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Full text of "Investigation of concentration of economic power. Hearings before the Temporary National Economic Committee, Congress of the United States, Seventy-fifth Congress, third Session [-Seventy-sixth Congress, third Session] pursuant to Public Resolution no. 113 (Seventy-fifth Congress) authorizing and directing a select committee to make a full and complete study and investigation with respect to the concentration of economic power in, and financial control over, production of goods and services .."

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Public Resolution No. 113 
(Seventy-fifth Congress) 


PART 21 


DECEMBER 4, 5, 6, 7, AND 8, 1939 

Printed for the use of the Temijorary National Economic Committee 

124491 WASHINGTON : 1940 


(Created pursuant to Public Res. 113, 75th Cong.) 

JOSEPH C. O'MAHONE Y, Senator from Wyoming, Chairman 

HATTON W. 8UMNERS, Representative from Texas, Vice Chairman 

WILLIAM H. KINO, Senator from Utah 

WILLIAM E. BORAH, Senator from Idaho 

CLYDE WILLIAMS, Representative from Missouri 

B. CARROLL REECE, Representative from Tennessee 

THURMAN W. ARNOLD, Assistant Attorney General 
*W£NDELL BERQE, Special Assistant to the Attorney General 
Representing the Department of Justice 

JEROME N. FRANK, Chairman 
•LEON HENDERSON, CommLssioner 
Representing the Securities and Exchange Commission 

GARLAND S. FERGUSON, Commissioner 

•EWIN L. DAVIS, Commissioner 
Representing the Federal Trade Commission 

ISADOR LUBIN, Commissioner of Labor Statistics 

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics 

Representing the Department of Labor 

JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel 
Representing the Department of the Treasury 

CLARENCE AVILDSEN, Special Adviser to the Secretary 
Representing the Department of Commerce 

JAMES B. BRACEETT, Executive Secretary 



Testimony of — Page 

Arnold, Thurman, Assistant Attorney General, Department of Justice, 

Washington, D. C 11311-11326 

Buell, Raymond Leslie, Round Table Editor, Fortune Magazine, New 

York, N. Y 11224-11246 

Forbes, Russell, Commissioner of Purchases, New York, N. Y. 11150-11166 
Haring, Albert, secretary, American Marketing Association, Bloom- 

ington, Indiana .' . 1 1283-1 1 309 

Hoffman, P. G., president, The Studebaker Corporation, South Bend, 

Indiana 11181-11223 

Johnson, T. M., supervisor of purchases> New York University, New 

York 11166-11180 

Lubin, Isador, Commissioner of Labor Statistics, Washington, D. C. 

Nelson, Donald M., executive vice-president. Sears, Roebuck & Co., 

Chicago, Illinois ._. 11247-11282 

Renard, G. H., executive secretary-treasurer. National Association of 

Purchasing Agents, New York, N. Y 11121-11150 

Thorp, Willard L., Adviser on Economic Studies, Department of Com- 
merce, Washington, D. C 11065-11119 

Vance, H. G., chairman of the board. The Studebaker Corporation, 

South Bend, Indiana 11181-11223 

Statement of — 

Kreps, Theodore J., economic adviser, Temporary National Econoniic 

Committee, Washington, D. C 11326-11331 

Effect of wars on prices 11021 

Price trend, 1913 to 1922 11022 

Prices, at the beginning of the World War, in present war, since August 

1939 11049 

American foreign trade during the World War___i 1 1066 

Inventories and production during the World War period and since August 

1939 11077 

Present price trends as viewed by an industrial purchasing agent 11121 

The problem of adequate supplies of commodities controlled by belligerents. 1 1 133 

Present price trends as viewed by a municipal purchasing agent 11151 

Price problems viewed by an institutional purchasing agent 11167 

Automobile manufacturers compare present automobile prices and operat- 
ing costs with those of twenty years ago 11182 

Effect of lower costs on prices and volume of demand 11199 

Average price increase on automobile materials since outbreak of war 11206 

Effect of European war on American economic system: evaluation of 
trade agreements and other sanctions as effective controls of war-time 

trade : 11224 

Present price trends as viewed by a large retailer 1 1249 

Information concerning productive facilities and their use, market condi- 
tions and inventories useful in preventing runaway prices 11271 

Problems of the small merchant when prices change 11 283 

Relationship between markup on cost and profit on sales 11290 

State price control laws 11302 

Proposed organization for prevention of unjustified price increases. 11311 

Summary of price hearings ^' 1 1326 

Schedule and summary of exhibits: 

Monday, December 4, 1939 11021 

Tuesday, December 5, 1939 11121 

Wednesday, December 6, 1939 11181 

Thursday, December 7, 1939 11247 

Friday, Decembers, 1939 11311 

Appendix 1 1333 

Supplemental data 1 1380 

Index ._ _ :_. I 


Number and summary of exhibits 

at page 

on page 









































1450. Chart: Wholesale prices, all commodities, yearly average, 

1801-1939. Supported by statistical data in appen- 
dix, p. 11333 

1451. Chart: Wholesale prices in the War period, 1913-1922. 

Supported by statistical data in appendix, pp. 11334- 

1452. Chart: Prices of farm products and food in the War 

period, 1913-1922. Supported by statistical data in 
appendix, p. 1 1334 

1453. Chart: Prices of textiles and hides & leather in the War 

period, 1913-1922. Supported by statistical data in 
appendix, p. 11335 

1454. Chart: Prices of chemicals and drugs and building mate- 

rials in the War period, 1913-1922. Supported by 
statistical data in appendix, p. 1 1336 

1455. Chart: Prices of metals & metal products and bituminous 

coal in the War period, 1913-1922. Supported by 
statistical data in appendix, p. 1 1337 

1456. Chart: Changes in commodity prices in the War period, 

1913, 1917, 1920, 1922. Supported by statistical data 
in appendix, p. 11338 

1457. Chart: Cost of living, 1914-1921. Supported by statis- 

tical data in appendix, p. 1 1338 

1458. Chart: Average hourly earnings, 1914-1921. Supported 

by statistical data in appendix, p. 1 1339 

1459. Chart: Real wages. Federal employees in the District of 

Columbia, 1914-1921. Supported by statistical data 
in appendix, p. 1 1339 

1460. Chart: Real wages, teachers. 1914-1921. Supported by 

statistical data in appendix, p. 1 1340 

1461. Chart: Real wages, building trades, 1914-1921. Sup- 

ported by statistical data in appendix, p. 11340 

1462. Chart: Real wages, railways, 1914-1921. Supported by 

statistical data in appendix, p. 1 1 340 

1463. Chart: Real wages, bituminous coal mines, 1914-1921. 

Supported by statistical data in appendix, p. 11341 

1464. Chart: Real wages, group of 8 manufacturing indus- 

tries, 1914-1921. Supported by statistical data in 
appendix, p. 1 1341 

1465. Chart: Real annual earnings, all manufacturing, 1914- 

1921. Supported by- statistical data in appendix, 
p. 11341 

1466. Chart: Real annual earnings, selected manufacturing 

industries, 1914-1921. Supported by statistical data 
in appendix, p. 1 1342 

1467. Chart: Pre-war commodity prices, 1913-14 and 1938-39. 

Supported by statistical data in appendix, p. 11342 

1468. Chart: War-time changes in commodity prices, July 1914 

to January 1915. Supported by statistical data in 
appendix, p. 1 1 343 

1469. Chart: War-time changes in commodity prices, August 

1939 to December 2, 1939. Supported by statistical 
data in appendix, p. 11343 



Number and summary of exhibits 

at page 

on page 



















































1470. Chart: Daily prices of basic commodities, 1939: domestic 

agricultural products and industrial raw materials. 
Supported by statistical data in appendix, p. 11344 

1471. Chart: Daily prices of basic commodities, 1939, metals. 

Supported by statistical data in appendix, p. 11345--_ 

1472. Chart: Daily prices of basic commodities, 1939, textiles. 

Supported by statistical data in appendix, p. 11345 

1473. Chart: Daily prices of basic commodities, 1939, domestic 

agricultural products. Supported by statistical data 
in appendix, p. 11346 

1474. Chart: Daily prices of basic commodities, 1939, imports. 

Supported by statistical data in appendix, p. 11346 

1475. Chart: Retail food prices, 1937-1939. Supported by 

statistical data in appendix, p. 11347 

1476. Chart: Retail prices of 4 foods, 1939. Supported by 

statistical data in appendix, p. 11347 

1477. Chart: Prices of 5 drugs, 1939. Supported by statistical 

data in appendix, p. 11348 

1478. Chart: Exports of merchandise by Continental destina- 

tion, fiscal years 1913-19 and calendar years 1936-39. 
Supported by statistical data in appendix, p. 11348 

1479. Chart: Merchandise exports and imports, 1901-1938 

1480. Chart: Trade of the United States with Canada, 1901- 


1481. Chart: Trade of the United States with France, 1901- 


1482. Chart: Trade of the United States with United Kingdom, 


1483. Chart: Trade of the United States with Norway, 1901- 


1484. Chart: Trade of the United States with Sweden, 1901- 

1938 -\ 

1485. Chart: Trade of the United States with Argentina, 1901- 


1486. Chart: Trade of the United States with Brazil, 1901-1938. 

1487. Chart: Trade of the United States with Germany, 1901- 

1938 . 

1488. Chart: Trade of the United States with Japan (including 

Chosen and Taiwan), 1901-1938 

1489. Chart: Indices of value and quantity of merchandise ex- 

ports, 1915-1919. Supported by statistical data in 
appendix, p. 11354 

1490. Chart: Gold and dollar resources of the United Kingdom, 

France and Canada, 1914 and 1939. Supported by sta- 
tistical data in appendix, p. 11354 

1491. Chart: Wholesale prices in England, France, Germany 

and the United States, by quarters, 1913-1918. 
Supported by statistical data in appendix, p. 11355 

1492. Chart: Money in circulation and bank deposits, 1913- 

1918. Supported by statistical data in appendix, 
p. 11355 

1493. Table: Business savings and net new money invested by 

individuals — selected types of corporate Enterprise, 

19ia-1918 - 

.1494. Chart: Indexes of value of inventories, 1913-1922. 
Supported by statistical data in appendix, p. 11356 

1495. Chart: Indexes of value of inventories and sales, 1913- 

1922. Supported by statistical data in appendix, p. 
11356 _ 

1496. -Chart: Farm crops: production, price and acreage har- 

vested, 1911-1919. Supported by statistical data 
in appendix, p. 11357 



Number and summary of exhibits 

at page 

on page 

1497. Chart: Cotton: acreage, production and prices, 1911- 

1919. Supported by statistical data in appendix, p. 

1498. Chart: Corn: acreage, production and price, 1911-1919. 

Supported by statistical data in appendix, p. 11357 

1499. Chart: Wheat: acreage, production and price, 1911- 

1919. Supported by statistical data in appendix, p. 

1500. Chart: Farm mortgage debt, value per acre of farm real 

estate and gross farm income, 1910-39. Supported 
by statistical tjata in appendix, p. 11358 

1501. Chart: Composite monthly price of finished steel,* 

monthly steel ingot production and annual steel capa- 
city, 1914-1919. Supported by statistical data in 
appendix, p. 1 1358 

1502. Chart: Pig iron production and capacity of blastfurnaces, 

1910-1938. Supported by statistical data in appen- 
dix, p. 11359 

1503. Chart: Production and capacity of Portland cement mills, 

1910-1937. Supported by statistical data in appendix, 
p. 11360 - 

1504. Chart: Cotton mill activity and price of cotton goods, 

1914-1920. Supported by statistical data in ap- 
pendix, p. 11360 

1505. Chart: Physical volume of production and wholesale 

prices, 1913-1922. Supported by statistical data in 
appendix, p. 11360 

1506. Chart: National income, total exports and net exports, 

1913-1919. Supported by statistical data in appendix 
p. 11361 

1507. Chart: Monthly indexes of industrial production by 

major types, 1935-1939. Supported by statistical 
data in appendix, p, 11351 

1508. Table: Trade of 20 Latin- American republics in total and 

with certain countries — in specified years, 1929 to 1937. . 

1509. Table: Approximate distribution of trade of 20 Latin- 

American countries to various markets in 1937 

1510. Chart: Indexes of Physical volume of production, con- 

sumption and inventories of consumer goods, 1935- 
1939. Supported by statistical data in appendix, 
p. 11364 

1511. Chart: United States total inventory, value and trends, 

1935-1939. Supported by statistical data in appendix, 

p. 11365 

1.')i2. Table: Approximated amount of funds expended an- 
nuallj' for commodities, by class 

1513. List of 812 passenger cars which have been made in the 

United States, showing 21 makes still being produced 

1514. Chart: Passenger car operating costs today % of costs of 


1515. Chart: 26 million passenger cars registered in U. S 

1516. Chart: Retail prices of passenger cars delivered at the 


1517. Chart: Ownership of automobiles by income groups 

1518. Chart: Two used cars sold for every one new 

1519. Chart: Comparative wholesale and retail price fluctua- 

tions, New York, 1913-1919 

1520. Chart: Comparative wholesale and retail price fluctua- 

tions, Chicago, 1913-1919 

1521. Chart: Wholesale price fluctuations during World War I : 

sugar, wheat, oats, corn, fruits and nuts, tobacco and 










































Number and summary of exhibits 

on page 

1522. Chart: Wholesale price fluctuations during World War I: 

livestock, poultry, vegetables, vegetable oils, tea and 
coflFee, soaps and paper 

1523. Summary of State price control laws issued by the Ameri- 

can Retail Federation, Nov. 3, 1939.- 

1524. Newspaper article by Bruce Catton, Washington corre- 

spondent, praising the work of the Antitrust Division 
of the Department of Justice in its building industry 


1625. Memorandum, dated Dec. 7, 1939, prepared by Thur- 
man Arnold, Assistant Attorney General, containing 
excerpts from bulletins published by a cost surveying 
agency in a large American city under a so-called State 
unfair trade practice law 



Balance sheet of the Great Atlantic & Pacific Tea Co. for 
Feb. 28, 1938, submitted by Dr. Albert Haring in 
response to a request by Clarence Avildsen, a member of 
of the committee, during Dr. Haring's testimony 






United States Senate, 
Temporary National Economic Committee, 

Washington, D. G. 

The committee met at 10:35 a, m., pursuant to adjournment on 
Wednesday, November 15, 1939, in the Caucus Room, Senate Office 
Building, Senator William E. Borah presiding. 

Present: Senator Borah, acting chairman; Representative Reece; 
Messrs. Arnold, Henderson, Lubin, Hinrichs, O'Connell, Avildsen, 
and Brackett, 

Present also: Edward J. Noble and Willard Thorp, Department of 
Commerce; Walter Keim, Saul Nelson, Aryness Joy, and Edwin 
Martin, Department of Labor; and Theodore J. Kreps, economic 
adviser to the committee. 

Acting Chairman Borah. The committee wiU be in order. 

Owing to the necessary absence of the chairman I have been 
requested to preside, which I am very pleased to do. We are open- 
ing at this time a hearing on the general subject of the current price 
situation. While we have been and will continue to study the sub- 
ject of price in its broadest aspects, thi^ particular hearing is one 
step we are taking in response to the President's request that this 
committee maintain constant surveillance of prices because of the 
war situation; 

Our intention is to present an ovor-all picture at this time for the 
purpose of increasing our awareness of the basic factors which may 
be expected to influence prices. I think the President's letter has 
already been inserted in the record, but I desire to insert it here again. 

Dr. Lubin, we are going to ask you to address the committee on 
this subject. 



Dr. Lubin. In presenting the problem of price changes and their 
effect upon the economy it is my intention today to present the picture 
of the effect of war emergencies upon price structures in the past, the 
effect of these price rises upon the economy as a whole, and give 
particular emphasis to what has happened in the past 3 months in the 
light of past experience and throw some light upon what naight happen 
in the event that these price changes that occurred during the past 
3 months continue to broaden. 

effect of wars on prices 

Dr. Lubin. The first chart, which is entitled "Wholesale Prices, 
All Commodities — Yearly Average" gives a picture of what happens to 



prices in cases of war. You will note, for example, that the War of 
1812 sent the price level up from about 94 to 155 in a very short period 
of time. The Mexican War had relatively little effect, due primarily 
to the shortness of time and due also to the fact that the war was 
waged at quite a distance from the source of manufacture. In other 
words, it was almost a war in another world. 

(The chart referred to was marked "Exhibit No. 1450" and appears 
on p. 11023. The statistical data on which this chart is based are 
included in the appendix on p. 11333.) 

Dr. LuBiN. The Civil War sent prices up from 61 in 1860 to 132 
in 1865; the World War sent prices up from about 85 to 154 in a 
period of 3K years. 

The significant thing is not only that the wars brought these 
tremendous price changes with them at a very fast rate, but imme- 
diately after these wars prices collapsed very, very rapidly, in nearly 
every instance to below the point at which they had started their real 
upward rise, and with these collapses came readjustments in the 
economy that brought difficulties to every class in the population. 

One can point to the last war, where you had a drop in a few months 
from about 154 to 98; most of us remember all too well the effects 
of that price crash upon agriculture, upon employment, wages, upon 
industry as a whole. As a matter of fact, the price drop that started 
during that period has left its effect upon that whole period up to 
the present date. As a matter of fact, I think that there is very good 
authority for the statement that we are still, in part, in the period of 
readjustment that followed from the extensions of production, the 
overcapacity that was developed because of high price rises, the new 
agricultural acreage brought into existence, and the resultant rise in 
the prices of farm lands and mortgage indebtedness. All of those 
things haven't yet been washed out of the economy. We are still 
paying part of the price. 

PRICE TREND 1913 TO 1922 

Dr. LuBiN. Now the next chart is "Wholesale Prices in the War," 
showing what happened to prices during the period 1913 to 1922. 

(The chart referred to was marked "Exhibit No. 1451" and apj^ears 
on p. 11024. The statistical data on which this chart is based are 
included in the appendix on pp. 11334-37.) 

Dr. LuBiN. It is ratjier significant that in 1913 and 1914, indeed 
until October 1915, the general price level remained virtually un- 
changed. War was declared at this point here (1914), and there was 
a period of almost a year and a half in which there was virtually no 
change in the general price level. However, about the end of October 
1915 prices took a marked upward trend, and jumped 63 percent in 
a period here between October 1915 and April of 1917; the whole 
economic situation had felt the pressure of this upward trend in prices. 

You will note that after we entered the war there was a tendency 
for prices to level off. That was partly due to the fact that American 
industry had expanded to the point where it was meeting part of the 
demand for larger supplies. It was partly due, also, to war control 
of prices. Through the War Indu^ries Board, the Food Adminis- 
tration, and the Fuel Admiuistration, definite controls were put into 
effect which result^ in leveling off that price level. 



oo592oooo o 



CK I926M00 iNc 

800 1810 1820 1830 1840 1850 I860 1870 1880 1890 1900 1910 1920 1930 1940 1 

xes euncAu of lasoa statistics • >«» lo homth avcuoc 






"^— « 





































3 S 




However, in order to get more production, more production and 
more production, it was necessary, apparently, at least with the de- 
vices that were existent at that time, to increase prices still higher, 
as we went fvrther into the war to call forth more resources, with the 
result that just about the time of the armistice prices were at 195 as 
compared to 1913, which meant in this period from October 15 to 
November 1918, a period of 3 years, prices just about doubled. 

Now with the armistice, you will note a relatively slight decline in 
prices. That decline did not last very long, and you will note during 
most of 1919, indeed right up to May 1920, the trend of prices was 
steadUy upward, and by May of 1^920 we had reached an index of 240, 
which meant that prices had increased about two and a half times in 
this period from 1913. 

Exhibit No. 1451 



1913 1914 



With the collapse that took place in the summer of 1920 came this 
terrific drop in prices, and between May 1920 and the summer of 1921, 
prices dropped from 240 to about 134, reaching the low point in Janu- 
ary 1922, when they were 131 or about 30 percent higher than they 
were during the prewar period. The next chart breaks this sohd black 
line which I showed you on the other chart, ^ showing all commodities, 
into two important constituents, namely, food and farm products. 

(The chart referred to was marked "Exhibit No. 1452" and appears 
on p. 11025. The statistical data on which this chart is based are 
included in the appendix on p. 11334.) 

Dr. LuBiN. You will note very definitely that both food and farm 
products followed the trend of all prices during the period up through 
the fall of 1916. When we entered the war, however, farm products 

« See Exhibit No. .1451, above. 



took a rather sudden jump, and in April 1917, were at 175, or about 
three-fourths above the level of this period. They continued upward, 
and in November, at the time of the armistice in 1918, were at 210, or 
slightly more than twice as high as they had been before the war 
started. Although there was a slight sag immediately after the armis- 
tice and another in 1919, prices continued to rise, and reached a level 
of 238 in January of 1920. Then, lii^e other commodities, they took a 
very precipitant fall, falling substantially below the level of all prices 
by June of 1921. In other words, whereas prices as a whole in the 
summer of 1921 had fallen to about 134, farm prices had fallen to 113. 

Exhibit No. 1452 









■ ■ ' - 



1 1 










_ _ ^ 

X. t^ 



1 ^^ 


















In other words, the farmer found himself in a position where what he 
got for his products was relatively less than what other people got for 
their products, thereby causing a rather appreciable gap in his ability 
to purchase the products of other industries. 

Food, on the other hand, which is really the farm product after it 
has been processed, followed very closely the trend of all commodities, 
with no marked diversion from the trend of prices as a whole. 

In the next chart this general price level that we saw in a previous 
chart *, this black Une, is broken down into other commodities on the 
same basis as we have broken it down into the prices of foods and 
farm products. 

(The chart referred. to was marked "Exhibit No. 1453" and appears 
on p. 11026. The statistical data on which this chart is based are 
included in the appendix on p. 11335.) 

> See "Exhibit No. 1451," supra, p. 11024. 



Dr. Lubin. You notice that farm products, although they did not 
move with all commodities, moved up rather faster at the befrinninp: and 
fell rather faster toward the end; in the case of textiles and leather 
you notice very marked diversities from the general trend of prices. 
In other words, by looking at the general price level you can't tell 
what is happening to prices of given goods in ilie economy as a whole. 

Taking this case of textiles, this dotted line on this chart which is 
entitled "Prices of Textiles and Hides and Leather," you will note 
that up until the time in which general prices rose, textiles were 
selh'ng at a level lower than all commodities, and then during the 
period from October 1915 to the time of our entry into the war, they 
moved almost exactly with commodities as a whole. 

Exhibit No. 1453 






1913 1914 


When we entered the war in April of 1917, textile prices were about 
54 percent above where they had been in 1913. You will note, 
however, that after we entered the war, they took a course entirely 
different from those of other prices. There was a tremendous demand 
for textiles. There was need for clothing for the Army, there was 
need for blankets, and let's bear in mind that by and large, the 
average man in the Army is better dressed in terms of the amount of 
textiles he consumes than he is in times of peace. Every soldier had 
to have a new suit, and every soldier had to have a new overcoat 
and every soldier had to have a certain nimiber of blankets, whereas, 
in time of peace, there are many hundreds of thousands, indeed 
millions, that don't have an overcoat and have suits that they have 
had in their possession for 4, 5, 6, or 7 years. 


The result was that in order to get the output from industry, 
prices rose to the point in the late summer of 1918 for textiles of 253; 
m other words, textile prices had gone up one and one-half times. 
Shortly before the armistice there was a very marked rise, but in the 
early spring of 1919, textile prices had fallen to about 200, but note 
that even after this sharp drop, they were still higher than commodi- 
ties as a whole. 

This drop was relatively short-lived, and again in the summer of 
1919, textile prices started rising and reached a level in April of 1920 
of 340, an increase of two and a half times above the level of 1913. 

Once this inflationary bubble had been burst, textile prices col- 
lapsed, fell to 157 in August of 1921, and rose slightly thereafter. 

Now, hides and leather, on the other hand, acted very much as 
prices m general during this period, with the exception of the 6 or 
8 months before our entry into the war. One factor that affects the 
price of hides is shipping, because we are large consumers of imported 
hides of various types. The result was that when we entered the war, 
hide prices were not quite double where they had been in 1913, 
whereas prices as a whole were up only about 60 percent. But 
thereafter, during the war period, hide prices followed the prices of 
commodities as a whole. 

After the armistice, however, the speculative fever hit the hide and 
leather industry, as it did others, and by August of 1919 hide and 
leather prices were at 307 or about three times where they had been 
before war was declared, and when the collapse came — and inci- 
dentally it came sooner than it did in textiles — hide and leather prices 
fell to the low levels of 1921-22. But it should be noted that neither 
textiles nor hides and leather fell as much as commodities as a whole 
during the years 1920, '21, and '22. 

Now a further evidence of the inability to tell what is happening 
to prices and to the economic structure as a whole, from the general 
price level, is this chart entitled "Prices of Chemicals and Drugs and 
Building Materials in the War Period." 

(The chart referred to was marked "Exhibit No. 1454" and appears 
on p. 11028. The statistical data on which this chart is based 
are included in the appendix on p. 11336.) 

Dr. LuBiN. Here, again, you note the tremendous divergences 
between the general price level and chemicals and drugs and building 

You will note, for example, that immediately upon the xieclaration 
of war, chemicals started running away, and by the spring of 1916 
were 220, or more than twice the level of the pre-war period. The 
reason, of course, was the import situation. We were dependent 
upon certain European countnes for a large part of our chemical 
consumption, and due to their being shut off from our markets and 
due to other types of shipping difficulties, the market situation re- 
sulted in a sky-rocketing of these prices in a very short period of time. 

By 1915, the end of 1915 and early in 1916, the situation had im- 
proved a bit through the development of certain types of production 
in the United States, largely as the result of the fact that these prices 
had gone so high. 

And by September 1916, there was a rather marked drop from 
220 to 179 in the price of chemicals. That, however, was short-lived 
and chemical prices started the upward trend, reachmg their peak in 



the spring of 1918, when m March and April they were 237 percent of 
their pre-war level. They started downward again, and reached the 
level of commodities as a whole in April 1919 and in 1920 experienced 
the price collapse of other commodities. 

In contrast to chemicals and drugs, which you will note stayed 
above all other prices during the war period, and then fell below all 
prices in the post-armistice period, are building materials, which you 
will note stayed below the level of other prices, right through the war 
period and didn't start rising really markedly until after the armistice. 
You will note that building materials from the middle of 1916 until 
the middle of 1919 were below the level of aU commodity prices. In 

Exhibit No. 1454 











1 60 






1913 s 100 














i A^ 






1, u 



' V 







micals;and drugs^/ 













— ^ 














1918 1919 1920 1921 1922 



the spring of 1919, they started a very marked upward rise, and 
reached a point three times as high as their pre-war level in April of 
1920. The reason, of course, is obvious. During the war we con- 
trolled building construction. We limited the market of building 
materials. The result was that with a restricted demand, the price 
situation is pretty well controlled, that restriction of demand, of 
course, being purposeful by the Government itself. Once the ban 
was off, the price structure ran away and, as I said, reached a level 
three times that of the pre-war period, and like other commodities 
suffered a very marked drop between the middle of 1920 and the end 
of 1921. 

But again one should emphasize the fact that building materials 
did not faU below 160, whereas prices as a whole fell to about 130. 

Not only that, but having reached that low point of 160, they 
immediately started upward again, so by the end of 1922 they were 


186, which was 86 percent higher than they had been at the beginning 
of the war period. 

The chart entitled, 'Trices of Metals and Metal Products and 
Bituminous Coal in the War Period," is still further evidence of the 
fallacy of attempting to determine the industrial and economic situa- 
tion by your general price level. Here you have the picture of metals 
and metal products, and bituminous coal during the same period from 
1913 to 1922, the period of the last war, that is immediately preceding 
and immediately following, as has been shown in previous charts. 

Bituminous coal, for example, showed a very interesting trend dur- 
ing this period. You will note, for example, that after the war had 
been on for about a year, bituminous coal prices were at a level lower 
than thev had been before war had been declared. 

(The chart referred to was marked "Exhibit No. 1455" and appears 
on p. 11030. The statistical data on which this chart is based are 
included in the appendix on p. 11337.) 

Dr. LuBiN. In fact, there was no rise of anv significance. The 
trend was entirely downward until July of 1915. At that time, 
bituminous coal prices were at 84, or in other words, 16 percent lower 
than they had been before war was declared in Europe. You will 
note that in the Monter of 1915-16 there was a slight rise in coal prices 
and coal prices passed the level of the black line which represents 
commodities as a whole, and reached a point about 20 percent above 
where they had been before war had been declared. That was a 
sudden situation due to a relatively unimportant shortage, and imme- 
diately they fell again to below where they had been before war was 

However, with the mdustrial activity that started in 1916, which 
brought with it a tremendous demand for coal for fuel and power 
purposes, you had a sudden jump in bituminous coal prices from 
about 98 in the summer of 1916 to 333 in February of 1917, 2 months 
before we entered the war. 

Now, the effect of this price rise was evidenced in the employment 
situation and the production situation in the bituminous coal industry. 
As a matter of fact, it is pretty hard to say what was cause and what 
was effect. Durine this period here in 1913, when prices were at this 
level [referring to "Exhibit No. 1455"] we produced 478,000,000 tons of 
coal. The next year, 1914, production fell by 50,000,000, and that 
fall is evidenced in that price situation, the actual production in the 
year beine 423.000,000. 

1915 didn't witness any real large demand for coal either, production 
being 443,000,000 as compared to 478,000.000 2 years previously. 
This increased demand, and a 'rather sudden increased demand, 
brought with it. of course, an increase in production, and in 1916 we 
produced 503.000,000 tons, which you will note is about 24,000,000 
tons greater than in the 1913 period. 

In 1917, however, the cumulative demand of 1916, plus the price 
situation which brought into production thousands of mines that other- 
wise wouldn't have operated, grave us a production level of 552,000,000 
tons, one of the highest that has ever been attained in American his- 
tory. That price rise, however, was brought to a rather quick stop by 
Federal control in the summer of 1917. When Federal control came 
into the picture there was a sudden drop from 327 to 166 in a period 
of 3 months. 

124491 — 40— pt. 21 2 



KXHTBTT No. 1455 


However, apparently the price fixed was not sufficient to bring out 
sufficient coal to meet the demand. The result was there were various 
adjustments in coal prices, and from the middle of 1918 or late spring, 
1918, to the time of the armistice, these prices were set at 215, which 
was slightly twice the level that we found there in 1913-15. 

You will remember, of course, that immediately after the, armistice 
all control disappeared, and here again one gets an interesting insight 
into the effect of other aspects oi the economy upon specffic industries. 
In the spring of 1920 there was a switchmen's strike, and with this 
switchmen's strike went a car shortage. The result was that coal 
prices jumped from a level of about 216 to a level of 708. In other 
words, prices more than tripled in the short period of a few months. 

However, one should note the fact that these prices are spot prices; 
in other words, the price people had to pay when they went out in the 
market and wanted coal. A lot of coal, the great bulk of coal, of 
course, is sold under long-time contracts, but if you look at the average 
realized prices the mines received for their coal, you will note that tms 
tremendous increase had a very deffiiite effect upon contract prices 
as well, with the result that the average realized price in coal mines of 
spot and contract coal was considerably higher than it had ever been 
prior to that date, or than it has been since. 

The collapse in 1920 in the price level was felt by the coal industry, 
of course, although prices never fell to anywhere near the low levels 
of prices as a whole, the low point being in March 1922 when the price 
level was 174. 

In 1922 came a coal strike, an attempt by the miners to maintain 
the wage levels that they had secured through negotiation during the 
earUer years. With that coal strike came the coal shortage and coal 
prices again did a skyrocketing act, jumping to 502 in August of 1922. 

In contrast to your coal is the metal and metal products group. 
There you will note that virtually nothing happened back during the 
early period of the war, war being declared at this point here [referring 
to "Exhibit No. 1455"]. For almost a year metal prices were below the 
level of prices as a whole. There was a slight spurt in 1916, but by 
and large metal prices followed the pattern of all prices imtil we entered 
the war. After we entered the war, metal prices followed a path 
which was below that of prices as a whole except for the summer of 
1917, the factor here of course again being control by the Government 
of metal prices. With the collapse in 1920, metal prices fell faster than 
prices as a whole, and by August of 1922 were only 11 percent above 
where they had been before war was declared. 

This large chart gives you a further picture of what may happen to 
the economy, and after all, when you talk about any economy you are 
talking about specific industries — the clotliing industry and the coal 
industry and the steel industry and a thousand and one different 
industries, and those industries in order to survive must meet condi- 
tions which face them at any giyen moment. And although the price 
level as a whole gives you some picture of where we may be going, 
the fact that the price level may have increased only 40 percent is 
Httle consolation to the manufacturer who "has to buy coal which is 
seUing at 500 percent above the price it formerly had been. In chart 7 
we have attempted to show what happened to a group of prices during 
the war period. 


(The chart referred to was marked "Exhibit No, 1456" and faces 
this page. The statistical data on which this chart is based are 
included in the appendix on p. 11338.) 

Dr. LuBiN. The preceding charts attempted to show what happened 
to the general price level and break it down into important groups like 
steel and coal and building materials and so forth. In this chart wo 
have attempted to bring out some of the dramatic aspects of what 
may happen in times of world emergency. 

You will note that the general price level [referring to "Exhibit 
No. 1456"] never got much above 240, and by 1922 was about 40 per- 
cent above where it had been in 1913. In other words, this was the 
course of general prices. Yet see what happened to a lot of individual 

Here is caustic potash, which is used in our chemical industry — is 
used, I think, in many branches of war industry, and is rather im- 
portant to certain segments of our economy. The price of potash 
jumped from 100 to 2,423, in other words, rose 24 times between 1913 
and 1917, which is this center point. 

Acting Chairman Borah. What were the elements which caused 
that shooting up of price? 

Dr. LuBiN. For the most part our dependence on foreign supply, 
primarily Germany, and Germany just couldn't ship goods here. 
Incidentally, as I hope to point out later, the development of a chem- 
ical industry in the United States since the last war is going to protect 
us against certain things happening this time that happened last. 
That is particularly true of certain basic chemicals. It is not true of 
a lot of other speciaUzed chemicals which already have been acting 
up rather markedly in the past 2 or 3 months. 

Mr. Henderson. You mean by that, so far as the supply factor is 

Dr. LuBiN (interposing). Very definitely. 

Mr. Henderson. In other words, there would be no necessity for 
enormous price increases because of any shortage in these products. 
There is i^o protection against what might be done in some of these 
commodities, however. 

Dr. LuBiN. When I say "protection" what I really mean is that the 
supply is here which will not make it possible for anybody to justify 
raismg prices abnormally because of shortages. 

Mr. Henderson. But a large number of these commodities are 
very closely controlled. 

Dr. Lubin. But the capacity is a protection to us in the sense that 
we know that the causes that existed prior to our entering the last 
war do not exist at the present time. 

Mr. Arnold. That means in effect that there is a better opportunity 
for us to put effective brakes on prices today than there was in the 
last war. 

Dri Lubin. I think very definitely upon certain commodities the 
capacity of producing has been increased very markedly. 

Mr. Thorp. We do have, then, a situation which can be controlled 
if desired? 

Dr. Lubin. I think so. 

Acting Chairman Borah. I would like to follow the question of 
Mr. Arnold a little further. In what respect can we control the 
situation differently from what it was controlled? 



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Mr, Arnold a little further. In what respect can we control the 
situation differently from what it was controlled? 


Dr. LuBiN. Personally, insofar as these price rises are the result of 
controlled output, and we know that the capacity is here, I think that 
we do have an approach to the problem through the Sherman law, ^ery 
definitely, insofar as such control is purposeful and by agreement 
among given producers. 

Now you will notice other conmaodities jumped at very terrific 
rates in the early days of the last war. Benzoic acid jumped from 100 
to 2,275. That is the second line there. Acetophenetidin, a chem- 
ical, jumped from 100 to 2,232; in other words, went up about 22 times 
in price in the period of 1913 to 1917. At this point here you have 
indigo paste, a cool-tar dye, for which we depended primarily upon 
Germany, the price rising eight times; and at this point here you have 
ferromanganese, a very basic factor in steel production [referring to 
"Exhibit No. 1456"]. 

And so one can go down the line. Soda ash went up 4 times, phenol 
went up 4 times, steel plates went up from 100 to 376, dried beans went 
up from 100 to 346, potatoes, white potatoes, went from 100 to 311, 
steel billets went up from 100 to 275, and one can go down the line 
mentioning all of these commodities that went up rather markedly 
in price between 1913 and 1917. 

However, again getting back to the significance of the general price 
level, while all these prices were doing these gymnastics, we want to 
bear in mind that a lot of prices were going down, and between 1913 
and 1917 rubber fell to 88, coffee to 83, phosphate rock to 78, menthol 
to 47. There were very definite downward tendencies in the prices 
of certain commodities. 

Now, not only is this terrific increase in prices that came with the 
war significant, but it is further significant to note that after the war 
came to a close and prices started rising again in 1919, many com- 
modities were selling in 1920 at levels higher than they had been in 
1917. _ . 

I might cite a few instances of commodities that went up rather 
markedly after the war came to an end. Potatoes jumped from 311 in 
'17 to 453 in 1920. Glazed kid leather jumped from 275 m '17 to 429 
in 1920. Wheat flour jumped from 273 to 312. Woolen overcoatings 
jumped from 187 to 256, sole leather jumped from 185 to 191. Sugar 
jumped from 181 to 297. Raw cotton jumped from 178 to 260, and so 
one could go down the list showing commodity after commodity. One 
might mention, for instance, common brick, which during the war, 
and for the year 1917, averaged about 132, more than doubling in 
price between '17 and '20, reaching 279 in 1920; or white pine, which 
jumped from 133 in 1917 to the average for the year 1920 of 277, 
again more than doubling during that period. 

On the other hand, one should note too that during this period 
from '17 to '20 some prices also fell — rubber, plantation rubber, being 
the most significant case, due primarily to the fact that during that 
period plantation rubber for the first time really kept coming into the 
market in tremendous quantities. Prior to the war virtually all of 
our rubber came from Brazil. It was natural rubber in the sense that 
it came from the jungle areas, and the plantations that were planted 
prior to the war started bearing fruit during the war years, which 
resulted in a fall in rubber prices. 

Acting Chairman Borah. Dr. Lubin, as I gather from your state- 
ment, in a study of the increase and fall of prices, you have got to take 


into consideration almost entirely each commodity. The general 
rise and fall doesn't solve the question. 

Dr. LuBiN. Exactly. Getting back to the question Commissioner 
Henderson raised, what we have to do is watch these individual 
commodities and see whether there is any justification for their 
prices being raised. 

Acting Chairman Borah. Listening over the radio Saturday night 
to someone speaking from Dublin, he spoke about the increase of 
living prices, things which were necessary for daily living, and said 
they had shot up from 20 to 25 or 50 percent. Such condition as 
that in Europe will in time affect us, won't it? 

Dr. LuBiN. Senator, I think very definitely if this price trend that 
has started — and it hasn't been very marked except in certain areas — 
continues that way and broadens — in other words, after all, the man 
who buys ferromanganese or burlap and has to use it in making steel 
or rugs and other floor coverings — after all that is an importana factor 
in his cost of production — has to add that additional price that he has 
to pay for his raw materials to his cost of production. In the case of 
clothing, if wool goes up, the cost of manufacturing a man's suit 
has to go up, because the manufacturer who huys this wool at a higher 
price is going to figure that additional cost in the cost of production. 
If that thing should spread and widen, it must be reflected ev ntually 
in cost of living. I don't see any way of that not happening. 

Mr. Henderson. Before you go on there, Dr. Lubin, I understood 
Senator Borah to ask whether the price increases in the war countries 
might eventually affect us. The conditions of supply over there are 
affecting the price, but we have an abundance of supply. 

Dr. Lubin. We have a very definite abundance of supplies, yet on 
the other hand, one could conceive of the belligerent nations coming 
into our market and purchasing sufiiciently large quantities of goods 
to have some effect upon domestic wholesale prices. 
Mr. Henderson. Not on the whole broad list of prices. 
Dr. Lubin. No. There again it gets back to watching individual 

Mr. Arnold. Of course, their purchases would tend to create an 
imbalance of price by concentrating on war-boom industries. 

Dr. Lubin. You have hit the kfrnel of the whole thing. Everv 
time this happens to one commodity, it causes an imbalance at least 
so far as that industry is concerned, and those industries that buy 
those things Ihat people want. 1 am goin^ to come to the case of 
buiiap later. I might mention it at this point. Burlap has gone up 
100 percent in the last 3 months. It is being reflected in the price of 
feed the farmer has to pay. He buys his feed in burlap bags, con- 
sequently the price of that feed has gone up to reflect that increase in 
burlap bags. Fortunately, we do have an alternative. We have 
already begun to shift, T understand, to cotton bagging for feed. 
They wiU feel that same problem, of course, in fertilizer. In the 
spring, because most fertilizer is sold in burlap bags, either fertilizer 
is going to reflect the increased cost of burlap, or they are goins to use 
a cotton bag for making deliveries. In talking to some of tlie auto- 
mobile men last week, I found that some of the purchasing agents, 
fearing this imbalance, have a list of substitutes ready. If com- 
modity A gets beyond a certain price, don't use it any more, shift to 
commodity B. It is that imbalance that throws the whole thing 


out of gear. The farmer having to pay more for his feed, can he get 
more for the livestock he sells? If he can't, he is out of luck. 

Mr. Arnold. I pursue that further because I have heard so much 
talk about the advantage of the stimulus to creating general pros- 
perity. It would be quite possible for the price of fertilizer to go up 
very materially because of foreign purchases, and the price of cotton 
and tobacco and the other products which the farmer sells as a result 
of the fertilizer actually to go down. 

Dr. LuBiN. It is very possible. 

Now, I want to point out one further fact which bears upon this 
question of imbalance; namely, that after you had this terrific collapse 
of prices in 1920, and you will notice that virtually all are going down 
from this time on, you still find yourself in 1922 with some prices 
higher than they had been at the peak of the war level. 

For instance, glazed kid leather jumped from 275 during the war 
period to 281 in the depression period in 1922. Wliite pine, which 
was selling at a level of 133 in 191*7, was selUng at 217 during the 
depression period, when prices as a whole were going down. 

Of course the answer is simple. These folks who were getting 
lower prices for their commodities, had to pay higher prices for white 
pine during that period, which affected their costs and threw them out 
of balance. Common brick, which averaged 132 during 1917, aver- 
aged 202 during the depression period of 1922. White-oak boards, 
which averaged 107 during 1917, were selling at 182 during 1922. 

Coffee, which of course had been selling abnormally low, did increase 
slightly. Phosphate rock increased rather slightly, and menthol, 
which was selling very low throughout this whole periodj doubled in 

In other words, even a fall in prices doesn't bring these things back 
into line. Certain things stay even higher than they have been at the 
peak of the high point. 

The chart, which is entitled "Cost of Living," attempts to show 
what happens when these wholesale prices start moving in a given 
direction, when they become reflected in retail prices, and conse- 
quently upon the cost of living of the average person. 

(The chart referred to was marked "Exhibit No. 1457" and appears 
on p. 11036. The statistical data on which this chart is based are 
included in the appendix on p. 11338.) 

Dr. LuBiN. These figures, incidentally, are a new series of figures 
of the Bureau of Labor Statistics based upon quarterly periods from 
1914 to 1922. 

If you look at all items, the cost of living as a whole here, you will 
note that one must come to the same conclusion there that he came 
to in talking about wholesale prices. In other words, this will tell 
you what has happened to the cost of living as a whole, but it doesn't 
tell you what is happening to the things that enter into the cost of 
living. You will note, for example, that the cost of living was un- 
changed from 1914 to the fall of 1915. If you remember, our wholesale 
prices started rising about November of 1915. Cost of living started 
rising shortly thereafter, and by the spring of 1917 they are about 19 
percent above where they had been when war was declared in Europe. 

By the time we entered the war, cost of living was up to about 125, 
or about 25 percent higher than it had been before war was declared 
in 1914. 



From that time on there was a continuous rise, and at the time of 
the armistice the cost of living was 160. There was a slight, almost 
insignificant drop after the armistice was declared, and there was no 
fall anywhere near proportionate or equal to the fall of wholesale 
prices. Cost of living hardly dropped at all. Wholesale prices took 
a temporary drop during this period. 

This continued upward to 208 in the summer of 1920, made the turn 
shortly after wholesale prices made their turn, and fell to a level of 
172 at the end of 1921. 

Now, contrast that course of the cost of living as a whole to what 
happened to clothing prices during that period, clothing being one of 
the items in the budget ruiming something around 10 to 13 percent 
of the total family expenditures. 

Exhibit No. 1457 





1914-— Ql 
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Or contrast your cost of living as a whole to rents, and see the 
tremendous differences in the courses of these prices. 

Getting first to the question of rents, you will notice that there was 
no change in rents until after the armistice — vu'tually none at all. 

What did that mean to property owners for whom clothing costs 
were going up, for whom food costs were going up, for whom transpor- 
tation costs were going up, for whom all other costs were going up? 
Evidently, in terms of what they were getting for their properties 
during tliis period for the country as a whole, there was virtually no 
change in their income, only insofar as they had more rentals, that is, 
their properties were more fully occupied, but in terms of the actual 
rental there was virtually no change. The real change in rents came 
almost with the armistice, although even then for the next year it was 
relatively slight, and rents really started their upward trend in the 
fall of 1919. 


However, it should be borne in mind that even in this period 
1919-20, the rate at which these rents increased was in a sense cush- 
ioned by rent laws in various cities. Some cities passed laws actually 
limiting the percentage increase in rents. The result was that even at 
the end of 1921 rents were 152, or 52 percent above the level at which 
they had been almost throughout the whole war period, as compared 
to the cost of living as a whole, which was up to 172. 

Now, clothing, you will notice, acted in exactly the opposite manner. 

These clothing prices reflected the wholesale trends of textiles. 
When war was declared in 1917, clothing already was up by 31 percent 
above its prewar levels. At the time of the armistice, clothing was 
just about double its prewar levels. In the spring of 1920, it was more 
than three times its prewar level, having jumped to 312. 

The depression of 1920-21 had its effect upon clothing prices, but 
even at that, at the end of 1921 clothing prices were almost double 
where they had been before war was declared, in contrast to the cost 
of living as a whole, which was up only by 72 percent. 

Food acted more like all items in the cost of living, of course the 
main reason being that it is the most important item in the index of 
cost of living, accounting for pretty close to a third of the total 
expenditures of your family. 

But, the sigrtificant thing that should be pointed out is the fact that 
there is this lag between yoiu- wholesale prices and your cost of living 
items, and that certain commodities in the cost of living acted very 
much like the wholesale prices for the raw materials which were the 
basis for their production. 

Mr. Thorp. May I ask a question at that point. From the point 
of view of the attitude of people toward the cost of living, whether or 
not it is a basis for dissatisfaction or discontent, does it matter whether 
some of the indexes remain rather flat, as the rent index did. My 
impression is that most people are talking about cost of living in terms 
of a very limited number of commodities, so that actually from the 
point of view of general attitude, if a few commodities rise con- 
spicuously, there is an alleged rise in the general cost of living, at least 
from the point of view of impact on people's contentment, if not in 
terms of impact on their actual economic situation. 

Dr. LuBiN. I think that the average person, the man on the street, 
and let me put it better, the woman on the street, for after all she is 
responsible for the way we think about these things for the most 
part, is the same as that of an employer when workers ask for a 20 
percent increase in wages. It is going to ruin them. It may be, 
after you sit down and negotiate the thing, the 20 percent increase 
in wages may mean a 2 percent increase in cost. The 20 seems 
like a lot and at the moment they get very much upset about it. 

You get exactly that same situation in the cost of living. AVhen 
Mr. Jones comes home at night and his wife tells him pork chops were 
10 cents a pound higher today than they were a month ago, he is very 
much upset about it. Her cost of living is running away from her. 
It may be the difference in price of pork chops may not mean a dollar a 
month or a dollar a year to her, she may buy them so rarely, but the 
fact remains she knows she had to pay 40 percent more for them 
today than she did last month. 

That is particularly true of rents. We are not accustomed to 
rents changing. We pay the same rent month after month, fre- 



quently year after year, and then all of a sudden the landlord asks 
20 percent more and you hit the ceiling about it, and immediately 
you visualize your cost of living jumping so high that you can't 
do anything about it. 

In other words, there are particular types of commodities, certain 
food commodities I think are very definitely in the category that you 
mentioned, I mean an increase in their price makes the housewife 
temporarily feel that the cost of living is running away with her, 
but the most important of those items, I think psychologically, are the 
rent items, and as I say, you might have dozens of these commodities 
changing in price and yert the effect upon the cost of living may be only 
a fraction of 1 percent. 

Exhibit No. 1458 


Now the question arises as to what this change in the cost of living 
during this war period has meant to t^e economy as a whole, and after 
all, those increased living costs are reflected in the economy by de- 
mands on the part of workers for higher wages. As their cost of 
living goes up, they demand higher wages in order that they might 
maintain their existing standards. 

The next few charts show what happened to the average hourly 
earnings of workers during this same period that we have covered in 
the cost of living chart. 

The chart which shows average hourly earnings^ with 1914 equaling 
100, gives you an interesting picture of how living costs play their 
part in wage rates, and of course if one goes a step further, we will 
show later how wage rates again become reflected in production costs, 
which again become reflected in living costs. 

(The chart referred to was marked "Exhibit No. 1458" and appears 
on this page. The statistical data on which this chart is based 
are included in the appendix on p. 11339.) 


Dr. LuBiN. This chart shows the av^erage hourly earnings from 
1914 to 1921 for workers in a group of eight manufacturing industries, 
in bituminous coal mining, in the building trades, and for Federal 
employees in the District of Columbia. If you take bituminous coal 
mining first, you will note that there was a gradual upward trend in 
their wage rates right up to the period of the armistice. In the year 
of the armistice, bituminous coal miners had had an increase in hourly 
wage rates of 85 percent as compared to what they had been in 1914. 
They continued increasing after the armistice and reached a level of 
262 in 1921. ,It was to maintain tliis wage level, of course, or as much 
as that wage level as they could maintain, that the strike of 1922 was 

If you contrast the trend of bituminous coal mining wages with the 
trend of wages in this group of eight manufacturing industries, they 
include cotton textiles, boots and shoes, clothing, hosiery and knit 
goods, woolens, lumber sawmills, iron and steel, and slaughtering 
and meat-packing — you will note that up to 1919, manufacturing 
hourly earnings moved just about the same as did bituminous coal 
mining. After that point they moved much more rapidly and reached 
a point of 263 in 1920 as compared to 100 in 1914, whereas in 1920 
the coal miners were at a level of about 243. However, manufactur- 
iug wages fell much more quickly from 263 to 219, between 1920 
and 1921, whereas bituminous coal wages continued their upward 

Now contrast those wage rates with the wage rates of the building 
tradesmen. As we noted previously, wholesale prices of building 
materials were down fairly low during the war period, the reason of 
course being restricted demand due to Government activity. 

The result, of course, was relatively less building, consequently less 
employment and less demand for workers. The result was that 
building trades wages didn't rise very markedly up to the time of 
the armistice; as a matter of fact, in the year of the armistice building 
trade wages were only 21 percent higher than they were in 1914, yet 
at that time the cost of living was 57 percent greater. 

It wasn't until the armistice was declared and the restrictions on 
building were removed, that the demand for building trades workers 
increased and their hourly rates went up. You will note that they 
reached a point of about 190, at their peak, at least in the 1921 period, 
as compared with 262 foi- coal mining and 263 for manufacturing. 

But even in 1920, when they were about 186, you will note that the 
cost of living was 208 or twice as high as it had been. In other 
words, even having gone through this period of higher cost of living 
and relatively lower wages, when they had their wage increase it 
wasn't relatively as high as the cost of living had risen. 

Another group are the Federal employees of the District of Colum- 
bia, whose wages, of course, are fixed by law, and you will note that 
they never passed 144, although the cost of living doubled, their 
wages never increased more than 44 percent, although they didn't 
show much of a decline after that period. 

The next chart converts the hourly earnings of chart 9 into real 
wages. In other words, if you divide the wages by what happened 
to cost of living, you get a picture of what has actually happened to 
real wages, or putting it in these words, what the workers actually 
get in terms of food, clothing and rent, and all ol the rest that enter 
into the standard of living. 



(The chart referred to was marked "Exhibit No. 1459" and appears 
on this page. The statistical data on which this chart is based 
are included in the appendix on p. 11339.) 

Dr. LuBiN. This chart shows what happened to the actual real 
wages and the standard of living, its byproduct, of Federal employees 
of the District of Columbia. You will notice their cash wages did 
get up to 145. However, cost of living was going up all of this time. 
The result was that there was a gradual downward trend in the actual 
real income in terms of food, clothing, rents, housing, and everything 
that goes into the standard of hving of the worker. In the year we 
entered the war, it had fallen by 12 percent; by the next year it had 

Exhibit No. 1459 



1914 — 21 
INDEX 1914^=100 














fallen by 21 percent, and by 1920 it had fallen by 28 percent, despite 
the fact that there was a gradual increase in the cash weekly wage. 

Acting Chairman Borah. The wages measured in the things which 
the workman had to have to live lagged beliind. 

Dr. LuBiN. Very definitely for certain groups, not for all groups. 
It did for Federal employees and I am going to show other groups 
and show how they came out. Here are teachers who again have 
their salaries fixed by law. You will notice that their weekly cash 
wages went up to 114 here, 121 here, 186 here, but while these are 
going up, this curve here, cost of living, was going up faster. The 
result was they coidd buy even less with their income than they 
formerly could, so by the time we entered the War these teachers of 
the country as a whole had suffered a decline in their standard of 
living of about 11 percent, and at the time of Armistice, suffered a 
decline of 21 percent. It wasn't untU 1921 when the cost of living 



was coining down and their wages were coming up, that they broke 
even. They ended up 6 percent better due to the fact that with 
the lower cost of Hving, they got more for those wages than they 
formerly could. 

(The chart referred to was marked "Exhibit No. 1460" and appears 
on this page. The statistical data on which this chart is based 
are included in the appendix on p. 11340.) 

Dr. LuBiN. The next chart shows what happened to the standard 
of living and the real wages of the building trades workers. You 
noted that their average hourly earnings did not rise veiy markedly, 
despite the fact that the cost of living was going up. We know too 

Exhibit No. 1460 



1914 — a I 
















WAGES -—--^^^ 






their employment didn't increase, due to the fact that there wat 
restriction on building. And you will note that starting at the 
beginning of 1916, there are virtually no increase in wages, there was 
an increase of 9 percent by 1917 but the cost of Uving had gone up 
much faster, so that in the year we entered the war their real wages 
had fallen 15 percent. By the next year their real wages had fallen 
by 22 percent. At the peak of industrial activity in 1920, their real 
wages were still 9 percent below where they had been before the war. 
They were 9 percent worse off. And agam it was only when prices 
had fallen very markedly that they really got the advantage of the 
so-called boom period. By that time the depression hit them, and 
those people who were working in 1921 in the building trades were 
6 percent better off than they had been in 1914. But their wages 
did not catch up with the cost of Uving until 1921. 



(The chart referred to was marked "Exhibit No, 1461" and appears 
on this page. The statistical data on which this chart is based are 
included in the appendix on p. 11340.) 

Dr. LuBiN. Here you have a picture of what happened to the stand- 
ard of living of railroad workers. The picture is slightly different 
than you have seen for teachers and building workers and others. 
You will notice there was a gradual upward trend in cash wages, 
so that in the year we entered the War, they were getting 23 percent 
more than they were here. However, the cost of living was moving 
much faster, so their dollar bought them at the time we entered the 
war about 4 percent fewer goods than they could formerly have gotten 

Exhibit No. 1461 



I9I4-=I00 INDEX 





CASH vy 


'" if 







^_ REAL W 
^^^^^^^^ WA 

3ES^ ^^ 




va\h. their lower salaries. By 1918 their wages had gone up 72 per- 
cent. The cost of living, however, had also gone up, but not quite 
so fast. The result was m the year of the Armistice they were 12 per- 
cent better off than they were here in 1914 when they were getting 
a lower wage rate. There was a slight decline here, because this 
wage increase was not equal to the cost of living, and a gradual rise 
here, and in 1920, they were getting 122 percent more in wages. That 
increase in wages bought them 11 percent more goods than they h 'd 
formerly bought at this period here. In 1921 they were getting 
twice as much in wages, but that increased wage amount only 
bought them 16 percent more than they formerly had received before 
the war was declared. 

(The chart referred to was marked "Exhibit No. 1462" and appears 
on p. 11043. The statistical data on which this chart is based are 
included in the appendix on p. 11340.) 



Dr. LuBiN. Here are the wages in the bituminous coal industry. 
Here is the curve you saw previously for average hourly wages. Here 
it is computed in terms of weekly wages and we notice by 1917 an 
increase of 45 percent in these cash weekly wages from 1914, and yet 
when these weekly wages were spent for goods, when we entered the 
war they were getting 12 percent more goods than they were in 1914, 
that is their real earnings were 12 percent greater. By 1918 they 
were 14 percent greater, and this increase in wages at this point, 
coupled with a downward trend in the cost of living, increased their 
r^al wage in 1921 to 140; in other words, during 1921 the high wage 
rate and the lower cost of living meant the miners were 40 percent 

Exhibit No. 1462 


INDEX 1914. «I00 


better off, those that had jobs at that time, than they had been 
in 1914. 

(The chart referred to was marked "Exhibit No. 1463" and appears 
on p. 11044. The statistical data on which this chart is based are 
included in the appendix on p. 11341.) 

Dr. LuBiN. This is the manufacturing industry. This curve is very 
similar to the one you saw recently, showing actual hourly earnings. 
This is cash weekly earnings. The cash weekly earnings moved a 
Httle faster than average hourly wages because there was more work 
to be done. You got more hours of employment during this period 
of time so at the end of the week there is relatively more in the pay 
envelope. But even these manufacturing workers who experienced 
that steady, constant increase in wages, weekly wages, from 1915 to 
1920, even at the height of their prosperity when all these so-called 
silk shirts were being purchased, were only getting 21 percent more in 



Exhibit No. 1463 





Exhibit No. 1464 






real goods, in actual real earnings then they had been at this period of 
time, although their actual cash earnings had gone up by 142 percent. 

(The chart referred to was marked "Exhibit No. 1464" and appears 
on p. 11044. The statistical data on which this chart is based are 
included in the appendix on p. 11341.) 

Mr. AviLDSEN. Are those hourly earnings or total? Do they have 
to work longer hours, put in more actual work than in 1914 to get 
that extra money or is that hourly rate? 

Dr. LuBiN. These are all cash weekly earnings. The first chart ' 
I showed you shows average hourly earnings. These are all cash weekly 
earnings. You will note, for example, here that bituminous coal, 
let's say, at this period here, 1920, about 243 was the actual hourly 
earning rate. Here it was 227.^ In other words, in these instances 
they were doing less work. On the other hand, if you look at building 
trades,^ at this period the real weekly wages were 91, their cash 
weekly wages were 182, their actual hourly earnuigs were just about 
the same. It will vary from industry to industry. Your weekly cash 
earnings are a function of what you get per hour plus the number of 
hours you work. In many instances the increase in the weekly 
earnings is due to the fact that you are actually domg more work. 

Mr. AviLDSEN. That is strictly true of the manufacturing industry 
of that period then? 

Dr. LuBiN. Yes. Now here we have a picture not of weekly earn- 
ings but of the annual earnings, which is a function not only of the 
number of days worked per week, hours per day, but weeks per year, 
which is really the most significant factor in our wage structure. It 
is after all what a man earns per year that determines how he can 
live. Here you will note that taking your manufacturing industries 
as a whole, the workers in the manufacturing industries during the 
first 2 years of the World War, 1914-16, showed no actual increase in 
their real earnings. 

(The chart referred to was marked "Exhibit No. 1465" and appears 
on p. 11046. The statistical data on which this chart is based are 
included in the appendix on p. 11341.) 

Dr. LuBiN. In other words, they could buy just about as much 
in 1916 for the dollars they earned as they could in 1914. With this 
very marked increase in wages in 1916-17, with wages jumping by a 
third to 133, there was a slight gain in their real earnings due to the 
fact that the cost of living was not going up quite as fast; the fact 
is, about this time the cost of living had gone up to about 128. The 
result was they could get 4 percent more goods for their money at 
this point than they could here. 

Then you had a rather sharp increase with wages at 169 percent 
of this level in the year of the armistice, the cost of living having 
risen markedly, and the result is they were 10 percent better of}'. 
You had a sharp increase up to 1920, but your cost of living had also 
risen very sharply, so even if you take all of the increased employ- 
ment, aU of the increased wages, put them all together into these 
cash annual earnings, when you were through at the peak of this 
prosperity you were only 17 percent better off, than you were at the 
time the war broke out. 

I See "Exhibit No. 1458", supra, p. 11038. 
> See "Exhibit No. 1463", supra, p. 11044. 
» See "Exhibit No. 1461". supra, p. 11042. 

124491 — 40 — pt. 21 3 



So I think it is quite evident from these figures that as far as labor 
itself is concerned, they didn't profit tremendously from the war. 
Certain groups lost very, very definitely; particularly those groups 
in those industries where there was no organization, or where there 
was controlled demand, and where wages were fixed by law, there 
was a very definite lowering of the standard of living, and in those 
instances like manufacturing and mining where there was a fairly 
large increase in wages, the net addition to the workers' incomes in 
terms of goods was at no time more than 17 percent. 

Mr. Henderson. This covers the current cost of living for wage 
earners. To the extent that he was paying off debt, the debt burden 
was somewhat lessened, isn't that correct? 

Bmhibit No. 1465 





1914 = 100 





~ ^ 





sh annual 











Dr. LuBiN. Oh, 1 think very definitely. I think there is no denying 
that, but the question is, here you have a tremendous increase in prices. 

Mr. Henderson. That is, suppose he was taking on debt, suppose 
he was building a house or something like that, then he was getting a 
larger debt which would be a bigger burden at a later time. 

Dr. LuBiN." Very definitely so. 

Mr. Henderson. And isn't it also true in paying off the mortgage 
debt, which is usually the biggest thing for the wage earner and on an 
installment basis, he got very little relief, for only a few months. 

Dr. LuBiN. Even if he got all that relief, his total saving at the 
peak of his so-called prosperity was less than 20 percent. You were 
relieving that burden by only 17 percent at the peak of all this pros- 
perity, in terms of the annual earnings. He has 17 percent more to 
spend, as it were, in terms of what he previously had, assuming we had 


a fixed price level. Or putting it the other way, his actual earnings 
made it possible for him to buy 17 percent more goods than he 
formerly could. 

Mr. Henderson. In terms of his savings, if he had a substantial 
portion of savings and then the price level declined, he would have 
gained an advantage there, but your studies show that the percentage 
of savings in the wage-earning group is relatively small. 

Dr. LuBiN. Yes, but let me point this fact out. I think this chart ' 
will show as far as the manufacturing industries are concerned, that 
the period of greatest savings, not in terms of savings in dollars but 
in abihty to buy or pay off debt, was at this period here (1920). 
That wasn't due, however, primarily to this. This was primarily 
due to the fact that this has gone down,^ the cost of living had gone 
down. Wages themselves didn't take care of that difference for him. 
It was the fart that he had these higher wages and prices of other 
things were going down. 

Mr. Henderson. Going back to some of your other charts on 
prices, for example, bituminous coal, textiles, iron and steel, did 
these increases in hourly rates and weekly earnings absorb all of the 
price rise in that period? 

Dr. LuBiN. What do you mean by that? 

Mr. Henderson. Is the price rise in textiles and coal and iron 
and steel to be accounted for solely by the increase? 

Dr. LuBiN. No; the proof of that fact is, you see these prices went 
much higher. Wages did go up, but nowhere near enough in many 
instances to make up for the increase in the cost of living. In other 
words, there was a shortage so far as labor was concerned. He wasn't 
getting back the difference. You couldn't say that his wage increases 
were responsible for those prices because after he got his wage increases 
he couldn't get as much for his money as he formerly got. 

Mr. Henderson. Those price rises ^ were much more substantial 
were they not? 

Dr. LuBiN. Here they are. At this pouit, it isn't so abnormal here. 
There was a period of a little over a year in wliich the prices were 
rather high. The coal prices were up to 332, bituminous wages were 
up 45 percent,^ and the same situation exists in textiles.^ 

Now what I have taken is a group of industries, taken your real 
annual earnings and I want you to bear in mind these are the total 
earnings of the workers over the year, they are wage rates multiplied 
by the number of hours employed tliroughout the year and you get 
this interesting picture of what happened to the earnings of workers 
in our industry. In the case of textiles, you will note that in tex- 
tiles, the actual real earnings of textile workers increased rather 
markedly. By the time of our entrance into the War they had gone 
up 8 percent. By 1918 they were up to 16 percent, and by the time 
of the peak of 1920 they were up by 25 percent. But let me point 
one thing out, that here was probably one of the lowest wage indus- 
tries in America at the time. In 1914, 15 cents an hour was a good 
average wage rate in the industry, so it was a very definitely low-wage- 
rate industry. 

» Bee "Exhibit No. 1465," supra, p. 11046. 
« See "Eihiblt No. 1457," supra, p. 11036. 
« See "Exhibit No. 1455," supra, p. 11030. 
< See "Exhibit No 1453." .■iupra, p. 11026. 



(The chart referred to was marked "Exhibit No. 1466" and appears 
on this page. The statistical data on which this chart is based are 
included in the appendix on p. 11342.) 

Dr. LuBiN. There was this tremendous war demand, and you had 
this increase throughout the war period for textiles of aU sort, and 
despite the fact that the dollar wages of these workers mcreased by 
about 150 percent, their actual real earnings increased only by 25 
percent. The effect of this rise in the textile wage level has caused 
us a lot of headaches ever since. The fact is that the rise that took 
place in textile prices^ and the rise that took place in textile wages, 
brought with it a tremendous increase in capacity in the United 
States, and in the year 1917 we added more spindles to our capacity 

Exhibit No. 1466 




















— ^FOOD 














r % Wjmuuii or xjtoom ttatistics 

than any other year for which we have record. And if you take this 
whole period here, we added more spindles to our capacity than any 
other period, with the exception of one back here in 1910 when the 
industry was getting going full blast. 

Not only then did it leave us with this tremendous capacity, which 
we h^,ven't worked ofiF yet, and, as somebody once described it, has 
led us into 20 years' depression that we are not out of yet so far as 
textiles are concerned, but it led to a differential in wage rates in the 
textile industry between those areas which were getting large war 
orders and in which labor shortages developed and other areas. Be- 
fore the war the difference in the wage rates between Northern and 
Southern plants was about 37 percent. That was their differential. 
At the end of the war that differential was 60 percent. In other 
^ords, the workers in the North were getting 70 percent more per 
liour than the workers in the South. That widened differential has 

Exhibit No. 1467 


1913-14 AND 1938—39 





AUG. 1913 


JULY 1914 




SEPT 1938 


AUG. 1939 

PRINTING OFFICE : 1940 O- (2449* 

(Face p. Il04tt) 


XXJ. VXJ.V t~J\J Li VXl . 

xixab wmeueu dilferentiai has 


been again one of the tremendous problems we have had to face in 
that industry in recent years in getting the industry back into some 
sort of balance, but that is just one of the many examples of dis- 
organization which is brought about by these runaw^ay prices, fol- 
lowed by increasing wages and which leaves its mark for more than 
a generation on the economy. Your steel industry, which of course 
felt the burden of the war as textiles did, is another industry where 
workers gained in their real annual wages. With much more em- 
ployment, the wage rates went up, and the result was that, although 
in i915, the year after war was declared, the workers were 5 percent 
worse off than before war was declared, by 1917 they were 11 percent, 
and by 1918 they were 22 percent better off and stayed there tlirough 

But note, with the collapse there was a very marked decline in 
their real earnings and their earnings fell to 7 percent above where 
they were in the pre-war period as contrasted with 22 percent. But 
note, at no time were they more than 22 percent better off than they 
were at this point, 1914. 

The food industry is very similar, reaching its peak in 1921 but 
never reaching the levels of textile wages, and iron and steel wages. 

In the agricultural-implement industry again, most of the workers 
were worse off from 1914 to 1919 than before war was declared, their 
real wages being below the 1914 levels, the rise taking place in 1919 
and '20, and a large part of this rise, incidentally, taking place not 
because of increased wage rates but because of falling cost of living, 
and similarly this rise here also took place not so much because of 
increased wage rates but because of falling cost of living. 


AUGUST 1939 

Dr. LuBiN. Now, I want to shift from the effect of the last war on 
prices, on wages, on cost of living, and upon the real income of our 
working population, to a picture of what has happened to prices since 
the last war, and then follow that up with a picture of what happened 
to prices during the first 6 months of the last war and what has hap- 
pened in the last 3 months in this country. 

This chart, which is pre-war commodity prices, is merely to illustrate 
that after a generation has passed, after 25 years, your individual 
commodities have moved in all sorts of directions. 

(The chart referred to was marked "Exhibit No. 1467" and faces 
this page. The statistical data on which this chart is based are 
included in the appendix on p. 11342.) 

Dr. LuBiN. Tliis point here, 100, is the average of these prices for 
the year August '13 to July of '14. This hne here at the extreme 
right is the average for last year, ending August 1939, in other words, 
the year before this last war was declared. 

Here is a picture, in other words, of what happened betw^een the 
period of the declaration of war in 1914 and the period of the declara- 
tion of war in September 1939. 

You will notice that the line representing all commodities show^s a 
relatively insignificant increase of about 12 percent, and yet a lot of 
commodities have moved in a lot of directions. Ferro-manganese, 
for example, at the beginning of this war was selling in the United 
States at 191 as compared to 100 at the declaration of the World War. 


Mr. Henderson. Dr. Lubin, I think you ought to make it clear — 
should you not — that these lines do not indicate the course these prices 
took in the intervening years. 

Dr. LtJBiN. Yes; I am glad you pointed that out. In other words, 
here is where they were at 1914 (100) and there is where they were at 
the declaration of war in 1939, but a lot of things may have happened 
in between. In other words, the idea is to show you had a dispersion 
and you started this last war or the present war with an entirely 
different dispersion in your price structure from what you had when the 
last World War was started. 

Ferro-manganese, for example, as I say, was selling at 191 percent 
higher at the beginning of the present war than at the beginning of 
the last war. 

Acting Chairman Borah. Dr. Lubin, I don't know that I under- 
stand this. Is this 100 designed to represent the price at the beginning 
of the World War? 

Dr. Lubin. Yes. 

Acting Chairman Borah. And the points to which they have gone 
are the prices now? 

Dr. Lubin. An average of the last year before the present war; yes. 

In other words, it gives you a picture of what prices looked like the 
year before the World War started and what they looked like the year 
before the present war started. 

Benzoic acid was selling at 105 percent higher; ferro-manganese, 
90 percent higher; common brick, 87 percent higher; phenol, 79 
percent higher; woolen overcoatings, 77 percent higher; steel plates, 
67 percent higher; caustic potash, 63 percent higher; steel billets, 59 
percent higher; white pine, 51 percent higher; and so one could go 
down the line of these commodities, which at the beginning of the 
present war were considerably higher than they were at the beginning 
of the last World War. 

On the other hand, it should be borne in mind that a lot of com- 
modities at the present time, or during the period immediately pre- 
ceding the declaration of war, were relatively lower than they had 
been in 1914, 25 years previously. For example, smoking tobacco 
was down by 9 percent, hogs were down 10 percent, indigo paste, 
a coal-tar product, which we noted up here,^ had jumped something 
like 700 percent during the early days of the last war, was selling 
recently at about 17 percent below the pre-war period of 1914, the 
reason, of course, being we developed an industry of our own in the 
United States. 

This war started out with burlap 18 percent below what it had been 
at this period here. Copper ingots were 30 percent lower than they 
had been; raw cotton was 31 percent lower, and coffee was 44 percent 
lower, and plantation rubber was 74 percent lower than it had been 
at this time. 

Acting Chairman Borah. Dried beans, 23 percent lower. 

Dr. Lubin. In other words, you get there a picture of the trends 
that are going on in a price level. Here is what happened to prices 
as a whole, and yet here is what was happening in the economy at 
this end, and here is what was happening in the economy at that end. 

Having seen where we started out when war was declared in 
Europe, the general price level about 12 percent above where it had 

» See "Exhibit No. 1456," supra, facing p. 11032. 



; F s is Uns i i oi 

:d JI 

X O 
















been when war was declared last time, with the spread in prices, some 
being twice as high as they had been when war was declared in 1914 
and others down to 26 percent of the level that they had been at 
that time, let's take a look at what has happened to prices, what did 
happen to prices, during the early days of the last war — in other 
words, what was the immediate effect of the declaration of war upon 
prices in this country — and compare that picture with what has 
happened during the last 3 months; namely, September, October, 
and November, after war was declared in Europe. 

During the first 6 months, from July 1914 to January 1915, the first 
6 months of the World War, the price level as a whole did not move 
very much. 

(The chart referred to was marked "Exhibit No. 1468" and faces 
this page. The statistical data on which this chart is based are 
included in the appendix on p. 11343.) 

Dr. LuBiN. The price level increased by 1.2 percent, to be exact. 
And yet you had some marked skyrocketing of prices during that 
short period of time. Phenol jumped to 666 as compared to 100 
6 months previously; indigo paste, which I have mentioned before, 
jumped from 100 to 361. But it is important to note that most of 
these commodities here, all of these lines, are chemical products. In 
other words, it was the immediate effect of German supply being cut 
off from our market. 

On the other hand, of course, certain commodities showed marked 
drops in prices during the first 6-month period. Potatoes, wliich 
we noted before, ended up in 1920 about four and one-half times as 
high as they were when war was declared, had fallen to almost half 
their previous level. Raw cotton had fallen very markedly, by 41 
percent, to be exact. Most of these commodities were chemical com- 
modities, like phenol, indigo paste, benzoic acid, caustic soda, potash. 
Ferromanganese showed a very marked increase, and again I want to 
note its importance in American industry today in the manufacture of 
metals. Wheat flour also showed a rather important increase, the 
actual increase during the 6-month period being about 72 percent. 
But beyond that, by and large, these were chemical products. 

Now let's take a look at what happened to prices during the past 3 
months and see how that picture compares with what happened to 
prices during the first 6 months of the last war. This shows what has 
happened to prices from August of this year up until last vreek, the 
last date for which we could have figures, namely the week ending 
December 2. 

(The chart referred to was marked "Exhibit No. 1469" and faces 
this page. The statistical data on wliich tliis chart is based are 
included in the appendix on p. 11343.) 

Dr. LuBiN. Here you udll noce that there has been virtually no 
increase of any importance in the general wholesale-price level. The 
exact increase was 5.2 percent during the period from August to last 

Acting Chairman Borah. Does that include the general? 

Dr. LuBiN. That is the general price level. 

However, burlap has doubled in price. Winter wheat jumped 30 
percent; ferromanganese, which we noted on the last chart jumped 
rather markedly in the early days of the last war, has jumped again, 
increasing by 25 percent. Rubber has increased by 23 percent; 



electrolytic copper, ingot copper, has increased by 21 percent. Sole 
leather has increased by 16 percent. In fact, by and large there 
have been, with the exception of probably a dozen or so commodities, 
there have been no really marked increases, burlap being the onlj 
startUng increase during that period of time, and the only commodi- 
ties showing any sort of drop during the period being hogs, parti- 
cularly light hogs. 

Mr. AviLDSEN. Have you any explanation for that rise in the 
price of burlap. Doctor? 

Dr. LuBiN. Will you save that question? I am going to come 
back to burlap in just a minute. 

This chart breaks your price level since August 1, for the last four 
months, into its constituent parts. Again I would like to note that 

Exhibit No. 1470 



AUGUST 1939 AVERAGE = 100 


this is a new index of the Bureau of Labor Statistics which is a daily 
index showing what happened to prices from day td day, and then 
they are computed also on a weekly basis. 

(The chart referred to was marked "Exhibit No. 1470" and appears 
on this page. The statistical data on which this chart is based 
are included in the appendix on p. 11344.) 

Dr. LuBiN. You will note that your all-commodity index has 
moved, as I said a minute ago, up by 5 percent since war was declared, 
and you will notice that the big increase came there in the first 2 
weeks. Tliis is your all-commodity level. Nothing has happened, 
really, since the middle of September. It has stayed more or less flat. 

On the other hand, if you take your 28 basic commodities, and I 
will hst those in just a minute, and watch them day by day, you will 
note that this has happened, that whereas they were 100 in August, 
the 28 of them put together on September 21 were up by 24 percent, 


and they stayed around that level, i ad then started downward 
gradually, and are back to 19 percent above where they were in 

In other words, your all commodity index has increased 5 percent, 
but 28 basic commodities that enter into the industrial picture of 
America as basic factors have gone up by 19 percent, although they did 
reach a point which was 24 percent higher than they had been in 
August. Incidentally, again you will notice that this increase of 24 
percent in these commodities came in 3 weeks. There was a very 
sudden increase. 

I will give you for the record the list of the 28 commodities that are 
in this index, 

Mr. Henderson. Couldn't you give an explanation of what you call 
a basic commodity? 

Dr. LuBiN. Perhaps 1 can give you that better by giving you the 
list of them, so you can see the nature of the commodities: Wheat, 
flaxseed, barley, corn, butter, tallow, hogs, steers, lard, sugar, coffee, 
cocoa beans, shellac, rubber, hides, rosin, cottonseed oil, print cloth, 
raw silk, raw wool, burlap, scrap steel, tin, copper, lead, zinc, cotton. 

In oilier words, they are the raw materials that enter into the pro- 
duction of virtually all of the important industries in our economy in 
some way or another. 

Mr. Henderson. They are to be distinguished from the strategic 
commodities listed by the War Department? 

Dr. LuBiN. Oh, yes; very definitely. If you take those 28 com- 
modities and break them down into, let's say, your raw materials, 
16 of them are raw materials, 6 of them are domestic agricultural 
products, and you will find that those 16 that are used in industry as 
raw materials jumped higher than the index as a whole did, jumped 
to 127 percent of their August level, and continued to rise longer; 
whereas the group as a whole continued to rise only to September; 
and at the present time are still 25 percent above where they were 
in August. 

On the other hand the agricultural products reached a peak in 
September of 24 percent above August and started down, and now they 
are only 116 percent of what they were, whereas raw materials used 
by industry are 25 percent higher than they were in August, before 
war was declared. 

Now, if you break those commodities down still further, into their 
constituent elements, some of which I have mentioned, you have this 
interesting picture. Here is copper. Here is where copper was in 
August. In early September it jumped. It jumped from about 103 
to about 115. It stayed at 115 for a couple of weeks, jumped to 120, 
and stayed at 120, last Saturday's price still being 12 cents a pound, 
or 20 percent higher than at was at this point. 

(The chart referred to was marked "Exhibit No. 1471" and appears 
on p. 11054. The statistical data on which this chart is based are 
included in the appendix on p. 11345.) 

Dr. Kreps. Do you mean that copper is generally available at 12 
cents a pound? 

Dr. LuBiN. I am glad you raised that question, because this is a 
quoted price. Now, what has happened in the copper industry is this: 
From all we can learn copper has, in a sense, been rationed in the 
United States. A copper consumer can get his orders filled to the 



extent where they are equal to what he formerly consumed. If he 
wants more copper, that is, copper more than he usually has been in 
the habit of buying, he must buy that extra supply at not the American 
domestic price, but at the export price, which is about a cent higher, 
so that in reality any consumer of copper who wants more copper 
now than he usually buys pays not 20 percent more than he formerly 
did, but it would run about 30 percent, roughly. 

Acting Chairman Borah. How does that happen? 

Dr. LuBiN. I would rather you asked Mr. Arnold that question. 

Acting Chairman Borah. I will ask him later. 

Dr. E!reps. There is an international cartel operating in the copper 

Exhibit No. 1471 




Dr. LuBiN. The zinc picture is quite different from copper. You 
will notice that zinc jumped to about 125 percent immediately after 
the declaration of war. It got up to 135 percent at the end of Septem- 
ber, and has stayed at that place, namely 7 cents a pound, ever since. 
Incidentally, I might mention the fact that the stocks of zinc in this 
country are still relatively low, and the fact is that despite these 
price increases we have not got our production up to levels equal to 
those, say, of 1929. 

Your lead picture is not quite similar to the others. It jumped 
9 percent and stayed at 9 percent higher. Your tin picture shows a 
jump of 23 percent in a short period of time, maintenance of that 
price for about three weeks, a drop, holding its own, coming back 
almost to its August levels in the middle of November, and at the 
present time back to 107, or 52 cents a pound, which is just about 
7 percent more than it was before hostilities were declared. 


Again you see the picture of the significance of these various trends 
in basic materials. Here is scrap steel, which jumped to 146, in- 
creased almost by 50 percent in a period of a month. It started down- 
ward and is at the present time 23 percent higher than it was as com- 
pared 'v^'ith zinc, which is 35 percent higher than it was 3 months ago. 

In other words, I think these tables show pretty definitely that 
that picture of what happened to prices at the beginning ef the last 
war is in a sense being repeated, although in a much more limited 
degree, today. In other words, the last 3 months have witnessed the 
beginning of something that might turn into what happened in the 
last war, and I think it is very important that we watch these prices 
in order to avoid the consequences that we had to suffer during the 
last war. 

Mr. Henderson. Dr. Lubin, on those prices you picked out for 
this last chart, the price Hne is rigid except for scrap steel. Is that 
the kind of behavior which usually takes place where there are a few 
producers in control of the supply? 

Dr. Lubin. Very definitely. In other words, you will find that 
excepting certain periods, if you ViJl take a long period of time you 
will find rather marked periods where the day to day quotations scarcely 
jfluctuate at all. 

Mr. Henderson. And in scrap steel there are Ukely to be a con- 
siderably larger number 

Dr. Lubin (interposing). You may have a million different people 
feeding scrap steel into the market, and thirty or forty or a hundred 
people competing against each other for the supply. Every junk 
dealer is a potential producer of scrap steel, as opposed to copper, 
tin, lead or zinc. 

Acting Chairman Borah. Dr. Lubin, it is 12:30. Would it incon- 
venience you to discontinue now until 2 o'clock? 

Dr. Lubin. It is perfectly all right, although I can finish in 30 

Mr. Henderson. The afternoon witness, too, will need all the time 
he can get this afternoon, so I suggest that we go on. 

Acting Chairman Borah. Proceed, Doctor. 

Dr. Lubin. If you take that chart that I showed you a minute ago, 
of your twenty-eight basic conunodities, and break them down still 
further, into textiles, let's say, you again get an interesting picture. 

(The chart referred to was marked ''Exhibit No. 1472" and appears 
on p. 11056. The statistical data on which this chart is based are 
included in the appendix on p. 11345.) 

Dr. Lubin. Mr. Avildsen raised a question about burlap. Here it 
is in August, here at the end of September; at the end of October it 
is twice its August price, at the beginning of November it is up by 
109 percent, and at the present time it is double what it was three 
months ago. 

The answer, Mr. Avildsen, apparently lies in the fact that the 
belligerents want sandbags, at least the allied belligerents want sand- 
bags, and there are reports of Government purchases by the various 
belligerents for sandbag purposes, and it must also be borne in mind 
that the source of supply is the jute from India. There is a shipping 
problem. There have been rumors in the trade of certain ships 
having been sunk, and that in itself is important. 



I think it should be emphasized further that our present inventory 
in the United States is equal to one month's consumption. What 
that may mean in terms of rug costs, because burlap is used in making 
rugs, or in linoleum or things of that sort, we don't yet know. It 
may be a rather insignificant factor, of course, but it may not be. If 
it is reflected, then of course you get the beginning in the terms of the 
price you and I pay for our rugs, of a rise in the cost of Uving. Inci- 

ExHiBiT No. 1472 




AUGUST 1939 AVERAGE = 100 


dentally, rug prices already have begun to go up. On the other 
hand it will mean substituting cotton for jute bags, which has already 
started in certain uses of the commodity. 

Mr. AviLDSEN. Would you say the rise in price is due to bidding 
of the buyer, rather than collusion among the producers? 

Dr. LuBiN. Plus one other thing — your shipping situation. That 
is one of the aspects of the problem that I think we ought to go into. 
I don't know that I would have time to today. 


Then there is the place that the Govemm^nt plays in bidding for 
things in times of an emergency such as this. I Imow from my own 
experience during the past war where one Govermrient department 
placed an order, or at least made inquiry for, a supply of a certain 
commodity which was three times greater than the whole world's 
capacity to produce. After all, I appreciate the attitude of the Army 
or Navy officer. His job is to see to it that he gets his goods. Yet 
in getting them, he plays havoc with the market in which the private 
producer has to go out and get the materials to meet his demands. 

Mr. AviLDSEN. We had similar experiences in the tool industry dur- 
ing the World War. I know of a particular order for tools that one 
of the Government departments placed for $2,000,000. The tool 
manufacturer said, "We don't think you need these tools, we have 
looked into your stock, we have looked into your condition." 

They said, "It is none of your business what we need. You make 
the tools." 

After the war, they hadn't been used. They were still on hand, 
and sold at public auction at 10 percent of their cost. We know that 
happens in wartime. Is there anything we can do about it? Is there 
any answer to the problem? 

