beneficial to workers, who would not be trying to spend their additional income until a time when they could spend it without driving up prices. These plans should be tied in with the Savings Bond Payroll Deduction Program.
But voluntary saving is not a substitute for adequate taxation or other inflation controls. Nothing could be more destructive of the willingness or ability to save, than constantly rising prices. After other inflation controls took hold earlier this year, and helped to stabilize prices, the rate of voluntary saving moved very sharply upward.
Price and wage stabilization
Indirect measures for controlling inflation are vitally important. But with inflationary pressures as large as those which we may face in the year ahead, indirect controls are not enough. They must be buttressed by direct price and wage controls.
The basic objective of price control now is to hold the general price line. Ceiling prices should not be raised except where essential to provide adequate production incentives to business, or to correct clearly inequitable situations. As a general rule, price increases should not be approved, even where some costs have risen, if the industry is earning a fair and equitable level of profits. Just as some upward adjustments of some prices will be needed, some rollbacks will be needed in selected cases, for example, where prices or profits are excessively high. This is the practical way to maintain adequate flexibility in the price structure, while holding the general price line. This requires legislation which strengthens, not weakens, price control.
Wage stabilization requires a careful balance among three major objectives. First, it should seek to prevent an increase in total payrolls so large that, after making due allowances for taxes and voluntary saving, they would seriously inflate total demand. Second, it should provide adequate incentives for increased productive effort, and redress serious inequities in the wage structure. And third, it should minimize wage increases of a kind which would require price increases.
The achievement of these objectives is the primary task of the Wage Stabilization Board. In the January Economic Report, I expressed hearty agreement with the principle that effective wage stabilization in a democracy requires the active participation and cooperation of management and labor. This is being attained through the present Wage Stabilization Board, which contains equal representation of those two groups and of the public. In addition to its stabilization responsibilities, the Board is empowered to handle labor disputes affecting the national defense program if parties jointly submit their case for recommendation or decision. The Board is also empowered to recommend a settlement in labor disputes certified by the President as threatening the progress of the national defense program. The labor dispute responsibilities of the Board are the minimum necessary for the mobilization effort.
Fair and practical wage policies are in process of development. This is not a simple task. The Board has recognized that wages should be adjusted to compensate for changes in the cost of living. Other wage adjustments are also desirable, if hardships and inequities are to be dealt with, as required by the Defense Production Act. The Wage Stabilization Board has taken steps to deal with the difficult problems of productivity allowances and so-called fringe benefits. Within proper limits, productivity allowances provide desirable incentives and can make a real contribution to the mobilization effort while some fringe benefits may be anti-inflationary. These and many other problems must be solved in developing integrated wage policies.
The control of rents is important to the success of our mobilization effort. As we expand output in different industrial areas, we have to attract outside workers who would be repelled if rents were allowed to rise exorbitantly. Simple justice also requires us to protect the families of our soldiers, who move to the areas where military camps are being reopened or expanded.
Despite the great postwar building boom, vacancy rates are very low, while the expanded mobilization effort is creating new and large demands for housing in many parts of the country. We cannot control prices and wages effectively if rents are uncontrolled.
The rent control law now in effect was designed to permit orderly decontrol of all rents by this time. But it was not enacted in an environment of great defense expansion. That effort is already seriously affecting the housing supply in many areas. The new law that is being considered by the Congress should be geared to the new needs of the defense effort. It should permit effective control of rents, where an inflationary rise is threatened which would be harmful to the mobilization effort.
SUMMARY OF ECONOMIC DEVELOPMENTS IN
THE FIRST HALF OF 1951
In its second half year since the Korean outbreak, our economic mobilization for defense made heartening progress. Since the middle of 1950, the economy's over-all output has increased at a faster rate than in any previous postwar period. Price and wage inflation, rampant in the first weeks of 1951, was checked by the imposition of general price and wage controls at the end of January. Soon thereafter, and partly as a result of this action, inflationary pressure subsided temporarily as consumers moderated their abnormal rates of buying. Government spending for defense and defense production mounted at an accelerating pace, however, presaging a revival of inflationary pressures later on.
Both on the production and the stabilization sides, the record leaves room for improvement.