Dr. LuBiN. I think an intelligent approach to the problem is 
possible. If the Government realizes, first, that it is sovereign, and 
that if the emergency becomes acute, it can confiscate anything it 
has to have if war is declared — if it always remembers that, I think 
some purchasing agents will stop rushing out buying the first time 
they conceive the idea that they may need 5,000,000 hat straps, let's 
say, for troops, or 10,000,000 canteens, or things of that sort. I 
think that there is always a minimum limit of freedom that should 
be given to all purchasing agents, but once it gets beyond a certain 
point, I think a purchasing board with a representative of the De- 
partment of Commerce on it ought to look into things of that sort. 
They know what capacity is. They know what the potential pro- 
duction rate might be, so that if they found that commodity X is 
important, yet one can always get all one wants if one gives these 
fellows 30 or 60 days' notice, the board would say, let's hold back on 
those. On the other hand, there are other commodities which we 
know we couldn't get out without tremendous delays, let's get them 
out. I do feel the Department of Commerce should play a much 
bigger part in the purchasing of the Government than it has. 

Mr. Arnold. That would seem to indicate two things, Mr. Lubin, 
first, that some sort of body be established with sufficient funds so that 
it knew the inventory situation and the data in each industry, which 
we don't have now, do we, and wouldn't it also indicate that the 
Government, in making purchases, should be free to use some of the 
trading devices which an ordinary business man uses? 

I have noticed in the antitrust division, in examining prices, we find 
the Government habitually pays higher prices than private contractors 
because the bids are made public, and these people are afraid of being 
called chiselers, whereas the actual price to the private contractors 
when bids are not pubUc, are lower. These two things might be 
properly considered, might they not? 

Dr. Lubin. Yes. I do feel, however, that in a time of an emergency 
or threatened emergency it is just natural that those who are respon- 
sible for the national defense should feel that they must get every- 


tiling they want as quickly as they can get it. They wouldn't be 
doing their jobs well if they didn't in terms of the purposes which 
they are to serve. On the other hand, I also feel that after a little 
thought and discussion, many people realize that they don't need the 
thmgs as badly as they thought they did. I remember during the 
war there was a story going around in the General Staff that one of the 
branches of the services had wanted, I think, blackberry jam, in a 
quantity equal to three times the total world production of blackberries, 
and they wanted it right there and then. 

There was a story about these colored hat bands, these field service 
bands that the soldiers were to wear. They never wore them in 
reality, because they always wore trench caps, overseas caps. But I 
remember when we were discussing the shortage of shipping at the War 
Industries Board during the war, one economist said, "Why worry 
about shipping? If you take all of the excess canteens that the Army 
has ordered which they will never use, and tie them together with all 
the excess hat bands they will have, you can float all this stuff across 
to Europe." 

Mr. Arnold. Of course there is nobody that is checking on requests 
for "three times as many blackberries as there are." Your testimony 
clearly indicates the need for such a body. 

Dr. LuBiN. Very true. Possibly another significant fact is that 
once the situation gets out of hand, once the Government comes in and 
boosts these prices still further, you get these maladjustments which 
we all pay for eventually. 

Dr. LuBiN. This chart,^ as I said, breaks these commodities into 
still further groups. Here is the case of wool, which reached 155 per- 
cent of its level in August, is down to 144 percent, and has held its own 
fau'ly well; raw silk, which is now going up again; print cloth, which 
jumped to about 118 percent of its former level, is back right now to 
about 109 percent of "its former level; and raw cotton, which took a 
sudden slight jump, 5 percent above August, fell back somewhat but 
is now up to 108 percent of where it was in August. 

The only commodity of any importance really that has been rising 
in the past month, due in part, I think, to the substitution of cotton 
for burlap, is raw cotton. 

A further break-down of these basic commodities is shown in the 
next chart. 

(The chart referred to was marked "Exhibit No. 1473" and appears 
on p. 11059. The statistical data on which this chart is based are 
included in the appendix on p. 11346.) 

Dr. Ldbin. There again you have this interesting phenomenon of 
hogs having jumped to 140 percent of the August level almost over- 
night, from 100 to 140, a speculative rise, and now back to 12 percent 
below where they were last August. People thought they remembered 
what happened during the last war, and as a matter of fact they 
weren't remembering that at all. They were remembering what 
happened at the end of the last war. Lard jumped 44 percent in a 
week; it is back at the present time to 10 percent above where it 
formerly was; steers jumped 22 percent in a short period of time, and 
are down again at the present time to about 8 percent above where 
they lormerly were. Com, up 34 percent, and right now 122 percent 

» See "Exhibit No. 1472," supra, p. 11056. 



of where it was, the last figure for last Friday being 122 as compared 
to 117 the previous Wednesday. 

And here is the picture of wheat, which took a rather marked rise 
last week and is now 33 percent above August, having risen earlier 
up to a high point of 132, and is higher than in 2 3'ears, the last quota- 
tion being the high point for the last 2 je&vs in wheat. 

And finally in the basic commodities are commodities which we 

You notice burlap is not in here, that was included with textiles; 
shellac jumped only slightly in the early days of the present war, 
held its own for a while, jumped again, and is now selling at 74 percent 
higher than it did 3 months ago. Hides reached a peak of 141, and 
are now 26 percent higher than 3 months ago. 

Exhibit No. 1473 




(The chart referred to was marked "Exhibit No. 1474" and appears 
on p. 11060. The statistical data on which this chart is based are 
included in the appendix on p. 11346.) 

Mr. AviLDSEN. Tell us where shellac comes from? 

Dr. LuBiN. India, primarily. 

Mr. AviLDSEN. Is that a cartel controlled product? 

Dr. LuBiN. I don't know. 

Mr. AviLDSEN. Do you know? 

Mr. Nelson. No. 

Dr. Kreps. I don't know. 

Dr. Lubin. Of course, shipping is a factor in it, but it has kept 
its own so steadily it makes one raise the question whether there 
hasn't been something else in the picture. 

Sugar shows the interesting picture of jumping 35 percent, then 
dropping off again, and it is now 3 percent above where it was when 


Exhibit No. 1474 



AUGUST 1939 AVERAGE =-100 

Exhibit No. 1475 



> IMtMr or.kMon tantiics 


war was declared. No basis to it at all, a bunch of damn foolishness, 
as it were, and the thing is beginning to find its own leveL 

The little country store merchant who bought sugar at a premium 
is either going to have to get a higher price for sugar or lose money. 
Somebody is going to pay for that, and it is that sort of thing that 
throws this whole thing out of gear. 

Your coffee situation ; only a slight increase and back to 5 percent 
below where it was when war was declared. 

Now, the question arises what does all this have to do with retail 

As far as retail prices as a whole are concerned, there is no evidence 
of these wholesale prices having yet been substantially reflected in 
the retail price that we pay for thmgs. Certain things have gone up 
in price, certain silk products, particularly silk hose, and incidentally 
it is the branded types of silk products that have gone up most. 
The unbranded types have not gone up very much. 

Rugs show some trend upward, and certam food commodities have, 
but if you take foods as a whole you get this interesting picture, and 
after all, food comprises more than one-third of the farnily budget. 

You will note that food prices even at the peak in September, when 
food prices were 79 as compared to the 1923-25 average (the 1923-25 
average being 100) food prices were still lower than they had been 
in '37, two years ago, and you will note further that at the present 
time, the November figure of 77 is lower than in any month of 1938 
except November. In other words, these prices were reflected in a 
marked sudden increase in the retail market, an increase from 75 to 
79 between August and September. They have already started 
downward, back to 78 which is lower than they were in 1937 and the 
early part of 1938. 

(The chart referred to was marked "Exhibit No. 1475" and appears 
on p. 11060. The statistical data on which this chart is based are 
included in the appendix on p. 11347.) 

Dr. Lubin. So these wholesale prices have not yet been reflected 
in the retail market and the question, of course, is whether or not they 
will broaden out or keep going up. In other words, those that have 
started up, may go further, which means reflection in the retail mar- 
kets, or they may influence other prices in which they are used. 

This chart breaks these foods down into four particular types just 
to show how these things work. 

Here is sugar, that jumped up here to 124 and then started down. 
There are navy beans, which incidentally went up to 129 and are still 
20 percent above the August 15 price, and by the way, that happens 
in almost every war. The same thing happened in the last war. They 
feel the effect very definitely. 

Bacon, however, only went up 5 percent, and is now below what it 
was before war was declared, and canned tomatoes went up by 4 per- 
cent and are slightly above whd,t they were. The tomato grower and 
the farmer who raises bacon has to pay these higher prices, but he gets 
only this much increase. 

(The chart referred to was marked "Exhibit No. 1476" and appears 
on p. 11062. The statistical data on which this chart is based are 
included in the appendix on p. 11347.) 

Dr. Kreps. Dr. Lubin, why did the price of navy beans break in 
early October? 

124491 — 40 — pt. 21 4 


Exhibit No. 1476 






AUG. 15 

AUGUST 15.1939-100 

NOV. DEC. 5 



Dr. LuBiN. I don't know offhand. 

Dr. Kreps. Any connection between that and the action of the 
Federal Trade Commission against a group of producers and mer- 
chandisers in Michigan? 

Dr. LuBiN. I don't know. Finally, I want to cite this as an illus- 
trating example bearing upon the question that Dr. Thorp raised about 
what effect these things have upon the cost of living, and how far this 
cost of living business is a psychological factor. 

Here are five drugs, every one of which is important. Here is cod 
hver oil, which is a standard article of diet in any family that has in- 
fants. Here are belladonna roots which are used in certain drugs for 
eyes, by anybody who wears glasses and has his ej^es tested. The 
amount may be insignificant. Here is ergot, an important drug used 
by doctors in cases of childbirth. Here is gum arabic, the basis for 
making pills and all sorts of medical preparations, emulsions and things 
of that sort. And there is orange oil, which is used in flavoring. They 
are not important things, by and large. I suppose the total value of 
their products would be insignificant, and yet after all when Mrs. Smith 
goes down to the drugstore and finds that cod liver oil has gone up, 
and she asks the druggist about it and he says, "Look here, it has gone 
way up in price in a short period; I have got to get more for mine." 
That affects her attitude toward the cost of Uving. And so on all the 
way down the line, for any of the conmiodities you could pick out. 
You could pick 100 more of a different type, all of them relatively un- 
important, and yet each affecting one little segment of the population, 
so when all get together psychologically the impact is tremendous. 

(The chart referred to was marked "Exhibit No. 1477" and appears 
on p. 11064. The statistical data on which this chart is based are 
mcluded in the appendix on p. 11348.) 

Dr. LuBiN. So I think it is very important that that aspect of the 
thing be made pubUc, be emphasized, rather, so that even though 
someone says it is imimportant, — after all, what does the total pro- 
duction of cod-liver oil amount to, it is not more than five or six 
million dollars — we realize it is important to the family, it is impor- 
tant to the man in his attitude toward his wages, his attitude toward 
his job, and things of that sort. 

In conclusion, I would like to summarize this whole picture. Every 
war that we have had or every war that we have been directly or 
indirectljr connected with in any manner, has brought with it a very 
marked mcrease in prices. These increased prices have brought with 
them very marked increases in productive capacity. These increases 
in productive capacity have been financed at higher price levels, which 
has meant that the^ have been financed under conditions that have 
brought with them in many instances high overhead costs. 

If history is to repeat itself and that happens again in the United 
States in the next couple of years, just as sure as we are sitting here, 
I think, we can expect such a situation to be followed by some sort 
of a collapse. That collapse finds us with this increased capacity, 
financed at high costs with a high mortgage debt, higher overhead 
charges, and industry or somebody is going to have to bear that in- 
creased burden. And that is true not only of manufacturing and 
business as a whole, it is equally true of agriculture. If you look 
at the situation in the United States during the past v/ar, you will 
find that the value per acre of farm land jumped from an index of 100 



Exhibit No. 1477 


AUGUST I939«I00 


in 1913 to 170 in 1920. While that increase of 70 percent was taking 
place, the farm mortgage debt of the country increased from an 
index of 110 to 214. In other words, farm prices went up. That in- 
creased value of farm land meant the farmer sold his land at a higher 
price, that higher price was financed by a higher mortgage, and the 
result was when 1921 came with the collapse, farmers couldn't meet 
their mortgage debts, banks that had advanced these funds went 
broke, and there was a holocaust of bank failures and agricultural 
failures, and everything that goes with it. 

So I think that, forgetting the ethics or the morals or anything else 
you want to, of price rises, if you think of it solely in terms of the 
welfare of the Nation as a whole, the total economy, the price you have 
to pay after you are through, is so great that by and large I can't feel 
that anybody who looks at the thing reaHstically can justify any of 
the advantages that you think you are getting while this period of 
spectacular price rises is taking place. 

Thank you. 

Acting Chairman Borah. The committee will adjourn imtil 2 

(Whereupon at 12:50 p. m. a recess was taken until 2 p. m.) 


The cormnittee resumed at 2:50 o'clock, Acting Chairman Borah 

Acting Chairman Borah. The committee will come to order. 

We wiU hear Dr. Thorp now on the question of world prices and the 
probable effect upon the present conditions. 


Dr. Kreps. Mr. Chairman, this morning we had a discussion of 
price movements at present and in 1914. Dr. Thorp is going to dis- 
cuss the general forces that lay back of the price pattern during the 
World War, and contrast them with forces such as we now see at 
work at the present time. 

Dr. Thorp. Mr. Chairman, tliis morning we focused attention on 
the behavior of prices. I am going to try to set this price pattern 
of the World War and the price pattern as at the present time in their 
general setting, and discuss the various factors which brought about 
the price rise during the World War, and the status of those same sets 
of influences at the present time, I realize that there is great danger 
here of oversimphfying the picture. Our economic history is a matter 
of a great many different forces, aU playing independently and in a 
related way, and it is impossible to present a picture in full detail, so 
I will have to at many points hit the more important aspects of a 
^ven development and not try to develop all the interesting and some- 
times all the important aspects of it. 

War is inevitably a dislocating factor. You have seen what it 
does to prices. As far as the economy in general is concerned, war 
periods are periods of apparent prosperity. There is usually full 
employment, great activity, and all the superficial characteristics 
which we use to determine prosperity are present. 


. act^V tlSf '^"'''' " ' ^''^'""'" ^'"^ employment and 
I think it is important to note that in the history of the past, the 
effect of wars has not been limited to the belUgerent nations. In fact 
the swmgs of busmsss conditions throughout the world seem to tie the 
various nations together, and it sometimes is true that neutral nations 
are as senously affected sometimes even more seriously affected, than 
the beihgerent nations themselves. 

w^fS w'fif- ^bout the World War pattern, perhaps I should start 
S. iJf ' lo^rf ^^"^ }^^^ summary which I wiU picture a Httle later. 
Hj late 1915 operations m most industries were close to capacity, 
and thereafter m spite of the vigorous demand for goods, further 
increases in production were relatively slight. The effect of the 
increased demand was reflected, therefore, after late 1915, in the price 
mindous ^'' productive activity, and price increases were tre- 

in ^.^^??'''^?^T^- ^""^f that mean, Dr. Thorp, that all this increase 
m price Dr. Lubm portrayed this morning really didn't call into 
production a very large quantity of goods? 

Dr Thorp That is quite correct. I shaU develop that point with 
a good deal of material somewhat later, but the increases in production 
came pnmanly before the price rise began. The price rise came 
after we reached capacity operations. It did not caU for the con- 
siderable further mcrea?es in production. 

Mr Henderson. In other words, it runs quite a bit contrary to 
the theory of what an increase in prices is expected to do so far as 
bringing mto existence a greater production is concerned ' 

Dr. Thorp That is correct. In fact, I think it might be said that 
qmte as much new capacity in most lines would have been brought 
into production had the price increases been much less 

Mr Henderson. I think that is very significant in terms of the 
minutes of the War Industries' Board Price Fixing Committee, which 
were not pubhshed, as you know, until the Nye committee published 
them. But running all through the considerations of that price- 
hxmg conmuttee there was very definitely the feeling on the part of 
the price faxers that an additional price had to be granted in order to 
get the demanded production. I think that that part of your testi- 
mony IS very interesting. 

Dr. Thorp. That is very important, and I think it will be clearer 
when we get mto some of the detailed record of what happened to 
domestic production and capacity during the war period. 


Dr. Thorp. We shall start our analysis with considering various 
tactors which mcreased the demand for goods during the War period 
J^irst and perhaps most unportant is the demand which came from 
abroad and it is unportant for us to look in some detail at the foreign 
trade pattern of the Worid War period. I shaU mtroduce the chart 
entitled E xports of Merchandise by Continental Destination." 

74lh Coifg.. mXs.*^ investigating the Munitions Industry, Senate Committee Print No. 6 (In 4 parts). 



(The chart referred to was marked "Exhibit No. 1478" and appears 
on this page. The statistical data on which this chart is based 
are included in the appendix on p. 11348.) 

Exhibit No. 1478 


Fisca/ Years /9/3-/S 

Ca/mchr Years 193639 


1913 1914 1915 1916 1917 1918 <9I9 

1936 1937 1938 1939 • 

'EiHmtM/cn taut af fir// 9 in<mMr. 

Ji^/tv.' U. S. O^paffm^nf of Con^mcrc^ 

Dr. Thorp. The members of the committee who have booklets of 
charts will find additional charts with the following titles in these 
booklets. I do not have the larger charts to present. 

Merchandise Exports and Imports (1901-38); Trade of the United States with 
Canada; Trade of the United States with France; Trade of the United States 
with the United Kingdom; Trade of the United States with Norway; Trade of 
the United States with Sweden; Trade of the United States with Argentina; 
Trade of the United States with Brazil; Trade of the United States with Germany; 
Trade of the United States with Japan. 

(The charts referred to were marked "Exhibits Nos. 1479 to 1488" 
and appear in the appendix on pp. 11349-53.) 

Dr. Thorp. In looking at these charts the significant point for our 
domestic economy is this tremendous increjtse in the foreign demand 
for goods which began to appear in 1915, but was decidedly greater 
in the later years.^ 

Prior to the war, our exports were in the neighborhood of 2)^ billion 
doUars a year. In 1915, they increased toward 3 billion, but in 1916, 
the jump was to 5K billion. In 1919 we reached the peak of 7.9 
billions of dollars of exports of merchandise. 

Of course, at the same time there was some increase in our imports, 
and perhaps in measuring the impact on the economy, we ought to 
consider the net change of the two. That is seen from the first chart 

1 See "Exhibit No. U78," on this page. 


in the booklet to which I referred, which gives both exports and 

As you can see, the gap between exports and imports increased 
tremendously during these years. I will summarize it this way, that 
whereas the pre-war period produced a net demand for American 
goods from foreign buyers, that is the difference between exports 
and imports, of about 400 million dollars a year, during this period 
from 1915 to 1919, the net export demand was somewhat over 3 billion 
dollars a year, $3,163,000,000, so that coming from abroad, we had 
during this war period a demand for goods close to 3 billion dollars 
additional over the customary amounts before. 

Remember that at tliis time our total national income was some- 
where in the neighborhood of 35 billion dollars, so you might say 
that that new demand represented a clear 10 percent increase in 
terms of our total national income. 

I suspect that one can find very few cases of as powerful a pump- 
priming influence as the effect of those foreign purchases during the 
war period. 

So far as the individual countries are concerned, the records are 
extremely interesting. I should like to point out, for example, the 
tremendous difference which appeared between the exports and 
imports to France.^ Incidentally, these charts are on a logarithmic 
scale and show, therefore, percentage increases. If these were in 
flat scales, they would go way off the page. 

One other case which is interesting is that of Norway ^ and Sweden,'* 
indicating that there was a good deal of indirect trade to the conti- 
nental countries of Europe. Germany,® of course, disappears at the 
bottom of the chart during this period. 

The variation among the different countries is interesting, but the 
total is the significant thing in its impact on the United States. I 
might add that one other chart which is not included here is "Trade 
with Russia," which showed the greatest increase of our trade with 
any of the countries during the war period, an increase of 1,800 per- 
cent. It reached 9 percent of all our exports in 1917, then disappeared 
completely in 1918. That is the kind of erratic behavior which is 
very apt to occur during war periods, and is very disturbing for our 

After Russia, Norway is second, with an 800-percent increase in 
the value of our exports to that country. 

Dr. Keeps. Do you have any evidence to show what this would 
be in terms of quantities, whether in terms of our labor or our com- 
modities exported, the increase was of a similar order or was it con- 
siderably less? 

Dr. Thorp. We now turn to charts which I hope will answer your 
question. Dr. Kreps. 

The next chart is entitled "Indices of Value and Quantity of Mer- 
chandise Exports, 1915-1919." 

These are estimates prepared by Dr. Berridge while at Harvard 
arid were published in the Review of Economic Statistics, and endeavor 
to break down tliis export pattern as between quantity and value. 

1 See "Exhibit No. 1479," appendix, p. 11349. 
» See "Exhibit No. 1481." appendix, p. 11350. 
3 See "Exhibit No. 1483," appendix, p. 11351. 
« See "Exhibit No. 1484," appendix, p. 11351. 
» See "Exhibit No. 1487," appendix, p. 11353. 



Exhibit No. 1489 



1915- 1919 

Fiscoiyeor CJ9JI-J4'I00) 
























J I I L 




Quanliiy V**" 

1 1 1 1 1 


J L 

1915 '16 '17 '18 '19 1915 '16 '17 '18 '19 

SOURCe WA BernOge. Rpvietv of economic S to f IS tics, 1919 
















The 100 line is the average for the years 1911 to 1914. These other 
Unes are index numbers based upon that basis. 

It ia interesting to note that in the total of our exports, our big 
jump came almost immediately, 1915, and then as far as quantity 
was concerned, moved upward until in 1917 it was 171, or about 70 
percent above. By 1919, the quantity had dropped off to 40 percent. 

The increase in value was much greater than the increase in quan- 
tity. By 1919 the value index is 317. 

(The chart referred to was marked "Exhibit No. 1489" and appears 
on p. 11069. The statistical data on which this chart is based are 
included in the appendix on p. 11354.) 

Dr. Thorp. It is important in this picture to realize the situation 
at the time of the outbreak of the war. It happens that 1914 was a 
very poor crop year in Europe, ard an exceedingly good one in this 
country. The immediate impact of the war, therefore, was on our 
export of foodstuffs, and this advance to 1915 is greatest in the food- 
stuffs field, where the quantity exported in 1915 was greater than in 
any of the later years of the war. 

You notice, on the other hand, that the quantity of manufactured 
foodstuffs kept moving up, and was at a higher level in the latter 
part of the period. 

In crude materials the change is less than in any of the other 

It is quite evident, therefore, that the impact of the war so far as 
distinction between quantity and value of product is concerned, was 
to move the quantity of our exports up rather quickly to levels con- 
siderably above the 1911-14 leveal, and that the later advances in 
these totals, which you see on the other chart, came through increases 
in price. 

It is important now to consider how this could come about. After 
all, here was an impact during the war period averaging three billion 
dollars a year on our economy, purchases by these foreign countries, 
and necessarily that requires on their part purchasing power. Some- 
how payment has to be made for such purchases on their part. 

We need to think a little bit about the way in which this war in 
general was financed, in order to understand the whole pattern. 

In Great Britain, the war expenditures were financed about one- 
fifth by taxes and about four-fifths by borrowing. In France, the 
war was financed about 1 percent by taxes and 99 percent by borrow- 
ing, including in borrowing increase in note circulation. 

And in the same way we find that this demand for foreign goods was 
financed primarily through the credit mechanism. 

I will introduce a chart entitled "Gold and Dollar Resources of the 
United Kingdom, France, and Canada, 1914 and 1939," and ask you 
at the moment to disregard the 1939 picture and look only at the 1914 

(The chart referred to was marked "Exhibit No. 1490" and appears 
on p. 11071. The statistical data on which this chart is based 
are included in the appendix on p. 11354.) 

Dr. Thorp. In 1914, there was about two and a half bUlion dollars 
of gold avaOable to these countries and somewhere between three and 
four and a half additional billion resources, either deposits in banks 
in this country, American securities or other type of assets, bringing 
the total to somewhere between five and a half and seven billion dol- 



lars of purchasing power. To that could be added each year some- 
what less than three hundred millions of new gold production. 

That was available to them and it should be obvious that that was 
not by any means sufficient to pay for the goods which were purchased, 
and I can give you in some detail the actual way in which this pur- 
chasing was done. 

There was about $12,000,000,000 of American goods to be paid for 
in one way or another. That is the net merchandise exports from the 
United States to these foreign countries, about $12,000,000,000 which 
had to be paid for. 

About one bilUon was paid for by gold. As you know, tliis gold 
supply was not completely exhausted during the war. In addition, 
about two billion was paid for by the sale of American securities, so 

Exhibit No. 1490 

1914 AND 1939 

O 1 Z 3 



O lOO 200 300 






Souret, Board of Governors of the Federal J^eserw Syafa 

that probably about $3,000,000,000 was used out of what here repre- 
sents theoretically available purchasing power. 

The additional eight biUion eight hundred million was financed 
by private and public loans made in this country to foreign countries, 
so that in fact the process which took place was a lending process in 
the United States to foreign countries, which used that purchasing 
power for the purchase of American goods. We were hoistmg our 
economic productivity upward through an expansion process which 
in fact was taking place m this country to a very large degree. 

There is one other aspect to this foreign trade picture which I am 
very eager 

Mr. Henderson (interposing). Dr. Thorp, did we get that money 

Dr. Thorp. On the contrary the total volume of loans went on and 
became even greater after the war. We kept on financing purchases from 


the foreign goveniments. The net result was an increased volume 
of claims against the foreign countries in the form of bond issues, a 
very large part of which have gone into default and are still in default. 

Mr. Henderson. The net effect of a large portion of that 
$12,000,000,000 worth was that we paid for it ourselves. 

Dr. Thorp. That is correct. These goods were in fact paid for 
in the United States, and the process whereby loans were made to 
the foreign countries and used by them was merely a form of enter- 
tainment rather than having any significant economic effect on later 
flow of goods. 

Acting Chairman Borah. We furnished the goods. 

Dr. Thorp. We furnished the goods, yes, sir. 

Acting Chairman Borah. And we furnished the money to pay 
for them. 

Dr. Thorp. We furnished the money to pay for them. 

Acting Chairman Borah. And we have never gotten the money 

Dr. Thorp. And we have never gotten the money back. 

I mentioned the fact that the foreign countries were proceeding on a 
credit rather than a cash basis in financing the war, that it was done 
by borrowing rather than taxation. As might be expected, this was 
reflected in the price levels in the other countries. I will present a 
chart entitled "Wholesale Prices in England, France, Germany, 
United States," to show the way in which prices rose on these Euro- 
pean countries as compared witn the United States. 

(The chart referred to was marked "Exhibit No. 1491'' and appears 
on p. 11073. The statistical data on which this chart is based are 
included in, the appendLx on p. 11355.) 

Dr. Thorp. That price rise of course also had its influence upon 
our foreign trade, because it meant that many goods could be sold in 
foreign countries for a higher realization than in this country. 

Mr. Henderson. It also means, so far as this unpaid balance is 
concerned, that if our price level hadn't risen so much we wouldn't have 
lost so much, does it not, Dr. Thorp? 

Dr. Thorp. That is quite correct, yes. 

Dr. Kreps. I notice that prices rose by different amounts in 
France, Germany, England, and the United States. Is that at all 
associated with the fact that France financed less of her war by 
taxation and more by credit, and possiblv the United States more by 
taxation and less by credit? Particularly if you had the price level 
in Sweden in that period, would that show that price levels abroad 
and inflation abroad necessarily have their full impact on our econ- 
omy? What is your opinion in that regard? 

Dr. Thorp. I think that is quite correct with regard to the first 
point which you raise. Of course it is diflficult to isolate any single 
factor, but there is a rather close correspondence between the volume 
of note issues in these countries and the rise in prices. Since none 
of them are countries which expanded largely through bank deposits, 
note issues is one of the measures of what might be called "degree of 
inflation". There is a very close relationship between the size of the 
note issue and the level reached by commodity prices, and the coun- 
tries which most carefully kept in balance, as did Sweden, for example, 
had much the lesser impact on their general price level. 



Exhibit No. 1491 





QUABTEBS • 1913-1918 












25 O 


1913 1914 1915 1916 1917 1918 

SOUflCf • War industnei Board ae-M-lU 





/ Et^Ic 


/ ^ 


/ / 











Dr. Keeps. You don't regard this inflation that occurred and the 
inflated war cost, therefore, as something that had to happen? It 
was the result of lack of policy, or the result of pohcy? 

Dr. Thorp. I should say it was an mevitable thing to happen if 
one ^financed the war m the way in which it was financed. I don't 
think there is anythmg inevitable about the way in which any given 
war shall be financed, as will be evident when I talk about the current 
situation and tne policies that appear to be those followed by the 
countries at the present time, policies which are veiy much in contrast 
with the policies followed during the World War. 

I have spoken now about the foreign-trade demand. That repre- 
sented a major stimulant to our own economy from the point of view 
of the producer. From the point of view of the producer of goods 
there IS no distmction as to whether he is producing for a foreign Sation 
or a domestic consumer. From the point of view of the worker in the 
factory there is no distinction, and as one might expect this new 
demand of $3,000,000,000 a year was a major stimulant 

I must mention one other external factor which appeared, comine 
out of our foreign relations, before I get into the domestic factors, 
which contributed to the price rise. It has already been touched on 
a>l J: .i ^^r ^^ l^^^^ ?^^ mention it to make sure it is in our minds 
1 hat IS the tact that there are a certain number of commodities for 
which we are dependent on foreign sources of supply They are 
beyond our o^^^l control. They are things which we buy from other 
countries, and when the prices of those commodities rise,'there is no 
way m which we can defend ourselves from it or defend our price 
structure from it You may have noticed on Dr. Lubin's charts the 
price behavior of certain of these imported commodities. That is 
another factor from abroad which we have to keep in account when we 
try to explain the behavior of our own domestic price structure 

Now I will turn to certain domestic factors, which created the 
demand which drove our production up to capacity, and then drove 
our pnces on to their high peaks. First I must discuss the demand 
which arose out of the financial system, and thinking primarily of the 
commercial banks because during the War period the security markets 
were significant primarily in relationship to these foreign loans which 
we have already discussed. 

You may recall that just before the beginning of the War our financial 
system had been reorganized into the Federal Keserve System One 
of the^ purposes of the Federal Reserve System was not only to 
strengthen the banks, but to make it possible for a given amount of 
reserves to support a larger volume of credit. It is significant that 
at the same time that the Federal Reserve System was being estab- 
lished, we had a marked increase in gold flowing into this country 
Ihe net result was that from our own banking system there was a 
continual increase in funds going out primarily into the busmess com- 
mumty, new funds one can call them because they were created 
through the process of bank loans. 

I will now introduce a chart entitled "Money in Circulation and 
Bank Deposits, 1913-18." These represent approximately the total 
deposits of commercial banks. 

(The chart referred to was marked "Exhibit No. 1492" and appears 
on p. 11075. Ihe statistical data on which this chart is based are 
mciuded in the appendix on p. 11355.) 

^ Supra, p. 11027. 



Dr. Thorp. From 1913 to 1915 there was a gradual increase in 
bank deposits, but from 1915 on the expansion was very considerable. 
Over the 3 years 1915 to 1918, about $10,000,000,000 of additional 
bank deposits were created in the banking system. I say "were 
created" because these bank deposits correspond to an increase in 
bank loans which occurred during the period. There was also an in- 
crease in money in circulation from somewhat less than $4,000,000,000 
to over $5,000,000,000 at the end of the period. This was accom- 
plished without any major decline in the reserves in the banking 

Exhibit No. 1492 














L 1913 J 

. 1914 J 

. 1915 J 

. 1916 J 

[ 1917 J 

[ 1918 J 





tSoarce: Ameriean Z&anamic Reyisiv, JO/9 

system, partly because of the inflow of gold which we have already 

One interesting aspect about this period from the financial point 
of view is the fact that until 1917 the expansion went on in the 
individual banks without any considerable recourse to the Federal 
Reserve System. In 1917, however, the rediscounting process came 
into play, and the Federal Reserve banks themselves gave a great 
deal of support to the total situation. It is important, I think, to 
realize that this expansion of bank deposits and money in circulation 
was a major source of new purchasing power which came in and 
pressed upon our productive mechanism and, inasmuch as I have 


already indicated we were producing at close to capacity, was diverted 
in its influence largely into the price structure. 

I must also mention in this connection financing done by the 
United States Government itself. It is interesting to note that for 
the fiscal years 1913 to 1916, the increase in Government expendi- 
tures was from $985,000,000 to $1,034,000,000, a relatively sKght 
increase. Government expenditures remained almost constant from 
1913 to 1916, but as soon as we entered the war, the situation changed 
materially; Government expenditures increased tremendously, and 
another factor came into play, supporting the latter part of the 
period very strongly. 

Our Federal revenue from April 6, 1917, to June 30, 1919, was 
$8,400,000,000, while Federal expenditures were $32,000,000,000. 
The gap between was represented by Liberty Loans and such things, 
which again provided a further source of increased demand pressing 
upon our economic structure. 

I have now discussed three factors, the foreign export demand, 
the effect of price rises on imported commodities, and the expansion 
from the banldng mechanism. I would now Uke to speak a moment 
about expansion which arose from the business commimity itself and 
from the behavior of the price structure itself. 

With regard to the business comimunity, the early years of the 
war were years of very high profits. The peak of profits, as I recall 
it, was reached in 1916. I will introduce a table into the record, 
"Business Savings and Net New Money Invested by Individuals," 
a table from the National Bureau of Economic Research, which gives 
some indication of the amount of profits and savings in the business 
system itself. 

(The table referred to was marked "Exhibit No. 1493" and is 
included in the appendix on p. 11355.) 

Mr. HiNRicHS. Mr. Thorp, just to tie that back to this morning's 
record for a moment, may I call attention to the fact that the rise in 
real earnings that we were talking about was barely getting under 
way in 1916, which you cite as the year of very high profits. That 
relates to Mr. Henderson's question as to the relationship between 
profit volumes and some of these selected increases in wages that we 
saw this morning.^ 

Dr. Thorp. The cost-price situation is important not only because 
of the fact that within the business system itself funds became avail- 
able which added to this total of demand, but also because the various 
elements in the price structure began to climb on each other. Raw 
materials and finished goods went up in sort of a hitching fashion. 
If one would rise the other would rise. The same thing was true of 
wages and cost of living, and the adjustment which was made was 
inevitably an adjustment of whichever was lower coming up to 
whichever was higher. That is a process which seems to foUow 
through in any wide movement of prices, so that a price movement 
in any part of the structure is apt to encourage similar price move- 
ments at other points. 

Perhaps I should note in this regard the fact that at this period of 
time the adjustment was not always made easily. The number of 
strikes increased sharply; union membership nearly doubled during 
the wd,r, but wages lagged and profits grew rapidly, particularly during 

• See "Exhibits Nos. 1458-1466, "supra, p. 11038 et seq. 


the early part of the period. It should be noted that this lag in wages, 
which would ordinarily be a drag on consumption, was probably more 
than offset by these demands from other sources which kept the 
economic system functioning even though there had been some shift 
within the national income so that the part taken by labor had not 
advanced as had some of the other elements in national income. 

Mr. Henderson. You mean that though we had a larger amount 
of production and though labor was not getting an additional share, 
we didn't have an imbalance in the economj^ because we were shipping 
the increased production abroad and really taking it off the market. 

Dr. Thorp. Yes; we had such a tremendous demand from these 
various sources of purchasing power that I have been talking about 
that the normally deterring factor of delayed advance in wages was 
thoroughly offset by these other forces. If the situation had been 
more closely in balance, then the lag in wages might have been a 
serious factor. 



Dr. Thorp. I have been talking about demand. Now I wish to 
speak a little bit about the supply of goods. 

I would like to introduce a chart entitled "Indexes of Value of 
Inventories, 1913-22," also a chart entitled "Indexes of Value of 
Inventory and Sales, 1913-22." 

(The charts referred to were marked "Exhibits Nos. 1494 and 1495" 
and appear on pp. 11078-79. The statistical [data on which these 
charts are based are included in the appendix on p. 11356.) 

Dr. Thorp. These are new indexes which have just been prepared, 
based upon the records of about 70 of our largest corporations during 
the war period. 

Mr. Henderson. Did you make these up especially for this hear- 

Dr. Thorp. Yes, these were indexes prepared at Dun & Bradstreet 
especially for presentation at this hearing, because I believe no one 
has ever had the slightest idea as to what happened to inventories 
dm'ing the war period. I think these give some indication of what 
probably happened, although they have the weaknesses of all inven- 
tory figures. 

Dr. Kreps. If the question does not require too extensive an 
answer, could you tell us something of how these figures were put 
together? They are new and striking and challenge the thought of 
anyone interested in securing further inventory figures. 

Dr. Thorp. These figures are based upon the balance sheets of 
these companies over the period 1913 to 1922. We found that a 
good many companies had to be eliminated because of mergers, 
amalgamations, and one thing 'or another, but were able, in the time 
available, to find 69 corporationsfor which one could get what appeared 
to be consistent figures over the period. They have been broken 
down into groups, and the dollar figures of the corporations in each 
group were added together. My guess is that these 69 corporations 
pictured in this chart represented somewhere between 15 and 25 
percent of the volume of activity during the period. That is a wild 
guess. Our study of inventories for the wa,r period is not completed. 

124491 — 40— pt. 21 5 



Exhibit No. 1494 









1913 J9I4 1915 1916 1917 1918 1919 1920 1921 1922 





Exhibit No. 1495 

AND SALES. 1913-1922 












( 1 

««-^ ( 


*^ <> 

1 ^x^ 

























Source; Dun and Bradshvef 








P _ 

• ( 



; ( 










, ' 


\^ , 

r . 


r-^ ' 











INDE X NUMBERS, 1913*100 



















I expect to publish a more complete report at a later date in ''Dun's 

I have tried to determine what these figures mean in terms of how 
one would judge whether inventories had moved in any disturbing 
way or not. The heavy black line indicates virtually no rise in 
inventories, at least up to the end of 1915. I should point out the 
fact that these figures, though they are charted in the middle of each 
block, actually hold good untU the end of the year, so that this point 
represents the end of 1915, and by the end of 1915, at which time our 
production had risen tremendously, there was very little increase in 
the inventories recorded by these companies. 

We can get one interesting check as against this point in 1919. 
The production, the value of production, for all manufacturing indus- 
tries in 1919 was 160 percent above the 1914 point. The inventory 
point here as given is 170 percent above the 1914 point. Inasmuch 
as there is no effort made to weight these figures in the same way that 
the Census of Manufactures is weighted, I would feel that a variation 
of 10 percent is not significant, and that one can at least say that 
during this period, during the early part of the period and the level 
-reached by 1919, there is no indication that our economy piled up 
any ajjpreciable degree of inventory. 

I think that is not unreasonable. After all, we were operating near 
capacity. Goods were moving as fast as they could. The only way 
one would expect inventories to appear would be if we were so out of 
balance that certain part§ of the economy piled up goods while other 
parts did not. 

I think if one examines the individual industries here pictured, he 
can see some interesting points. Here is a rapid rise in inventories 
in railroad equipment. That Ulustrates one characteristic of inven- 
tories, however, that in the inventory figures as kept by our corpora- 
tions are included goods in process, so that if a railroad equipment 
company is building locomotives, its inventory increases steadily as 
the locomotive gets more and more buUt, untU it finally, at the moment 
of delivery, has an inventory of a complete locomotive. The result 
is that if the railroad equipment industry is busy, it wUl inevitably 
have larger inventories untU it reaches a point where its deliveries are 
as rapid as its new construction. 

I would like to call your attention to the year 1920, although I 
haven't been talking about the post-war period at all. We have a 
peak reached in inventories, at the end of 1920, notably in two lines. 
One. is the line for distribution, which represents certain large retailing 
corporations, and the other is the producers of consumers goods. I 
think it is interesting to note that at that final point, when the price 
increase ended, it was the people nearest the consumer who seemed 
to have been caught with the largest inventories. That, of course, 
means that we reached a point where goods were no longer moving 
into consumers' hands and pressure was developing which in large 
part contributed to ending that period. 

Now,' turning to the other picture of inventories, in a few cases we 
were able to get inventory and sales figures. For three steel manu- 
facturing corporations it was possible to get those, and as you will 
noticis here, the inventories on the part of the steel companies showed 
very little advance considering the rise in sales during the whole war 


On the other hands, railroad equipment, which I have abeady dis- 
cussed, had inventories appreciably higher than at the beginning of 
the period. You will notice that inventories were piling up in the 
distributing corporations' hands throughout the period, and reaching 
a peak in 1920. 

I would summarize this material, though, as indicating that there 
is no clear-cut evidence that during this war period inventories in gen- 
eral expanded either prior to or beyond the requirements of increased 

Mr. AviLDSEN. Dr. Thorp, all these inventory figures are in dollars 
and cents values, and in actual quantities the increases would not 
have been as great, I judge. 

Dr. Thorp. That is correct; these are all in dollars and cents values. 

Mr. AviLDSEN. You show an increase there of perhaps 200 percent. 

Dr. Thorp. If one however, compared the sales and inventories, 
the sales were also in dollars and cents values, so that the price impact 
would appear both on inventories and sales, and to that degree cancel 
out when comparing those two lines. 

Mr. AviLDSEN. But the physical increase in inventories is not as 
great as these charts indicate, due to the price rise» 

Dr. Thorp. That is correct. 

Mr. Henderson. On the other hand it probably indicates that there 
was very little increase, as I understood that rough dejQation you 
pointed out. 

Dr. Thorp. My guess would be that there was no physical increase 
of inventories during this period. 

Mr. AviLDSEN, I notice Dr. Lubin's chart shows that all commodi- 
ties in 1919 had advanced to 220 from 100, an increase of 120 percent,^ 
but your inventory increase was greater than that, I believe. What 
was it — up to 300 percent, in the chart you just had there? Yes; 
it is slightly over 300 percent, an increase of over 200 percent, as 
against a price increase of 120 percent. Is that true? 

Dr. Thorp. Which year are you considering now? 

Mr. AviLDSEN. I am taking your chart, 1913 to 1922. Sixty-nine 
corporations went from 100 to a Uttle over 300, an increase of 200 

Dr. Thorp. Yes. 

Mr. AviLDSEN. And the all-commodity price chart of Dr. Lubin 
shows that the price of all commodities went from 100 in 1913 to 240, 
or 220, in 1919, an increase of 120 percent.^ 

Dr. Thorp. That is right. I think, though, you-ought to also 
take into account the fact that production was probably up about 25 
percent, so that goods in process, necessair raw materials and so forth, 
would just about balance up for the difference between those price 

Dr. Kreps. This may anticipate something you are going to cover, 
but 1 notice the inventory in the World War neither rose early nor 
precipitately. Is the same true this time? 

Dr. Thorp. This is a very different pattern from the current pat- 
tern of our inventory record. I intend to introduce that in the record 
a little later.' 

> See "Exhibit No. 1451," supra, p. 11024. 


* Subseqaeatly entered as "Exhibits Nos. 1510 and 16U;" see infra, pp. luog and Hill. 


Now we turn to the problem of capacity and increased supply of 
goods, the degree to which the tremendous demand which I have been 
discussing was reflected in increasing our production and in increasing 
our capacity. There are a number of cases where one can clearly see 
a tremendous reaction to the war demand. For instance, in the 
machine-tool industry, in 1914 there were 30,000 employees; in 1918, 
77,000 employees; in the chemical industry, an increase from 300,000 
employees in 1914 to 436,000 employees in 1919. 

One of the very striking increases during the war period was in the 
automobile industry. I am not at all sure that one can attribute 
this specifically to the war. It happened that the automobile in- 
dustry was then just reaching maturity, and therefore you get this 
kind of picture. In 1914 we produced half a million cars, 25,000 
trucks; in 1915, 900,000 cars, 74,000 trucks; 1916, a miUion and a 
half cars — 2 years up 3 times, you see — and 92,000 trucks, 3K times 
up in trucks; in 1917, 1,700,000 cars, 129,000 trucks. 

So that there were at a number of points in our economic system 
very rapid expansions in output taking place. In the cases of ma- 
chine tools and the chemical industry one can clearly attribute that 
to the war. In the case of the automobile industry the war may have 
had some influence, but it merely happened to coincide with the war 
period in its growth. 

At the other end is the construction industry. Where the rate of 
construction had been rather high during the pre-war period, during 
the war period construction was carried on at a relatively low rate. 
One would expect that under these circumstances of demand there 
would be a rapid increase in the supply of goods, and I wish now to 
introduce some illustrations of what happened at certain points in 
the economic system with regard to an adjustment to these higher 
prices and to production. This will indicate rather specifically in 
particular cases the reply to the question raised by Pommissioner 
Henderson with regard to the relationship between price, capacity, 
and production. 

Let's start with farm crops. I think it is the general impression 
that during the war there was a rapid expansion in acreage. As a 
matter of fact, the total expansion during the period from 1911-13 to 
1919 was 10 percent in acreage. The production varied, as it always 
does, from year to year, largely dependmg upon the conditions of that 
year. In 1915 prices were stfll at about the same level, but in 1916 
they began to rise and had doubled by 1917. There was an increase 
in acreage,, as I said, of 10 percent, most of which occurred in 1917 
and 1918. 

(The chart referred to was marked "Exhibit No. 1496" and appears 
on p. 11083. The statistical data on which this chart is based are 
included in the appendix on p. 11357.) 

Dr. Thorp. These high prices continued on through 1919 and 1920, 
having undoubtedly some influence on acreage but no apparent extra 
influence resulting from that extremely high level. 

One can see that also by looking at certain specific crops. 

Here is the chart for cotton acreage, production and prices; acreage 
harvested during the period, if anything, has a slight downward 
tendency in cotton. It was very low in 1915 and came up to '18 and 
then dropped off again. Production, as you can see, was a good deal 



lower through the whole war period. The price, on the other hand, 
advanced tremendously. 

(The chart referred to was marked "Exhibit No. 1497" and appears 
on p. 11084, The statistical data on which this chart is based are 
included in the appendix on p. 11357.) 

Dr. Thorp. The same sort of picture appears for corn; in this case 
not mi til 1917 do you get a really^ big price advance; in spite of the 
fact that the price went on still higher in 1918, the acreage harvested 

(The chart referred to was marked "Exhibit No. 1498" and appears 
on p. 11085. The statistical data on which this chart is based are 
included in the appendix on p. 11357.) 

Exhibit No. 1496 





INDEX NUM BERS. 19 U'1913-100 
r~I 1225 










S>X> i9-l9* 

Dr. Thorp. Wheat is one case in which one does see a very de- 
cided reaction, although it is a rather curious one. This early period 
of price advance paralleled a decline in acreage harvested, but then 
acreage advanced very sharply during the 2 years at which prices 
were at a high level. Of course it must be remembered that when 
one is studying individual crops, increases take place by transfer of 
use of land from one crop to another, and do not necessarily affect the 
total agricultural acreage. 

(The chart referred to was marked "Exhibit No. 1499" and appears 
on p. 11086. The statistical data on which this chart is based are 
included in the appendix on p. 11358.) 

Dr. Thorp. Perhaps at this point I might indicate that the dis- 
turbance in agriculture was perhaps more the impact of these higher 
prices on land values than on the acreage harvested itself. If we had 
a chart for land values one would find them going up into the 1920's 



Exhibit No. 1497 


fi9ii-n= loo) 






















■je Prl 











1 Ac 

1 Han 






,'^^ "' 

— ^ 

■^ ^-.. 



1911 1912 1913 1914 1915 1916 1917 19I8 1919 










Source: U. 5. Dipartmeot of AgJipuJtur*; Work» Progres* Admaatfraiioa 



Exhibit No. 1498 









AND PRICE, —1911-1919 











— 1 — 



Average . 





r — 1 







\ . 



.* ; 

\ / 


: y? 







^ ffar 



1911 1912 1913 1914 1915 1916 1917 1918 1919 

Soarce. USDepor/ment of Commerce: WPA 











Exhibit No. 1499 

PRICE' 1911- 1919 


























Average JF^j'ce* 






1 > V / 





/"" 1 


f / 


/ \ 

1 / 


ZXNv \ 


^ .^ "^^ 


/ .y^ 



^_,/ L..^/ 



\ \f 


"Acreage Hai 

-vested ' — 

1911 1912 1913 1914 1915 1916 1917 1916 1919 










Source. U S Deparhneni of A^rjcujfure i WPA 




very decidedly, reflecting these high prices. What actually happened 
to the farmer was that he found himself not with so many more acres 
of land as with a great many dollars of land value — represented too 
often through mortgage values. 

In order to make that clear, perhaps I might introduce into the 
record a chart which you have not been given, "Farm mortgage debt, 
value per acre of farm real estate, and gross farm income, 
1910-39," in which one can see that the farm mortgage debt kept on 
increasing until 1923. The value per acre of farm real estate reached 
its peak in 1921. 

(The chart referred to was marked "Exhibit No. 1500" and appears 
on this page. The statistical data on which this chart is based are 
included in the appendix on p. 11358.) 

Exhibit No. 1500 


250 — 








Dr. Thorp. There are certain other industries for which we have 
material which indicates what happened relative to price and pro- 
duction, and I will introduce the "Composite monthly price of 
finished steel, monthly steel ingot production and annual steel ca- 
pacity, 1914-19."^ 

(The chart referred to was marked "Exhibit No. 1501" and appears 
on p. 11088. The statistical data on wliich this chart is based are in- 
cluded in the appendix on p. 11358.) 

Dr. Thorp. If one starts at this point in 1914, the rise of produc- 
tion started early in 1915 and reached a level which is quite evidently 
somewhere near capacity; a line moving fairly flat across the chart 
here can be taken to indicate about where capacity is. It moved up 
to capacity, and at about the time that production reached that ca- 
pacity level the price advance begins. I think it is a very clear illus- 
tration of the point which I suggested earlier, that the fii'st impact of 
this demand coming in from these various sources was on production, 
that when production got up somewhere near capacity, then it was 

> HearlDgs on the Iron and steel industry ore Uudnded in Hearings, Parts 18, 10, 20, 26 and 27. 



Exhibit No. 1501 





Index Numbers* /9/4^/00 







100 <*-'**\V5^f?=' 








50 1 1 1 1 1 1 1 M 1 1 f 1 1 1 1 1 1 1 M 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 M 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 50 
1914 1915 1916 1917 1918 1919 

Source: Iron Age: American Iron and Steel InsfHuie 



transferred over into the price field and we got these tremendous 
price advances. 

This capacity line is also put with 1914 as 100. That is why one 
has the curious effect of having capacity below production. The 
capacity line moved on upward. During the period 1914-19 there 
was an increase of 37 percent in steel capacity. The line moves up 
very smoothly. It starts up in 1915 and its biggest jump is from 1915 
to 1916. There is nothing which could be regarded as a reflection of 
the wide swings in price. I suspect that the increases in capacity 
depended much more on the volume of orders on the books than on 
the price at which those orders were placed, that if the price pattern 
had moved along at this level there would probably have been about 
the same capacity picture. These increases in price from the point of 
view of the economic factor of attracting any capacity at any rate do 
not demonstrate any close connection on most of these charts. There 
are certam exceptions. 

I now introduce a similar chart on pig iron capacity and capacity 
of blast furnaces. 

Exhibit No. 1502 







(The chart referred to was marked "Exhibit No. 1502" and appears 
on this page. The statistical data on which this chart is based are 
included in the appendLx on p. 11350.) 

Dr. Thorp. This is over a long period of time. You will have to 
concentrate a little bit to pick out the war period. The wholesale 
price is this line which moves up so rapidly. The production line, 
as you can see, just as in the case of steel, moved up first, and the price 
line came up later. In this case, production crossing the capacity line 
is a phenomenon which can happen because it is practical capacity 
rather than theoretical. This capacity was expanded somewhat, 



as one can see, during the war period. The impact of demand, again, 
IS chiefly on price. 

Here we have another long range chart on Portland cement. We 
can use this even beyond the war period because it gives even a clearer 
picture of these relationships of which I have been talking. Here is 
the price rise from 1915 to 1920. You will notice that capacity was 
advancing slightly during the period. Then we get a period of price 
decline from 1920 to 1933. Yet during that period of price decline 
we have this period of great advance in capacity and great increase in 
production. Of course, anyone would at once exclaim, ''That is why 
the price declined, because there was that tremendous increase in 
production and in capacity, and that is the way in which the forces 
worked at this time," but the fact remains tnie that the idea that 

' Exhibit No. 1503 






rising prices will stimulate new capacity seems to be difficult to fit in 
perfectly into that pattern. 

(The chart referred to was marked "Exhibit No. 1503" and appears 
on this page. The statistical data on which this chart is based are 
included in the appendix on p. 11360.) 

Dr. Thorp. Here we have cotton-mill activity and price of cotton 
goods from 1914 to 1920. Raw-cotton consumption is taken as an 
index of production shown by cotton mills. This is cotton consump- 
tion by cotton spindles. In this one there is a rise in the cotton-goods 
price up to 350 in 1919-20, an increase in cotton spindles over the 
whole period of 9 percent. Again one sees that the rise in cotton 
spindles comes along in the early part of the period and is perhaps not 
as active thereafter. 

(The chart referred to was marked "Exhibit No. 1504" and appears 
on p. 11091. The statistical data 'on which this chart is based are 
included in the appendix on p. '11360.) 


Exhibit No. 1504 

OF COTTON GOODS 1914-1920 


350 1 \ 1 \ \ \ 1 1 3 5u 

300 i 300 

250 i Z50 

200 / ZOO 


lOO ^^: ^ .> ' ^■^^ KTT^' . -±1 lOO 

50\ \ I I \ I \ so 

1913-14 1914-15 1915-16 1916-17 1917-18 1918-19 1919-20 

^Otfrce. C/ S H^xrrfraenf of Commerce. U S Bureau of Labor SMishcs 




















— .:-i: 




^^^-^ ' 



7es in / 



Dr. Thorp. Iu order to be sure that we have this general pomt of 
business expansion in perspective, I have brought back several of the 
charts which I used in testifj'^ing before this committee once before, 
and I should just like to point out one other factor very briefly. I 
would like to indicate that on all these charts one finds it is hard to see 
that in this war period, which stands out so tremendously in the price 
charts, will stand out appreciably in the production charts or in the 
new capacity charts. You remember the first chart Dr. Lubin 
mtroduced into the record showed certain points of extraordinary 
price change — three very sharp peaks at war periods.^ Nothing like 
that appears at all in the production records of industry, and therefore 
I think it supports the thesis that this price performance is a per- 
formance somewhat independent from our production performance 
in that once capacity is reached, output responds but slowly, however 
great the further increases" in price. 

Here is a chart givnig the consumption of various textile fibers, and 
if we pick out the war period here, one finds it very difiicult to dis- 
tuiguish from any other 5-year period on the chart.^ Here are 
production and imports of sugar, which one would expect might be 
quite disturbed by the war period. Taking those same years here are 
the sugar shipments to continental United States, our own beet-sugar 
production, and our own cane-sugar production; one would never, iil 
looking at that chart, pick out that particular period as being a period 
of any extraordinary performance.^ 

Here we have production of fuels on a long-run basis, taking the 
war period as it falls in here; natural gas and bituminous coal and 
petroleum, aU of them seeming to conform fairly well to the trend.* 

If anything, there was a sharp stepup in natural gas, which then 
flattened out through the rest of the period, but the unusual expansion 
was the expansion early during the war period. 

Finally, here is the production of wagons, buggies, passenger cars 
and trucks, because I have already mentioned the automobile industry. 
Here is our war period, from 1914 to 1920. You can see that the 
increase had been pursuing its course for some time, and that the war 
period perhaps was flattening out even though it is very considerably 
above any earlier level.^ 

The one case that may be significant is that the war may have 
hastened the end of the horse-and-buggy period. At least the buggies 
and public conveyances seem to have met their doom during the war 
period, along with the cavalry. 

Dr. Keeps. One particular matter I would like to call attention to. 
These are logarithmic charts, aren't they? 

Dr. Thorp. Yes, these are logarithmic charts, and that would mean 
that what might appear to be a relatively small increase in automobile 
production, might be a very considerable production in number of 

D^r. Keeps. I was looking back at the "Woolens" chart,* and I 
notice in 1913 and 1916 that apparent wool consumption rose rather 
considerably, from 450, I judge roughly, to about 700 million pounds. 
As you say, the percentage increase isn't any different from previous 

' See "Exhibit No. 1450," supra, p. 11023. 
» See "Exhibit No. 78," Hearings, Part 1, p. 144. 
« See "Exhibit No. 77," Hearings, Part 1, p. 143. 
♦ See "Exhibit No. 76," Hearings, Part 1, p. 142. 
» See "Exhibit No. 75," Hearings, Part 1, p. 141. 
« See "Exhibit No. 78," Hearings, Part 1, p. 144. 



periods. There are previous periods, in fact, which are even greater, 
but the absolute changes are perhaps fairly large. 

Dr. Thorp. It is important to realize that wool is a commodity 
which does have an unusual war demand, and would be much more 
apt to reflect the war period than most commodities, 

I think perhaps all this can be best summarized in two charts, 
which will show the total of all these efi"ects during the war period. 

I might have started with this chart. It shows the index of pro- 
duction, physical volume of production, and the wholesale price pattern 
during the war period. 

(The chart referred to was marked "Exhibit No. 1505" and appears 
on this page. The statistical data on which this chart is based are 
included in the appendix on p. 11360.) 

Exhibit No. 1505 


INDE X NUMBERS. 1913-100 




INDEX NUMBERS, 1913 = 100 








' T^/ces 



" i^> 





















SCH/XCe: USiBurtaucT LaborStatiitics: economic Tentlencia in the Uniletl Sfo/O, r.CMIIl3 







Dr. Thorp. You will notice that the big increase in 1915 was in 
the production line, moving up to 16 percent above the 1913 level, 
while prices had not yet started to move. From that point on, there 
is increase in production, but the high point of 128 in 1917 is not as 
much above 1916 or even 1915, as 1915 was above 1914, and from 
1917 on, if anything, our prodi^ction feU off a trifle. 

There are a number of reasons, of course, why it should. The 
diversion of manpower into the war itself, and the emergence of bottle- 
necks in transportation, the increased number of strikes, and other 
factors tended to keep us at or below this level reached in 1917. 

And the demand which I have talked about, the demand from 
abroad, the purchasing power out of our financial structure from our 
Government expenditures, from business profits, were reflected from 

124491 — 40— pt. 21 6 


1915 on, and particularly after 1917, in. causing these tremendous 
increases in wholesale prices. 

This is another way of telling the story on national income, 34 
billion dollars in 1914, against some 66 billions doUars, and our exports, 
which appear pretty far down this chart were nevertheless a very 
considerable part of our total. Our exports were 8 billion dollars in 
1919 as compared with a national income of 66 bUlion, and 4 billion 
net exports. 

(The chart referred to was marked "Exhibit No. 1506" and appears 
on p. 11095. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 11361.) 

Mr. Henderson. If you take the line of physical production on 
that chart,^ and put the price level with it, you would have an explana- 
tion of why the national income rose. 

Dr. Thorp. That is right. I think one can quickly summarize and 
find that this rise of national income was to a very large degree the 
reflection of the price chart rather than increases in production. 
Mr. Henderson. It is just bigger dollar signs, is that aU? 
Dr.. Thorp. While they are not strictly comparable, there is no 
difficulty about making rough calculations. 

Mr. Henderson. If you had an increase in the wholesale price level 
right now of 100 percent, the national income would probably be at 
least 50 percent more in dollar marks. 
Dr. Thorp. Yes, certainly. 

Mr. Henderson. So that with a 68 billion dollar estimated 1939 
income, you would" be rather close to the 100 billion dollar mark, but 
that wouldn't change the fact that the volume of goods available for 
a citizen has not increased. 

Mr. Avildsen. Dr. Thorp, would you say that the rise in wholesale 
prices, without change from production, reflects a situation in which 
the buyers of the commodities anticipate that there can't be a very 
great increase in production, and therefore give more for the goods in 
the face of increased demand? In other words, isn't the very fact 
that they know the steel miUs can't double their output overnight, 
isn't that the reason they bid more for steel, and that causes the price 
to rise? 

Dr. Thorp. Yes; this is a pyramiding of price which to a very large 
degree comes from competitive bidding. Of course, it is hard to dis- 
tinguish the processes, because in many cases the prices are determined 
by the seller in terms of what he believes to be the willingness or 
attitude of these buyers. The net effect, of course, is that there must 
be such a demand or the prices cannot be sustained at these higher 
prices, so that the buyers are a party to it quite as much as the sellers 

Mr. HiNRicHS. Isn't it partly the w&j of converting butter into 
cannon? By 1917 your production index indicates we were operating 
about at our capacity levels, and yet there was a demand for getting 
more out of our economy to blow up. We had to take it away from 
somewhere, and the answer was that sufficient rises in price will take 
it out oi domestic consumption and put it in the trenches. 

Dr. Thorp. That is right. This becomes a way .of doing something 
about aU this purchasing power, and a way of adjusting the facilities 

' Referring to "Exhibit No. 1505", see supra, p. 11093. 



Exhibit No. 1506 

AND NET EXPORTS* 1913- 1919 

































1913 '14 15 ;i6 '17 '18 1919 

SOURCE u S Department of Commerce. NOTionol Bureau of Economic Research. 


of the country according to, you might say, the bidding processes of 
various purchasers, various users. 

Mr. AyiLDSEN, I know, for instance, in the bolt and screw business 
in the Middle West in that period, a number of the small manufac- 
turers had contracts to sell a certain type of screw at $3 a hundred, 
we'll say Well, they told me that they weren't filling those contracts 
at that price, because jobbers and speculators would come to them 
and offer them $10 a hundred for the same thing, so they would tell 
their customers, we can't ship on that contract, we can't get the raw 
materials. They, in turn, had orders with steel miUs for steel at low 
prices, for steel which they couldn't get deHvery on, and they would 
pay some other steel mill a higher price. There was no collusion 'at 
all between producers, but it was all due to this bidding on the part 
of the buyer. 

There is nothing in the antitrust laws that would seem to me would 
ever prevent a thing Uke that happening all over. 

Dr. Thorp. There is a further factor in that, namely, the fact of 
people who fear they may not be able to get all their orders, multi- 
plying their orders, perhaps ordering five times what they need, in 
the hope that they will get one-fifth of their orders from each suppUer, 
which creates an artificial appearance in the market of demand, which 
is in no sense real. 

Dr. Keeps. Your inventory figure shows that the inventories were 
largely held by these corporations, and of course you had chaotic gov- 
ernmental buying on the part of the allied governments and our own 
Government, so that in reality industrial and governmental buyers 
were pyramiding orders, and causing chaos in the market, with con- 
sumers, certainly a number of them, unable to make their dollar stretch 
as far as it had before. 

Dr. Thorp. I think Dr. Lubin indicated the fact that there was 
no tremendous purchasing on the part of consumers, at least not by 
Government employees and wage earners. The demand was quite a 
different sort of demand, as you indicated, and not so much a demand 
for consumers goods as it was for the heavier types of things which 
are used more directly in prosecuting a war. 

Dr. Kreps. Which would indicate that the corrective would Ue 
along more inteUigent governmental buying, and more intelligent 
industrial buying. 

Mr. AviLDSEN. And perhaps more information for the industrial 
purchasing agent as to actual conditions, which would prevent specu- 
lation, because that is what it gets down to, pretty much. It is 

Mr. AviLDSEN. Kather than collusion on the part of the producer, 
speculation on the part of buyers. 

Dr. Thorp.. That probably would have to be solved commodity 
by commodity. 

Mr.' AviLDSEN. That is true, but in a great many commodities 

Dr. Thorp (interposing). In a great many commodities it is 
speculation, in a good many it is collusion, in a good many it is 
probably both. 

Mr. AviLDSEN. For instance, in the steel industiy today, I imder- 
stand many of the small mills are selling steel substantially above the 
price of the United States Steel Corporation, because they can make 
deUvery. Buyers are bidding on the basis of such deliveries. 


Mr. Henderson. Before you go on, along the lines of Mr. Avildsen's 
question coupled with what Dr. Hinrichs has pointed out, I think what 
he said is true about the bidding up of prices by inflated demand. 

I think also that the record of prices in the war period and the period 
before America got into the war will sho.w that the controlled commod- 
ities were able to take greater advantage of that increased demand and 
that pretty largely, as in other price rise periods, the price rises were 
greater in the controlled commodities than they were in those where 
ordinarily prices are competitive. 

Dr. Kreps. You would certainly agree, wouldn't you, that com- 
peting sources of supply make it much harder for speculators to 
pyramid prices. 

Dr. Thorp. Yes, I don't see how one could argue the point. One 
of the characteristics of control is the ability to take advantage of 
any market situation for advancing prices. 

iSiow we can, with this background, turn to the present situation. 
I hesitate to try to discuss exactly what may happen in terms of 
the reproduction of this pattern because one has to make so many 
assumptions about the character of the war that is being fought, 
but I am willing to do the best I can, and I hope you will all realize 
that there has to, be a certain number of assumptions in any discussion 
of the degree to which these factors which I have been analyzing may 
influence the situation in the near future. 

Mr. Henderson. What you are saying is that you are going to 
do a piece of intellectual neck-sticking-out. Isn't that what you 

Dr. Thorp. I'm afraid so ; yes. 

As background for the present situation, I would like you to look 
at the chart entitled "Monthly Indexes of Industrial Production by 
Major Types, 1935-1939." 

(The chart referred to was marked "Exhibit No. 1507" and ap])ears 
on p. 11098. The statistical data on which this chart is based are 
included in the appendix on p. 11361.) 

Dr. Thorp. One important thing about the World War was that 
it began when we were sliding down into a period of depression, and 
the net result was that there was a possibility of considerable expansion 
and improvement before one reached a situation of pressure. 

This chart indicates the serious depression of 1938, in which pro- 
duction had dropped from somewhere in the neighborhood of 118 or 
120 on the index number down to below 80. There was an iniprove- 
ment in production in the latter part of 1938, some decline during the 
first months of 1939, but from the early summer on an improvement 
which, toward the latter part of 1939, was very marked. The index 
is now in the neighborhood of 124. 

One cannot say that the war has affected this index only during 
these last several months. Some unlcnown amount of buying has been 
going on through all this period in terms of war preparations by 
foreign countries. We laiow, for example, that the machine tool 
industry has been exporting a very considerable percentage of its 
output for many months. However, the greatest impact is one that 
has occurred since September, and paralleling the picture which Dr. 
Lubin indicated this morning, of a tremendous price advance. 

It is important, I think, to realize that that extraordinary, almost 
instantaneous movement early in September did not reflect anything 
that can be found anywhere in the consumption pattern. 



There is no indication of purchases at that time from foreign buyers, 
there is no indication of any strong upswing in our own retail trade. 
What actually happened was that a great many people, for various 
reasons which I wUl try to elaborate in a moment, placed orders in the 
markets, particularly in the heavier goods markets, although it also 
carried over into textiles and leather and various of the soft goods. 

Part of that buying was undoubtedly what might be called war risk 
inventory, the feeling that we were headed into a period of uncer- 
tainty and the wise man should have materials on hand. It is quite 
possible that many businessmen will try to carry heavier inventories 
for some period of time, so long as they feel that these uncertaiaties 
are present. 

Exhibit No. 1507 

BV MAJOR TYPES, 1935 - 1939 









7- ••" 

if/unmiAi moDucnoN / 



1923-25 '/CO 












iOURCC: Boom of Co¥^t 

f Ftd^ral Rtifrv^ System 

Some of the buying was out-and-out speculation in terms of a fear 
of or expectation of price increase. It was quite clearly a matter of 
mass psychology in which the business community, in a matter of 
2 or 3 weeks, bought iu, or placed orders in, tremendous quantities 
That it was a fairly temporarly boomlet I think is indicated first by the 
fact that these new orders, or this rate of new orders, has very drastic- 
ally declined toward more nearlv normal levels, as also the fact that 
the wholesale markets, the wholesale prices, seem to have weakened 
for a number of the commodities. 

On the other hand, we have had this increase in production and it 
is important to reaUze that that has exceeded the rate of consumption, 
and that during this period we seem to be accumulating inventories. 

However, I want to keep the inventory story until we come to it 
in ^discussing [things [inWthe same order in which we went through 
the World War period, because basically we should not emphasize this 
temporary movement of the last several months. Our basic problem 


is whether or not the materials are here that will require or necessitate 
a major price upheaval such as that of the World War. 

So, in order to parallel my discussion of the World War record, I 
would like to turn to the problem of foreign demand. 

You may recall, in the case of the World War, that was a major 
factor, and what should we or can we expect again from that same 

We have to set that against a background of nationaUst poUcies 
We have to remember, for example, that the British Empire adopted 
a policy looking toward self-sufficiency, and that as compared with 
the World War, when England was buying 20 percent of her goods 
from the Empire, she is now bujdng 40 percent from Empire countries. 
This shift represents a decline m her dependence upon the rest of the 
world for the supply of goods. 

Mr. AviLDSEN. What was that first figure? 

Dr. Thorp. From 20 percent to 40 percent has been the increase in 
the supplies obtained by England from the Empire. 

Acting Chairman Borah. That is, whereas she was obtauiing 20 
percent, at the beginning of the World War, she may now obtain 40 

Dr. Thorp. That is right. 

Mr. AviLDSEN. Of all her imports. 

Dr. Thorp. Yes. There are certain imports in which it has been 
much greater, of course. 

Acting Chairman Borah. You referred to the fact that Great 
Britain had changed her poHcy. Do you refer to the tariff policy 
inaugurated in 1931? 

Dr. Thorp. The so-called Ottawa agreement in which a 10-percent 
preference is estabhshed for inter-Empire trade. 

Similarly, one sees in many countries the development of nationahst 
policies, of higher tariffs or trade barriers which have tended to tre- 
mendously develop industries and give them some increase in self- 

I think that is an important general background which we must 
keep in mind as we think about the prospects or the dangers, depend- 
ing on how one looks at it, of any tremendous demand upon us from 
foreign countries. 

Now we have to realize that this war is rather different from the 
World War, first because the preparedness in this case is not merely 
military. During the World War the countries in Europe were appar- 
ently caught without any special supplies of raw materials, in fact 
with actual shortages of foodstuffs. During the last several years, 
however, stocks have been built up and at least in the short run there 
is an economic preparedness which somewhat reduces the pressure, 
the immediate pressure, for buying in foreign markets. 

Furthermore, there is the fact that the blockade has gone into 
operation much more quickly, and finally, that controls have been 
estabhshed much more thoroughly in the foreign countries than was 
the case in the World War. For example, in the case of England, the 
quickest adjustment was made in agriculture. Already all farm work- 
ers over 21 years of age have been exempted from combat service. 
Extra rations of oil and gas, and that imphes, of coiu"se, rationing in 
general of oil and gas, are given for the operation of farm tractors. 
There is even a subsidy of 2 pounds per acre for new land put into 


operation, .a rather interestiDg reverse application of our A. A. A. 
procedure. And in general, one finds immediate programs of that sort 
throughout all industry. In the field of prices, for example, Great 
Britain already has established maximum prices for all commodities. 
The original act set up a price structure in which prices were to be 
held as of August 1, and then had a machinery for making adjustments 
in accordance with increased costs, government boards, and so forth. 
August 1 proved to be an unsatisfactory date, and it was later set at 
August 21.^ But an immediate effort has been made to control the 
price situation, quite different from that during the World War, when 
prices, as we saw on the chart, were allowed to move up rather 

New capital issues are debarred, and it is expected that some central 
investment board will be created to determine the flow of capital. 
Priority is established for the army, and secondly for the export 
trades, with permits and such things prerequisite. 

I could go on with further details of these controls. Perhaps I 
should add that, as distinct from the World War, already a taxation 
program has been established in which, in England, the basic income 
tax rate has jumped to 37K percent with a lower exemption level. 
The effort is being made, very clearly, to finance this war as far as 
possible out of taxation rather than to follow the processes of the 
last war. 

Mr. Henderson. That was true of their preparedness program dur- 
ing recent years, was it not? 

Dr. Thorp. That is correct. Their preparedness has been done 
very largely through a taxation program, rather than through bor- 

Acting Chairman Borah. Borrowings have already begun rather 

Dr. Thorp. I don't want to imply that they are not also using the 
borrowing technique, but I think the important thing to recognize is 
that there is an effort to use the taxation procedure just as far as 
possible as well. 

Acting Chairman Borah. The question that arose in my mind was 
as to whether the proportion in taxes would be any greater in propor- 
tion to the amount borrowed. They are already borrowing very 

Dr. Thorp. I am afraid we caa't just tell until we can see what the 
total expenditures are apt to be. 

Mr. Henderson. But in the budget estimates they have made 
they have planned a substantial increase in the proportion which will 
come from taxes. 

Dr. Thorp. I am sure that that is the policy that has been adopted. 
How far they can and will carry the policy through remains to be 
seen. The effort is being made along that Une, at any rate. 

Mr. AviLDSEN. I had an experience along that line in my little com- 
pany in October. 

Along in October we received a report from our Paris agent, who 
represents us throughout France, saying there was no such excited 
demand in France, no chan^'-e in prices, his customers were not in- 
clined to place any large orders, but to wait and see what happened, 
directly opposite to the situation here. He said, "I can't imderstand 
what is causing all the excitement in America. There is nothing like 
tl)i)Lt. going on here in France." 


Mr. Henderson. Aro you going to discuss, for example, the copper 
situation, so far as England is concerned? Immediately after the 
declaration of. war they fixed a price of less than 10 cents. The 
significant thing about it to me, in terms of Empire sources, is that, 
whereas in the last war they were dependent on external suppliei"s 
very largely, and therefore in many cases had to pay a price that ran 
as high as 27 cents, they are able now to get from their possessions 
a larger amount of copper. They are able to control not only the 
supply, but also the price, by reason of the fact that they are dealing 
with parts of the Empire. 

Dr. Thorp. I think one way of developing that point a little further 
is just to summarize by saying that this war is being very carefully 
planned from the point of view of goods and commodities. This 
taxation program is, I think, intended indirectly to transfer pur- 
chasing power away from nonessentials and make it available to the 
Government, but it also appears in terms of British import restrictions. 
The British market is now practically closed for luxury goods, wearing 
apparel, electrical household appliances, passenger automobiles, toilet 
preparations, certain oflBce supplies, and a number of other such 
items which they feel are nonessentials and of which therefore they 
don't wish to permit any purchasing, or into which no purchasing 
power should be dissipated. 

Mr. AviLDSEN. Did they put on similar restrictions during the last 
war, or were they put on very much later, or do you Imow? 

Dr. Thorp. I'hey came very much later. I am not sure that 
they ever reached the same degree that they already have reached in 
the present war. 

I think one must feel that this kind of war, with such controls oyer 
the purchases, may limit to a considerable degree the demand which 
will reach this country. We need to look for a moment at whether 
or not such demands could be financed. 

You will notice on tliis chart of means of payment that in terms of 
actual resources, the estimate here is that something like nii;e and 
one-half billion dollars of purchasing power is in the hands of the 
United Kingdom, France, and Canada, of which over five billion 
dollars is in the form of gold, and that annual gold production is now 
about three-quarters of a bilhon dollars a year.* That would^ tend 
to indicate that under normal processes, at any rate, the capacity to 
buy is quite as great as that which was present at the beghming of the 
World War, although you remember that in the World War period 
the actual purchases were not made so much by using these resources 
as by the extension of credit. 

Acting Chairman Borah. Which is what they would like to do 

Dr. Thorp. I am afraid I don't know the answer to whether they 
would like to buy on credit again. 

Acting Chairman Borah. It is a very strong habit they have 

Dr. LuBiN. The fact remains that with that gold production, there 
is that amount available for shipment to other countries for purchase 
of other imports. 

Dr. Thorp. That is right. During the last half dozen years we 
have been taldng in over a billion dollars of gold a year as a regular 
part of our balance of international payments. 

i Se« "Ezbibit No. 1460", aopra. p. 110711 


During 1939, the inflow of gold into this country has been more 
rapid than in the previous years, so that we are accustomed to taking 
in gold. Senator Borah, as our part of these arrangements of the flow 
of goods. 

Acting Chairman Borah. Who does that gold belong to? 

Dr. Thorp. The gold, actually, until some months back, I believe, 
was taken by the Treasury and sterilized. I am afraid I will have to 
ask someone else if he has the details as to what the shift in that 
policy has meant. 

Mr. Henderson. I don't think it is significant, but our Treasury 
representative left about the time the "Gold" chart went up. 

Dr. Kreps. Dr. Thorp, is the status of the gold resources the same 
m 1939 as 1914? It occurs to me that in 1914 these controls you spoke 
about did not come into operation, but it took sopae length of time 
before they were brought about at the command of the Government. 
Is tliis the situation again? 

Dr. Thorp. That situation has very much changed. In the United 
JSingdom, one of the first measures was the institution of Government 
control over all foreign exchange and gold transactions through the 
Bank of England on September 3. One had to obtain a permit from 
the Bank of England, with the exception of a few dealers, to handle 
any transactions in this field. Official rates of exchange were estab- 
lished, all private holdings of currency, of belgas, dollars, francs, 
guilders, kroner and pesos, were required to be surrendered to the 
Government, which means that the ioreign exchange and gold was 
immediately mobilized by the Government. 

Furthermore, the Treasury has required the registration of all 
American securities in England and while one is permitted to seU 
American securities, he must turn over the proceeds in foreign exchange 
to the British Government, from which he then receives pounds, the 
British Government holding the exchange. While one is permitted 
to sell foreign securities one is not permitted to purchase them, so the 
net effect over a course of time is to move more of the proceeds of the 
sale of American securities into the hands of the British Treasury. 
Inevitably there will be sales, as one merely requires turning an asset 
in a security into cash, and there is fairly complete mobihzation in 
England of control over foreign exchange and foreign assets. 

In France the same thing has happened. Exportation of capital 
in any form is forbidden without authorization of the Ministry of 
Finance. Gold transactions are subject to permit, aU foreign exchange 
transactions must be carried on through the Bank of France. Resi- 
dents of France must sell to the exchange office all foreign exchange 
accruing from proceeds. Of course, in Germany, control over foreign 
exchange has been relatively complete for some time, so that in terms 
of mobifization of resources the foreign governments are much more 
prepared this time than they ever have been before. 

Mr. AviLDSEN. Dr. Thorp, what would you say as to the purchas- 
ing power of that gold and foreign exchange at this time as compared 
with 1914? Isn't it true that prices generally are higher now, that 
they couldn't buy as much, that they would require more gold to buy 
the same amount of goods? 

Dr. Thorp. Yes, that is true, that prices are 10 or 15 percent above 
the pre-war level. 

Mr. AviLDSEN. Is that aU? 

Dr. LuBiN. Yes. 


Mr. AviLDSEN. No more than that? I thought they would be 

Dr. Thorp. On the other hand it doesn't take quite so much gold 
to make a dollar. 

Acting Chairman Borah. Have you figures as to the amount of 
gold which France possesses? 

Dr. Thorp. If I may, I will introduce that in the record.^ 

Acting Chairman Borah. And also insert at the same time the 
amount of gold which Great Britain is supposed to possess, and the 
amount of gold which Great Britain has in this country. 

Dr. Thorp. I will be glad to insert those figures. 

I have been talldng about the prospects of foreign trade with 
regard to the belligerent countries, and it is important, I think, to 
comment with regard to the prospects of trade from Latin America. 

Dr. LuBiN. May I interrupt for a moment? With regard to your 
gold chart, is the 1914 supply valued at the then existing gold dollar 
price, and the 1939 the current dollar price, or do you have them 

Dr. Thorp. At the values at the time, at the current values. 

The dominant factor in our relationship with Latin America is the 
cutting off of Germany both as a buyer and a seller to those countries. 
I should like at this time to introduce into the record two tables, one, 
"Trade of 20 Latin American republics in total and with certain 
countries, in specified years, 1929 to 1937," and the other, "Approx- 
imate distribution of trade of 20 Latin American countries to various 
markets m 1937." 

(The tables referred to were marked "Exliibits No. 1508 and 1509" 
and are included in the appendix on pp. 11362-63.) 

Dr. Thorp. I might say that what that shows is that for these 20 
Latin American republics the United States in 1937 took 31 percent of 
their exports, and provided 34 percent of their imports, while Germany 
had 9 percent of the exports and 15 percent of the imports. 

The significant point here is that these goods, which were currently 
bought from Germany, were paid for by other goods sent to Germany, 
that the cutting off of the German relationship does not automatically 
provide a new market for these goods which were sold in Germany. 
To a large extent they are things which we produce in this country and 
for whicli there is no market here. The result is that the problem 
becomes one of whether they can turn these goods, which they no 
longer send to Germany, into purchasing power which might be used 
here or in any other country. The obstacle to a large degree, is a 
financial obstacle of obtaining foreign exchange. This country is the 
natural source for supplying those goods which were previously sup- 
plied by Germany, but it is not the natural market for the goods which 
were formerly purchased by Germany. The possibility of meeting this 
dilemma is a matter of long-run adjustment. If that trade is to in- 
crease decidedl}^ in the short run it would have to be done by credit 
extension, and the record indicates that about 70 percent of our loans 
to Latin America are now in default. 

There will undoubtedly be some expansion in such trade, because it 
foUows any increase in our own business activity. Latin-America is a 
source for some of our needed raw materials, and if we have, as we 
apparently can anticipate, considerable business activity in this 

1 See supporting data for "Exhibit No. 1490," appendix, p. 11354. 


country, we can look forward to that reflecting itself in our Latin- 
American trade. But it is important, I think, to realize that the loose 
talk which one hears of our taking over markets which used to be 
German markets, involves some very serious problems of adjustment of 
financial difl&culties which cannot be taken care of in any quick way. 

To summarize this discussion of our export trade prospects, I am 
unwillmg to anticipate a volume of demand corresponding to that 
which came during the last war. It should be noted, however, that 
there will be very heavy selective demand for certain specific items. 
Certain industries are going to find themselves under tremendous 
pressure to provide goods. Certain other industries will find them- 
selves seriously embarrassed by the curtailment of the European 
markets, as for example the motion-picture industry finds it a very 
serious burden not to have its foreign outlets in the same volume which 
it had before. 

The net effect of that on the price structure is important, because of 
the fact that if at certain points pressure appears, that will undoubtedly 
generalize to a number of other points. I think it was clear in Dr. 
Lubin's testimony this mornmg, that one cannot isolate individual 
price movements, but if certain priced commodities move out of line, 
they seem to have a magnetic influence over the price of other com- 
modities which have some degree of relation to them. 

Dr. Kreps. What effect do you thmk the mobilization of dollar 
resources by the Allies will have on the character of our export trade 
to the Allies? 

Dr. Thorp. During the last war our export trade to the Allies 
was rather scattered among the great many different types of products. 
Furthermore, I failed to mention the fact that foreign exchange during 
the last war was such as to encourage the shipment of goods from this 
coimtry to Europe. Under the present controlled situation it would 
appear that many of tliose purchases which took place in the normal 
course of business will now be curtailed, and the foreign exchange 
movement, which is in the opposite directioi; of that during the World 
War, is a further restrictive factor against any considerable flow of 
goods from this country to England on other than out-and-out gov- 
ernment purchase bases. It deters private business participating in 
the demand for American goods. 

Dr. Kreps. That is, at the beginning of the World War, exchange 
went adverse to the dollar for a time. I believe it went to levels of 
from six to seven dollars to a pound. That would encourage buying 
over here, normally, wouldn't it? <i 

Dr. Thorp. That is right. The pound could be used to obtain 
more dollars, therefore encouraged the purchase of goods in the 
United States, while at the present time the pound will bring an 
unprecedentedly small number of dollars, somewhere near $4 to the 
j>ound is it, at the present time? 

Dr. Kreps. Even somewhat lower. 

Dr. Thorp. Less than $4 to the pound, which naturally discourages 
the purchase of American goods. 

Dr. Kreps. Do you think then that the Allies will probably con- 
centrate in countries like their Dominions, that are on the pound 
basis, even their purchases of goods that we used to export? In 
other words, will they use their dollar resources only to get airplanes 
and munitions of that sort, and tend to divert even a part of their 


normal trade with us to areas where they can get credit and where 
they can trade in pound sterUng? 

Dr. Thorp. It is quite possible that that may develop, yes. 

Acting Chairman Borah. I observed, put out from London a few 
days ago, that while there would be a great increase in the purchase 
of a certain line of goods in the United States, like munitions and so 
forth, it would result in the decrease, in all probability, in the purchase 
of agricultural products, perhaps to the extent of $150,000,000 a year. 
Is that what you had in mind? 

Dr. Kreps. Yes. 

Acting Chairman Borah.. There would be no place to transfer 
that, because the market in South America is filled with those things 
which we produce, agricultural products, so it seems to me one of the 
most serious propositions connected with this question of price rise 
is, how it is going to affect the American farmer? It doesn't seem to 
me he is going to get off at all, because the method which they have 
already adopted is as suggested, one which will result in their pur- 
chasing a certain line of goods, and excluding our purchasing where 
they can purchase the other line of goods, to wit, agricultural products. 

Dr. Thorp. That is quite right and I think it extends beyond what 
we ordinarily think of as the major activities. For example, already 
there is a decrease in the quota of apples to be allowed to enter, and 
that sort of thing. 

Mr. Henderson. One other question. In the World War period 
our balance of exports went roughly from half a billion to about 
3 billion, I think you indicated. At that time, that was a decidedly 
large percentage of our total productive capacity. 

Dr. Thorp. That is right. 

Mr. Henderson. And even if we had such an increase at this time, 
discounting all other things for the purpose of argument, it ought not 
to weigh so heavil}'^ on our abihty to produce as it did the last time. 
Therefore, it seems to me, it shouldn't affect the price level so much. 

Mr. AviLDSEN. In other words, it was about 10 percent of our 
national income in 1914. Would it be 5 percent now? 

Dr. Thorp. It is probably not correct to measure it against the 
national income because the national income includes a number of 
things which can't be exported anyway. But if one takes the measure 
of exportable goods, moveable goods, which eUminates rent and such 
things as that — the highest point during the war was 16 percent 
being exported. The normal is less than 10 percent, and in recent 
years it has gotten down at times to as low as 6 percent, but during 
the war period, I think it was during 1919, it was 16 percent of the 

Mr. AviLDSEN. Now if we got the same dollar volume as at this time 
would it be 16 percent? 

Mr. Henderson. About 8. 

Dr. Thorp. No; I think it would be above that because you can't 
compare this with the national income of 35 billion since it rose during 
the period so the average over the period might not be very far away 
from our present level. It would be less than 16. Let's put it that 
way. How much less requires very elaborate calculations and if you 
like we can struggle with it and try to introduce it into the record, but 
it would be less. 


Dr. Kreips. How far have these imports tended to influence prices 
of materials that are basic to the American consumer? How far has 
British effort to control imports led to schemes for price control — 
that is for control of the price of wool and articles of that sort? 

Dr. Thorp. So far the only cases which I know of, and there may 
be others, are in the wool picture and in the tin picture. 

In the case of wool the British Government purchased the entire 
clip and while we are at the present time much less dependent than 
we were before on the rest of the world for wool, we still import all 
of our carpet wool and maybe zero to 25 percent of our apparel wool, 
depending on the total consumption. 

Mr. Henderson. I want to point out that the supposition I made 
would be considerably less. First of all, there is no reason to assume 
that the American national income would not increase during this 
same period, and also that there would not be a substantial increase 
in goods, rather than in dollars. On the other hand, the various 
figures which you supplied seem to indicate that they got in that 
period 170 percent increase in quantity and paid for it with 190 
percent in value. 

I Was speaking of the drain on our physical production. My 
supposition would be that it would be less than 10 percent. In other 
words, it would not weigh so heavily on the producing faciUties of 
this country as it' did the last time. 

Dr. Thorp. We have spoken about the effect of possible exports. 
The other external factor, you may recall, which I discussed in 
connection with the World War was the impact of prices of imported 
goods upon our economy. Thereabout all that one can say is the 
generalization that while there has been some decrease in our depend- 
ence on foreign sources of supply 

Acting Chairman Borah (interposing). WUl you please excuse me 
Dr. Thorp, I have to leave now. 

Dr. Thorp. Certainly. 

(Mr. Avildsen assumed the Chair.) 

Dr. Thorp. There are several new commodities which have in- 
creased in importance and we certainly cannot feel that we have 
reached a point where we are not susceptible to pressures from these 
import prices. 

In the case of wool, for example, we are almost independent with 
regard to wool for domestic apparel, but we are still completely 
dependent on, imports for the low-grade wools used in carpets. 

In chemicals and drugs we have achieved a good deal of inde- 
pendence. Dye stuffs, you may recall, was something about which 
we were very much embarrassed during the World War and in which 
our domestic industry has since developed. The same is true for 
potash and the same is true for nitrates. On the other hand, in the 
case of rubber, we have reached a much greater dependence than ever 
before and one could speculate on the theory that we are more 
dependent on tin than we were at the time of the World War. 

Certainly during the World War the canned-goods industry ex- 
panded tremendously and I suspect has increased in its importance 
since then. 

So there are a number of points at which we are susceptible to 
influence from outside, influences to some degree beyond our control. 
And these import prices represent one of the threats. I think this is 


particularly true when one realizes that these imported commodities 
are the source of purchasing power on the part of the other nations 
and in many cases we are the major consumer of the commodity. 
Their national policy would seem logically to move in the direction of 
getting a maximum volume of purchasing power in the United States 
through the shipment of this commodity. 

Their programs with regard to controlling domestic prices might 
be modified in connection mth commodities which were to be sold 
in the United States and it would seem rather reasonable to expect 
that such poUcies might be followed with rather considerable impact 
in some cases, on our own price structure. 

You may recall that at the time of the World War one of the major 
sources of new demand was the financial system. At the present time 
we have even more capacity for expansion through bank credit than 
we had at that time. In fact, the primary factor in the present 
financial situation is the tremendous volume of member bank excess 
reserves. Those have been mounting steadily until at the present 
time these peace reserves exceed $5,000,000,000 and very conserva- 
tively these could be a basis for $30,000,000,000 of expansion in the 
form of loans. 

Of course, at the time the Federal Reserve System was established 
it was believed — and I think more strongly afterwards— that it had 
certain powers which could be used to keep the credit structure as a 
stabiHzing rather than a disrupting force. The theory was that 
through open market operations the banks could be forced to redis- 
count, that through interest rates it would be possible to make this 
rediscounting a rather painful and expensive process and that there- 
fore the Federal Reserve System was in a position to control the 
volume of bank credit. People disagreed as to the degree to which 
the volume of bank credit controlled our total economic picture, but 
I think they all agreed that it was exceedingly important. 

Now where do we find ourselves at the present time? I said there 
are over $5,000,000,000 of excess bank reserves. The Federal Re- 
serve System holds about 2% billion of Government securities. That 
represents the maximum that it can do in open market operations if 
it completely stripped its portfolio at the present time-. It has certain 
powers to increase the reserve requirements. If it increased its 
reserve requirements as far as it can go under the present limits, that 
would absorb then, 9 billion of this excess total. That would reduce 
these excess reserves to somewhat under $2,000,000,000. The Treas- 
ury could reduce reserves it it went into a form of open market opera- 
tion, but the Treasury is very close to the debt limit which is imposed 
on it and therefore there is a decided limit as to how far it can go under 
present circumstances in absorbing these excess reserves. 

Now at this same time remember that any flow of gold into this 
country, coming in almost $2,000,000,000 since the beginning of this 
year, is reflected back into the banking system and is the primary 
method for the increase in these excess reserves. 

One other factor should be noted and that is that the rate of turn- 
over at the present time, the rate at which we are using our bank 
deposits, is less than one-half that in the late twenties. So that even 
without any change in the reserve situation we could gft a vast 
increase in purchasing power ovpir a more rapid use <jf our bgnk 


All of this can be summarized, 1 think, in saying that from the 
point of view of expansion and the credit machinery, there is more 
potential expansion there today and less possibility under present 
circumstances of controlling than we have had at any time probably 
in our whole economic history. It should be added, however, that 
this possibility for expansion has been present for some years, 4 or 5 
years, to say the least, and we have not had an expansion which has 
taken place. 

Perhaps the best way to summarize is merely to say that here is 
an inflammable element in the situation, that wars are apt to throw 
out considerable numbers of sparks; one thing we need to worry 
about is the possibiUty that a spark may land in this inflammable 
situation and start us in a spiral which could very easily duplicate a 
price pattern just through its own self -genera ting force — dupUcate 
the World War price pattern. 

Mr. Henderson. I gather from what you say that the old concept 
that the Federal Reserve, through its various powers, could exercise 
an influence on the general price level doesn't have a substantial 
reliance at the present time on account of the excess reserves and the 
fact that the debt limit is decidedly fixed. 

Dr. Thorp. That is right. We have these techniques, but the 
techniques cannot be used unless the existing power of the Federal 
Reserve System over reserve requirements is increased and/or the 
Federal debt limit is raised. 

Mr. Henderson. Strictly on a technical basis then, assuming that 
there is a possibility of controlling the price level by means of the 
Reserve System, there would have to be some changes in reserve 
requirements. You might have to go, for example, to 100 percent 

Dr. Thorp. That is right, quite right. 

Now we come to the factor of business in this picture and the 
possibility of business expansion. First we will consider the inven- 
tory picture. There are in a sense two phases to the problem of 
business contribution to an expansion period. If there are con- 
siderable inventories that is a limiting factor on price rises; if there 
is a considerable volume of excess capacity it will act as a limiting 

First we will discuss the inventory picture and then we wiU discuss 
the capacity situation. 

I now introduce a chart, "Indexes of physical volume of production, 
consumption and inventories of consumer ^oods." 

(The chart referred to was marked "Exhibit No. 1510" and appears 
on p. 11109. The statistical data on which this chart is based are 
included in the appendix on p. 11364.) 

Dr. Thorp. These are new indexes prepared in the Department of 
Commerce by Mr. Bassie and are introduced to give a picture of the 
physical volume of production, consumption, and inventories. The 
solid line is the line of production. The dash line is the line of con- 
sumption. Essentially this shows goods being made and this is goods 
being sold by retailers. Somewhere between the production and 
consumption is in a case like this [illustrating] accumulation of goods, 
and in a case Uke this, liquidation of previously produced goods. 

This line of inventories represents the cumulative influence of 
these shifts up and down as between the production and the con- 



Exhibit No. 1510 


(Adjusted for Seasonal Variahons) 
































Source U. 3. D^fior^me^/- o/' Co/n/nerca 
124491 — iO— pt. 21 7 



sumption line. Unfortunately the chart doesn't come right up to 
date so that it doesn't show the developments of the last few weeks. 
I think it is very clear though, in showing the degree to which our 
high rate of production during the Jast part o'f 1936 and early 1937 
was a matter of production for inventory and it runs far ahead of 

This is a chart of physical volume and I will now introduce some 
evidence \vith regard to dollar volumes. United States Total Inven- 
tory Value and Trends—l 935-39. 

(The chart referred to was marked "Exhibit No. 1511" and appears 
on p. mil. The statistical data on which this chart is based are 
included in the appendix on p. 11365.) 

Dr. Thorp. The top lines represent certain inventory figures com- 
piled by Dun & Bradstreet on the basis. of data for some of the years 
for as many as 20,000 companies an4 the last figure is, based on about 
9,000 companies. This goes back to the end of 1935 and shows on 
just annual figiu-es up until the end of 1937 and semiannual thereafter, 
the increase in inventories in this country. There is no doubt about 
it, this inventorv accumulation was a strong factor in carrying us 
up in 1937 and then was responsible for the low level reached by 
production in 1938. 

This line at the bottom is an adaptation of this Une ^ corrected for 
price change, or rather, with the price factor added. 

Dr. Keeps. Would you explain that line on inventories, Dr. Thorp? 
It is 40 percent. What is the base year — 40 percent of what inven- 
tories? Is that an index? 

Dr. Thorp. The inventory line is based on the percentage of 1935 
consumption so that inventories represented 40 percent of a year's 
consumption in the year 1935. 

Dr. Keeps. Then it is not strictly an index? 

Dr. Thoep. It is not strictly an iadex. It is an index in the sense 
that it relates to ^ constant base, the 1935 consumption. 

Acting Chairman Avildsen. Will you tell us what that chart is 
based on? 

Dr. Thoep. These are computations which are made in the Depart- 
ment of Commerce, using primarily Federal Reserve Board material. 

Acting Chairman Avildsen. Are they based on reports by manu- 
facturers or producers of goods to the Department? 

Dr. Thoep. No ; they are based on materials that come in from all 
Rorts of sources. It includes all the materials which we have in the 
Department, It also includes, however, such reports as those 
published by trade associations with regard to various industries. 
The consmnption line includes department store, records and various 
other measures of retail trade. 

With regard to these indexes, we hope to have an elaborate discus-' 
sion of the methods pubUshed shortly in the Survey of Current 
Business, but it hasn't Deen released yet. 

Acting Chairman Avildsen. Do you consider our inventory satis- 
factory today? The Department is collecting as much information 
as it should on that subject? 

Dr. Thoep. I consider our inventory information one of the very 
weak spots in our information service. 

1 See "inventories line" on "Exhibit No. 1510", supra, p. 11109. 



Exhibit No. 1511 

VALUE AND TRENDS— 1935-1939 

Bimoifs or cai&fSfrrDcajjiss 



















^ , J 

















s— ^ 


193S 1936 J937 1936 

Source. US Department of Commerce, Daji Sf Srad)lreei 







Acting Chairman Avildsen. You think it is feasible to correct that 
situation? I have in mind the fact that my company just received 
requests from a couple of investment houses in New York — investment 
counselors — asking us to tell them what our inventory situation was 
and what our customers' inventory situation was, saying that when 
they collected this information they were then going to compile it 
and send it out to all the members. In other words, it seemed to 
me a private firm was doing what should be a Government job due 
to the lack of Government statistics on the subject of inventory. 

Dr. Thorp. What has happened is that since this experience in 
1937 in which the increase in inventories represented something from, 
let's say, fifteeti billion dollars up to nineteen, four or five billion dollars 
of productive capacity going into inventories, people have realized 
how tremendous a factor that can be in giving a stimulant to business. 
They also realized that when you are producing for inventory you 
are producing on a thoroughly temporary basis. As long as you keep 
piling up inventory it gives you a constant stimulus. The minute 
you go on to a basis of holding inventory a certain part of the demand 
is reduced so that the impact of inventory change can very decidedly 
be to give rather a considerable stimulant but one which is like many 
stimulants, only temporary in its effect and, in the case of inventories, 
is apt to mean a subsequent period of liquidation. 

Acting Chairman Avildsen. In the last 2 weeks I talked to a 
number of businessmen al)out this question, and each one I asked, 
"What do you thinlc of the inventory situation — has it increased in 
the last few months?" Half of them said they didn't think- there 
had been any increase in inventories; the other half said thepe had 
been, showing that it is a bad situation if we should be in doubt 
about a question so important as that. 

Dr. Thorp. Of course, I think there are a number of factors there. 

Acting Chairman Avildsen. You think there has been an increase 
in inventories in recent months? 

Dr. Thorp. I don't think the increase in inventories has been 
felt very seriously as yet because it has been a matter of new orders 
and goods flowing on which haven't really come to rest. 

Whatever increase in inventories there has been so far has been on 
goods in process. The businessman hasn't a feeling of a big accumu- 
lation of finished goods waiting to move. But what has happened 
is that this tremendous volume of new orders and this rate of pro- 
duction is far ahead of the rate at which goods ar^ moving into con- 
sumption. I have seen no one who has hinted that our consumption 
of steel has suddenly jumped in any way corresponding to the present 
increase in the rate of production over the last 3 months. Those 
inventories, if they haven't piled up yet, are in the process where 
they will pile up over the next few months. Whether or not that 
is going to be a damper on the situation will depend in part on whether 
businessmen intend to carry heavier inventories over the next few 
months. But this much is certainly true, that the inventory pur- 
chases that have carried us up to somewhere near a hundred and 
twenty-four on the index of production are dropping out of the 
market, and we will inevitably have to have some adjustment in our 
rate of production down to something nearer the consumption level. 

Our knowledge of inventories is extremely scanty. We have to 
depend on this kind of indirect device to get any sort of picture as 


to what the mventory picture is. These figures [illustrating with 
"Exhibit No. 15U"] are in dollar figures, and we don't know how 
much of it is dollar change and how much of it is physical volume 

Dr. LuBiN. Do you have any figures on inventories in the mining 

Dr. Thorp. I don't think I have any here. There are figures 
available. Again, part of the difficulty is this: Where we have in- 
ventory figures they may not always include all places where the 
inventories may be. We might have figures. We could get figures 
of inventories of copper held by copper refineries, but inventories of 
copper which might be held by the telephone company, or which 
might be held by some manufacturer using copper, are just not 

Actually one of the interesting bits of our economic history was 
back in 1920 when the prices of sugar were tremendous and no one 
could buy any sugar anywhere, but when the prices fell sugar jufet 
appeared from all sorts of unexpected places, and it turned out that 
a lot of people had carloads of sugar which were just sitting on the 
tracks and were pa5T^g demurrage on the basis of storing that sugar, 
and individuals who had warehouse space had purchased sugar, and 
no statistical measures of the ordinary kind caught those people at all. 

The net result is that inventories of a given product may be held 
at many different points and usually what we know is how much is 
held at one of those points without being abJe to build up any total 

So you get very curious and misleadmg results of large inventories 
piling up, of a crude drug, let's say, when what has happened is that 
there is a tremendous shortage of the refined drug and you haven't 
got the refined inventory figures. It is a xevj difficult problem and 
one which a great many people are now enough concerned about so 
that I should feel that the time had come, particularly when we are 
threatened with disturbing factors in the commodity markets, when 
we need to sharpen up our information, and that, I think, is particu- 
larly true of inventories, because they represent stoppages, they 
represent cases where the flow of goods for one reason or another 
hasn't been smoothly going on. They represent your danger spots 
to the markets. 

Acting Chairman Avildsen. In other words, this bidding on the 
part of buyers, which you stated this afternoon causes these price 
advances in many cases, would probably be eliminated to a large 
extent if the buyers had mbre information on inventories and therefore 
extremely important- 

Dr. Thorp (interposing). You would eliminate certain parts of it; 
vou would eliminate in considerable measure the out-and-out specu- 
lative inventory purchase. I think there are other factors here. For 
example, it is clear that any considerable anticipated rise in cost 
means that the businessman will speed up his rate of production and 
pile up inventories in order to take advantage of the lower costs. 
You remember the N. R. A. boom which was of that sort, and in 1937 
again, or 1936, there was a good deal of fear of labor difficulties, busi- 
nessmen piling up inventori^ in part as a labor risk msurance fund, 
you might say. But of*aU these factors the most disturbing one is 
that arising from out-and-out speculation, particularly when the 


speculation is based on some misunderstaudiag as to whal, the exist- 
ing supply is. It could be corrected by adequate infonnation. 

Acting Chainnan Avildsen. You think that ought to bo compulsory 
or by just asking industry to cooperate? 

Dr. Thorp. I should like to see the cfTort made to gather the 
material through a voluntary basis. It would seem to me that the 
business community should be given a chance to indicate its concern 
about these situations and its willingness to put in its share of neces- 
sary information in tlic public interest. If the business community 
faib to participate in the program, then I think one might face the 
issue as to whether or not in the public interest this information was 
not just a matter of private property, but of public concern, and the 
Government, as representing the public interest, would have a right to 
demand basic essential information needed to stabilize our economy. 

Dr. LuBiN. Is it true, Dr. Thorp, that in certain industries when* 
we have very good information on production and resources — that is, 
inventories — when it became important that we have this information, 
particularly in September, October, and November, the people's 
associations collectmg it rofused to make it public? 

Dr. Thorp. I believe there are certain cases. 

Mr. Henderson. No doubt about ihc Copper Association, was 

Dr. Thorp. Well, I don't know tlie details. The Copper Asso- 
ciation is- a case in point. Of course, the same thing has happened in 
the past in the case of copper. Several times the copper statistics 
have been discontinued, almost always at times when the industry was 
seriously out of balance. 

Mr. Henderson. Taking th« purpose which Mr, Avildsen wants it 
to serve, certainly the buyers of copper would be in the dark unless 
they knew tliree very essential things, including the export matter. 
They would need to know the rate of production — that is, the capacity 
which was being used; they would need to know tlie inventory status 
and the orders ahead ; and they would need to know something which 
Dr. Lubin discussed this morning — the selling policy of the small 
group that really control how much passes into production.^ Those 
three things are completely absent at the present time, so far as cop- 
per is concerned. 

Acting Chairman Avildsen. Mr. Henderson, lot me ask you thcti, 
Wliat is your opinion as to how this information should be collected? 
Do you think we would ever get satisfactory figures by voluntary 

Mr. Henderson. I think the experience the Bureau of Labor 
Statistics has had in the collection of information on a voluntary basis 
is a good example of what you could expect. I share with Dr. Thorp 
the feeling that it ought to be tried, on a voluntary basis, but where 
he merely says would raise a question, I would go miich further 
and say, if you couldn't get it on a voluntary basis, the public inter<>st 
is so largely charged there that it ougbt to be a matter of require- 

Acting Chairman Avildsen. Dr. Lubin, could you agree? 

Dr. Lubin. Very definitely; I think our experience has proven con- 
clusively that you can always get enough infonnation on a voluntary 
basis to do the job that you want to do. Of course, one must qualify 
when using the word "always." 

• Supra. 


Every now and then yon do run across a situation where manufac- 
turers or otliers will not give you the information you ask for, but, 
by aind large, the general rule, I would say, is that the voluntary 
system works, and it is only upon its failure to work that I would 
attempt to get 

Mr. Henderson (interposing). I would like to point out, Dr. 
Lubin, in connection with your example, that you are merely col- 
lecting statistics on price. You are not undertaking to assess price 
policy. You don't ask the voluntary submission by an industry of 
its price policy. 

Dr. Lubin. No; but on me other hand, take such things as pay 
rolls, number of people at work, man-hours of work, which is exceed- 
ingly important information and valuable so far as competitors might 
be concerned. Yet we find that we can get a very good picture of 
the American economy as long as industry feels that the figures it 
gives are going to be treated absolutely confidentially and the com- 
petitors or anybody else will not know what the individual firms are 

Acting Chairman Avildsen. Do you agree that the Department 
of Commerce is the logical bureau to collect such information? 

Dr. Lubin. I would say one of the outstanding charges I should 
make against the Department of Commerce, if I was going to make a 
charge, is failure to have inventory data. [Laughter.l 

Acting Chairman Aatildsen. What is your defense on that? 

Dr. Thorp. Our defense to tnat is if you didn't get a letter today 
asldng for this infonnation from the Department of Commerce in 
your company, it is because you were here rather than at your home 
oflace. [Laughter.] We are starting to collect such information and 
hope to build from it the kind of picture you want. 

Acting Chairman Avildsen. How much do you think it is going 
to cost the Government a year to get that information? 

Dr. Thorp. I haven't any idea. It is not a basically expensive 

Acting Chairman Avildsen. $50,000 a year? 

Dr. Thorp. I can't tell you what the cost would be. 

Mr. Henderson. Wliat I want to get back to is the importance of 
price in the volume of inventory accumulation. There is no doubt 
that under a condition of excited price rise there is considerable 
accumulation of inventory which does not take place if there is 
reasonable stability and balance in prices. Isn't that so? 

Dr. Thorp. That is right. The inventory accumulation is in 
considerable measure related to price shifts. It is the effort of the 
business man to avoid the losses and to make the profits that can be 
done by price changes and the business man becomes rather than a 
producer operating a factory, a speculator operating in the commodity 
markets. In some industries that has become the major deter- 
minant of profits rather than the actual operatioiis themselves. 

Mr. Henderson. In the World War situation concerning which 
you presented those new figures you indicated that there hadn't 
been an enormous increase in inventory.^ On the other hand, the 
period of probably the greatest accumulation of excess inventories we 
know anything about, that is 1936 and 1937, corresponds identically 
with the excited price rises that took place in that period. 

1 See "Exhibits Nos. 1494 and 1495," supra, pp. 11078 and 11079. 


Dr. Thorp. That is correct. 

Mr. Henderson. It would tal^c a i^reat dejil of argument, (o coji- 
vince me that they were not very closely related. So far as the 
purpose of this hearing is concerned, I think one of the valuable facts 
to be adduced is that if we do not have an excited and unwarranted 
price rise, then we arc not likely to have an extraordinary accumula- 
tion of inventories which always spells disaster when such a period 
is liquidated. 

Dr. Thorp. I think you could add that to the general point and 
see that where you get unusual demands coming into the picture, that 
is the time in winch unless adjustments can be made in production 
easily and quickly, you are apt to get a reflection in a price disturb- 
ance, and if it is a persistent demand sych as came during the last war 
from foreign countries, then it becomes a very major matter and 
inventory demand woidd undoubtedly never reach that same pro- 
portion, but still as in 1937, could be very disturbing to us. 

Dr. Kreps. Yet your figures showed that the accumulation of 
inventories didn't occur during the war.^ 

Dr. Thorp. That is right. 

Dr. Kreps. They occurred after the war when a period of specula- 
tion started in. Now is there any corinection between tiiis specula- 
tion, this desire to speculate, and the withholding of certain statistics 
by groups in which price management and collaboration in price 
policy has been known at times to exist? Would you find it difficult, 
in other words, to collect inventory figures properly in industries 
where you might find it easy to collect wage figures and pay roll figures, 
simply because inventory figures are an essential element in the 
management of prices? 

Dr. Thorp. We could tell better about that after we have pushed 
through our present efforts, but I do think it is quite conceivable 
that the inventory material being more closely related to price may 
be more precious than wage material might be, from the point of view 
of the individual businessman involved. 

Mr. Henderson. If you relate those new figures you introduced,' 
concerning inventory trends from 1914 into the 1920's to the in- 
crease in bank debits, it seems as if the increase in loans and deposits 
was taken up in an increase in price rather than in an increase in 

Now we have at the present time, as you say, these excess reserves. 
It is still possible, is it not, that we could have a considerable expan- 
sion of bank loans which would really represent the generatmg power 
for increased production and would not parallel that previous ex- 
perience in price? 

Dr. Thorp. That is right. Perhaps I ought to introduce here some 
material with regard to where we are now in relation to capacity. 

Mr. Henderson. What I wanted to get clear was, in our prior 
discussion about the 100 percent reserves and the expansion of the 
debt limit, there would be no real cause for alarm in an expansion of 
bank loans for commercial purposes if they reaUy represented new 
effort. It is when they would be for the purpose of financing a rising 
price level that they would be very dangerous. 

Dr. Thorp. That is right. 

• "Exhibits Nos. 1494 and 1495," supra, pp. 11078 and 11079. 


Mr. Henderson. And that would be the only situation in which the 
Federal Reserve would be required to take action. 

Dr. Thorp. The danger comes only when one is near enough 
capacity so that further increases in purchasing power arc concen- 
trated on the price structure. 

As far as our present relationship to capacity is concerned, I would 
like to comment briefly on the situation and the problem as to whether 
we slioidd expect that the higher profits which are now being recorded 
this quarter will be rapidly translated into capital expansion. I think 
it is important there to realize that the current stimulant has come 
out of this demand for inventories and hasn't come out of any strong 
mcrease in consumption as yet evident. Even with this temporary 
stimulant to demand, few mdustries except steel are near capacity. 
The paper uidustry, various sections of it range between 75 and 90 
percent, cement around 60, glass at 70, coal less than 50, lumber 
about 40, Hour mills 65 — these figures are all very rough but they do 
indicate the fact that we arc operating in many lines considerably 
below capacity. 

Of course, capacity is hard to figure. I suppose we would have to 
say that in shipbuilding at the present time we are at capacity. As 
far as I understand it, there is not an available shippmg way in the 
country at the present time that isn't in actual use. On the other 
hand, the construction industry and agricultm'e are very far away 
from any kind of capacity operation that one might establish. 

If one takes the present durable-manufactures production index at 
around 130, that probably is fairly close to what can be immediately 
done in terms of our production machinery in that you can't start the 
wheels turning overnight.^ It requires the accumulation of materials, 
the obtaining of skilled labor, and so forth. 

The very best estimates, however, that I can find, or the best experts 
with whom I have discussed the point, indicate that the}'^ feel that it is 
conceivable for us to be operating 2 or 3 years from now at a level of 
physical production of 150 to 170, that that can be done although 
there arc many adjustments necessary and at some points where 
skilled labor becomes a serious shortage we might find ourselves up 
against a bottleneck. 

It doesn't matter, perhaps, whether those figures are exact or not. 
The reason why they are significant is merely to indicate that we do 
have further capacity, and that consequently from the point of view 
of the impact on our economy of increased demands, it can go some 
distance before it necessarily will have to be siphoned off in terms of 
price increases. 

Mr. O'CoNNELL. Wasn't that also true to a large extent at the 
opening of the World War? 

Dr. Thorp. That was true at the opening of the World War to a 
considerable degree, and we did get an increase in production at that 
time of 20 percent or so. 

Mr. O'CoNNELL. And the substantial price changes followed the 
getting up to capacity. 

Dr. Thorp. Yes. 

Dr. Kreps. In your- opinion, did the recent price rises that Dr. 
Lubin pointed to this morning in zinc, in copper, in lead, occur because 
those industries were operating at capacity? ^ 

> See "Exhibit No. 1507," supra, p. n098. 
See "Exhibit No. 1471." supra, p. 11054. 


Dr. Thorp. No ; none of those industries is operating at or even very 
noar capacity at thn present time. Of course, this is true with regard 
to atiy commodity market, that if a sudden demand conies into the 
market m, say, a week's time, the only reflection can be one in price. 

Mr. Henderson. On the spot market. 

Dr. Thorp. On the spot market, and it would hardly be fair to 
judge that or to put those two things together in terms of the spot 
situation. On the other hand, if this higher price is not reflected in 
increased j^roduction fairly promptly, then one can puzzle over what 
limitations there are in that industry which are preventing the increase 
in output which ought to come from the price development. 

Acting Chairman Avildsen. In other words, many of the large 
users of zinc, lead, and so on, are buying under contracts at the old 
price and are not paying this new spot price, is that true, do you think? 

Dr. Thorp. Yes, I think there is a good deal of that. In terms of 
business expansion, therefore, I think we have to recognize that we 
are not near capacity in many industries at the present time, and 
furthermore, that a considerable part of the purchases which have 
appeared to be new capital investment may not in the long run be net 
addition. T have in mind this sort of thing. We have heard a good 
deal about railroad purchasing coming into the market in the last 
several months. So far that seems in general to have taken the form 
of moving the planned expenditures of 1940 ahead into 1939. Whether 
the actual expenditures in 1940 will therefore be lower than they had 
been planned before, or whether 1941 expenditures will be moved 
ahead into 1940, no one can tell. At the present time it israther 
difficult, I think, to regard that buying as necessarily indicating an 
upward swing or a new tendency toward considerable capital invest- 
ment on the part of the railroad industry. 

So from the point of view of expecting to get support from business 
expansion comparable to the World War, by watching capacity figures 
and inventor3'^ figures, we have to recognize the fact that the situation 
as it is at present, or as it may even appear to be in the somewhat 
middle-run future, is not a situation which would normally provide 
the basis for substantial price advance. 

There is just one other point which I haven't covered, and I will 
touch on that very quickly. You may recall that one of the factors 
wliich I noted as contributing to the World War price increase was 
the fact that prices and costs had an interrelationship and that 
advances at any one point pulled up the rest. Perhaps the only point 
that needs to be made in that connection is to note the greater organi- 
zation of labor at the present time than .at the time of the World War,' 
and the likelihood, therefore, that advances in wages will correspond 
more closely to advances in prices than was true at that time. 

Perhaps I shouldn't put it that way because it implies advances in 
prices as inevitable. Perhaps I should put it that where there are 
advances in prices, the tendency of those working in that industry to 
obtain increased wages will 'be enhanced by the greater volume of 
unionization now presfent. 

Mr. Henderson. I don't know whether you noticed it or not, but 
today's paper carried an account of an announcement by Sidney 
Hillman of the Amalgamated Clothing Workers Union to the effect 
that the contemplated discussion on increasing wages, which the 
union suggested in September and October when prices were going up 


and they were faced with the prospect of an increase in cost of Uvinj;, 
has been indefinitely deferred. There was no doubt that the prospect 
of an increase in wages for the Amalgamated was predicated upon the 
excitement taking place in that period with the prospect of an increase 
in the cost of living. 

Dr. Thorp. I suspect it is probably true that most of the more 
advanced businessmen and advanced labor leaders recognize the fact 
that the ideal situation would be one in which there was neither dis-* 
turbance in prices or in wages, that a disturbance in either field is 
inevitably going to be reflected in the other. 

I should perhaps summarize it by saying the problem of keeping a 
balance between those two is probably better taken care of at the 
present time than at the time of the World War. It will mean un- 
doubtedly less in the form of tremendous profits than was true in the 
case of the World War. 

Acting Chairman Avildsen. Would you say, Dr. Thorp, on the 
whole the business leaders of this country have shown more states- 
manship in recent months than in previous periods of expansion, in 
keeping prices down, and so forth? 

Dr. Thorp. It certainly has been true that since this excited 
period in September, the business community has shown more clear 
understanding of the situation and the dangers of permitting it to 
become a highly speculative development, and we do seem to have 
had during the last month or two adjustments at certain points. I 
would hesitate to feel that in all commodities and in all lines there had 
been this same amount of understanding with regard to the dangers 
that might come from price increases. The dangers are in part, as I 
think I have indicated here, that we have factors present, such as the 
credit situation, which if any major swing begins, can extend it to very 
disastrous lengths. We had a moderate upswing at the time when the 
war broke out, and we can expect further advances in our produc- 
tivity. The difficulty is a difficulty of keeping in adjustment if abnor- 
mal demands overstimulate one part or another of the economic sys- 
tem. That is the basic difficulty of war. War provides unusual and 
abnormal demands and one makes the adjustment in the economic 
system, and then when war is over, shifts have to be made back. We 
get these abnormal impacts from various som-ces, and there is no single 
way of dealing with it. It seems to be necessary to watch all these 
factors and use many different poUcies to try to keep ourselves in 
balance and not permit war developments to bring us into a state 
where adjustment is going to be difficult. One high cost of war is the 
difficulties of adjustments afterwards. These are made much worse 
if short-sighted policies permit acute price movements to occur. 

Dr. Kreps. Mr. Chairman, before you dismiss the witness I would 
like to ask that the new material particularly, and supporting data, 
be introduced in the record, that is the numerical material, the tables 
back of these charts that have been presented to us. 

Acting Chairman Avildsen. They may be so received. 

Also before we conclude, I would like to ask Dr. Lubin if he would 
care to express an opinion as to my last question to Dr. Thorp, namely, 
whether he felt that the business leaders of this country as a whole, 
we know there are exceptions, but as a whole whether they haven't 
shown more business statesmanship in this recent period in expanding 
activity than they have shown in other periods of expanding activ ity 


Dr. LuBiN. I would agree fuUy with Dr. Thorp. However, I 
think it might be well to inquire as to some of the reasons for such 
statesmanship as did prevail. I sometimes wonder, I have no 
evidence, as to how far the existence of this very committee made 
certain groups realize the disadvantages that might accrue. I think 
by and large one finds more businessmen, as one wanders around the 
country, as one meets them, who are conscious of this problem and are 
trying to do their best to avoid the repetition of what has happened 
in other times, than at any other time I personally have known of. 

Mr, Chairman, for the purpose of the record, I would like to state 
that the chart that I inserted this morning, entitled "Pre- War Com- 
modity Prices,"^ had an error in it. We have discovered an error in 
computation for the price of soda ash, and I would like the record to 
show that this was an error and that it will be corrected at the 

Dr. Keeps. And the resulting value figures are likewise in error. 
They will also be corrected for the record. 

I will just say that tomorrow there wUl be- brought in industrial and 
governmental purchasing agents, Mr. George Renard, Mr, Forbes, 
and Mr. Johnson, who will indicate that at the present time some of the 
disturbing influences are at work which we have shown in Dr. Thorp's 
testimony were at work before. 

Acting Chairman Avildsen. The committee will stand adjourned 
until 10:30 tomorrow morning. 

(Whereupon at 5 p, m. a recess was taken until Tuesday, December 
5, 1939, at 10:30 a. m.) 

1 "Exhibit No. 1467," supra, facing p. 11049. 



United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:40 a. m., pursuant to adjournment on 
Monday, December 4, 1939, in the Caucus Room, Senate Office 
Building, Senator William E. Borah presiding. 

Present: Senator Borah, acting chairman, Messrs. Henderson, 
AvUdsen, Hinrichs, O'Connell and Brackett. 

Present also: Willis J. Ballinger and Edward Fischer, Federal 
Trade Commission; Willard Thorp, Department of Commerce; 
Hugh B. Cox, Department of Justice and Theodore J. Kreps, Eco- 
nomic adviser to the committee. 

Acting Chairman Borah. Is Mr. Renard in the room? 

Do you solemnly swear the testimony you shall give in this hearing 
shall be the truth, the whole truth, and nothing but the truth, so help 
you God? 

Mr. Renard. I do. 

YORK, N. Y. 

Dr. Kreps. Mr. Renard, for the purposes of the record will you 
state your fuU name? 

Mr. Renard. George A. Renard. 

Dr. Kreps. What position do you hold? 

Mr. Renard. I am executive secretary-treasurer of the National 
Association of Purchasing Agents. 

Dr. Kreps. How long have you been in that position, Mr. Renard? 

Mr. Renard. A little over 11 years. 

Dr. Kreps. And how much experience have you had in industrial 

Mr. Renard. About 10 years prior to that — about 20 to 25 years. 

Dr. Kreps. Will you proceed with your testimony? 

Mr. Renard. I suppose you want me to read this statement that 
I have prepared. 

Dr. Kreps. Yes. 



Mr. Renard. Gentlemen, you can get enlightening figures on prices 
from any representative index. Our own commodity index covers 
wholesale prices of 140 important commodities selected as repre- 




sentative of 14 groups of materials. The figures for an average of 
all of those 140 commodities run: 1926, base year, 100; December 
1929, 88; December 1932, 48; April 1937, 88; January 1939, 88; 
August 18, 1939, 63.7; September 1, 1939, 65.4; October 20, 1939, 
74.2; November 17, 1939, 73.3; November 24, 1939, 72.8; December 1, 
1939, 72. 

Now if we lay those price averages on a representative index of 
business activity or of industrial production we can get more light. 
The Annalist Index of Business Activity was above the 100 line called 
normal durhig all of the 4 years 1926-29, and went below normal 
about April 1930. The Annalist Index went above normal again in 
1936 and stayed up there until late in 1937, when it dropped from 110 
to 80 in just a few months. Early this summer it started at about 86 
and hit around 110 again i\i November. 

That comparison of the movement of a business-trend mdex with 
the movement of a commodity-price index shows three periods with 
business above the estimated normal while, at the same time, com- 
modity prices reached 88, then 88 again and this time 74. 

If we use a break-down of those commodities into groups, we find 
additional interesting comparisons, as price movements are by no 
means uniform. 






December 1929 . 



September 1, 1939.. 

October 20, 1939 

SO. 6 


December 1932 

November 17, 1939 

November 24, 1939 

December 1, 1939 


April 1937 


January 1939 -. . 


August 18, 1939 

Tliis comparison shows agricultural commodities have reached 88, 
83, and 64 in those three periods, while the industrial index ran 85, 
87, and 80. 

Other comparisons of selected groups of indicative materials, such 
as finished or semifinished materials, show a comparable lack of 
umformity in price movements, and the Fairchild Retail Index gives 
another picture. This index of retail prices, which includes only 
clothing, apparel, and household furnishings, was as low as 69 in 1933 
and as high as 96 in 1937. Its trend in the past 3 months has been: 
August 1, 89.3; September 1, 89.5; October 1, 90.2; November 1, 91.2. 
Preliminary estimate, December 1, 92.3. 

That index was at 88.9 on January 2 of this year; so, the climb has 
been very gradual. 

Since the normal or base periods for various indexes frequently 
differ, and their components of selected commodities or activities 
likewise differ, the extent of fluctuations in the indexes will not be 
uniform, but their trends are useful for comparative purposes. 

We are primarily interested in the two indexes quoted — the all- 
commodity index showing 88^88 and then 74 for the three periods, 
and the industrial index showing 85 — 87 and 80. That is very 
satisfactory price behavior over the past few months under the 
business conditions and psychological influences which would ordi- 
narily' introduce inflationary and speculative factors into our price 


Dr. Lubin and Dr. Thorp ' have presented and discussed the 
statistical data and economic factors essential for your consideration 
of the price problem. We know the results to be expected from an 
inflation of prices, and we know the economic effects or, rather, 
aftereflects which flow from maladjustpients between prices for 
products of various groups and classifications. 

Going back to the war period of 1914-18 for a guide to use in the 
present situation, we find contrasting conditions in both the produc- 
tion and distribution of commodities which make comparisons with 
present supplies, and prices of little practical value. However, we do 
find precedents which picture the results which would almost certainly 
follow dupUcation of the price policies of that period. Some of the 
factors and influences affectuig prices may be beyond our control 
because of the international situation, but all of the unportant ele- 
ments of our economy should, and 1 think do, want emphatically to 
avoid becoming involved in this war; they are equally interested hi 
avoiding, so far as possible, a repetition of the deflationary difficulties 
experienced in the period foUowing the last war. The statements of 
many prominent spokesmen for business assure you of their attitude on 
both points. Surely all will agree that we should do everything pos- 
sible to muiimize the effects of problems we cannot avoid. 

Certain factors have become important in determinmg price policies. 
One which is very apparent is the development of statistical informa- 
tion and a paraUel expansion of economic education for its interpre- 
tation and use. We have created tools for making comparisons and 
yardsticks for measurmg results in situations which formerly set the 
stage for considerable speculation and hit or miss judgment. 

Dr. Kreps. Mr, Renard, in this connection it was stated yesterday 
that figures for inventories might prove useful to industrial purchasing 
agents. Are you of the opinion that we have now adequate inventory 
figures, and, if we do not, could you explain in what way the industrial 
purchasing agent might find additional figures useful? 

Mr. Renard. There isn't any doubt but what the more information 
we can have as to suppHes, which is inventory — inventory is the 
supply end of our two factors in the commodity price situation — the 
more information we can have as to the available supply the more 
satisfactorfly we can fix sound price policies. There isn't any question 
about that. I would say that the more mformation that we can get 
that is authoritative and representative the better the purchasing 
agent, the better every element m the business economy would be. 

In a number of fields we don't have saitsfactory inventoiy ii^forma- 
tion, that is quite true. 

Dr. Kreps. In which fields would you suy the lack is outstandhig? 

Mr. Renard. I wouldn't pick out any particular ones, I under- 
stand the Department of Commerce is just startmg now on the 
development of inventory information. I don't know that I have seen 
anything. The only real general uiventory information, I believe, 
that is available now is that wliich comes from the National Industrial 
Conference Board, which has only been developed in the past several 
months, I believe. 

Mr. Henderson. Mr. Renard, take the work which the committees 
of your organization do on fuel oil and on coal for example, Tliere 

I Supra, pp. U021-ll(Wfi and pp. 11065-1 1 n9. 


isn't any doubt in your mind, is thero, that that committee gets pretty 
accurately the stocks above ground in the case of coal? 

Mr. Renard. That is right. 

Mr. Henderson. And what the inventory picture is and some idea 
of the orders ahead and that it is able to pass that along to your 
purchasing agents, 

Mr. Renard. That is quite true. Those are probably two of the 
best reports on supplies on hand and consumption available; and by 
the way, the coal report is developed in cooperation with the Govern- 
ment, with the Department of the Interior, now the Bituminous Coal 
Commission Statistical Section. 

Mr. Henderson. I have followed that for a good many years 
through your bulletin. I have often wondered whether it failed badly 
at any period since you have been keeping it. 

Mr. Renard. Not that 1 know of. 

Mr. Henderson. That is, barring some sudden change in demand 
and supply that couldn't be forecast, the picture has been satisfactory 
so far as the buyers of those supplies are concerned. 

Mr. Renard. For practical purposes, I would say yes. It may 
have been sUghtly off statistically, where you would gather an error 
and increase it as you went along for a few months but that has always 
been found and corrected over a period so there has never been a false 
picture presented; I think I can state that. 

Mr. Henderson. That means, does it not, that in these cases the 
purchasing agents have to make their estimates several months ahead 
in their buying in order to get some of these supplies 

Mr. Renard. That is quite true. 

Mr. Henderson. In any quantity and some of those are on a 
contract basis, are they not? 

Mr. Renard. A great amount of coal is purchased even on a year's 
contract, or was before the present bituminous coal law went into 
effect, which is limited to 30 days until the prices are fixed. 

Mr. Henderson. So if a purchasing agent guesses wrong on one 
of those things he is in serious difficulty for an extended period. 

Mr. Renard. Yes, sir; for a long period of time. 

Mr. Henderson. In your mind, these two at least have proved 
pretty practicable. 

Mr. Renard. Yes, they have been good practical guides and not 
only our own members, the industrial purchasing men and the utility 
purchasing men make use of them, but we find the producing end of 
the industries are in entire accord with our development, and at times 
they make use of them. 

Mr. Henderson. And the press does also. It takes them almost 
as standard information on those commodities. 

Mr. Renard. Yes; we have three reports, our business siirvey 
report, our coal report, and our fuel oil report, which are widely 
distributed and reproduced by the press. 

Dr. Thorp. Mr. Renard, one of the difficulties often cited with 
regard to getting figures of this type is that the business man doesn't 
have them himself, and that consequently if the Government or any 
other agency asks him for current information such as his iaventory 
position, it involves him in a very expensive process of either additional 
record keeping or make-up of special accounts, or something of that 
sort. In your experience do you find that this information is difficult 


for business men to provide, or do they nctnally have it fairly readily 

Mr. Renard. Doctor, I would say that normally a business or- 
ganization has the information available at all times as to what its 
inventory position is. They can hardly do business and figure costs 
unless they have that information. That is an essential portion of 
their business. 

Dr. Kreps. Proceed. 

Mr. Renard. During the last 25 years, and, especially the last 10 
or 15 years, there has been a continual and unusual increase in the 
statistical and economic information available to guide governments 
and business in the determination of policies. The responsibility and 
recognition given this economic committee and the valuable assistance 
given you by other important agencies of oiir Government, as weU as 
by businessmen and their organizations, are the best evidence of that 
development. It is also evidenced by the information compiled and 
distributed by our Government, by our trade publications and daily 
newspapers. p3 well as by special services. We see it in the use of 
expert ecoiiomic consultants by industry, agriculture, finance, and 
labor, as well as by government. There has been' a comparable devel- 
opment in all important commercial nations, and the exchange of such 
information among them has multiplied its coverage and increased 
its value and use. 

Representative business organizations laiow more about material 
and labor costs, fixed charges, overhead, etc., than would have been 
considered possible 25 years ago. That represents another develop- 
ment of statistical and economic education. 

This broader knowledge and imderstanding can probably be attrib- 
uted to the unusual conditions created by the 1914-18 period and its 
aftermath of booms and depressions. Certainly, you do not need a 
specialized education in economics these days to understand that 
cause and effect, boom and depression, inflation and deflation are 
related. The lajman can even understand that effect, depression, and 
deflation are related to unemployment, relief, distress, debt, and taxes; 
and he can readily follow the economist in tracing them all back to a 
cause in the form of boom and inflation. 

Because of the adverse conditions during the period of this develop- 
ment, we may have become overly conscious of the difficulties caused 
by surpluses and low prices. Our attention for several years has 
been focused on the problems of surplus production. Our efforts 
have been centered on protection for the producer, to assist him to 
stabilize and advance prices to a profitable level, or at least to secure 
for him the cost of production. 

Other nations have had the same problem and the growth of quotas, 
tariffs, import excise taxes, blocked currencies, and other devices to 
protect the prices of domestic production has been the result. Within 
the last few months, that situation has been completely reversed in 
most nations. From the problem of bolstering prices for the producer 
in peacetime, they have turned their attention to the prevention of 
inflation of prices in vru,rtime. That is also our problem. 

Expanded production capacity during the former war, inducea by 
inflationary prices and attractive profit possibilities, was the cause of 
many of our problems of the following years. In many instances, 
that expanded capacity had little opportunity to be used or, where 

124491 — 40 — pt. 21 8 


used, its production became a surplus which depressed prices. Limi- 
tations on production and on hours of work are a result of that 

It has been found necessary in both iudustiy and agriculture to 
secure prices which carry the added cost of nonproduciug capacity. 
While it has not always been possible to do so, in many instances 
operations have been made profitable with a considerable percentage 
of plant capaoity idle. That extra capacity, which was^marginal and 
largely idle for a number of years, is a cushion which can, in many 
cases, absorb added costs without advancuig prices. 

Mr. Henderson. Right there, Mr. Renard, I gather from what you 
say that the charge which goes into price for idle capacity is a sub- 
stantial portion of price. 

Mr. Renard. Depending on the percentage of idle capacity, yes. 

Mr. Henderson. When there is a relatively low level of operation, 
and a company is trying to recover all of its overhead cost, particu- 
larly that for its idle capacity, it does have an effect on price, does it 

Mr. Renard. It certainly does if they are operating at a profit, 
because they must carry the overhead cost of the idle capacity. 

Mr. Henderson. And it is always a factor which they try to 
recover, is it not? 

Mr. Renard. Oh, yes; that is the attempt. 

Mr. Henderson. And that means that so far as the current pro- 
duction goes, there is a portion of the price which does not truly 
represent the actual cost of making that particular unit. 

Mr. Renard. That would be true where you have idle capacity, 
and that is included in your overhead cost; yes. 

Mr. Henderson. So that means that a sort of Alice-in- Wonderland 
situation exists. Wlien your production is low your unit cost is likely 
to be higher. 

Mr. Renard. Your unit costs would certainly be higher, because 
you would have that idle capacity included. Of course we have that 
same situation in connection with some of our labor rates. Take 
for instance in the building industry, we have got to the point, I 
beHeve, where in some fields wage rates are based on a seasonal 
period, the only time that they work, and they have to support 
them over a year's period on the seasonal production. I think that 
is a comparable situation in labor rates that you have in material 
prices, based on idle capacity. 

Mr. Henderson. And then you have the converse situation, when 
a reasonably satisfactory level of production is maintained, the 
companies attempt to make up losses they have had in prior periods, 
and to get a cushion for the' nes^t -prospective decline. Therefore, 
you have these losses which have* an effect on prices, even at a higher 
rate of production, do you not? 

Mr. Renard. That is true. We talk about feast and famine 
periods. Some industries seem to operate on a feast basis at one 
time and go over onto a famine basis at other times, and a number of 
them try to equalize that so they can get sufficient profits to cushion 
them over those other periods. 

Dt. Thorp. Mr. Renard, you spoke earlier about the increased 
knowledge that the business man has. Would you feel that any 
considerable part of the business community has such exact figures 


of unit costs that its price policies could actually be thought of as a 
direct reflection of unit costs? 

Mr. Kenard. I think a very considerable proportion of your 
business community does have that information, and that realization. 

Dr. Thorp. And it is a dominating factor in their price policy? 

Mr. Renard. Well, of course, at times it can't be, when prices 
get too low, but ordinarily it is one of the essential factors. Some- 
times they have almost to disregard costs to meet conditions in some 

Businessmen know that increased production reduces the cost per 
unit by spreading certain fixed charges. Having followed that cost 
formula during depression years, those who operated profitably with 
idle capacity would seem to be stopped from reversing it now. Busi- 
nessmen have learned from experience and have statistical history 
to prove the cost of an inflationary boom; the result is deflation and 

Labor, now well organized, likewise has its economists and statis- 
ticians. Industry knows that labor wUl demand and receive its 
share of the inflated prices, for they are reflected in living costs, and 
a vicious spiral develops. Labor problems multiply in periods of 

The only real incentive for inflationary prices — profits — has been 
curbed by the taxing procedure of governmental agencies. Graduated 
taxes remove the unusual profits of an inflationary period; and the 
periods of depression resulting from inflation throw additional burdens, 
on local, State and national governments, compelling them to- secure 
greater tax income. We then have another vicious spiral. 

There is neither a practical excuse nor a selfish reason for price 
inflation. By that I mean unjustifiable advances which do not reflect 
increased costs. We do have several important factors to consider, 
however, and should avoid the conclusion that any advance in prices 
is arbitrary and an evidence of profiteering. We must maintain a 
proper perspective and that may require an orientation of our thinking 
to meet the changed conditions created by the war and the expansion 
of production. 

If we are to have elastic rather than rigid prices, they must go up 
when conditions warrant. The indices used to measure price trends 
are an average of the prices of from 30 to several hundred com- 
modities. The price action of a single commodity or a group or 
classification may be lost in the compilation of an index average; so, 
fair judgment requires consideration of its background. A low price 
moving higher is entirely different from a high price moving up. 
Therefore, the starting point may well determine the reasonableness 
or justification for an advance or decline. 

Some materials have been entirely too lov/ in price — too low for 
the producer, labor, or the public interest. Government must secure 
its income from taxes on profitable operations. We all wanted prices 
in some classifications to rise; we lioped for better business which 
would permit them, to rise. So, an advance can hardly be con- 
demned. Certainly there can be no valid objection to a justifiable 
advance in prices. It is equally true, however, that price advances 
are not justified merely because others are doing it. 

Dr. Kreps. In this connection, Mr. Renard, have you any evidence 
that recently there have been price advances which were not justified" 
but were made merely because other prices were increasing? 


_Mr. Renard. The general evidence is that our prices have stayed 
fairly well in line, particularly the industrial prices that I speak of. 
I wouldn't want to pick out any particular commodity that has gotten 
well out of line, but you can take any commodity that has advanced 
more than, say, 25 or 30 percent and I would say that was getting 
out of line, even if it was going from a low level, because the average 
advance has only been about 12 percent, something along that figure. 

Mr. Henderson. I don't want to question you about individual 
commodities, but let me ask you whether your association and its 
membership have felt that some prices are out of line. 

Mr. Renard. Here and there, there has been some questioning of 
prices, yes, that is true, and the feeling that they advanced a little 
bit too far and too fast, but those have been the exceptions, however. 

Mr. Henderson. But your association has no means as an associa- 
tion to deal with those prices? 

Mr. Renard. Oh, no; we don't even attempt to, except to inform 
our members through our regular information services of price con- 
ditions in the different fields. We don't ever attempt at any time 
to directly influence prices up or down. 

Mr, Henderson. That is, if the material you collect and dis- 
seminate relating to, say, fuel oil or coal, seemed out of line statis- 
tically, your association wouldn't thuik as an association of asking the 
American Petroleum Institute for a conference on prices? 
^ Mr, Renard. Oh, not at all. No, we would present the informa- 
tion on that picture to our members and let them draw their own 

I think I could say that the average industrial buyer has sufficient 
economic information to know when a statistical position is out of line. 

Mr. Henderson. I mean that a well-informed buyer, and as I 
understand it, you have most of the big industrial purchasing agents 
in your association 

Mr. Renard (interposing). A very large percentage. 

Mr. Henderson. He would know that if there was a very high 
inventory in rubber or tin or the like, it was a time for caution in 
buying and he would act individually on that matter? 

Mr. Renard. That is true, and by being informed on factors that 
possibly are not general information, he would form conclusions pos- 
sibly different thai he would otherwise. 

As a good examp -^j you mentioned fuel oil. There might possibly 
be the general impr*. ision that we would be going in for an extreme 
shortage of fuel oil because of the international situation, the situation 
in Europe. On the other hand, the average, you might say ultimate 
consumer now, differentiating between the ultimate consumer and 
the export consumer whom we represent, might not take into con- 
sideration the fact that the use of oils in the belligerent states has 
been practically prohibited; in other words, England doesn't permit 
them' to take gasoline for use in private automobiles, and Italy 
doesn't, and of course Germany can't, so that instead of having a 
much larger demand on our oil industry for the supply of oil, the 
chances are that at the present time the demand is lower than it was 
in August because of that situation. 

Dr. Thorp. What has been the recent record of prices of fuel oil? 

Mr. Renard. They have beei strengthening somewhat. I wouldn't 
say that they have strengths ned — in fact. Dr. Thorp, I don't 


know just bow mucli, but our last report I know pictured fuel oiJ, 
aiid the lubricants particularly, as being in a stronger position than 
the}^ bad been for some time. 

A good bit of that, of course, is due to the carrying charges, too, 
from the Gulf around, and to this transfer of boats and so forth, as 
to whether or not we are going to have the same transportation 
mediums that we had before. The cost of transportation tJone has 
been considerably higher. Of course we had a shut-dowai in the oil 
industry for some time to reduce the tremendous surpluses that they 
had in certain sections, so that the statistical position has bceri svorking 
m somewhat better position. 

Mr. Henderson. I wouldn't want to check you on that, but the 
testimon}'- in the oil hearing ^ was that that was for purposes of 
conservation and not for purposes of affecting surpluses. 

Mr. Renard. Well, that may be true. 

Mr. Henderson. That may be true but there was serious doubt 
about it. 

Mr. Renard. I wouldn't question the gentleman who made that 

Mr. AviLDSEN. Why should the cost of transportation go up? 

Mr. Renard. Because of their drawing some of our boats out of the 
ordinar}' channels of transportation would be the only real reason for 
it. On the other liand, it might be our American boats that normally 
would move to Europe might be tied into the coast trade, as we call 
it, and really give us a greater transportation medium than we had 
before. That is in a sort of condition of flux, I believe, although a 
number of our larger tankers I beheve have already been transferred 
to foreign registry. 

Mr. AviLDSEN. Has there been an actual increase in transportation 
costs? Do they pay more wages? Do they pay more to operate the 

Mr. Renard. I don't know just where the element comes in, 
whether it is insurance, wages, or what it is, but there has been a 
higher rate; transportation costs from the Gulf around to eastern 
ports I know for the past 3 months have risen, but that again was 
moving from a tremendously low rate that they had early this summer. 

Mr. Henderson. One more question about the nature of your 
association. In your association you have purchasing agents from 
companies which are buying the products of companies represented 
by other members. For example, you might have purchasing agents 
from steel and alumimmi companies bu;^ing oil and purchasing agents 
for oil companies buying steel and aluminum. Isn't that correct? 

Mr. Renard. That is true. We have probably the widest cross- 
section of membership in that way, a variety of industry, of any or- 
ganization in the country. We have over 5,400 members. 

Mr. Henderson. How many? 

Mr. Renard. Fifty-four hundred, and representing, I can say, 
almost all of the large organizations and a considerable percentage of 
the medium and a number of the smaller industrial organizations. 

Mr. Henderson. And you have an active interchange of informa- 
tion between those purchasing agents, do you not? 

Mr. Renard. Generally, speakmg, yes. 

1 Dr. Joseph E. Pogue, vice president. Chase National Bank, New York City, testified, on the subject of 
proration and conservation, in Hearings, Part 14. Col. Ernest O. Thompson, member, Texas Eailroad 
Commission, testified, on the administration of proration in Texas, in Hearings, Part 16. 


Mr. Henderson. It is a working organization rather than 

Mr. Renard (interposing). Very cooperative. It is purely a 
service organization exchanging information, yes. 

Dr. Thorp. I would like to ask a question in connection with this 
phrase of the "reasonableness or justification for an advance or 
decline." You point out certain things, the matter of cost, the matter 
of the question whether prices are in line or not. I am wondering 
what kind of tests the purchasing agent ordinarily will use in terms of 
whether or not he feels that he should yield to a demand for higher 
prices from some seller, what kind of criteria one can adopt for rather 
quick judgment on whether a price advance is reasonable or not. 

Would you feel, for example, that price advance could be reasonable 
at the same time that inventories of a product were piling up? 

Mr. Renard. Generally speaking, no; there might be some excep- 
tional conditions that would make that possible, yes. 

Dr. Thorp. Would you feel that a price advance was reasonable if 
an industry was operatmg with a large volume of unused capacity? 

Mr. Renard. That would depend on the price. If the price was 
exceptionally high and it was including a large volume of unused 
capacity, you might question that. 

Dr. Thorp. Isn't one of the purposes of low price to bring as much 
demand as possible into the market and therefore to get as much 
capacity into use as possible? 

Mr. Renard. That is true, yes. In other words, the nearer you 
can come to production capacity the lower your unit costs should be. 

Dr. Thorp. Would you feel, then, that if one were faced with the 
problem of observing price behavior that inventory and capacity 
figures would be very relevant in making quick judgments at any rate? 

Mr. Renard. I would say so; yes sir. We have had a good 
example of that over the past few years, that you are probably familiar 
with in our paper board industry, the so-called container industry, 
which is the final manufactured product; through the development of 
Dr. Hurley, I believe, in the use of southern pine and the manufacture 
of kraft paper we have had a tremendous increased capacity in that 
particular industry, and we have brought in really a competitive 
process between the kraft manufacturer and the jute board manu- 
facturer, so that we got prices down probably too low for either one 
of them to operate satisfactorily. I think that has been recognized 
by the buyer, and today prices having advanced in that particular 
industry more than we might say the normal advance over the entire 
price average, might not mean that they had been unjustifiable ad- 
vances, because we have had a complete new picture in that industry 
of competition between new processes and new capacity coming in, 
forcing prices down to a subnormal level, probably. So that there is 
a question of where your price starts from, which enters very strongly, 
because with the competition between new processes and the tre- 
mendous new capacity there isn't any doubt at all but what there is 
a large part of vital capacity in that industry and, at the same time, 
they couldn't include their entire overhead costs in their products. 

Dr. Thorp. If those prices advance, won't that curtail the demand 
and just make the situation worse? 

Mr. Renard. In that particular industry? 
^cDr, Thorp.;: Yes.^: ■■ ;. '-v;-: r-^; :;•.->/!••' -^^i^r^j .-••:.r.xi;!iv!5'Kv^a'.<? .:/. 
' Mir. Renard. : ]^0^.;their- pi^c^^s -di^i^^^MiiMM^/W^Mmr^BO^ 
a tremendous increase in demand. 


Mr. HiNRicHS. That is, your justification in that particular in- 
stance is the fact that they were forced by the demand to resort to 
the use of high-cost capacity. 

Mr, Renard. Yes; they got back into full production, both the 
jute board mills and the la-aft mills, as I understand it. 

Mr. HiNRiCHs. But do you think of any circumstances in which 
you would justify a price advance where the idle capacity was itself 
relatively efficient capacity that you were calling into use? 

Mr. Renard. I don't believe 1 get the question. 

Mr. HiNRiCHS. You said that the existence of idle capacity would 
not always indicate the unreasonableness of a price advance, that it 
would depend upon the level from which you started. The example 
that you cited of kraft board was a case of calling into use high-cost 
capacity that had been idle because of its high cost. There seem to 
be some instances in which relatively efficient capacity is also kept 
idle during periods of extreme depression. I was asking if you would 
in judging of the reasonableness or unreasonableness of price advance, 
assume that the presence of efficient idle capacity was always an 
index of the unreasonableness of the price advance no matter from 
what level it might have started out. 

Mr. Renard. No, I wouldn't say so, that it would always be an 
indication, because that would depend, too, on the profitable opera- 
tion of the company. In other words, if a company can operate at 
a profit with a considerable amount of efficient capacity idle and carry- 
ing that idle capacity in its overhead cost, then you do have that 
cushion in there, but if that company is operating at a loss you have 
an entirely different problem and I understand that was true in this 
particular industry, the paper board industry, that they hadn't been 
getting prices that would return them profitable income. Do you 
get my distinction on that? 

Mr. HiNRicHS. Yes. I do. 

Mr. Renard. Anotner point on which we must get a proper per- 
spective is the changed relations of governments to all of the factors 
in our economic life. This changed relationship brings to govern- 
ment a responsibility for prices not only when they result in unem- 
ployed men and sick industries, but during the preceding periods 
which create those conditions. 

Dr. Kreps. It is an interesting thesis, Mr. Renard, that govern- 
ment should prevent the disease of price contagion which you have 
described above rather than try to ameliorate the evil effects after- 
ward. I am not quite clear in my mind how you would distinguish 
price contagion, that is the spiral of price inflation which you believe 
the Government ought to try to stop — from a healthy price rise. 

Mr. Renard. I think that I develop a little later on. Doctor. 
That general information on the picture of conditions on supply and 
demand is one of the best ways to do it, just as this committee is 
doing here. If we can keep all of that information out in front of 
us so we know where we stand and the dangers of moving in the 
wrong direction, I think it is the most helpful effect we can possibly 
have. I do believe that if Goveitiment is going to be entirely respon- 
sible for the bad situations that we might get uito, that Government 
should also accept some responsibilities to try to avoid those dan- 
gers, if we can develop any, sort of an arrangement through which 
the Government can assist industry to stabilize and get away from 


some of this difficult deflation that wc apparently have to go through 
as a result of inflationary periods. 

Dr. Keeps. You also believe that the action of government should 
be along the line of getting information on particular commodities? 

Mr. Renard. I think information is probably the best source that 
we can use to try to avoid this situation. 

Mr. Henderson. What do you think the Government ought to do 
if it finds that there is an association which is exchanging informa- 
tion among its membership as to prices, as to the rate of operations, 
stocks on hand, and the like, and not making it public to the buyers? 

Mr. Renard. Well, I think the more of that information that we 
can make available generally the better position we will be in to pre- 
vent these situations, and 1 thmk that it is for the best interests of 
industry to make that information available, because mdustry must 
suffer along with the entire economy when we do get into these 
deflationary periods. 

Mr. Henderson. The reason I asked is that one of the illustrations 
you used recently of a commodity is one in which the industry associa- 
tion does have extensive information for its own members only, but not 
available to the buying customers or to the public generally. 

Mr. Renard. I think that is a mistake. I think that is a mistake 
upon the part of that industry to conceal that information. I think 
it is a mistake on the part of any industry to develop statistical infor- 
mation on supplies, operations, and so forth, and then limit it;S use. I 
think that it should be made available just as widely as possible. 

It seems highly improbable that we can ever again have an uncon- 
trolled sellers' market with "all the traffic can bear" prices, for we 
know such profits are fool's gold and the only plausible incentive there 
ever was for them has been removed. Certainly it can only happen 
in this country, for all others, for the period of the war at least, have 
governmental controls over prices, production, imports, exchange, 
exports, and so forth. Democratic procedures, apparently, are luxur- 
ies which no nation can afford when engaged in war. Centralization 
of control in a democracy must meet and overtake the production 
efficiency and speed of decision and action in a totalitarian govern- 

Acting Chairman Borah. Would you Hke to amplify that a Httle? 

Mr. Renard. I think I do a little further along here, Senator, with 
the idea that our democratic nations that are at war have gone to 
practically dictatorial methods or procedure insofar as control of 
commodities and so forth. 

Acting Chairman Borah. Very well. 

Mr. Renard. Tliis country is planning to spend enormous sums of 
money for preparedness. Those expenditures are almost unanimously 
approved and supported because there is general understanding that 
other forms of government threaten any democratic nation which does 
not maintain efficient military and naval defenses. 
, Controls in other important nations of the world may also find us at 
a disadvantage economically. Unless we are careful, the clouds of 
war may have a silver fining for them and the rosy attractiveness of 
our neutrafity may conceal a few thorns. 

The British Bill of Goods Act, as I understand it, estabfishes prices 
on a pre-war basics and advances must be justified by in creased, costs. 
If that great democratic people continue that careful control, where 


will \vc ho if our price lovcl goes skyrocketing;? Aside CroiH (he imme- 
diate disadvantacres in world trade, with currency ex< Imnge rates ad- 
vancing our prices in most ox])ort transactions, the cud of the war 
would find us in a difficult competitive position. The most modern 
mills, factories, and foundries l)eing equipped by other nations for war 
])roduction will remain to compete for peacetime trade, with prices 
and exchange already in their favor. 

The war activities of those nations, the business end of it, are being- 
handled by their most able businessmen and most representative trade 
organizations. It is entirely possible they are giving more considera- 
tion to those future conditions than we are. It is very essential that 
we do so. 

Purchasing executives know the advantages of centralization in 
control over ])rocurement and distribution of material. Almost every 
nation we wish to deal ^dtli now has that advantage— and the Rol)in- 
son-Patman Act and the Federal Trade Commission do not reach 

Dr. Kreps. Could j'ou amplify that? AVhat lias been the efi'ect 
upon foreign purchasing as you see it today? 

Mr. Regard. The effect so far has not been unsatisfactory, as I 
mention a little bit later, but there isn't any question at all but wdiat 
all the important nations of the world now have a centralized control 
over their purchasing, production, and distribution of all important 

Mr. Henderson. And they are acting as a unit, and if they buy 
in this market they are pretty generally dealing \nth individual com- 

Mr. Renard. That is true. In other words, they have the entire 
British Empire dealing tlirough one agency. The sam.e thing would 
be true of any other of these nations at war. 

Mr. Henderson. One thing which we passed over rather hurriedly 
is the interesting view you set forth that if we stand idly by and let our 
price level go skyrocketing and the British and others keep their 
prices within control, w^e would be at an even greater competitive dis- 
advantage in world trade if peace broke out. Is that your point? 



Mr. Renard. That is the point I was trying to bring out there; yes. 
Even at present in the discussions that we have of extending our world 
trade, our foreign trade, for instance, to South American countiies, 
we might find ourselves in that position now; even with the exchange 
running against us we might find controlled prices coming from some 
of these other countries, maldng it impossible for us to get that 
foreign trade. 

Mr. Henderson. Isn't it true that a number of our American cor- 
porations ah-eady have to sell in foreign markets at prices lower than 
local consumers pay in order to get business? 

Mr. Renard. That has been true over the past several years, but 
I believe that they are swinging into other directions now, and, as a 
matter of fact, in the recent announcement of steel prices for the first 
quarter of 1940 the very unusual statement was made that that was 
for domestic sales only; in other words, I beUeve that now the foreign 


prices of steel are carrying a higher price than the domestic price, 
although generally speaking that is not true. You see, we have a 
Webb-Pomerene Act that permits om- industrial oiganizations to get 
together and fix prices for export. 

Mr, Henderson. Yes; but that is selling as a group. Where there 
is no export association, a number of American corporations have had 
to sell, they felt, at lower prices in foreign markets than they were 
charging in the local markets. Isn't that true? 

Mr. Renard. That is true; that is very frequently true. 

Mr. Henderson. And if we had the kind of situation you outUned 
here that might take place under the British Goods Act, they would 
be at even greater disadvantage later. 

Mr. Renard. Yes; that is what I was trying to picture in that 
statement, that they might be able to control their prices through 
their governmental agencies and keep us at a decided disadvantage 
if we permit our prices to get inflated. 

Mr. Ballinger. What do you mean by the statement that the 
Robinson-Patman Act and the Federal Trade Commission do not 
reach them? 

Mr. Kenard. We have no control through our governmental 
legislation over the activities -of these foreign governments, so far as I 

Mr. Avildsen, What does the Robinson-Patman Act do to prices? 

Mr. Renard. The antidiscrimination Act. 

Mr. Avildsen. What is the effect of that on prices? 

Mr. Renard. What I am trying to bring out there is there isn't 
any reason why these controls — certainly they haven't so far, at 
least so far as I know — there isn't any reason in the world why they 
couldn't develop discrimination in prices in order to hold some of this 
foreign trade. 

Dr. Thorp. Perhaps we might state it this way: That the Robinson- 
Patman Act requires businessmen in their sales to have sales to 
various competitors, competitive purchasers, kept in Une, and the 
interpretation would probably not include sales to a foreign govern- 
ment as being sales by a competitor of a domestic consumer, therefore 
would not extend to control over the price structure where the sales 
were made in foreign markets. 

Mr. Renard. There is a possibiUty, you see, of them handhng 
their sales to this country and to other countries on an entirely dif- 
ferent basis. We don't know. There isn't any way for us to regulate 
that. That is within their control, not within ours. 

Mr. HiNRicHS. In the last war the buying of many of the belHgerent 
countries was decidedly an inflationary force, wasn't it? A part of 
their bujdng in 1914-15 was rush order, large volume buying, from a 
buyer's pomt of view rather badly, awkwardly, done, 

Mr. Renard. So I understand, that there was considerable com- 
petitive bidding even among the different nations. 

Mr. HiNRicHS. Has there been any evidence so far of this foreign 
buying as a disturbing force? Has it come in in large chunks into 
the market and given temporary spurts, or is it being done as business- 
like buying, quietly and continuously at the present time? 

Mr. Renard. I a\ ould say it is being handled very carefully at the 
present time, that fclujprocedure for the British Empire bujdng, which 
jsithe -only ,w«.tihftX';hai|. received, a gE^^^^ deal. o£ publicity that has 


come to my iittention, has been on a very businesslike basis. They 
have established offices, I suppose, here in Washington, working very 
cooperatively with our owti Government's Procurement Divisions. 

I don't Imow, I just surmise that. But I know they have very 
able businessmen at the head of their office in New York, with a man 
that was formerly at the head of a big Canadian organization, an- i they 
have brought experienced men in, and I understand they are getting 
away from competitive bidding which would act as a lever on prices 
to them. 

Mr. Ballinxier. The Hobmson-Patman Act doesn't mean our own 
Government, doesn't restrain the United States Government when 
it purchases. 

Mr. Renard. No; I don't believe it even applies to one of our 
subdivisions lilve a city or State. 

Dr. Kreps. Do you associate the newer and better methods of 
buying on tlio part of the British Government with the fact that to 
do their war buying they have substituted expert purchasing agents 
for military officers who, however patriotic, are amateiu-s in the ways 
of industrial markets? 

Mr. Renard. Well, I wouldn't make that direct contrast, but I 
w^ould say that they have certainly put the control of their procure- 
ment into the hands of a business organization, experienced business- 
men. There isn't any question about that. That is true, as I imder- 
stand it, in their Ministry of Supply in England and right down through 
their agencies in this country and in Canada. 

Mr. AviLDSEN. Mr. Renard, is there any publicity as to what the 
British purchasing commission is buying m this country? Do we 
know what fields we are going to feel their bidding in, their purchasing 
and so forth? 

Mr. Renard. So far I have seen no general publicity given to that. 
Reports are, of course, that they are buying heavily in the aircraft 
industry and in the machine tool industry, and I haven't heard of it 
in any other industries. There was one very large order, I think for 
shoes in the shoe industry, but generally speaking the reports I get 
are that it has been confined to the aircraft industry and the machme 
tool industry. 

Mr. AviLDSEN. Do you feel that a pijrchasing agent would be at 
an advantage if he did have that information as to what they were 
buying, and so forth, so he wouldn't berunning into competition with 
them on the bidding side? 

Mr. Renard. If it were getting to the point where it is going to 
disturb markets; yes. If they were going to come into our markets, 
for instance, and tie up deliveries of our manufactured products, not 
only their procurement work but our own Government's procurement 
work, which might have the same effect, should be known to busi- 
ness organizations. 

Mr. AviLDSEN. Can you see any disadvantage to the British com- 
mission to publish such information? 

Mr. Renard. I wouldn't see any particular disadvantage in it. 
There might be some disadvantage in publishing complete price infor- 
mation, but insofar as the requirements that they are taking out 
of tliis market, I wouldn't see any big disadvantage in it, any more than 
there would be for pubhshed statements of our. own (Government buy- 


ing, which is public information, I believe, if you can find the right 

Mr. AviLDSEN. What would you think of your association asking 
them to make that information available to your members? 

Mr. Renaed. We have had a few requests from members who ask 
us if it were at all possible to find what materials were being bought 
by Government for war purposes or for the preparedness program, 
but 1 have told them franldy that I didn't know where they could 
secure the information unless they seciu"ed it from their suppliers. 
We get the requests from the angle that a buyer, for instance, for a 
large industrial organization thinks that if his suppliers are going to be 
tied up with a considerable amount of war material, he would like to 
know that and anticipate in advance so that he can spread his re- 
quirements over other suppliers, so that he wouldn't get tied up on 
deliveries. Our problem there, so far, I think has been more a ques- 
tion of dehvery than of price. If you tried to buy some machine tools 
today I suppose you would have to wait quite a long time in order to 
get them. Of course the average industrial organization doesn't 
buy airplanes, so we are not particularly tied up there. 

Mr. AviLDSEN. I know my company tried to buy some machine 
tools recently, and we were quoted deliveries of over a year on certain 
types. We couldn't get any in less than 14 months. 

Mr. Renaed. I understand that that is a condition that is very 
difficult to overcome, and I understand a considerable amount of that 
is due to foreign purchases. 

Mr. Hendeeson. Have you heard, Mr. Renard, that some of the 
foreign governments are buying up complete machine tool plants 
and taking them abroad? 

Mr. Renaed. I have seen reports of that. I don't of my own in- 
formation know that, but the Journal of Commerce in New York 
pubhshed a report about 10 days ago that an entiie machine shop 
in Detroit had been purchased and was going to be moved, I don't 
know whether it was to France or to Canada, and mentioned the 
possibility of taldng an entire plant and its equipment out of this 
country. I don't know of any actual instance of it being done, but 
that report has been even in such a well-known trade pubhcation as 
the Journal of Commerce in New York. 

Acting Chairman Boeah. You may proceed. 

Mr. Renaed. The nations at war want our manpower converted 
into the producti6n of our mills, foundries, and machine shops. They 
do not want our pig iron or other materials but they do want the 
airplane engines and machine tools; our men, plants, and manage- 
ment can make from those materials. We want and need certain 
raw materials those nations can furnish. There has been no shortage 
of raw materials so far; there seems to be no present need to anticipate 
either a shortage or a scarcity of them. 

This country has a double-barreled objective to watch and provide 
for in that situation. First we must avoid, for our own good as well 
as that of our foreign customers, the probable result of a bottleneck 
created by the demand in a few industries for skilled machanics. 
That could blow up the price level of finished materials and induce 
maladjustments with dangerous resxilts. 

We must make certain also that adequate supplies of tin, rubber, 
manganese, chromium, silk, burlap, wool, and other essential materials 


whicli must be iuportcd me. made availablo for onr rpquircmonts ai 
prices which do not net ns a lover on onr price levels. As onr supplies 
of these materials mnst now move through governmcnfid control 
agencies of the producing countries the influence of this Government 
might be helpful. Perhaps that is already being given to us, as there 
has been no cause for criticism and this comment is not intended as 

Mr. Henderson. I gather what you say is that tin, rubber, man- 
ganese, chromium, silk, burlap, and wool and some otliers are under 
control agencies of foreign governments. 

Mr. Renaed. Of the producing governments abroad, yes. 

Mr. Henderson. That means that an individual producer in this 
country usually has to treat with an organized producing group. 

Mr. Renard. That is true. Their production and sale, as well 
j)s their purchases, are funneled through these governmental controls. 
For instance, the British Government, as is well known, took over the 
entire Australian wool crop; recently a certain percentage of that 
has been released, possibly through the influence of our own govern- 
mental activities, so that probably a few months from now, in fact 
at the present time, there is not the shortage that seemed apparent 
only a few months ago. That is an illustration. The same thing 
could be true in any of these other essential materials that we are 
compelled to import. 

Mr. HiNRiCHS. The price of wool is up about 45 percent now over 
its August level, isn't it? 

Mr. Renard. I don't loiow just exactly what the figure is, but it 
has declined somewhat over the past month. I think it got up higher 
than that, and declined some. 

Mr. HiNRiCHs. About 154 was the peak in our series, I believe. 
I am reading from the chart. ^ It looks as though it got to 154 and 
declined to 145 in the past month. 

Mr. Renard. There has been a decline there. I think that is due 
l)robably to the fact that the information has gone out that a certain 
percentage of tliis British production of wool will be made available 
to us so that we won't have the shortage that we feared. We may 
have a scarcity at the present time, but it is not an actual shortage 
so far, and not nearly such an apparent shortage was we were thinldng 
of say 60 days ago. 

Mr. HiNRiCHS. We have two concerns, haven't we? One is a 
physical shortage in which you are proliibited from receiving more 
than a certam supply, and the other is the question of a possible 
monopoly price w^hich j^ou are asked to pay even with reference to 
fairly adequate physical supply. 

Mr. Renard. Yes, they might make the material available to us 
and still put a price on it that would be high. 

Mr. HiNRicHs. That would act, in the case of some of these ma- 
terials as a fairly substantial price lever on the American economy. 

Mr. Renard. Very definitely. For instance, if they could jack 
up the price of wool, it would of course have its effect all through 
woolen products. 

Mr. O'CoNNELL. What you are suggesting as regards these com- 
modities to w^hich you have referred is that the power exists upon the 
country controlling the output, the same sort of power any monopoUes 

> See "Exhibit No. 1472," supra, p. 11056. 

11138 concentSation of economio power 

would possess, to charge whatever the traffic mil bear. We have no 
way of knowing yet whether that power will be exercised, but it exists. 

Mr. Renard. I think that is true. I think they are organized, and 
I don't think we should take snap judgment that they are going to use 
that organization wrongfully, and I think we should have organization 
to at least present our picture of the situation and see that we do have 
proper influence at court when the time comes when we do need these 
commodities. In other words, as I understand it, back during the 
previous war period, the tin prices got exceedingly high over a period, 
and then through an agreement, as I understand it, worked out 
between representatives of our Government and the tin control com- 
mittee in London the price was very materially reduced, just through 
an arrangement made by representatives of our Government with 
the representatives of that Government which had control. 

Mr. Henderson. Mr. Renard, in that connection I have before me 
some of the testimony of Bernard Baruch of the War Policies Com- 
mission, and he said — I am quoting:^ 

When such study indicated new foreign sources, the power of the Board — 

The War Industries Board — 

in the field of international economic strategy was immediately called into play. 
Some of the incidents of this administration were almost romantic. We withheld 
Swedish iron from the Central Powers by buying it ourselves, persuaded Chile to 
disgorge nitrates by" the discovery that her gold reserve was sequestered in a 
Berlin bank. We drove from Spain the mules she had refused us by dangling 
before her a supply of ammonium phosphate for which she was starving, procured 
jute at a reasonable price bj'- threatening to cease the withdrawal of silver dollars 
from our monetary system, which we had done to stabilize Indian currency. 

That indicates the romantic methods this Government was called 
upon to employ last time in order to get some reasonable supplies of 
things we needed. Isn't it true that in the last war we had consider- 
able difiBculty in getting all these commodities you mentioned for our 
industrial purposes? 

Mr. Renard. That is quite true, until our War Industries Board 
used these romantic methods, as you say, which stated baldly, I think, 
is that they used pressure in representing the demands of our industries 
and our Government for those materials. 

Mr. Henderson. They had to have them and the}' went out and 
got them. 

Mr. Renard. I thint that is true. I think if it comes to a show- 
down we should be in a position to do the same thing again if necessary. 

Mr. Henderson. That is, even in this period of neutrality. 

Acting Chairman Borah. What will they likely do when we do 
that with our cash-and-carry proposition? 

Mr. Henderson. I should be glad to hear the Senator on that. 

My point is this, isn't there a likehhood that American producers 
are going to be up against a great deal of control of these important 
commodities, and since they need them so badly and these countries 
need buying power so badly, these countries will be tempted to use 
their power to jack up prices? 

Mr. Renard. Of course there is that offsetting factor, that they do 
need their buying power in this country for certain materials that 
they must purchase over here. They need the exchange to tinance 
that. -Of course we hear lots of reports about how much exchange 

« House Doc. No. 163, p. 43, 72ud rou?., 1st Sess., "Report or tbe War Policies Commission to the 


they already iiave here, how much money they have available in this 
country to buy, but thej^ are also going to have boats moving over 
here in order to take purchases out of tliis country, so they will want 
to get materials to us. There are these factors favoring their supply- 
ing these materials to eveiy possible extent they can. They will have 
boats coming here to get our materials and they can very well bring 
materials over. They need money with which to buy the materials 
over here, so there is that factor. But if it does come to a show-down, 
there might be the possibility that they would get prices out of line 
for some of that material, which would, as the Doctor says, become 
a lever on our prices. 

Dr. Kreps. They would have an interest in having the price of 
wool relatively high, would they not, because it would make more 
foreign exchange? 

Mr. K.ENARD. There would be that fkctor, unless there was too 
much of a differential between our prices and their own, although of 
course depreciation of currencies within those countries may offset 
that. As we go along in this period the chances are that those 
currencies will depreciate even more. There is an 11-percent depreci- 
ation now with Canadian exchange, so that throws our prices that 
much higher in purchasing here as against purchasing in these coun- 

Mr. Henderson. Independent of the method that might be used, 
whether romantic or otherwise, there is no doubt in your mind, is 
there, that this Government needs to keep an eye on the prices of 
controlled commodities that come from abroad? 

Mr. Renard. I would say, generally speajdng, that is true, yes. 
I think that probably has been done and that probably is one of the 
reasons why they have been so satisfactory over the past few months, 
but certainly we should pay careful attention to those prices. 

Dr. Thorp. May I ask one question, Mr. Henderson? Are those 
devices which you have quoted ones which were used prior to the entry 
of the United States into the war, or subsequent to that time? 

Mr. Henderson. They were after, I think. 

Dr. Thorp. Was there any indication during the World War that 
the Government used any of these devices in the interests of our own 
consumers or our own domestic industry, or did the problem only 
arise after we entered the war? 

Mr. Henderson. As I recall from the War PoHcies Commission 
report, it did not arise imtil after we went into the war. I don't 
believe that there were substantial uses of any pressures on 

Dr. Thorp. I think it is an interesting point to note that wc 
suddenly became concerned about these price situations only after 
we entered the war, although they had existed in a number of cases 
for some time before that, but up to that time the cost and burden 
had been on industry and on consumers, and it was only when we 
faced the problem of Government organization that we became aware 
of the difficulty. You would feel, Mr. Renard, wouldn't you, that 
there was a very serious impact of these prices on consumers within 
the country quite regardless of whether or not we were engaged in a 
Government program of preparedness or of Government purchasing? 

Mr. Renard. I think that we have that very definitely to keepl in 
mind. Doctor, as well as our own governmental program of prepared- 
ness which, as I understand it, is getting under way now. 


Mr. Henderson. As I recall from reading various records of 
war economics, at the time this Government did try to exercise some 
of its powers in relation to getting materials, prices were already so 
far out of hand there w^as very little that could be done about it. 

Mr. Renard. Yes, if they once make the move it is difficult to 
bring them back. 

Another importan'. factor is the procurement procedure of our 
Government in handling the preparedness program. Our Govern- 
ment is and will be the largest factor in the purchase of many materials. 
The procedure should be sound and carefully handled to prevent the 
development of artificial price levels. Congress has given our pro- 
curement officers a difficult job by instructing them to purchase and 
store materials at tliis time. 

Dr. Kreps. Would you, like to amplify that by an example or so? 

Mr. Renard. If you will let me finish that paragraph, I believe 
I would. 

Perhaps that policy of inventory accumulation will have bad 
after efi'ccts just as similar piling up of inventories by business does. 
The immediate problem is to secure mileage for the dollars spent, in 
material values. Careless handhng of this large buying program 
could easily inflate prices, and values must have first consideration 
regardless of market conditions. 