Employment has increased substantially during the last year, with unemployment failing sharply, the total labor force growing at about twice the normal rate, and our armed forces more than doubling. Nonagricultural employment, after expanding rapidly following the Korean outbreak, has been relatively stable in 1951, while agricultural employment has continued its long-run, year-to-year decline. In June, total civilian employment was 61.8 million--300,000 higher than in June 1950.
While there is not yet any over-all manpower shortage, we do face serious shortages in certain skilled trades and professions, some of which have been long-continuing.
Unemployment in the first 6 months of this year was 1.8 million lower than in the same period last year. In June, it reached the lowest level for any June since World War II--2.0 million. The average duration of unemployment, as well as the number of people out of work, has declined.
Working hours, which lengthened considerably during the second half of 1950, declined somewhat during the first half of this year. In June, the average workweek in manufacturing industries was 40.8 hours, compared with 40.5 hours in June 1950, with all of the increase occurring in durable goods industries.
Production of goods and services as a whole (as measured by gross national product in constant prices) was more than 5 percent higher in the first half of 1951 than in the second half of 1950, and about 10 percent above the first half of last year.
Industrial production, which soared during the last 6 months of 1950, increased from an index figure of 218 in December (1935-39= 100) to 223 in April. But since then, because of raw materials shortages, cutbacks, and slackening of civilian demand, the overall index has shown no change.
Continuing high rates of agricultural production indicate that our supply of foods in the year ahead should be at least as great as in the year just passed, and fully adequate for normal requirements. The demand for food, however, is unusually high. Fortunately, current crop prospects are encouraging. Production of cotton will be sharply expanded this year.
Prices at midyear 1951 were far above their levels a year earlier, reflecting largely the surge before the General Ceiling Price Regulation was issued at the end of January.
Wholesale prices stabilized by mid-February, and tended down slightly in the second quarter, returning by midyear to a level only slightly above that at the time of the General Ceiling Price Regulation. In June, farmers were, on the average, receiving prices equivalent to 106 percent of parity, but there were wide differences among commodities. Throughout the second quarter, wholesale industrial prices were in a very slow but steady decline, and at midyear were at about their January level.
Consumers' prices, which were climbing about 1 1/2 percent monthly in the buying wave at the turn of the year, increased only 0.9 percent from February to May, reaching in the latter month a level of 8.9 percent above that of June 1950. Retail food prices were 2.5 percent higher than in January. They moved down 0.3 percent in June, but were 11.7 percent above June last year.
Wages continued to rise in the first half of 1951, but at a diminished rate. Average hourly earnings in manufacturing, which had increased over 8 cents an hour from July to December 1950, increased by almost 5 cents an hour from January to June of this year. Weekly earnings in durable goods manufacturing advanced almost $3.00 during the first 6 months of 1951, but rose only 10 cents for workers in nondurable goods manufacturing during the same period.
Work stoppages have not been a serious problem so far this year. While the number of stoppages was higher than in the comparable period of 1950, total man-days of idleness were at considerably lower levels.
Profits of corporations, before taxes (not adjusted for changes in inventory valuations), are estimated to have reached a new record annual rate of 50 billion dollars in the first half of 1951. The level estimated for the second quarter of 1951--48 1/2 billion--is below the peak of nearly 52 billion reached in the first quarter. It compares with 37 1/2 billion in the second quarter of last year. Corporate profits after taxes, reflecting higher tax rates, averaged 22 1/2 billion for the half year, compared with 19 billion in the same period of 1950 and a peak rate of nearly 28 billion in the fourth quarter of last year.
The net income of nonagricultural unincorporated business, after dropping off in the fourth quarter of 1950, reached a new peak in the first quarter of this year, and then declined. The net income of farm proprietors moved steadily upward from mid-1950 to the spring of 1951, reaching an estimated annual rate of 17 billion dollars in the second quarter of this year. This was 5 billion higher than last year, but 1 1/2 billion short of the record level in the second quarter of 1948.
Money and credit developments in the first half of 1951, in contrast with the general expansion occurring in the first 6 months after the Korean outbreak, were divergent.
The privately held money supply (including demand and time deposits), declined in the first quarter of the year, under the usual impact of personal income tax payments, and then expanded in the second quarter.