What I am trying to bring out there is that unless we are very 
careful in our purchasing procedure for our very extensive prepared- 
ness program we will find Government and our own mdustries bidding 
for the same materials, which naturally will create an inflationary 
effect. One of the best illustrations you can possibly have for that is 
the price of liemp and the movement in the price of hemp a few months 
ago, when the Government Procurement Office attempted to, or at 
least asked for bids on about 20,000 tons, w^hich is possibly half as 
much as we have normally imported in any j^ear over the last 7 or 
8 years, and cerLainly a great many times any amount that the 
Government has purchased in any recent period. That naturally 
would just skitn the market, as you would say, of all the hemp that 
would be available, and have everyone bidding for it. 

As I understand it, the price of hemp doubled within a week or 
10 days. Then the Government withdrew its hiquiry, apparently 
realizmg it was havmg a too unstabilizing effect on the market, and 
that market has settled back partially, but nowhere near back to the 
point it was. Does tliat answer your question? 

Dr. Kreps. Yes. 

Mr. HiNRiCHs. Anybody who was so unfortunate as to buy hemp 
at that same time is left holding it rather high and dry, isn't he? _ 

Mr. Renard. Yes; he is left with 13-cent hemp, because the price 
lias since dropped to about 10 cents, whereas before this movement it 
was about 5 cents, or slightly over .5 cents. The peculiar situation 
there is that a large part of this hemp comes from our own Philippuic 
Islands, as I understand it, and we shouldn't have any great difficulty 
in our own governmental agency in securing products from the 
Philippine Islands. If it were coming from Gennany it might be an 
entirely differet problem, because it might be tied up so that we 
couldn't get deliver^^ of it, but vv^hy we should try^ to tie up all of the 
hemp that our Navy, for instance — and I suppose it is for the Navy — 


could use over a period of 3 or 4 years in just a short time like that 
is hardly understandable. 

Mr. O'CoNNELL. Mr. Renard, how would you suggest meeting 
that type of problem? Would you say the collection of adequate 
informatdbn as to the available supply and other market conditions 
was essential to buy intelligently? 

Mr. Renard. I think a general picture is what you have to have 
there; yes. We have a number of problems in connection with this 
preparedness program that are going to be exceedingly difficult to 
handle, especially as the Government, and very rightly, believes we 
should have supplies of certain of these essential materials. But of 
course the proper time to purchase them would have been about a year 
ago or 3 years ago, in one of these periods when there was an enormous 
overproduction, rather than during the war period. 

Now, going in at this period, we have to be exceedingly careful to 
avoid inflating our prices by these purchases. I think one element 
that must enter into that picture is that a great many of these essential 
materials the Government can't use in their raw form. They have 
to be manufactured and processed by our American industries, and 
why the Government should carry a duplicate stock of the materials 
our industries are goLag to have to process for the Government 
before they can be used is a Uttle bit difficult to understand. 

Now, if we are going to have Government and industry both bidding 
for inventories of the same materials for the same purpose, we are 
naturally going to get into an inflated position. Industry and Govern- 
ment are going to have to work close together without question on our 
preparedness program and on any program which requires the proc- 
essing of materials, and I think there is a point where we should 
begin to start working together. 

Dr. Kreps. If the industrial purchasing agent were asked over a 
period of time to get 20,000 tons of hemp, what in general would be 
his procedure? Would he get the order all at once? 

Mr. Renard. No; the chances are that he, of course, would have 
the advantage of handling it through negotiation with the sources 
of supply rather than just coming out and bulling the market by 
asking for 20,000 tons of hemp. 

Dr. Kreps. How would you suggest, then, that the Governmental 
procedure in purchasing ought to be modified to accord with industrial 
purchasing procedure? 

Mr. Renard. I am not an expert on Government procurement 
and I wouldn't want to make any definite statements that might 
appear critical of our Government procurement officers without 
Imowing much more about it than I do, but I think that there is a 
fine opportunity there for us to use the procurement methods that 
are used in industry rather than, well, to use a good illustration, the 
best thing I could say is that if the Congress decides that we want 
$10,000,000 worth of manganese, we shouldn't be interested only in 
spending $10,000,000, we should also be interested in how much 
manganese we get. 

Mr. Henderson. In other words, in a situation such as you have 
described, instead of the more you buy the cheaper the price, the 
more you buy the higher the price? 

124491 — 40 — pt. 21 9 


•Mr. Kenard. By cleaning up the market, that is true, and particu- 
larly where you are getting dupHcate stocks and competing with 
industry for those stocks. 

Manganese, as I understand it, taking that as an illustration — 
there is no shortage of it and no difficulty about it so far as I know, 
is largely used in the production of steel, and our steel producers are 
the ones that are going to have to use that manganese in order to 
supply it to the Government. 

I don't know just what the Government is going to do with a 
tremendous supply of manganese, except in their own arsenals where 
they do probably use some portion of it. But a very large part of 
^hat manganese is going to be processed in industry, and it seems to 
me that, as I said before, there is a point where Government procure- 
ment and industrial procurement should begin working together if 
that manganese is going to have to be used by the steel industry, it 
would seem to me that the steel industry could be very helpful in 
working out the plans for procurement rather than bulling the market 
on it. 

Mr. AviLDSEN. Do you think the laws requiring pubhc sealed bids 
should be modified? Do you think the Government Procurement 
Office should negotiate hke a private corporation? 

Mr. Renard. I wouldn't say that and I wouldn't want even to give 
an opinion. You can probably get a much more expert opinion on 
that from Dr. Forbes, who I understand is going to talk to you a Uttle 
later,^ as we in industrial purchasing recognize Dr. Forbes as an out- 
standing authority on Governmental procurement. 

Mr. Henderson. He has also been recognized by the Government.- 
As I understand, he has been called in as a techxdcal consultant. 

Mr. Renard. Since that would be the better evidence, I woulc^ hesi- 
tate to give an opinion. 

In my opinion, price behavior of the last few months has been very 
satisfactory, and the statistical information confirms that view. A 
very desirable moderation has been shown, and the attention given this 
important problem by the Government and bv the leaders of industry 
has been admirable. 

Included in the announcements of first-quarter prices for steel and 
aluminum — which by the way were announced with no changes, as 
you probably know — we find sound advice to aU businessmen. We 
can hope that leadership which says: "This company is not in favor of 
taking advantage of extraordinaiy conditions to seek prices out of 
harmony with costs," and "In spite of rising costs and many uncer- 
tainties, tve desire to cooperate in preventing inflationary tendencies," 
wiU be followed, for we may be entering an extended period when in- 
flationary dangers will always be present. 

One essential service is a continuance of the development of sound 
statistical information as a basis for decisions on price pohcies, and the 
distribution of those statistics. Information on the availabiUty of 
materials was never more important and it has decided influence on 
price trends. One of the long established indices of demand — ma- 
chine tool orders — is no longer distributed generally. 

That is just within the past 3 or 4 months. 

> For testimony of Dr. Russell Forbes, see Infra, pp. 11150-11166. 


A year or more ago the copper industry discontinued, for a time, the 
distnbution of important supply and production information. 

That, by the way, has, I understand, again been discontinued within 
the past 2 or 3 months. 

Such actions are not in accord with the trend and, in my opinion, 
should be discouraged. Especially is that true if the information is 
gathered and then made available only to a limited circle of producers 
and consumers. 

Much of the statistical information furnished to business by our 
Government is accepted as the best available; its expansion and, where 
possible, a reduction in the time lag would be very desirable. 

It is possible the practice of blackouts and censorship will curtail 
information from the usual channels on commodities which must be 
imported. Governmental controls in the producing countries will 
have the facts, and possibly some thought should be given to the prob- 
lem of making sure they will become available for our use in develop- 
ing our price policies. Lack of information or misinformation fosters 
speculative excesses, and one of the strongest forces that can be used 
to avoid inflation is weU-informed opinion that results from the wide 
distribution of accurate information on supplies and prices. 

Mr. O'CoNNELL. Mr. Renard, I notice in the last paragraph on 
page 6, which refers to the recent announcement of first-quarter prices 
for steel, you refer to the leadership of the steel industry. Do you 
mean that to indicate that you consider an industry such as steel to 
operate as a leader for other fields of industrial activity? 

Mr. Renard. Yes; there isn't any doubt at all but what not only 
the steel industry but the leaders of the steel industry are probably 
recognized and have considerable importance and influence on other 
industry, particularly on smaller organizations. 

Mr. AviLDSEN. Mr. Renard, you are familiar with the rise in prices 
which took place in the last war and also the year 1920 when we had 
another boom in which the general commodit;^ price level went 
higher than it had been in the war. Is it your opinion that that rise 
to a great extent was due to bidding among buyers, dealers, specula- 
tors, and so forth, for the commodities, rather than collusion among 
the producers to get a higher price? Did you have practical personal 
experience in that period? 

Mr. Renard. I had personal experience in purchasing during that 
period ; yes ; and of course there were the extended deliveries that were 
piling up the inflationary situation. Whether it was influenced by 
price control or influenced by buyers bidding would be hard to deter- 
mine. I don't know that I would want to give an answer. Price 
controls, in my estimation, can't hold for any length of time unless 
there is active bidding for the product. That is particularly true in 
any industry where you have a large number of producing units. 
They can't build up prices and continue to pyramid them if they don't 
have a demand for the product. . 

Mr. AviLDSEN. But you don't have any opinion as to this last 
boom, this 1920 boom, as to what was the primary cause? 

Mr. Renard. No; I wouldn't want even to give an opinion on that. 
It was difficult to get materials and there wasn't any doubt at all but 
that there was bidding going on among buyers for those materials in 
order to secure them. I think we are in a possible position in that 
connection, for instance, in the machine tool industry now. You get 


an offer of a delivery of one year on some machine tools that you find 
it essential to have in your production operations ; you go to some 
manufacturer and say, ''Well, your standard price on that is $3,000 
but you can't deliver it for a year. I will give you $3,500 for one if 
you win give it to me in 3 months." If you do that you have estab- 
lished a new market for that machine tool, $3,500, and someone else 
comes along and wants it badly and he will pay $4,000 to get 1 in 
3 months and you have estabhshed another price for it. That is 
where we go in a situation of that kind. 

Mr. AviLDSEN. I had personal experience along that line. In 1920 
that was going on. I wondered if you had any opinion as to how that 
could be prevented in case of another boom and that same thing won't 
happen all over again. 

Mr. Renard. I don't know what the answer is unless it is just as 
much complete factual information as we can possibly have available 
to avoid it, so that there is no area in there of speculation that you 
can't actually base your price policies and your production policies on. 
If we can eliminate that blank space that we must guess about, I 
think that we can get away from a lot of our inflationary tendencies, 
but when a buyer doesn't know the facts about when he can get steel 
or putty or what-not, he is liable to go into the market and just be 
willing to pay almost anything that he has to in order to secure it. 

Mr. AviLDSEN. Do you thmk that the reports as to inventories, 
sales, unfilled orders, and so forth, should be compulsory or voluntary? 
Do you think on the voluntary basis we will really get good reliable 
information, timely information? 

Mr. Renard. I would think that on a voluntary basis you would 
get just as much and just as satisfactory information as you would 
on a compulsory. I think it would be to the interests of all bu^ess- 
men to have that information available. It might in some industries 
require a Uttle sales work. 

Mr. AviLDSEN. We know now that the copper people evidently 
don't feet it would be advantageous to them to have information 
available to their customers. 

Mr. Renard. Yes; that is a rather surprising situation, because 
there we have an industry that is even at the present time trying to 
resist the lowering of an import excise tax to protect their product, 
and at the same time refusing to give information about their product. 
That seems to me to be a sort of cockeyed situation. 

Mr. AviLDSEN. That is why I asked whether you didn't think it 
would have to be compulsory to ^et the information. Also, don't 
you think we should have information from jobbers, brokers, dealers, 
wholesalers, and so forth, as well as just manufacturers of a com- 

Mr. RENA.RD. Yes. The farther it goes the more complete it 
would be, of course, because the so-called invisible stocks may be a 

Mr. AviLDSEN. Doesn't every boom create a number of specula- 
tors, jobbers, and dealers who accumulate large stocks of merchandise? 
Mr. Renard. That is particularly true and that is another element 
in your price structure. I wouldn't want to say how many industries 
there are, but there isn't any doubt at aU but what a number of our 
industries find themselves in the position where they must protect 
their distributors. Sudden movements of prices down, not up, are a. 


very serious matter for the distributor who has a heavy stock. When 
prices are advancing, of course, that is an entirely different problem, 
the distributor appreciates his stocks, but when you have gotten 
your prices up high that is one of the difficulties in getting them back 
down. Most industries, I think, try to protect their distributors' 
stocks to avoid the deflation that they cause. 

Mr. O'CoNNELL. I understood you to suggest that in your opinion 
price control cannot be maintained unless there is active bidding for 
the commodity being offered and that that was particularly so where 
jou have a large number of producers. I take it it would follow that 
it becomes less and less so as the number of units in the productive 
side becomes less and less. 

Mr. Renard. That would be true; yes. 

Mr. O'CoNNELL. In other words, an industry composed of a few 
large units is better in a position to maintain price control regardless 
of the demand side. 

Mr. Renard. That would be true. For instance, 1 company can 
fix its price. Ten companies can't do that, but 2 companies might 
come closer to it, 3 companies a little farther away; when you get up 
to 100 copipanies the chances are that unless you have a supporting 
demand you won't be able to control the price, to fix a price and 
absolutely control it. 

Dr. Kreps. Wb^t ^re the factors that seem to you to make industrial 
purchasing agents relatively helpless aside from lack of information? 
To be specific, at the present time the price of zinc has increased be- 
tween 35 arid 40 percent. To what extent do industrial purchasing 
agents have the power to make the price of zinc and to what extent 
are they compelled to accept it? 

Mr. Renard. Well, of course, when there is a very considerable 
demand for zinc they are practically compelled to accept the price, 
but if they know the demand factors and the supply factors they can 
stay out of the market if the price gets out of hand. That is the only 
defense that they have, and as a matter of fact zinc has declined within 
the past 10 days or 2 weeks; they have had a very considerable decline 
because of the fact that the lai^e consumers of zinc were probably in 
a position to hold off and not buy. 

Mr. Henderson. The price of zinc is based on the foreign price, 
plus shipping is it not? 

Mr. Renard. 1 don't know just how far that goes, but of course 
the zinc price in the British Empire, which would be the foreign price, 
has been fixed by the government at a price materially lower than our 

Mr. Henderson. Doesn't the price in this country for American 
produced zinc tend to be the foreign price plus shipping, insurance, 
and the hke? It is based on the London price because the London 
price has been considered the world price on zinc. If the cost of 
shipping goes up, despite the fact that the zinc is produced and used 
in mid-America, the price of zinc goes up also. 

Mr. Renard. That would be true if they followed it completely, 
but on the other hand if they are going to follow the British control 
price it would be going way down, and I understand the British control 
price on zinc now is about 3K cents. 


Dr. Kreps. Then there are situations beyond your control where 
the industrial purchasing agents, instead of making the price, are 
compelled to accept it? 

Mr. Renard. Oh, yes. 

Dr. Kreps. And their efficacy is more or less limited to contagious 
price situations, that is the prevention of pyramiding of buying. 

Mr. Renard. Well, and buying at the right time and buymg in the 
right quantity so as not to pyramid orders. 

Dr. Tkorp. On that point, you tallied about the information on the 
supply side. Is it at all important to get information on the demand 
side? Isn't it conceivable, for instance, that unrelated buying of 
these various purchasing agents might hit the market just as the 
Government purchase for hemp hit the market? 

Mr, Renard. That would be possible. 

Dr. Thorp. And you might get, therefore, through the erratic way 
in which private buying would develop, an ignorance about how much 
of it represents speculative demand and how much of it represents 
demand for consumption, a disorderly situation. Let me ask it this 
way. To what extent is information known through industries as to 
the purchasing requirements of the various members of a given 

Mr. Renard. I don't know that there is any definite information 
on that from the consuming industries. The producing industry in 
that product I think generally has a very good idea of what, the con- 
sUining industries will consume over a given period, and I imagine to 
some extent know what the so-called invisible stock is, that is, the 
stocks in the hands of the consuming industries. 

Dr. Thorp. Your logic, then, I take it, would be something hke 
this-^-that since the consumers are a much more scattered group 
ordinarily than the producing group, the most useful tiling to do is 
to get as much of the information which the producing group may 
have out into the hands of consumers as possible. 

Mr. Renard. That is right. 

Dr. Thorp. And probably one can't do very much by organizing 
the consumers themselves to coUect information about their require- 

Mr. Renard. That would be true. They would have to work 
together, and as a matter of fact I understand that ha^ happened in a 
few industries where arrangements have been made by the producing 
group with several of the larger consumers, so that they would ex- 
change information on producers' stocks and consumers' stocks as 
indicative and in that way attempt to develop a balance. 

Dr. Thorp. You talked about controls particularly with reference 
to controls over selling. Does it ever happen that control groups are 
present on the buying side of a market? 

Mr. Renard. I don't think that is true in industrial buying. I 
have never heard of it. Do you mean a group of buyers getting 
together and deciding when they are going to buy and what price 
they are going to pay? 

Dr. Thorp. That is right. Where a product is used by a limited 
number of industrial consumers they are getting together for the 
purpose of holding the price down, the same way that sellers might 
get together for the purpose of putting the price up. 

Mt. ReNatid. That might be entirely possible, but I have never 
hanJtfin ins'.iance of it caHad to my attention, Doctor. 


Mr AviLDSEN. Mr. Renard, is it true that your association has 
advised its members that it is the opinion of the majority that pnces 
will advance next year and that wise purchasmg agents wiU put m 
larger stocks of goods? I have heard that statement made by pur- 
chasing agents. I wonder if you would care to comment on it. 

Mr Renard. That is not true, because our association never ad- 
vises its members to buy or not to buy or to get their prices high or 
prices low We do present information on which they can base their 
purchasing policies. We have economic consultants that prepare 
articles for us regularly, that appear in our weekly mformation bulle- 
tins that go to our members, and one of those economic consultants 
may make that statement his opinion, but we also frequently make 
the statement right in the bulletin that that is the opinion of the 
consultant and it is not a recommendation of the association, vve 
never make a recommendation to buy or not to buy, although 1 be- 
lieve that it is the consensus of opinion that there will be a gradually 
advancing price level. . . . 

Mr. AviLDSEN. Next year, early next year, prjces wiU continue to 

"^Mr Renard. That we are in a low now. In other words, there 
was a bulge in September when the very thing that Dr. Thorp men- 
tioned did happen. All buyers went into the market, you might say, 
almost haphazardly, there for a week or 10 days, because of this war 
psychology, and as a result we had a real bulge in prices. A great 
many of them are settUng back now as we get away from that extreme 
demand of that period, but I think it is the consensus that conditions 
are generally such that we are in a sort of waitmg penod with prices 
setting, and that they will now take a more orderly development, 

but will advance. . „„„„„ 

Mr. AviLDSEN. When you say consensus, do you mean consensus 

of purchasing agents? . 

Mr. Renard. And our consulting economists. , , ^^ ^ . 

Mr. AviLDSEN. The purchasing agents themselves feel that pnces 

are going to rise? , , , i i • • • 

Mr. Renard. That there will be a gradual and orderly nse m pnces 
and not the speculative outburst such as we have had; and there, ot 
course, I would also want to mention m connection with that that 
with an orderly rise in prices there is no particular need for the m- 
dustrial buyer to go out and build up an extremely large mventory. 
Mr. AviLDSEN. But he would put in more stock than he ordmanly 

"^"^Mr' Renard. He would have to put in more stock now because of 
the length of time it takes to get deliveries For mstance, m August 
he could get steel delivered in 2 weeks. Now he might have to wait 
3 months He has no control over that. Inventones Pyramid as 
our production goes up. We have to cany more matenal, or at^ast 
have commitments for it and make certam we are gomg to get it. 

Mr. AviLDSEN. Would you say the average purchasing agent has 
doubled his inventories as compared with a year ago, or 6 months 
ago? How much do you think he has increased his mventory ^ 

Mr. Renard. Again I wouldn't want to give an exact figure, borne 
of the figures I have seen say that mventories haven t mcreased at all 
at the end of October, and you have the factor that you have a longer 
cycle of deUveries, but I think that generaUy speakmg mventones 


have very materially increased over the past few months because of 
the conditions that developed. 

Mr. Henderson. Mr. Renard, I am very much interested in 
your prediction of an orderly rise in prices, and in your saying that 
purchasing agents aren't particularly disturbed so long as it is orderly, 
and — I gather from your paper — so long as it represents actual in- 
creases in cost. We are .operating now at a level of production which 
is higher than 1937, and the level of prices is about eight points lower 
than the peak of 1937. Have you any opinion, based on extensive 
price information which your experts collect, as to what level of prices, 
or price increases, could be well withstood at this level of production? 

Mr. Renard. No, I haven't; and as a matter of fact, I haven't 
given it any real thought as to just what that level might be. Of 
course we know the disastrous effects of what happened in 1937. In- 
ventories piled up, and then we just had a break-off in both- prices 
and production as a result of it. There isn't any question at al' but 
what we had too fast a movement there in both prices and produc- 
tion. Just where that point would come I don't know. It would 
depend, of course, on whether we maintain the demand we have for 
this production over quite a period of weeks. If we go ahead with 
continuing demand for practical capacity of our plants, of course your 
gradual increase in material costs, labor costs, and so forth, are going 
to bring you a gradual increase in prices, just as going the other way 
would bring you a gradual decrease. 

Mr. Henderson. But if we did not have an excited movement in 
costs, we really ought to have a reduction in prices, because unit 
costs are going down. 

Mr. Renard. That works out up to the point of capacity, yes; but 
when you start from a level, say, of LPS pricing of something like 76, 
with a level of capacity use of about 65, and then you go up to 90 
percent use, your unit costs have gone down. 

Mr. Henderson. Theoretically, if you got to using obsolete equip- 
ment and higher cost labor, thus increasing the costs, then you could 
understand why there would be price increases. 

Mr. Avildsen. Why would we have to increase the price then? 
Why couldn't you use some of the excess profit to sustain the opera- 
tion of the obsolete equipment? I think the way you worded it 
would imply that that would be justified. I don't know whether it 
would be justified even then. 

Mr. Henderson. I didn't say you couldn't do it. All I know is 
that when unit costs are going down, that is when prices are on the 
increase, and it is contrary to the old idea of mass production. 

Mr. Renard. That is true. 

Mr. Henderson. That is, if we started this bulge at around 75 or 
76 in the price level, without any substantial increase in the costs of 
labor — and we have had just a moderate increase — theoretically we 
probably should have had a reduction if prices followed cost. But 
as we know, they lag considerably behind both on the up side and 
on the down side. Now, what I was trying to get at, and what I 
guess you can't give me, is whether your experts have any idea as 
to how far the price level could go at this level of production without 
getting alarming. 

Mr. Renard. No, we haven't given any thought to that. Of 
course in that connection, in the development of prices in the mass- 


production industries you have the one other procedure, which is 
reportedly followed in the automotive industry, where they fix a 
price based on a certain production of autuomobiles. In other 
words, if they were only going to make 5,000 automobiles, the price 
of those automobiles would be very high, but the large automobile 
manufacturers say, "We are going to base this price on a manufac- 
ture of 400,000 automobiles," and in that way figuring out their 
costs on that basis. 

Mr. Henderson. I presume you noticed in the trade journals' 
business pages before this upward surge took place that imit costs 
in American industry were never lower. 

Mr. Renard. Yes. 

Mr. Henderson. And I think you recognize too that the break- 
even point of many industries is lower than it has ever been. 

Mr. Renard. WeU, I think that over a period there the company 
that couldn't break even at, say, 60 percent of its capacity, was 
considered poorly managed. 

Mr. Henderson. If they can break even at 60 percent, and if 
they get to 80 or 90 percent with no excessive increases in cost of 
material or labor, we ought to have a reduction in price, or at least 
no great bulging in prices. 

Mr. Renard. That is what I brought out in my statements that 
we should have that cushion in there of expanding production, lowering 
the unit costs by scattering the overhead. 

Mr. Henderson. I think we are fortunate, Mr. Chairman, to get 
the purchasing agent's point of view on some of these price questions, 
because I have generally found that the purchasing agent who is on 
the line buying goods conforms rather closely to the best theoretical 

Mr. HiNRicHS. Mr. Chairman, may I ask a question, please? 
I would like to come back, Mr. Renard, to the question of the collec- 
tion of inventory information. You indicated that you thought the 
information could be collected on a voluntary basis, and if so, that it 
should be. Do you feel that the public interest in that information 
is so great that if a sincere effort to collect it on a voluntary basis 
fails, that the Government should use compulsory powers to secure 
information there precisely as we have compulsory powers for a 
biennial census, for example? 

Mr. Renard. I haven't given that any thought. I won't say 
oflthand that there would be any need for the compulsion to begin with. 

In certain lines, certainly in these critical materials, it might be 
sufficiently important to do that. 

Mr. HiNRicHs. There certainly is a very great public interest which 
depends upon that information. 

Mr. Renard. There isn't any question about that. 

Mr. HiNRicHS. A second question along that same line. The 
information with reference to inventories is an important advantage to 
well-informed bargaining, that is, sellers who have information with 
reference to inventories dealing with buyers who don't know anything 
about inventories have an advantage. Similarly, buyers with in- 
formation on inventories have an advantage in dealing with sellers who 
are badly informed, don't they? Won't that mean, then, that if you 
are going to exercise any pressure in the collection of inventory 
information, at least in those situations where the number of buyers is 


actually less than the number of sellers, you should have inventory 
information from the buyers as well as from the sellers? Take a 
specific example: There is information with reference to inventories in 
the hands of gray goods mills. There is no information with reference 
to inventories in the hands of converters. There are many less con- 
verters than there are gray and cotton mills, and if you are getting an 
inventory picture you need the information of inventory at both 
points m the process, if you are going to have the whole picture, don't 

Mr. Renard. Well, yes; where there is any considerable percentage 
of either the production or consumption tied up, you might say, m 
process, as it would be with the converter; as I understand it the con- 
verter ordinarily doesn't have the material very long. He passes it 
through, and we do have some information on the gray goods on hand 
probably in the next step of the processing. 

There isn't any doubt at all, though, but what if the information on 
the producers' inventories is valuable, that all along the Une is of a 
similar value in determining what the available supply is. 

Mr. HiNRicHs. So that speaking for the purchasing agents in 
general, you would like to see inventory information accumulated at all 
points where that is significant, even though it might lessen in some 
instances the buyer's advantage at the present time. 

Mr. Renard. I would state as a general principle, yes, that the 
inventory information, supply and demand information, is so valuable 
that I think the buyer recognizes that value and in a great many 
instances actu ally contributes information on an exchange basis in 
order to secure the information from the producer. 

Acting Chairman Borah. Thank you, Mr. Renard. The Com- 
mittee wUl meet at 2 o'clock. 

(Whereupon, at 12:30, a recess was taken until 2 of the same day.) 


The hearing was resumed at 2:15 p. m. upon the conclusion of the 

Acting Chairman Borah. Do vou solemnly swear the testimony 
you shall give in this hearing shall be the truth, the whole truth, and 
nothing but the truth, so help you God? 

Dr. Forbes. I do. 


Dr. Kreps. Dr. Forbes, would you give your full name, please, 
for the purposes of the record? 

Dr. Forbes. Russell Forbes. 

Dr. Kreps. And title? 

Dr. Forbes. Commissioner of Purchase, City of New York. 

Dr. Kreps. How long have you been in that office? 

Dr. Forbes. 6 years. 

Dr. Kreps. And how long have you had experience in purchasing? 
Where were you prior to that time? 

Dr. Forbes. Prior to that time I was professor of Government at 
New York University and consultant to the National Association of 


Purchasing Agents in the field of governmental purchases. Prior 
to that I was a,ssistant secretary of the National Association of 
Purchasing Agents. 

Dr. Kreps. Will you proceed? 


Dr. Forbes. Our experience in purchasing for the city of New 
York shows that it is impossible for us to make any generalization 
about price fluctuations in the commodity markets. We do not 
claim that our experience has been typical or representative of the 
experience of industrial and commercial organizations. We can only 
cite the record of large-scale buying for consumption and not for 
profit or resale. Price trends during this year, according to our 
records and study, fall into three general classifications. 

Some commodities, such as foods were priced at approximately a 
cost level in the spring of the year, enjoyed a sharp rise in the early 
fall, and have now seemingly leveled off at a point slightly higher 
than the spring quotations. Then there is another group, such as 
fuel oil, lubricants, and textiles. These commodity groups remained 
static until September 1, when prices increased sharply, havLag since 
remained at the newly adjusted levels, but ^ive every indication of 
resuming an upward trend in 1940. The third group includes com- 
modities such as coal, electrical equipment, and certain nonferrous 
metal products for which we have contracts at a fixed price cohering 
the period which is under review. In these instances, we do not have 
any experience data as to price movements and fluctuations. 

Nearly all commodities have had one common characteristic. On 
or about September 1, all prices increased. By the middle of October, 
however, the majority had receded. The causes for the price reces- 
sions which did occur may be attributed in the composite judgment 
of our buyers, to several basic factors. 

Of course, the September rise in prices may be partially attributed 
to "war psychology." Since most stocks had been held to minimum 
requirements, the outbreak of war resulted in accelerated purchasing 
as a hedge against a possible recurrence of the 1914 price situation. 
Most of the purchasing agents did not expect to be able to buy 
materials which were obtained from other than domestic sources. 
Further difficulties were expected in obtaining sufficient supphes of 
materials which belHgerents would require over and above their own 
usual requirements. These anticipated fears did not materiahze. 
The recession of commodity prices coincided with the realization that 
belh'^erents were not seriously affecting the demand for many com- 
modities. In many instances, belhgerents had developed their own 
internal resources to a point where they found it unnecessary to enter 
the United States market in order to fulfill their requirements. There 
are other commodities which the foreign powers had stored in larger 
quantities than most forecasters realized. 

The early September rise in prices was further accelerated by 
speculators entering the commodity markets. 

The memory of speculative profits in 1914 no doubt induced the 
usual number of operators to make commitments in various com- 
modities. There is no doubt in my mind that President Roosevelt's 
letter of September 29, 1939, to Senator O'Mahoney prompted many 


of these speculators to liquidate their options. This action, of course, 
tended to stop the runaway prices which were being quoted during 
the early part of September. 

Dr. Keeps. Dr. Forbes, when you say they Hquidated their option, 
would you explain what happened at that time? 

Dr. Forbes. My understanding of what actually happened was 
that speculators had entered the market, had gotten options on large 
stocks of supphes, especially in foodstuffs, anticipating a profit by 
creating a shortage and then an increased price, and then unloading 
gradually; but when the shortage did not develop and when there was 
public notice of the fact that the shortage did not exist, and this 
committee was asked to look into it, we feel that a great many of-those 
speculators got out of the market quickly and unloaded. 

Dr. Keeps. Then these are private speculators in the organized 
commodity markets? 

Dr. Forbes. Yes. 

Dr. Kreps. This would not affect commodities for which prices are 
not quoted in the organized market, would it? 

Dr. Forbes. No. 

Dr. Kreps, Was there any attempt by governmental purchasing 
agents, municipal governments, to make similar anticipaticJn? 

Dr. Forbes. Yes. 

Dr. Kreps. And do you feel that they likewise revised their pro- 
grams of purchasing upon the publication of this letter? 

Dr. Forbes. Yes, that was our experience. 

At the outbreak of the present war, we expected that there would 
be heavy fighting which would deplete the supplies of the belligerents. 
Such large-scale operations would deplete stocks and it was expected 
that this situation would be reflected by the placing of large war 
orders in this country. In general, this expected stimulus to demand 
has not been forthcoming. 

We further expected high prices based on scarcities and sharp 
demands in those commodities whose supply was principally imported. 
But in some such cases, such as surgical and scientific instruments, 
satisfactory domestic substitutes have been found, thus stimulating 
production in this country. As in the 1914-18 period, it is expected 
that the curtailment of imports will stimulate regular domestic pro- 
duction of such commodities and permanently lessen importation. 

Dr. Kreps. Dr. Forbes, do you feel in this connection that a pro- 
gram of research which would indicate substitutes for expensive 
imported commodities might play a rather important part in diminish- 
ing the upward spiral of prices? 

Dr. Forbes. I do. 

Dr. Kreps. Wliat were these substitutes that were found, for 
example, for certain foreign surgical and scientific instruments? 

Dr. Forbes. In our experience in surgical instruments, for example, 
our doctors and surgeons preferred the French instruments handled 
by C. R. Bard, but when it became almost impossible to secure them, 
they were then induced, through the impossibility of securing any- 
thing else, to use the domestic substitutes, and as far as I know they 
like them. 

In other words, their preference was caprice to a certain extent. 

Dr. Kreps. Do you collect information on substitutes for com- 
modities which you buy? Are your specifications so flexibly made 


out that in the event a particular article cannot be obtained except 
at an excessive price, you are able to shift to, say, a domestically pro- 
duced substitute at a more moderate price? 

Dr. Forbes. About 2 years ago, the Board of Estimate of the City 
of New York, which is the controlling executive appropriating and at 
that time legislative body as well, passed a resolution by which they 
set up a price differential of 25 percent in favor of domestic products, 
and authorized and directed the purchasing oflBcials to buy foreign 
goods only when their price was more than 25 percent less than the 
domestic price of comparable quality. We have adhered to that 
ever since, and in order to stimulate the use of domestic products 
write to the requisitioning department pointing out that on a- certain 
requisition they have asked for a foreign article, and ask for an ex- 
planation of why that is essential and the only thing they can use if 
that be the case. In that way, our office has created a great deal of 
stimulus for substitutes. 

Dr. Kreps. Do you stipulate the development of substitutes and 
information about substitutes in the buying department? 

Dr. Forbes. In the requisitioning department; yes. 

There was a marked advance in prices paid for food during August 

d September 1939. This we attribute partly to the expected re- 
quirements of beUigerent countries and to the temporary shortage 
created in the United States by increased orders from dealers who 
doubtless made commitments based on war scares. This is best illus- 
trated by the price of sugar, bought by the department of purchase, 
which rose from $0.04295 per pound in April to $0.0544 per pound 
on October 2. That this price increase was unwarranted and artificial 
is demonstrated by the fact that sugar was quoted at $0,047 per pound 
on November 29. Most food prices have increased in the vicinity of 
20 percent since the spring of this year. The chief cause of this general 
rise was the war hysteria which gave a good many dealers who were 
operating at little or no profit, an opportunity, which they seized, to 
raise their prices. Prices are levelling off but the war has given packers 
and producers an opportunity to bring their prices to a level at which 
they may operate and realize a legitimate profit. 

Dr. Kreps. Would you like to define for us what a legitimate profit 

Dr. Forbes. No; I wouldn't. 

Dr. Kreps. Would you feel that this increase in price in sugar went 
to producers or did that temporary price rise go primarily to specula- 
tors in the sugar exchange? 

Dr. Forbes. To speculators, I think. 

Dr. Kreps. Then so far as sugar is concerned, the increase of price 
that occurred did not go to the growers of sugar beets? 

Dr. Forbes. That is my belief. 

Dr. Kreps. Would you feel that the increase in pfice of pork chops 
that occurred similarly went to speculators and processors and did 
not go back to the producers? 

Dr. Forbes. I don't know. Presumably it didn't. 

Dr. Kreps. Isn't it generally true that short speculative rises 
rarely accrue to the benefit of producers? 

Dr. Forbes. Yes; it is. 

From April until September 1, the price paid for domestic chem- 
icals remained constant. During September there was an ad vane 


in price. By the end of October, the prices had receded to their 
previous levels. Chemicals and chemical raw materials of foreign 
origin rose sharply after September 1 and have continued their rise 
since that date. 

Crude drugs or the byproducts of such drugs wliich have been im- 
ported from belligerents, or carried in belligerent bottoms, have shown 
a sharp increase in price. 

Sixty percent of the city of New lorK's fuel oil requirements are 
fulfilled by bf.rge deliveries, with the price based upon New York 
Harbor price. It has risen from $0.95 per barrel in May to $1.15 
per barrel on September 18. 

The city of New York has a contract for lubricants wliich does not 
expire until March 31, 1940. When this contract was awarded, in 
August, there has been no sharp fluctuation in the price of lubricants. 

The price of gasoline increased from $0.0634 in the spring to $0.0724 
per gallon on November 1, 1939. 

The price paid for copper and brass products has increased 20 per- 
cent. Tin has increased 19 percent and lead 8 percent. Non-ferrous- 
metal prices have remained at the peak which they reached in the 
latter part of September and early October. 

The department of purchase made a 6-month contract on August 
1, 1939, for brass pipe, enabling us to stay out of market until Janu- 
ary or February 1940. A similar situation exists in connection with 
brass nipples and fittings. By that time, it is expected that the 
speculative excitement which has motivated the copper market will 
have subsided. 

Tin rose in price, within 10 days, from $0.45 to $0.75 per pound, 
and has now dropped off to $0.53}^ per pound. This decrease is 
largely accounted for by the withdrawal of speculators from the 

In our requirement contract purchases for steel, we experienced a 
slight price mcrease because of the withdrawal of price concessions 
previously enjoyed by large pjurchasers. There seems to be a grow- 
ing tendency toward eliminating these price concessions. 

Dr. Kreps. Could you tell us what the nature of these concessions 

Dr. Forbes. A discount from the published or list price. 

Dr. Kreps. Do you recaU, just roughly at the present time, what 
they havt been? 

Dr. FoPBES. I don't recall. They vary in different commodities. 
I could supply that for you later. 

Mr. O'CoNNELL. Did I understand the city of New York, in its 
purchasing of steel products, was able to obtain some of the price 
concessions to which you have referred? 

Dr. Forbes. Yes. 

Mr. O'Connell. During the recent hearings we had involving the 
steel industry there was testimony to the effect that while price con- 
cessions were quite prevalent during past years, they did not extend 
to the Federal Government purchases, that all major suppliers in 
bidding on Government contracts adhered to the list price. Is there 
any difference in the method of procurement between the Federal 
Government and the government of New York that might explain 
that difference? 

Dr. Forbes. Basically they are the same. 


Mr. O'CoNNELL. How do you explain the difference? 

Dr. Forbes. I didn't know it existed. 

Dr. Keeps. Did you encounter any identical bids in the case of 

Dr. Forbes. Yes. 

Dr. Kreps. What did you do in that case? 

Dr. Forbes. Our experience with identical or tie bids has been 
quite varied. When this present Department was created in 1934, 
and when I became Commissioner, we naturally found that a great 
many bids of identical price were submitted under N. R. A. codes. 
After the N. R. A. was declared unconstitutional, however, a number 
of industries continued the submission of tie bids. We have used a 
number of devices. One is to send to the Federal Trade Commission 
the full data concerning the transaction through the United States 
Conference of Mayors or directly, and then to throw open our files 
to investigators; in other cases other cities throughout the country 
have done likewise on a specific commodity. The action of the 
Federal Trade Commission has been very helpful indeed in some cases, 
such as fire hose as a conspicuous example. 

Then we have a policy which works like this: If the bids are tied 
and there is a bidder or ^Didders, let's say, who have their factories 
within New York City, preference is given to them. If there are 
two, lots are drawn from between two local producers. If there is 
one, the contract is awarded to that local producer. Otherwise lots 
are drawn publicly from among all bidders, and we have found that 
on large contracts the drawing of lots publicly is a considerable 
deterrent to the submission of future identical bids. 

Of course we were bombarded by the various bidders in the early 
years to split up the business among the tie bidders, but that is 
something we never did. One would get all and the rest would get 
nothing, and I think that has had a very discouraging effect on the 
continuance of identical bids. 

Mr. O'CoNNELL. You still get identical bids, I take it. 

Dr. Forbes. In a few cases. Typewriters, of course, is an out- 
standing example, and microscopes. 

Mr. O'CoNNELL. Do "^u happen to know anything about the price 
levels or prices for typewriters that you huj as compared with prices 
paid by the Federal Government for typewriters? 

Dr. Forbes. We pay, I think, about $10 per machine more than 
the Government price for typewriters. 

Mr. O'CoNNELL. You don't buy for the public schools in New 

Dr. Forbes. No; and they buy at a lower price than we do. 

Mr. O'CoNNELL. And at a lower price than the Federal Govern- 

Qr. Forbes. For educational purposes. 

Mr. O'CoNNELL. Yes; but in each area the prices are identical, are 
they not? 

Dr. Forbes. That is right. 

Mr. O'CoNNELL. There is one level of prices for municipal pur- 
chasers, one level of prices for Federal Government purchasers, and 
one level of prices for educational purposes. 

Dr. Forbes. That is right. 


Mr. O'CoNNELL. But within each area the prices are identical and 
have been for a number of years. Is that correct? 

Dr. Forbes. That is right. 

Mr. Cox. Do you recall when you got the last set of identical bids 
for typewriters? 

Dr. Forbes. I think it was about a year ago. 

Mr. Cox. You haven't had any since July of this year? 

Dr. Forbes. We will soon be getting bids on the renewal of the 
contract with the four companies. At the present time tie bids are 
few in number in our Department. 

Mr. O'CoNNELL. You don't recall, in referring to my original ques- 
tion relative to steel, whether in recent purchases for steel products 
you have been able to get bids other than tie bids? 

Dr. Forbes. I think they are competitive now. 

Mr. O'CoNNELL. Is that so? 

Dr. Forbes. Yes, that is my recollection. 

Dr. Kreps. I aru interested to hear you say that they are competi- 
tive bids. How do you judge if you don't have tie bids that the bids 
are competitive? Is it not possible for a large group to put in com- 
plementary bids? 

Dr. Forbes. Yes. 

Dr. Kreps. And have a low bid? 

Dr. Forbes. Ybs. 

Dr. Kreps. Do you have some tests that you apply to indicate 
whether the price irrespective of whether identical bids exist or not is 

Dr. Forbes. In our Department we have a group of 13 skilled 
buyers who were selected by rigid civil-service examinations and who 
for the most part have wide experience as purchasing agents in indus- 
trial corporations or other governments, and who are thoroughly 
good specialists and well-informed on market conditions and sources 
of supplj' , so naturally I rely on them; before I authorize the award of a 
contract they certify to me that the prices are competitive and fair 
and they compare the current prices quoted with those previously paid 
and make comments on market conditions. 

Mr. O'CoNNELL. Just to carry that along a little further, then, 
it must be that if bids are tied they ar^ presumptively collusive from 
your standpoint and that if they are not tied you make further ex- 
amination to see as well as you can ascertain whether or not they arc 
in fact competitive. 

Dr. Forbes. Yes; I think presumptively they are collusive although 
I think it is possible to have accidentally identical bids. 

Mr. O'CoNNELL. It is stretching the coincidence quite a bit, though, 
if you get a close series of presumably independent competitors arriv- 
ing at the same price on a complicated specification. 

Dr. Forbes. Yes; on the other hand, we have many cases where on 
a long list of items which are being procured there will be one or two 
items in the whole list in which two bidders, for exanpple, submit 
identical bids. Those I consider to be pure accident and not collu- 
sive, but when the whole list, let us say, is identical it indicates to me 
that there is some sort of understanding in advance of the submission 
of bids on the part of the bidders. 

The prices of certain items of hospital and surgical supplies have 
risen to a marked degree since September 1939. Some of these 


increases may be attributed, undoubtedly, to the outbreak of hostilities 
in Europe while others may be attributed to domestic industrial 
changes, such as wage and hour rates. In certain isolated instances 
p ice changes appear to have been caused by speculative tendencies 
on the part of suppliers. 

The Department of Purchase received bids for surgical dressings on 
October 6, 1939, which showed price increases from 10 to 28 percent 
over the previous contract period. Wage and hour rate changes in 
the textile industry is responsible, to some degree, for this increase. 

Dr. Kreps. How many suppliers are there of surgical dressings? 

Dr. Forbes. Bauer & Black, Johnson & Johnson, and Kendall — 

Dr. Kreps (interposing). Bauer & Black is part of the Kendall firm. 

Dr. Forbes. That is right. Then, as I recall, there is a Lewis 

Dr. Kreps. That is about three? 

Dr. Forbes. Two or three. 

Dr. Kreps. Bauer & Black is a Chicago firm, isn't it? 

Dr. Forbes. Yes. 

Dr. Kreps. And the other is Johnson & Johnson? 

Dr. Forbes. At New Brunswick, N. J. 

Dr. Kreps. Did the low wage-and-hour rates exist in those fac- 
tories? Or have increases in wages in the textile industry due to the 
Wage-Hour Act been localized primarily in the South? 

Dr. Forbes. I think so. 

Dr. Kreps. Then it is probable that there was no increase in wages 
in these northern areas. To the best of my information, these firms 
have paid above the minimum continuously, on the other hand, it 
might be that the fewness of the number of suppliers would contribute 
to an increase in price. 

Dr. Forbes. It would, yes, in any industry where the number of 
suppliers or producers are few. 

Mr. AviLDSEN. Do I understand, Dr. Kreps, that they actually 
make the gauze in these northern plants? Might they not buy that 
from the southern mills and process it or assemble it in these northern 

Dr. Kreps. Are you famihar, Dr. Forbes, with that? 

Dr. Forbes. I don't know. 

Dr. Kreps. There may be certain materials. 

Mr. AviLDSEN. I had the impression that Bauer & Black plant at 
Chicago was not a textile mill. I mean at the place where they prepare 
adhesive tape and all these things, they don't actually make the cloth. 

Dr. Kreps. They undoubtedly don't fabricate the raw material. 
Nonetheless, it would mean that the increase in price of surgical 
dressings would probably depend on the amount of spread between 
the raw material prices and those of the finished products, which is 
subject to considerable change. You don't get an automatic trans- 
mission into the price of the finished product of increases in the price 
of raw material. 

Dr. Forbes. The most important changes that have been caused 
in this field by the European war have been the difficulties of obtaining 
certain imported materials whose source has been hitherto restricted 
to the European markets. Such items as microscopical cover glasses 
and certain laboratory filter papers are at a premium and only mini- 
mum quantities are available. The glass used m the manufacture of 

124491 — 40 — pt. 21 10 


the microscopical cover glasses is manufactured only in Germany and 
Japan and exports to the United States have been sharply curtailed. 
Filter paper is imported from England, and, of course, is subject to 
the hazards of shipping. 

Dr. Kreps. Dr. Forbes, in that connection you remarked earlier 
that substitutes in some cases had been found. Do you have an 
investigating section or a standards bureau to which you go and find 
out what are good substitutes? 

Dr. Forbes. We have in the Department of Purchase a miniature 
bureau of standards consisting of a testing laboratory which does 
research testing. That is the attempt to determine the quality of a 
suggested substitute and to report on it accordingly as well as to test 
deliveries of supplies. And then in connection with that we have a 
division of specifications at headquarters at the laboratory which 
serves as a staff for a board of standardization. That board of 
standardization adopts specifications for city-wide use. 

Dr. Kreps. Do you utihze the services of other governmental 
units, Federal and State, in determining standards? 

Dr. Forbes. We rely to a great extent on the Federal specifications, 
the Federal Specifications Board and other separate departments, and 
the specifications adopted by S. A. E. and A. S. T. M. and other 
scientific standardizing bodies, and we also secure as much information 
as we can on given ticklish questions from the United States Bureau 
of Standards whenever they will make such information available to us. 

Dr. Kreps. What are the conditions under which information from 
the Bureau of Standards is available to municipal purchasing agents 
and other governmental bodies? ^ 

Dr. Forbes. As I imderstand it, the Bureau of Standards is com- 
pelled by law to make tests for State governments without cost or 
charge, but they are not required by law to make tests for munici- 

Therefore, if they were to make tests for us we would have to pay the 
Bureau of Standards. 

Mr. Henderson. Your purchasing is much greater than that of 
many States, is it not? 

Dr. Forbes. Yes, I think so. We sometimes secure confidential 
information from the Bureau of Standards on comparative qualities 
of various brands of items which they have tested, but that must be 
l^pt confidential. 

Mr. O'CoNNELL. Does that mean that they are also prohibited by 
law from making pubhc the results of comparative tests? 

Dr. Forbes. I think they are prohibited by law, or at least it is an 
unwritten law. 

Mr, O'CoNNELL. I think it is an unwritten law. 

Dr. Kreps, Suppose you accumulated certain experience in your 
division, couldn't you transmit that to other departments of the 
municipal government in New York, or even to consumer groups? 

Dr. Forbes. We could, yes; we do exchange information constantly 
with the State purchasing oflSice of the State of New York and with 
other governmental bodies. 

Dr. Kreps. In connection with microscopical cover glasses which 
are rnanufactured in Germany, isn't the United States able at all to 
provide that material? 

I In tbis connection sce^Statement of Functions and Activities of the National Bureau of Standards, 
Hearings, Parts, appendix, p. 3475. 


Dr. Forbes. I understand that there will be a substitute available 

Dr. Kreps. Isn't some of the best of this microscopic glass manu- 
factured in Germany under United States patents? 

Dr. Forbes. I am not sure. I don't know. 

Mr. AviLDSEN. Mr. Forbes, getting back to surgical dressings, did 
I understand you made a contract with one of these suppliers, that is, 
an annual contract? 

Dr. Forbes. We never, as far as I can recall, have made an annual 
contract for those items. 

Mr. AviLDSEN. How long did the contract run? 

Dr. Forbes. Six or three months, I believe, is the typical contract 
for surgical dressings. 

Mr. AviLDSEN. So it is conceivable, referring to Dr. Kreps' com- 
ment, that the advance in price was for the reason that they were 
obUgating themselves to supply these dressings over a period, even 
though immediate stocks might have been purchased at a lower 
price, and they had to anticipate higher costs La supplying thedressings 
over a period of months. Is that right? 

Dr. Forbes. Yes. 

Dr. Kreps. Do you think that is a good way to avoid inflation, to 
validate in price contracts anticipated iucreases in costs? I mean 
don't busLuess firms promote rather than avoid pyramiding inflation 
if they validate in their prices anticipated increases in costs, rather 
than actual ones? 

Dr. Forbes. It would seem, of course, that when entering into a 
long-term contract they would have to look ahead, and in a state of 
uncertainty, protect themselves. 

Dr. Kreps. Under competition, wouldn't the anticipations differ? 
In fact, might not under competition the level of prices be reduced to 
actual costs rather than rise to include increases in anticipated costs? 

Dr. Forbes. I think so, yes; but in an industry where there are 
only a few potential sources of supply, it is more diflScult to regulate. 

Dr. Kreps. In other words, the anticipations are more nearly alike. 

Dr. Forbes. Yes. 

Mr. AviLDSEN. Why do you make contracts insteud of buying 
your requirements from month to month? 

Dr. Forbes. There isn't any estabUshed rule in our Department. 
Some we do buy from month to month. Other items we buy on 
annual contracts. 

Mr. AviLDSEN. Don't you think that such purchasing in a period 
of this kind does have the effect of raising prices, just as in this case 
the manufacturer feels he has to do it to protect himself? His 
directors would probably criticize him if he were later found delivering 
goods on a contract wmch brought a loss to the company. 

Dr. Forbes. We feel that in many Hnes long-term contracts are not 
the proper type of contract td.make in this period, and so we are 
constantly changing our policy in the direction of shorter contracts. 

Mr. AviLDSEN. You don't know, in the case of surgical dressing, 
whether you could have avoided these increases if you had not asked 
for a contract? 

Dr. Forbes. We are required to have a contract, instead of an 
open-market purchase, when the amount is over $ 1 ,000. I am speaking 


now of a contract as a technical document, as contrasted with an open- 
market order. 

Mr. AviLDSEN. But this is a contract in which the suppHer agrees 
to supply these dressings to you at a fixed price over a period of 
maybe 6 months. 

Dr. Forbes. Yes. 

Mr. AviLDSEN. Who suggested that, you or the supplier? 

Dr. Forbes. We asked for it. Very frequently we get alternate 
bids on a short period and over a long period, reserving the right in 
advance to award on one and reject on the other. 

Mr. AviLDSEN. When you asked for that 6 months' contract you 
weren't compelled by law to get a 6 months' contract? 

Dr. Forbes. No; there is only a prohibition against a contract for 
more than 1 year, except in a few special cases. 

Mr. AviLDSEN. Generally speaking you agree that if you ask all 
your suppliers for 6 months' contracts it would have the effect of 
raising your costs at this time? 

Dr. Forbes. I think it would; yes. 

Mr. AviLDSEN. Why did you do it in the case of surgical dressings, 

Dr. Forbes. Did I say that I did? 

Mr. AviLDSEN. I just got the impression. 

Dr. Forbes. I don't believe I did. 

Mr. AviLDSEN. You didn't accept the offer? I got the impression 
that something went up here from 10 to 28 percent: "Received bids 
for surgical dressings which showed price increases from 10 to 28 
percent over the previous contract period." You will find it under 
"Hospitals and Surgical Supplies." 

Dr. Forbes. I don't believe that was a 6 months' contract. I 
think it was a 3 months' contract. That is my recollection. 

Mr. AviLDSEN. Even a 3 months' contract would have the effect 
of raising the price in a period of this land, wouldn't it? 

Dr. Forbes. I don't Imow whether it woidd or not. 

Dr. Kreps. Whether you buy it for 3 or 6 months is probably 
dependent, then, I take it, on what your anticipation is with regard 
to price, what your needs are, whether you want to be assured of 
deUvery, and what sort of bargain you can strike. Is that right? 

Dr. Forbes. That is ri^ht. 

As I recall it, this particular contract is not of very large amount, 
because on the previous contract we had drawn in large quantites 
and had stocks on this particular line of goods, anticipating a price 

Prices paid for cotton piece goods reached their lowest point in 
May and remained level until the first 2 weeks in September when 
prices sharply increased and sales were the heaviest in years. The 
price of finished goods, because of stocks on hand, did EOt increase 
as much as gray goods. The average increased price of finished goods 
to date has been approximately 12K percent, and finished articles such 
as dresses, uniforms, and so forth, have similarly advanced. The price 
of wool tops has increased 35 percent. Finished cloth has not reflected 
this advance but has been confined to a rise of 15 percent while suits, 
overcoats, and wearing apparel have increased only 10 percent. 

Dr. Kreps. Is it your impression, Dr. Forbes, that the price of 
finished cloth ought to rise 35 percent inasmuch as wool tops rose 35 


percent? Is it not conceivable that wool tops, the expenditure for 
wool tops, is a minor or relatively smaE factor in total cost of finished 
cloth, and that therefore a 15-percent rise in the price of the finished 
product might more than compensate for a 35-percent rise in one of 
the materials? 

Dr. Forbes. I wouldn't know. 

Dr. Kreps. I was just wondering whether in your experience there 
was such a conformity between increases in prices of certain raw 
m.aterials and other finished products which you buy. 

Dr. Forbes, In lumber there was a steady rise in the price of hard- 
woods averaging about 16 percent. In softwoods there has been a 
slight rise of about 3 percent in price since the beginning of the war, 
which brings current prices to about the level of last spring. 

In building materials, prices paid for the above commodities which 
are fairly representative of items used in maintenance and construction 
work have remained constant so far this year. 

The price of our present deliveries in these commodities was made 
on contracts awarded in June. Since that time, we have had no 
occasion to secure quotations. 

There has been practically no change in the price paid for glass 
during this year. Any changes were reflected in the industrial group 
where crystal sheet and polished glass were slightly lower in price 
on September 1 as compared with the period 4 months previous. 

The Department made the majority of its contracts covering the 
present period for electrical equipment, parts, and supplies prior to 
September 1. In those few instances where we have gone into the 
market for electrical equipment since September 1, our experience 
indicates that prices have remained unchanged. In the case of wire 
and cable, prices paid in September were 6 percent lower than in June. 

In paper and paper products our buyer expects a sharp increase in 
the price of paper in 1940 due to the shortage of pulp, which has been 
imported. Paper products have shown a sharp increase from 10 to 
25 percent since September 1. 

Our experience in the city of New York has, I imagine, been par- 
alleled by other cities and governmental subdivisions. It indicates 
that thus far commodity prices have been governed by natural 
causes, and that the skyrocketing of prices of the "Seller's Market" 
during the comparable period of 1914 have been avoided. It is. 
indeed fortunate that such is the case. Governments buy what they 
must have for consumption and the maintenance of public services. 
Since governments are nonprofit making and are nonproducers, they 
cannot raise the prices of their products to cope with increased costs 
of raw materials and increased overhead costs. "Runaway" prices 
would inevitably lead to (1) the curtailment of essential governmental 
services, or (2) increased taxes; or (3) deficit financing. In the 
present state of the Nation, aU three of these alternatives should be 

Dr. Keeps. Dr. Forbes, what is the annual budget of the city of 
New York, roughly? How much is spent? 

Dr. Forbes. Well, the tax budget in the current fiscal year ending 
June 30, 1940, is $587,000,000. 

Dr. Kreps. What amount of that is spent for commodities? What 
percentage, roughly? 

Dr. Forbes. About 5 percent, roughly. 


Dr. Keeps. And the rest is all spent for services? 

Dr. Forbes. In New York City the debt service is a sizable 
figure, and that eats up about, I think, one-third of the budget, 

Dr. Keeps. Then the extent of your purchases is roughly 25 
millions a year, twenty-five or twenty-six millions a year? 

Dr. Foebes. Our purchases run in th& neighborhood of 30 million. 
The debt service this year is about 26 percent of the total. Salaries 
are approximately one-half of the total. But then, of course, there 
is the capital outlay budget and special appropriations outside this 
volume, which is the tax budget. 

Mr. Henderson. Do you do the buying for that? 

Dr. Foebes. Yes and no. In some cases we do, in other cases 
we don't. When a contract is awarded for tbe construction of a 
public building in which the contractor furnishes tbe materials as 
well as the labor, we have nothing to do with it. Where it is 
erected with W. P. A. labor, the city contributing the materials, we 
do the buying in some of those cases. In other cases the Federal 
Government does the buying for us. 

Mr. Hendeeson. What would be the extent of your buying for 
W. P. A. contracts in a year? 

Dr. Foebes. I think this year it will be in the neighborhood of 
half a million dollars. 

Mr. O'CoNNELL. You don't do all the buying for W. P. A.? The 
State procurement probably would do a more substantial part of 
that buying, wouldn't they? 

Dr. Foebes. Yes. 

Mr. Hendeeson. I should like to ask a question. You say half of 
this $587,000,000 is for employees' compensation. 

Dr. Foebes. Salaries, yes. 

Mr. Hendeeson. For salaries? 

Dr. Foebes. And wages. 

Mr. Henderson. If you had a substantial increase in prices, 
causing an increase in the cost of living, would that represent an 
additional pressure on the city to increase rates of compensation? 

Dr. Foebes. Yes; it would. 

Mr. Henderson. So a price increase isn't truly reflected by just the 
amount it affects your buying budget for commodities. If you had 
a price increase, it would mean much more than merely the effect 
on vour 30 million dollars of purchases? 

Dr. Forbes. I think it would ; yes ; because as the cost of living goes 
up, then the wage or salary dollar goes down, and the employee 
naturally agitates for an increased salary. 

Mr. O'CoNNELL. I would like to ask a question along the line that 
we were talking a few moments ago, about how, and with what suc- 
cess, you have attempted to meet the problem of tie bids or identical 
bids. I understood you to say that over the years you have been able 
to substantially reduce the extent of that practice. 

Dr. Forbes. Yes. 

Mr. O'CoNNELL. And that one of the techniques which you used, 
as I understood it, had to do with the proposition of drawing lots 
among the identical bidders. I am not entirely clear as to the utility 
of that in preventing the practice. Would you explain that to me 


Dr. Forbes. I said before that when bids were tied, if five or six 
bidders submitted identical bids, in the early days we would invariably 
be approached with the proposition that each of the bidders should 
get one-fifth of the business, if there were five. We never did that. 
We always stuck to the pohcy that we will draw lots and one will get 
all and the others will get nothing. 

I think that was a deterrent to continuance of that practice. 

Mr. O'CoNNELL. I might say that, as I understand it, is the poUcy 
which is in general followed by Federal Government purchasing agents, 
and it is my impression that they have been less able to cope with the 
problem of identical bids than you have indicated has been your exper- 
ience. As I understand it, it is typical in Government purchasing, 
where identical bids are received, to draw lots. The Federal Govern- 
ment as far as I know has never attempted to allocate the business 
among identical bidders, yet it is also my impression that the practice 
of identical bidding on Government contracts is still quite substantial, 
so that the technique of drawing lots hasn't been effective insofar as 
the Federal Government is concerned, I don't beheve. Of course, you 
have indicated that there are other things that you do. I take it that 
where you can give a preference to a local bidder, that would mean 
that any of his competitors outside of the city of New York would 
have to make a price concession, would have to bid competitively in 
order to be entitled to any of that share of the business. 

Dr. Forbes. That is right. 

Mr. O'Connell. Had you ever considered in that field the use of 
substitutes for things upon which you have been receiving identical 
bids over a period of time? Does your examination of the use of 
substitutes include that situation? 

Dr. Forbes. I don't recall any exact instances of that. There 
may have been. 

Mr. O'Connell. It was suggested during our steel hearings ^ that 
one of the reasons that the Federal Government was not able to obtain 
the price concessions in steel that were available to other purchasers 
of steel was that the policy of public bidding, and public indications 
as to the prices bid, was one of the reasons for adherence by all of 
the bidders to the base prices during that period. Have you ever 
considered, for public purchasing, the advantages of negotiating con- 
tracts, private negotiations as distinguished from public bidding now 

Dr. Forbes. There are many cases where we are told that if we 
could negotiate privately without opening bids publicly, we could get 
lower prices and special discounts and concessions. 

Mr. O'Connell. Of course that type of purchasing has its own 
dangers too, I take it. 

Dr. Forbes. It is very dangerous. 

Mr. O'Connell. One other question: Does your department give 
substantial consideration to the genetal problem of restrictive specifi- 
cations and their effect upon restricting the area of competition as 
between the suppliers of particular things that you need? 

Dr. Forbes. You mean with respect to 

Mr. O'Connell (interposing). To the actual drafting 

Dr. Forbes. Shutting out bidders from other States? 

I Testimony on the steel Industry appears In Hearings, Parts 18, 19, and 20. Subsequent bearings on 
Steel are included in Hearings, Parts 26 and 27. 


Mr. O'CoNNELL. Even in your own State I take it it is entirely 
possible for persons responsible for drafting: specifications to so draft 
them as to result in a restriction upon competitors who may bid. 

Dr. Forbes. Oh, yes. In this new Department of Purchase that 
was one of the really major undertakings, to eliminate such restrictive 
devices. For example, one specification I recall at the moment said 
that bids would be received only from those producers whose factories 
were within 25 miles of the municipal building, Borough of Manhattan. 

Mr. O'CoNNELL. Isn't it also possible to so draft specifications in 
technical language as to include patented devices and other things 
which would in effect restrict the supplier to one whUe at the same 
time not serve the interests of the municipality? 

Dr. Forbes. Yes. 

Mr. O'CoNNELL. I take it to meet that problem it is necessary to 
have some sort of research department, something comparable to 
what you referred to as a bureau of standards, in order to ascertain 
what would best fit the needs? 

Dr. Forbes. We have that, as I said before, in a small way and 
we have found in many cases where the restriction was not as bald 
and bold as the case I mentioned, of the location of the factory within 
a radius of 25 miles, but that nevertheless some one person's product 
would be written into a specification in several hundred words. 

Mr. O'CoNNELL. I have seen that type of specification. 

Dr. Forbes. Instead of a picture of it there would be a lot of words 
which described some one particular thing. We have had hundreds 
of such cases which we had to open up. We have found, however 
that in our work by having no secrets about our work and by allowing 
and encouraging people to write in and complain, that such restric- 
tive specifications are easily detected. In other words, if one gets 
through my specification staff or my buyers and gets into a contract 
proposal some one of the potential bidders who is cut out by this error 
and this restriction will immediately begin to complain, and so the 
wheels will be stopped, the proposal changed and then started under 
the new specification. 

Mr. OCoNNELL. So to that extent the competitors shut out of the 
market operate as a check on your organization or the persons re- 
sponsible for drafting the specifications. 

Dr. Forbes. That is right, yes. Personally I depend upon my 
mail as one of the principal safeguards I have. It is unpleasant to 
read but it is very helpful. 

Mr. Henderson. I want to go back to your forecast of what takes 
place with runaway prices. As I gather, you make the point that a 
city or a State has to operate on a budget and that budget is usually 
on an annual basis. If there is a sharp price increase in the budget 
period you are confronted with the problem of either curtailing or of 
meeting the extra prices. In the succeeding year, however, you are 
confronted with the problem of how to get additional revenue. In 
New York City that would have to come from an increase in taxes and 
which taxes would probably have to be increased? 

Dr. Forbes. Well, the real-estate tax is one. 

Mr. Henderson. That would reflect itself in rents, then it would 
be again reflected in taxes — I mean as a cost of producing goods and 
services — and again it would, get into the price structure, would it 


Dr. Forbes. It would increase the cost of living, yes. 

Mr, Henderson. So a price increase results in additioncl taxes, or 
deficit financing adding to the big debt burden, which is a charge on 
business and owners of property. They in turn add that to their 
prices and you get a spiral in that way, do you not? 

Dr. Forbes. Yes. 

Mr. O'CoNNELL. Dr. Forbes, do you happen to have any informa- 
tion as to the cost of purchasing in the city of New York as compared 
with that in other large cities such as Chicago? Is there any difference 
substantially in the price level for things that you buy? 

Dr. Forbes. We have a regular monthly service of the New York 
Conference of Mayors and other city officials, which compiles com- 
parative prices paid by the cities of New York State and then dis- 
tributes them among the cities. There is no exchange of informa- 
tion as a general thing, although we correspond and answer requests 
and very frequently write out to other cities to see what has been their 
experience, but there is no regular service. 

Mr. O'CoNNELL. Do the activities of the United States Conference 
of Mayors include any particular reference to purchasing policy by 

Dr. Forbes. This is the New York State Conference of Mayors. 

Mr. O'CoNNELL. I understand that. I am referring now to the 
national organization. 

Dr. Forbes. Do they have any policy? 

Mr. O'CoNNELL. Yes; of coordinating Government municipal 
purchasing policies or exchange of information, that sort of thing. 

Dr. Forbes The office of the United States Conference of Mayors 
will, at the request of any city, and has on many occasions at the 
request of New York City, collect specifications or price date or both. 
They don't do it as a regiilar service but they will do it upon specific 
request. It has proved very helpful. 

Dr. Kreps. Do you ever find yourself in competition with other 
municipalities or with the Federal Government in bidding for a given 

Dr. Forbes. We were confronted by that specter. We were 
planning this fall, in October, to buy a considerable quantity of 
automobile trucks, but when we learned that the Federal Government 
was in the market for a large quantity, I believe 15,000 or more, we 
did not ask for bids and have not yet asked for them. We are holding 
up our purchases. 

Dr. Kreps. Is there an exchange of, as it were, intentions, pur- 
chasing intentions, by purchasing departments so that purchasing 
agents everywhere can adopt a rational policy of dovetailing their 
buying or attempts to buy in periods when others are not in the 

Dr. Forbes. I have never heard of any such coordination or 

Dr. Kreps. Do you know what amount of commodities in sum total 
is purchased by municipalities? 

Dr. Forbes. No. 

Dr. Kreps. Do you think it would be desirable, follovsdng the lead 
this morning, for some service to be set up which would collect such 
figures? Would they be useful to you? 

Dr. Forbes. Yes; very decidedly. 


Dr. Keeps. Would you indicate the nature of the data that you 
ought to have, that you would like to have? 

Dr. Forbes. To be helpful it would have to be truly comparative, 
that is based on definite quality standards. In other words, you 
couldn't say "potatoes", because one might be U. S. No. 1, and another 
U. S. No. 2, so they wouldn't be truly comparative. To be compar- 
ative and therefore useful you would have to have the exact specifi- 
cation as to quality delivered. 

Dr. Kreps. You have not indicated the relative quantities here, 
but I am wondering whether it is possible that building materials and 
office equipment are the larger items. Would you state roughly for us 
what the items are that you buy, at least the five or six largest items? 

Dr. Forbes. Here is a list. 

Dr. Kreps. Would you like to submit that for the record, Dr. 

Dr. Forbes. Yes. 

(The list referred to was marked "Exhibit No. 1512" and is included 
in the appendix on p. 11365.) 

Dr. Forbes. Laboratory animals, about $30,000. Anns and 
ammunitions, $12,000. 

Dr. Kreps. Just name the largest for us, Dr. Forbes, 

Dr. Forbes. Rentals of equipment, $1,000,000. Drugs, medicines, 
and sundries, $1,500,000. Foods, $5,000,000. Fuel, coal, lubricants, 
fuel oil, $5,500,000. Furniture, $700,000. Plumbing supplies and 
heating equipment, $260,000. Materials of construction, $3,575,000. 
Printing and forms, $1,500,000. That includes the printiug of our 
daily newspaper, the City Record. Automotive vehicles, $2,500,000. 
Wood products and lumber, $1,000,000. Those are our principal 

Mr. O'CoNNELL. You mentioned $3,575,000 for the purchase 
of building materials. Those are substantially all used in connection 
with regular maintenance. 

Dr. Forbes. That is it. 

Mr. O'CoNNELL. And I take it that the amount included in the 
capital outlay budget for construction would include a much more 
substantial amount of building materials purchased by contractors. 

Dr. Forbes. Yes; this is repair and maintenance. 

Dr. Kreps. That is all. 

Acting Chairman Borah. Thank you Dr. Forbes. 

(The witness was excused.) 

Acting Chairman Borah. Mr. Johnson, do you solemnly swear the 
testimony you shall give in this hearing shall be the truth, the whole 
truth, and nothing but the truth, so help you God? 

Mr. Johnson. I do. 


Dr. Kreps. Will you state for the purposes of the record your full 

Mr. Johnson. My name is Theodore M. Johnson. 

Dr. Kreps. What is your position? 

Mr. Johnson. I am a supervisor of purchases of New York Uni- 
versity, also treasurer of the Education^ Buyers Association, and 
also treasurer of the Educational Inst&ution Cooperative. 


Dr. Kreps. How long have you been in this field of institutional 

Mr. Johnson. I have been in the institutional buying field about 
17 years. 

Dr. Kreps. Will you proceed? 

Mr. Johnson. It has been my privilege to observe from the many 
published accounts of its hearings, that this committee is endeavoring 
to gather unprejudiced information on how, when, and where prices 
are made. Many national leaders in the processing and manufac- 
turing of our most essential couMnodities have reported to you con- 
concerning various methods used in manufacturing; reductions in 
costs of production through research; and new methods of distributing. 
These men have also spoken of certain difficulties facing them; for 
example, they have presented their tax problems and their labor- 
relations problems. And even though they are confronted with many 
difficulties they have manifested their strong desire to keep within the 
bounds of a reasonable and competitive selling price for their com- 
modities. The spirit which prompted these leaders to testify has 
been ably summed up by one of the executives in the petroleum indus- 
try who said: 

Ever since the committee announced these hearings on the oil industry, I 
have looked forward to them as an opportunity for the industry to tell the public 
about itself. I have hoped that a statement of policies and achievements would 
give the public a better understanding of the industry and its contribution to the 
general welfare. 

It is significant that these spokesmen represent a cross section of 
American business, and they have achieved a wide sphere of influence. 

I only wish that I were qualified to present a picture that would 
give the public a better understanding of the wide and varied efforts 
made by educational institutions to contribute to the general welfare. 
But, as a matter of fact, to do this is hardly necessary since we are 
as a nation, devoted to the ideals of education. In the time allotted 
to me I shall endeavor to keep within the subject assigned to me and 
to discuss the price situation as seen through the eyes of the purchasers 
in the educational field. 


Mr. Johnson. The buying situation present in the instance of the 
college or university offers a different set of problems from those of 
the industrial organization. This is because we in the educational 
field are concerned with the procurement of products for final con- 
sumption or use, while the industrial firm is naturally concerned with 
the resale factor, in one form or another. Institutions of higher 
learning are not interested in making a profit, but must strive to make 
ends meet with a maximum of educational value rendered. 

The educational institution is limited as to the amount of potential 
income it may receive. When it is confronted with increased costs, 
it cannot readily pass them on, as may be done by the commercial or 
industrial organization. The institution's income is derived from 
endowments, student fees, gifts, and in the case of hospitals, from 
clinics' and patients' fees. The State-supported organization receives 
its income through taxation and, of course, has the opportunity of 
increasing its appropriation through the established legislative chan- 


nels. Of the two general types the State mstitution has, at least, a 
theoretical advantage m the matter of elastic income. But practically 
speaking, the system of annual fixed budgets often finds the State 
institution more rigidly limited as to availabie funds for a given im- 
mediate purpose than the private school. During the past few years 
the National Government has assisted many tax-supported schools, 
colleges, and universities in enlarging their educational plants through 
W. P. A. and P. W. A. grants. This financial aid, is of course, of an 
emergency nature. It is outside the scope of regular income. 

During the last decade only those financial executives who were 
willing to change their business methods with the changing times 
have been of real value to their institutions. This is as true in educa- 
tion as in business. 

One highly acceptable method of financing education is through 
endowments. But such means of income have decreased considerably 
during recent years and have placed a great many problems on the 
shoulders of the financial executive. To meet this situation he has, 
among other factors, given a great amount of study to the more 
efficient performance of the purchasing function in his institution. He 
has become a close student of price and market conditions in order to 
effect as large savings as possible in what he purchases. 

Because of loss in income from reduced yield, many colleges and 
universities were forced to cut salaries of their teaching staff at a time 
when those institutions should have been doing everything in their 
power to maintain their high standing academically and adminis- 
tratively. At one time a few of our educational institutions were 
forced to board up some of their buildings because of lack of income 
from endowments necessary to maintain them. Such experiences 
which have taken place during the last 10 years make one wonder 
what will happen in the future. In other words, will such income 
be seriously reduced because of the lack of accumulated fortunes such 
as have been acquired in the past? 

At this point it m-ay be interesting to quote from a statement made 
recently by the president of one of our larger universities regarding 
the subject of large incomes. He stated that there were 87,589 people 
in 1926 who reported an income higher than $25,000, with a grand 
total of $5,727,000,000. And in 1937 those who reported an income 
over $25,000 decUned to 55,158, with a total amount of $2,999,000,000. 
The question of taxation for the very rich causes them considerable 
concern, and the question arises as to whether very many people will 
ever accimiulate enough funds to contribute to education as they have 
done in the past. Reduced yield and increased taxes have combined 
to diminish the number of fortunes which might be calculated some 
day to be placed at the disposal of educational institutions. 

Because he has to be a reahst, the educational officer has had to meet 
the challenge of reduced income from capital hj turning to other 
sources. Many such executives have been obliged to pay closer 
attention to the matter of student fees. And in the instance of many 
endowed colleges and universities the income from student fees has 
over the period of the past 10 years become their major source of 
income. As a matter of fact, the organizations which had a large 
student enrollDient throughout the depression years fared better than 
heavily endowed institutions in the matter of steady income. It was 
easier for them to estimate more accurately what their anticipated 


income would be be, and because of this advantag:e it was possible for 
them to operate under a more intelligent and more definite business 

How long this type of income will bear up is also somewhat problem- 
atical. In estimating its duration one must necessarily study the 
trends in population. Educational institutions are now enrolling 
students who were bom during the years following the last World 
War. Statistics disclose to us that this country, as well as other 
countries, had a high birth rate during the period from 1919 'o 1922. 
This means that at present we can estimate that our enrollmr^nt will 
bear up for a few more years, but after that what will the situation 
prove to be? 

And I might say in passing that I noticed a clipping in one of the 
Washington papers, last night's edition, in which they state [reading] : 

The college registrars in holding their meeting at State College, Pennsylvania, 
notify the association that colleges have now enrolled over 1,000,000 students. 

That is the first time that the colleges have ever made that mark. 

And even though the trend should increase, the private institutions 
must face the fact that State institutions have been and are gr<>wing 
at an increasing rate. 

This growth has come about because our people have sought to 
provide the benefits of higher education to those of limited means. 
To a certain extent such growth will check the growth of the private 
institutions depending upon student tuition for their income. State 
colleges and universities are contributing immensely to the advance- 
ment of education. Since the privately endowed colleges and uni- 
versities were the first to be founded, they have well-established 
organizations, and it is my belief that many of our State institutions 
have been patterned after them. I hope there will always be that 
happy competition — if competition it can be called — between these 
two types of educational institutions, 

I have taken time roughly to sketch the changing income situation 
facing educational institutions in order to emphasize its decreasing 
aspects. In my opinion, if this country were to witness an unusually 
rapid price increase, educational institutions would be caught between 
reduced income and increased cost of operation. 

There has been a gradual increase in price on the general types of 
commodities used in hospitals, universities, and colleges over a period 
of years since the lows of 1932 and 1933. We have also witnessed 
another general rise on most of the commodities used during this 
last summer and fall. Except for a few war items, the price behavior 
has been generally accepted as being necessary for the promotion of 
better business conditions. 

I cannot sympathize with the effort on the part of some sales staffs 
to use the threat of war demands and the chance of this country's 
possible participation in war to create a larger demand for their 
commodities. This type of selling effort should be discouraged, for 
it can do a great amount of harm to business. It can in the long run 
set it in reverse faster than any other single force. Purchasers should 
naturally cover themselves for a reasonable period, but many of 
them get somewhat panicky over wild and unfounded rimiors. The 
Government agencies and the executives of the National Association 
of Purchasing Agents deserve a great deal of credit for the advices 
that have been distributed concerning the true facts underlying the 


price situation. Many farsighted sellers have also played an im- 
portant role in discouraging unduly alarmed consumers from over- 
buying. It is true that sources of supply, along with buyers, lose if 
purchasers are overstocked and caught with large and expensive 
inventories on their hands. 

Much has been said and written about the importance of any business 
knowing its exact costs of manufacturing, distributing, selling, and so 
forth; but in spite of all the advice and exhortation on this subject, 
we still have too many sales organizations trying to arrive at a selling 
price by the simple expedient of adopting the Ust prices of a leading 
competitor as their own Ust prices. 

Dr. Kreps. Mr, Johnson, in that connection, would you like to 
ampUfy for the committee, by way of example, this practice of price 

Mr. Johnson. I have noticed over a period of several years that if 
there is a leader in the field everybody tries to live up to what he has 
been doing in the way of price structure, and I know of an incident 
which has happened within the past year in the glass industry. One 
organization, of course, has been a leader for many, many years in this 
field, particulariy in our type of work, and now we find another organi- 
zation coming into the field, but it has adopted the same list prices 
as the old leading organization. I often wonder how a new organiza- 
tion can arrive at the identical list price of the older leading organiza- 

I have also found a similar instance in the office-supply business, 
in which one large national manufacturer enjoyed business over a long 
period; suddenly another new national organization handles the 
same type of product and now they find themselves compelled — 
whether they compel themselves or not I don't know, but the fact is 
that they do have the same list price, and it is with that thought in 
mind that I wrote that statement. I thought that prices today 
should be built on the basis of the actual cost of manufacture plus a 
reasonable selling cost and distribution cost, and so forth, and not 
merely try to arrive at what the other fellow has done and shoot at that. 

When a firm follows such a price policy, it is because it is generally 
known that there is a wide margin for potential profit and they are 
taking little risk. 

But it avails little to the buyer, It does not tend to curtail existing 
marketing wastes, and it contributes nothing constructive to the mar- 
keting system. Above all, it does tend to force prices upward with 
a resultant loss of confidence on the part of the buyer in the price 
structure of the commodity or fi^ld in (Question. 

Frequently the list price for an article is absolutely meaningless. 
It is subject to one or more discounts before it can be considered as 
the real price. This system of itself may be wholly necessary, but its 
weakness lies in the way it is administered. For example, the careful 
buyer, the one who is informed, will know what discount he should 
get; the casual buyer may not. and his discount will usually be much 
smaller than it should be. To many concerns the price system 
seems to be bmlt not so much on the basis of what the traffic will 
bear, but rather on how much they can bear down on the traffic. 

I might say that that remark might apply more in a seller's market 
than ih a buyer's market. 

In many industries such is our pricing system today, and it is 
surely not the type of system in which the buyer and tne seller can 


develop mutual confidence. Under this practice the buyer frequently 
wonders when the real price is estabhshed. How much better it 
would be if the buyer could always know about the value he is receiving 
for the money he spends. 

In accordance with the discussion we have had today so far in the 
way of getting this information together, if the buyer could get as 
much information as possible so that he would be educated on all 
given commodities in the way of manufacture, in the way of cost of 
manufactm*e, and also distributing cost, it would help him a great 
deal in knowing just what is the right price to spend for a commodity. 

I know some large organizations that think they have had pur- 
chasing engineers who go out and make a study of what it should 
cost an organization to make a given commodity and compare that 
with what they could probably make it for themselves in their own 
organization, so if they can make it cheaper, naturally they would go 
in for it. 

Dr. Krepb. I take it, by real price you mean the price at discount 
from list price? 

Mr. Johnson. Net price, the money you actually spend. This 
idea of discounts — I wul just diverge a httle here about purchasing. 

Of course, all purchasing agents are supposed to be helping out 
their organizations. You find the discounts ranging from 30, 40, 
50, to 60 percent, but when it comes right down to going to the 
department stores and seeing what 60 percent off wholesale lists are 
and the actual selling price that a department store gives an article, 
you might find it might be cheaper to purchase at a department store. 

That is what I really had in the back of my mind when arriving at 
the actual net price that you pay for a given commodity. 

Dr. Kreps. It has been reported that discounts in recent months 
have been diminished a good deal. There has been a tendency to 
lessen these discounts, to firm up the real price to the list price. 
Have you noted that at all? 

Mr. Johnson. I noticed it in some instances, but I have also 
noticed it the other way, where you can get more discount today than 
you could before. 

Dr. Kreps. Would you give us some examples? 

Mr. Johnson. Well, there was a commodity that last year we 
received a 33}^ percent discount on, and this year it is 40 percent 
discount. I have an instance here in some of the notes of prices. I 
think I can quote from one of my colleagues. By the way, I wrote 
to a number of imiversity purchasing agents throughout the country 
who have been closely associated with me in this method we have of 
buying for universities, and whenever I want information it isn't 
hard to get. I am now going to quote from a letter received hj the 
purchasing agent of Syracuse University, in which he mentioned 
something about the price of tables. He says it this way [readingl: 

I particularly want to call to your attention that phrase "equitably based on 
cost." I do not believe that there is any justification in the present market 
situation on this raise. I think my whole letter can be summed up as a complaint 
against prices which are equitably based on what the market will stand. I 
particularly point this out by citing an example where prices have not changed 
even in spite of new regulations of the wage-and-hour law. This example is in 
the wood furniture industry. This industry, as you know, has been, during the 
past 8 years, a depression industry. They have witnessed within the last 2 years 
two cost advances in their labor. They have absorbed these increased labor 


costs and have not advanced their prices only because the market for furniture 
would not bear these increases. Quite unexpectedly we had to purchase recently 
a carload of small dining room tables and chairs. We secured the same prices 
for these items as we did a year and a half ago. The fact of the matter was that 
there were two companies who bid lower than the prices which we secured a year 
and a half ago. These bids had to be thrown out because they would not secure 
delivery within the specified time. 

This shows an instance of prices being reduced on account of the 
discount that this one organization got, and two other organizations 
were willing to quote a lower price this year than they did the 
year before. 

In many industries such is our pricing system today, and it is surely 
not the type of systems in which the buyer and the seller can develop 
mutual confidence. Under this practice the buyer frequently wonders 
when the real price is established. How much better it would be if 
the buyer could always know about the value he is receiving for the 
money he spends. And how much better our economic situation 
would be if the manufacturer or distributor could make a reasonable 
profit so that he could continue to serve those whom he has previously 
served so well. This whole situation may be somewhat idealistic, 
but at least it may show you the reaction that certain price policies 
have on buyers. 

One trouble with business is that distribution and selling costs are' 
frequently entirely out of line with the physical value of the com- 

I was thinking when I wrote that of the poor farmer in my State 
of Jersey. I happen to be a farmer and I know my neighbor gets 67 
cents a hundred pounds for milk. I bu^ that same milk in New York 
City at 18 cents a quart, which is what is usually equal to two pounds 
so you can see the difference in cost between the time that farmer got 
his 67 cents and the price I paid for it as a consumer in New York City. 

Acting Chairman Borah. That doesn't apply to milk alone. 

Mr. Johnson. Probably not, Senator, but that just happened to 
be the point I had in mind at that particular time. 

I would also mention something about business machines. I heard 
mention before about the prices of business machines. I don't 
exactly know the cost of manufacture of certain types, but I have 
heard it said that one business machine varied in price, or in cost of 
production, from $12.15 to $26, and the cost of that machine in New 
York City is in the neighborhood of $130. I often wonder why there 
should be that variance in prices of business machines. It is another 
one of the facts along the same line as my milk story. 

Perhaps an analogy will best show what I mean. When a student 
matriculates at a school or college, he pays his money for an education, 
and when he is graduated, he coimts upon this education to assist 
him throughout his life. He does not have to pay any more at any 
time for the education that he has received. However, this same 
situation does not seem to prevail in the education of a consumer in 
the use of commodities that he constantly must have. The consumer 
must keep on paying for this education regardless of the number of 
years he has used the identical material. There is just as much sales 
effort to sell him today as there was 10 years ago. There is altogether 
too much waste in selling effort — and the buyer must pay. In my 
opinion 'the difficulties of the present method could be at least alle- 
viated by an arrangement that would allow the buyer to accept such 
services as he actually desires or needs. 


Such an arrangement involves the subjects of packing, product 
finishes, inspection services, transportation methods, and sizes and 
standards of products principally. I believe you will readily see 
that if the buyer could have more to say concerning each one of the 
above factors, he can help to reduce marketing costs by eliminating 
those he does not want. 

I might elaborate on that a bit to tell about certain articles used in 
universities. When you make your periodical plant investigations, 
which is a wonderful thing for every purchasing agent to do, you notice 
things in going through the plants that might be of assistance to your 
own organization in the way of saying, "Well, now, I wonder why 
I need to have this done to the article that I need in my place." I 
can remember the case of one large desk company, where I went in 
and I was introduced to an old fellow right out in the mill who was 
the man to select the veneers for the different grades of wooden desks, 
and after the men who introduced me were a httle ways away from 
me, I said, "How can you tell the difference between the grading of 
your B grade and your C grade desks?" 

He said, "I'll tell you, it's pretty hard to decide between the grading 
of those two." 

This organization had four grades, A, B, C, and D. I was always 
buying the B grade, but you can rest assured that from the remark 
of that man who was the expert, when I went back I bought C grade 
desks, because the lumber or selection of wood in those two were so 
difiBcult for that expert to decide, and I didn't think it was wise for my 
university to pay that B grade price. 

Dr. Keeps. Do the university purchasing agents have a coopera- 
tive arrangement whereby they can ascertain the quahty of the article 
or articles which they purchase? 

Mr. Johnson. I might answer that by giving a little history of the 
organization called the Educational Buyers Association. All the 
college purchasing agents throughout the country are grouped together. 
There are 333 of us, but not all are purchasing agents. Some have 
other duties. Some are treasurers of their organizations, some are 
business managers of their organizations. We all have common prob- 
lems. We all get together and discuss our business pro and con. 

We all know practically what the other fellow pays for his mer- 
chandise, and I must admit it hurts me when a small organization in 
Ohio, we will say, can buy typewriters at a price of $60 for all uses, 
where they may buy only about 10 a year, and I, who might buy 150 
a year, have to pay anywhere from $70 to $93. I just can't figure out 
the justification of that kind of pricing system. 

Mr. O'CoNNELL. This isn't intended to make you feel any better, 
but I understand the Federal Government, which expends possibly 
$2,000,000 a year for typewriters, also pays $70 for the one that the 
school district buys for $60. 

Mr. Johnson. Of course, in university circles there are two prices 
for typewriters. One is the standard educational price and the other 
is the instructional price. The instructional price is $70, but the 
educational price is something a little different, it is a little higher. In 
New York, I guess I am too close to the main oflSces because I can't 
get the instructional discount for my own university, only when it 
is used directly in the classroom. I may have an office and for the 
typewriter I buy for that office I have to pay $93 and some pennies, 

124491 — 40 — pt. 21 11 


but in the classroom adjoining, for the typewriters used there, I pay 

Mr. O'CoNNELL. You are speaking of the typewriter from what- 
ever company, too; the prices are all the same. 

Mr. Johnson. Yes, they are all the same. 

Dr. Kreps. Aren't you able to bargain? 

Mr. Johnson. You have to sign some kind of paper and say that 
you use it for instructional purposes to get it, and of course, if you 
have your secretary using that typewriter it is not wholly within the 
statement used for instructional purchases. 

Dr. Kreps. Who sets these prices? I take it these prices are set 
by some organization. 

Mr. Johnson. That is rather difficult to answer, who sets the prices, 
but it seems to me a strange coincidence that four organizations shoiild 
have the same list prices and exactly the same discounts to anybody. 
I couldn't tell who set the prices. 

Now can I get to the original question? I started to describe the 
association and its membership. We have been going now for a period 
of about 5 years, and during the course of our discussions we wondered 
if we couldn't start some kind of arrangement w^hereby we might pool 
orders. This happened years ago. The pooling of orders was not 
the way of handling it, although it did help us as buyers to get a 
reduced price, but all it did was to peg the market in certain smaller 
commodities. That is, I can recall the alcohol situation, in which 
my friend the purchasing agent of the University of Chicago arranged 
a pooling arrangement for all of us. Well, the organization who got 
the business that year got a great deal of business, but the next year 
his competitors got wise to it, and naturally they all reduced the price, 
to that same level, and the original arrangement we had wasn't 
nearly as effective, because some of our membership in the Midwest 
and Far West would naturally buy from the source of supply nearer 
home. It paid them to do so, so that type of buymg and selling didn't 
seem to be successful. 

However, w^hen w^e were pinched in these depression years we had 
to do something in the way of getting our merchandise and keeping 
within our budget. So some of the fellows decided upon this idea of 
cooperative buying, and we tried the cooperative-organization move- 
ment. We organized and were incorporated in the State of New 
York, but we wanted to try it in an experimental way locally, so it was 
tried up in middle New York State between Cornell, Syracuse Uni- 
versity, Rochester, and a few of the smaller colleges up that way. It 
seemed to work fairly well, so they decided, "Let's see if w'e can't 
invite a few more fellows around New York City," and then it seemed 
to stUl be working all right, so they finally decided we would go 
national, and now we have the purchasing organizations or the 
bushiess managers of 333 universities "ho are stockholders in this 
cooperative, and 277 of our members have actually participated in 
purchasing their materials through this cooperative arrangement. It 
has, I think, got to the point today where it is really a success, and 
that is going to be rather unwieldly for a group of purchasing agents 
whose hobby it is to help out one another to handle. It is going to 
have to be put in the hands of its own organization somehow, and 
run on that basis. 


Dr. Kreps. When you speak of cooperative buying, do you mean 
that by one contract you get a supply of a given commodity for many 
universities at the same tune? 

Mr. Johnson. Well, this organization, or the corporation, gets the 
franchise from some manufacturer to handle their line of merchandise, 
and this cooperative is selling their line of merchandise, and I, as a 
purchasing agent in my organization, buy from that "co-op" if it 
handles something I can use. There are many times, of course, when 
we cannot participate in any arrangements they have because our 
local situation is better, but many of the universities in the country 
can see the direct benefit by trying to reduce the distribution costs in 
some of the commodities where w6 do not have to accept all of the 
services that are forced on the purchaser. 

I might also say that there are times when we are now getting some 
of our merchandise or our supplies manufactured for us under our own 
trade name, and in that way we try to uphold the price situation to a 
point where it is competitive in a particular locality, and by selling our 
own commodity that way. 

Acting Chairman Borah. You are liable to get under the anti- 
monopoly laws. 

Mr. Johnson. The antimonopoly law? I wonder, Senator, if there 
is anything wrong with that kind of buying. It is just an organization 
that is organized to sell to a particidar field. 

Acting Chairman Borah. I was thinking of the decision of the 
Supreme Court yesterday in the milk situation. Aren't they coop- 
eratives? I haven't read it. But I will not disturb you, so we will not 
get worried about it. 

Mr. AviLDSEN. How much of a saving do you make on those coop- 
erative purchases, on the average? 

Mr. Johnson. Well, we don't have to have so many of the costs 
involved in selling effort, and on the basis of that it varies, oh, I would 
say from 10 to 25 percent. 

Mr. AviLDSEN. The average would be in between those two figures? 

Mr. Johnson. I would say the average saving in the actual discount 
arrangements — of course the cooperative naturally has to make a 
profit, and whatever profit they make is turned in in the form of 
dividends which each one of these universities participates in up to 
the amount that they have participated in the actual business of the 

Mr. AviLDSEN. That becomes a discount. The dividend is the 

Mr. Johnson. No, sir; they are two separate things. You might 
have discounts first and dividends later. We get both. 

Mr. AviLDSEN. Regarding the dividend and the discount, how 
much would their total savings be, about? 

Mr. Johnson. The dividend doesn't amount to a great deal. The 
dividends up to now amoimt in the neighbor-hood of 5 percent as 
dividends. There is about 5 percent for handling the office and office 
salaries, and the like. 

Mr. O'CoNNELL. How successful has your cooperative been in 
meeting the situation you described to us existing in the typewriter 

Mr. Johnson. We haven't even tried. We have been trying it in 
other fields first. It was furniture houses we started with, and I don't 


mind saying for publication that if it hadn't been for this method of 
getting prices and buying through a cooperative, I in New York would 
probably be in the position of paying either list price or almost list 
price for my office equipment, that is, steel equipment. I might say 
that when this "co-op" was organized we asked a number of firms to 
participate and they didn't seem to want to do it, and one organization 
did and the result is now that the organization that I did business with 
for a number of years, and who went up to just giving me the ordinary 
list prices, is now back down offering me 25- and 30-percent discounts 
for their commodities. That would be an indication of what has gone 
on in that particular field. 

Dr. Kreps. Does the cooperative keep a stock on hand of the 
supplies that universities are likely to want? Or do you pool orders? 

Mr. Johnson. They do keep some supply on hand, but most of the 
business is done direct by us sending the order direct to the factory, 
and the shipments coming direct from the factory. We have stock 
on hand at all times. Then occasionally they might run a pool of 
some commodity. I am reminded of the pool that we ran on library 
cards. There seemed to be a field where one or two organizations 
had complete control, and I for one was paying $3.90 for my 3- 
by-5 library cards for catalog files. Through pooling arrangements 
and getting the specifications from the Library of Congress, also 
specifications from other manufacturers who were supplying the 
distributors that sold us, we actually drew up a set of specifications, 
and asked several manufacturers to bid on these cards in great volume, 
in vobime of many millions, and on the basis of that we got a price 
that we could sell to our members at $1.65 a thousand, where the price 
was $3.90 for me individually. 

So there is just another method that is used by the cooperative in 
trying to buy the same material. As a matter of fact, I Imow we 
bought the same card stock from one of the same manufacturers that 
originally sold the distributors who sold us. 

Dr. Keeps. When you spoke of the organization did you mean a 
given business or an organization of businesses, such as a trade asso- 
ciation in that particular situation? 

Mr. Johnson. This particular deal, this pooling arrangernent, was 
on our own buying, but the question of trade associations brings up a 
problem that I have often wondered about. I have often wondered, 
while the trade associations do a lot of good in maintaining their 
standards and some of their business practices, if they don't do a lot of 
discussing of prices and price manipulation behind closed doors. 
I can't prove it except from a few statements that have been said to me 
by some very good friends, and I wish that some of that was open and 
aboveboard, so that we could do something about getting the right 

Dr. Kreps. In this particular situation which you have not yet been 
able to master, namely that of typewriters, is it your impression that 
the matter of prices is probably not competitive? 

Mr. Johnson. Well, I wouldn't want to say, because I don't know. 
However, I can say that it is rather a strange coincidence that always 
when those prices fluctuate they all fluctuate at the same time from all 

Dr. Kreps. When you say you can't crack that nut, what do you 

Mr. Johnson. Did I say that? 


Dr. Kreps. Yes; in essence. 

Mr. Johnson. The idea is th&t there are times when a purchasing 
agent gets rather perturbed over the fact that everyone seems to have 
that same set-up, and in my own way of thinking I don't think that 
that is a fair way to sell merchandise I can't conceivably think how 
four different organizations can arrive at the same price. They must 
have differences Lq costs, there must be one president that might get a 
liigher salary than another, and the labor may get more salary in one 
organization than another; more efficiency may play a part in one 
organization where it doesn't in another, yet they all seem to arrive at 
that same figure for four different mdustries. 

Dr. Kreps. It doesn't allow you much leeway for intelligence and 
bargaining power, does it? 

Mr. Johnson. You can't do any bargaining about it. It is all cut 
and dried, take it or leave it. 

Dr. Kreps. In other words, you are up against a united front and 
as consumers are regimented. 

Mr. Johnson. We have that, but that is about as far as it will get in 
that particular industry. We can do no more than protest, and 
probably the reason I can feel freer to talk over some of the other men 
is that we don't have anything to sell, and our type of organization 
does not wait for a profit, and we are naturally trying to use every con- 
structive business means of getting our product for our own organiza- 
tions at the best possible price. 

Dr. Kreps. In other words, you interpret the American way to 
mean one of free and open markets. 

Mr. Johnson. One of free and open markets, and sell your goods 
at what you can afford to sell them for and make a profit. 

Dr. Kreps. And therefore, when consumers are regimented, we are 
departing from the American way? 

Mt. Johnson. I don't thmk we are regimented entirely to the 
extent of aU consumers. You might say, in one way, we happen to 
be, in our particular field, a sort of a friendly group in which we can 
talk these things over and we do have annual conventions and many 
group meetings throughout this land in which we meet in small groups 
and talk over practically the same thing every time we meet. 

Dr. Kreps. You don't do the regimenting. You are being regi- 

Mr. Johnson. Being regimented; yes. 

(Mr. Avildsen now presiding.) 

Acting Chairman Avildsen. Is there a high duty on typewriters? 

Mr. Johnson. Duty? 

Acting Chairman Avildsen. Did you ever try to import type- 

Mr. Johnson. I never heard of any typewriters being imported. I 
think there is an export; they have a different price on typewriters 
for exportation. If one could get that particular price it would be 
different from the price we pay. 

Mr. Fischer. The typewriter manufacturers do not have a trade 
association, do they? 

Mr. Johnson. I don't know. I know I tried to get a sellmg agency 
from one of the vice presidents, from one of the largest typewriter 
manufacturers, and he couldn't answer my question. He said, "Not 
before I talk it over." What he meant by talking it over I don't 
know, but I assumed it meant he bad to ask the other three. 


Mr. Fischer. To what causes do you attribute the fact that you 
have to pay higher prices for your university as compared with those 
in Ohio that you mentioned before? 

Mr. Johnson. That was only in that one particular industry, and 
I think, as I mentioned before, I am too close to the home offices, and 
the managers in the field seem to take more latitude in the way of 
interpreting the rulings. That is about the size of it. 

Mr. O'CoNNELL. As I understand it, there is a price level for 
typewriters for educational purposes which is a little lower than for 
typewriters sold for other purposes. In other words, it is my under- 
standing that a typewriter which a school district could buy for $60, 
the Federal Government would pay $70 for, and your university might 
pay $70, or $60 if it were for educational purposes. 

Mr. Johnson. It is just as I said before, there is the instructional 
discount and the educational discount. 

Mr. O'CoNNELL. Which is the lower? 

Mr. Johnson. The instructional is the lower, but it is no longer 
$60. It is all $70 now, and the educational discount is higher. 

In conclusion, the institutional purchasers have experienced a 
moderate increase in prices since the outbreak of war in Europe. 
The net effect of this increase has not been serious, and in fact our 
colleges and universities are wholly sympathetic with the need on 
the part of our business structure for adjustments in the basic price 
level. I have endeavored to point out that the income of educational 
institutions is limited by certain factors, and for this essential reason 
any run-away market would affect Lhem rather acutely. I have also 
endeavored to indicate that there are many elements of waste in our 
complete marketing system and that net costs to educational institu- 
tions could be reduced if these wastes could be eliminated. 

You need hardly be reminded that in the event of a radical increase 
in prices our educational institutions would be adversely affected 
from the viewpoint of academic standards. Our faculties would 
suffer along with the institutions. The students would be obliged 
to use inferior articles and whatever sjiibstitutes we might be called 
upon to provide. 

Dr. Keeps. Do you have a regular service that you consult con- 
cerning substitutes? How do you know that an article 

Mr. Johnson (interposing). Not definitely as a service, but we do 
in our group meetings find out the results of what one another has 
been doing, and if one fellow s&js, "I found a new source of supply," 
we will say, "for cover glass," we wiU all be naturally interested and 
say, "Who is it?" And in that way we investigate. We also in our 
association work are now trying to have tests made of various com- 
modities that are more popular in our use, and at Western Reserve 
University their purchasing agent has established quite a laboratory, 
and he has the facilities of some of their city testing laboratory to 
help him. Right now be is doing some work for us along the lines of 
testing certain commodities for our particular organization. 

Dr. Keeps. Can't you get the information from the United States 
Bureau of Standards? 

Mr. Johnson. I am afraid that I as a representative of a privately 
endowed institution can't get the kind of information that, I want. 
Naturally they do a lot of testing, but I don't think it is generally for 
the publication to all consumers. As we heard before, through Pr. 


Forbes, he might be able to get it through the State organization, 
State purchasing organization, but I am just in the same position there 
as some rubber company would be trying to get that same information. 

Dr. Keeps. If a rubber company wanted to test different types of 
rubber for one purpose or another, couldn't it have that test made 
at the Bureau of Standards? 

Mr. Johnson. I don't know the activities there. I don't think 
that they could, it would be my offhand opinion, because I don't 
think that the Director would naturally want to make tests for all 
the industrial organizations throughout the country. I am afraid 
they would be flooded with tests. 

Dr. Kreps. If financed by a company, doesn't the Bureau of 
Standards make tests for producers and for business organizations? 

Mr. Johnson. I have never hea^-d of them making tests for any 
individual. As a matter of fact, I should think that I would have 
heard of it, because of close association with men who are interested 
in tests for organizations. I have never he?rd of them talking about 
it. ^ 

Dr. Kreps. However that may be, it is then true that as a consumer 
you are not able to get the results of such tests. If the Bureau of 
Sta,ndards finds out what is the best storage battery, and they do 
know, you as a consmner, even as a university consumer, cannot get 
those results. Is that correct? 

Mr. Johnson. I couldn't get those results; no. 

Dr. Kreps. Do you regard that as a deficiency in the operation? 

Mr. Johnson. I would like to get, naturally, more information 
about all the commodities that are used in our particular field, but I 
can readily see where that would cause a great deal of hub-bub on 
the part of all industrialists, because jou have all your competitors 
wanting to get the Bureau of Standards to test them. It would 
seem to me to evolvu finally into an endorsing agency, that the 
Bureau of Standards said this was good, and the Government Bureau 
of Standards said, "This is not quite as good as the other," and that 
wouldn't bo practical, it would seem to me. 

Dr. Kreps. Do you have Canadian buyers in this Association? 

Mr. Johnson. We have one or two Canadian buyers in our asso- 
ciation, and of course they are naturally interested to be in there 
more from the standpoint of getting the comparisons of what we do 
in the United States and what they can do in Canada, because you 
see, before the war they had better facilities of getting materials from 
England than we had. We had to pay quite a heavy importation on 
some of our merchandise, and lately, although my buying of foreign 
merchandise hasn't been great, we still have to get some materials. I 
am reminded of one particular instrument light now that I don't know 
whether it is down in the bottom of the sea or not, but we have ordered 
something that cost $1,900. We ordered tliis definitely last April so that 
this scientist abroad could calibrate the instrument on a certain day 
in June, and that was the only day that that could be cahbrated in 
the year, so if I hadn't got my order in then, I would have had to 
wait a year before I could order it again, and now I don't know where 
the instrument is, because it was supposed to be here and has not 
arrived as yet. 


Dr. Kreps. Do you find that Canadian purchasing agents are 
helped in their purchases by the fact that consumer goods there are 

Mr. Johnson. No; I don't think their consumer goods are graded 
anj^ better than ours, but from what I have learned recently about 
their comparisons of the market structure, I understand that the 
Canadians have set as their level August 1939, as a basis of 100, and 
from there on it is very easy to find out whether you have had the 
reaction of a price increase or decrease. That is much more helpful 
than our methods of price comparisons in this country. 

Dr. Keeps. In other words, you would like to see certain indexes 
of prices in this country at least published on the basis of August 1939. 

Mr. Johnson. I would like to see them adjusted and published 
that way, and let's get a better comparison than we have been able 
to get up to now. 

Dr. Keeps. What percentage of the expenditures of the university 
go for commodities, approximately? 

Mr. Johnson. I will have to answer that by using my own organi- 
zation as a model, because that is the only one that I know of. We 
have a budget of $8,800,000. That is for salaries and supplies, and 
a few other expenses. My buying of that $8,800,000 is one-million- 
two-hundred-and-forty-some-odd thousand, so it is about 8 to 1. 

Mr. Fischer. To what extent do educational institutions endeavor 
to build up stocks? 

Mr. Johnson. They, as a rule, don't carry a great deal of stock. 
I will qualify that by saying th^ will carry a varied line of stock 
but not in great volume. The universities located in the smaller 
towns naturally have to buy and look ahead, I think, more than we 
that are located in larger cities. Up to now we stUl can depend upon 
our source of supply acting as our storekeeper. 

In making these statements I do not at all underestimate the 
resourcefulness of our educational institutions. I am convinced that 
education would go on but impeded in its full development by a 
situation which I believe has no basis for existence. 

As a representative of educational institutions, it is natural that 
I should be among the first heartily to approve of the conference 
method of bringing abo^it more confidence between buyers and 
sellers. I have indicated above in my opinion many of our maladjust- 
ments can never be corrected unless we can establish confidence in 
both parties to the business transaction. 

Above all else, our American educational institutions have faith in 
the American way. They believe in encouraging every business 
enterprise that holds to these same ideals. And I believe that if 
we are, all of us, frank and honest with one another, we can build up 
the confidence that is so greatly needed. 

Actiiij^ Chairman Avildsen. Are there any other questions? 
Thank you very much. Mr. Johnson. 

(The witness was excused). 

Acting Chairman Avildsen. The committee will adjourn until 
10:30 tomorrow morning. Mr. Vance of the Studebaker Corporation, 
as well as Mr. Hoffman of that company, will testify. In the after- 
noon we will have Mr. Buell, of Fortune Magazine. 

(Whereupon, at 4:12 p. m., a recess was taken until Wednesday, 
TJe6ember G. 193^, at .?;30 a. m.) 



United States Senate, 
Temporaey National Economic Committee, 

Washington, D. C. 
The committee met at 10:35 a. m,, pursuant to adjournment on 
Tuesday, September 5, 1939, in the Caucus Room, Senate OiO&ce 
Building, Senator Borah, presiding. 

Present: Senator Borah, acting chairman; Messrs. O'Connell, 
Avildsen, Arnold, Henderson, Hinrichs, and-Brackett. 

Present also: Willard Thorp, Department of Commerce; Edward 
Fischer, Federal Trade Commission ; and Theodore J. Kreps, economic 
adviser to the committee. 

Acting Chairman Borah. Do you solemnly swear the testimony 
you shall give in this hearing shall be the truth, the whole truth, 
and nothing but the truth, so help you God? 


Mr. Hoffman. I do. 

Mr. Vance. I do. 

Dr. Kreps. Mr. Hoffman, for purposes of the record, will you 
state your full name? 

Mr. Hoffman. My name is Paul G. Hoffman. 

Dr. Kreps. Your position, please? 

Mr. Hoffman. President of Studebaker Corporation. 

Dr. Keeps. How long have you been in the automobile business? 

Mr. Hoffman. Thirty years. 

Dr. Kreps. And, Mr. Vance, for the purposes of the record, will 
you similarly state your full name? 

Mr. Vance. H. S. Vance, chairman of the board of Studebaker 

Dr. Kreps. And how loug have you been in the automobile business? 

Mr. Vance. About 30 years. 

Dr. Kreps. Mr. Hoffman, are you going to testify? 

Mr. Hoffman. Mr. Vance is going to testify. 

Acting Chairman Borah. Did you say you had been in the business 
30 years? 

Mr. Hoffman. Yes, sir. 

Acting Chairman Borah. You must have started pretty ea/Iy. 

Mr. Hoffman. I started just after I left college. 

Mr. Vance. It is unnecessary for me to dwell on the rapid growth 
or the present size of the automobile industry. You are familiar 



with the fact that within one generation it has developed from a minor 
business into a major one, exceeded in annual volume only by the 
sale of food and clothing. 

Of .course, the automobUe industry had a great opportunity, but 
opportimity alone could not have produced what has happened. In 
my opinion the most important factor in the development of the 
automobile industry has been competition, natural in form, intense 
in character, which has compelled progress as the price of survival. 

The Federal Trade Commission in its recent report on the motor 
industry recognized this fact with the statement: 

Consumer benefits from competition in the automobile-manufacturing industry 
have probably been more substantial than in any other large industry studied by 
the Commission. 

More than 800 makes of cars have been offered to the American 
public; today 21 remain. 

Tliis chart, r;^entlemen, is a list of the makes of cars that have been 
offered to the American pubhc since the beginning of the industry, 
and those in bold-face type, which are 21 out of a total of 812, are those 
still being offered to the public today. 

Mr. AviLDSEN. I would like to suggest, Mr. Chairman, that this 
exhibit be printed in the record. 

Acting Chairman Borah. Very well. 

(The chart referred to was marked "Exhibit No. 1513" and is 
included in the appendix facing p. 11365.) 

Mr. Vance. Mortality has been high in the ranks of automobUe 
dealers as well. Great losses have come to those in the industry who 
could not keep up the pace, but great gains have come to consumers, 
the millions of families who today fmd personal transportation a 
necessary part of their daily lives. 


Mr. Vance. Retail prices for closed cars, v/liich account for sub- 
stantially all of the present-day business, are from one-half to one- 
third of closed-car prices of 20 years ago. Prices prior to 1919 are 
of little value for comparative purposes because in earlier years sub- 
stantially all of the cars sold were open cars. 

I would like at this time, gentlemen, in connection with a statement 
that today closed-car prices are from one-half to one-third of what 
they were 20 years ago, to say we have an exhibit here which is more 
illuniinating than my words. We have a 1920 closed car, a Stude- 
baker, and three 1940 model Studebaker closed cars. 

We were unable to place them in the Caucus Room, but tliey are 
in the courtyard, and we think a view of them would be illumuiating 
to you. If it is not out of order, I would like to suggest that at recess 
time you take a look at these three cars, the three in the aggregate 
costing the public today less than the one model 20 years ago. 

Mr. Henderson. There is nothing in it about upkeep, though, 
Mr. Vance. What would the upkeep be for a person who in 1922 
was driving a 1918 Studebaker? 

Mr. Vance. I am just about to give you those figures. 

While prices have been going down, values have been going up. 
I need not take your time by explaining how improvements have 


been made to the extent that the low-priced cars of today arc much 
better, more durable, more comfortable, more economical, safer, 
better values m all respects, than were the high-priced cars of a few 

years ago. 

Exhibit No. 1514 

Vfe OF COSTS IN 1902 


1930® ®®®a> 4.2^ 


1938(?)C?)(?)0 3.W 


But even the combination of greatly reduced prices and greatly 
increased values does not tell the story. Available data sliows that 
total operating cost, including depreciation, for the popular size 
four-passenger car was: 

18.0$i per mile in 1902 
n.H per mile in 1912 
7.U per mile in 1920 
5.3^ per mile in 1925 
4.2(i per mile in 1930 
3.30 per mile in 1935 
3.1^ per mile m 1938 


To go back to your question, Mr. Henderson, this would indicate 
that in 1920, when the 1920 model was offered to the public, average 
operating costs were 7.4 per mile, whereas in 1938, the last year for 
which figures were available, 3.1, so while the ratio isn't 3 to 1, it is 
better than 2 to 1.^ 

Mr. Henderson. Since that period, I suspect, one of the big costs 
which has been reduced is tires, is it not? 

Mr. Vance. That is correct. 

Mr. Henderson. I recall going completely broke at that time 
buying a $60 tire which only ran between five and eight thousand 
miles, so it must be one of the big items, 

Mr, Vance. It is one of the big factors. 

In speaking of what the industry has done to make a more efficient 
automobile and a more durable automobile, I am not speaking of the 
car manufacturers alone but of a considerable number of what you 
might call associated manufacturers; parts makers. For example. 
There are people who make clutches, others who make transmissions, 
others who make steering gears, and others who make carburetors, 
and in the sense we are now discussing this subject, they are as much 
a part of the industry as the car manufacturers themselves. 

Mr. Fischer. Do these operating costs include the cost of gasoline 
and the taxes? 

Mr. Vance. They include gasoline, of course, and they mclude 
repairs, tire replacements, and they include depreciation. 

Mr. Fischer. But not the taxes? 

Mr. Vance. I can't answer that question; I don't know. They 
tell me that they do not include all taxes. 

In recent years these figures were drawn, I think, largely from the 
studies of the Bureau of Labor Statistics, which now includes the cost 
of operating an automobile as one of the items in calculating the cost 
of Uving. 

When one considers that there are approximately 26,000,000 passen- 
gers cars ^ and 4,400,000 commercial cars registered and in use in the 
United States, that they are estimated to travel 250,000,000,000 
vehicle-miles per year, it is apparent that betterment of product for 
more economical operation has been the outstanding and most worth- 
while benefit to consumers, arising out of the kind of competition 
which has prevailed in the automobile industry. 

Acting Chairman Borah. Twenty-six milUon — that means about 
one car for every fourth individual in the United States. 

Mr. Vance. Koughly 30,000,000 cars, including commercial cars. 

Mr. Hoffman. On tliis question of taxes, in that figure of upkeep 
cost, you have all the gasolme taxes, the license fees, you do not have 
property taxes. 

Mr. Fischer. I had particular reference to the gasoline taxes. 

Mr. Hoffman, The gasoUne tax and all license fees are included 
but not the property tax. 

Mr. AviLDSEN, The average for the country, that is the average 
for the United States. 

Mr, Hoffman, Yes. 

Mr, Vance. That of com*se includes taxes on the original purchase 
of the car and on parts and tires and so on, 

I See "Eihibit No. 1514." p. 11183. 
> Bm "Exiibit No. 1515," p. 1118,';. 



Exhibit No. 1515 


1935 1939 


Thirty-odd years ago, the editor of a popular magazine wrote, 
"Everyone can afford to run a car now that it costs only 16 cents a 
mile." But he couldn't visuaUze as "everyone" the millions of low- 
income car owners of today. These just couldn't afford to operate 
automobiles at a cost of 16 cents per mile. 

Today, studies of the Bureau of Labor Statistics and the Bureau of 
Agricultural Economics show that half of the famihes with incomes 
between $60 and $100 a month own cars,^ that their average annual 
expenditure including depreciation for driving about 3,000 miles is 
$70, or approximately 2% cents per mile. 

It is easy to see why automobile manufacturers have placed car 
performance and durability, prime factors in economy of operation, 
even above low initial price as the most important factors in develop- 
ing a broad market. No rnatter how low prices might have gone, had 
operating cost stayed at the level of even a few years ago, there could 
not be 26,000,000 passenger cars in use today, because the incomes of 
a niajority of the owners of such cars could not have supported their 

Today retail prices of passenger cars range from $350 to $7,175 
delivered at the factory.'' 

In ?pite of the great range of current prices,- it is only within com- 
paratively narrow limits that volume possibilities make mass produc- 
tion possible. 

There have been many attempts to open up a broad market for 
new cars in the very low price range, but none of these offerings have 
been able to compete successfully with the better equipped used cars 
selling at the same or lower prices. 

Mr. Henderson. Doesn't that get down to the relationship of the 
number of used cars to the number of new cars produced each year? 
That is, if it weren't for the value of the used car would we not have 
a lower-priced car without so many gadgets? 

Mr. Vance. Possibly so, but the progress of the industry in terms 
of improvements in automobiles has been such that in the upper 
income group of automobile owners, which certainly is not over 25 
percent of the total of owners, who constitute the entire market* for 
new cars, in that group of prospective new-car owners we find a 
willingness to take a heavier relative depreciation on their old cars on 
the basis of usable life, in order to get the advantage of the improve- 
ment of succeeding models long before the usable life of their old cars 
have been exhausted. This business is not one in which a man buys 
an automobile and uses it until it is no longer usable. I think it would 
be perfectly safe to say that the average car remains in the hands of 
the new purchaser, on the average, for less than one-third of its usable 

Mr. Henderson. That is what I am getting at. The car when it 
passes to the second or even the third owner still has a high amount 
of transportation value for which somebody is willing to pay. There- 
fore, in order to get a proper ratio between a used car and a new car, 
the new car has a higher price relatively than it would have if there 
weren't this value in the used car. 

Mr. Vance. It has a higher price only because it is a belter car. 

Mr* Hoffman. I wonder if I could answer that, I -^ould like to 
make this point, that the price of the used car is controlled by the 

> See "Exhibit No. 1517," infra, p. 11188. 
« See "Exhibit No. 1516," infra, p. 11187. 


Exhibit No. 1516 















• • 

i : 

• • 

i : 


• t 

s < : • * 

• • • - 

• I • 

• • • • 















Exhibit No. 1517 





TO < 


TO -< 







10 20 30 40 50 60 70 80 90 100 





























'^//////////>///^^^^^ 1 





































10 20 30 40 50 60 70 80 90 100 



price of the new car; in other words, the used car has no effect on the 
new-car price; the new-car price has an effect on the used-car price. 

Mr. Henderson. How about the number of used cars that have to 
be sold in connection with the new car? Doesn't that have some 

Mr, Hoffman. Mr. Vance is covering that later. 

Mr. Vance. We are taking care of that a little bit later. 

Mr. Henderson. The point I wanted to make is this. If it 
weren't for the used car market we would probably have a low-priced 
car, considerably below today's price for the new car. 

Mr. Vance. That is correct. 

Mr, Henderson. It wouldn't have as much equipment, it wouldn't 
have as much power, it wouldn't have all the fine furnishings and the 

Mr. Vance. But from a social standpoint, Mr. Henderson, we have 
this situation. Suppose — to take this hypothetical case that you 
bring out — that all new cars were lower in price and suppose they were 
stripped cars, so to speak, and here is the important point in this 
hypothetical question that you ask, the important point is that the 
new car stays in the hands of the original purchaser substantially 
throughout its life because that is the only way in which your used 
car market would be wiped out of the picture. If that were true, it 
would be very difficult if not impossible for the low income person 
who can't afford to invest more than let us say $100 or $200 in a car 
to have personal transportation, because the onl^ thing that gives 
him an opportunity to buy a car at that price with respect to the 
balance of transportation in it that is worth more than that price is 
that the original purchaser has been willing to take more than his 
share of depreciation. 

Mr. Hoffman. I think there is one point there that in a free 
economy the customer has a choice and tha customer has demonstrated 
that he much prefers a used car with what you call the gadgets and 
comforts to a new car that might be sold at a comparable price. 

Mr. Henderson. But I don't know that that is complete freedom 
of choice because nobody in your group or the Big Three has ever 
undertaken to get down to that other level. 

Mr. Hoffman. I think history would raise a question about that 
statement of yours because there have been numerous exceptions 
when the public has been offered a stripped car and the public has 
not purchased it. You get right down to the fact that if you offer a 
customer a stripped car — and such cars have been offered — the 
customer won't buy it. He will buy a used car that in his opinion 
represents better transportation value. 

Mr. Vance. On the point of whether manufacturers have attempted 
to offer so-called low-priced cars; from 1907 to 1939 there were a totd 
of 110 different makes of cars offered to the pubUc at prices ranging 
from $100 to $600 and the great, majority of them were between $351 
and $450. 

Mr. Henderson. This isn't a comment to end all comments, but I 
would say that the general public would certainly welcome wer- 
priced new car that was something more than a stripped car. ether 

or not they can get it in the economics of the industry r,h the 
high value and the number of used cars is another question. 
But certainly the public hasn't completely dissipated its idea that it 

124491 — 40— pt. 21 ^12 


m^ght get a brand-new car at something like a dollar a day as Ford 
was thinking about when he put out the first "Lizzie." I know that 
from the volume of correspondence I received when I was making a 
study of this industry. I'he number of people who feel that they 
ought to get a new car at less than the average price for the standard 
makes is tremendous. 

Mr. Vance. Of course the public would always like to get what they 
want for less money. That goes without saying. You speak of Ford. 
Three years or so ago Ford brought out another model car, what they 
called a 60 Model, and the first year that it came out it differed very 
little from the 85, the standard model which had been in production 
several years, except with respect to Engine size, appointment, and a 
few things of that sort. 

He made a difference of $50 in the price of the two cars. The 
Sixty, the lowest-priced car, never did get over, according to the best 
information we have been able to get. It never accounted for more 
than twenty percent of his production. He still sold, out of five cars, 
four of the higher-priced model against one of the lower-priced model, 
with this difference of $50 between them. 

Now, I think that that is an illustration of the point we are trying 
to make, and that is that people, even in the low-priced field, do, 
when they buy an automobile, want a certain level or standard of 
accommodation, if we may call it that, including in the word "accom- 
modation" all the various things that make up for convenience and 
comfort and so on. 

Mr, Henderson. And the psychological advantage of having a 
new car. 

Mr. Vance, That's right, and it is the psychology of it that has 
resulted in Ford sales still being predominantly of the higher-priced 

Mr. Fischer. Would you regard the Crosley product as a stripped 
car product? 

Mr. Vance. It is more than a stripped car. It is a sub-standard 
car in size. Have you ever seen a Crosley? 

Mr. Fischer. Yes, I have. That is why I asked the question. It 
appears to be somewhat depleted of much equipment. 

Mr, Vance. It is a car that not only has been stripped of equip- 
ment, but it has been reduced in size as well, because neither the 
reduction in size nor taking of equipment off alone would have 
produced the low price which was the objective of the manufacturer. 

Used car competition is a vigorous factor in tUe industry today. 
For each new car sold, two used cars pass into the hands of new owners,^ 
It is estimated that in a year such as 1939, fully a million used cars 
are sold for $100 or less. It is even suggested that more used cars 
than new cars are sold between $500 and $700. The used car cannot 
be disregarded in estimating the potentialities of the market for low- 
priced new cars. 

We cannot over emphasize the importance of visible advancing 
value in the new car in discussing the relationship of price to volume. 
For example, during the past several years, the buyers of low-priced 
automobiles which were offered in both deluxe and standard models 
have bought considerably more of the former than of the latter, 
electing to pay from $50 to $60 for the added features of the deluxe 

I See "Exhibit No. 1518." Infra, p. 11191 


models; features contributing to convenience, to appearance and to 
improved service. 

The public demand for more car is self-evident. 

Manufacturers have been able to give advancing values each year 
because they have been free to devote a la*ge portion of the economies 
worked out in production to this purpose. 

However, if the savings from improved design and manufacture 
were to be consumed by increases in the price of materials, which 
would add nothing to the value of the car in the eyes of the buyer. 

Exhibit No. 1518 

Two Used Cars Sold For Every One New 

Number of Used Vehicles Sold per 100 New Vehicles Sold 




Cars it 





































1939 (10 Mbs.) 




Sotirce: Monthly reports to Automobile Manufacturers Assn. 

the relation between value and price in Ids mind would become less 
favorable and would inevitably affect the market adversely. 

Our manufacturers themselves have fairly well exhausted the 
opportunities to finance any part of this needed annual increase in 
value out of their margin of profit. 

There has been a drastic shrinkage on the profit side during recent 

On the basis of computations made recently by the Federal Trade 
Commission, the industry's average net profit before Federal income 
taxes, on passenger car sales was $29 per car in 1937. In 1929 it 
had been $55. 

Dr. Kreps. By that figure, do you mean margin or profit? 

Mr. Vange. Profit. 


Dr. Kreps. Profit on capital invested? 

Mr. Vance. No, profit in dollars per car. 

Dr. Kreps. It's gross margin, then. 

Mr. Vance. That is right, before taxes. 

Dr. Kreps. It is true, is it not, that profit on invested capital, as 
shown by this same study, has held up? 

Mr. Vance. It was undoubtedly a reasonable profit. What the 
aggregate was, I don't know. 

Dr. Kreps. Your industry has shown that profits per dollar of 
investment are Ukely to increase with lower prices and lower gross 
margins, and low cost distribution to the consumer. 

Mr. Vance. Profits haven't increased on any basis, whether the 
basis be number of units sold or investment, or dollar sales. 

Dr. Kreps. Isn't it true that this same study you are quoting 
showed that profit per dollar of capital invested was even greater in 
1937 than it had been in the average years in the twenties? 

Mr. Vance. I don't think so. I haven't the figures available. 

Mr, Avildsen. Do you have any opinion on that, Mr. Hoffman? 
That was my impression. I felt the same as Dr. Kreps. 

Mr. Hoffman. I think that is true. Of course that is confined to 
one or two companies. But I think perhaps the over-all picture 
would show a somewhat higher return on investment. 

Mr. Vance. I think we may be conflised by these two figures. 
You probably are talking about the over-all profit of manufacturers. 
Let's take General Motors as an example. Don't forget that the 
consolidated profit of General Motors comes out of many activities. 
It comes out of the General Motor's interests in the Ethyl Gas Cor- 
poration, General Motors' activities in electric refrigeration, and 
various other things. What we are talking about here specifically 
is gross profit on automobile sales, on car sales, and for the first time 
the split-up of the consolidated profit of General Motors has been 
available in this Federal Trade Commission report, and in the con- 
solidated report it doesn't show. For example, I think it is fair to 
say that the split-up of General Motors' consolidated profit as shown 
by the Federal Trade Commission study received a very substantial 
contribution from their subsidiary, the GMAC, which financed car 

Dr. Kreps. The technical methods of the Federal Trade Com- 
mission I think are excellent in that regard, and the figures which 
they use on profits per dollar of investment conform with the very 
best practice available. There is no mixture of the kind indicated. 
My question is answered simply when you say that manufacturers 
are distributing cars to the consumer at lower gross margins, and 
thereby, fortimately, getting more on their investment. 
Mr. Vance. That, without any question, is true. 
Mr. Hoffman. I think the point Mr. Vance makes is an important 
one though, that if you divorce from General Motors' profits, profits 
on activities other than car manufacture — I don't know that this is 
true, but I think you would find that even with them the return on 
invested capital had decreased. They have capital invested in other 

activities, too. Taking car manufacturers per se 

Dr. Kreps (interposing). The study does that. It does make that 


Mr. Henderson. I think the important thing is that the amount 
of actual capital investment for automobile companies had declined, 
but the capacity to produce had diminished very little. I think that 
is one of the most extraordinary records as to what is being done with 
the ability to produce in modem industry. The actual amount of 
capital invested was considerably lower, and therefore profits were 
applied against a lower base. 

Mr. AviLDSEN. Mr. Vance 

Mr. Vance (interposing). I have some exact figures that might be 
interesting along this line, Dr. Kreps. I am comparing 1929 and 1937 
for another reason, but they will be illuminating, I think, on this 
point. The average wholesale value, that is to say the price received 
by the manufacturer, and this is for the whole industry, in 1929, was 
$575; in 1937, it was $690; the average net before taxes in 1929 was 
$55.30; and in 1937 it was $29. The percentage of net before taxes 
to the dollar of sales was 8.6 in 1929, and 4.2 in 1937. 

Mr. AviLDSEN. Have you deducted Federal taxes in those figures 
in figuring the net profit? 

Mr. Vance. No; this is before taxes. 

Mr. AviLDSEN. Haven't you deducted the Federal taxes? In my 
business we deduct taxes before figuring profit. 

Mr. Vance. We haven't deducted them for the reason that from 
year to year the Federal income tax varies widely, and therefore these 
figures in a comparative sense are more illuminating. 

Mr. AviLDSEN. Still, it gives you an exaggerated profit if you don't 
deduct that. 

For instance, if the Federal tax is 18 percent, and the profit is $29 a 
car, that means you may have a tax of $5 per car, making your profit 
$24 instead of $29. 

Mr. Hoffman. One further point. Even in the case of that $29 pro- 
fit, the sources of profit are 50 percent from parts sales and accessories. 

Mr. Vance. That is your operating profit. Those are the terms in 
which we think. 

Mr. Henderson. That is the profit. You pay the tax on the 

Mr. AviLDSEN. But you don't pay dividends out of the $29. 

Mr. Vance. In normal times, and to a great extent even under 
conditions such as the present, the automobile industry can and does 
police the prices of materials with an effectiveness little realized. 

The huge scale of automobile purchases is a perpetual inducement, 
not only to engineers and technicians of the manufacturers them- 
selves but to suppliers and would-be suppliere, to develop substitutes 
or alternative materials or designs, at lower costs. Thus, we have 
seen iron and steel replace aluminum in crankcases, gear boxes and 
cylinder heads. We have seen the lightweight steel piston become 
a competitor of the aluminum piston. 

We have seen steel replace wood, stampings compete with castings 
and forgings, improved sheet glass compete with plate glass. We 
have seen lacquer displace paint and varnish, and lacquer in turn 
partially displaced by synthetic enamel. 

In the textile field, research has combined cotton in the warp 
and rayon in the woof to produce a stronger and more durable material 
and to free automobile fabric prices from complete dependence upon 
the price of wool. 


Stainless steel competes with chrome plate, and plastics with both 
for many parts in a car, and one prevents the other from getting out 
of line in price. 

Mr. Henderson. I have anticipated you several times, but I believe 
I have not this time. When you speak of the huge scale of automobile 
purchases as a perpetual inducement toward lower costs, you have 
left out what is to my mind probably much more important than 
this development of alternative materials and designs. That very 
scale of buying induces the toughest of competition on the part of 
suppliers, does it not? 

Mr. Vance. That is correct. 

Mr. Henderson. There is probably no single item that has led to 
reduction of cost more than this concentrated buying power, is there? 

Mr. Vance. I tliink it is fair to say, Mr. Henderson, that in the 
past 30 years the automobile business has been largely responsible 
for the great development that has occurred in the machine tool indus- 
try, the great improvement in machine tools. I tliink that it has 
been directly responsible for a large part of the evolution and improve- 
ment that has occurred in the steel industry. Why? Because with- 
out that new volume which the automobile business created, without 
the large volume which the automobile business created, some of those 
very intricate and expensive machines couldn't have paid their way. 

Mr. Henderson. That's right. 

Mr. Vance. Again, I want to get back to this point. The con- 
tinuous mill wouldn't have been possible if it were not for the auto- 
mobile demand for sheets. 

Mr. Henderson. We had an example in connection with our steel 
hearings of the buying of ore.' Everybody else was in one category, 
but Mr. Ford was over here in a separate category. That is, if you 
wanted to sell to Mr. Ford, you had to do business on a competitive 
basis. In fact, this pressure for cony^etition so far as the supplying 
industries for automobiles are concerned is probably as intense as in 
any large manufacturing field. 

Mr. Vance. I think tiiat is true. 

Mr. Henderson. There was some evidence in a study which I 
happened to make that there was overcompetition, if ever an econo- 
mist can recognize overcompetition. Particularly in the drastic de- 
cline of the thirties^ there was exercised an almost monopolistic 
power in some cases by the pressure which some companies could 
exert on some suppUers because of the tremendous volume of pur- 

Mr. Vance. I don't think that was true of the industry as a whole. 

Mr. Henderson. I don't make it as an indictment. 

Mr. Vance. I understand. 

Mr. Henderson. I think it probablj^ has been one of the greatest 
factors in keeping down prices, and I think we can run the risk, some- 
times, of that intensity of competition in other industries for the sake 
of the over-aU advantage we get. 

Mr. Vance. I have been a purchasing agent myself in this business. 
A purchasing agent's responsibiUty is not only to get a low price but 
it is to get two other things that are just as important in the business. 
He has to get service; that means delivery, and then he has to 
get quality, and if he fails in either of those two respects, his clever- 

< See Hearings, Fart 18, 


ness in getting a low price doesn't mean anything. It is very quickly 
wiped out. 

Mr. Henderson. If an automobile company is dealing with a tire 
company, it means getting a good grade of tires, doesn't it? 

Mr. Vance. Right; and they have to be there when they are needed. 

Mr. Henderson. I think one of the significant examples of the 
competition induced by this scale of buying are the; tire companies. 
These are pretty generally regarded as gigantic enterprises in the 
American economy, but, although history shows they are inclined to 
stray from time to time into the paths of noncompetition, so far as 
original equipment is concerned the evidence is pretty clear that there 
has been a high degree of competition. In fact, one of the complaints 
which the tire people make is that there is overcompetition, that they, 
in order to get this basic volume, have had to sell for less than cost to 
the supphers. But leaving aside any judgment, the pressure exerted 
by this tremendous buying power does lead to competition 

Mr. Vance (interposing). Of the keenest sort. 

Mr. Henderson. Of the keenest sort, and it raises in some cases a 
question of stewardship, of how far that buying power ought to §o. 

Mr. Vance. Of course, I think that the buying power exerts itself 
into the ranks of supphers and even into the ranks of basic material 
manufacturers not only with respect to price, Mr. Henderson, but also 
with respect to research, improvement in technique, which in timi 
may mean lower costs and lower prices, but which also may mean 
higher quality and wider use. Let us take, for example, the 
development of alloy steels, which has been a major development in 
the automobile industry. Very important contributions in the de- 
velopment of alloy steels were made by the automobile manufacturers 
themselves, and turned over to the steel manufacturers in the form of 
requirements: "We want this, with such and such specifications," and 
so on. 

Mr. Henderson. Well, you have chosen steel as an example. There 
is no doubt whatever that you get a better grade of steel in the auto- 
mobile industry, because of these things you mention, for a price that is 
40 to 50 percent under prices in other Imes over a period of years. 

Mr. Vance. That is right. 

Mr. Henderson. And the pressure exerted by this buying power is 
largely responsible for that? 

Mr. Vance. It has made for progress as well as price, as well as 
lower prices. 

Mr. Henderson. That is right. 

Mr. Vance. There are a few raw materials which are essential to 
car manufacture for which no adequate substitute has been found — 
for example, tin for bearings, nickel and other alloys for high-grade 
steel, but happily, the quantities of these materials in the average 
automobile are small and the impact of their prices on the price of 
the finished product is in proportion. 

Dr. Kreps. Has there been any of this substitution since the out- 
break of the war? For example, have manufacturers been able to do 
something about the increase in price of burlap, in turning to other 

Mr. Vance. Oh, yes. Burlap is one of several materials which may 
be used for deadening the resonance of steel panels in a body, such 


as, for instance, in a steel floor and underneath the seat, something of 
that sort. We will use burlap only as long as its price is favorable 
in relation to various forms of cotton products, and when, as I beUeve 
is true today, the cotton ijroducts are slightly lower than burlap, suit- 
able cotton products, an immediate substitution will be made in the 
material used, each functioning the same way, and just as effectively. 

Dr. Keeps. Then that is a very effective check on acute price rises 
in, say, imported materials, is it not? 

Mr. Vance, That is right. 

Dr. Keeps. Of the materials you use, what exceptions would you 
say exist? What materials do you have to have, do you have to pay 
for at the price that might be set by foreign governments or outside 

Mr. Vance. Imported materials? 

Dr. Keeps. Yes. 

Mr. Vance. I should say the most important of them are tin, 
nickel, rubber. Rubber of course comes first, and possibly a few other 
metals which are used in very small quantities by the steel industry in 
making alloys which we think are essential. However, we do have a 
way out there. I mean to say that so many different combinations 
of alloys have been developed that we are not dependent upon just one 

The great exception to what I have said about the ability of the 
industry to have some measure of control over the prices it pays for 
materials is, of course, rubber. A set of five tires on the typical 
automobile contains about 66 pounds of virgin rubber and other 
rubber parts bring the total per car to over 100 pounds. Roughly 
speaking, a cent change in the price of rubber means from $1 to $1.25 
change in the cost of the car. There is no justification for the increase 
in the price of rubber which has taken place since the outbreak of the 
European wars. For years plantation capacity has been greatly in 
excess of demand, and there has been market control under the so- 
called Stevenson plan, which, within the past 6 months, was used to 
limit the supply of rubber coming onto the market to a quota of 50 
percent. The principal areas of production are across the world from 
the locale of the European wars. Ocean transportation across the 
Pacific to the United States has not been subjected to the great hazards 
of war. The best estimates available indicate that pre-war prices 
were profitable to the grower, and barring extension of war activity 
to the producing area, there is no legitimate reason why rubber prices 
should not return to about last summer's level. 

Dr. Keeps. Are rubber prices quoted in terms of pounds sterling, 
or dollars? 

Mr. Vance. Both. Of course, we don't deal in virgin rubber. 
Our interest in rubber goes back to the rubber fabricator, the tire 
manufacturers or the makers of other molded rubber parts, but the con- 
trolling rubber prices are those of London and Singapore, and of 
course the day-to-day fluctuations of rubber are quoted in their 
money. However they are translated daily, just as foreign exchange 
is translated daily, into our own money terms. 

Dr. Keeps. If the price of rubber had not risen in pounds sterling, 
would it not have gone down in dollars because of exchange? 

Mr. Vance. Undoubtedly it would. 


Dr. Kreps. That is, just roughly, if it takes $5 to buy a pound at 
one time and only $4 the second time, and if the price quotation doesn't 
change in pounds sterling, you ought to get the commodity for $4. 

Mr. Vance. That is true. Of course I don't think that the reduc- 
tion in the value of the pound is necessarily controlling insofar as the 
whole rubber market is concerned. It is true that the British influence 
on rubber prices has been predominant, but rubber production is not 
by any means 100 percent controlled by British nationals, nor are the 
costs of rubber, if you please, determined entirely in terms of the 
English pound. For example, production control. 

As another corollary to that, some of the American rubber companies 
have plantations in the Far East. Undoubtedly in terms of their capi- 
tal investment, they amount to millions of dollars. 

Dr. Keeps. Has there been an increase in the cost or risk of 

Mr. Vance. Yes; but after all, that hasn't been enough propor- 
tionately in the cost of rubber to account for anything like the change 
that has taken place. War risk insurance, of course, has increased on 
everything to some extent. 

Mr. Henderson. Does that $1.25 make much difference? 

Mr. Vance. To the automobile manufacturers? 

Mr. Henderson. Yes. 

Mr. Vance. Of course it does. Every cent makes a difference to 
the automobile manufacturer. 

Mr. Henderson. Take the case of a small competing company, 
one that has had considerable difficulty in kee]>ing in business. It 
might get down to determining whether they made or broke in a 
certain season, might it not? 

Mr. Vance. You mean the automobile manufacturer? 

Mr. Henderson. Yes. 

Mr. Vance. Well, after all, the picture is this. WTien we sell an 
automobile, we don't sell a thing like a steel rail which is a unit, an 
indivisible unit of one kind of manufacture, but what we sell is an 
aggregation of many parts. There are over 1,200 separate distinct 
parts in an automobile, and that doesn't count every tack and screw 
and every bolt, but only the classifications of materials like bolts and 
screws and nuts, but it does count wheels and brakes and crank shafts 
and cam shafts and pistons and all that sort of thing. There are over 
1,200 different parts that go into the manufacture of an automobile, 
so when we build and sell an automobile we are selling an aggregation 
of a great range of materials and of a great number of different pieces 
put together to make a functioning unit. 

Now, it is perfectly obvious that if you have a bill of material con- 
taining 1,200 different parts in various quantities, 1 of this and 4 of 
that and 10 of something else, that with all these various items a cent 
difference this way and that way on that item and on this item adds 
up at the end of the 1,200 items to a very substantial sum, and these 
small items cannot be disregarded. 

In figuring our costs for materials, which we do and have to do very 
accurately, we carry all of our costs out to the fourth place after the 
decimal. That is how important we regard the minor changes in price. 

Mr. Henderson. I can recall talking with a small manufacturer 
some years ago who said he just had to get his costs down $2 or else 
some part of the bricks and mortar, the going value of his concern, 


would go with the automobile when it was sold, so it does make a 
diiference particularly to the fellow who is trjdng to keep some 

Mr, Vance. That is correct. 

Mr. Henderson. I think you would agree with me that it is quite 
essential that we have some small concerns in the automobile busi- 
ness, would you not? 

Mr. Vance. Yes, sir; we do, we agree with you on that. 

Mr. Fischer. May I ask a question. Has this increase in price of 
rubber, since the outbreak of the European war, been passed on to the 
consumer in the present retail prices of cars? 

Mr. Vance. Not in our case; no, sir. 

Mr. O'CoNNELL. You say there is no legitimate reason why rubber 
prices should not return to last summer's level. 

Mr. Vance. To about last summer's level. 

Mr. O'CoNNELL. On a basis of a supply and demand factor, but I 
take it quite possibly there is another factor in the situation maybe 
to prevent those prices from returning to last summer's level. 

You indicated a few moments ago that your industry hasn't the 
ability to cope with the rubber price. 

Mr. Vance. That is correct. 

Mr, O'Connell. Do you think the industry may have trouble 
coping with the rubber price? It is a controlled price. 

Mr. Vance. It is a possibility. All we have to do is look back over 
what has happened ever since the Stevenson control went into effect 
and we can find not one occasion but many occasions in which it seems 
to be, from all the facts that are apparent to us in this country, that 
control has been used to not only maintain but to increase price. 
That is what control in the rubber industry, as far as production and 
the plantation is concerned, was established for, to improve the price 

Mr. O'Connell. It would be naive to expect that it would not be 
used for that purpose. 

Mr. Vance. I should say it would be very naive to expect it. 

Mr. O'Connell. And if it is used for that purpose, there isn't very 
much you can do about it. 

Mr. Vance. That we can do about it; correct. 

Mr. Henderson. Suppose all the automobile manufacturers were 
to go into' the parts-making business themselves. 

Mr. Vance. For what purpose, controlling the price of automobiles? 

Mr. Henderson. Yes. 

Mr. Hoffman, I would like to answer that question. If we had gone 
into that type of control 20 years ago, we would still have this same 
kind of car we are exhibiting out here because all the pressures to in- 
crease value would have been dissipated. 

Acting Chairman Borah. It is too complicated as a whole in the 
development of the automobile industry, with aU the different kinds 
of parts. 

Mr. Hoffman. The minute you develop price control you put a 
stoppage to the strain and stress to find some way to build a product a 
little better for a little less, and if we hadn't had the Stevenson control 
in rubber we probably would have found the producers laying awake 
nights figuring some way they might get costs down. 

The moment you put control in it you put a stoppage to progress. 
That has been demonstrated. Certainly it is a perfectly fair state- 


meDt that if we had had controlled prices in the automobile field the 
mcentive to progress would have been absent and you would still be 
naving about $2,450 for a sedan mstead of about $8UU. 

Acting Chairman Borah. Whatever profits from improvements 
have been made have not been passed on to the consumer i" 


Mr Hoffman. I think Mr. Vance has covered this point, but Mr. 
Henderson asked if a doUar and a quarter made a difference. It you 
had any idea of the way our engineers will struggle to find some way ol 
makmg one particular part a little better and 5 cents cheaper you 
would have a clearer picture of what has gone on It isn t a matter ot 
dollars, it is actually a matter of pennies in this busmess a penny 
saving if we could find a way of building a part for 1 cent less and 
building it a little better at the same tune, that is a major accomphsh- 
ment. Each year the engmeers are under a contmual chaUenge to 
fold some way to buHd that car a Uttle better for a ittle less, and 
in an ordinal year we will pick up ten or twelve doUars which we 
sometimes use to reduce prices, sometunes utilize by addmg new 
gadgets or what we regard as improvements. j-^^^.^^^ ;„ 

Mr. Henderson. Does the price of steel make any difference m 
the price of an automobile? 

Mr. Hoffman. Oh, certainly; certainly. fu^^fi^c in 

Mr. Henderson. You differ with some very good authorities m 

^^Mr'n^FMAN^'l have no knowledge of what the steel authorities 
might have said, but every part that goes mto a car, tbe Pnce of eveij 
paFt that goes iito a car, has an effect on the price of the automobile, 

""^MrlviLDSEN. Do you think that any small increase or decrease 
in the price of an automobile has an effect on the demand, volume 

of sales of automobiles? . ^i. • ^*„«oT.«inn ttah 

Mr. Hoffman. Obviously, if you raise the price of a car $100, you 
cufdo^ the volume demand, and therefore there is only one logical 
conclusion, and that is, that that $100 i^ake%a difference If $100 
makes a difference, $1 makes a difference. I thmk that fact is ob- 
scured at times because there are other mfluences at work 

• For instance, our market is so dependent upon the state of mm d of 
the people. li a buoyant market you might ^^f^f g^^^^f ,^^4 ^ 
that a $25 mcrease affects your volume, because ^^e market tsell is 
buoyant and thmgs go along aU right It is ?7^^^^^i^|^f "^^^^4^ 
Dressed market, a $25 reduction would certainly not have enough 
EtoTustifv making a reduction, but it would have an effect; and 
I think aCne who makes a statement, if a statement has been made, 

that the p^r'ce does not affect volume, is without ^^^^^i^^- because 

after 30 years of merchandising I arn convmced ^^at every dollar up 

or down has some effect on demand, some effect on volume-every 

dollar, whethef times are good or tunes are ojd. 

Mr AviLDSEN. Do you agree with that, Mr. Henderson? 

Mr Henderson. WeU, if I were a Senator I would pomto my 

pubUc utterances on that. I tWnk you would find they would be 

100 percent in agreement with Mr. Hottman. 


Acting Chairman Borah. The rubber item in the automobile 
represents about 80 percent of the cost? 

Mr. Vance. Oh, no, sir. 

Mr. AviLDSEN. Eighty percent of the rubber consumption of the 
country goes into the automobile business. 

Acting Chairman Borah. Oh, I see. 

Mr. Vance. To return to my opening statement that the automo- 
bile industry is one of the largest in our industrial economy, you may 
be interested in the percent of total United States consumption of 
certain important raw materials, accounted for by this industry in 
Steel, in all forms . 17% 

Getting back to my statement that the automobile industry was at 
least indirectly responsible for the development of the continuous 
mill, the automobile industry uses over 50 percent of the cold-rolled 
sheets that the steel industry produces, and without that market the 
continuous mill wouldn't have been possible. 

Mr. Henderson. This is another situation that delights me because 
again you are in conflict with eminent steel authorities who took com- 
plete credit for that development before this committee a few weeks 
ago. I think Mr. Hook took credit for that development completely.^ 
I don't recall that he left any part reserved for the automobile industry. 

Mr. Vance. We are not taking credit for the technical development 
of the continuous mill. If I conveyed that impression I want to 
correct it. What I said was that it was the volume of purchases by 
the automobile industry. 

Mr. Henderson. That exercised a pressure for quality and service 
and without that volume a continuous mill would have been redundant 

Mr. Vance. In other words, it is the automobile market that made 
the huge investment which the continuous mill represents a possi- 

Mr. Henderson. But going back to the previous statement, it is 
something more than just that volume. It is the pressure you exert 
on your suppher, because of the volume of your purchases that brings 
about a reduction in cost, is it not? 

Mr. Vance. To a great extent that is true. 

In 1938 the industrjr — I want to correct a statement that I made — 
used 41 percent, I said "more than half"; the exact figure was 41 
percent of all of the sheets produced by the American steel industry. 

Mr. Henderson. Take this table showing that you used 80 per- 
cent of the rubber. Anything that is done in the way of limiting 
production of rubber, anything which the English Government feels 
it has to do about rubber, becomes immediately translated into one 
of your operating factors, does it not? 

Mr. Vance. Correct. 

Mr. Henderson. So the people they are really touching is the 
automobile industry and through you the consumer. 

Mr. Vance. Correct. 

' Testimony of Charles Hook, president, American Rolling Mill Co., on the development of the con- 
tinuous rolling mill, appears in Hearings, Fart 19, p. 10680 et seq. Further testimony of Mr. Hook ap- 
pears in Hearmgs, Part 20. 


Steel, in all forms 17% 

Rubber 80% 

Plate Glass __. 69% 

Upholstery Leather 65% 

Lead.. __ 35% 

Tin- 9% 

Zinc . 10% 

Copper 12% 

Nickel 29% 

Cotton 10% 

Corollary to the importance of the industry as a user of raw mate- 
rials, it is estimated that, in 1938, 713,000 people were directly em- 
ployed in the production of automobiles, parts, tires, and so forth, and 
another 1,165,000 in selling and servicing them. These figures do not 
include those engaged in the primary fabrication of raw materials, 
who draw part of their employment from the automobile, such as 
steelworkers, glassmakers, and so forth. 

In varying degree, of course, but in the aggregate to a very impor- 
tant extent, all these people, their incomes, and the purchasing power 
of their families are directly affected by the ups and downs of auto- 
mobile production, and it is not too much to say that costs and 
resultant prices have a direct effect on that production and therefore 
on them. 

If means can be found to protect our industry from having to pay 
exploitation prices for certam essential imported materials, such as 
rubber, tin, and nickel, I feel reasonably optimistic about our domestic 
prospective material price situation. 

Mr. Henderson. What would you suggest as a proper means of 
protecting your industry from exploitation prices? 

Mr. Vance. I rather anticipated that question, Mr. Henderson, 
but frankly I don't think that we are competent to answer it. 

Mr. Henderson. Yesterday some purchasing agents testified ^ and 
there was at least a suggestion that since the individual companies had 
to deal mth an organized suppUer in these controlled materials the 
individual manager, operator, was rather helpless. Is there any idea 
in your mind as to what the nature of the means should be rather than 
what the specific means should be? 

Mr. Vance. When I say that I don't think we are competei^t I mean 
to suggest that I have two things in mind. The first is this: I know 
that so far as Studebaker is concerned, and ] am quite sure this 
applies virtually to everybody else in the industry, we are not our- 
selves buyers of these materials. For instance, the biggest source 
of supply for nickel is Canada. With the exception of Mr. Ford, who 
does make some steel, the rest of us all buy our steel in what from the 
steel standpoint is fiiiished form. We don't buy the nickel as an 
alloying element and put it into our open hearth or electric furnace 
to make the finished steel product. The steel company from whom 
we buy the finished product imports the alloying element, nickel in 
this case and I should say, for example, that the steel people would 
be in much better position to teU you what are their present experi- 
ences and what they think might be or /Should be done in this matter 
than are we. We are the secondary, not the primary, customers. 
The same thing is true of wool. We don't buy New Zealand or 
Australian wool. We buy the fabric from the textDe people. And 

> Supra. 


we don't buy the virgin rubber. We buy rubber products. The 
tire companies and the various rubber companies buy the virgin 

Mr. Henderson. Maybe Mr. Hoffman would like to speak on this. 

Mr. Hoffman. Yes; I should. As I should judge, there is a deter- 
mined effort being made to eliminate profiteering in the United States, 
and public opinion, of course, will support that adequately. I think 
if public opinion can be brought to bear on this question of profiteer- 
ing as a result of foreign controls it might have some persuasive 
influence on those governments. In other words, after all, public 
opinion is quite a potent force and if brought to bear on this question 
I think the foreign governments would see that they had made a 
mistake in alienating American opinion as a result of prices that were 

Mr. Henderson. We have somewhat of a special situation here in 
which the usual competitive arrangements between a buyer and a 
seller are not present. I gather from some of the testimony we have 
had and some of the letters which have been coming in that many 
people feel there should be some resistance to exploitation, to profi- 
teering, as you s&,id, and what troubles me, as a believer in compe- 
tition, is who should be responsible for, in your case, say, the organ- 
ization of public opinion. Should it be the industry which is pri- 
marily the buyer? Should it be, for example, in the case of tin cans, 
the steel companies or should it be the tin can companies? Should 
it be an organization of manufacturers perhaps like the United States 
Chamber of Commerce or the National Association of Manufacturers, 
or should it be B, governmental procedure? That is what I mean. 
"V^Taere do you think the responsibility ought to lodge for trying to 
bring about a better balance at least in these relationships? 

Mr. Hoffman. I think the only effective opposition to these foreign 
controls and unduly high prices must come from the Govenmient. 

I don't think a resolution by the United States Chamber of Com- 
merce would have any effect on the English Government's position on 
rubber control, for example. On the other hand, if there was evidence 
that rubber prices were unduly high and the American public was 
going to be subjected to profiteering on the part of foreign suppliers, 
I think if the foreign government's attention was called to that and 
its possible effect on American public opinion, some result might be 
achieved by government influence, but I don't see how any business 
group could accomplish it. 

Mr. Henderson. I take it that in saying that you don't abandon 
or depart from your traditional attitude toward competition. 

Mr. Hoffman. Not at all. 

Mr. Henderson. You regard it as a special situation and if the 
Government, for purposes of protecting the economy against inflation, 
did come into that situation, it probably could expect help, could it 
not, from business groups and buyers without any thought that it 
was a step in the direction of regimentation, or something of that kind? 

Mr, Hoffman. I certainly would agree with that. In other words, 
the attempt to break up one of the enemies of free enterprise, namely, 
controlled prices. The issue is very clear in my mind. 

Mr. Vance. It is governmental action supported by public opinion 
that c"an do this job under priesent conditions. 


Acting Chairman Borah. Taking the rubber industry, that trust 
is in the British Government and there is no way we can reach that 
except by what you might call diplomatic relations with that country. 
We can't reach it by any judicial process or anything of that kind. 

Mr. Hoffman. That is right. It is all persuasive. 

Acting Chairman Borah. And the result of it is that we must rely 
upon what the diplomats may do. 

Mr. Hoffman. I concur in that. In other words, I think if the 
British Government could be shown that as a matter of self-interest 
they ought to prevent the profiteering in rubber because of the effect 
of profiteering upon public opinion, such representations to them 
might be effective. 

Acting Chairman Borah. In view of the fact that the British 
Government is in possession of the commodity and in view of the 
fact that we have to have it, it would be rather diflScult to convince 
them that it was not to their interest to get aU the traffic would bear. 

Mr. Hoffman. That is the problem, but I would think they would 
be responsive to the suggestion that American public opinion is quite 

Acting Chairman Borah. I am not arguing against you, but I am 
just thinking about the ineffectiveness of it because it is a matter to 
which a whole lot of thought has been given. 

Mr. Henderson. Out of these 10 raw materials you have listed 
here, 6 of them either directly or indirectly are affected by the type of 
control mechanism existing in those materials abroad, not to mention 
some that are affected by controls in this country. If you set your 
industry out as a competitive industry you are dealing with a world 
which is increasingly composed of controlled suppliers. 

Mr. Hoffman. Correct. 

Mr. AviLDSEN. Mr. Vance, I noticed in the charts which were in- 
troduced here the other day by Dr. Lubin, in one headed "Daily 
Prices of Basic Commodities, 1939,^" that rubber advanced 50 percent 
early in September and then declined to a point at the end of Novem- 
ber where it was 22 percent above the September 1 price. Do you 
know what accounted for that decline in price of rubber? 

Mr. Vance. I think that in the rubber industry, in fact I know that 
in the rubber industry itself, the initial prices irimiediately following 
the outbreak of the war were not representative of normal buying. 
They were, on the other hand, spot buying; they were spot prices 
which were dependent very largely upon the fact that at that time the 
amounts of spot rubber available in the principal markets at London 
and Singapore were very small. Those prices in the early days follow- 
ing the outbreak of the war were of no great significance. 

Mr. AviLDSEN. Were they prices paid by speculators? 

Mr. Vance. Price asked by speculators, but they weren't prices 
that any large consumer of rubber actually paid. 

Mr. AviLDSEN. I notice that another chart shows that tin went up 
about 23 percent early in September, then dechned to a figure in 
November where it was only about 2 percent above the September 1 
figures. Tin is a British cartel product too, I imderstand. 

Mr. Vance. Yes. 

Mr. AviLDSEN. In other words, early in November you could buy 
tin at only 2 percent above the September 1 price and I should think 

• See "Exhibit No. 1474," supra, p. 11060. 


that with an increase in war-risk insurance and some other things there 
might have been a justifiable increase of 2 percent. 

Mr. Vance. Again I think it was spot prices that produced that 
peak immediately following the war. No large purchaser bought on 
those prices. 

Mr. Henderson. No, but large purchasers now are having a great 
deal of difficulty in getting their forward commitments filled at those 
prices because of the feeling on the part of the tin producers that that 
price is too low. I want to point out, Mr. Avildsen, that there are 
other countries besides Britain in the tin cartel. 

Mr. Avildsen. Do they have competition? 

Mr. Henderson. No, that is just it; they remove competition by 
bringing in the other suppliers. What others are in on tin Dr. Kreps, 
do you know? The Dutch? 

Dr. Kreps. The Straits 'Settlements, primarily, and Bolivia are the 
two largest suppUers. 

Mr. Henderson. But regardless of who controls it, the impact on 
the American economy is the same. 

Dr. Kreps. It is the same. 

Mr. Avildsen. These prices on these charts going up and down 
certainly can't be the cartel prices. The cartel would have no purpose 
in jigghng the price up and down. These must be speculators' prices. 
Isn't that true? 

Mr. Vance. I think the sharp increase which occurred at the out- 
break of the war which has since receded was largely the speculative 
spot price, which always follows a big disturbance in conditions. 

Mr. Henderson. In this case, Mr. Avildsen, if that spot price 
jiggles too much, there is a buffer pool, as they call it, which is some- 
thing like the Treasury has — a fund so it can buy and sell — in addition 
to the cartel agreement. In some cases, as the English have found out, 
there is still an additional pool, as there was in pepper and some other 
commodities, run by outsiders which will take care of too large a 
fluctuation from the established price. 

Mr. Avildsen. Do you know, Mr. Vance, what the cartel has done 
on rubber and tin, disregarding the spot market? 

Mr. Vance. I know what the cartel, so called, has done on rubber. 

Mr. Avildsen. What has been the advance by the cartel? 

Mr. Vance. Do you mean in price or in quantities? 

Mr. Avildsen. In price. 

Mr. Vance. I think probably we have to tell the whole story, we 
have to talk about price and relaxation of control. In the second 
quarter of 1939, that would be for the months of April, May and June, 
the allotment of rubber under the international committee's plan, was 
50 percent, that was the quota. 

Dr. Kreps. Fifty percent of what? 

Mr. Vance. Fifty percent of a standard base, a theoretical capacity. 

Dr. Kreps. Of production capacity. 

Mr. Vance. That is right. I am talking in terms now of virgin 
rubber coming onto the market from the plantation and the grower. 
The quota for the second quarter of 1939 was 50 percent. The quota 
for the first quarter of 1940, as I understand, is 80 percent. 

Dr. Kreps. How does that information reach you? Is that 
annouiiced by the cartel? 


Mr. Vance. Oh, yes; it is a very important bit of information for 
anybody who is concerned with the rubber industry, and when the 
committee meets, as it usually does, in London, it is an item of great 
concern. All the papers carry the following day what the committee 
has decided will be the quota for the succeeding 3 months' period. I 
think it is only fair to say that this increase in quota which has been 
gradual since the second quarter of the year — for instance I think there 
was an increase which was 60 percent for the third quarter, 75 per- 
cent for the fourth quarter of this year, and 80 percent for the first 
quarter of 1940 — if those figures are not correct they are approx- 
imate and the range tells the story — has resulted among other things 
in this: That there is today in Singapore a very substantial amount of 
rubber that has been purchased by American users, such as tire 
companies and rubber manufacturers whose immediate problem is to 
get sufficient shipping space to bring that rubber to this country. 
Right at the moment the problem is shipping space to bring the rubber 
into the United States. There have been very substantial purchases 
and deliveries of virgin rubber in Singapore within the last few weeks. 

Mr. AviLDSEN. At an advanced price or at the old price? 

Mr. Vance. I don't know what the average price would be that 
has been paid by these large purchasers, but in November the average 
price of rubber was about 20% cents, as against a price of 16 cents 
in August. 

Mr. AviLDSEN. Are you talking about the price at Singapore or 
the New York spot markets? What is this price? Is it the cartel's 

Mr. Vance. Yes. I am talking about the average price at Singa- 
pore. Now I would imagine that the great majority of this rubber 
has been purchased shghtly under the daily quotations. After all, a 
buyer of rubber who is buying in future quantities like a buyer of 
cotton, for example, in the South, is watching the market from day 
to day, he is buying on Tuesday and not on Wednesday, and so on. 

Dr. Keeps. Do you know whether in setting quotas the cartel con- 
siders or has means of getting information concerning the needs of 
American consumers? 

Mr. Vance. Presumably that is the basis, not only of American 
consumers, but other consumers throughout the world. Undoubtedly 
they take into consideration the current demand and the stocks of 
rubber in the hands of fabricators and speculators. 

Dr. Keeps. Is it your impression that the American consuming 
industries have a certain amount of representation or at any rate are 
heard by the cartel? 

Mr. Vance. I believe that they have some representation on the 

Mr. Hoffman. I think very definitely they have. 

Mr. AviLDSEN. You would guess, Mr. Vance, that the cartel has 
been getting somewhere around .20 percent more for rubber in recent 
months, would you say? 

Mr. Vance. I would say that in November the average price was 
about 25 percent more than in August, between 20 and 25 percent 
more than in August. 

124491 — 40— pt. 21 13 




Mr, Vance. The purchase of a release of materials made by us in 
October compared with a sitnilar purchase made before the outbreak 
of war showed an increase of only 1 percent in total material cost, 
and I doubt that today's purchase would be more than 1 percent 
above October. However, I should qualify this statement by saying 
that before the war we had protected ourselves on certain important 
materials, including rubber, so that our current experience is not a 
precise indicator of what has happened. 

Mr. AviLDSEN. Will you explain what you mean by "release of 

Mr. Vance. Wliat I mean by that is this. From time to time 
during the course of our production ye^r, which is from September 
to September, we authorize our purchasing department to place ma- 
terial, that is to buy, for 10,000 or 20,000 or 30,000 cars, some definite 
amount of balanced purchase for our production schedule. 

Mr. AviLDSEN. That includes all the 1,200 parts going into it. 

Mr. Vance. Yes. 

Mr. O'Connell. Might it not be that in view of the very substan- 
sial volume that your industry has and the weapons that it is able 
to employ as a bargainer, that the reflection of increased prices might 
not be so evident in case of your purchases as it might be to other 
consummg groups? 

Mr. Vance. That is true. Paradoxically, in the purchase that was 
made in October we had increases which in the aggregate were more 
than 1 percent, but we actually had some decreases, and 1 percent 
was the net result. 

Mr. Henderson. Mr. O'ConnelFs point, I gather, is that in a 
number of these materials a part of the actual price increase that 
took place was a withdrawal of discounts, special concessions, and the 
like. A large buyer probably would be able to insist on those as 
against the average buyer. 

Mr. O'Connell. To be quite precise, I should think from what you 
had indicated about the volume of purchasing and the way you pur- 
chase, that in dealing with the steel industry in buying cold-rolled 
sheets you would probably be in a better bargaining position today 
as you were a few months ago than would the individual purchaser 
of some fabricated material, an oflSce building, or something of that 
sort. In other words, you are such a substantial purchaser that you 
may be better able to deal with commodity increases in this country, 
I mean as distinguished with foreign materials. 

Mr. Vance. That is a very difficult question to answer precisely, 
for this reason: That steel prices are pubUshed, as you know, from 
quarter to quarter, and that the attitude of steel companies is, of 
course, that those are prices for everybody, and that they have no 
other prices. 

Mr. Henderson. Now that is different from the steel industry's 
contention that the pubUshed price really meant nothing, that they 
very seldom got ^"^ - --'^r^t from the Government, and all the rest of 
you sharp bargainers goo . Mwer price.^ They did admit, however, 

» See Hearings, Part 19, p. 10594 et seq. 


that as volume started to go up they tended to come closer to that 

Mr. Vance. I said, Mr. Henderson, that that was their attitude. 
Their attitude was that these were pubUshed prices, and were 
prices for everybody. Now there have been times when it has been 
possible to buy steel at more favorable prices than the current pub- 
lished hsts. There have been other times when it has been much 
more difficult. It depends to a great extent upon the supply and 
demand situation in the steel industry at a given time. 

Mr. O'CoNNELL, Let me ask you this. Preliminary to the posting 
of steel prices for cold-rolled sheets, say for any given quarter, is there 
or is there not a period of negotiation between the steel pople and the 
automobile people? I mean are you helpless or do you just wait for 
the posting of the price of cold-rolled sheets? 

Mr. Vance. Sometimes we do and sometimes we don't. What is 
much more effective in the purchase of steel by us than this poker 
playing game which you describe, negotiations so to speak, between 
the purchasing agent and the agent of the steel company at the moment 
that the purchasing agent wants to buy — what is much more potent 
with respect to the steel prices that we ultimately pay is that we 
watch the steel market and try to make up our minds when is the time 
to buy. Those of you who are familiar with steel prices of course 
know — I am teUing you nothing when I say that there was a period 
late last spring when the steel prices were veiy^ unstable. 

Mr. Henderson. You mean very competitive, don't you? 

Mr, Vance. Yes. There are degrees of stability in prices, as you 
know. There was a time late last spring when steel operations were 
at a low level and when prices were very unstable, and for a purchaser 
of steel that was the time to buy steel in substantial quantities for 
future deliveries, and that is what the automobile industry did. 

Air. O'CoNNELL. The reason I asked my question was that during 
the steel hearing we had an explanation of the way prices are made for 
tin plate,* and in general as I understood it those prices were made by 
negotiation between the largest supplier of tin plate, Carnegie-Illinois, 
and the American Can Co., the largest purchaser of tin plate, after 
which, after previous negotiations, the price was posted for the period 
by the Carnegie-Illinois, and I wondered whether in your industry, 
which is comparable in some respects in that it is a very large pur- 
chaser of the other type of steel, the process were very much the same. 

Mr. Vance. I can't speak for the industry as a whole. From what 
Mr. Henderson said a few minutes back I would take it that you have 
some evidence that at least in the case of Ford those sorts of negotia- 
tions are entered into now and then. Of course Mr. Ford is in a 
peculiar position because he, himself, is a producer of steel, and he 
goes out to buy only his sm^plus requirements, and he has many 
markets from which those surplus requirements can come. 

With respect to Studebaker alone, I would say that there is not the 
type of negotiation on each purchase which you indicate for the tin 
plate buyer. 

Mr. Henderson. I think that is a fair statement. I think in tin 
plate, except for Weir and his contract with Continental, the buyers 
of tin plate took that negotiated price which was published as the 

' See Hearings, Part 20, p. 10750. 


basis for their contracts. As I recall, in the automobile industry 
the buying is not on the published price basis, but it is on the poker 
plaj^ng basis with each company. 

Mr. AviLDSEN. Mr. Vance, when you bought that steel last spring 
were you assured that the price wouldn't go any lower? Did they 
give you a guarantee? 

Mr. Vance. We didn't make a firm commitment; we simply took an 
option on tonnage. 

Mr. AviLDSEN. They gave you an option on tonnage at a low price, 
so if the price went lower you had nothing to lose, you would buy at 
the lower price? 

Mr. Vance. That is correct. 

Mr. AviLDSEN. Was there any consideration for that option? 

Mr. Vance. No;, the consideration was our business. 

Mr. AviLDSEN. You didn't have to give your business if somebody 
else gave a lower price, so there was no real consideration. 

Mr. Vance. Not a tangible one, but a very intangible consideration. 
We consider that a supplier who helps us to keep our costs down or to 
reduce them is entitled to some consideration from us later on; that 
is to say, we favor the suppliers who cooperate with us. 

Acting Chairman Borah. That is almost tangible. 

Mr. Vance. Yes; that is almost tangible. 

Dr. Kreps. Did you notice in your recent dealings any tendency 
toward firmness, toward a withdrawal of some of these concessions 
that were obtainable earlier in the spring? 

Mr. Vance. I am quite sure that we couldn't buy steel today at 
the prices we paid last spring. 

Dr. Keeps. About how much would you say the firming up would 
be in the price? 

Mr. Vance. Pretty substantial. 

Dr. Kreps. Very substantial. 

Mr. AviLDSEN. Mr. Vance, getting back to this option they gave 
you last spring, they reduced the price to a very low fignre, yet it 
did not inspire you to buy anything. You didn't part with any of 
your cash for that steel. You were stUl afraid it might go lower, 
isn't that true? 

Mr. Vance. No; we were pretty sure it wouldn't go lower, but it is 
our practice to make commitments with respect to definite quantities 
of materials, only by this release method which I have described to 
you. We may make an agreement over a period of time with some 
supplier like a tire manufacturer for our requirements for a certain 
period. Our requirements are very indefinite, but we make actual 
releases, and therefore commitments on our pruchase orders, only from 
time to time as we release all the materials. 

Mr. AviLDSEN. That was a contract to buy, and this other thing 
was just an option. I don't see what the steel company got out of 
such a deal. They didn't get any orders from you, or the assurance 
of any orders. 

Mr. Vance. They got our good will, and that is pretty important. 
As the Senator said, it comes pretty close to being tangible. 

Mr. AviLDSEN. If another suppher came along with a lower price 
you would not have exercised that option? 

Mr. Vance. If that were true ; yes. 

Mr. Henderson. You would probably have asked the company 
with which you had the option if they wanted to meet it. 


Mr. Vance. That is right. That is a matter of fair play, not a 
matter of legal obligation. 

Mr. Henderson. Your intention when you took the option was 
really to give your business there, and to give them some idea of what 
their production schedule would probably be so far as your business 
was concerned. The commitment really meant, "We don't know 
exactly what our sales are going to be, but as fast as we see them we 
will give you releases on this." 

Mr. AviLDSEN. But that reduction did not stimulate any purchases 
on your part, did it? You didn't buy any more steel because of that 

Mr. Vance. No, sir. 

i)r. Kreps. Does the volume of your purchases depend on the 
activity you anticipate you are going to have? 

Mr. Vance. Correct. 

Dr. Kreps. With the increased activity that has occurred recently, 
what tends to happen to your inventory? 

Mr. Vance. Our inventory on October 31 of this year — we haven't 
the figures for the end of November — was 10 percent less than it was 
on October 31a year ago. 

Dr. Kreps. Would you say that that was usually the case, that 
with increased activity inventories might tend to go down? 

Mr. Vance. I think it is pretty generally true in the automobile 
industry because of the greater velocity of the industry this fall as com- 
pared with last fall. Inventories turn very rapidly. We are turning 
our inventory at the present time in less than 30 days. 

Mr. Henderson. That is true at this particular period, but take 
the occasion of the upsurge of 1936-37. Pretty generally automobile 
companies did have a substantial increase in inventories at the year 
end, did they not? 

Mr. Vance. There are many factors that may affect an inventory 
position temporarily. 

Mr. Henderson. Your inventory position at the present time is 
quite different from what it was at the end, say, of 1937. 

Mr. Vance. At the end of 1937? You are correct. 

Mr. Hoffman. I think that question perhaps merits a httle break- 
down. If you take the period when we had the upswing in business in 
1937, there would be Httle, if any, increased inventory. The increased 
inventory at the end of 1937 came as the result of a very bad guess on 
volume during the final quarter. 

Mr. Henderson. And it included a guess on st^el for a number of 

Mr. Hoffman. It included a guess on steel and various other com- 
ponent parts of the car. 