The total loans of all commercial banks increased about 5 percent, or nearly 3 billion dollars, between December 1950 and June 1951. During the same period a year earlier, the increase was 4 percent; in the second half of 1950, it was about 17 percent. Mortgage credit continued to rise in the first half of 1951, but at slower rates than in the last half of 1950, as credit restrictions took hold. Consumer credit outstanding, after soaring 2.4 billion dollars in the second half of 1950, declined about 900 million dollars in the first 6 months of 1951.
Personal income rose nearly 6 billion dollars (annual rate) in the first quarter of 1951 and, advancing almost 6 billion more in the second quarter, reached an annual rate of 250 billion. Despite the tax increase, personal income after taxes rose from an annual rate of 215 billion dollars in the last quarter of 1950 to 217 1/2 billion in the first quarter of 1951 and 223 billion in the second quarter.
Consumption expenditures, following roughly the same pattern as in the last 6 months of 1950, spurted in the first quarter of 1951 to a record annual rate of 208 billion dollars, and then declined to an estimated annual rate of 203 billion in the second quarter of this year. In constant prices, consumption in the first half of 1951 was about 2 percent less than in the second half of last year.
Net personal saving, under the impact of the first quarter buying wave, is estimated, in that quarter, to have amounted to only 4 to 5 percent of disposable income. In the second quarter of 1951, saving apparently rose to between 8 and 9 percent of disposable income--the highest rate of the postwar period, but far below the rates attained during World War II.
Gross private domestic investment in the first half of this year reached a record level of 62 billion dollars at a seasonally adjusted annual rate, 40 percent higher than in the same period last year, and 15 percent above the second half of 1950.
Plant and equipment expenditures reached a new high in the second quarter of 1951, nearly one-third above the corresponding quarter of 1950, with the increases concentrated in outlays for industrial facilities directly or indirectly serving the security program.
From the Korean outbreak to May, the book value of inventories in manufacturing and trade rose at a record rate. Inventory accumulation slowed in the first quarter of 1951, but then in the second quarter rose again, as sales failed to meet expectations. In May of this year, the ratio of inventories to sales dropped slightly, but was close to postwar highs. At the retail level, the inventory-sales ratio was considerably above any previous postwar figure.
While new construction activity was at a record level of about 32 billion dollars (seasonally adjusted annual rate) in the first half of 1951, the most striking change has been the increasingly sharp fall since February in seasonally adjusted new private housing expenditures, as the credit controls have begun to take hold. But private industrial and public construction have far exceeded the levels of a year ago.
International transactions of the United States in the first half of 1951 reflected expansion of United States exports and leveling off in imports, as our very heavy post-Korean buying eased somewhat. Our export surplus increased from an annual rate of 2.5 billion dollars in the fourth quarter of 1950 to an estimated 5.8 billion in the second quarter of this year.
Largely as a result of increased military aid, total net financing of foreign transactions, including export of military equipment, by the U.S. Government rose from an annual rate of 4.5 billion dollars in the last quarter of 1950 to 5.1 billion in the second quarter of 1951. With the greater export surplus, the outflow of gold and dollar assets from the United States was greatly reduced.
In Western Europe, increasing need for imports raised the trade deficit from an annual rate of 3 billion dollars in the final quarter of last year to more than 5 billion in the first quarter of this year. Price inflation during the first half of 1951 became more and more clearly a world-wide problem, with most countries suffering greater post-Korean price increases than the United States.
Government finances in the first 6 months of the year involved a temporary surplus of Federal receipts over expenditures, as the growth of defense expenditures lagged for the time being behind the increase in taxes. The budget surplus was 4.1 billion in the first half of calendar 1951, and 3.5 billion in the fiscal year ended June 30, 1951. The Government's total cash receipts from the public, including social security and other transactions as well as those appearing in budget accounts, exceeded payments to the public in the first half of 1951 by 6.9 billion dollars, or by 3.9 billion when adjusted for the seasonal peak in receipts in the first quarter.
Estimates of changes in State and local government finance indicate that in the first half of 1951 the small deficit incurred by these governments in the last 6 months of 1950 was virtually eliminated.
HARRY S. TRUMAN
Note: The message and the complete report are published in "The Midyear Economic Report of the President, Transmitted to the Congress July 1951" (Government Printing Office, 1951, 278 pp.). printed above, illustrative charts and all references to them have been omitted.
Harry S Truman, Special Message to the Congress: The President's Midyear Economic Report Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/230448