Mr. Vance. Actually what happened was this: Business was very 
good in the early fall of 1937, until about the middle of October, and 
then in the middle of October, when we ran into the so-called 1938 
depression, in the automobile business at least the drop in business was 
very precipitate, and the angle of the drop was such that inventories 
couldn't, within a few weeks up to the year end, be brought down to 
the new level. 

Mr. Henderson. But the prospective increase in prices that came 
along in 1936 and 1937 did lead to a kind of buying, did it not, ir 


Mr. Vance. No. 

Mr. Henderson. Not on the part of your company? 

Mr. Vance. No. I think the significance of the inventory situa- 
tion in the automobUe business today, in contrast to a year ago, is 
just this: We have had, in the last few weeks, a very substantial in- 
crease in activity in the basic industries which supply the automobile 
companies with large quantities of materials — steel, for example. 
Now, the question is a very natural one : Has- that upsurge in activity 
on the part of suppUers led to an increased inventory in the hands of 
the fabricators, namely the automobile manufacturers themselves? 
The answer is "No." 

If the answer were yes, if this greater activity in the steel business, 
for example, had resulted .in large accumulations of steel in the hands 
of automobile buyers, it would be an indication that in this particular 
instance, at least, production was running ahead of consumption. 
That is not true. 

Acting Chairman Borah. Would it inconvenience you if we should 
adjourn until 2 o'clock? 

Mr, Vance. No, sir. 

Mr. Henderson. I will not be here this afternoon. I should like 
to ask some questions. 

Mr. AviLDSEN. I think I have a number of questions that I would 
like to ask this afternoon, but if Mr. Henderson has some now, why 
don't you let him ask those, and then finish your statement? 

Mr. Henderson. I wanted to go back to this last response you 
gave. So far as your particular business is concerned, you do not 
feel that production is going ahead of consumption? 

Mr. Vance. No, sir. 

Mr. Henderson. Your orders ahead are keeping pace with your 

Mr. Vance. More than that. They are greater than they have 
been in years. 

Mr. AviLDSEN. Are the steel nulls carrying the stock of steel for 

Mr. Vance. Noj sir; we are pressing them for deUveries. 

Mr. Henderson. I gathered from the answer you gave Dr. Kreps 
that although we have had the statement that steel prices were not 
increased, there has been a substantial increase in the price you would 
have to pay for steel at the present time. 

Mr. Vance. There would be, I believe, if we had to go into the 
market today. 

Mr. Henderson. So the posted price may not have gone up, but 
the actual price to the buyer has gone up. 

Mr, Vance. You might say the price has strengthened. The posted 
price is stronger today than it was 6 months ago. 

Mr. Henderson. Mr. Vance, I might not. A steelman might, 
because that is the usual way it is expressed. 

Mr. AviLDSEN, Mr. Vance, when will you run out of this low-cost 
steel? You arg. still getting deUveries at the low cost. When will 
that cease? -^^"^ 

Mr. Vance. Toward the end of the first quarter of 1940. 

Mr. AviLDSEN. You will be getting dehveries practically until the 
end of the first quarter of 1940 at the old price? After that date 
you will have a substantial increase in the cost of your car, is that 
right, due to that? 


Mr. Vance. Tliat is correct. 

Mr. O'CoNNELL. Unless you are able to buy- 

Mr. Vance (interposing). Unless the situation changes between 
now and then. 

Dr. Kreps. It has been reported in various places that these con- 
sessions amounted to something like $6 a ton. From your general 
knowledge of the industry, would you say that that was somewhere 
near, somewhat in excess of, or somewhat lower than the figure you 
believed existed, say, last spiing? 

Mr. Vance. Well, the differential varies on different classes of steel 
products. I would say that was a fair average. 

Acting Chairman Borah. Shall we recess or shall we finish? 

Mr. Hoffman. Could I remind you that if we do recess, we would 
very much appreciate the members of the committee seeing this 
exhibit that we have.^ 

Dr. Kreps. I would suggest that we recall the witnesses at 2 o'clock. 

Acting Chairman Borah. We will take a recess until 2 o'clock. 

(Wlaereupon, at 12:15 p. m., a recess was taken until 2 p. m. of the 
same day.) 

afternoon session 

The hearing was resumed at 2:10 p. m. upon the expiration of the 

Acting Chairman Borah. Mr. Vance, you may proceed. 

Mr. Vance. Domestic producers of raw materials and the primary 
fabricators thereof have shown httie indication of a desire, or perhaps 
I should say of an inclination, to take advantage of the present situa- 
tion, to extract higher prices from their customers. 

In this connection I should say to you that in some respects our 
concern as to price changes is even greater with respect to the non- 
automotive commodities which affect the general level of the cost of 
Hving. Because, after all, basic raw materials themselves do not 
constitute more than about 10 percent of the cost of an automobile. 
A good 70 percent represents labor cost, not only in automobile 
plants where wage rates are currently at a record high, but in eveiy 
one of the hundreds of industrial operations which have a share in 
the prefabrication of the basic materials. 

Dr. Kreps. Mr. Vance, analyzing the operations and expenditures, 
in your own plant, what percentage of your total expenditures goes 
for raw materials? 

Mr. Vance. Do you mean for basic raw materials, unfabricated? 

Dr. Kreps. For all the raw materials that go into the maldng of a car. 

Mr. Vance. WeU, I think, first of all we have to define what we 
mean by raw materials. 

Dr. Kreps. Let's put it this way — make it materials. 

Mr. Vance. My point is that practically all of the materials which 
we buy are prefabricated to some degree. 

Dr. Kreps. Yes. I should not have said raw materials. I should 
have said for commodities, that is for materials 

Mr. Vance (interposing). As distinct from labor in our own plant? 

Dr. Kreps. As distinct from labor in your own plant, as distinct 
from disbursements for possibly rentals and the hke. 

Mr. Vance. About 75 percent. 

1 Mr. Hoflfman refers to a display of Studebaker automobiles i*i the courtyard of the 
Senate Office Building. 


Dr. Keeps. About 75 percent. Then what percent of your total 
expenditures go in the form of pay rolls and in the form of labor? 

Mr. Vance. Between 20 and 25 percent. 

Dr. Keeps. The balance all goes to labor? 

Mr. Vance. That is, of the element of cost exclusive of overhead 
other than labor. 

I understood that to be the point you wanted to make. 

Dr. Keeps. Yes; exclusive of overhead other than labor. 

Mr. Vance. That is right. 

Dr. Keeps. This break-down you have just given is a break-down 
of what might be called direct costs? 

Mr. Vance. Costs of material and labor and that part of overhead 
which is labor. 

Dr. Keeps. Now, in terms of the total costs of the car, including 
administrative overhead, advertising and sales expense and the like, 
transport, rentals, what percentage are your direct costs of your total 
costs, roughly? What do they average, usually in the industry, over 
a period of years? 

Mr. Vance. I am trying to give you as accurate a figure as I can. 
My best off-hand estimate is 85 percent. 

Dr. Keeps. Then that would mean that of your total outlays, 
possibly between 15 and 20 percent goes for labor? 

Mr. Vance. No; more than that. Of the total outlay? That is 

Dr. Keeps. I want merely to be sure that this 70 percent figure 
was your estimate for all the integrated processes 

Mr. Vance (interposing). Down to the basic raw materials. 

Dr. Keeps. Down to the basic raw materials. Of course you know 
that that sort of a telescoping process could be done for profits and 
for interest and dividends. 

Mr. Vance. Correct. 

Dr. Keeps. And all the way back, and it would be perfectly easy 
for me to demonstrate that upwards of 70 percent of the cost of the 
car T«epresents profits, or represents dividends, or represents almost 
any other factor, by cumulating the figures backward. Actually, of 
course, labor in the economy doesn't get more than two-thirds, of 
all income. In certain industries, such as service industries, labor 
costs are high. In fact, almost the whole cost is labor, only com- 
pensated for by the fact that in other industries where you have heavy 
overhead expense the relative labor expense is low. Your charges in 
your industry are relatively heavy for machinery and equipment. 

Mr. Vance. That is correct. 

Dr. Keeps. So that this statement of your interest in raw materials 
versus labor is not strictly applicable to your operations. It is 
applicable rather to the whole of the automobile industry as you 
view it. 

Mr, Vance. My statement was pointed to this, that our interest 
in prices of materials and commodities is by no means confined to 
the basic commodities' which enter directly into the cost of the 
automobile, as an integral part of the automobile, but we are more 
vitally interested, if anything, in the price level and price change of 
commodities which affect the general cost of living, because we, as 
the ultimate fabricator, if you please, have to pick up into our costs, 
and therefore into our prices, all of the pre-fabricator's costs including 


his costs of labor, which are affected by the price of non-automotive 
commodities, commodities which affect the general cost of living. 

Dr. Keeps. That is right. In other words, I want to make the 
point that this wasn't automobile labor that got 70 percent. 

Mr. Vance. Oh, no; indeed. 

Mr. AviLDSEN. I think that is a very good point that you made. 

Mr. Vance. It is the labor in the steel mills, the labor in the textile 
plants, and even the labor on the farm, and so on. 

Industrial profits are lower than they used to be in relation to 
sales, and in relation to investment. No better example can be found 
than the automobile industry. But the way to increase profits or to 
create them to take the place of losses is not by increasing prices but by 
protecting and increasing volume. By the same token that increased 
national income is a better solution to our governmental revenue 
problem than are increased taxes, so an increased volume of pro- 
duction is a better solution of an industrial revenue problem than are 
increased prices. 

Dr. Keeps. I wish that last statement could be on the desk of 
every economist and officeholder and industrialist in the country. 

I think, Mr. Avildsen, you have a series of questions. 

Mr. Avildsen. One question I would like to ask about is the 
current seUing prices for automobiles, whether they are based on pre- 
war costs of materials, whether they anticipate any rise in the cost 
of materials entering into an automobile, or whether you would have 
to raise the price of your cars if there is an increase of say 10 percent 
in the next few months. 

Mr. Vance. Of course in the matter of w^hat factors were taken 
into consideration in establishing current prices we can speak only of 
Studebaker. In our case current prices were based on pre-war prices. 
We established a price of our Champion, our lowest priced car, the car 
that we are selling in greatest volume, about the middle of August 
before the war started. We established prices on our other pas- 
senger car models about the middle of September, and even though 
that was after the European war had broken out and there was an 
obvious upset in prices, nevertheless the prices of the cars established 
in September as well as of those established in August were based upon 
pre-war prices of materials. 

Dr. Keeps. Wasn't that in advance of the establishment of prices 
elsewhere or is my memory wTong? Didn't you establish your prices 
for this year in advance? 

Mr. Vance. We did in the case of our low priced car; we were the 
first to announce 1940 prices in the low price field. 

Dr. Keeps. How, generally, are prices established in the automobile 
industry? Can you tell us how you got to these conclusions about 
price ahead of the industry? 

Mr. Avildsen. I think we have in mind there the fact that in the 
steel hearings and other hearings it is the custom of the smaller pro- 
ducers to follow the lead of the larger producers in regard to prices. 

Mr. Vance. WTiat you mean is whether or not there are price 
leaders in the industry? 

Dr. Keeps. Yes. 

Mr. Vance. Yes; I think there have been many price leaders in 
the industry from time to time as circumstances have changed. Very 
obviously in the low-priced field, at least in the beginning, Ford w^as 


the price leader. Why? Because he was the original exploiter, the 
original developer of it. Later on, when Dodge Brothers decided to 
build an automobile and hadn't even designed it, they were per- 
fectly free to enter any field, any place in the price range of the in- 
dustry which they chose to enter. 

They didn't choose to enter the lowest price field but picked another 
field because they saw from the operations, the current operations 
and sales of other companies, that that field offered a satisfactory 
opportunity to them. I think that in answer to the specific question 
of whether or not there are price leaders in the industry, that I can 
say that whenever a company, or rather more precisely whenever a 
make of car of a certain size and specifications at a certain price 
appears to develop a wide appeal, which is demonstrated by expanding 
volume, regardless of what the price level may be, it becomes a price 

As an illustration of what I mean, if X company should bring out 
a car of a certain size to sell to the public at $1,200, which today is 
in the high-price range, and did actually secure a larger volume of 
business from the pubUc by reason of the appeal of the car and the 
price combination, a larger volume of business than the rest of the 
industry anticipated, the rest of the industry so to speak, would say, 
"Well, here these people have demonstrated that here is a field bigger 
than we thought, and perhaps we in our effort to cover this market as 
widely as possible should bring out a car of about that same size and 
about that same price." 

Dr. Kreps. Is your price followed or is it somewhat lower than 
prices announced subsequently. 

Mr. AviLDSEN. You are talking now about the low price car? 

Mr. Vance. The current prices, the delivered prices delivered at 
the factory. Of course in the low price field. 

Dr. Keeps. What is the trade name of that car? 

Mr. Vance. I will tell you the different cars with the prices. Using 
the two-door sedan or coach, 

Mr. AviLDSEN. Is that the biggest seller? 

Mr. Vance. Yes; I am speaking of that first because it is the biggest 
seller. Current delivered factory prices are as follows: For the 
Studebaker Champion, which was the first 1940 price announced about 
the middle of August, $700; for the Ford 85, $704; for the Chevrolet, 
$699; for the Plymouth, $699. For the regular four-door sedan, 
Studebaker Champion, $740 ; Ford 85, $750; Chevrolet, $740; Plym- 
outh, $740. 

When we move into the range of de luxe models, the differences are 
a Uttle greater. The Studebaker Champion at $785, the car that is 
in the courtyard, compares with the Ford de luxe 85 at $812; the 
Chevrolet de luxe model at $802, and the Plymouth de luxe model at 

Dr. Kreps. Have you noticed any repercussions on volume due to 
the fact that your price was a little lower and that you led the field 
in announcing the price? 

Mr. Vance. It is very difficult to estimate it. Undoubtedly that 
is so, but as Mr. Hoffman stated this morning, here is an instance, 
and this so frequently happens, where a price change is accompanied 
by a very decided current, one way or the other, in business. Now 
business m these past few months since 1940 models went into produc- 


tion has been very decidedly on the upgrade. By reason of other 
factors than price, if we hadn't made any change in price, general busi- 
ness nevertheless would have followed this pattern we are familiar 
with, and under those circumstances it is mipossible to say what 
proportion of our increased demand is due to the specific thing. There 
are too many factors pushing business ahead at the moment. 

Dr. Keeps. Business has improved very substantially over last 

Mr. Vance. Correct, and unquestionably the price adjustments 
downward that we made have had an effect. 

Dr. Keeps. Would you feel that if by virtue of pyramiding costs, 
labor costs included, you would be compelled to charge higher prices 
that would be likely to diminish the volume of sales? 

Mr. Vance. It imdoubtedly would have been a factor, but I can't 
tell you what factor, how much in other words it might have slowed 
up the natural demand that we have as far as general business is 

Dr. Keeps. But, as I interpret your testimony, one of the very real 
reasons jou are much concerned about unwarranted increases in price 
of materials and labor is the fact that any price increase is going to 
mean higher costs and therefore higher prices necessary for your prod- 
uct out of the diminishing volume of goods you can make, and involve 
you in a vicious spiral of lower volume, higher costs, and higher prices 
and stUl lower volume? 

Mr. Vance. Doctor, we have actual demonstrations of that in our 
ordinary operations. For instance, we brought out the Champion in 
the sprmg of 1939. It was offered to the pubUc about the first of 
April. As is true with respect to other makes in the low-price field, 
we offered a regular model and a de luxe model. You may recall that 
I told you in my testimony that people paid from $50 to $60 more for 
a de luxe model and more de luxe models are sold in the low-price 
field than regular models. When we established our initial prices on 
the Champion last spring we made approximately the same spread 
between the regular model and a corresponding de luxe model that 
competition in that field made. 

In other words, $60 per car. Our regular sedan for example sold 
delivered for $740 and the de luxe model for $800, $60 apart. We were 
disappointed in the proportions of our sales as between the regular and 
de luxe models and as a partial corrective of that situation we reduced 
the spread when we annoimced 1940 model prices in August from $60 
to $45. We left the price of the regular sedan as it was, namely, $700; 
we reduced the price of the de luxe model from $800 to $785, making 
the differential $45 instead of $60, a difference of only $15 in an $800 
article, and since that price change was made we have seen a gradual 
increase in the percentage of de luxe models sold as against regular 
models sold. 

Another illustration of the same thing that has been occurring in the 
last 2 or 3 months is that during 1939 we had a smaller differ- 
ential in our higher price cars between the four-door and the two-door 
sedan than prevailed generally in the industry. We increased that 
differential slightly in our 1940 prices and we have seen the proportion 
of two-door sedans in the higher price models go up as compared with 
what it was in 1939 season, as the result of that email change. 


Those perhaps are concrete evidences of the fact that a difference of 
a few dollars and a difference very small in percentage does nevertheless 
have an effect on the purchase of such an automobile, even a relatively 
high-priced automobile. 

Mr Hoffman. I wonder if I might answer your question as to our 
fear of the effect of higher prices. Our concern is over unbalanced 
prices A general price mcrease applied m the same percentage to all 
commodities might not be disturbing, but if automobile prices were 
forced up and other prices remamed unchanged, automobiles would 
be put at a disadvantage as agamst other commodities. 

As a consequence our industry is particularly subject to that type 

Mr. AviLDSEN. Mr. Hoffman, could you tell me approximately 
the net worth of your company as compared with General Motors? 

Mr. Hoffman. The net worth of our company is approximately 
somewhat more than $20,000,000. , r /-, i 

Mr. AviLDSEN. About how much is the net worth of General 

Mr. Hoffman. We will ask Mr. Pearson. 

Mr. AviLDSEN. Approximately a billion dollars? 

Mr. Hoffman. It is over a billion dollars. 

Mr AviLDSEN. Over 50 times the size of your company? 

Mr. Hoffman. Eight hundred and ninety-five million. That was in 
1937. It is probably today over a billion dollars. 

Mr. AviLDSEN. That is still not far from being 50 times the size 

of vour company. . r j i- 

From my unpression of the great expansion of mass production, 
I am curious to know how you can compete with a company so much 
larger than yours. Your volume of sales must be ever so much snialler 
than General Motors, and I would like to have you tell the conimittee, 
if you will, how you can compete with these larger companies, because 
in all other mvestigations before this committee we have found that 
the small company didn't have much chance agamst the large inte- 
grated companies. . ., x 

Mr. Hoffman. Well, to give a really adequate answer to that ques- 
tion it would take a dissertation of several hours. 

I will try to do it m 3 or 4 minutes, and you will have to recognize 
that it is not adequate. 

What you have reallv asked is whether or not we can produce an 
automobile and sell it at a price which makes it an equal or better 
value than cars produced bv the big integrated companies because 
despite the fine sentiment that Mr. Leon Henderson displayed toward 
the smaller companies— I am sorry he is not here— I don't thmk Mr. 
Leon Henderson would give us 5 cents more for our cars because ot 
that sentiment. i xv 

In other words, when it comes to buymg automobiles the only thmg 
that counts is equality of value. As a matter of fact, the mdependent 
company has to give the pubhc a Httle better value because ot the 
assumption that you expressed that the big companies are m a position 
to give better value. So we have, to use baseball parlance, one strike 
on us when we offer you our product. 

Mr. AviLDSEN. What about two strikes? 

Mr Hoffman. We will admit one strike, not two. That question 
breaks down into these parts. First of all, if we are to produce equal 


value can we compete in engineering with the bigger companies? 
The answer there is that the quahty of engmeermg m a motopcar ^s 
dependent on the quaUty of engmeermg brams and not the number ol 
en&neers and draftsmen you employ, and I thmk the record not only 
of Studebaker but several other independent companies m the matter 
o contributions to the art would be an adequate answer, to that 
question In other words, we are able to employ as fine engmeers as 

'^Mriv^LBsL'^tor- about research? I understand General 
MotOTS have elaborate research laboratories that must cost several 
tadred th^'usand dollars a year to operate. Certamly a company 
r.f vour size couldn't conduct research on that scale. , , , _ 

Mr HoffmIn We have spent more than that m research but we 
can't engage in research to find out why grass is green, Mr^Ket ermg s 
famous Olustration.^ That is long-pull research of a kmd but as far 
as^?oLctVesearch is concerned we wiU spend ust as much money on 
pSct reselr'ch per unit, takmg Studebaker as a unit^as^^^^^^^ 
agamst any other make of car as a unit. We have to. ^^ess we am 
we wouldn't keep up with engineering. In that connection there is this 
Tact We have^a Me freer hand; iS other words, our engmeers when 
they start out to design more Studebakers ^f de^ig^g^ ^^^^^^^ 
^fiirlpbaker and we can base our decisions only on Studebaker, ^vnereas 
the enrineersoi one unit of the bigger companies might develop some 
Xro^went but obviously the hnpact of that ^-prove^^.^^.^P^^ 
the^entire line has to be considered, so we have. always felt that w^ had 
an advantage when it came to product engmeermg m the smaller 

""TIviLDSEN. Haven't the great developments come out of the 
laboratories of large companies as a practical matter r 

Mr HUFFMAN. Some of them have, but if you take a record of the 
10 or 15 most important developments in this industry over the last 
10 or 15^ears I thmk you would find that Studebaker and other 
L'de'penderSmpa^s Lve produced their ^-11^-^^^^ 
fViinf wp have ffot the brains. In other words, alter all, tne aeveiop 
S ^the art'doesn't come from the number of . engineers you have; 
H comes from the quality of the engmeermg brams J^em^^^^^^ and 
we have 2 or 3 or 4 men who are recognized as top-Aiglit engmeers and 
they WiU produce their full quota of improvements. If you mil ]ust 
survey the records of the automobile Product in the last 10 years you 
will find independent compames have co^^^'^^uted their luU share ana 
perhaps considerably more than that, m our opmion, which might be 

^""^hf next question is can we complete in styling, because we are m 
a fashion business-in other words, you have sunply got to keep the 
^tvW UD to date We think there that we are under no handicap, 
fe^o'ou'tside and employ styhsts, because - find it is bet ter^^^^^^^^^^^^ 
nnr Itvhsts awav from our production men and engmeers. iney are 
somelhat i^Sd to be ii^uenced by the practical considerations 
neriiaDs overly influenced. Our designing department is on Fifth 
Avenue nIw Yo^ We employ an outside designer who also designed 
fhe Broadway Limited and designs ice boxes.. No company can 
pmnlov him for his fuU time because he is not mterested We can 
employ hi^ for such time as we need him each year from the stand- 
pomt of styUng automobiles. 

1 See Hearings, Part 2. p. 355. 


So we are under no handicap on engineering or styling, which 
brings us up to the question of whether or not from a production 
standpoint our costs can be held down to the point at which they are 

WeU, that involves consideration of a development which we our- 
selves promoted, and that was the steel body in the automobile in- 
dustry. The steel body brought about an entirely new situation, 
because it calls for very heavy annual tool expense. 

When you come to the tooling for steel bodies, plus sheet metal 
that goes with the steel body, a company to keep up to date has to 
count on an annual expenditure of approximately $2,000,000. That 
is for one set of tools. 

In that particular phase of operations the big companies have an 
obvious advantage because of overhead spread. They will spread the 
cost of tooHng over a large number of cars, and the unit cost will be low. 

They, of course, have to have several sets of tools to build a mUhon 
cars. One set of tools might be good for 250,000 cars, but when you 
go beyond that you get into duplicate sets of toolings; nevertheless it 
is an item of cost which, in my opinion, would make it very difficult 
for any company to build a small number of cars per year and be 
competitive. The burden would be too great. 

You reach a point, however, in volume, at which you become com- 
petitive. Our volume this year will run about 110,000 units, which 
puts us, from as far as a distribution of tooling cost is concerned, in a 
sound position competitively. They may have a Uttle advantage on 
unit cost, but not enough to put us out of the running. If we were 
building 10,000 cars we would be out of the running, because that 
would mean a $200 charge per car, and we couldn't absorb it, because 
the public won't pay a dime for inefficiency, and that would be an 
example of inefficiency. 

Mr. AviLDSEN. About how many units would General Motors 
produce this year? 

Mr. Hoffman. A million five hundred thousand of various makes, 
but still our unit cost on 110,000 cars wiU not put us at any serious 
disadvantage. It will be very shght. 

There are offsetting advantages. The smaller company, in our 
opinion, has the obvious opportunity of maintaining a better labor 
situation. It is our own fault if our relations with our employees 
are not on a somewhat sounder basis and friendlier basis than could 
prevail in the case of a big company with scattered units throughout 
the country'. 

After all, Mr. Vance and I live right on top our plant. We are right 
there in South Bend, and when things come up that might be the cause 
of friction unless they are quickly met, we are there to deal with 
them, on a personal basis. Mr. Vance and I, whenever anything 
serious comes up, meet with our men ourselves, and with due respect 
to the legal profession, we have never had a lawyer in the meeting. 
We have just met with our own men, and we have tried to iron out 
the differences, and we have been successful in so doing. 

That means that you automatically have a better labor efficiency. 
In other words, it is our contention that when men feel friendly toward 
the management and feel that there is a mutual interest, there is an 
intangible quality that goes into their work that gives you a definite 
advantage, so that answering your question, we felt that if we could 


get our production up to 100,000 cars a year or more, we would be 
in a position to compete successfully, and on even tenns, with the 
Big Three, and be penalized only to the extent that we have to offer 
a better value than they do in order to attract the customer. 

Mr. AviLDSEN. About how many employees do you have? 

Mr. Hoffman. We have at the present time about 8,000. 

Mr. AviLDSEN. I t:uppose your labor costs are lower in South Bend 
than in a city hke Detroit. 

Mr. Hoffman. No; we pay the same rates. That has been a 
matter of poUcy with us. We pay the same rates Detroit pL^rs, 

Mr. AviLDSEN. Do you work on hourly rates or piece rates 

Mr. Hoffman. We work on piece rates, 

Mr. AviLDSEN. Is that customary in the industry? 

Mr. Hoffman. We are the only company in the industry doing 
that today, spealdng of the over-all picture. 

Mr. AviLDSEN, Do you think that accounts for your greater efl&- 

Mr, Hoffman. It is certainly one of the factors, because in piece 
work you have an automatic incentive toward high production and 
you have no argument about it. You are an employer yourself, and 
you know the moment you establish a day rate, and then have to 
depend on a quota to get that day's work out of the man, he immedi- 
ately feels that you are asking too much in the way of work, but if, 
on the other hand, he is being paid for whatever work he does, you have 
avoided all of the argument, and in the case of our own employees — 
it is a matter of their own election. 

In other words, we haven't forced piece rate on them. They have 
elected to remain on p'ece rate because they felt that we have fairly 
administered the piece rate system, and they don't want to go off piece 

Mr. AviLDSEN. What is your minimum wage in South Bend? 

Mr. Hoffman. Our minimum wage today in South Bend is 72 
cents for sweepers. 

Mr, AviLDSEN, In other words, if a man doesn't earn the piece 
rate, he at least gets 72 cents an hour? 

Mr. Hoffman, That is correct, 

Mr, AviLDSEN, Why doesn't General Motors use the piece rate 

Mr. Hoffman, I don't know. I can't speak for General Motors, 

1 know the day rate came through Detroit. We were affected for 1 or 

2 weeks. One or two of our departments felt they wanted it. They 
went on day rate, and then found they were making less money and 
went back to piece rate of their own volition, 

I was going to say that I think, perhaps, the most adequate answer 
I could give briefly to your question as to whether we compete is by 
reciting the figures for this year, because we wiU sell this year some- 
thing in excess of 110,000 cars, as against 52,000 cars last year, or 
considerably more than 100 percent increase. 

The general industry increase is between 35 and 40 percent, so that, 
whereas, last year we got approximately 2 percent of the total business 
done, this year we expect to get something over 3 percent of the total 
industry volume. 

Mr, AviLDSEN, You will show a fair profit on those cars? 

Mr. Hoffman. We will show a fair profit. 


Mr. AviLDSEN. Will your profit be as large as the General Motors 
or Chrysler profit? 

Mr. Hoffman. General Motors' profits are always subject to the 
qualification that they have a diversification. I don't think our per 
car profit will be as great as General Motors or Chrysler, because we 
have to give a better value, so we have to take a penalty in the way 
of profits, not excessive, but it might amount to $5, $10, or $15 a car. 

Acting Chairman Borah. Is that all? 

Mr. Fischer. Is it your opinion that a direct or indirect interest 
on the part of a manufacturer in a financing company tends to keep 
within the control of that manufacturer the distribution of auto- 
mobiles to retailers? 

Mr. Hoffman. Well, I don't know quite how to answer that ques- 
tion. We have an arrangement with the Commercial Investment 
Trust by which they are our ojBBcial financing company, but we have 
had it always clearly understood that the question of the financing 
arrangement was entirely up to the dealer's decision. We have tried 
to persuade our dealers to use C. I. T. service as against some service 
that resulted in the customer being charged an excessive finance rate. 
Our only policing has been done on rates, and not on companies. In 
other words, we don't care w:here a dealer finances, just so he doesn't 
finance on a rate in excess of that offered by C. I. T. 

Mr. Fischer. You don't think a manufacturer's direct interest in a 
financing company would enable that manufacturer to offer a product 
to the purchaser at a lesser price? 

Mr. Hoffman. I don't quite understand the question. 

Mr. Fischer. The point I make is that if a manufacturer is inter- 
ested in a finance company, is he able ultimately to offer the purchaser 
a product at a lesser price? 

Mr. Hoffman. He would be able to if he were willing to take the 
finance profits and consider them for the purposes of reducing car 
costs, but the answer is, that isn't the way business is done. 

Mr. Fischer. Yes. 

Mr. AviLDSEN. I have one more question. Looking over these 
cars in the courtyard, I got the impression that your current 1940 was 
a little smaller than the Chevrolet, Ford and Plymouth. I wondered 
how — I assume that that smaller size enables you to get your price 
down to a point where you could compete with them, but I wonder 
how you can overcome the consumer resistance to the size angle. 
I should think the average customer would want a car as large as a 
Plymouth and Chevrolet if he is paying about the same price. 

Mr. Hoffman. Are you in the market for a car? 

Mr. AviLDSEN. No, I am not. 

Mr. Hoffman. That is rather an interesting question, because we 
were much concerned with it. That Champion you saw down here 
was the result of consumer studies made some 4 years ago. I am 
sorry Mr. Henderson isn't here, because I would like to have had him 
present when I told some of the results of those studies. 

We had decided that in order to increase our volume to a point 
where we could compete, we had to break into the low-priced field, 
and the question was, how? We decided to go right to the consumers 
themselves and find out what they wanted; that is, purchasers of 
low-priced cars — to find out what they wanted in the way of an 
automobile. We found a very insistent demand for greater operating 


economy than was offered by the cars in the low-priced field, but we 
found no evidence whatever that the customer would accept anything 
in the way of a compromise in the matter of comfort, in the matter of 
ride, in the matter of equipment, in the matter of quality. What the 
customer wanted, as the customer always does, was a car that would 
give liim everything offered by the three low-priced cars, plus, if 
anything, a better ride, plus operating economy. 

Obviously, we couldn't hope to give that same sized car and at the 
same time offer better operating economy, because operating economy 
is a matter of weight. It costs so much, it takes so much gasoline, 
to haul around so much weight. We went to our engineers and said 
to our engineers, "Here are the results of the survey. The public 
apparently is ready and waiting for a car that will give better operating 
economy and a better ride and equal or better quality, but it looks 
rather hopeless, perhaps," and they said to us, "No; if you will give 
us a free hand in designing a car, let us tackle this problem in the same 
way that the railroad engineers have tackled the problem of the modern 
streamlined Pullman, which weighs about 42 tons as against 75 to 
80 tons in the old-fashioned Pullman, we can do just what they did. 

"We can give you a lightweight car which will give a better ride 
and at the same time better operating economy, and as far as inside 
dimensions will accommodate five people comfortably. But we can't" 
they said, "be handicapped. You mustn't ask us to take the Com- 
mander engine and put in smaller pistons." That is the general 
practice in the industry — to have one engine running through the line. 
" You can't ask us to take the Commander engine and at the same time 
take out weight. You have to give us an absolutely free hand, and 
we cannot be asked to have any part of the new car interchangeable 
with your higher priced cars." 

That was a very serious question posed to us, because it raised 
this question, as to whether or not the public was ready to buy auto- 
mobiles on a transportation basis, or whether they would still be wholly 
influenced by the size of the package, because the point you brought 
out is quite true. This car is not as large as a Ford, Chevrolet, or 

Mr. AviLDSEN. How much less in weight is it? 

Mr. Hoffman. About 500 pounds. 

You have a paradox in the automobile business. The medium 
price cars of today, the Studebaker Commander, Oldsmobile, Pontiac, 
all medium priced cars, weigh approximately a thousand pounds less 
than 12 or 13 years ago. There has been a constant reduction in 
weight, and at the same time, improvement in ride and operating 
economy. But in your low priced field the weights have gone up. 
They used to weigh 2,600 pounds, now they weigh 2,900 pounds, 
partly because of this matter of compromising design, in order to 
get interchangeability of parts,, of which much can be said in defense. 
But our engineers said, "We can't give you the car you want unless 
you give us an absolute free hand." 

Mr. AviLDSEN. What do you mean by interchangeability? I 
understood all of your parts are interchangeable. If I take a piston 
out of one of your Champions and put it in another, it will be inter- 

Mr. Hoffman. I mean interchangeable between lines. It is general 
practice in the industry to design a part for your low-priced car suSi- 

124491 — 40 — pt. 21 14 


ciently heavy to be used in other models as well. The cylinder block 
will be made of sufficient weight and size so it can be bored out and 
used in the higher priced model. There is much to commend that 

Mr. AviLDSEN. If I buy a thousand-dollar car I might get the same 
engine as in an eight hundred dollar car? 

Mr. Hoffman. Not necessarily, but if you bought a thousand- 
dollar car, it might have the same cylinder block they use in an 
eight-hundred dollar car. 

Mr. AviLDSEN. Just the cylinder block? 

Mr. Hoffman. And many parts of the car, many parts used through- 
out the car. We had to turn our backs on all that and we had to ask 
this question as to whether the public was ready to buy a car that 
would give better operating economy, and a better ride, but was 
smaller in size, and we didn't know. Mr. Vance and 1 made the 
decision to gamble 4% million dollars on our guess that the pubhc 
was ready to buy on that basis, but it was a gamble, because the size 
of the package has always been considered the most vital selling 
point in a product, and all we can say is that we have been happily 
gratified at the intelligence of the public, because it has been buying 
more of these cars than we could produce ever since we put the 
Champion into production. We estimated we might possibly sell 
50,000 cars the first year of production. That was our highest hope. 
I think we will sell approximately 100,000. 

Mr. AviLDSEN. Suppose the large companies decide to make a light- 
weight car. Wouldn't they have an advantage over you with their 
larger production if they cut out all that iron and so forth? 

Mr. Hoffman. No; they wouldn't if we can maintain our present 
volume level, because of what we have put into this car — you see the 
thing that deterred the industry from building this type of car was this 
fact: that the weight you take out is very low-cost weight — cast iron, 2 
cents a pound. In other words, it cost almost as much to build a car of 
this type, the type of the Champion, as it does a bigger automobile. 

There is very little saving, around $20. We decided to put most of 
that $20 back into the car through quality ahd to try to offer this 
job as a high-quality car in the low-priced field. We made a definite 
attempt at least to build the highest quality car being offered in 
the field by taking the savings that came out of weight reduction 
and putting them back into better trim, better hardware, items of that 

Mr. AviLDSEN. How much can you reduce the operating cost by 
taking out these 500 pounds? 

Mr. Hoi'FMAN. You can reduce your gasoline and oil consumption, 
tire consumption and similar items from 10 to 25 percent, an average 
of 20 percent: 

^ Mi^. AviLt)8EN. Wouldn't these large companies be forced to make 
similar changes to compete with that saving? 

Mr. Hoffman. There is always a lag. In other words, even though 
this car is aU we think it is, there will be a long lag because they have 
so many more dealers than we have and so many more points of sale, 
and they have also a natural claim on their present ownership. In 
other words, if a person has been using a Ford, Chevrolet or Plymouth 
and is well satisfied with it, the natural thing for him to do is to go 
back to the dealer he knows and purchase another new car of the 
same kind, so after aU we are not talking about a big share of that 


business. That market is good for around a million and a half cars 
a year. We would be happy with 10 percent of it, you see, as com- 
pared with their 90 percent. It will take a long time, really, as the 
result of any competitive pressure from us, to force General Motors or 
Chrysler or Ford to change their programs. 

Mr. AviLDSEN. Are the costs of the products going into your car 
higher than the costs going into General Motors? I assume General 
Motors would buy 10 times as many spark plugs and tires and so on. 
Do you buy them cheaper? 

Mr. Hoffman. No. 

Mr. AviLDSEN. They have no advantage over you? 

Mr. Hoffman. No. We will buy this year over $50,000,000 worth 
of supplies. When you are a $50,000,000 buyer you get prices that 
are competitive with anyone. In addition to that, you have, I think, 
a very genuine interest on the part of most suppliers in maintaining 
some competition among the independents, and as a rule they give 
the same prices to the stronger independent companies that they do 
to the big three. 

Dr. Thorp. May I pick up one point that interests me? You 
spoke about a saving of $20 which you then put back into hardware. 

Mr. Hoffman. I didn't say hardware. 

Dr. Thorp. Well, hardware and such quality. How would you 
go about deciding whether or not the consumer would rather have 
that $20 put back into the car rather than to have the price lowered 

Mr. Hoffman. That comes out only with what we call intuition, 
which comes out of experience, and nobody knows. We might be 
wrong, but as far as surveys of consumers will guide us it is perfectly 
evident that the consumer prefers the higher quality to the $20 
lower price. 

Dr. Thorp. How far would you carry that? Apparently you are 
used to putting problems up successfully to your engineers. Sup- 
pose you went to your engineers and said: "We want a car that we 
can sell for $450. We think there are consumers who will buy for 
$450." Would your engineers come through with a car that would 
at least provide transportation? 

Mr. Hoffman. It would be no problem whatever to build a car 
that would sell for $450. 

Dr. Thorp. What you feel is that there aren't enough consumers 
now kept out of the market, or let's put it this way, consumers who 
can buy second and third-hand cars, so that there is not an additional 
market that could be tapped by a new car at that level. 

Mr. Hoffman. From some 30 years' experience in this business 
I would say that the competition from used cars, which Mr. Vance 
covered this morning, would be so keen and so fierce that any stripped 
car — it would have to be a stripped car — that you put on the market 
simply could not attain a volume to justify the investment. You 
see, this thing has been tried time and again and it has always failed. 
The public has always preferred the fully equipped used car 1 year 
old to the stripped car brand-new. 

Mr. Fischer. You have no plants or affiUates in Canada or Euro- 
pean countries? 

Mr. Hoffman. We have a plant in Canada which we are not using, 
because they reduced the duties in Canada and we can manufacture 
in the United States more eccnomically. 


Acting Chairman Borah. Gentlemen, you have given us a very 
instructive hearing and we thank you for your appearance. 

(Whereupon Mr. Hoffman and Mr. Vance were excused.) 

Mr. AviLDSEN. I would like to suggest that we arrange to have 
the charts presented by Mr. Vance entered in the record. 

Dr. Keeps. I should like to have them in the record. 

(The charts referred to were marked "Exhibits Nos. 1514 to 1518" 
and appear on pp. 11183-91.) 

Acting Chairman Borah. The next witness is Mr. Buell. 

Do you solemnly swear that the testimony you shall give in tl is 
proceeding shall be the truth, the whole truth, and nothing but tlie 
truth, so help you God? 

Mr. Buell. I do. 


Dr. Kreps. Dr. Buell, for the pxirposes of the record will you state 
your full name? 

Mr. Buell. Raymond Leslie Buell. 

Dr. Kreps. What is your present position? 

Mr. Buell. I am Round Table Editor of Fortune Magazine. 

Dr. Kreps. Previous to that what was your position? 

Mr. Buell. Former president of the Foreign PoUcy Association. 

Dr. Kreps. How long have you been thinking and writing in the 
field of international relations on which you are about to testify? 

Mr. Buell. Since 1921. 

Dr. Kreps. You may proceed. 


Mr. Buell. As a result of the outbreak of war in Europe, the Amer- 
ican economic system has been affected in a number of ways. As a 
result of increased demand and costs — actual and anticipated — a 
number of prices have already increased, and the problem is how to 
prevent maladjustments from arising which will adversely affect the 
functioning of our enterprise system. My assignment is to discuss 
this question from the standpoint of America's export and import 

Although many individual buyers are mostly interested in the 
adverse effects of the war upon the price of their materials, and 
although others fear that the war will injure their exports, I wish to 
start by discussing what to me is the most important problem of 
all — namely, the effect of the war upon the general balance of pay- 
ments of the United States. 

There are those who assert that the United States will not develop 
an imusually large war trade during the present hostilities, unlike 
the trade which developed in the last war. The belHgerents have 
been preparing for this war so long and have become so self-sufficient 
that some believe they will not need to rely upon the United States 
^s they did between 1914 and 1917. It is too soon to give a categorical 
answer to this question. But it should be remembered that the first 
effect of the outbreak of war in 1914 upon the United States was 


depressing. Both exports and imports fell off in August 1914, the 
first month of the war, in contrast to increased exports and imports 
both in September and October of this year 

It was only in 1915 that the belligerent trade really got under way 
last time. In view of mammoth airplane orders it may start sooner 
this time, depending upon the future nature of the war. If the 
present war is to be a war of nerves and diplomacy, in which small 
neutrals receive more punishment than belUgerents, the consumption 
of materials may be relatively small; but it is doubtful whether the 
nerves of the belligerents will stand this kind of war indefinitely; and 
once fighting starts in the air in a big way, war exports should in- 
crease. The fact that the belligerents are denied access to our credit 
market should not prevent the development of this trade. It is 
estimated that Britain and France have net available resources in 
this country amounting to about $10,000,000,000 which is about 4 
times the amount borrowed here by the Allies between 1^14 and 
1917. Moreover, the United States imported gold amounting to 
$1,752,000,000 in 1938. If Britain and France can continue to mine 
gold they will have another means of meeting their obligations here. 
At the same time the dollar value of such trade may not be as large 
for the same v(?lume of goods as during the last war simply because 
the Anglo-French buying agency wiU not push prices up by competi- 
tive bidding. 

Even if the war trade does not develop, the United States will un- 
doubtedly increase exports to Latin American countries and to other 
neutrals formerly dependent upon belligerent buyers, if means of 
payment can be found. Government credit may possibly be extended 
to assist Latin-American countries to pay for American exports. 
Nevertheless the United States is confronted with the danger of 
developkig a one-way trade, possibly approaching that which existed 
between 1920 and 1929, which will impose a severe strain upon 
American prices and create other maladjustments, particularly if the 
bottlenecks in the American economic system are not soon removed. 

In 1938 the export surplus of goods was 1.3 biQion dollars more 
than imports, due to the drop in imports on account of the domestic 
slump. Nevertheless the export surplus of October, 1939, was $117,- 
000,000; and as the war develops the positive balance of payments 
may actually increase, particularly since the offsetting factoi of 
American tourist expenditures in Europe is being eliminated. This 
trade may suddenly come to an end when the means of payment is 
exhausted. The payments now being made in gold are largely of 
questionable value to the American people and cannot be continued 
indefinitely, since the United States has already about 65 percent of 
the world's gold. If the United States is not to lose the value of this 
gold, it sooner or later must resort to foreign gold loans, but such 
loans only can be repaid to the United States in goods and services, 
which again involve developing a passive balance of payments as 
other mature creditors have done. 

The only sound solution, under such circumstances, is to increase 
imports of goods and services or decrease exports. The latter solu- 
tion is imdesirable, however, because it means a brake on recovery and 
reemployment. The increase of imports in relation to exports, how- 
ever, in the upswing of a business cycle may mean that a check will 
be placed on rapidly mounting domestic prices, and that the country as 


a whole will receive useful goods in payment for its exports. I believe 
this situation should be constantly watched by the Department of 
Commerce and State Department and that Congress should either 
delegate powers to the President to meet a dangerous condition in the 
balance of payments, or that he should make periodic recommendations 
to Congress. 

What concerns many American interests is not this general problem, 
but the particular maladjustments which may arise as a result of the 
war. These may arise out of the establishment of drastic Govern- 
ment controls over exports and imports by belligerents, and the fixing 
of prices which may equally react against American business inter- 
ests. Beginning September 5, the United Kingdom required exchange 
permits for all imports into the country. In addition, many imports 
are subject to Ucense and a large number of imports are temporarily 
prohibited. Many industries such as wool, foodstuffs and steel are 
completely controlled by government. The British Government has 
taken over the Australian wool clip and the entire African coco crop. 
Under the nonferrous metals order of 1939 the British Government 
requires aU purchases of copper, lead and zinc to take place under 
license at maximum prices fixed in accompanying schedules. In 
France imports of aU merchandise except gold are subject to special 
import license, as they are in Canada. Moreover, on November 17, 
1939, the British and French Governments signed an economic 
accord estiblishing six Anglo — French executive committees — to 
carry out common action regarding munitions supply, raw materials, 
shipping and economic warfare. In addition to coordinating indus- 
trial production these committees will equalize any hardships caused 
by the reduction of imports and ehminate competition in foreign 

The establishment of these strict governmental controls over foreign 
trade and the very nature of belligerent trade may prove injurious 
to particular American interests. Although the belligerents will 
increase their purchase of munitions and finished products from 
neutrals, they will inevitably have to cut down imports of nonessen- 
tials, particularly in the field of consumer goods. Already the 
British Government has imposed en embargo on American apples 
and pears and reduced by half similar purchases from Canada. As a 
result American apple exports are down about 75 percent from last 
year, and the pear exports have been even further hit. Such losses 
are important to an industry which in the case of apples normally 
exports 15 percent of its product, and of late winter pears which ex- 
ports 46 percent. American growers naturally fear that apples from 
Canada and pears from Argentina formerly marketed in Britain will 
now crowd in o v^er the United States tariff. Although this fear has not 
yet been realized, it is partly due to the fact that the Argentine pears 
have not been harvested. 

Still a different type of problem would be created if the Government 
controls over articles normally imported into the United States 
would operate to our disadvantage. Although the price of rubber 
has risen only moderately, I understand that American importers 
are having some difficulty in securing releases of rubber to replenish 
depleted stores. Moreover the British authorities have fixed the 
domestic price of lard and pork at such a low figure that, it is feared, 
the price here of such products will be adversely affected, because 
of the amount exported to Britain. 


Again, belligerent Governments may discriminate against Americans 
in the allocation of exchange. Thus the British Government already 
has cut to 50 percent the normal dollar revenue which may be remitted 
to this country for the rent of films. Military operations themselves 
may disrupt needed imports from Europe. Fifty percent of the total 
paper requirements of the United States is imported such as pulp- 
wood, wood pulp and newsprint, a large part of which comes from 
Finland and the other Scandinavian countries. If Russia succeeds in 
dominating these countries, this pulp trade will in all probability be 
disrupted, to the detriment of American interests. Generally, aUied 
governments may have it within their power to divert trade of every 
type to each other and away from neutrals, as a means of strengthening 
their resources in a desperate struggle. 

The question is whether neutral America, even if benefiting from a 
general increase in exports, is going to be injured by belligerent buying 
or lack of a willingness to sell, and what if any steps should be taken 
by the Government to protect these interests. In approaching the 
question, the American Government and economic groups involved 
should, in my opinion, take into account the following considerations: 

1. First, the belligerents are fighting for their national existence, 
and must follow their own interests; if the United States were in the 
same position it would do the same. 

2. Second, if certain American interests will be adversely afi'ected by 
the war, other interests will be benefited. We caimot eat our cake 
and have it too. If certain farm exports have been hurt, the import of 
Polish ham has been stopped and domestic ham has received increased 
protection. If the effect of the war has cut down imports of jute 
bagging, the position of domestic cotton manufacturers of Osnaburg 
and narrow sheetings has improved. 

3. Third, to a certain extent the increased price of imported ma- 
terials and the diflficulty of maintaining certain exports is due to the 
United States Neutrality Act which has withdrawn American shipping 
from European combat zones, and which inevitably increased freight 
and insurance rates, as well as producing certain delays in the move- 
ment of goods. 

Dr. Keeps. You mean imports from European countries, do you 
not, in that connection? 

Mr. BuELL. Wouldn't it be i he same thing. 

Dr. Kreps. If such shipping is diverted in the oriental trade, would 
it be necessarily true? 

Mr. BuELL. If you could find substitute sources of supply or sub- 
stitute markets, but certainly they haven't been found yet, and that is 
why these maladjustments, if they exist, may be due to the fact. 

Dr. Kreps. Of the increase in price that has occurred in imported 
materials, do you believe that the materials from the Orient have 
shown less increase than those from Europe? 

Mr. BuELL. I didn't know there had been any marked increase in 
imports and certainly the increase in imports has not exceeded the 

Dr. Keeps. Increase of price in the materials? 

Mr. Buell. The only article I am familiar with is rubber, and that 
has increased quite moderately. 

Dr. Keeps. Would this consideration affect quite as much the 
price of rubber asit might the price of articles imported from Europe? 


Mr. BuELL. Of course the Neutrality Act does not apply to the 
Orient, as I understand it. 

Fourth, as yet it is not clear how serious the maladjustments may 
prove to be as a result of belligerent acts, or whether they will not 
correct themselves. October foreign trade figures show certain de- 
clines in exports of fresh fruit, but increases m camied fruit and 
manufactured foodstuffs, and great increases in cotton. It is too early 
to determine the imderlymg trend in foreign trade, or the manner in 
which belligerent controls will be exercised. Long before the war 
broke out, many governments controlled foreign exchange or licensed 
foreign trade; consequently the transition from a peace to a war 
economy involves a much less shock both to belligerents and neutrals 
than it did in 1914. No. doubt many existing obstructions to trade 
will be removed once belligerents have completed the adjustment of 
their economies to a miUtary objective. 

The very fact that severe price controls have been introduced may 
protect importers here from runaway prices. Thus the price fixed by 
the British authorities for African cocoa is about 5 cents a pound 
c. i. f . landed in New York, which compares with a price the day 
hostilities broke out of 4}^ cents, which was within three-quarters of a 
cent of the all-time low. The prices fixed under the nonferrous metals 
order work out at less than the price for similar metals in the United 
States. Thus before the American price of zinc was lowered yester- 
day, the price in Canada for prime spelter worked out at 3.05 cents 
per pound in comparison with a price of 6.89 cents in New York. 

It can be assumed that Britain and France will make every effort 
to maintain their exports to this market because they need dollar c^: 
change. Although the British Government has taken over i 
Australian wool clip, the amount is so large that Britain will un- 
doubtedly wish to sell much more than the 10 million pounds released 
to the American buyers. If not, the South American supply and 
substitutes should prove available. Belligerents realize that if they 
charge uneconomic prices to the United States a buyers' strike will 
take place which wUl lead to a search for substitutes and possibly 
permanent loss of the American market. The position of the American 
importer has been improved by the depreciation of the pound, although 
as a result exports to Britain become more expensive. 

The London Economist of November 4, 1939, page 163, says [read- 

In recent weeks the British authorities have been at some pains to keep the 
price of tin, and to a lesser extent of rubber, down. Tin has risen in New York 
less than the non-ferrous metals that America herself produces. 

The Economist criticizes such a policy, saying that it loses sight of 
British foreign trade interests, and the article even advocates a sys- 
tem of differential prices for sterling under which the United States 
would pay more dearly for British goods than other countries. Should 
such a policy be adopted, or should there be outright discrimination 
against American buyers, the United States might have a legitimate 
ground for complaint. So far, however, instances of such discrimina- 
tion seem to be rare if they exist at all. 

5. American businessmen and business organizations, profiting 
from the experience of the last war, have shown an unusual awareness 
of the danger of rapidly increasing prices and of recovery based on a 
war boom. .^ Indeed, they have shown during the past 2 months real 


industrial statesmanship in averting such dangers. I do not believe 
many such industries wUl erect new plant purely for the purpose of 
meeting war orders, unless they make provision at the same time for 
quickly writing off such plant. Others are working two and three 
shifts instead of expanding plant capacity on war orders. Many 
manufacturers, I understand, are worried about receiving payment 
for war orders; and apart from this, are primarily concerned with 
domestic peacetime recovery. As a result, some of the fears as to 
runaway domestic prices have vanished. To cite one example, at 
one time such a shortage of steel scrap existed that the proposal to 
impose an embargo on such steel was frequently made. Yet the 
price of steel scrap was actually declined from $22.50 to $18.58, or 
$3.92, since the first week in October. The reasons for such decline 
have been increased production of new scrap as a result of increased 
domestic activity, the movement of scrap out of hiding, and the 
knowledge that recent reports of export sales have been exaggerated. 

I advance these considerations not in support of the thesis that the 
United States should do nothing to meet the maladjustments which 
may arise out of the foreign trade situation. I do believe it is possible 
to exaggerate these maladjustments, and I am of the opinion that 
drastic measures of Government control over exports and imports 
should not be established until the need for such control is demon- 
strated and until other remedies have been attempted and failed. 
If, however, events should prove that American importers of rubber, 
for example are having a difficult time in getting releases, or if the 
price of rubber should shoot up to more than a dollar a pound, as it 
did under the Stevenson plan, or if belligerents would dump large 
surpluses of nonessentials into this market for the purpose of obtaining 
vitally necessary exchange, then a case for Government intervention 
would arise. However, I believe that the problems now envisaged 
could be met by (1) Government negotiations, or (2) the exercise of 
existing governmental powers over foreign trade if negotiation should 
not bring mutually satisfactory results. 

Dr. Thorp. You spoke about the higher shipping costs. Do you 
have any information as to whether the shipping costs have increased 
since the neutrality act? My impression is that the increases came 
before the enactment of that legislation. 

. Acting Chairman Borah. There has been some on some things. I 
don't know whether it has been general or not. 

Dr. Thorp. Some shipping increase since the neutrality? 

Acting Chairman Borah. On certain particular matters. 

Mr. BuELL. In any case I should think they might have been in- 
creased in anticipation of the act. 

This problem of protecting the American price of imported raw 
materials, the source of which is controlled by international foreign 
cartels or governments, is not new. President Hoover showed an 
active concern over international controls of raw materials insofar as 
they affected the United States. Moreover, before the London Eco- 
ncwnic Conference of July 20, 1933, Secretary of State Hull advanced 
a proposal to the effect that international commodity agreements 
should contain provisions for the protection of consuming countries. 
In 1934-35 a subcommittee of the House Committee on Foreign 
Affairs made an exhaustive investigation of the International Tin 
Control. Whether or not as a result of the American viewpoint, the 


tin and rubber cartels both now make provision for consumer repre- 
sentation, at. least in an advisory capacity. 

I believe that the State Department is in a strong position to protect 
the legitimate economic interests of the United States through nego- 
tiations with belligerents. It should be able to induce belligerents to 
charge fair prices and to grant releases of materials needed by Ameri- 
can industry and, if the need arises, even to impose quotas on ship- 
ments to the United States of commodities which otherwise might be 
dumped in our markets. 

While it is true that the belligerents must consider primarily their 
own interests, I believe they will meet any reasonable request of 
the United States, With the repeal of the arms embargo, American 
markets are now open for belligerent purchases, and it is to the inter- 
ests of belligerents buying in this market that American industry 
be supplied with the necessary imports. 

The present gold policy of the United States, although adopted 
supposedly for purely domestic reasons, operates greatly to the 
advantage of those belligerents having gold to sell. And in our trade 
agreements the United Staties has made tariff concessions to France 
and Britain which remain unchanged, although these belligerents 
have now restricted the importation of certain items upon which 
tariflF concessions were made to the United States before the outbreak 
of war. Generally speaking, France and Britain wish to do nothing 
that might antagonize the United States. And I believe that the 
State Department could meet many of the questions which may 
arise by the conclusion of Executive agreements with belligerent 

Already two examples of negotiation may be cited. On November 
30 the Department announced, its intention to negotiate a supple- 
mentary trade agreement with Canada to deal with the special emer- 
gency arising out of the marketing of silver and black fur. If this 
agreement leads Canada to take measures to prevent the dumping of 
fur into this country, a precedent may be established for the future. 
A further example of a different nature is the agreement signed Octo- 
ber 9 by the Commodity Credit Corporation with the Imperial 
Tobacco Co. of Britain, relative to the purchase of American tobacco. 
Because of difficulties in obtaining exchange, this company had to 
discontinue its purchases of flue-cured tobacco in this country. But, 
as a result of this agreement, the Commodity Credit Corporation 
advanced funds enabling this concern to buy a quantity equal to the 
normal purchases throughout the remainder of the marketing season, 
or about 175 million pounds. In this case the foreign corporation 
buys for the account of the Commodity Credit Corporation, and the 
theory apparently is that Britain will be able shortly to raise the 
exchange restrictions so that it may be repaid. 

Should this and other types of negotiation fail to lead to a satis- 
factory adjustment of difl&culties, I believe the Federal Government 
already has adequate sanctions at its disposal. For example, the 
trade agreement with the United Kingdom contains several escape 
clauses which the State Department might employ to terminate the 
agreement should it prove impossible to negotiate a settlement of 
questions arising out of the war. In my opinion, the renewal of the 
Trade Agreements Act in June is particularly important, because it 
gives the State Department the flexibility of negotiation needed to 


meet new conditions as they arise, in the field of wartime trade, with- 
out vesting in it detailed controls interfering with the market 

A further direct sanction may be found in the Antidumping Act, 
which gives the Secretary of the Treasury power to impose an anti- 
dumping duty if investigation establishes that a commodity is being 
imported at less than its foreign value, to the detriment of an Amer- 
ican industry. Similarly, section 303 of the 1930 Tariff Act authorizes 
the imposition of countervailing duties so as to offset the payment of 
export subsidies. Section 337 of the same act declares it is unlawful 
to engage in "unfair" methods of competition in the importation of 
articles into the United States the effect of which is substantially to 
injure an industry efficiently and economically operated in the United 
States. And further, the President has the power to deny to foreign 
governments which, discriminate against American commerce the 
benefits of duty reductions in trade agreements, which otherwise 
would be generalized to them under the law. 

Again, under the Trading with the Enemy Act, as amended in 1933, 
the President has the power to apply exchange prohibitions against 
any foreign nation in the event of war or national emergency, or 
prevent all transfers of credit between banking institutions. Further, 
an act of September 8, 1916, provides that when during a war in which 
this country is not engaged the President finds that the laws and 
practices of a belligerent country discriminate against American ships 
and citizens as compared with citizens of any nationahty other than 
that of such belligerent the President is authorized to withhold clear- 
ance from one or more vessels of such belligerent country or deny 
commercial privileges in this country to the belligerent in question. 
Thus, if as part of the Anglo-French economic control the United 
Kingdom gave the citizens of France privileges not extended to citi- 
zens of the United States, the President apparently could invoke 
these powers. 

For its part, the Department of Agriculture has certain powers 
which it may use to protect agriculture. Under section 22 of the 
Agricultural Marketing Agreement Act the President, after investi- 
gation by the Tariff Commission, may impose quotas upon agricul- 
tural imports if they threaten to interfere with any specific control 
program undertaken by the act, including marketing agreements. 
Such quotas cannot reduce imports less than 50 percent of the average 
between 1928 and 1933. Moreover, the Federal Surplus Commodities 
Corporation may purchase agricultural commodities, employing them 
for reHef purposes, and thus support a market which formerly de- 
pended upon exports. For example, this Corporation began to buy 
apples in October, and I imderstand plans to purchase 10,000,000 
bushels this year — which is nearly 20 times last year's purchases — on 
the understanding that the industry divert a like quantity to byprod- 
ucts. As a result of such purchases the price of apples has improved. 

It should further be pointed out that under the Webb-Pomerene 
Act exporters may come together and form export associations, which 
might prove useful in bargaining with belligerent governments. 

Thus the Federal Government already has a vast panoply of powers 
over foreign trade. Experience may demonstrate the need of pro- 
cedural changes to hasten action under existing laws. But I do not 
believe in extending existing powers until after it is estabUshed that 


they cannot correct the serious maladjustments which may arise, since, 
as I point out later, the vesting of power in the Government over the 
detailed process of foreign trade may disrupt a relatively free domestic 

Also, I beHeve that the Bureau of Industrial Economics, which I 
understand is being established in the Department of Commerce, 
should establish a service upon which any businessman in the United 
States can call for assistance in meeting difficulties over exports and 
imports as they arise. I believe this service should also set up an 
advisory committee composed of practical businessmen, theoretical 
economists, farm and labor leaders, and representatives of consumers, 
to meet periodically and discuss these concrete cases and the general 
foreign trade situation. As a result of deliberations of this com- 
mittee and the conclusions of the Bureau of Industrial Economics, 
the Department of Commerce could bring matters to the attention of 
the State Department to be handled by negotiation if deemed neces- 

To summarize, I believe that the short-term problem should be met 
(1) by careful analysis over an adequate period to determine how real 
are the particular trade maladjustments caused by the war; (2) estab- 
lishment of a service in the Bureau of Industrial Economics of the 
Department of Commerce, supported by an advisory committee, to 
receive complaints and requests for information from individual busi- 
ne'5s concerns affected by the war; (3) negotiation by the State De- 
partment with the belligerent concerned to remove the maladjust- 
ment; (4) the exercise oi the sanctions already vested in the Federal 
Government over foreign trade if it becomes absolutely necessary to 
protect an AL.ericar. Interest. 

I realize that a more radical approach to this problem would be to 
establish a Government export or import agency and place all foreign 
trade under license and have it carried on by barter agreement. The 
statement has been made that the outbreak of war has killed the 
whole philosophy of the Hull trade program, which looks to the resto- 
ration of multilateral trade carried on by competitiye private enter- 
price and the generalization of tariff reductions through the uncondi- 
tional most-favored-nation clause. 

TVliile it is true that the outbreak of war has led to the extension of 
Government controls over foreign trade, this problem is not new; 
and, in my opinion, it would be a catastrophic mistake for the United 
States Governrnent to abandon the Hull trade program now, both 
from the short-term and long-term points of view. The IJnited 
States in its trade agreements thus far concluded has been able to 
negotiate satisfactory arrangements with several countries regarding 
exchange controls. The State Department has not insisted that such 
controls be abolished but it has merely demanded most-favored-nation 
treatment. For example, article V of the agreement with the United 
Kingdom says [readingl: 

If imports of any article into any of the territories of either High Contracting 
Party should be regulated either as regards the total amount permitted to be 
imported or as regards the amount permitted to be imported at a specified rate of 
duty, and if shares are allocated to countries of export, the share allocated to the 
territories of the other High Contracting Party shall be based upon the propor- 
tion of the total imports of such article from all foreigp countries supplied by the 
territories of that High Contracting Party in past years * * * 


Even though regulations arising out of belligerency may be exempt 
from this article, certainly the United States would have the basis to 
claim most-favored-nation treatment if confronted by any dis- 
crimination arising out of the war. If we abandon most-favored- 
nation treatment now, a legal principle which works in our favor 
would disappear^ and countless irritations wouJd arise. From the 
political standpoint the desertion of most-favored-nation treatment 
by the United States now might give rise to a system of tariff dis- 
criminations under which this country would treat one Latin- American 
repubUc differently from the other, and I am inclined to tlri ik that 
such discriminatory treatment would assist in undermining the marked 
progress which has been made in international relations under the' 
"good neighbor" policy. 

I believe ever more strongly that the preservation of the principles 
of the Hull trade program is important from the long-term point of 
view. If this program is now abandoned in favor of Government 
barter or quantitative restrictions on all exports and imports, I 
believe forces might be unloosed wbich would take this country into 
State capitalism and eventually bring about far-reaching controls 
over the domestic economic system. "Whenever a governmental 
authority rations exports or imports it automatical^ gets control 
over the price and output of certain iDdustries. The market mecha- 
nisms are replaced, or at least interfered with, by bureaucratic adminis- 
tration, and new maladjustments are frequently created which very 
easUy lead to the fixing of domestic prices, quotas c^ production, and 
wages. If the United States abandons the principles underlj^ing the 
Hull trade program for the quota and barter system, we will tend to 
move into, I beUeve, the German type of economic system. I am 
opposed to this system because I do not believe it can lead to the 
efficient production and distribution of goods unless the energies of 
the state are concentrated upon some emotional and unified objective, 
such as rearmament or war. 

Dr. Keeps. Dr. Buell, in that connection, in your study of sub- 
versive movements abroad — communism, fascism, nazi-ism, and 
military Marxism in Japan, isn't it almost always true that they are 
associated with military-mindedness, with, as you say, some emotional 
and unified objective such as rearmament or war? Can you think 
of any such subversive movements that have not been tied to a 
military dictatorship of some sort? 

Mr. Buell. I think the result has been a military r-ictatorship, ^'ut 
certainly the Communist movement was not estah'"-"; --d originally oy 
a desire to estabhsh a vast armament program, li was a means tc an 
end, as I think it is in most every one of these countries. I think the 
Nazi Party wanted to throw off the chains of the Treaty of Versailles 
and wanted to remove the inequalities of the Versailles Treaty, but 
they found that once they moved in the direction they took, they were 
militarizing the whole country, but I don't believe it was a conscious 
policy in the beginning. 

Dr. Thorp. May I ask, when you are talking about controls, are 
you talking about Government controls? For example, would you 
feel that if foreign trade were controlled by the Webb-Pomerene 
Act, as such, that was a different form of control and not to be con- 
sidered in the same class? 


Mr. BujELL. I think that could be more readily watched by Govern- 
ment. As I point out later, I think international administrative con- 
trols must be estabhshed over international cartels. I can see a case 
for a cartel in certain cases of raw materials, but I don't believe, if 
we are going to have any form of world organization which will pro- 
tect the interests of the consumer countries, that these cartels can 
decide for themselves, without any superior responsibility, what they 
are going to do. And under the Webb-Pomerene Act you have that 

I read with much interest the testimony here before this committee 
several weeks ago.^ I think it was the Steel Export Association — 
wasn't it? — that showed to me the dangers of the Webb-Pomerene 
Act very decidedly, but it might be, nevertheless, useful in meeting 
the emergency conditions, particularly if the Government continued 
to control it, but when the Government itself sets the quotas there is 
nobody above the Government to protect it. 

Dr. Thorp. There is a distinction to be made between controls by 
the Government and controls by a business organization or by Fome 
other government. The thing you are most worried about is the 
matter- of control'by our own Government. 

Mr. BuELL. I am worried about a control by Government which 
fixes quotas, prices, and wages. 

Dr. Thorp. That is, the prices and quotas, are fixed by some other 
government over a commodity coming into this country; that doesn't 
worry you in terms of destroying competitive situations, so to speak? 

Mr. BuELL. In that country or here? 

Dr. Thorp. Here. 

Mr. BuELL. Why certainly. If those governments use that power, 
as they may easily do, without respect to their costs, to indulge in 
what we know here as unfair competition, I certainly think, as I 
endeavor to point out, that the Government has not only a right but 
an obligation to protect our individual interests against it. I can see 
how belligerent coimtries might, through power of government, 
dump huge quantities of goods in here, irrespective oi cost, simply for 
the purpose of getting exchange, which would destroy oiu- competitive 
market, and for the sake of preserving the competitive system here. 
Government would have to intervene, and I believe that the first step 
should be to negotiate, and say to the belligerent governments, "Since 
you already are on the basis of a war economy, you can put a quota 
on much easier than the United States can." If they don't do it, I 
think we ought to exercise these powers that we have to keep them out. 

Dr. Thorp. I just wanted to get clearly in my own mind as to where 
the line is to be drawn between the Government stepping in and doing 
those things, and this new phase of your testimony in which you 
prophesy State socialism when the Government does these things. 
Perhaps it is a matter of degree. 

Mr. BuELL. Certainly it is a matter of degree, as most things are, 
but there is much difference, in my opinion, between taking a concrete 
situation, such as silver fur from Canada, and saying to the Canadian 
Government, "Here is a situation we want to clear up by negotiation," " 
and issuing a law under which the Government would say that all 
requests for imports into the United States must come here to be 
licensed in accordance with a schedule of some authority in Washing- 

> Testimony of S. M. Bash, member of the board of managers of Tbe Steel Expcit A^ociation of 
America, is included in Hearings, Fart 20. 


ton To me there is not only a difference of degree but of principle 
involved if the negotiation with respect to silver fur fails, then it may- 
be we ought to resort to the Anti-Dumping Act or something like that 
to impose a penalty to keep it out. I don't see that that kind of de- 
fense under the Anti-Dumping Act is a step toward state capitalism. 
I tliink, on the contrary, it is an essential measure to protect our com- 
petitive system here. 

Dr. Thorp. I don't want to discuss in detail that particular point, 
because it is not important. I would like to suggest that my own per- 
sonal opinion is that you can't rely very heavily on an anti-dumping 
act as a form of defense. The type of evidence that is required, par- 
ticularly with regard to foreign costs and with regard to the effect 
on the domestic industry, is so difficult that experience would indicate 
that the Anti-Dumping Act, as it operates at present, is of very little 
effect; but I introduce that just as an aside. 

Mr. BuELL. That is why I indicated that possibly procedural 
changes in these laws to speed up action might be desired. 

Acting Chairman Borah. The Anti-Dumping Act might be help- 
ful in keeping things out which we do not want to come in, but the 
thing that seems to be most difficult to deal with is how we are going 
to control the matter of bringing into this country the things which 
we very much need while those things are under the absolute control 
of a foreign cartel. Take for instance rubber, which we have been 
discussing this morning. It would be within the power of this cartel 
to raise the price of rubber so as to be very destructive of a big industry 
in this country. I don't know, myself, how we are going to control 
that except through the mere power of persuading the Government 
of Great Britain to modify their position. 

Mr. BuELL. Well, there are two other alternatives. One is sub- 
stitutes. I am not an expert in these matters, but I understand that 
we can now manufactiu-e domestic rubber, chemical rubber, for about 
50 or 60 cents a pound. We are now paying, I think, about 20. The 
second is the development of rubber as a long-time project in Brazil. 
Those are the two alternatives. 

Acting Chairman Borah. Of course those things are possible, but 
I was thinking of meeting this situation as it now; confronts us. 

Mr. BuELL. I think we can do that now if it arises and, I don't 
believe it is going to arise. It is to their interest to obtain doUar ex- 
change here, and they have been very conservative, it seems to me, 
in the way they have exercised their control over rubber since the war 
started. But they will need our exchange much more, I think, than 
they will need all their rubber, and I think it is a matter of interest 
with them to see to it that the price is moderate, and if they don't 
then certauil;7 we have powers which could be exercised against them 
which are quite drastic. 

Mr. O'CoNNELL. It seems to me that it is very possible for people 
to have widely divergent views as to what the policy of Great Britain 
would be as regards what they will do in the price of rubber. Ad- 
mittedly they need foreign exchange. It is also true that they need a- 
much foreign exchange as they can get, and I take it that the highe^ 
the price of rubber, the more foreign exchange, assuming there i 
no buyers' strike, because they get more for their rubber. 

It seems to me it runs a little counter to general human experienc 
to assume that people who have the power to control price, when th* 


power is usually brought into play because of their influence on price, 
would not be expected to exercise that power in an effort to get as 
much as they could. 

Mr. BuELL. I agree that you can not entrust your own interest 
to a monopoly, and expect it will exercise self-restraint. 

Mr. O'CoNNELL. That is exactly what we are confronted with. 

Mr. BuELL. Yes. My answer would be that we have the possi- 
bility of substitutes in the case of rubber, but we also have very strong 
sanctions which we can exercise. 

Mr. O'CoNNELL. I am inclined to agree with what Senator Borah 
meant, that substitutes may be a long-range solution. 

Mr. BuELL. I don't imderstand that to be true. 

My understanding is that chemical rubber can be produced for 
50 cents a pound in this country, 

Mr. O'CoNNELL. That would mean that it might have the price of 
rubber below 50 cents, instead of 20, as it now is. 

Mr. HiNRicHs. Would you regard that as a reasonable form of 

After all, among other things, for example, we have been talking 
about 'the desirability of maintaining low prices in the automobile 
field. Rubber has played a part in the cost of automobiles and other 
products as well. An increase of 150 percent as a form of protection 
seems to me to be' some assurance that we can still run on rubber tires 
rather than go back to the horse and buggy, but as a form of economic 
protection, it doesn't seem to me to be particularly effective. Does 
it to you? 

Mr. BuELL. Well, as I point out, if this war goes on and spreads, 
the hope of getting a low-priced competitive economy in every country 
is going to disappear. I don't see how it is possible, as I am going to 
point out, to maintain a domestic low-priced competitive economy 
in a world dominated by monopolistic totalitarian governments 
controlling foreign trade. 

Acting Chairman Borah. I think that is manifest, but if the war 
goes on for another year or two, and an article like rubber becomes 
vital to a situation, we really now have no means of taking care of our 
situation — that is, I mean, effectively, of taking care of our situation, 
unless we can make a satisfactory arrangement with the government 
which controls the cartel. That is the way it seems to me, and it 
seems to me that it is a difficult problem zh^^. is presented here. 

We may control our own affairs, we may uu this, we may do that, 
but, for instance, suppose Great Britain sees fit to increase the price 
of rubber, and we say that "We think you ought to restrain your use 
of this power." She will naturally ask, "In whose interest is it to 
restrain it?" And she may say to us that "While you need rubber, we 
need wheat, we need corn. We need this and we need that. Now 
you won't let us have it unless we pay cash, and we haven't got the 
cash, so if you are goiug to ask for rubber, we ask for credit." What 
would we say? 

Mr. BuELL. I would like to hear your answer on that, Senator. 

Acting Chairman Borah. We would say credit, and the cash-and- 
^arry proposition would disappear like the mist before the sun. 

Mr. Buell. Well, Senator, if the State Department said to the 
British Ambassador that "If we can't reach an agreement on the fair 
price of rubber, the President will exercise his powers imder the act of 


September 8, 1916, to exclude British ships from our ports," do you 
think they would keep the price up? 

Acting Chairman Borah. Well, that would depend upon the war 
situation entirely. But the President would not say to Great Britain, 
in the present situation with reference to the war, or any situation 
which will arise with reference to the war, and Great Britain knows 
perfectly weU that the President will not say, "We will prolubit your 
ships from coming into our ports." They would know that better 
than we know it. 

Mr. BuELL. I can't speak for the President. 

Acting Chairman Borah. I can't speak for the President, but I 
know hjjn weU enough to know that he would exercise a vast amount 
of common sense in this matter. 

Mr. Buell. Of common sense? 

Acting Chairman Borah. Yes. 

Mr. Buell. Do you mean to say he would not exclude British 
ships from our harbors in order to bring down the price of rubber? 

Acting Chairman Borah. I do, if the war situation is as it is now, 
and the issues remain as they are now. 

Mr. Buell. Would Congress think of passing a law stopping the 
export of bombing planes in order to bring about the price of rubber, 
in their view? 

If Congress believed the price of rubber was too high, would it pass 
a law saying that unless, by such and such a date, the price came down, 
the export of bombing planes is hereby prohibited? Would Congress 
pass that? 

Acting Chairman Borah. Of course, you have said you don't know 
what the President would do, and I don't know what Congress 
would do. 

I bring up that illustration not with the expectation of its being a 
conclusive proposition, but it presents the evil of- the situation, as I 
see it. ' ^ 

Mr. Buell. Senator, if this war goes on, there are going to be 
manifold evils inherent in war, and I don't see how there is any 
absolute protection against these evUs. In fact, I think they are 
going to get worse. 

Acting Chairman Borah. I agree with you. 

Mr. Buell. Can I proceed? 

Acting Chairman Borah. Yes, sir. 

Mr. Buell. I am opposed to this system because I do not believe 
it can lead to the efficient production and distribution of goods unless 
the energies of the State are concentrated upon some emotional and 
unified objective, such as rearmament or war, and because I feel that 
the adoption of this system is incompatible with poKtical democracy, 
private initiative, and civil liberties. There is a grave danger that 
the United States will nonetheless move in the direction of State 
capitalism both because of tlie short-sighted demands of pressure 
groups within the United States and of the international situation. 
The keystone to the retention of the American system, therefore^ is 
the contmuation of the Hull trade program. Should this program 
be emasculated by giving one-third of the Senate a veto over each 
trade agreement, it would be tantamount, in my opinion to rejection. 

I also beheve that if we wish to preserve our economic and pohtical 
system during this present emergency and prevent price maladjust- 

124491 — 40 — pt. 21 15 


ments and inflation from taking place; if we wish to check the trend 
toward State capitalism in this country, government must adopt a 
policy of attacking the deterrents now holding back domestic recovery. 
The Temporary National Economic Committee has already inquired 
into certain monopoUstic practices of industry and such matters as 
fair prices. 

In my opinion, it should also examine such questions as whether the 
capital market is functioning properly; whether existing tax legislation 
discourages enterprise capital and purchasing power; whether exces- 
sive wage rates and other restrictive practices in certain industries, 
together with the lack of apprentices, will produce labor bottlenecks 
holding up recovery ; whether the railroads need to undergo far-reach- 
ing measures of consohdation. Our whole agricultural pohcy needs to 
be probed to determine whether it aims at merely cushioning necessary 
adjustments in agriculture, flattening out short-term market fluctua- 
tion, and bringing about soil conservation, or whether it is the begin- 
nings of State capitahsm. 

Dr. Keeps. Defining State capitalism, would you care to tell us 
what it is you understand by that? 

Mr. BuELL. By example, State capitalism is an economic system 
which you find in every great country outside of the United States 
today. France and Britain have had to adopt a form of it in entering 
this war, in which Government controls the major aspects of economic 
life, detailed economic decisions, licenses exports and imports, decides 
on priorities between this industry and that; controls private invest- 
ment, makes huge pubhc investments, fixes wages, quotas of produc- 
tion and prices. 

Dr. Keeps. You are not using it at all, then, in the ordinary 
technical economic sense in which State capitahsm merely means 
Government ownership and operation of at least the capitalistic 

Mr. Buell. Well, I think that distinction has been pretty well 
eliminated on the basis of European experience. The Russian system 
is a system of State nationahzation. I don't think the Russians would 
admit it was State capitalism. 

Dr. Keeps. That is what they call it. 

Mr. Buell. They call it State capitahsm? 

Dr. Keeps. Yes. 

Mr. Buell. But I think as far as results are concerned there is very 
little difference in practice between the war economy in Germany and 
the war economy in Russia. There are certain differences but it 
seems to me they have a good deal in common. I was trjdng to use a 
term which embraced all of those various forms. They are each 
different, according to the national characteristics. 

Dr. Keeps. You see. Dr. Thorp's point raised a while ago is still 
vital. There are forms of control such as the policeman at the 
comer and the red lights and green lights, which you will admit 
release enterprise and release movement. 

Mr. Buell. I won't admit it; I iasist they are absolutely essential. 

Dr. Keeps. I was trying a moment ago to see whether you made a 
distinction between forms of restrictive governmental controls and 
those that release the flow of production and flow of communication. 
I take it that you would agree that antitrust laws operate in the 
latter sense? 


Mr. BuELL. I want to say something about that in a minute. 
Dr. Keeps. I was wondering whether your distinction was one of 
civilian controls which are responsive to actions of Congress regularly 
elected, and the kind of controls which seem to me tend to subvert 
democracy, controls such as those you refer to m Germany, Italy, 
Russia, Japan; subversive movements that march in, usually, m 

Mr. BuELL. I don't think that makes much difference. I read 
recently an economic history of the German Republic, and it is 
quite a striking thing that the economic system of totaUtarian Germany 
was inaugurated by a democratic parUament, supposedly controlling 
the an ti- Weimar Republic. You had what you call a sy3tem of 
political wages, a system of political prices; you had 40 percent of the 
banks owned by the State, as you know; you had the nationalization 
of a large part of enterprise; you had labor legislation which went 
even beyond the Wagner Labor Act in prohibitiug company unions, 
and insisting that unions should be independent. 

Dr. Keeps. But you had cartels. 

Mr. BuELL. You had cartels in addition to what I am saying, but 
as far as the labor system is concerned, you had a system of com- 
pulsory arbitration, but the result of it is that the Government soon 
came to impose its wishes upon labor and capital equally imder the 
repubUc, and when the thing didn't work it was the Government 
that was blamed for all the woes of the country; the Nazis came in 
as a reaction and carried it a step fiurther. 

Dr. Keeps. You had a cartel system of operation of industry and 
the cartel backers, the chief one of which has only recently been 
compelled to flee, were the ones who financed and put Mr. Hitler in 
power. In other words any cartel system, any system of control 
which is not subject to democratic processes, is likely to be a mili- 
taristic, regimented system. 

Mr. Buell. I don't think that distinction is nearly as important 
as you do, Mr. Kreps. You had the democratic control in Germany 
but when you put the decision of prices and quotas of production in 
the hands of a parliament what basis does it have to operate upon to 
determine whether the allocation of resources is efficient or inefficient? 

Dr. Keeps. But that is not what happened, I dispute your facts. 
The price of potash was determined by the potash cartel and the 
cartel was dominated by large business concerns. If you get your 
economy dominated by u*responsible elements, then your economy is 
headed for the kind of regimentation that you have been talking about, 

Mr. Buell. Are you meaning to say that an elective legislative 
body or civil service which meets your definition of responsible, can 
decide prices, fix prices and quotas of production and wages and 
prevent these constant maladjustments which have arisen in both 
Russia and Germany? 

Dr. Keeps. No; I simply said they did not have the price-determin- 
ing function under the pre-Hitler German Government. 

Mr. Buell. You are not denying that the Weimar RepubUc had 
very wide social powers? 

Dr. Keeps. That is true. 

Mr. Buell. From my standpoint I would prefer, if this countrj 
gets into a situation in which Government has to control all pricfiw 
and quotas and production and wages, to nationalize the whole thing. 


Dr. Kreps. I am interested still to see you meet Dr. Thorp's 
point of the types of control that you feel do not involve this danger. 

Mr. BuELL. I think I am developing that, if I may finish this. 

In this connection I would like to point out the importance of the 
tariff as a means of checking domestic price increases, arising out of 
a monopoly or over optimism. In many cases our tariff duties on 
manufactured products are so high as to eliminate aU effective com- 
petition. The reduction of such duties would oft^n mean that the 
manufacturers would reduce their prices to a reasonable level, which 
would permit them to increase sales even in the face of foreign com- 
petition. In the case of commodities for which there is a flexible 
demand, reduction in price usually means increased consmnption, 
greater employment, reduced unit costs, and greater profits over the 
long run. The tariff is a powerful instriiment of bringing about a 
sound price policy in this country. 

A properly administered tariff pohcy, such as embodied in the 
present trade-agreement program, can serve as a check upon the 
freezing of administered prices at a high level. I would like to see 
our tariff lowered so as to admit foreign goods to the equivalent of 
say 5 or 10 percent of the domestic production of leading articles. 
Such a margin would create really competitive conditions in every 
industry and keep down prices to the advantage of the farmer and 
consumer. At the same time, limiting such tariff reductions to say 
5 or 10 percent of the domestic production would constitute a virtual 
guarantee of the best of the market for American producers. Here 
I am talking about tariff quotas and not actual quotas. 

Likewise the tariff can be an important instrument in the conserva- 
tion of natural resources. By lowering the tariff increased amounts 
of raw materials such as copper, petroleum, zinc, and other materials 
may enter this country and thus slow up the exhaustion of domestic 
reserves. At a time when domestic oil production is being prorated 
to conserve natural resources, the conclusion of the Venezuelan trade 
agreement of November 6, 1939, reducing the import tax from one- 
half to one-quarter cent per gallon on an annual quota from all coun- 
tries of 5 percent of the total quantity processed inside the United 
States, is important. 

In this kind of process the marginal high cost producer would 
probably be eliminated; but marginal high cost producers in certain 
lines of activity have got to be eUminated if the competitive principle 
is to function in this country and efficient production resumed. The 
workers displaced would then be absorbed in mof^ efficient pursuits 
elsewhere. One school of planning would give the central authority 
power to fix administered prices and to allocate quotas to conserve 
natural resources. It is much more consistent with the system of 
free enterprise to accomplish the same end through a wise poUcy of 
tariff reduction. 

I reahze that an attack on deterrents is difficult from the political 
standpoint, but I am convinced that this approach must be made if 
the American system is to continue to function. The Hull trade 
program and the antitrust prosecutions of the Department of Justice 
are, so far as I know, the only two concerted efforts now being made 
to reinove deterrents to the functioning of private enterprise and to 
unloosening the fetters upon efficient production. I beUeve this 
approach must be extended if we are to escape from a Government- 


directed economy which has descended upon nearly all the rest of 
the world. 

Finally, I am convinced that even the Hull trade program or a 
forceful domestic policy aimed at deterrents, will not succeed in main- 
taining and restoring the American system if the international situa- 
tion continues to deteriorate. Should Germany conceivably win this 
war, or should the whole of. Europe become dominated by the Com- 
mimist form of organization, Americans would be excluded from 
trading with Europe, at least upon a basis of competitive enterprise. 

The same thing will happen if Japd;n succeeds in establishing the 
so-called new order in Asia, for its object is to build up a vast self- 
contained unit in the Orient from which all outside competitive trade 
would be barred. , In its note of October 6, 1938, to Japan the United 
States declared that all shipping in China was becoming dependent 
upon a Japanese agency for allotments of space and stevedoring 
facihties, and that the Japanese Government was proceeding to 
organize a monopoly of both the wool trade and tobacco in North 
China, as well as two special promotion companies which would con- 
trol the investment and regulation of large sectors of economic 

Japan today has monopolized navigation on the Yangtze, excluding 
all foreigners. Partly as a result of the establishment of the "yen 
bloc" embracing North China, Manchukuo and Japan, America's share 
in China's total exports fell from 28 percent in 1937 to 11 percent in 
1938, while Japan's share increased from 10 percent to 15 percent. 
It is true that the imports to Manchukuo from the United States were 
larger in 1938 than in ' ^^37, but this was due largely to the purchase 
of American trucks ^ r Japanese armies. The trade which took 
place was noncompetitive and would be eliminated by Japan to a 
large extent if its self-pufficiency drive succeeds. 

Some observers even beheve that should Japan succeed in its objec- 
tives in China, it will not only monopolize trade to the detiiment of 
the United States but will utUize cheap and virtually compulsory 
Chinese labor to dump exports into foreign markets, even more exten- 
sively than it has done during the past 15 or 20 years. Moreover, 
Japan, if it carries out its present plans, will grow the cotton formerly 
imported from the United States by Japan. The industrialization 
of an independent China might mean the elimination of its raw-cotton 
trade with the United States; but in return an industriahzed China 
would increase its purchases of other articles from America. 

A China completely dominated by Japan, however, would mean 
the loss of the American cotton export market as well as of possible 
industrial expansion. 

Should Japan succeed in dominating also the South Seas, which 
now produce much of our tin and rubber, it presumably will have 
raw-material surpluses for sale, but the terms will be fixed by Japan 
largely alone. 

Thus, in the event of a long war, particularly culminating in German 
and Japanese victory, the United States may find itself excluded from 
foreign markets unless it goes out and vigorously fights for them, and 
will be confronted with the danger of foreign imports being dumped 
in this country produced by low-paid, overworked, and even con- 
scripted foreign labor, such as Germany today is imposing upon the 
Poles and Czechs. Should such conditions come into existence, or 


should a Communist system come to dominate both Europe and Asia, 
the United States would either have to ren9unce foreign trade and go 
upon a basis of self-contaioment, which in itself is a form of state 
capitaUsm, or it would have to go into export and import controls 
and embark upon a diplomatic if not miUtary struggle for markets. 
Consequently, the United States has a vital interest in seeing to it 
that a type of world reconstruction takes place at the end of tms war 
under which the system of private enterprise again can function. Even 
if Britain and France win this war, a long, drawn-out struggle may fasten 
upon them a state-economic system which will work against the long- 
term economic interests of the United States. Nevertheless, I believe 
that the United States has a far greater opportunity to induce them 
to restore some form of free enterprise and in reaching equitable agree- 
ments about international economic problems, than in case the 
totaUtarian states are victorious. 

To repeat, I fear the introduction of a quota or barter system, or the 
general restriction of exports — except possibly for such exceptions as 
have already been made in the case of tin scrap and heHum — for the 
purpose of meeting what may prove to be minor difficulties, will have 
profound repercussions upon American business and poUtical iustitu- 
tions. Domestic industrial freedom is inextricably bound up with 
a large measure of freedom in international trade. In a world of 
quotas and barter the state is bound to expand greatly its control over 
domestic industry. 

Virtually every economic and nationalist group in this country pro- 
fesses to beheve in democracy and free enterprise. If we wish to be 
free, however, w6 must understand the conditions of freedom. The 
genuineness of our assertions are going to be put to the test during 
the next few years both in the field of domestic and foreign policy. 

If Congress yields to the clamor of pressure groups and throws out 
the Hull trade program in favor of the barter system, the one remain- 
ing great power upholding a system of free enterprise will have 
hauled down the flag. I want to keep the flag flj^ing, but to do this, 
we have got to have a foreign as weU as a domestic poHcy. 

I have already raised some longer-range aspects of this problem 
than this particular hearing probably permits, but I hope very much 
that before it concludes its deliberations the Temporary National 
Economic Committee can inquire into the kind of a world order needed 
for the proper functioning of a free economy here at home. I do 
not envisage the establishment of free trade and laissez faire upon an 
international basis; but there is wide agreement that there can be 
no peace restored to the world until trade barriers are drastically 

Moreover, international administrative controls must be estabhshed 
over international cartels. Arrangements such as the Ottawa agree- 
ments and the preferential export tax on tin found in the British Em- 
pire must be drastically modified. Agreements must be reached upon 
competitive subsidies, whether of commodities such as wheat or sugar, 
or on merchant marines. Other international agreements looking to 
common action on pubhc-works programs and fiscal poUcies should be 

International lending for genuinely productive purposes must be 
resumed. Just as in our domestic economy, we must have effective 
Govermnent intervention, not only to control but also encourage 


private enterprise, as well as meet generally accepted social needs, 
so internationally the shackles now holding back world production 
must be removed by a judicial combination of private initiative and 
intergovernmental planning. 

In the present tense situation it may sound Utopian even to mention 
such possibilities. But I believe that unless we move in this direc- 
tion, our own interests will be greatly injured. Purely from the eco- 
nomic standpoint, this country cannot indefinitely meet ah armament 
bill which in the 1941 Budget may reach two and a half bilhon dollars, 
without suffering a further impairment in the standard of living, 
particulariy in the present state of our economy. Moreover, if we 
wish to prevent the loss of the greater part of our seventeen billiona 
of gold we must endeavor to rehabilitate a world economy on the 
lines of a modified gold standard. 

The maintenance and development of the American economic and 
political system depends, in my opinion, upon the restoration of a 
peaceful and orderly world. In contrast, a policy of passive indiffer- 
ence to foreign events means, I fear, that America will gradually 
drift into state capitalism, possibly brmging with it all the conse- 
quences which state capitalism, whether it be called communism or 
fascism, has produced in other countries. 

Dr. Thorp. Mr. Buell, you have spoken about the powers which 
the Government now has. Do you have any proposals for modifica- 
tions or new developments which you think ought to be adopted 
rather promptly? 

Mr. Buell. No, sir. I believe, if I may summarize, that first we 
should estabhsh how serious these maladjustments are going to be; 
secondly, we should endeavor to remove them by negotiation, and 
then if negotiations fail we should test the extent of the present 
powers. The only possible change which I would make would be 
procedural changes to hasten, to speed up, these questions of hearings 
and other matters which you have mentioned. I don't know enough 
about the technical aspects of those laws to be in position to make a 
definite proposal. 

Dr. Thorp. In regard to the trade-a^eements program specifically, 
do you feel there should be modification or extension of the powers 
now there? 

Mr. Buell. I would not propose it now. 

Dr. Thorp. It has been proposed that there should be congres- 
sional approval of trade agreements. What is your feeling on that 

Mr. Buell. I think that that, instead of facilitatmg procedural 
action would tie the hands of the Govemnaent so that they would be 
less able than at present to meet a situation as it arises. In the first 
place, Congress is not in session all the year, and in rnatters of tariff 
you have in past histoiy at least what we call logrolling, tradmg of 
special interests. I think it is perfectly consistent with democracy 
to delegate certain decisions, having defined the principle, to adminis- 
trative bodies. We have done that, the best example being the 
Interstate Commerce Commission in respect to railroad rates, and I 
think that if we discontinue that practice with respect to the trade- 
agreements program, the limits of which are defined by the statute, 
the extent of the reduction of which is defined by the statute, we will 
further hamstring the Government and increase the difficulty of 


meeting these situations quickly. The virtue of the trade-agree- 
ments program is that it does give a flexibility of negotiation which 
would be absent in the event of a statutory term or in thfe event of a 
requirement that Congress would have to approve the agreement. 

Acting Chairman Borah. Dr Buell, you spoke about pressure 
groups which are seeking repeal of the trade agreements. What to 
you mean by pressure groups? 

Mr. Buell. I mean groups which have limited economic interests 
at stake who are endeavoring to bring pressure. 

Acting Chairman Borah. What do you mean by pressure? Do 
you mean simply presenting their cause? 

Mr. Buell. I didn't say there was anything improper about their 
action. I simply said it should be resisted. 

Acting Chairman Borah. "Pressure groups" of course, as you know, 
has a certain meaning used on this Hill, and that is that effort is being 
made to do something other than to present actual facts with reference 
to the matter, political pressure, and so forth. 

Mr. Buell. I assume that has taken place, too. I would assume 
that these groups would make it very difficult for a man to be reelected 
if he voted against them. 

Acting Chairman Borah. That group would be the voters. 

Mr. Buell. It would be the voters, but I didn't say what they 
would be but I said I assumed these groups would make it as difficult 
as they could to prevent the man's reelection. 

Acting Chairman Borah. That is the business of democracy, is it 

Mr. Buell. Surely; that is why I have made these statements, so 
that the other fellow will get busy. 

Acting Chairman Borah. Yes, well; he will be busy. What I am 
trying to find out is whether you mean anything, when you speak of 
pressure groups, other than the effort of those who are dissatisfied 
with those agreements to present the matter in its proper way to 
those who make the laws of the country. 

Mr. Buell. I don't know what you mean by "proper." If you 
will leave that word out I will accept the definition. 

Acting Chairman Borah. What I mean by "proper" way is simply, 
as you see, by submitting it to the voters and letting the voters elect 
those who represent their views. 

Mr. Buell. That is perfectly all right with me, but my point is 
that the people who carry on the propaganda in this country for 
measures do it in a perfectly legitimate way from their standpoint, 
from what I regard as limited economic interests, whereas, the great 
mass of consumers, people who have most to profit by the policy, either 
don't understand it or are not organized to present their case. That, 
to me, is the great problem in our democracy, I am frank to say. 

Acting Chairman Borah. Well, it is altogether probable that the 
State Department is as well organized to present its side as the farmers 
are to present theirs. 

Mr. Buell. Government pi Dpaganda in a democracy isn't very 

Accing Chairman Borah. I wish I could believe you. The only 
pressure that I know of — and I think I am fairly familiar with it — 
IS an' effort to present this matter to the voters. Now if the voters 
in Nebraska, for instance, should be in favor of repeal, the voters in 


Massachusetts might be opposed to it, and when they come together 
in the Congress to vote upon the matter you would have an expression 
from the different parts of the country as evidenced by the action of 
the voters. That couldn't be considered in any proper sense a pressure 

Mr. BuELL. I am not saying whether it is proper or improper. I 
say we have a great problem in our democracy, the problem of organ- 
ized lobbies in Washington which are not registered. Congress has 
passed a law requiring the registration of foreign propagandists. I 
think that is fine, but I think we ought to have a law requiring the 
registration of domestic lobbies, and I think that is really a serious 
problem in our democratic government. I don't say whether it is 
proper or improper, but I am convinced that the general interests of 
the consumer and the people who believe in the broad aspects, in the 
long-term aspects of this problem, are not represented adequately in 
our system. 

Acting Chairman Borah. The only way you can have them repre- 
sented is through submitting the matter to the voters of the country. 

Mr. BuELL. The elections are on personalities and broad issues. 

Acting Chairman Borah. Yes; that is true. 

Mr. BuELL. And I don't believe that the Hull trade program or the 
antitrust laws as a rule is going to get into an election. 

Acting Chairman Bor.ah. However, the Hull trade agreement came 
from the Congress of the United States. Without that Mr. Hull could 
not act, supposedly. Now is there anything improper at all in return- 
,ing it to the Congress of the United States to receive its judgment 
anew as to whether it should be continued? 

Mr, BuELL. It has to be returned in June when the act expires. 

Acting Chairman Borah. It can expire without being returned, but 
is there anything improper in returning it to the Congress, that is to 
say in resubmitting it, in having the voters pass upon the question? 

Mr. BuELL. Of course not. I would be delighted to have the voters 
pass upon the question. 

Acting Chairman Borah. I understood frcm your statement that 
you supposed that there was a certain lobbying interest aside entirely 
from what the people might have to say that were seeking 

Mr. BuELL (interposing). I certainly believe there are lobbying 
interests. I think that is a great problem in our Government. 

Acting Chairman Borah. Do you know anything about who thev 

Mr. Buell. I have seen a number of various studies on the lobbies 
in Congress. 

Acting Chairman Borah. Do you know of any lobbying interests 
in connection with the repeal of this reciprocal trade law? 

Mr. Buell. The organizations working against it are a matter of 
record down here. 

Acting Chairman Borah. Do you know of any organizations except 
such organizations as are affected, like the farm organizations, people 
like that? I don't know of anybody really who is opposing it excepting 

Mr. Buell. I don't know as to .who the detailed organizations are. 
I don't think that is quite relevant to my point, that we need to have 
organizations which would exert equal pressure — I don't use that word 
in any improper sense — representing a much wider point of view, the 


point of view of the consumer and people interested in the long term, 
in addition to the people who are interested in a limited interest. 

Acting Chairman Borah. If this question should be resubmitted to 
the people in the next campaign that would take it to every voting 
precinct in the United States. 

Mr. BuELL. I am all for that. 

Acting Chairman Borah. What is that? 

Mr. BuELL. I am all for it. 

Acting Chairman Borah. That is all. Thank you very much, 

The committee will stand adjourned. 

(Whereupon, at 4:30 p. m., the committee recessed until 10:30 a. m., 
Thursday, December 7, 1939.) 



United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:45 a. m., pursuant to adjournment 
on Wednesday, December 6, 1939, in the Caucus Room, Senate Office 
Building, Mr. Avildsen, presiding. 

Present: Mr. Avildsen, acting chairman; Messrs. Arnold, Hinrichs, 
and Brackett. 

Present also: WiUard Thorp, Department of Commerce; Kemper 
Simpson, Federal Trade Commission; Theodore J. Kreps, economic 
adviser, and John E. Hamm, economist for the committee. 

Acting Chairman. Avildsen. The committee will be in order. 

The first witness will be Mr. Nelson. 

Do you solemnly swear the testimony you are about to give in this 
proceeding shall be the truth, the whole truth, and nothing but the 
truth, so help you God? 

Mr. Nelson. I do. 


Acting Chairman Avildsen. WiU you give the reporter your name 
and business position? 

Mr. Nelson. My name is Donald M. Nelson, executive vice 
president of Sears, Roebuck & Co., Chicago, 111. 

Acting Chairman Avildsen. Will you tell us how long you have been 
in that business, Mr. Nelson? 

Mr. Nelson. I have been in that business since April 1, 1912. 

Acting Chairman Avildsen. Do you have a statement you would 
like to read? 

Mr. Nelson. I have a short statement which I would like to read 
first, Mr. Chairman. 

When the present European war broke out about September 1, 
a very rapid switch from a buyer's to a seller's market took place 
almost overnight, and at the same time, as you know, basic com- 
modities had a very rapid rise in price. For the moment it looked as 
if prices on finished products, influenced by the rising commodity 
prices, might run away as they had done during times in the past 
when similar rapid rises took place in basic commodities, particularly 
in 1937. However, industry in the present situation, it seems to me, 
displaj^ed great statesmanship and prevented a run-away price 
situation, and what is even more to its credit, I believe displayed 
greater statesmanship in advising its customers not to load up on 




The present generation of industrialists have learned through bitter 
experiences some very interesting lessons on the necessity of keeping 
a balance in our economy, and have learned that stability in price 
structure is more important to their welfare than is a rapidly rising 
price structure. As a matter of fact industry has learned that rapid 
increases in prices, even though they may temporarily bring profits, 
are bad for all concerned, including themselves. 

Dr. Thorp. Mr, Nelson, when you use the word "industry," are 
you referring there to manufactures, or would you want to broaden 
that to include the distribution activities? 

Mr. Nelson. I am thinking, Dr. Thorp, of industry in general 
terms, manufactures and distribution as well. 

It has learned that paper profits are not real. 

The present price situation is quite different from that experienced 
during the last World War. I shall not try to develop this except 
to say that the price rise during the last World War developed much 
more slowly, probably because the last World War found us in the 
decline of a depression, and the present European war found us coming 
out of a depression. 

The retailer had some unpleasant experiences during the last World 
War which prepared him to tackle the present situation with judgment 
and restraint. During the latter period of the last World War prices 
and wages soared rapidly and even after the war came to an end prices 
continued on their upward way. The suspension of hostilities caused 
war industries to rapidly demobilize and the purchasing power of 
the people was rapidly decreased but prices still remained high. 
Not alone were prices of consumer goods abnormally high during the 
World War but due to the high earning power of workmen and farmers, 
there was a tremendously large demand for higher priced luxury 
merchandise; the sale of $10 to $15 silk shirts was common. Not 
alone did the doUar shirt go up to $2.50, but there were very few of 
them sold relatively. 

And I would like to stress that point, Mr. Chairman, because it 
seems to me it is a thing that hasn't been well covered in reviewing the 
experiences of the retailer during the last World War. The retailer 
got a great deal of blame for high prices, but the demand came so 
largely on high-priced luxury merchandise due to the abnormal 
earning power that the public generally got the impression that prices 
were much higher than they really were. 

Keeping his stocks in line with the demand of the buying public, 
the retailer had his stocks loaded with high-priced merchandise and 
there was a shortage of lower priced staples. Then the public stopped 
buying high-priced goods and the retailer found his inventory com- 
pletely unbalanced. The general feeling of the buying public was 
that retail prices were entirely too high. The Government felt forced 
to take drastic action to bring about a decrease in the cost of living 
and during that period the Lever law, which had been passed by 
Congress some time previously, was attempted to be rigidly enforced 
by the Department of Justice. 

Fair-price committees were set up in various communities to take 
arbitrary action in many cases against the retaler. The retailer has 
always borne the brunt of criticism in periods of rapidly rising price 
because it is he who must pass the higher prices on to the consumer, 
and no one likes to pay higher prices even when they feel they are 


justified. During the period the retailer lost caste in the minds of the 
public. I feel in most cases the criticism was unwarranted. But, 
more important than losing caste, was the tremendous losses the 
retailers had to take in marking their inventories of high-priced 
goods down to lower levels. The profits made during the inflationary 
period were wiped out. This experience is fresh in the minds of the 
present generation of merchants, and in the present situation they 
have exercised their influence to prevent a threatened run-away price 
rise, knowing full well that they must take most of the blame, justifi- 
able or unjustifiable. The retailer realizes his great responsibility 
to the buying public, and acting as he does, as purchasing agent for 
the buying public, has as his aim keeping on the sane path with respect 
to the pricing of his merchandise. 


Mr. Nelson. I should like to point out that although commodity 
prices advanced in some cases as much as 25 percent during the first 
2 weeks of September, and the wholesale prices of all commodities 
rose some 6 percent, Fairchild's composite index of retail prices 
shows an increase of less than 2 percent. Piece goods, and men's 
and women's wearing apparel retail prices show a rise of less than 
that, showing,- I believe, that the retailer has done a good job in 
preventing prices from increasing faster than purcahsing power. 
Of course, unless the wholesale prices decrease some from the present 
level, the retailer eventually will have to pass on higher prices. How- 
ever, at present I feel the retailer has the situation very well in hand. 

This price situation is one that industry should continue to give 
a great deal of thought to, and must exercise the soundest judgment 
in continuing to keep the price level in line with purchasing power. 
I think there is no dispute over the fact that our major problem is to 
utiUze all of our economic resources to the fullest extent. We should 
do everything we can to keep our production going at full speed. 
To do this we must keep our price levels in proper balance with the 
purchasing power of the people, particularly of the farm groups. 

Industry must continue to keep prices relatively low, depending 
upon increased production wherever possible to bring about decreased 
overhead and lower posts. Labor leaders, too, should exercise their 
statesmanship in not allowing increased hourly wages to raise unit 
costs to a point where prices will be out of line with purchasing 
power, and production slowed up. Workers should depend upon 
increased employment to raise weekly and annual wages. None of 
us want to see the mistakes of 1937 repeated. 

I do not at the moment see any necessity for any governmental 
agency to police the price situation. I beheve that industry is fully 
aware of its responsibility and that competition between retailers 
in the field of distribution Avill act as the necessary brake in preventing 
abnormal price increases, making governmental action unnecessary. 

When we think of the price situation today, we make the mistake, 
I beheve, of comparing prices with subnormal levels of the year 1939 
rather than making our comparison with normal levels. Prices at the 
present time, and I believe even for next spring, on necessities in con- 
sumer goods, will be low even after the necessary small increases are 
made. I have before me a record of our general catalog selling prices 


from fall 1923 to date, and I shall cite several instances for the benefit 
of the Committee.^ 

Eighty -square percale, which is the material used in making house- 
dresses and children's dresses, an item very important in the budget, 
in the fall of 1929 sold for 26 cents a square yard, and even in the 
spring of 1934 sold for 18 cents, and now, at the present time, in our 
catalog at 12 cents. For spring 1940, 80-square percale wUl be 
priced at 13K cents, just a little more than half of the fall 1929 price. 

An 81 by 90 standard sheet is now selling for 71 cents; in the fall 
of 1923 this same sheet sold for $1.59; and for spring 1940 will be 
priced at 76 cents, a very nominal advance. 

Double L sheeting, which sold in the fall of 1923 at $1.55 for 10 
yards is now selling for 62 cents for 10 yards, and for spring 1940 
will be sold at 69 cents for 10 yards. 

A standard chambray work shirt which sold in the fall of 1923 
for 85 cents is now selling at 47 cents, and will be sold at 48 cents 
in the spring of 1940. 

Chairman Avildsen. Are those increases due to the wage-and- 
hour law? 

Mr. Nelson. To a very large extent. 

Chairman Avildsen. To what extent? 

Mr. Nelson. I should say that about — you see, these prices that 
I am reading show an increase of somewhere around 7 to 8 percent. 
Now, of that, in the case of cotton goods, the testimony before the 
committee, which recommended a wage to the Wage and Hour 
Administration, of which I was the chairman, showed that it would 
bring about an increase of some 5 to 6 percent, even with the increase 
of wage to 32}^ cents, which was the wage recommended and which 
was put into effect by the Administrator. 

Chairman Avildsen. Would that increase be in the retail price or 
the wholesale price? 

Mr. Nelson. Sir, that was the increase in the wholesale price. 

Chairman Avildsen. Five to six cents? 

Mr. Nelson. That's right — 5 to 6 percent, not cejits, which would 
be the same when passed on to the retaU price. 

Chairman Avildsen. The retail price would go up by the same 

Mr. Nelson. The retail price would go up by the same percentage, 
due to the wage-and-hour bill alone. Now, we must also remember 
that the textile industry hasn't made any profit for a long number of 
years, and while it has not been particularly concerned with that 
phase of the situation at the present time, when we have to switch 
from a buj^er's to a seller's market, the null is naturally going to make 
a profit if it can. Some of that increase is due to an attempt on the 
part of the mills to make a profit, which I think we can't condemn 
them for. 

Chairman Avildsen. Would you say that we are now in a seller's 

Mr. Nelson. Definitely in a seller's market, although it is, in the 
last few weeks, I believe, switching back to a buyer's market. The 
big rush of buving is over and as soon as the production runs out, 
I believe we win see a switch again from a seller's to a buyer's market, 

' For further discussion of this subject see pp. 11277. infra. 


which will tend to bring those prices more into line with the actual 
increase made by the wage-and-hour bill alone and by the price 
advance in the price of cotton. 

Dr. Kreps. At what percent of capacity was the industry operating 
in June of this year? 

Mr. Nelson. Well, I don't have those 

Dr. Kreps. At what percent of capacity is it operating now? 

Mr. Nelson. I would say that it is operating at full capacity at 
the present moment. 

Dr. Kreps. Suppose it increased its operations from, let's say, 
75 percent of capacity to a hundred percent of capacity, would labor 
costs tend to go down or go up? 

Mr. Nelson. Well, labor costs, of course, would tend to go up, but 
overhead and fixed charges and so forth on a percentage basis would 
tend to go down. 

Dr. Kreps. Therefore, would the labor cost per unit of production 
tend to increase or decrease? 

Mr. Nelson. Well, the labor cost per unit of productivity, of 
course, might increase and still have prices go down. 

Dr. Kreps. Does labor eflSciency and productivity in the textile 
industry increase as industry produces to capacity, the way it does 
in every other industry? 

Mr. Nelson. I think it does, sir. 

Dr. Kreps. And when labor productivity increases, does not the 
cost per unit of product decrease? 

Mr. Nelson. It tends to; yes, sir, it does. But it is a question — 
I am not an expert on textile manufacturing so I can't answer your 
question with any great degree of authority, but I should say that the 
increase due to the wage-and-hour bill would offset that increase in 
efficiency due to productive capacity. 

Mr. Arnold. But I thought you said that the increase of cost per 
unit of material had gone up about 5 or 6 percent? 

Mr. Nelson. That is right, sir. 

Mr. Arnold. That means that after they have gone up to full 
volume, even after that, it is increased 5 or 6 percent? 

Mr. Nelson. No, sir; I haven't the figures on that; I am not an 
expert in textile manufacturing, but I was saying that the testimony 
before our committee, the Wage and Hour Committee, prepared by 
the Bureau of Labor Statistics, estimated that the increase due to 
raising the wage to S2% cents would be around 5 to 6 percent, sir. 

Mr. Arnold. Were those figures based on full capacity or 75 
percent capacity? 

Mr. Nelson. I don't recall, sir. 

Dr. Kreps. Those figures would probably be based on the same 

Mr. Nelson. I presume they were. 

Dr. Kreps. Therefore, it is easily conceivable that when industry 
increases its operations from 75 percent capacity to full capacity, 
the wage cost per imit of product might easily have gone down rather 
than up? 

Mr. Nelson. That could be true. I am sorry that I don't know 
enough about that particular thing to be able to answer your question. 

Mr. Arnold. And the cost, however, of the product has gone up, 
the wholesale price has gone up? 


Mr. Nelson. Has gone up, yes. 

Mr. Arnold. And therefore there is a very fair chance that that 
wholesale price is not based upon the additional price of labor. 

Mr. Nelson. I think that in the case of cotton textiles, particularly 
in sheets and wide sheeting, it is my personal opinion that the price 
advance has been greater than has been justified. 

Mr. Arnold. Therefore, your statement that there was no necessity 
to poUce the price situation would have to be qualified a Uttle bit. 

Mr. Nelson. I am afraid that I didn't make very clear what I 
meant there, Mr. Arnold. 

L saw after I read this, when I came in — I wrote that section 'ast 
night on the plane coming out, may I amplify it a minute? 

Mr. Arnold. I interpret that to mean that you don't think there 
is any need for any antiprofiteering legislation. I will agree with you. 

Mr. Nelson. That is exactly what I mean. I didn't mean the 
existing agencies of government — I felt this way; the existing agencies 
of government, the Department of Justice, T. N. E. C, and the 
Federal Trade Commission, had, in my opinion, suflEicient police power 
to prevent abnormal price increases due to abnormaUties of monopoly 
and SO" forth, and that it was not necessary that antiprofiteering, or 
separate, distinct bodies, be set up to police the price situation. That 
is exactly what I meant by that situation. 

Mr. Arnold. I thought we agreed and I wanted to make that 
perfectly clear. 

Mr. Nelson. I notice it is stated rather unfortunately. 

Mr. HiNRicHS. May I ampUfy one statement? 

Mr. Nelson. That is a man who can 

Mr. Hinrichs (interposing). This isn't shedding light, I think, on 
the problem of the committee, but merely to clarify the record. 

The figures to which Mr. Nelson referred, showing the wage dis- 
tribution, were compiled by the Bureau of Labor Statistics. The 
estimate as to the increased labor costs that might result in 32}^ cents 
were made by the Wage and Hour Administration. That is not a 
field in"~which the Bureau of Labor Statistics has been functioning in 
connection with these wage hearings. It is entirely incidental as far 
as this conimittee is concerned. It was based on the figures that were 
prepared by the Bureau of Labor Statistics. 

Mr. Nelson. That is a more accurate statement. 

Mr. Arnold. Of course, I think it should be added, for the purposes 
of the record, that the present Anti-Trust Division has only 10 men 
on the project for the United States, so I would say it is unlikely that 
we are getting perfect enforcement, and I would say there is a very 
fair chance that some of the theoretical price raises due to higher 
wages in textiles are not based upon actual wages paid, but only upon 
the wages which they ought to pay if there were better enforcement. 

Dr. Kreps. Summarizing that, would you not say that with the 
increase in the percent of capacity of operations in the textile industry 
there had been an increase in labor productivity? 

Mr. Nelson. I would think so, sir. 

Dr. Kreps. And, therefore, possibly a reduction in per unit labor 
costs, at least that, is the experience m other industries. There has 
certainly been a reduction in per unit overhead costs of all sorts. 

Mr. 'Nelson. That is right, sir. 

And may I point this out to the committee, that when I tell ^ou 
that a sheet wmch is now priced at 71 cents, wiU be priced in the spring 


of 1940 at 76 cents, that does not take into account all of the price 
use that has occurred at the present moment. We must anticipate 
prices, because our prices remain in effect for 6 months. These prices 
will be m effect m our catalog until July of 1940, and we must anticipate 
what^ we believe the actual price increase in the wholesale commodity 

Dr. Kreps Isn't it true, moreover, that there were plants in the 
textile industry already paymg more than the minimum provided in 
the wage-hour law, at least in certain areas of the country, were there 

Mr. Nelson (interposing). Right. 

Dr. Keeps. These would not find their costs of production affected 
at all by the increase m wages given to certain people in certain areas 
where wages were below the wage-hour minimum? 

Mr. Nelson. That is v^y true, sir, except that what happens in a 
norma situation is this: The price at which the commoditv is sold is 
controlled for them very largely by people who may have been paving 
very low pnces, and they may not have been able to get the prope? 
price for their product, due to competitive situations, due to paymg 
lower wages than those set up. ' f j & 

You and I are competitors, and you are paying a lower wage and 
you set a certain price for your product. I niay be paymg a higher 
wage because I feel that that is the social thmg to do, or I am forced 
to competitively, or by any number of reasons. You set my price to a 
veiy large extent assummg we are makmg exactlv the same product 
and there is no difference in relative value of the product from the 
consumer's point of view. 

Mr. Kreps In your experience with businessmen, Mr. Nelson, 
do you find that the hard-pressed firms, the smaU firms, are the ones 
that dominate the pnce picture? 

Mr. Nelson. In certain industries that is true. 

Let us take, for instance, the field of cotton work garments, work 
shirts, overalls, cotton garments for children. You will find that the 
margma mills, to a very large extent, do set a price pattern which all 
must follow. 

Dr. Keeps. Generally, however, you would state that the larger 
firms which on the whole pay the better wages, make the better 
profits, would tend to set the price? 

Mr Nelson. When you get out of this very highly competitive 
field ot cotton garments and textiles, I would say you are right 
*v u \^^^- Therefore it is problematic, it 'is debatable whether 
tHere has been this increase in costs of 5 or 6 percent which is alleo-ed 
to have occurred. '^ 

Mr. Nelson. No, I believe that the 5 or 6 percent increase m costs 
IS actual. 

Dr. Keeps. Despite the decrease in overhead cost per unit? 

Mr. Nelson I was gomg to qualify that to this extent, that I do 
not know on what those prices are based. We went into those prices 
very closely in the committee, because it was quite important that 
we know under the law that making the recommendation for a wage 
would not decrease employment. It is a fact, of course, that as 
prices go up the volume goes down, unless all move up together, unless 
there is a balance in our economy. You can't have one price segment 
sticlang its head out and increasing its price without decreasing the 

124491 — 40— pt. 21 16 


volume, and we went into those figures very, very carefully, and I 
believe them to be as accurate as you could make prognostications. 

Dr. Keeps. On the assumptions made. 

Mr. Nelson. That is right. I am not qualified to tell you whether 
or not 

Mr. Arnold (interposing). May I call your attention to a few 
other assumptions which I think are implicit in those price levels. 
No one knows much about this, but you would say, wouldn't you, 
that 10 men in the Department of Justice enforcing the wage-hour 
law all over the United States wouldn't get much enforcement, 
wouldn't you? 

Mr. Nelson. Yes, sir; and I think, sir • 

Mr. Arnold (interposing). And, further than that, you would say 
that it would be the tendency of an employer who wasn't paying the 
wages and hours nevertheless to base his prices on the wages? 

Mr. Nelson. Definitely. 

Mr. Arnold. Therefore the wage-and-hour law, unenforced, would 
have the tendency of raising prices without raising the purchasing 
power of labor. In other words, it would give them the psychological 
excuse for raising prices, and since it was unenforced, wouldn't give 
the additional purchasing power to labor which would balance it. 

Mr. Nelson. That's right, and I should say that one of the major 
problems before this administration is the enforcement of the wage- 
and-hour law, and enough people ought to be put on so there will be 
rigid enforcement. We can never know whether a law is sound or 
unsound unless it is enforced, and if you have one segment of a com- 
munity which is paying a price and another segment is not, you will 
certainly have an unbalanced economy. 

Mr. Arnold. You also have this situation in unenforced law, don't 
you: It can be used by certain organized groups in some communities 
to get the increased wages? 

Mr. Nelson. That is right. 

Mr. Arnold. And that will create a tendency of the people in those 
communities to lose their business 

Mr. Nelson (interposing). Right. 

Mr. Arnold. To other communities where it isn't being enforced, 
so that unenforcement will not only have the difficulty of raising 
prices without compensating wage advancement, but it will also dis- 
locate industry by moving it from an enforcement area to a nonen- 
forcement area. 

Mr. Nelson. I believe that is absolutely sound. 

Acting Chairman Avildsen. Do you think the psychological ad- 
vantage Mr. Arnold mentions with regard to getting the higher price, 
even though they are not paying the higher wages due to evasion of 
the law, would exist in a buyers' market, or only in a sellers' market? 

Mr. Nelson. In a sellers' market, and we are talking now about 
the present situation, where there is a sellers' market. In a buyers' 
market, then, it would have the opposite effect. The man who is 
paying the lower wage would depress the price situation, particularly 
in those communities where they were observing the law. 

Acting Chairman Avildsen. How long has the sellers' market 
existed in the textiles? 

Mr. Nelson. Since September 1, and it is weakening rather than 
strengthening at the present moment. 


Acting Chairman Avildsen. And if that tendency continues, we 
will not necessarily have this situation Mr. Arnold describes? 

Mr. Nelson. Except that it will always be there, and it is impossible 
for me to tell from a theoretical point of view just how important it 
will be, but I am assuming that the proper thing to do is always to 
enforce a law that is on our statute books. 

Acting Chairman Avildsen. I agree with you, but that particular 
psychological advantage is only good in a sellers' market. 
Mr. Nelson. That is true. 

Acting Chairman Avildsen. And on the law of average, that 
market is a rare market in the textile industry. 

Mr. Nelson. That occurs in my experience only in a period of 
rapidly rising prices, or where some set of conditions creates a shortage 
or scarcity. 

Acting Chairman Avildsen. In the last 10 years, how many sellers' 
markets have you had in textiles? 

Mr. Nelson. In textiles probably not over three. I am 'making a 
guess at that; it isn't from an accurate^ recollection. 

Acting Chairman Avildsen. Were they of relatively short dura- 
tion — a few months, perhaps? 
Mr. Nelson. I would say 3 to 4 months. 

Mr. Simpson. Mr. Nelson, from what you said to Mr. Arnold, I 
assume that you do not believe in antiprofiteering legislation or in 
price fixing. 

Mr. Nelson. At the present moment I do not see the necessity for 
it. That is what I answered to Mr. Arnold. 

Mr. Simpson. I am not going to suggest by my question that I do 
believe in governmental price-fixing or antiprofiteering legislation, but 
m line with that testimony, it occurred to me that you might give your 
reaction to this conclusion. 

During the last war there was a good deal of price fixing, govern- 
mental price fixing. The Federal Trade Commission, the War 
Industries Board, fixed prices on a great many things, yet by your 
testimony you admit that there was a rapid and disastrous rise of 
prices for which industry, and economy as a whole, had to pay during 
the 1921-22 reaction, and for some years afterward. 
Mr. Nelson. That is right. 

Mr. Simpson. I am not suggesting that I believe in antiprofiteering 
legislation nor in price-fixing, except that I think cost-finding for the 
purpose was useful, because it answered a great many of -^ q-.i is- 
tions about which we have to speculate, that is, questions > a regard 
to the effect of the rise in wages and change in overhead costs per unit 
of product with change in use of the existing plant capacity. 

I think the cost figures are useful because they give us a picture of 
the unjustifiable increase in prices in this industry or in that industry, 
but what I would like to know is, if prices begin to rise very rapidly' 
what would you suggest? ' 

Mr. Nelson. Well,- sir, if there appears to be a situation that 
mdustry itself can't handle, and I mean by that that I believe the 
first step in any situation is for industry itself to try to handle the 
situation without governmental interference— we are talking strictly 
on the antiprofiteering and price-fixing and so forth— then I believe 
some agency like T. N. E. C, who can, in situations where industry 
can t , handle and explain the price rises, might be very useful, assum- 


ing we had a complete run-away situation, wmcJti I do not anticipate, 
and, in addition, a situation where the industry itself could not 
handle it. 

Let me give you an example of exactly what I mean. The National 
Retail Dry Goods Association, I think, at the very outset of this war, 
took a very wise action when they set up an emergency committee 
of merchants from all over the country who were to meet and discuss 
among themselves price increases and call upon industry itself, 
who had made prices, assuming that run-away prices had occurred, 
as we all felt might have been probable the first week of the war. 
The very effect of that has a deterent effect when an industry must 
explain its prices to its customers, and I believe that that is a very wise 
way of handling the situation within industry itself. 

Now, assuming that that industry will not explain and can't ex- 
plain, and that it has got together — I believe there are agencies of 
the Government who can be called in. The Department of Justice 
is very anxious to find those particular cases. I think, if I know 
them rightly, they will be very anxious to know every instance where 
price increases, quite general among the trade, can't be explained, so I 
do not see the necessity for a separate body set up on the basis of 
cutting across the present Unes of law enforcement. That is exactly 
my position in this case. 

Mr. Arnold. May I use you as a sounding board for what is 
essentially testimony on my own part? 

Mr. Nelson. All right, sir. 

Mr. Arnold. If I have stock in the Winchester Arms in New Haven, 
and it goes up on account of the war, the psychological tendency 
would be to call that profiteering, wouldn't it? The increased profits 
of the Winchester Arms would appear to be profiteering, wouldn't it? 

Mr. Nelson. No; may I interrupt you in your giving your testi- 

Mr. Arnold. May I use another example. Let me contrast this. 
Suppose there is an enormous increase in a war industry in New Haven 
which causes an opportunity for householders to double the price of 
rents. Now, the chances are that in an ordinary poUtical situation 
the householders are close enough to the plain people so that the price 
of rents ought be considered legitimate, and the increase in the war 
profits would be considered illegitimate. That is a pohtical guess, 
isn't it? 

Mr. Nelson. Yes; pohtically, perhaps. 

Mr. Arnold. And therefore, when you start to draw up an anti- 
profiteering law, you are going to try to get a law which will justify 
the low income householder in increasing his rents, and which will 
attempt to curb the profits of the Winchester Arms? 

Mr. Nelsqn. Yes; I should say that would be a very natural thing 
to do. 

Mr. Arnold. And you can't state that in' terms of Winchester Arms 

, and householders, can you, because the law must be general ; therefore, 

you try to get an abstract standard of unreasonable profits, don't you? 

Mr. Nelson. That is right. 

Mr. Arnold. That ^vill nm undoubtedly into a test of constitution- 
aUty, bjat even if it doesn't, you will find that many of the worst cases 
of profiteering are on the part of people who are losing money, isn't 
that right? 


Mr. Nelson. That is true. 

Mr. Arnold. And, therefore, the tendency of the enforcement of 
such a law is to boost prices. In this instance, suppose that all the 
small retailers should start to profiteer on sugar. You would attempt 
to attack them on the ground that they were making unreasonable 
profits, and they would show you that they had lost money in 10 years, 
and 80 percent of them went bankrupt, and you would end that in- 
quiry by raising the prices, wouldn't you? 

Mr Nelson. That i» right. 

Mr. Arnold. Isn't that generally the tendency of antiprofiteering 

Mr. Nelson. I think it is. Of course, the thing that has always 
worried me in connection with the expression "profiteering," just as 
in the use of the word "monopoly," is that the use of the word "prof- 
iteer" has such a broad application and doesn't apply to all situations. 
The householder who had raised his rent might be just as much a 
profiteer as a very large industryj and still we don't think of him as a 

Mr. Arnold. We unconsciously think of a profiteer as a man who 
is making a lot of money. 

Mr. Simpson. Out of us. 

Mr. Arnold. And actually the worst profiteers are often people 
who are pricing themselves out of the market and losing money. 

Mr. Nelson. Right; exactly, sir. 

Mr. Simpson. Having had some experience with the Food Ad- 
ministration, having made some analysis of the Food Administration 
experience, and having studied the costs and the work done ia price 
fiixing in the Federal Trade Commission, it occurs to me that the most 
unsuccessful way to control prices was through the method of profit 
legislation. The Food Administration determined that every man 
should make the same rate of profit. The low cost man was assumed 
to make the same rate of profit on his invested capital, or on his cost, 
as the high cost man, which made for a difference of prices in the same 
market, and that is an economic absurdity. 

The other method of fixing prices would be more reaching toward 
the Federal Trade Commission way, on the basis of costs. Obviously 
it is an impossible job to determine the costs of producing every 
commodity in the United States and to try to fix prices on the basis of 
costs of production. 

Mr. Culver, who is now dead, a former member of the Federal 
Trade Commission, a very able man, once suggested an idea I would 
hke to try out on you. He said, instead of going to all of this trouble 
of determining costs of producing everj'^ product and establishing the 
bulk line, the marginal producer, and fixing the price on the basis 
of marginal costs, why shouldn't we take an average of prices for 
various products over a 3-year period preceding this period and fix 
prices on that basis of that average? What would you say as to 
that, if we should need governmental control of price? 

Mr. Nelson. Well, I would want to think that through a little 
more, but I beheve that price fixing is never effective, and I think that 
in any situation that I know anything "febout, or contemplate hap- 
penings, even if unfortunately we should be drawn into the war, 
assuming that you have free competition and no collusion, I think 
that the competitive situation will prevent abnormal prices for any 
period of time. 


Now, there may be a very short period, but I think that the com- 
petitive forces, if kept in free motion, and that there be no back-ups, 
no dams to the forces of competition, will take care of this price 

Mr, Simpson, Mr. Nelson, you must believe that there were some 
industries that were competitive in 1917 and '18 and '19, there were 
some industries in the United States that were still competitive, 
were there not? 

Mr. Nelson. Yes; I think that is true, sir; but I don't believe you 
had exactly the same set of competitive situations in those days that 
you have now. 

Mr. Simpson. Even if there were no collusion, the temptation to 
raise prices in time of wQ,r, when the demand increases, particularly 
after a period of bad business, such as we had from '32 on in this 
decade and in 1912, '13, and '14 in that decade, is a great temptation 
to get as much as the traflfic will bear. I mean, you can't expect 
businessmen, even if they are not in collusion, to hold down prices, 
can you? 

Mr. Arnold. The farmers were attempting to raise prices at the 
beginning of the last war, weren't they? They would have liked to 
have done it, wouldn't they? The cotton people would have liked to 
see prices go up. 

Mr. Nelson. I think everyone would like to see their own go up 
and not have to pay more for anything that anybody furnishes. 

Mr. Arnold. Did the cotton people succeed in getting their prices 
up during that campaign to buy a bale of cotton? 

Mr. Nelson. They did not. 

Mr. Arnold. And the reason was there was free competition? 

Mr. Nelson. May I answer your question with regard to prices? 

Unless there is a scarcity which brings about an artificial restraint 
wliich eliminates, of course, competitive forces, but I don't foresee 
that at the moment because of our productive facilities and the decrease 
in growth of our population and a lot of other factors, I believe that 
our present productive facilities have changed the situation entirely 
from the period that prevailed in 1917. 

Mr. Simpson. You mean the capacities have increased so much. 

Mr. Nelson. Yes. 

Mr. Simpson. Aren't you, Mr. Nelson, talking about a period 
before the Government went into the market and started to buy and 
put up prices? After the Government started to buy, after these 
so-called shortages appeared, there were rises in every price. 

Mr. Nelson. That is right. 

Mr. Simpson. And we* are now envisaging a period when that will 
happen, not perhaps at the present or not in 1940 — we are considering 
'15, 1916, 1917, and what Aay happen if those so-called shortages 

Mr. Nelson. Well, perhaps; the whole thing seems so improbable 
to me — that such a set of conditions will happen — that is is hard for 
me to get my mind focused on what to do if it does happen. 

Mr. Arnold. Suppose it does happen, suppose there is a drastic 
shortage in some commodity. Do you think that the Government 
is going to be able to lower the price when there is a tremendous 
shortage ? 


Mr. Nelson. I do not, sir; I don't believe they ever have been 

""^MfARNOLD. In other words, competitive forces as with the 
farmers, may create problems, but they will take care of prices. 

Mr Nelson. That is right; I believe that to be true. 

Acting Chairman Avildsen. It is a fact, though that competition 
among the buyers wiU cause prices to rise m a period of shortage. 

Mr. Nelson. In a period (d abnormal shortages. 

Acting Chairman Avildsen. The competition causes the price to 

"Mr. Simpson. Especially the Government suppliers isn't t^^^^^ 

Acting Chairman Avildsen. Yes; that is true. In 1920 the rises 
that we had in a great many commodities were due to the biddmg 
hptween the buvers for the commodity. Isn t that truef 

Mr NelsoT Yes, that is true; but you also have to view the whole 
th^g in its perspective m order to answer that question. You had an 
entirelv different set of conditions. , x„+;^„ 

One of the reasons that during that time your transportation 
facmties weren't as efficient as they are today was that we didn t 
haveihe speed of transportation, and one of your ^f f ^7J^^^^^^^^^ 
with the tremendous volume of business you did ^^V^^^^^^^^^^^f^^^^^"^ 
far ahead because of your transportation f^^^.^^^;^^^' J^^^^^^'i^^d J^ 
Todav vou have your consumer groups quite actively organizea an 
over thJcountry, who I beUeve are going to be very vocal if a set of 
conditions comes about which causes abnormalities as between com- 
mun ties to arise. I just think that your whole set of conditions today 
Sso Sent from what they were at that time that it is very hard for 
me to see just Xt set of conditions might brmg about this so-caUed 
?^riceS because I am so unalterably opposed to price fixmg. I 
a thatVhryou start fixing prices you have to -mP gte^^^^^^^^^ 
ment the whole economy, because one step leads to the other, ana i 
Sn^t conceive of any place where you start fixmg prices at one part of 
the economy without fixing a lot of other factors, which leads you mto 

' rt REPrwfth reference to price fixing would you say that it 
ma^e ^W^erence by whom the price fixing was done, whether a 
fody t^h gove?^ental sanction or a body without governmental 

^^Mr'^NELSON No, sir. It makes no difference in my thinldng, 
be^use^th gove^^ental sanction even, other factors have to be 
controUed The minute you control prices, set prices, you must con- 
trol production ; the minute you control production you must control 

he price of labor, and so on right straight ^«^' .X^^^^^utVv^^^^^^ 
until verv soon the whole economy is regunented the mmute you start 
oS this price fixing at any place in the economy, m my belief, other 

''''^r'nit::'TZ:Z::T^:re wer, a situation ^J-e the Gov- 
emment had to put in a Veiy large order -^-^ J^^^,^,^^^^^^^^^^^ 
^flrkpt the tradition of condemnation proceedmgs is a better tradition 
Znnr^crfixing isn't it? For mstance, if the Government wants to 
buT 'loTofla^d The beaten path is for t^^-,^« f- -^;;,?3^^^^^^^ 
condemn the land and keep it down rather than to do it by price tixmg 
all land in the community. 
Mr. Nelson. Right. 


Mr. Arnold. And that principle followed with large Government 
purchases would be a better principle. 

Mr. Nelson. I believe that that can be done, that that is a very- 
possible thing to do. 

Mr. Arnold. Were you aware that in 1931 with the tremendous 
increase of prices in Germany due to the unrestricted operation of the 
cartel system, they did appoint a commissioner to fix prices? 

Mr. Nelson. Yes, sir; I am aware of that. 

Mr. Arnold. I understand that they succeeded in lowering no 
prices whatever because of the political forces in such a situation, that 
they only lowered the price of beer and chimney sweeps and some- 
thing of that sort. Those political forces, even if you got a theoretical 
price fixing, would operate in any situation. 

Mr, Nelson. Definitely, in a democracy such as ours, and I think 
the tendency when prices are fixed is to set prices too high in a de- 
mocracy rather than set them too low. 

Mr. Simpson. As a matter of fact, the p^rices fixed during the last 
war were often so high the manufacturers sold under those fixed 

Mr. Nelson. I believe that to be true. 

Mr. Simpson. They might have been called chiselers but they did. 
In line with Mr. Arnold's statement, when the Government purchased 
it did insist upon costs and a basis for determining a fair price, but my 
line of questioning or testimony had an entirely diflerent point of 
view. When the Government comes in and buys, makes large orders, 
giving large orders, it has an effect on all prices, not merely on the 
price of that product which the Government itself takes, and that has 
a tendency to raise prices. 

Mr. Nelson. Well, are you talking there of the cumulative effect 
of increased production on purchasing power? 

Mr. Simpson. No ; I am thinking of Government buying in time of 
w^ar; it tends to raise prices generally. 

Mr. Nelson. Oh, in time of war, possibly so. 

Mr. HiNRicHS. Doesn't the effect of the Government buying depend 
quite as much upon the way in which the Government places its 
orders as upon the machinery through which it places them, whether 
it tries to use price fixing or condemnation principles or anything else? 
Take, for example, the case of your police shoes that you haye listed 
down here. I ought to know immediately how many adult males 
there are in the country— about 30,000,000 might not be a bad bet, 
with a production of 30,000,000 pairs of shoes in the year, or something 
less than 3,000,000 a month. If the Government insisted upon satis- 
fying an order for 4,000,000 pairs of shoes for 2 or 3 months' delivery 
you would expect that to kick prices out through the sky, no matter 
what machinery you had, perhaps not for the Government, but cer- 
tainly 5'ou would expect in your next catalog to be pricing poHce 
shoes substantially higher, wouldn't you? 

If any time you have a Government order coming in for a huge 
volume in proportif)n to capacity and for very short delivery, even 
though it didn't affect the Government price it would certainly affect 
the price that retailers would have to charge. 

Mr. Nelson. Oh, quite definitely that is true, Mr. Hinrichs. 

Mr Hinrichs. So that the way in which Government orders are 
placed, the gradualness with which they are introduced into the 


market, using time as one of the essential dimensions of the order, is 
quite as important a device as far as the Government is concerned in 
controlling prices as anj'thing in the way of legal machinery, isn't it? 

Mr. Nelson. I would think that was true, and of course in con- 
templating what would happen to prices in the event of our entrance 
into the war, it would seem to me that today when wars are being 
fought, as they are, largely by industry, our whole productive facilities 
would have very largely to be turned over to the prosecution of that 
war, and in doing that there isn't any doubt but what we might have 
to make complete changes in our domestic economy, in retail com- 
petition and a lot of other factors. I am not answering your question; 
I am trying to assume during normal times. Now if the Government 
comes in and we have to utilize the full resources of our industry to 
win that war — and that is what we would have to do, it takes today 
some 17 men behind the lines to support 1 man in front, whereas 
formerly, during the l^ist war, it was 8 to 1 — that means that we should 
have to regiment olir industry, and just how to contemplate it at the 
moment is something that I am not authority enough to say. 

Mr. Simpson. Mr. Nelson, what do you think of this idea? Even 
if we didn't go into price fixing because the experience of the last war 
shows that it wasn't very successful, yet it might be useful to have a 
number of industries covered by cost investigations so that we could 
watch and see whether the price increases were justified by costs per 
unit of product, even though those costs were not used for statutory 
purposes, were not used for fixing prices. What would you think of 
having costs on many basic commodities in order to determine 
whether the price increases were justified by costs? ^ 

Mr, Nelson. Well, it would be probable in view of the very, very 
rapid rise in price caused by artificial factors, assuming large Govern- 
ment buying and all of those things, that you might have to have some 
method by which retailers who if they felt prices unjustified were 
being asked of them which they in turn would have to pass on to the 
consumers, could be helped; it seems to me it would be very helpful 
to the retail profession to have some sort of information of that kind. 
Naturally, the informed consumer will not blame the retailer for the 
price increase. He can't be informed unless he knows what price 
increases are justified. 

I am talking now only in case of abnormalities which I do not 
foresee at the present time at all. I don't see them in the offing. 

Dr. Kreps. Certainly at the present time you would like to know 
whether there has been an actual increase as alleged in costs of pro- 
ducing certain cotton textiles, in view of some of the considerations 
which have been previouslv mentioned; namely, the fact that the 
industry is operating at a large percent of capacity, that overhead 
costs and other fixed charges per unit have gone down, and so forth. 

Mr. Nelson. We make it our business to know. 

Dr. Kreps. Although you would admit that at the present time 
we don't really know what the costs of textiles are, whether they are 
lower or higher. 

Mr. Nelson., You mean the general pubHc information as to 
whether they are lower or higher? 

Dr. Kreps. Yes. Neither in the Government nor so far as I know 
among consumer organizations nor probably among other business 

> Subject resumed p. 11266 infra. 


do we really know whether today the per-unit cost of textiles, certain 
textiles, has increased, say, due to the wa^e-hour law, or whether the 
wage-hour-law increases that we think might occur and would occur 
if the industry operated at the same capacity have been more than 
absorbed by decreases due to these other factors. 

Mr. Nelson. That is right, but assuming that there can be no 
collusion on the part of textile maniifacturers in the setting of those 
prices, it is my contention that competitive forces when they get out 
of line will bring them into line very rapidly in our present economy. 
It might help to know that prices should only have gone up 10 percent 
instead of 11 or 12 or 15, but I think that competition will very quickly 
bring them into line today, assuming that there are no illegal collu- 
sions, which I am sure, with the Department of Justice watching, 
there can't be. 

Dr. Kreps. You would agree, then, that if you have volunteer 
price fixing and there is a good deal of volunteer price fixing in the 

Mr. Nelson (interposing). That is a natural thing to come about. 
I think that is a perfectly natural thing that it does come about. 

Dr. Keeps. You would agr^e that the presence of an emergency 
demand, such as war demand, would tend to bring about greater 
disturbances in prices than would occur ordinarily when, we will say, 
the buyers have more control and retailers can exercise more restraint? 

Mr. Nelson. Yes; assuming that you have artificial shortages, 
that is true. 

Dr. Keeps. Would you define an artificial shortage? When you 
say artificial shortage, do you mean that the industry is operating 
at capacity and that there is a demand for more than the capacity of. 
the industry? 

Mr. Nelson. Yes. For instance, suppose that the Government, 
assuming Mr. Hinrichs' situation takes a large number of shoes, we 
will say takes 40 percent of the production of the shoe industry, and at 
the same time you have your unemployed aU going back to work and 
wanting shoes; that might temporarily bring about an artificial short- 
age in the particular type of shoe that those people wanted to go back 
to work with. That is what I call an artificial shortage. Or you 
might take hides, you might not have enough leather to go around and 
have buyers bidding for lots of leather. 

Dr. Keeps. Then if you have increases in prices occuring on the 
order of, say, 25 or 30 percent, and if prices behave in what we call 
staircase fashion — remain at one level for a long time and then jump, 
then remain at another level for a long time, and then maybe fall — 
would you say that such price increases could be due to artificial short- 
ages if the industries concerned are operating at, let's say, 55 to 70 per- 
cent of capacity? Would you call that an artificial shortage? 

Mr. Nelson. No ; not if they are operating at 75 percent of capacity, 
I wouldn't. 

Dr. Keeps. That would then be an instance where volunteer 
price fixers are utilizing a favorable situation and probably increasing 
greatly the responsibilities of the Department of Justice in enforce- 
ment of the antitrust laws, would it not? 

Mr. Nelson. Well, I wouldn't want to answer that, categorically; 
I would want to know a lot more of the set of conditions and the 
picture. For example, in the present instance in the case of prices on 


sheets and sheeting, I think prices are higher than they should be. 
However, I do not think that that is collusion, just from my experience. 
I think that has been due to the taking of an abnormal amount of jute 
bagging in the world for various purposes, and that particular con- 
struction of cloth may be used for the making of bags. My point 
is that that rights itself very quickly and the consumer doesn't suffer 
necessarily in the meantime, because of these competitive forces I am 
talking about. There is enough inventory brought ahead so that the 
prices do not rise. 

In the case of sheets, prices have not yet risen to the consumer. 
The retailer has been in many cases feeding out his inventory at the 
prices that he bought the goods for, based on previous costs, even 
though the cost in the basic market has advanced some 9 percent. 
Discounts have gone down from 45 off Hst to 35 off list. Still, if you 
go in the open market you won't find the price of sheets has increased 
to any great extent. That is where the retailer exercises statesman- 
ship in not taking advantage of an immediate increase in the price 
of sheets to raise the price of his own. Part of that is due to these 
competitive forces that I am talking about, and the utilization of 
supplies which are on the market. Within a short period of time 
those "prices will seek their level. Does that answer your question? 
Dr. Kreps. Yes; it does. 

I have one other question. I noted from your testimony that mod- 
ern war is an industrial war and therefore the major thing that the 
economy needs is maximum industrial production. 
Mr. Nelson. That is right. . 

Dr. Kreps. Do you feel the economy reaches maxunum industrial 
production under conditions of competition? 

Mr. Nelson. Oh, yes. . .,11 

Dr. Kreps. And that it can shift its production most rapidJy when 
there is greatest flexibility under competition? 

Mr. Nelson. That is right. , , ^^ i , tttt 

Dr. Kreps. Dr. Thorp has pointed out that m the World War pro- 
duction never reached levels in 1918 and '19 that had been reached 
earlier, before extensive controls, military and otherwise, had come m 
to disrupt the economy. Wouldn't it be true m a modern war that 
any governmental action such as antitrust action which keeps the 
economy flexible would tend to keep that economy producmg at the 
full and make that economy have maxunum effectiveness for fightmg 
the modem kind of war? 

Mr. Nelson. Wefl, of course, I believe that a free economy is always 
the most efficient kind, and I think a free competitive situation will 
produce the maximum flexibility to an economy. That is one of the 
reasons why I am so fundamentally opposed to price fixing as such^ 
because I think it tends to freeze situations m the economy which 
prevents the utilization to the maximum. You do not get any play 
of competition. For example, when a price gets too high today, unless 
you have a law which compels the consumer to buy he doesn't have 
to buy. He stops buying and production goes down again. We had 
that happen in 1937. If you follow the record of 1937, I think the 
prices went entirely too high, went out of line with purchasing power; 
consumers didn't buy and prices came back in Ime again, only they 
always go just as far below the normal level when they go down as 
they go above. 


Mr. Arnold. It is perfectly true, isn't it, that in a period of flurry 
consumers are apt to rush in and raise prices for no good reason? 

Mr. Nelson. When they believe there are going to be shortages, 

Mr. Arnold. There are 1,400 consumers' organizations with which 
Mr. Donald Montgomery, of the consumers' counsel, is in touch. 
Those organizations are very poorly informed; they are willing and 
anxious to do something, but they are very poorly informed. Don't 
you think that an information service to those consumers might do 
something in preventing some of these flurries? 

Mr. Nelson. Yes; if it could be done quickly enough and be 
informative enough. Now, I think that the great difficulty with 
information services, particularly on costs, is that they can't be 
prompt enough. Naturally, if the Government is going to say, 
"This should be the proper cost," it is going to have to do that after 
a long and tedious investigation of what are costs, because those of 
us who went through the N. R. A. experience, as Dr. Thorp did, know 
that costs are not a definite thing. They are indefinable in many 
cases, and I believe that to do that on the basis of costs quickly 
enough, in our economy, to give the consumers the tiling they want — 
I thought through that very carefuUy, and it seemed to me at first 
that perhaps an information service was the ideal way to handle it, 
Mr. Arnold; but as I think back to the great difficulty of getting 
agreement on what are and what are not elements in costs, I am 
rather discouraged in feeling that that is the way to tackle the situation. 

Mr. Arnold. Well, let me give you an example of where I think 
information services work. In agriculture, all over the United States, 
there are county agents who are in touch with the farmers, generally 
educating them on agricultural problems. 

Mr. Nelson. That's right. 

Mr. Arnold. It seems to me that that service has created a great 
deal more inteUigent buying on the part of farmers of the things they 
have to buy — cattle and sheep and feeders and things of that kind — 
than they had before that information. 

Mr. Nelson. That's right. 

Mr. Arnold. And it probably has done at least sometliing to iron 
out the violent swings up and down of production, overproduction and 
underproduction. Don't you think that possibly something like that 
county agent system to consumers might be developed in each State? 

Mr. Nelson. Yes, I think there is a very interesting activity there 
to be explored. As a matter of fact, you do have now, as you know, 
with the county agents, county extension people who are teaching 
"buymanship" to the women in the country. I think the women in 
the country are getting more information on how to buy and what to 
buy than people in the cities are. I think one of the necessities is 
to give the people in the cities some of that same kind of information. 

Mr. Arnold. Now, suppose that this man in each State, put there 
for experimental purposes, should also be in touch with aU of the retail 
trade associations ; he would probably find that the secretaries of those 
associations were more interested in the iong-run conduct of the 
association than they were in the particular short-run profits of any 
of their members, wouldn't they? 

Mr. Nelson. That would be hard for me to answer, sir. 


Mr. Arnold. Well, there would be made, if this willingness on the 
part of the retailers and the retail associations exists, as you point 

Mr. Nelson (interposing). It does definitely exist. 

Mr. Arnold. There could be made a very important liaison arrange- 
ment between these consumers and the association? 

Mr. Nelson. That could be done. Now, if you are talking about 
the trade association of purchasers of the material, I would say that 
that probablj'- was true. 

Mr. Arnold. Well, the trade association or the local merchant 

Mr. Nelson (interposing). That's right. 

Mr. Arnold. And so on, and so forth. The local merchant 
doesn't know a great deal about his own buying, does he? 

Mr. Nelson. Yes; I think he does. 

Mr. Arnold. You think he does? 

Mr. Nelson. Yes; I do. I think his whole success depends upon 
how well Jie buys. 

Mr. Arnold. Yes; but his success is not conspicuous if you look 
at his bankruptcies. 

Mr. Nelson. Well, that is true of most all of us. 

Mr. Arnold. Well, no; I think there are more bankruptcies in local 
merchants than there have been in concerns hke Sears, Roebuck. 

Mr. Nelson. That is because there are more local merchants. 

Mr. Arnold. In percentage, what does the percentage run, about 
80 percent, doesn't it? 

Mr. Nelson. I think if you use the record in the mail-order business, 
you would find in the early days of the mail-order business there were 
that same record of failures. 

Mr. Arnold. But not today? 

Mr, Nelson. Because there aren't as many mail-order concerns 

Mr. Arnold. I was trying to build up a case for the superior 
efficiency of Sears, Roebuck, not for size. 

Mr. Nelson. Well, modesty prevented me from answering you. 

Mr. Arnold. In other words, the same agent could not only assist 
the consumer in his buying but also perform a useful function in the 
buying of these retailers? 

Mr. Nelson. Yes; that could be so; I can see that. 

Mr. Arnold. For informational purposes? 

Mr. Nelson. I could see that an information service of that kind, 
provided the difficulties of getting at accurate enough figures and 
authoritative enough figures, quickly and promptly enough, could 
be overcome, could be of tremendous value to the economy as a whole. 

Mr. Arnold. Now, of course, in the county agency, suppose that 
their figures are no further away, at worst, than the figures in other 
commodities, but nevertheless they have introduced a knowledge and 
a technique of buying in farmers over a period of years which is far 
superior to the old method, in spite of the fact that the same difficulties 
of guessing on this and that product that the bnyers are buying exist 
as on anything else; now, that might be hoped for among consumers 

Mr. Nelson. I think there is an interesting field there to explore; 
that is a verv interesting field to explore,^ and I wouldn't want to say 
ojffhand, witkout thinking it through very completely, just how that 


might be. done so it could be of value to the economy as a whole; 
that is, informing not alone retailers, small retailers 

Mr. Arnold. I am anticipating in there some- testimony I have to 
give tomorrow. 

Mr. Nelson. Oh, I see. 

Mr. Simpson. Mr. Nelson, do you think you have to have complete 
and accurate costs for the current period in order to check price 
increases? ^ Wouldn't it be satisfactory, for example, on cotton 
sheeting, say, cotton sheets, to have the cost, we will say, in 1936-37, 
know what the costs were then, and then introduce certain factors for 
changes in wages and changes in prices, and with adjustments for 
overhead based on different rates of capacity, couldn't you figure pretty 
well what the cost of sheets in 1939 are on the basis of what they were 
in 1937 and 1938, or would you get a pretty good indication? 

Mr. Nelson. Yes; you would get indications. The only difficulty, 
as you know, when the Government put out the information, it would 
be attacked, and unless the information is accurate, it is subject to 
attack, and when it is subject to attack, in a democracy like ours, you 
have all sorts of influences brought to bear all along the line on the 
agency- doing that particular job. 

Mr, Simpson. I can't agree with that, Mr. Nelson. I think that 
the Government has made many cost studies in many industries J 
every department of the Government is making them, and they 
haven't been attacked. The Federal Trade made a good many, 
the Tariff Commission has made many cost studies, and there have 
been very few attacks on costs during past periods. Then, with 
certain adjustments, the retailer, the consumer, the Government, 
could know whether the price increase was justified. I am not 
suggesting that these cost indicators or cost estimates be used as a 
basis for price fixing ; I am merely suggesting they be used as informa- 
tion services in the way Mr. Arnold suggested. 

Mr. Nelson. Perhaps I misunderstood your question. I thought 
you were asking me the question: Could we use approximate costs or 
should they be actual costs? When you refer to the studies of the 
Federal Trade Commission and the Tariff Commission and others on 
costs, the Department of the Interior, those are studies, that took a 
long period of time. I was merely answering to the question of givin 
approximate costs. When you give approximate costs, they are sub 
ject to attack unless they are very close to the actual. 

Mr. Simpson. Well, take petroleum refining, which just happens 
to come into my mind; I could mention seven or eight other examples. 
We have costs from 1924 to 1934-35, for every year, of all the refineries 
in the United States, the important refineries and some of the small 
ones. Wouldn't it be relatively easy to bring that material up to date? 
The Tariff Commission, the Federal Trade Commission, are doing just 
that sort of thing in certain industries. Wouldn't it be useful to expand 
that kind of service? 

Mr. Nelson. It would be. 

Mr. Simpson. As a guide? 

Mr. Nelson. It would be very useful. As I say, I have toyed with 
the whole question of whether or not authoritative information given 
to consumers would be of value, and came to the conclusion that it 
would' be too slow a job to be of real value to them. 

' For previous discussion of this subject see p. 11261 gupra. 


Mr. Simpson. You mean to find the actual cost of producing cotton 
sheets today, you would have to wait until the period was over before 
you could, and the books were closed, before you could find the 
actual cost? 

Mr. Nelson. Exactly, and in the mean tune, the cost had gone 
somewhere else. 

Mr. Simpson. Doesn't the manufacturer do exactly that? Isn't he 
brought cost sheets by his cost accountants, which are really esti- 
mates, until the books are closed at the end of the year, which serve 
him as an indication of the price below which he cannot sell and 
make a profit? 

Mr. Nelson. That is true, except that so many factors depend 
upon the amount of his productive facilities that he is using, you see. 
Now, you make estimates of cost and then you determine your margin 
above or below that in an industry, but if you follow the cost sheets 
of an industry, you will know that is constantly varying with the 
amount of production that is going through your plant. 

Mr. Simpson. That is one of the adjustments we have to consider, 

Dr. Thorp. Mr. Nelson, I would like to get back to this niatter 
of some of the factors that have been operating recently. I thuak it 
would be very helpful if you could give us some indication as to what 
consumer buying has been over the last few months. 

Mr. Nelson. Consumer buying has been good, but not in anv 
sense hysterical. I mean, the consumer hasn't fallen all over himself 
to go in and buy goods. He didn't — I think he rather yawned when 
people talked about price increases and just said, "Oh, yeah?" and 
was buying, as he needed the goods. 

Dr. Thorp. That is, you don't feel that at the time of our so-called 
flurry in early September, there was active causation coming from 
consumer buying? 

Mr. Nelson. No; I do not. I think it was not due to consumer 
buying at all, sir. 

Dr. Thorp. Now, our present rate of production is up some 30 
percent over it was last summer. Would you feel that that rate of 
production parallels any new demand which is inaking itself evident? 

Mr. Nelson. Well, I have the feeling that production is running 
ahead of demand at the present time; just how far ahead, of course, 
we have no figures to show, except that I really believe that the unit 
increase in sale to the consumer has been equal to the unit increase 
in production of consumer goods. Now, just where that inventory 
is and whether it would be troublesome, is one of the things that I am 
trying to make up my mind on at the present time. 

Dr. Thorp. Are there considerable shifts from time to time in the 
inventories held by retailers? 

Mr. Nelson, ibs; particularly of large retailers, particularly when 
there is a violent switch, such as occurred now, from a buver's to a 
seller's market, and naturally, one goes in to buy — I am talking now 
about the larger retailer — goes in to buy all the goods that he can 
get up to the limit of his facilities to store them, his capital, and so 
forth, at the old price before the switch took place, and there always 
is a reservoir of goods at the old price, which go rapidly into inventory, 
when that switch takes place. 


Dr. Thorp. Would you feel that one of the important factors of 
the last several months has been a demand from retailers to build up 
inventories at the old prices? 

Mr. Nelson. No; I think it has not come from retailers particularly. 
I think if you view the inventories of retailers and the deniand for 
consumer goods as such, I think you will not find that that increased 
production came just from that field. I think it came from industry 
in general building up itself, rather than the retailer. 

Dr. Thorp. In other words 

Mr. Nelson (interposing). From my experience, the retailer has 
beeu very moderate in building his inventory at the present time. 

Dr. Thorp. So that the gap between the rate of production and the 
flow of goods in the consumer's hands has, or is, piling up inventories 
back in the system prior to the retailer? 

Mr. Nelson. Prior to t*he retailer, I believe. Now, what I think 
has happened, when we had relatively — we will say that an inventory 
was a hundred milUon dollars just prior to September 1. All industry, 
including producers of all kinds, built that up, we will say, to a hun- 
dred and ten, and then bought from hand to mouth at a hundred and 
ten, rather than allowing it to pile up. I think inventories are fairly 
well in hand, from what I know of it, and not out of line particularly 
anywhere. But when you made the switch from the buyer's to the 
seller's market, the inventory went up as a result of that, and then 
hand-to-mouth buying occurred from that point on. Do you follow? 

Dr. Thorp. Yes. Do you feel that there are threatening at the 
present time any shortages of goods in any important field? 

Mr. Nelson. I don't know of any in any important field. 

Dr. Thorp. Do you feel that we are pressing against our capacity 
to produce in any important field? 

Mr. Nelson. I do not; not in relation to sales at the point of the 
consumer sale. 

Dr. Thorp. So that from the point of view of a general summary 
of the demand situation and the supply situation, as it exists at the 
present, consumer demand at one end and the ability of industry to 
produce at the other end, you don't see any threatened shortages 
which would presumably reflect themselves through these competitive 
forces, which you referred to in higher prices? 

Mr, Nelson. I do not, except, as I said, in the case probably of 
wide sheeting, where we had an abnormal situation due to the bag 
industry buying wide sheeting or sheetings in place of jute, which they 
formerly used for bags, and I think that was purely temporary. 

Dr. Thorp. Shifting to another point — did you want to ask some- 
thing, Mr. Hinrichs? 

Mr. Hinrichs. Just on that one question; wide sheeting is one of 
the two or three cotton textiles for which normal equipment is not 
interchangeable, isn't it? 

Mr. Nelson. That is right; the looms must be wider than the 
ordinary, and therefore 

Mr. Hinrichs (interposing). Therefore, if this shift from jute to 
cotton were to be a permanent shift, you would expect to see some 
increase in equipment? 

Mr. Nelson. Oh, naturally. But that would be purely a tempo- 
rary situation, and there would be equipment built very quickly to 
take care of the increased production. 


Mr. HiNRiCHs. So that you have something there which is more or 
less strictly in line with normal or orthodox economical thinking and 
unanticipated demand, sudden demand, on the equipment of an 

Mr. Nelson. That's right. 

Mr. HiNRiCHs. That forces prices up, and the profit margin prob- 
ably along wii/h it, for the time being, but does not indicate in any 
sense a crisis condition. 

Mr. Nelson. Not at all. If that profit margin continues, those 
mills now producing unprofitable lines due to intense competition 
will get into the thing in a very large way. 

Mr. HiNRiCHs. Or even the present mills making wide sheetings 
may expand; either way. 

Mr. Nelson. Either way. 

Dr. Thorp. You spoke about the interest of the retailer in keeping 
prices down. Why is he particularly concerned with holding prices 

Mr. Nelson. Well, he is concerned in at least two or three direc- 
tions. In the first place, the retailer knows that when the price level 
moves up too rapidly and his customers haven't gotten the propor- 
tionate increase in their purchasing power, he loses business. The 
retail trade is a very competitive trade, and no one wants to lose a 
position in the industry, so that when prices move up too rapidly, 
that particular retailer will lose his position if prices go up too high 
in ratio to his consumers. You have another set of conditions that I 
think force the retailer to do it. He realizes that as his prices move 
up, he must have more capital in order to have the same assortment 
of goods; in other words, if a retailer today had his inventory at 
$10,000, to take a small figure, enough for him to have a stock of 
goods, if prices go up 15 percent, he must have $15,000 in capital to 
have the same assortment of goods. In other words, it takes more 
money to run his business. Now, the retailer has learned, because 
he has been stung during the last decade, or rather two decades, 
from 1920 — we had the experience ol 1920, the fall of 1920, the rise 
again and then the fall — and he knows that when prices go up too 
rapidly, they are bound to come down and when they come down — 
or let's put it another way: As they go up, he can't raise his prices 
as fast as goods go up, but when they come down, he has to drop 
them as rapidly as they fall or his consumers may stop buying, due 
to the competitive play. Perhaps I have generalized too much in 
that, Dr. Thorp, but that is 

Dr. Thorp. Under the present situation, would you feel that if 
forces were such as to require retailers to advance prices, it would be 
a threat to our continued business activity? 

Mr. Nelson. Yes, naturally, unless the whole economy moves up; 
unless the farmer gets an increase in the prices of his products. That 
is why, to me, it seems that iiidustry has been statesmanlike in not 
letting these prices run away. I was very fearful after the first week 
in September that prices were going to start running away and that we 
would have an upset in our economy, and it was a source of great 
satisfaction to me to see the way industry did exercise that restraint 
in keeping its prices down. 

Dr. Thorp. How much can the retiilers do to keep prices down? 
Are they rather helpless in these situations? 

124491 — 40 — pt. 21 17 


Mr. Nelson. No, I think they can do a great deal. Let's assume 
I just mentioned sketchily this committee that I think the National 
Retail Dry Goods Association very wisely formed. Now, I believe 
that they can be very instrumental through that committee in bring- 
ing pressure to bear on manufacturers who are raising prices unduly. 
Naturally, if the price of the raw material goes up too nigh, as in the 
case of leather, we will say — hide prices have advanced about 43 per- 
cent since the 1st of September. Shoes, on the other hand, have only 
advanced in price — I am talking the wholesale market— about 14 
percent. Well, now, let's assume that leather would keep on going up. 
I think that all the retailer could hope to do would be to see that the 
manufacturer of shoes did not raise the price faster than leather went 
up. He cannot, of course, prevent the basic commodity; he has no 
control of it, and he has no way to get at it. 

Dr. Thorp. Suppose that at the same time, we have an increase in 
volume of sales by retailers; is it possible for them to absorb some of 
these higher wholesale prices because of the fact that their retail 
margin is spread over larger volume? 

!\&. Nelson. Oh, j^es; just as in manufacturing, if a retailer uses 
more of his plant facility and his sales people are employed longer 
numbers of hours per day and so forth — in other wordfs, as his volume 
increases, it is possible for him to absorb price increases without 
passing them on. Just what percentage, I wouldn't be able to tell you 
at the moment. 

Dr. Thorp. I suppose you must, for certain commodities, be placing 
large enough orders so that if you moved into a market with that 
order, in a careless sort of way, you could disturb the market very con- 
siderably, couldn't you? 

Mr. Nelson. Yes, we could. 

Dr. Thorp. What procedures have you found for helping a market 
to keep orderly when you come into it with large buying? 

Mr. Nelson. Well, in the first place, of course, the procedure that is 
most helpful is that of knowing what those costs are, and what the 
productive facilities are in the market, in a community, and placing 
your orders in such a way that they don't disturb it. A retailer can 
spread his buying over a period of time, presumably in the way the 
Government could not; if we had 5,000,000 men in the field that we 
had to equip, you have got to have 5,000,000 pairs of shoes immediately 
for those people. A retailer can spread that out over a period of time 
and not put an extraordinary demand on the productive capacity of 
the plant at the t'me he is buying; in other words, we might place very 
large orders and have them delivered over a year's time, you see. 

Dr. Thoi^p. In other words, if you can space deliveries over a 
period of time, it helps greatly? 

Mr. Nelson. It helps a great deal in preventing these abnormalities 
that you have mentioned. 

Dr. Thorp. Suppose that you were required to ask for public bids 
for the commodities which you were taking; what effect would that 
have on prices — rather than being able, as I assume you do, to nego- 
tiate through the industry and deal with the situation rather flexibly? 

Mr. Nelson. Well, of course, public bidding is a subject that I 
don't know a great deal about. We haven't studied it a great deal. 
There are, in public bidding, some forces tending to bring prices down 
and other forces tending to increase them, depending upon the 
position of the industry at the time you put out your tenders. 


Mr Arnold. You may not have studied it, but you have no inten- 
tion of puttmg it in, have you? 

Mr. Nelson. No; not at the present time. 

Mr. Arnold. You have studied the question of bidding in general 
and buymg most economically, and you are not now intending to eo 
mto it? ^ ^ 

Mr. Nelson. Not under the present set of circumstances, 
uv • ^RNOLD. Aren't you a little cautious in your statement about 
pubhc bidding there? 

£ i^^xV^^T^^,^^; \ ^^ always cautious when I am talking about a 
held that I don't know much about. 


, 5^- T^^ORP. We have had some discussion here about the fact that 
better mformation with regard to inventories, the conditions in the 
market, might be helpful in providmg stabilization. ^ 

Mr Nelson. I think they had been verv helpfiU. I think that 
one of the— I tried to impress it upon everybody that I have met in 
the Crovemment, that one of the best things that I know of to prevent 
run-away prices is mformation on productive facilities, amount of 
production utilized, mventories, back orders, and so forth orders 
placed. Now, it seems to me that if that information, if mdustry in 
general has that mformation, you will prevent abnormahties By 
that 1 mean you will prevent inventory accumulations. 

The things that cause the greatest disturbance in our economy are 
these inventory accumulations, with the resulting dumping of a lot 
of goods on the market when the demand falls off. 

I have always felt that we needed more information on industry in 
general, on the conditions facing industry at the present moment 

Actmg Chairman Avildsen. That information also should be 
timely,. Mr. Nelson; we aU know that. If it isn't timely, it is of no 

Mr. Nelson Definitely. If it is purely statistical, it is of no value. 
^ Ut. iHORp. Now tell me. What would you say regarding time of 
inventory information? I will give you an example. In the Depart- 
ment of Conimerce we have just sent out questionnaires to a number 
01 firms, askmg what their inventory was on November 30 We are 
hopmg to get those answers in by December 20, and to publish them 
promptly, as soon as we can tabulate them. 

Suppose that a number of answers come in in January. We know 
they aU won t come in by December 20. Would they be worth tabu- 
lating; and then suppose 

Mr. Nelson (interposing). Yes; I think so. 

Dr. Thorp. More in February. What I'd like to know is how 

X? -^ ?T^®® ^^ ^^^® *^ ^^ *^ ^® ^^ ^^^^6 to you as a buyer 

fh^f o>. .^^-"''^ ^el^v*^?u^^^^^ '^ ^^^^' '^ ^^ ^^^ ^on^» let's assume 
tfiat after this first rush of buymg went on in the month of September 
If even now, after all of that, we knew the situation with respect to 
mventones orders placed, orders unfilled, and so forth, why it would 
be extremely helpful. I think the length of time depends upon the 
time after the movement takes place. f y ^ 

>8Qpra,p. lllioetaoq. 


Ndw, you can very definitely judge an inventory movement over a 
period of a month or 2 months, after an event. The principal thing is, 
after an event, an abnormality in demand, to be able to know what 
has happened to inventories. 

Dr. Thorp. Now, tell me, How extensive do you think that inven- 
tory information should be? 

Mr. Nelson. I think it should be just accurate samplings. I don't 
think it needs to be absolutely accurate. I think if it is within 5 to 10 
percent in accuracy, it is plenty good enough for mformation of indus- 
try as a whole. 

Dr. Thorp. But I mean, it must not be limited only to the manu- 

Mr. Nelson. Oh, no; it ought to be samples of the whole economy, 
so we know what the inventory is in the economy. 

If you just limit it to manufacturers, you have only got a portion of 
it, and it is apt to lead you to wrong conclusions, but if you know how 
much is in the hands of the manufacturers, how much in the hands of 
distributors of all kinds, and there are samplings of that, I think you 
will get an inventory picture that would bte exceedingly helpful to 

Dr. Thorp. Do you think we could get that on a voluntary basis? 

Mr. Nelson. I think so. 

Dr. Thorp. Do you thinlc that in the tmie of rising prices, artificial 
shortages, speculation, and so forth, that all the jobbers and specula- 
tors wUl disclose their inventory position? 

Mr. Nelson. All would not, no, but I think you will get enough 
sampHngs to be able to, I think there are enough people in the country 
who are really interested in seeing us have a balanced economy rather 
than an abnormal one today, to want to do that thing. 

It may take a little selling, they may have to understand just 
what you want them for, it may take — there might be a little skepti- 
cism at first as to how they can be used, but I feel after the figures are 
once set up in the basis of index numbers, rather than as actual 
amounts, it isn't a mal amount that is necessarily the valuable thing, 
it is index numbe «, how much the condition has changed. 

Dr. Thorp. Ira sort of Gallup poll is taken of the inventory situa- 
tion, that is -practically what you are recommending. 

Mr. Nelson. That is right. 

Dr, Thorp. Why couldn't a job like that be done by the National 
Retail Dry Goods Association, for example, instead of waiting for the 
Government to do it? It wouldn't be such a tremendous imdertak- 
ing, I should think. It is done on a voluntary basis. It is so im- 
portant, I mean, why wouldn't your association, for example, do such 
a thing? 

Mr. Nelson. Well, I couldn't speak for the association at all, 

Dr. Thorp (interposing). Has your association considered it, 
getting such information on that kind of a basis? 

Mr. Nelson. I don't know, sir; but I would think that that wouldn't 
mean anything, particularly, because it would be only one segment of 
your economy, I think you have got to get all the segments in order 
to get at the correct information. 

Dr. Thorp, But I mean, get information as to the suppliers of the 
commodities that your industry, your association sells — textiles, shoes, 
and so forth and so on. 


Mr. Nelson. Well, as a matter of fact- 

Dr. Thorp (interposing). You would know how to buy, you could 
buy more intelligently. 

Mr. Nelson. Yes, as a matter of fact, our company does that, as 
far as we are able to do it, right along without the Retail Dry Goods 
Association, but that is one of the most important single things we 
have to do, and we do have a great deal of that information. 

For instance, we have to know, when we are pricing — I gave you 
the prices now that we are going to quote for next spring. We have 
got to have as much information as we can get about price move- 
ments over the next 6 months, in order that we may put those prices 
into effect. 

Now, that catalog will be on the press within a week, and those 
prices have to hold until next July, so it is necessary for us to get it, 
knowing how valuable the information is to us, in those segments 
that interest us. 

It seems to me it would be extremely valuable to retailers as a whole, 
to manufacturers, to distributors, to everybody. 

Mr. Arnold. Your point is that the Government can do a better 
job than the uncoordinated efforts of every association? 

Mr. Nelson. Exactly. You can get segments of it that one group 
can't get. 

Mr. HiNRiCHS. It can also, can't it, protect one group against 
another group? 

Mr. Nelson. That is right. 

Mr. HiNRiCHS. That is, the information simultaneously available 
for aU segments has value to all groups, but the information in detail 
with reference to one group in the hands of another group might give 
the second group a bargaining advantage. 

Mr. Nelson. That is right. 

Mr. Hinrjchs. That the first group would be unwilling to let it 

Mr. Nelson. I think there was a time when industry was very 
reluctant to give out its wages, and today that is a perfectly normal 
procedure for it to do, through the Bureau of Labor Statistics. 

I think when they recognize the value of inventories to themselves, 
purely selfishly, not alone their own inventories of their own segment 
of economy but inventories along the line, they would be perfectly 
willing to do it, Mr. Hinrichs. 

Mr. Hinrichs. On that inventory picture, let's take one of these 
cotton textile situations that has gone into history so we know what 
it was. 

Back in 1936, in June of '36, broadcloth was selling at 12.2 cents 
a yard, on the quotation to the B. L. S. wholesale price division. 

Mr. Nelson. Broadcloths, that would be very low very low for 

Mr. Hinrichs. In April 1937 it was 16.5 cents, and 27-inch print 
cloth, 64-60, went from 3.9 cents in June 1936 to 6 cents in April 
1937. ^ . 

Now, there is no question in your mind, is there, that the cotton 
textile industry was a highly competitive industry in 1936 and '37? 

Mr. Nelson. That is right. It certainly was. 

Mr. Hinrichs. The price movements that occurred there did not 
reflect a movement in costs. There was an increase in costs, an 


increase in raw cotton, some iacrease in wages, but the price increases 
that occurred from the summer of 1936 to the spring of 1937 were 
substantially larger 

Mr. Nelson (interposing). That is right. 

Mr. HiNRicHS. Than the movement in costs. So that you don't 
expect in fully competitive situations to see prices minutely geared 
to costs, or to cost movements. If you go from a buyers' market into 
a seller's market in the spring of the next year, your profit margin 
is going to change very substantially. 

Mr. Nelson. Well, you wiU have a situation as you had in the 
textile industry. You see the figures all the time. It is a very low 
profit industry. There are many segments of the industry that 
worked for a number of years without profit. Naturally when you 
switch from a buyers' to a sellers' market they have to make a profit 
or they go out of business. 

If they didn't have hope that at some time they were going to make 
a profit, they would go out of business, so that I think when we say 
that price movements in the textile industry do not go directly with 
costs, we have also to take the question of profits in the industry. 
Are the prices which we set as our base the abnormally low prices, so 
competitively low that there is no profit in it for the manufacturer? 
If so," they will not necessarily move as costs move. Naturally the 
manufacturer must find some period when he makes a profit or he 
goes out of business. 

Mr. HiNRiCHS. The mere pubhcation of cost information, while it 
would be of substantial advantage to know more in terms of costs 
than we now do, mere changes in costs as such are no guide to whether 
you are stiU deahng with a competitive situation that is essentially 
reasonable or unreasonable in cotton textiles. 

In textiles for that period, for example, you would have assumed 
that the market reflected the buying orders going into the market, 
more than any manipulative activity. 

Mr. Nelson. That is right. 

Mr. HiNRicHs. And the fact that the buyers also knew that that 
wasn't related to cost wouldn't have shed much Hght on their prac- 
tice. Every intelligent buyer at that time knew that this movement 
was larger than the movement in costs in textiles and stUl proceeded 
to buy. 

Mr. Nelson. That is right. 

Mr. HiNRiCHs. Well now, during that period, in retrospect, you 
believe that there was a very large accumulation of inventory all along 
the way, don't you? 

Mr. Nelson. I am sure there was. 

Mr. Hinrichs. Were you, as a rather well informed buyer, con- 
vinced of that as early as 1936, the end of 1936? 

Mr. Nelson. No; not at the end of 1936. We were not convinced 
of it until April of '37. 

Mr. Hinrichs. By which time the damage had already been done. 

Mr. Nelson. Had already been done. 

Mr. Hinrichs. I judge, therefore, that in spite of the fact that you 
are probably the best informed buyer in the country, you may even 
have lost a Httle money in textiles at that time. 

Mr. Nelson. We did, sir. 

Mr. Hinrichs. Wouldn't that price rise which was unrelated to 
cost have been more nearly controlled by having information available 


on rising inventories than by any other device that could have been 
developed for the cotton-textile industry, even if that information 
had been a month or so late? That was a market that lasted for 
8 months, and at almost any point in those 8 months inventories 
would have given you a rising flag of warning. 

If you had had the inventory information, even a month of so late, 
wouldn't it have modified your buying policy and that of other well- 
informed large buyers in such a way as to control a runaway market 
that pretty neariy wrecked the industry? 

Mr. Nelson. Well, yes; I think it would have been valuable to 
everybody concerned to have had more information at that time on 
inventories, and I have felt that the textile industry has those figures. 
They have them among themselves, and thej could be very easilv 
made public, but they wouldn't mean anythmg until they have all 
the other segments included with it, you see. 

Mr. HiNRiCHS. That is, if the textile mills merely release the figures 
which they now have, it would place them still further at the mercy of 
the jobber? 

Mr. Nelson. That is right; you would have to have all of the figures 
in the economy. You would have to know the position of the retailer, 
the position of the distributor, so the manufacturer would know what 
those figures really mean. All he knows today is that in the mills there 
is or is not an oversupply of goods. He doesn't know anything about 
the demand that is going to come to him. The point I have made is 
that if he knew all along the line as much as the buyers do about the 
condition in the market, it would be of value to him as a manufacturer. 

Mr. HiNRicHS. You actually wouldn't have been protected as a 
retailer if you had known the mill-stock figures at that point? 

Mr. Nelson. Mill stocks alone? No, sir. 

Mr. Hinrichs. Because mill stocks were declining in spite of the 
fact that the general movement in the economy was up. 

Mr. Nelson. That is right. 

Mr. Hinrichs. So that you would have had to have figures at all 
points almost down to the retail trade, and with those figures 

Mr. Nelson (interposing). They should have been all the way 
down to the retail trade. My point is, about inventories, that they 
should be all the way down to the distributor. 

Mr. Hinrichs. And with that information on hand you would 
have had much less in the w&y of a runaway market probably, than 
you did have. 

Mr. Nelson. Provided we can give them a long enough time to 
work to know what is a normal demand. 

Mr. Hinrichs. I don't mean that sort of thing can be cured over- 
night, but with that series of figures developed over a period of 2, 3, 4, 
5 years, we would have something that would guide buying poUcy. 

Mr. Nelson. You would prevent, I believe, abnormalities in the 
situation where you have rapid spurts and then a fall-off and then a 
period of lethargy for a while, as always happens in a market that runs 
away. 1 believe that the preventing of those abnormalities will be 
of value to everybody concerned. It wiU be of enough value to the 
manufacturer so" that he will want to contribute his figuies; it will be 
of enough value to the distributor so that he will want to contribute 
his figures; and enough value to the retailer so he would want to con- 
tribute his figures on a large enough sample so as to get at the facts. 


Mr. HiNRicHs. And with that many people mterested, there is 
enough interest to enable the Government to go out and get those 
figures, preferably on a voluntary basis, but at least to- get them. 
We can't operate in the market without anything as vital as inventory 
information, even if it changes the speculative position of one or two 

Mr. Nelson. That has been my feeling. 

Mr. Simpson. Speaking of statistics, and I am not trying to under- 
rate the compilation or gathering of statistics, but something struck 
me, that during the last decade and a half we have had more statistici- 
fying than ever in any other period. We have had Standard Sta- 
tistics giving us figures, we have ha4 all sorts of information, yet we 
have had the most unusual fluctuations in the cycle. Business didn't 
take the warning in '29, didn't take the warning in '37. How do you 
account 'for that? WTiy is it that we have had these tremendous 
shifts in price, fluctuations in the business cycle during a period in 
which we have had more statistical information than we have ever 
had before. 

Mr. Nelson. I have the feeling, sir, that one of the reasons we have 
had them is that we are in the position of just having a little too much 
without having the essentials. In other words, I think that the 
essential part of it all is this .whole question of inventories, unfilled 
orders and so forth, and I thinlc that all of these other statistics only 
tend to complicate the situation without knowing definitely what the 
status of demand is, and production. I felt that was the void in 
statistics, and I think you will find that most everyone who is today 
attempting to evaluate the future of the economy will trj'- to arrive at 
some sort of a figure in his own mind that gives him the condition of 

Mr. Simpson. There are only a few buyers in the market as clever 
as Rothschild, who said he bought on the way up and stopped before 
other people did. Don't most businessmen, when they see inventories 
piling up, say, "Well, I had better get in now too, because everybod}^ 
else is?" 

Mr. Nelson. That depends a great deal upon whether or not they 
expect shortages or expect rapid price increases and so forth. I think 
the judgment there — and one of the things I was going to comment on 
in your question is, I think today with all of the statistical services and 
with the rapid flow of information jou have more mass psychology 
than we have ever had before in the picture. Each one knows what 
the other is doing, and if the leader is wrong there are a lot of others 
wrong with him. 

Acting Chairman Avildsen. In other words, Mr. Nelson, you feel 
that even after you get all this inventory information we are still 
going to make mistakes, and buyers are going to buy. too much? 

Mr. Nelson. Oh, yes; I don't think it is a panacea. 

Acting Chairman Avildsen. You had information on inventories 
in '36 when you state your company bought too much in the textiles 
line. You had this Gallup poll type of information that you told us 

Mr. Nelson. Fragmentary, yes. 

Acting Chairman Avildsen. Substantially as much as you have 

Mr. Nelson. From the standpoint of what the manufacturers had 
We didn't know what other retailers had. 


Acting Chairman Avildsen. Do you now know what other retailers 

Mr. Nelson. No. 

Acting Chairman Avildsen. The retail association doesn't try to 
collect these figures? 

Mr. Nelson. No. 

Acting Chairman Avildsen. It would be a simple thing for them 
to do, wouldn't it? 

Mr. Nelson. It would be simple, but expensive. There are a lot 
of people involved in it. 

iJv. Thorp, We have talked about the effect on purchasing power 
of hi creased prices. Are there circumstances in the quality of goods 
whicj). are part of this picture also that we need to think about as one 
of the effects of why these swings in prices, and price levels? 

Mr. Nelson. Yes; that will always come about, because of the 
tendency of the public to want to buy within certain price ranges. 
For example, when a work shirt gets over $1 in price the demand seems 
to fall away much more rapidly than at any other time. Now, in 
the miuds of the public, $1 is just enough to pay for a work sshirt, 
no matter how much things cost. The great tendency, then, a you 
approach that dollar in price, will be to attismpt to build a shirt, that 
will meet that particular situation. In some cases, unfortunately it is 
done by talcing out yardage, or it may be done by using lower count 
cloths, and so forth, but there is in the retail trade certain price points 
at which everyone wants to try to sell. Wliether or not that is a fetish 
I don't know. I believe it is not. I believe that there is a definite 
reaction of the public toward certain price levels. 

Now there is another way in which, during times of rapidly rising 
prices, there may be changes in the construction of cloths and so forth, 
all of which wUl fit in and enable the retailer to have something that 
will sell at that particular price range. 

Dr. Thorp. So that in a period of rising prices, if one merely looks 
at the prices he may understate the change in the cost of living, so to 

Mr. Nelson. It could be understated, especially if there had been 
a very rapid rise in price. For example, you may be selling a suit of 
clothes at, say, $22.50. Well now, when woolens are very low there 
will be a much better quality of wool going into that $22.50 suit, 
than when there is a rapid rise in price, but you may tiy to keep that 
price of $22.50 as long as you can, beca\ise it is a price at which you 
have tested consumer buying, and you know at that price they buy 
freely, therefore your whole inclination is to try to keep as close to that 
price point as you possibly can. 

Dr. Kreps. Would you like to put the rest of your paper in the 

Mr. Nelson. Didn't I finish the paper? 

Acting Chairman Avildsen. You got down to work shirts when I 
interrupted you, I believe. 

Mr. Nelson. I forgot aU about the paper. 

An overall which sold for $1.25 in the fall of 1923 is now selling at 
65 cents, and will be sold in the spring of 1940 for 72 cents. ^ 

A full fashioned staple weight silk hose sold for, in the fall of 1923, 
$1.98 a pair, is now selling at 89 cents a pair, and wjll be sold for 94 
cents a pair. 

' For other future prices, see p. 11260 supra. 


A 45-pound cotton mattress which sold in the fall of 1925 for $6.48 
is now selling for $4.98, and for spring 1940 will be sold at $5.48. 

Dr. Thorp, May I ask here — your reference point back in the 
twenties varies for the different products. Can we assume that the 
price given in the twenties is selected as being the highest price during 
that general period? 

Mr. Nelson. No; m setting up oui* prices it may be the point at 
which we introduced the thing. We have that record back over a 
period of years, you see, and 1923 is the farthest back that we go. 
Some items were introduced in '25, some in '30, and some in other 

Acting Chairman Avildsen. Mr. Nelson, would these increases in 
price represent an increase in quality or merely an increase in the cost 
to you of the goods? Is this the same mattress, for instance? 

Mr. Nelson. Yes; everything I am giving you is exactly the same. 
There is no change in quality at all. I have picked items, and these 
items we picked are only items where there has been no change in 
the quality. It is a 45-pound mattress, it has the same ticking on it, 
the same thread count of ticking and the same quality of linters. The 
linters may vary somewhat, but very httle. 

Acting Chairman Avildsen. I understand this catalog will go 
out when? 

Mr. Nelson. It will go out January 15th. 

Acting Chairman Avildsen. And it is good for how many months? 

Mr. Nelson. It is good for 6 months, at least until the end of 

Acting Chairman Avildsen. As a practical merchandising problem, 
what would you do if these price advances did not hold and retailers 
were able to sell merchandise of this sort at the same prices that they 
sold earlier this year, for example? How would you meet that com- 
petition of the retailer who, I suppose, would be able to sell below your 

Mr. Nelson. We would meet it in two ways, neither of which is 
particularly effective. We would get out a new catalog at a con- 
siderably lower price or we would refund to th3 customer. For 
example, let's say that this sheet was worked out to a point where 
71 cents was the proper price; we would refund 5 cents to the customer. 
None of us are effective in increasing our sales; we are just out of luck 
if our prices are too high in the catalog. 

Acting Chairman Avildsen. Would you try to correct that by 
sending out a flyer? 

Mr. Nelson. A flyer or bargain counter bulletin, but it is not 
effective. Unless these prices are right we have guessed entirely 

Dr. Thorp. If prices are higher, how do you manage? 

Mr. Nelson. That is just our hard luck. If prices are higher there 
is no way we can get more money unless there is a very abnormal 
situation, such as occurred in the price of tires, the price of rubber, 
some few years ago when rubber went up to $1.25 or $1.30 a pound. 
We had reserved the right to increase the price in case of goveniment 
tax or anything of that kind, but practically, except in a very abnormal 
situation, it would cost us a lot of money. We have no way of raising 
the price. If that sheet goes up to a dollar apiece we would have to 
sell it for 76 cents. So it is a pretty good gage of how we feel about 
the price level for next spring. 


Dr. Thorp. If one can summarize these, they indicate that you 
feel that retail prices next spring will not advance materially over 
retail prices at the present time. 

Mr. Nelson. That is right, will not go our of line. My own reason 
for introducing them was to give the committee some mdication of 
how we felt about prices for next spring and what the effect would be. 

Acting Chairman Avildsen. Does this mean you are protected 
by your suppliers so you can sell at this price? 

Mr. Nelson. In some cases, yes; in other cases, no. If we thought 
the market was too high at the present time and wouldn't come down 
we would sell at market price in pricing our catalog. 

A poUce shoe which sold in the fall of 1924 for $4.98 is now selling 
for $3.98 and will be sold in spring 1940 for $4.25. 

A set of harness which sold in fall of 1923 for $52.50, is now selling 
for $39.95 and will be sold for, in spring 1940, $42.45. 

I just want to call attention to the fact that harness, which is 
practically all leather, has gone up about 43 percent. 

Acting Chairman Avildsen. Why shouldn't the price go up more? 
It has only gone up here 5 percent. 

Mr. Nelson. The reason for that, sir, is the lag that occurs in our 
being able to buy goods that were made up prior to the price increase ; 
in other words, there is in the hands of our manufacturer, in our own 
stocks, a considerable quantity of leather that was bought on the 
10-cent basis, some on the 11 cent, some on the 12 cent, some on the 
13 cent, and the average of it all enables us to be considerably under 
the present market. Now, if we thought that having that price at 
that point, $42.45, would result in a runaway business to a point 
where we couldn't take care of our business, we would have to in- 
crease the price. 

Acting Chairman Avildsen. In other words, these manufacturers 
who have these stocks of low cost leather are not working on the theory 
that they are entitled to the replaced cost of their inventory. They 
are willing to sell the finished article at a price which represents an 
old cost and not the replaced cost. 

Mr. Nelson. It has been my experience that all manufacturers 
that I know anything about in the consumer goods industries particu- 
larly, work on the basis of averages rather than on the replacement 
market. Thej are not able to get it on a replacement market. 

Acting Chairman Avildsen. Of course that indicates real competi- 
tion in their industry too. 

Mr. Nelson. That is right; it is a competitive situation within 
their industry. 

Acting Chairman Avildsen. If it were a sellers' market they would 
then use the old argument that they are entitled to replaced cost 
on their inventories, probably, would they not? 

Mr. Nelson. I don't think so. I find that most manufacturers 
want the price level as low as they can in order to get greater volume 
of business, and if you just jump it up to present replacement cost 
immediately you don't get the volume; the fellow who is willing to sell 
out some of his inventory at a lower price gets the volume, gets 
the business. 

Acting Chairman Avildsen. How about merchants, retailers gen- 
erally? Don't they work on the theory that they are entitled to 
replaced cost? 


Mr. Nelson. I think all retailers would like to do it, but I don't 
think they can do it. The competitive forces in the retail trade are 
too great. 

Acting Chairman Avildsen. Do you think they should do it if 
they can? Do you think it is sound for them to do it? 

Mr. Nelson. I think it is sound to this extent, that the small 
retailer must do it or he is eventually put out of business. 

Acting Chairman Avildsen. Why? 

Mr. Nelson. Let's say that you and I are small retailers. We 
have a business of $10,000; that is all we have, and the price level 
goes up 100 percent. We can only have half as much stock when the 
price has gone up 100 percent as we could have before it went up. 
Therefore, unless we keep a Httle bit ahead of the market, with the 
market advancing in price, the small retailer has no way to protect 
himself. I think you will find that is the experience in Germany 
during inflation, and so forth. 

Dr. Thorp. Why is that pecuhar to the smaU retailer? Isn't the 
same problem there for the larger retailer? 

Mr. Nelson. Yes; except the larger retailer has more ways to 
protect himself because he buys ahead farther. The small retailer 
hasn't as many ways of protecting himself. 

With the larger retailer, he has another factor, too. In other 
words, he gets a much greater turnover of his stocks,, and the faster 
he turns over his stocks, of course, the better utiHzation he can make 
of his capital. 

The retailer, when he gets into that, is the same as the manu- 
facturer when his labor costs go up too high. As labor costs go up, a 
manufacturer tends to become more efficient because he attempts to 
get greater productive facUities with his present capacity. Just s© 
with the larger retailer, he has more resources to get a greater turnover 
and thereby not be forced to increase his capital. 

Dr. Thorp. It is because he is replacing more quickly. 

Mr. Nelson. Exactly. 

Dr. Thorp. And he gets to the replacement what is, in effect, a re- 
placement cost, although it may be, in fact, based on the purchase cost. 

Mr. Nelson. Well, it may or it may not. I am only talking to 
the general theory. May I just comment on one thing? I am only 
talking to the general theory of the question, should a retailer sell 
out at the price at which he bought it, or should he follow replacement 

And I say to you that the smaller merchant does not follow replace- 
ment costs insofar as he is able to in competition; he is gradually 
using up his capital. 

Acting Chairman Avildsen. If the cost goes up 40 percent and 
he raises liis prices accordingly, isn't he profiteering, isn't he taking 
an excessive profit on what he bought? 

Mr. Nelson. I don't know what profiteering really is. 

Mr. Simpson. Well, Mr. Nelson, many wholesale grocers admitted 
when we investigated them after the last war that they had considered 
their replacement cost as their cost, that is, the wholesale grocer; if 
the cost of a can of tomatoes went up 50 percent, that was his cost, 
and to prove that he was profiteering, he made percentages of return 
on invested capital or on costs or relation to their retail price, that 
were so enormous that there wasn't any question of it. 


Mr. Nelson. But how much did he give back when prices went 
back down again? In other words, with this small retailer, here he 
is with this stock of goods and the prices drop again. Unless he has 
gotten some additional profit on them going up, he is wiped out when 
prices go back down again. 

Mr. Simpson. Of course, that is one of the reasons that prices go 
down again, because he wants too much profit on the way up. If 
they didn't go up so fast, they wouldn't have so far to fall. 

Mr. Nelson, That is almost like the cWcken and the egg, isn't it? 

Mr. Simpson. I think another thing that you said that rather 
surprised me was that retail prices dropped as rapidly as wholesale 
prices. In the course of your testimony, I drew that from what 
you said. 

I think Dr. Thorp, who perhaps knows these index figures better 
than I do, would agree with me that retail prices never do come down 
as fast as the wholesale prices or as the prices of manufactured goods 

Mr. Nelson. That isn't my experience, sir; naturally, I think the 
retailer, like everyone else, doesn't want to take losses, and when 
these prices go down, he has markdowns to take. 

What I was remarking to was that I tliinlv the competition is so 
great today that unless he does it he loses business. I think yoii will 
find today very definitely, it has been my experience, if sheets drop 
10 percent in the wholesale market, some live retailer in the market 
starts selling sheets on the low basis, and when he does everyone has 
to follow. That is my experience. Perhaps statistically it might not 
bear it out. 

Mr. Simpson. There is no use getting any more statistics if you 
don't beheve those of the Department of Labor, and they show very 
definitely, and all statistical services show very definitely, that retail 
prices tend to drop much more slowly than wholesale prices of manu- 
factured goods. For instance, retail prices of shoes tend to drop, I 
assume it is like other commodities, less rapidly than the price of 
leather or the price of hides, because on raw materials fluctuation in 
prices is much greater; they go up perhaps more rapidly and thej' 
certainly come down more rapidly. 

Dr. Kreps. That is only logical, Mr. Nelson, because wholesale 
prices usually are quoted on raw materials, and although the raw 
material expense may go down into the finished article, wage levels 
are also notorious in lagging beliind in a drop of prices. 

Mr. Nelson. That is what I was going to say, but I don't know 
just what measure you use. If you say that retail prices go down as 
rapidly as basic commodity prices, I would say "No." I am talking 
about the price of the finished product that we buy. 

Mr. Simpson. Some of your finished prices are not elastic. 

Mr. Nelson. That is right, just as they do not necessarily go 
up as fast, they might not necessarily come down as fast as basic 

Dr. Kreps. And that in part would be your answer to Mr. Avildsen 
why it was that harness did not go up as much in price as leather; 
namely, that the cost of raw material content of the harness might 
have gone up 40 percent and yet be compensated for by a considerably 
smaller percentage increase in the price of the finished product? 

Mr. Nelson. Yes; except that labor is a small percentage, depend- 
ing on the percentage labor is to the total cost. 


Mr. Simpson. And overhead items. 
Mr. Nelson. Yes; labor and overhead items. 
Actmg Chairman Avildsen. Getting back to the harness manu- 
facturer, you say It IS perfectly proper for him to sell harness on the 
basis of his old cost yet if leather went up 40 percent and stayed up 
40 percent and then he put in a big inventory at that higher price and 
then a decline came along you wouldn't pay him the prices for his 
harness that represented his actual cost at that high price You 
would say to him "You will have to fix your price on the basis of 
replaced cost of leather," wouldn't you? In one case you would 
expBct him to use replaced cost and m the other case actual cost. 
Why isn t he in the same boat as the retaOer? If he has very little 
labor m the commodity, he is practically a dealer in leather, just 
puttmg m a httle labor on it as he sells it. 

Mr. Nelson. Yes; you are opening up a question there that I think 
would take a considerable amount of explanation. In our business 

L>r Keeps (mterposing). I might interject, Mr. Nelson, that we 
plan to put on a witness this afternoon who will go into that in detaU 
m tnat particular relationship, so if you do not 

Mr.'^NELSON (ihterposing). I would just like to answer it. It 
won t take me but a few moments to answer it. In our business we 
regard the manufacturer as our paitner in the business. The two 
of us are attempting to work out a plan to get as much of the con- 
sumer s business as we can, and each make a proiit on it 

How do we two go about doing it? We do it by averaging on the 
way up and we attempt to buy it together, and if we get stuck with 
mvfentory we will each take our portion of the loss. I think that quite 
rightly on the basis of ethics, if you please, a man who has to take the 
loss ought to be entitled to take the profit. 

Business isn't done that way. We are not able to do it due to the 
play of competitive forces, if you gather what I mean to try to general- 
ize m a few words. j & ^xax 

Acting Chairman Avildsen. I see. You feel that you have a 
different relationship from the ordinary buyer who just buys wherever 

A?^xT ^ most advantageously; you work with this manufacturer. 

Mr. Nelson. We have to. The quantities we buy are so large 
that we have to work with him very closely, and the two of us together 
attempt to solve the customer's wants. 

Acting Chau-man Avildsen. You stiU didn't finish this statement. 

Mr. Welson Plow shares which sold at $3.70 in faU, 1923, now 
semng for $3.35, will be sold in spring 1940 at the same price. 

1 hese, i believe, are farHy typical items which make up the budget 
ot the people m the lower mcome groups. 

In general even with the present commodity markets which are 
up considerably from the low, prices for spring 1940 wiU be weU m 

oTigTe anTl937^^ ^ *^^ ^^""^ ^""^'^^^^ ^""^^ "" ^^^ ^P""""^ ^''^ ^^^ 

In other words, I believe that the situation we have here is about 
like that one we had m the fall of '36 and the spring of "37 

Actmg Chairman Avildsen. Are there any questions? Would you 
care to add any more? "^ 

Mr.^ Nelson. No; thank you, sir. 

Actmg Chairman Avildsen. I want to teU you, Mr. Nelson, that 
you have made a very valuable contribution to our record here and 
the committee is greatly indebted to you. 


(The witness, Mr. Nelson, was excused.) 

Acting Chairman Avildsen. The committee will stand adjourned 
until 2:30. 

(Whereupon, at 1:05 p. m., a recess was taken until 2:30 p. m. of 
the same day.) 


The hearing was resumed at 2:36 p. m., upon the expiration of the 
recess, Mr. Clarence Avildsen presiding. 

Acting Chairman Avildsen. The committee will be in order. The 
first witness is Dr. Albert Haring. Is Dr. Haring here? 

Do you solemnly swear the testimony you shall give in this hearing 
shall be the truth, the whole truth, and nothing but the truth, so help 
you God? 

Dr. Haring. I do. 


Acting Chairman Avildsen. Give your name and address to the 

Dr. Haring. Albert Haring, Bloomington, Ind. 

Mr. Hamm. Dr. Haring, you are connected with the American 
Marketing Association, are you not? 

Dr. Haring. Yes, sir; I am secretary and ex officio director. 

Mr. Hamm. Would you tell us something about the American 
Marketing Association? 

Dr. Haring. I would be very pleased to. 

The American Marketing Association is a professional organization 
whose aim is to improve the promotional standards in the field of 
marketing and distribution, which, of course, includes retailing, 
selling, and to try to move that field onto a basis of scientific operation 
based primarily upon a projection of the physical types of research 
in the field of distribution. 

It is old in the sense of its member organizations. The teachers m 
that field are about 15 years old in organization, but the current group 
was formed through a merger of the American Marketing Society 
and the National Association of Marketing Teachers 3 years ago, and 
today I think it is fair to say that this organization represents a very- 
large proportion of the better-known men in the field of marketing 
and distribution. 

Mr. Hamm. You may proceed with your statement. 

Dr. Haring. This prepared statement is aimed particularly at a 
consideration of the position of the small merchant when prices 

problems of the small merchant when prices change 

Dr. Haring. The small merchant is characterized by veiy limited 
working capital. Reference to the Census of Business shows that 
independent stores in the food ^roup average annual sales of $11,451 
and also that they are predommantly a small-store group with 47.8 
percent of the stores having sales of less than $5,000 per year and only 
2.2 percent of the stores having an annual sales volume equal or 


exceeding. $50,000. The failure rate among independent stores is 
high and the two main causes of such failures are inadequate working 
capital and inefficiency or lack of business experience. There is 
reason to believe that between 40 and 50 percent of the independent 
food stores in business at any one time will not be operating 5 years 
later. The reasons for the failure of the unsuccessful stores throw 
strong light upon the weak points of those stores which are reasonably 
successful. As a result, working capital and adequate management 
are key factors in judging the effect of business change upon the 
independent food dealer. 

With a stable price level, the independent merchant buys at one 
price, marks this purchase price up, and then sells at the retail price 
which he has so determined. Wlien prices begin to move upward, 
the wholesale price rises first. The initial increases are often so 
small on items retailing for less than 20 cents that an increase in the 
retail price of a full cent per item is not warranted. If the dealer 
permits Ms retail prices to remain the same, his gross margin shrinks 
and this will decrease profits, and, should profits disappear and losses 
occur, this wdll be absorbed by a decrease in working capital. In 
case the dealer increases the retail price by a full cent, he may be 
criticized for unduly enhancing prices. Such a quick retail price 
rise is not usual because retailers face competition and make adjust- 
ments to changing conditions somewhat sluggishly. 

As further increases move the price level sharply upward, the food 
dealer must adjust his selling prices. There is ordinarily some lag 
with the result that the prices at which the dealer buys rise more 
sharply than the prices at which he sells. This tendency has the 
effect of shrinking the margin between buying and selling price, thus 
leaving the retailer a smaller amount of gross margin per dollar of 
sales to meet his costs and yield a profit. 

It is true that the part of the inventory which he has on hand, 
which he sells after raising his retail prices, acts somewhat as a cushion 
for the small dealer. This is, I believe, a relatively unimportant 

Dr. Kreps. Does the experience record of retail stores indicate 
that their profits as a whole go down in periods of rising prices? 

Dr. Haring. There is a compensating factor in that a normal rise 
in price is usually accompanied by increased pay rolls, and if this 
occurs, a larger volume of retail sales in terms of units may result. 
Families begin to buy more. So the margin may shrink, but the 
total sales volume increases, splitting the overhead among more 
units, and thus decreasing the unit cost somewhat, and so, in normally 
rising prices, with enhanced business activity, a retail store, even 
though taking a partial loss on inventory, may show somewhat 
greater net profits. 

Dr. Kreps. And conversely, it is in periods of price decrease that 
the mortality among retail stores is likely to be large? 

Dr. Haring. It is likely to be large then, but it occurs quite 
frequently in the smaller stores, regardless of business conditions. 
They get caught whenever there is a change of any sort. 

The doUar sales volume for a specific quantity of goods will increase 
and rising prices are likely to be accompanied by greater pay rolls and 
enhanced industrial activity so that store sales volume will expand. 
These factors may or may not compensate for the unfavorable price 


situation. A very sharp upward movement of prices, therefore, is 
likely to find independent dealers increasing their consumer prices 
too slowly to protect themselves. 

In operating a store, there is need for a certain amount of physical 
inventory. As prices rise, the cost of this physical inventory moves 
upward and the only place where the extra funds can be obtained is 
from working capital. If prices move up 50 percent, the increased 
value of the inventory is largely obtained by moving cash or working 
capital into inventory with the possible result of an inadequacy of 
cash. When the merchant sells for cash only, the amount of funds 
flowing in will also be increased proportionately in a short time. In 
case the dealer sells upon a credit basis, the credit extended will be 
comparably Inflated. Indeed, if the food dealer's volume of business 
expands on account of improved business conditions, the credit 
extended may increase more than proportionately, thus causing the 
dealer to carry a greater credit burden and to deplete further his 
working capital 

That "more than proportionately" probably deserves a slight explan- 
ation. It is a question of personal opinion, somewhat. It is difficult 
to prove. When people get jobs, when one member of a family has 
had a job and another gets a job, it has been my experience that they 
begin to buy before the second job realizes money. WTien the activity 
of a firm makes it add new men, those that have had jobs feel more 
secure, and they begin to buy, and that projects over immediately 
into retail credit more than the actual increased earnings and puts the 
pressure of credit on the small retailer. 

Dr. Keeps. Does this tie in at all with the increase in bank credit 
that often occurs in such periods? Wouldn't it be true, that at about 
this point retailers and other distributors would go to the banks and 
increase their borrowings somewhat? In that way the price rise 
rather perpetuates itself, does it not? 

Dr. Haeing. Taking manufacturers and wholesalers and larger 
retailers, that is undoubtedly the case. WTien you take the really 
small retailer, of which we have several hundred thousand in the food 
field, it is rather doubtful whether he can turn that quickly to banlcing 
facilities, and how much he can really utilize. 

The figure for retailers doing a sales volume of $5,000 a year or 
under, if you project that back, means about $100 a week, of which 
he probably pays $75 for the goods, leaving $25 for his wages, rent, 
light, heat, and the like. He is a small operator. It is difficult for 
him to turn to a bank. He really has to ^um to his wholesaler, and 
the wholesaler turns to his bank. If you take a larger-sized retailer, 
of course, he can move direct. 

Acting Chairman Avildsen. You mean to say these men work on 
a gross profit of only $25 a week? 

Dr. Haring. It might be $3P, but you are very close to the actual 
facts as given by the Census Bureau when you make that statement. 

Acting Chairman Avildsen. How long, on the average, do Jhey 
last in business? 

Dr. Haeing. There are a number of studies available. Those 
entering business go out rapidly, and, roughly speaking, the figures 
1 quoted gave 40 to 50 percent going out within 5 years. 

One of the men who studied the field very carefuUy, Dr. Wilford L. 
White, of the Department of Commerce, stated that one of the main 

124491 — 40— pt. 21 18 


reasons, possibly, for their being in business is to obtain their own 
groceries at wholesale prices. That is one of the big factors that keeps 
them going. 

Dr. Kreps. It is sometimes said that in a period of rising prices, 
unless a grocer increases his retail prices at the time when prices 
increase, he will be unable to replace his inventory, the volume which 
he can purchase thereafter is likely to be less, and his services to the 
community are accordingly reduced, as his working capital is more 
or less fixed so that he is imable to use bank credit for expansion. 
Is that true? 

Dr. Haring. He would be unable to expand it if the wholesaler 
could not handle that by increasing the credit extended to him. He 
personally is in a very poor position to obtain credit from any source 
other than the wholesaler. 

Dr. Kreps, Isn't the period of rising retail prices, and even of 
rising wholesale prices, a period in which bankers revise their esti- 
mates, a period in which they more readily grant credit, and, therefore, 
on the whole, a period in which small retailers, as well as the larger 
retailer, can get more credit? In fact, it is probably the one period 
in which he does most of his borrowing, isn't it? 

Dr. Haring. That is absolutely correct with respect to the tend- 
ency of bankers to revise their estimates of business concerns. In 
spite of this, there are many small food retailers who, in the banker's 
judgment, would still be rated too low to give credit. 

Dr. Kreps. But it is your definite impression, none the less, that the 
chain of causation as far as the retailer is concerned, runs from the 
higher prices to the increased credit, rather than from increased avail- 
ability of credit back to higher prices for retail commodities? 

Dr. Haring. I am inclined to agree with that. 

Dr. Kreps. That means that those people who think they explain 
price changes in terms of the amount of credit available probably are 
ignoring some of the fundamentals of manufacturing and distribution. 

Dr. Haring. Wlien you put your facts and line them up to prove 
the opposite case, it looks very strong. I, personally, am inclined to 
line them up this way. 

The sharp upward movement of wholesale prices thus puts the 
independent dealer, particularly the small ^food merchant, in a position 
where it is very difficult for him to maintain working capital adequate 
for efficient operation. 

If the independent merchant could foresee such price rises, it might 
be assumed that he could make large future commitments and thus 
protect himself or, possibly, realize a speculative profit. It is doubtful 
whether or not the independent merchant has sufficient shrewdness to 
foresee correctly price movements. Even where he does forecast 
correctly, his limited working capital virtually makes speculative 
buying' in large quantities impossible. Some of the larger retail food 
operators undoubtedly indulge in forecasting and a certain amount 
of speculative purchasing of staples. Competition between the larger 
food chains and others, however, is sufficiently keen to force the sharing 
of such speculative gains with the public. It is probable that such 
practices upon the part of the large operators are partially responsible 
for the independent merchant's inability to raise retail prices as fast 
as wholesale prices move upward. 


The wholesaler is of aid to the independent retailer in this. He 
informs and advises the retailer to some extent. He in turn may buy 
ahead in some quantity and extend the retailer greater credit to some- 
what cushion this disadvantage, but on the whole the small food re- 
tailer does not have the' managerial skill nor the working capital to 
protect himself at all adequately, lq my opinion. 

Dr. Keeps. Not even the storage space, isn't that right? 

Dr. Haring. Correct. 

When a high speculative wholesale price level collapses, the high 
but relatively lower retail price level remains comparatively stable 
for a short tune. Dealers endeavor to unload inventories purchased 
at high prices before cutting retail price levels. Soon, however, one 
or more merchants will rebuj at lower prices and slash consumer 
prices. When prices fall rapidly, a slash by one major retail com- 
petitor purchasing new goods forces all to reduce prices before clearing 
out higher-priced inventories. Ketail prices fall more slowly than 
wholesale prices, but, in a period of rapidly falling prices, most inde- 
pendent dealers sell a large amount of merchandise at prices which 
involve a sacrifice when their purchase price is considered. Because 
of the pressure of competition, the favorable results which jnight com- 
pensate for the troubles of rapidly rising prices do not materialize. 
And store sales volume also falls. 

One exception should be noted for both rising and falling prices. 
There are, occasionally, particularly in rather segregated small towns, 
service stores whose patrons are relatively low-income-group people, 
who need credit because they are near the subsistence margin, and 
these stores occasionally have a virtual monopoly of this small market, 
making it possible for them to be in a better strategical position in 
handling the problem of both rising and falling prices. Actually they 
have a slight increment, a monopoly profit, at all times. As com- 
munication and transportation improve, these are slowly filtering 

Dr. Keeps. Would you say that the methods by which retailers 
and wholesalers are now doing business have changed as compared, 
say, to the World War period? It is frequently said, for example, 
that after the 1920 collapse, distribution as a whole went on a hand- 
to-mouth basis. With the maintenance of a hand-to-mouth basis this 
speculative danger would seem to be less than during the war. 

Dr. Haring. There is no question but that both at the time you 
indicate and starting in 1929 the hand-to-mouth wholesale and 
retailer operation has shown a tremendous growth. I would not care 
to guess whether that is cychcai in nature and will slowly disappear, 
partially, or whether it is going to be a permanent operation. Un- 
doubtedly inventories such as carried 25 and 30 years ago are becom- 
ing much rarer. I think we will never have a complete reaction to 
the pre-war inventory situation. 

Dr. Keeps. In other words, management in a modem retail 
organization tends to stress much more the factor of turn-over than 
did, say, the old general store? 

Dr. Haeing. That is undoubtedly correct. That emphasis, how- 
ever, is greater in the larger and more experienced operators, and the 
fact that the small food dealer is more or less hand to mouth is a 
question of necessity rather than preference in many cases. 


Dr. Thorp. There is another change, though, isn't there, that off- 
sets that somewhat, and this is that the consumer of food has become 
more hand to mouth, if you will permit me to use the phrase. In 
World War time, and perhaps up to 1933 or thereabouts, many of 
these independent food stores extended credit, but they reached the 
hmit of being able to act as relief agencies somewhere during the 
depression, with the net result that this activity, the retailing of 
food, has largely become a cash basis, and therefore you have some 
reduction on the capital reqmrement, the capital tied up by the 
independent retailer, which perhaps is the other end of the hand-to- 
mouth kind of situation. 

Dr. Haring. The statement I would agree with 100 percent with 
respect to the increased amount of cash purchasing. When, how- 
ever, you divide your retail food outlets into supermarkets, chains, 
voluntary chains, and unaffiliated independents, deleting the typical 
cash operators, the supermarket and the chain, when you drift over 
into the voluntary and particularly the unaffiliated field, the standard 
method of operation is still credit. Now it is a more limited credit 
than it was. Retailers object to carrying someone for 90 days, but 
it still is fundamentally a credit-service type of operation. 

This brief discussion leads to one general conclusion; that is, that 
both rapidly rising and sharply falhng wholesale prices place a good 
deal of unfavorable pressure upon the independent food merchant. 
The converse of this statement is that stable or mildly changing prices 
are more favorable because they do not force the independent food 
dealer toward buying and selling practices which are likely to deplete 
his working capital and threaten his solvency. 

At this point, in order to give a brief set of summary figures, I 
would like to submit some four diagrams which have been worked 
out with some care in conjunction with the Cooperative Food Dis- 
tributors of America, which show the World War picture with respect 
to retail and wholesale price lags and the effectiveness of control over 
some of these prices. I don't think it is necessary to describe them. 
They simply verify in general the broad statements that have been 

Acting Chairman Avildsen. They may be received. 

(The charts referred to were marked "Exhibits Nos. 1519 to 1522" 
and are included in the appendix on pp. 11366-69.) 

Dr. Haring. Price variations within a city and between cities and 
market areas are normal, indeed inevitable, for several reasons. Some 
of these reasons, certainly not all of them, are — 

(a) Transportation facilities. 

(6) Warehouse or storage equipment. 

(c) Wholesalers and their efficiency. 

These three factors affect the cost of merchandise bought by food 
retailers. Good transportation facilities with prompt delivery make 
it possible to maintain minimum inventories and pay minimum freight 
charges. Adequate storage space permits carload freight rates to be 
obtained and cuts warehouse costs. Numerous efficient, competitive 
wholesalers of sufficient size to purchase in carload lots — to secure 
minimum freight rates and, in general, the lowest available prices 
under the Robinson-Patman Act — provide the food retailer an 
opportunity to obtain good service and satisfactory buying prices: 


{d) Types of retailers, 
(e) Retail eflBciency. 
(/) Newspapers and radio. 
ig) Type of population. 

Where there are various types of food dealers— independent, vol- 
untary chain, chain, supermarket — of high efficiency in active com- 
petition and usmg aggressive newspapers and local radio for adver- 
tising, and where the population is price conscious and notes food 
advertising, consumer food prices will be relatively low and price dif- 
ferences between stores will be at a minimum. Stores granting 
credit and giving free telephone order and delivery service will charge 
more than cash-and-carry units, but prices will differ little above the 
cost of efficiently furnishing those services. 

Assuming reasonable efficiency, prices upon identical goods may 
dift'er by 10 percent or more within a city and by 20 percent or more 
within a State. And, with such differences, each food dealer may be 
making the same small profit or no profit at all. When it is recog- 
nized that some concerns are eflScient and others very poorly run, it 
is possible for prices to vary quite materially without any profiteering 
actually taking place. 

Just one little item to illustrate how we become accustomed to 
this: Practically I all of the supermarkets and many other operators 
sell Baby Ruth candy bars, gum, and similar things, three for a dime, 
and yet, in hundreds of outlets over any town or city, those are sold 
for 5 cents straight. Now the difference there is a difference of a 
third in price, or 33 K percent. 

Dr. Thorp. Professor Haring, I wonder if you would be willing to 
supplement your statement by indicating what you mean by the 
word "profiteering"? 

Dr. Haring. That is a diflBcult statement. In general, I consider 
profiteering, in my own mind, to refer to the taking of an abnormal 
profit, probably based upon unjustifiable circumstances. That is too 
strong, but certainly profiteering means to me more than a very low 
margin of profit. 

Dr. Thorp. That is, in your mind, it relates to the level of the 

Dr. Haring. Yes, sir. 

Dr. Thorp. And you have, I take it, then, some feeling as to what 
is a fair profit? 

Dr. Haring. That is an even more awkward question. In gen- 
eral, in business (considering the Government's activities in the 
World War, where they set as a fair profit "cost plus 10 percent," 
or 10 percent for net profit) I would say that, when the profit is under 
5 percent on sales, that our heritage and background indicate that the 
burden of proof is on the person who claims that to be profiteering. 

Dr. Thorp. I wanted to get that clear; 5 percent on sales, not on 
invested capital? 

Dr. Haring. Reverting again to the World War period, that is 
what the Government did — that is the stand it took. Actually, the 
retail operators in the last 10 years that have made 5 percent on sales 
or even 3 percent on sales over the decide as a group are rare. You 
would have to hunt a long while to find them and in the food field, 
you might' need a microscope. 


Dr. Thorp. You would feel that this fair rate of profit would be the 
same for enterprises in various industries, enterprises in various places, 
enterprises in risky activities and less risky activities, and do you feel 
there is a standard that can be applied to all industries? 

Dr. Haring. If so, it must be a flexible standard. Obviously, a 
drug firm, one part of whose service it is to keep on hand for emergency 
certain types of pharmaceutical and other medicines, which will have 
a turn-over of once every 3 months or even 3 years, would have to 
have a larger net profit on sales, to counteract the factor of turn-over, 
which, on the other hand, could be much more modest for a grocery 
store with a much faster turn-over. Many of the large grocery 
operators have had profits on sales running from 1 to 1}^ percent of 
sales that have been very satisfactory. 

Dr. Kreps. 1 was going to say, if you figure the rate of profit on 
sales, wouldn't it be true that 5 percent in some fast-moving lines 
might give a very great return on invested capital, and, in other cases, 
a margin larger than that would give no return at all? 

Dr. Haring. Yes. I tried to state it very carefully. I will see 
if I can mend my words, that when a rate of profit on sales of 5 percent 
or less was obtained, it was really up to the critic to prove that it was 
profiteering, and, in some lines, that would be undoubtedly true. In 
other lines it might not be. Now, even there, you come across this 
problem: Let us suppose that a really efiicient competitor enters an 
area where there is great inefficiency and can cut the retail price, 
assuming this would be possible, 10 percent to the consumer and still 
make 5 percent on sales. That would be giving the consumer the 
benefit, and a very high profit to the operator, and you would have to 
credit that to the inefficiency of the competition. 

I think what you would want would be more and better people of 
his nature to increase a little the efficiency and then work down that 
profit margin. 


Dr. Kreps. What relationship is there between this figure that you 
term profit on sales and mark-up on cost? 

Dr. Haring. I just don't know how to answer that. I don't have 
your question clear in my mind. Could you reword it, please? 

Dr. Kreps. Suppose that a firm customarily marks up its furniture 
40 percent on cost, meaning that for every dollar it has to pay, it 
charged $1.40. That mark-up on cost could be expressed as a percent 
of sales, could it not? 

Dr. Haring. Right. 

Dr. Kreps. I could do it in my head if I had chosen a dollar and 
a half instead of a dollar forty. 

Dr. Haring. That's right. Ordinarily, in the field of retailing, 
your percentages are spoken of as a percentage of sales price. 

Dr. Kreps. Now, the question I was really getting to was this: 
In general, are there any figures that are quoted by experts in mark- 
eting or merchandising concerning the percent of mark-up or the 
percent of profit per dollar of sales, that the/ ought to get? Is there 
any general mark-up figure such as 20 percent or 33)3 or 40 percent 
or something like that? It varies by line of merchandise. 

Dr. Haring. It varies by line of business. Your druggist, for 
example, dropping into the fair-trade areft where they have stated 


their aims, feels that they should have a 50 percent mark-up, which 
is a SZVi percent margin. In the food field, they would rather hke, 
or try to get, about 25 percent mark-up, which would be a 20 per- 
cent margin, depending on your type of operator. You have a tre- 
mendous variation in retail cost. There have been reported to be 
reputable supermarkets which claim to be operating on a cost of about 
6 percent of sales. In the case of certain service independents in 
combmation stores, we get up to 15, 16, 17, or 20 percent. There is a 
tremendous variation there. 

Dr. Kreps. Wasn't it drugs that you named? 
Dr. Haring. Yes. 

Dr. Keeps. If they secured or are able to enforce a gross margin 
of 33K percent on sales, that, I take it, would be in excess of the 5 
percent which you spoke of a moment ago as being fair. 

Dr. Haring. The drug costs vary, of course, but for our purposes 
I think we can say they are about 27 percent, which would give us 6 
percent. Now one of the troubles with all our retail price figures I 
think might well be mentioned at this pomt. We frequently do not 
get the mark-down sales, what proportion of the merchandise is mark- 
down, what volume is sold in those mark-down sales. Similarly, 
there is a tendency in the food figures not to get the week-end specials, 
which accoimt for a tremendous volume of food moved. 

As I understand it, most of the food indices coUect the figures the 
early part of the week, although the big food movement is your 
Friday and Saturday movement which is ordinarily characterized by 
a series of what are known as specials, very favorable prices on certain 
items which ordinarily move in quite large volume. So, even hi this 
case, what your druggist is asking for is a top price frona which he will, 
as occasion comes, cut, and that is one of the outstanding weaknesses 
of our retail-price information, that we don't get some of those things. 
Mr. HiNRiCHS. Mr. Haring, I was interested in the point that you 
just made with reference to the pricing of specials. It is not all due to 
accident that those special sales aren't priced. Don't you feel that in 
general those special sales bear some kind of a relationship to prices in 
the earlier part of the week? That is a recurring phenomenon, isn't 
it? The amount of the mark-down depends partly upon what was 
earlier being carried. 

Dr. Haring. Yes, sir. It is a recurring phenomenon. Many 
people, however — I can speak for only a relatively small sample; I 
probably haven't talked to more than 400 or 500 people on the sub- 
ject — quite accountably buy goods on Saturday, let us say, and buy 
enough, and they are eating the hash of the Saturday purchase 
Monday night or Tuesday. A good deal of food is purchased Satur- 
day. Sometimes special sales in canned goods will be for very limited 
times; whether a full week or a fuU month, all the figures undoubtedly 
catch some of them, but I have a feelmg myself that this is quite a 

I have watched the operation in Bethlehem, Pa., very carefully, 
because I had an interest, and there the supermarkets had set up a 
system of cashmg the pay checks of the Bethlehem Steel Co. I have 
seen any number of families come in, particularly on days when there 
were specials, and load up. I watched the store checks, and many 
checks would total $14 and $15 for a labormg family. How long that 
would last them I don't know. They woidd take advantage of, let's 


say, 8K cents — 14 cans for a dollar, and buy the 14 cans. I don't 
know what proportion of the total food trade that is, and I don't 
know how we could find out, either. 

Mr. HiNRicHs. Those special sales prices, however, tend to be some- 
what erratic and to some extent peculiar from store to store. Wouldn't 
that be true? 

Dr. Haring. That would undoubtedly be true, but there is a tend- 
ency for every operative who is depending upon prices as one of the 
major factors for his patronage, to have such specials with a surprising 

Mr. HiNRiCHS. All that I was trying to get at was the point of view 
of measuring long-time changes in the level of food prices. For ex- 
ample, in making a comparison of this year's prices with last year's 
prices, there is a degree of certainty that attaches to the comparison 
of Tuesday prices in even a relatively small sample that would not be 
present in a comparison of week-end specials if you were limited, as 
Government agencies necessarily are with a limited budget, to prices 
from a comparatively small sample of stores. We can't cover the en- 
tire marketing system to catch these prices. Obviously, it would be 
desirable to have such a provision if it could be had. 

Dr. Haring. And you are quite correct that there is no reason to 
assume on the face of it that if you take Monday prices one year and 
compare them with Monday prices next year they might not be very 
comparable, probably as comparable as any other device you could 
work out. On the other hand, when the prices are used to compare 
with costs of operations and profits and you begin to talk in terms of 
profits, of course you have got to consider those other prices. 

Mr. HiNRiCHS. I think we would agree with you entirely there. 
That is, if you are coming down to a margin comparison and a profit 
comparison and that sort of thing, it is necessary to go at that with a 
very intensive and careful study of all of the surrounding circum- 
stances, and one of those would be the volume of merchandise that 
moved at mark-down prices. 

Dr. Haring. There might be stated just a little bit about the 
psychology of price cutting. Insofar as seems to have been de- 
termined, if you could take 10 items with a list price of $1 and cut 
them each to 91 cents, you would sell more goods, but if you took 7 
or 8 of those items and cut them to 96 cents or 97 cents or 94 cents 
and then took the remainder and cut them to 81, tha't is ordinarily 
conceded as being a better business plan, and that is one of the things 
that makes the price profit concept in the retail field so difficult to 

According to the census, there are some 532,010 food stores in the 
country. Many of these stores, as already shown, are small. Any 
form of direct supervision of this great number of stores would probably 
cost more than it could, save the people. Moreover, there is doubt 
as to whether these food dealers have made any exorbitant profits 
during recent years. 

Dr. Thorp. Mr. Haring, what would your guess be with regard to 
the total picture of these 500,000 stores? Let's make a guess that 
perhaps 100,000 of them survive only 1 year. Would that be a fair 

Dr. Haring. That would be a fair guess. 

Dr. Thorp. Now in those cases you would have obviously a very 
considerable loss of capital. 


Dr. Haring. Right. 

Dr. Thorp. So that if we were actually considering this general 
activity as in terms of a profit-making type of activity, it would be 
true, wouldn't it, that it is a loss acti\dty in which consumers are 
getting this form of distribution through, in a sense, subsidy provided 
by individual savings, borrov^ings, and such things? 

Dr. Haring. There are so many complications that I would not care 
to deny a word that you have suggested, but let us look at one or two. 
The small independent store is a most interesting proposition on an 
employment basis. If we were hired by an outside organization, and, 
let us say, during the late twenties were making $50 a week, we might 
take a cut when the depression became severe, to along about $35, 
possibly even $30 a week. At that time it is quite probable, in terms 
of a retail store, that the store would become improfitable and be 
closed, or we would decide that we wouldn't work for that little for 
this corporation. 

But you take that same picture with an independent food retailer. 
He is his own boss, he likes to run the business, he gets his groceries 
wholesale, and he has a job, his wife has a job, and the children have 
a job, and it is quite possible that he may run his wages down to zero, 
or, as you indicate, even lose, and still he isn't on the unemployment 
basis, and therein you come across a wage figure. The only way the 
Census Bureau, with these small proprietorships, was able to handle 
this problem was to take the charges where they were available and 
then compute them and project them for the rest of the stores. We 
ruii across some very difficult concepts as to whether they did or did 
not make a profit. The field divides itself, roughly speaking, in some 
such manner as this: Some 40 percent' of the food business, lumping 
it all together, is done by the chains through various types of opera- 
tions, and your voluntary groups of memberships probably would 
account for another 40 percent, although many of these member 
stores do a small volume of business through the voluntary hook-up, 
leaving some 20 percent of the business, let us say, that is handled 
by unaffliated independent food stores. 

There may be a little disagreement on the broad scope of those 

Dr. Thorp. That 20 percent of the business represents what part 
of the half-million stores? 

Dr. Haring. Maybe 300,000. I am shooting out of my head. I 
could look it up. That may be off somewhat, but that is it roughly 

Dr. Kreps. In this connection, what is it that you understand by 
the high cost of distribution? 

Dr. Harding, There we come to meet the twentieth-century fund 
report and various other things. My feeling is that distribution is 
high cost when for this type of (let us say, these small stores) service 
food retailer, the cost of the independent is materially above the 
average for his type and kind, considering size of city and other 
conditions. That is my concept. 

Dr. Kreps. Isn't it quite true, shifting for a moment to manufac- 
turing, that under conditions of monopohstic competition you get 
industries in which few firms operate, in which prices charged are high, 
in wliich you get excessive capacity, w^th the result that price be- 
havior tends to be more stable, production unstable. The industry 


prices itself often at such a level that profits are relatively small. 
They have on occasion priced themselves out of the market. We 
say that that characterizes to some extent the phenomenon of monopo- 
hstic competition. 

Might it not be true in retailing that you have a pattern of essentially 
similar sort. Granted you do not have few competitors, none the less 
you have a psychology against cutting prices. The price cutter is 
regarded essentially as a chiseler, with the result that you have too 
large a gross margin, too many people go into that field. None of 
them individually make large profits. Yet in the aggregate they 
cost society too much in terms of service rendered. 

To use a very homely illustration, any farmer knows that you are 
likely not to have very good wheat over a straw pile, not because the 
ground isn't fertile but because the ground is too fertile and too much 
wheat tries to grow. No individual stalk gets much in the way of 
wheat in the ear. Similarly here in retailing, margins are too high, 
you price yourself out of the consumer market, you develop excessive 
capacity, the only difference being that in manufacturing that exces- 
sive capacity is concentrated in large blocs, whereas here with split 
ownership excessive capacity is split up among thousands of small 

Dr. Haring. There is no doubt but that size and low cost of retail- 
ing within broad limits are factors, and if you examine the cost of 
doing business of this typical smaller retailer of $5,000 volume or less 
in foods, and take one of $25,000 and one of $50,000, and take your 
available figures, you will find that the larger volume, to that point 
at least, wUl show a distinct saving in cost, and naturally there is a 
tendency on the part of the thousands of small food retailers to obtain 
a margin which they think will keep them in business and lead to a 
profit, and that has given the more eflScient operators continually an 
opportunity to advertise price, because their costs are lower. 

Possibly food prices, analyzed in the way you attack — that is, the 
margin necessary for the small retailer to make a profit — are higher 
than they need be, but if the consumer has an alternative of going 
and paying cash at the supermarket, or going and charging at an 
efl5cient voluntary chain unit, we might assume that the consumer 
doesn't know that much and isn't that careful; but if they do, that 
shrinks that margin about where it should be, and I wonder if the 
fact that this occurs isn't represented by the number of these small 
operators that go bankrupt. 

Dr. Keeps. You don't think that the number of the small operatives 
who go bankrupt is probably a function of the ease with which persons 
of small capacity and small-business experience are attracted into 
what seems to them a relatively simple line of enterprise, and 
that if freedom of enterprise, so to speak — meaning by that freedom 
to enter the retail field — were made conditional upon possession of a 
larger amount of capital, or demonstration of a larger amount of 
business experience, or the competition that existed was competition 
by large concerns operating on a smaller gross margin, the number of 
failures might be materially less? 

Dr. Haring. The number of failures I feel perfectly confident would 
be materially less, but the attractions at present I do not think are 
profit so much as the two things that stand out, your own groceries at 
a wholesale price, and employment, and your hope for the best. 


I am rather inclined to believe that the prices of the most efficien 
operators in the field would not be influenced if these people disappeai 
that they are doing their job, and it is up to the consumer, and th 
small independent has to adjust his price to get enough busmess t 
keep going or he goes out. Now there is a large social waste takin 
place through these people coming in and going out and losing thei 
small savings, and there have been a number of proposals that possibl 
we ought to license these people, requu*e a certain amount of capita! 
make them take an "exam," like a doctor, but up to date that has no 
taken hold the way some of the other proposed changes in our syster 

Dr, Thorp. Are there some illustrations of that having been acti] 
ally done? Are you famihar with Wisconsin's control over automobil 
dealers, for example? 

Dr. Haring. I am familiar with some phases of it. Automobil 
dealers, did you say? 

Dr. Thorp. Yes. 

Dr. Haring. I am famUiar with the licensing system from the poin 
of view of controlling installment-selling technique in a number o 
States. I did not laiow they had done that on the basis of capital 
however, or proof of retail efficiency. 

Dr. Thorp. I beheve there is a State regulation in Wisconsin whicl 
requires one to get approval from the State government before on 
can enter that field. 

Dr. Haring. Do you happen to know whether there is any grea 
test involved, any examination? 

Dr. Thorp. No; I don't know. I was hopmg that you might. 

Dr. Haring. No, sir; I am sorry; I have examined that set-up onl] 
from the installment angle, where they are licensing, and in a numbe 
of States, I think, that has been very happy. 

Dr. Kreps. At any rate you would agree that the mere fact tha 
there are a number of retailers who fail is not ipso facto evident 
either of a subsidy being given to consumers, or of a level of mark-u] 
being too low. It might very well be that consumers suffer becausi 
of the high mark-up and the economy as a whole suffers because o 
inefficiency in distribution, and that measures which would look towan 
increasing efficiency of distribution might very well make it unUkeb 
for so many inexperienced, undercapitalized persons to enter the field 

Dr. Haring. There is no doubt but that a hmitation on inexperi 
ence and lack of capital would help a great deal. As a matter of fact 
that probably is one of the thoughts in the mind of Congress whicl 
they recognized when they passed the George-Deen Act for training 
in the distributive trades. 

Dr. Thorp. I wonder if I may ask if you have any opinion yoi 
would like to give with regard to equalizing this competitive situatioi 
through chain-store taxation. 

Dr. Haring. My personal reaction, and in that very controversia 
field it must be personal, is that if the chains are able to sell at lowe: 
prices through some unfair advantage, we ought to eliminate that un 
fair advantage. If they obtain their advantage through open anc 
aboveboard efficient operation, it seems highly undesirable to tax th( 
consumer that amount because it will raise consumer prices and thui 
give the inefficient, who make the next higher price level, an oppor 
tunity to continue in business. 


Now, insofar as the chain retains the business and the Government 
collects a tax, it will have to get taxes anyway, and there is probably 
no great harm, but insofar as it puts a chain out of business and the 
result is the consumer pays a higher price and the Government gets 
nothing, it seems to me it is open to grave doubt. 

Acting Chairman Avildsen. What do you mean by the chain 
having an unfair — what were the words you used? 

Dr. Haring. Unfair advantage. I used that wording because the 
investigations which led up to the Robinson-Patman Act, in the minds 
of Congress, indicated that in some buying practices the large buyers 
had unfair advantages, otherwise Congress would not have passed the 
act. Now, when you examine any of those facts, there is a tremendous 
difference between men in the field as to whether those price differ- 
entials were justified or unjustified in a multitude of cases. In some 
individual specific cases they were undoubtedly very differential. 
When you take a thousand cases, for example, the people in the field 
do not agree whether they were unfair or not. Certainly the Robin- 
son-Patman Act in general has had the effect of limiting quantity dis- 

Acting Chairman Avildsen. Have you finished your formal state- 

Dr. Haring. I was given a third subject here, which I am a little 
bit afraid of, but I will try. 

According to the census, there are 532,010 food stores in the country. 
Many of these stores, as already shown, are small. Any form of 
direct supervision of this great number of stores would probably cost 
more than it could save the people. Moreover, there is doubt as to 
whether these food dealers have made any exorbitant profits during 
recent years. 

The Federal Trade Commission found that, during the prosperous 
1920's, the food chains made net profits of between 2 and 3 percent 
of sales. The comparable figures are available for the industry only 
in fragments, and in general follow the statement that I have made in 
writing here, that they are considered to be smaller, than the chain 
profits. As a matter of possible interest, the National Association of 
Retail Grocers felt so strongly that that was the case that they wrote 
to me and asked me if there was anything I could use in my testimony, 
and I said I would like to know what they had on independent profits, 
and they Indicated the fragmentary sources which I already had, and 
said they were so sure that this was the present situation also, that, 
if I wanted to read testmiony in a month later, they would go to any 
amount of trouble to collect figures. They are convinced that the 
present margin of profits is even more modest, rather than greater. 

Dr. Kreps. Here you use "net" profits. That isn't the same as 
mark-up, is it? 

Dr. Haring. No, sir. That would be net profits on a sale with, 
theoretically, all expenses paid. 

Dr. Kreps. What would you say the gross mark-up was on cost, 
or sales? 

Dr. Haring. Possibly I had better look at that this way. There 
is a tremendous variation' in cost. Your supermarket, depending on 
various authorities, will run, oh, an average of 9 to 10 percent. Then 
you would add their part of the chain operation, which would be 13- 
percent margin on seUing price that they would require. 


Now, your straight grocery chains probably would have a cost 
around 12 percent, and that would give them a margin of 14 to 15 
percent. Your combination stores, combinations of groceries and 
meats, have a little higher cost than your dry groceries, which might 
shoot them up a couple of percent, and your independents are a little 
higher up the line than that, so you would probably have a gross 
margin in groceries today from about 11 to 25 percent, all being effi- 
ciently run. That is a general picture, and some of these representa- 
tives of these retail trade associations would want to get some fractions 
in there and change them a little, but that is a composite over-all 

Dr. Keeps. Now, if you want to convert this figure of net profits 
into profits per dollar of invested capital, you would need to look at 
turn-over of inventory, wouldn't you? 

Dr. Haring. And you would need to look at invested capital. 
Your effect depends to a considerable extent on whether you own 
your property. 

Dr. Keeps. In manufacturing there is a substantial group of indus- 
tries wliich consider themselves fairly lucky if they make a dollar of sales 
per dollar of invested capital a year. What would you say would be 
the relationship between sales and invested capital in merchandising, 
particularly in the food chains here mentioned? 

Dr. Haring. Well, it again has a tremendous variation, but I 
would say that a well-run chain ought to get a turn-over of pretty 
nearly eight times. 

Dr. Kreps. Its sales ought to aggregate from 8 to 10 times its 
invested capital? 

Dr. Haring. Times its inventory. Now, its invested capital 
varies so much that you can't use it. Some of the larger chains are 
now going so far as to pretty nearly rent all their stores and rent their 
trucks and run them on a lease basis, and you just can't reach a 
figure, because of the variation of individual operation, on capital. 

Dr. Kreps. Of course such rental figures would be included in cost. 

Dr. Haring. That is correct. 

Dr. Kreps. Therefore a net profit figure of 2 to 3 percent of sales 
would, in your judgment, making the most likely kind of estimate, 
mean 8 times 2, to 8 times 3, percent of profits on invested capital. 
That is between. 16 and 24 percent on invested capital. 

Dr. Haring. No, sir; the inventory wouldn't be, or turn-over in 
that sense wouldn't be, the measure of the invested capital. There 
would have to be more than that. There is a good deal of working 
capital. But your successful chains ought to make, on the basis of 
their invested capital, 8 to 10 percent. 

Dr. Kreps. During this period do you know whether or not that 
was what they made? 

Dr. Haring. You are now getting over into the area of possible 
watered stock and various and sundry other things, but the operations 
during the last decade of the well-run chain, where they haven't 
been in any particular tax trouble and the like, in the food field, 
would, in my estimation, run along about that figure. 

Acting Chairman Avildsen. What does A. & P. make, if you 

Dr. Haring. Again you have your problem of capital and capitali- 
zation. One year I remember, in the thirties, A. & P. made 


$15,000,000 on sales, I believe, of 900 million, which gives you about 
1 Yi percent on the sales basis, net, and that gave them a satisfactory- 
dividend on their common stock, I believe. 

Acting Chairman Avildsen. You don't know what the percentage 
of profit on invested capital was? 

Dr. Haring. There is where I am very dubious about any evalua- 
tion of stock at market price, or the like. 

Acting Chairman Avildsen. I mean by invested capital the differ- 
ence between the total assets and the liabilities other than stock and 

Dr. Haring. I am sorry; I wouldn't care to guess at the A. & P.'s 
investment on any specific year. They have changed their operations 
radically in certain years. 

Acting Chairman Avildsen. Do they publish a balance sheet that 
would show all that? 

Dr. Haring. Yes, su* ; that is all available in the standard operations. 

Acting Chairman Avildsen. You might, if you care to, submit 
such a balance sheet for the record later. ^ 

Dr. Haring. I will be pleased to. 

Is there any chain besides A. & P. that you would like? 

Acting Chairman Avildsen. No; I think not, but if you can find 
out what their earnings are on net worth, which has nothing to do- 
with the market value of their shares, or how much water there may be 
in the shares — I mean the net worth is, what is the company worth? 
Take their assets and deduct their liabilities and that is the net worth. 

Dr. Haring. I have been a little bit of a skeptic. I have done it 
for certain companies at certain times. I am still skeptical, but I 
will be glad to submit it. 

A.'^ting Ohairman Avildsen. Why are you skeptical? 

Dr. Haring. It is a question of how your inventories are calculated 
and a question of various evaluations. 

Acting Chairman Avildsen. If the inventories are calculated at 
cost or market, whichever is lower, which would be the policy fol- 
lowed by such a company 

Dr. Haring (interposing). And what they own, and they do own 
some things, how they have evaluated those at their current or pur- 
chase price; and that is why I have always been dubious. 

Acting Chairman Avildsen. You may proceed. 

Dr. Haring. The chains during that decade are generally conceded 
to have been a very profitable type of food retailing, yet their known 
profits were not exorbitant. In the less prosperous times since 1929, 
food chain profits have fallen. The profit figures for small independ- 
ent food stores are not ofl&cially available in detail, but it is usually 
conceded that the average profit is low, probably materially under 
chain profits. The facts do not indicate any widespread profiteering 
over a period of time. 

Dr. Kreps. You base that statement on other facts than those you 
put here in the record, do you not? You just admitted a moment ago, 
that you cannot reason from 2 and 3 percent on sales to any conclusion 
about the reasonableness of the level of profit on invested capital; 
that would depend on turnover and a host of other factors, would it 

« Subsequently submitted, entered In the record on Dec. 18, 1939, as "Exhibit No. 1683" and appears in 
appendix, infra, p. 11380. 


Dr. Haring. You are absolutely correct, sir. In the case of food 
chains in a broad way, when those things are applied in a broad way, 
the figures come out at what I think — when I submit those and 
possibly others, you will reach the conclusion that they are not 
exorbitant. They have been reasonably fair. 

Now, the reason that the independent figures are so bad is this: 
Again, imputed wages of management. So many of the figures, for 
example, received by the Census Bureau have to impute wages. Now, 
they impute those on certain bases that are probably the best they can 
do, but if you came across a wage-and-hours bill which was applicable 
to that, why, you would have to put them out of business because they 
pay themselves too little. 

Dr. Kreps. Isn't it probably a fatal error of consumers ever to 
exhibit a willingness to buy large amounts of a specific item at ma- 
terially enhanced prices? 

Dr. Haring. It is usually unique when it occurs, but apparently 
with the time of year where a number of people did canning, with a 
hangover of the sugar psychology of the World War period, in certain, 
I don't know how widespread, but in certain well, known areas, that 
very thing happened. It projected itself even more broadly. I know 
in one isolated case, that one of my marketing association members 
bought a hundred and twenty dollars' worth of canned goods. He 
was going to eat this winter. 

Dr. Thorp. Have you any information that might indicate that the 
retailers themselves contributed to this jump in sugar prices by 
encouraging consumers to buy? ' 

Dr. Haring. The facts seem to be that the amount of sugar in 
the country was perfectly adequate, but that, with the quick psycho- 
logical reaction, the people cleaned out retailers who had difficulty, 
of course, in getting sugar for the next morning in some cases. They 
put the pressure on the structure above them, some of the operators 
possibly feeling exactly the way the consumers did, and actually 
advertised specials of sugar at higher prices, and sold very large 
quantities of it. 

Dr. Thorp. If the retailers had determined to keep the price of 
sugar down and had advised consumers that that would be their 
policy, would that have been of any influence? 

Dr. Haring. Of course, that is rather antagonistic to human nature, 
when you have an opportunity to sell out at a good price, to advise 
your customer not to buy. 

Dr. Kreps. You should say, contrary to monopolistic human 
nature, because quite obviously where you don't have monopoly, 
but where you have competition, it is equally human nature to sell all 
you can, is it not? 

Dr. Haring. That is correct, and I suppose that the situation that 
existed in certain towns was a group of competitors who were in a 
semimonopohstic position because, for a few hours or a very few days, 
they could not lay their hands upon reserves adequate to fiU their 
demand at available prices. 

Mr. Hinrichs. Isn't that largely nonsense in terms of public policy, 
anyhow, to even talk about temporary monopolies? I mean, we have 
enough in the way of monopoly in this country without worrying 
about. whether Joe Zook in the upstate corner of Pennsylvania, for the 
time being, happens to be the only man selling sugar. Of course he is, 


but is there any way in the world that you can conceive of dealing 
with these temporary flurries in the market when they occur? 

Dr. Haring. Would it be appropriate to ask if the witness is per- 
mitted to cheer at the statement of the committee member? 

Mr. HiNRiCHS. Well, what I want to drive at is that there is an 
enormous amount of excitement that is occasioned by things that 
probably, from a social point of view, are highly undesirable, but where 
there is no realistic method of approaching them as problems of regu- 
lation. The things that we can do in a situation of that sort are per- 
haps to have available a greater regular flow of information, better 
information, with reference to what the situation is. If we could have 
as much competition as we normally get in the grocery field, if we 
could have that in all fields, we could feel relatively happy and we 
wouldn't need to talk about monopoly, even though instantaneous 
monopolies might develop 'at one time or another. 

Dr. Haring. My thought is that your statement is excellent and 
that the way the sugar boom, if you could call it such, was broken by 
the Government makmg an annoimcement about increasing certain 
allotments and the like, in a way offers the technique for handling 
that sort of problem without getting involved in a great many details 
and expensive supervisions. 

One practical and inexpensive solution which might well be workable' 
lies in publicity. Mass psychological movements are not secret but 
public. Newspaper and radio statements ought to burst quickly any 
unfounded bubble. Where violent price rises are justified, a more 
severe problem arises. Even here, publicity ought to do the job. 

A newspaper or radio column may be permanently worth while to 
serve the people as consumers of foods. In such a column, the justifi- 
able rise and fall of retail prices could be stated, not technically, but 
in tenns of the recent past. For example, when meat prices ought to 
rise, Such a statement might read, "Lamb is scarce this fall and lamb 
prices will be greater. If your dealer increases lamb prices over 2 
cents a poimd, however, he is overcharging you." And the dealer 
who tried to get 4 cents per pound more for lamb would have quite a 
bit of explaining to do. No dealer, in addition, can afford to lose 
steady customers, and every retailer knows that a customer, once 
doubtful about the honesty of a store, will soon shift to a competitor. 

Now, before I am questioned, I would like to make this statement. 
It came up in this mommg's testimony and discussion. I have been 
very much impressed by the effect of the radio and newspaper an- 
nouncements upon the activity of our farmer group, both in the way 
they sell and in the way they buy and in the way they follow prices, 
and although possibly only a very rough job can be done in the con- 
sumer field, today our consumers are not very well informed in terms 
that they can look at. 

Now, from up above to down where the consumer is, is an oppor- 
timity to do a job, and I think that that sort of publicity will give a 
quick reaction — it could have had in this sugar case that came up — 
and it brings up the question. Should the Government do it? Well, 
I merely suggest that question; I don't know who should do it. 

Acting Chairman Avildsen. Have you ever talked to any publish- 
ers of large metropolitan newspapers about the question? 

Dr.TlARiNG. No, sir; I have not, because 

Acting Chairman Avildsen (interposing). Would it not interfere 
with their advertising business? 


Dr. Haring. It might, but it shouldn't. The big advertisers 
ordinarily in foods use a good deal of price bases, and what they 
advertise are usually their specials and it is inconceivable that their 
specials would have prices higher than any such column would 

Now, in the process of time, the agncultural prices have gotten into 
the papers, the movie programs have gotten into the paper, the re- 
views of the movies are in the papers, and it seems to me the thing 
could be built up and the newspapers would find it one of the services 
that they could perform, and I believe might well be willing. 

Dr. KTreps. At any rate, action on a local scale would be what you 
would recommend here, would it not? 

Dr. Haring. Yes, sir. The local problem of the town of 5,000 
people with some agriculture, and let us say, one small factory, with 
or without any chain unit or supermarket, is entirely a different 
problem than the metropoUtan one of New York or Washington or 
Philadelphia or Chicago. 

Dr. Kreps. Therefore, while information might be furnished in 
part from some central, say. Federal agency, the real task of massing 
effective pubHcity and of taking remedial measures, so far as retailing 
is concerned, would have to stay in local hands. 

Dr. Haring. I think that is highly desirable. It is my own feeling 
that this sort of a job is one which business, through chambers of 
commerce, better-business bureaus, trade associations, might find a 
very fruitful one, rather than having the Government go in directly. 
I personally feel that in this sort of thing, there probably is a desira- 
bility of having a httle threat in law, if certain stores may not be 
willing to "play ball" and, in a little bit of a monopoUstic situation, 
rate though it may be, try to take advantage of it, but insofar as pos- 
sible, the Government has much more to gain by possibly furnishing 
facts and then stepping out of the picture. 

Dr. Kreps. What facihties do locahties have for bringing pressure 
to bear? 

Dr. Haring. The one thing the woman food buyer is resentful 
about is being overchar^^ed when she can prove it, and T tlnnk that 
the women of these local places could give some dealers a discipline 
such as no government could give. 

Dr. Kreps. How do they do that? Are there local organizations 
that act on behalf of consumers to police retailers? At any rate, they 
inform consumers in the locahty about the best bargains? 

Dr. Hartng. It is very awkward to judge merchandise upon any 
known set i f standards compared to the way consumers will rate it in 
desirability. The most you can do, I believe, is to assume the retail 
structure the way it stands, the price level at a time of reasonable 
business, and talk about increases and decreases as they ought to come 
in dollars and cents at their store. It may be a flexible level, and then 
let them search around to find tke type of set-up they want, in quality, 
in grade and service, and let the stores adjust to the consumers. 

Dr. Kreps. Don't certain cities — I may be wrong in this — but 
doesn't New York City, for example, have a bureau of markets, that 
gives advice daily to consumers? 

Dr. Haring. Their bureau of markets, I beheve, runs a daily 
program, particularly on things that may arrive in the city currently. 
Now, New York is particulany fortuitously located for that because 

124491 — 40— pt. 21 19 


many foods from the West and other distant places, movmg with a 
diversion in transit privilege, are shunted into New York if they don't 
find a good sale elsewhere, with the result that you have a little bit 
of a dumping situation, and they perform a good service in that they 
indicate the appearance of bargains. But until I examined this sub- 
ject some 6 weeks ago and ran across this in the bibUographical refer- 
ences and looked it up (and I have been interested in the consumer 
movement) I just had never heard of it, so it hasn't had any widespread 
pick-up over the country. I just casuaUy heard about it, but — — 

Dr. Kreps (interposing). But it is such an agency that you have in 
mind as being a fairly good agency, locally, to keep the local consumers 

Dr. Haring. I would rather put it that way, that is one of the local 

Dr. Kreps. That you think ought to be developed? 

Dr. Haring. That is correct, in the smaller towns I think that the 
local busiuessman, in a less official way, if you get the information 
coming down from the top, I think that business itself can provide 
without very much Government help or assistance, a way of interpolat- 
ing the useful information that will be eflFective. You cannot build a 
mountain in a minute, and I think it is time we started. If we get our 
consumers looking for such information, then when a critical time 
comes, such as in this sugar case, they won't do foolish things, as long 
as they can have confidence in the information from the top being 


Dr. Kreps. Now, suppose they find that their action is not as 
effective as they would like to have it, due, let's say, to some united 
front among manufacturers or distributors or retailers. Are there 
local laws. State or municipal, that can be invoked by the consumer? 

Dr. Haring. Yes; there are a number in the States, and a very 
recent summary, which I beUeve to be very dependable, is one made 
out by the American RetaU Federation, with the date of November 
3, 1939. It lists four types of State laws: Antitrust, laws prohibiting 
hoarding, laws prohibiting the destruction of food, laws giving State 
agencies and municipalities authority to control prices, with a tabular 
summary of these laws for each of the 48 States, which may be of 
interest to the committee, and I would like to submit it. The cover- 
age is not thorough as regards the number of laws and their enforce- 
ment, but we have the structure on our lawbooks, largely constitu- 
tional and aheady formulated, for giving these groups or municipalities 
or States, or some local unit, the backbone power to be able to drive 
in, if essential. 

Dr. Kreps, It is your impression, then, that invoking these meas- 
ures that are available locally, is about as far as compulsion of any 
sort should go in the retailing and distributing field? 

Dr. Haring. Assuming that the laws that seem desirable are pro- 
jected to cover more States and municipahties than they now do, we 
have merely the structure and some of it is very excellent and some 
of it may work badly. 

My feeling is that if forceful regulation is necessary, it should go 
back further, go back to the wholesale market. Now, the wholesale 
market is a very broad picture, but the point I want to make is this: 
The retailer buys and depends on a certain mark-up in terms of per- 


cent; in some fields the wholesaler buys and he has a certain mark-up, 
usually in terms of j)ercent. Now, somewhere back along the line is 
an individual or a firm who, in a case of rising prices or scarcity, is 
setting its prices quite probably without much relation to cost, with 
much more relation to demand. Now, insofar as possible, your regu- 
lation ought to take place back there at a place which varies for differ- 
ent commodities, but certainly it isn't in the retail field. 

Possibly I should read the written testimony I have. 

Dr. Keeps. Would you like to finish the reading of the written 
testimony? I would ask, Mr. Chairman, if that could be submitted 
for the record [indicating statement of the American Retail Federation, 
to which the witness had referred.]. 

Acting Chairman Avildsen. Would you Uke it to be filed with the 
committee, or do you think it should be printed in the record? 

Dr. Keeps. I think it should be printed in the record. 

Acting Chairman Avildsen. It may be printed, then. 

(The statement referred to was marked "Exhibit No. 1523" and is 
included in the appendix on p. 11370.) 

Dr. Haeing. In case forceful price regulation is deemed necessary 
for foods, the wholesale market is a more logical field in which to 
enforce price controls because (a) there are many fewer wholesalers 
than retailers; (b) there are wholesale markets with recognized prices 
in many commodities; (c) wholesale houses are larger in size with 
more adequate personnel and records; (d) wholesale prices gyrate 
much more severely and rapidly than retail prices ; and (e) retail prices 
are determined by marking up the prices at which retailers purchase. 

To some extent, you can say exactly the same thing for wholesale 
prices, where goods move from manufacturer to service wholesaler to 
service retailer. It is somewhere back beyond the retailer. 

It may seem that I stated that in a confusing manner. That wasn't 
my thought. My thought was that it was a problem of the individual 
commodity or group of commodities, and I was pushing the problem 
back without saying where it should fall for a specific item. 

Practically, a control of wholesale prices and retail margins is 
simpler than to try to control retail prices directly. Even under 
emergency conditions, a newspaper and/or radio statement about 
food prices daily might well be the most effective and economical 
weapon to bring thousands of small food dealers into line. An adap- 
tation of the technique now in use to inform farmers of the wholesale 
prices of crops and Uvestock might well be applicable. 

Dr. Thoep. May I ask if you would be willing to indicate on what 
basis you would arrive at a decision as to when forceful price regulation 
might be deemed necessary? 

Dr. Raeing. Assuming for the moment that any problem of 
monopoly would be handled by the appropriate Government division 
and v/e can eliminate that, it is,my feeling (and it follows Mr. Nelson's 
this morning) that our productive capacity is such that this result 
would occur today probably only in a national emergency, such as 

Dr. Thoep. You would feel that ia a national emergency such as 
war, it would be necessary? 

Dr. Haeing. It would, I feel, be necessary then because there is 
one consideration if you are in a war, and that is to win. Anything 
you can do to make the adjustments as little rough iaternally as 
possible in the process of moving a large output of industry from 


domestic consumption into war consmnption, should be done to ease 
the shift. 

Dr. Thorp. I take it, then, that you are talking about price 
regulation, not merely in terms of foods, but complete price regulation? 

Dr. Haring. That is correct, sir, because the thing you immediately 
run into is the general lag in the rise of wages, and that precipitates 
some of the critical problems on our working class which, if possible, 
should be the last vitally affected. 

Dr. Thorp. I would like to ask a question, too, in one other general 
area. In recent years, there have been a number of laws, both 
Federal and State, which, it seems to me, have tended to limit the 
freedom of the retailer in determining prices — the Robinson-Patman 
Act, which has limited the freedom of certain retailers, the buying 
end, the resale price-maintenance laws, which tend to transfer certain 
problems of price determination to manufacturers, the unfair trade 
practice laws, with their mandatory mark-up provisions. What is 
your feeling about the significance of these limitations on price 
freedom during a period of price disturbance; will they be stabilizing 
factors or disturbing factors, or what? 

Dr. Haring. One of the greatest difficulties in answering that 
question is that a large proportion of our retailers, I don't think any- 
one knows how many, have never heard of the laws even in States 
where they are in force. I recently talked with Professor Gault of 
the University of Michigan, who did a study in 1939 on the reper- 
cussions of the Fair Trade Act on prices in Michigan. He found a 
large proportion of the dealers whom he interviewed had never heard 
of it, even though the State had this, and I have had similar reports 
from other sources. So we have one problem there that is difficult 
to answer. They have had no effect up to date. 

Mr. HiNRicHS. That is, they have done no harm because they have 
been violated; is that what you mean? 

Dr. Haring. They have done neither harm nor good, because the 
retailer didn't know they were there, nor did the operator. 

Mr. HiNRiCHS. Don't you think that is possibly a rather dangerous 
situation from the point of view of the habits of a democracy and 
having due respect for law? 

Dr. Haring. My small son taught me a new answer, and the 
answer is, "oh." Of course, these laws have been aimed at what are 
known as specials or loss leaders, as in price cutting, where it has 
proven advantageous to certain dealers to cut prices much more on 
a few special items than on the general run of merchandise in their 
stores, to bring people in. 

They then can make a gain in a number of ways: They can sell 
additional goods at full margin, they can create a customer who will 
"repeat," or. for the price-cut item they may substitute a different 
brand which, although selling at a still lower price, gives a full margin. 
Now, it has been claimed by many independent dealers that these 
large operators had loss leader prices at cost, below cost, certainly 
below cost, plus their operating expenses. They felt that that was 

If you read some of these laws, you will find that the food dealer 
must lawfully sell at cost, either his replacement or purchase price, 
whichever is lower, pli^s all his operating expenses, including overhead 
and everything you can literally think of, and then if you examine the 


operation in this State you find that some court or some committee 
or some commission has said, "We will take that as cost plus 6 per- 
cent." It is probable that the most efficient supermarket in the food 
field can't sell for a cost of less than 6 percent, and that would seem 
to be, if the independent was right there, some justification in setting 
a minimum price of cost, replacement or original, whichever is lower, 
plus the operating expenses of the most efficient competitor — in 
theory that is. Now practically, if you are going to do that 

Dr. Thorp (interposing). Would your theory still hold for that 
excess distributing capacity? 

Dr. Haring. In the highly competitive food field your efficient 
operators are moving at pretty close to capacity. The reason I said 
theory was simply this: that there is a disagreement as to what the 
most efficient operator is, exactly what his costs are, and I suspect if 
you are going to do that, if you have simply got to say the super- 
market is supposed to operate from 6 to 8 percent, let's make it cost 
plus 6 percent. 

Dr. Thorp. I didn't mean excess capacity of the individual store, 
but excess capacity in the industry, so that in fact since you put this 
in the realm of theory, shouldn't the return be less than cost until it 
has eliminated the unnecessary factors in the industry? 

Dr. Haring. In that competitive industry that minimum would 
put out a great many, as a minimum, without that being involved. 
As a matter of fact, the really efficient operators, regardless of type, 
usually are doing a fine busmess in spite of any competition. From 
the way I phrased a good many of these tilings you may feel that the 
independent is entirely inefficient. The well-run independent in the 
food or any other fine is not on the way out, decidedly not. 

The latest careful analysis based on actual shopping _ recently 
appeared in the Journal of Business of the University of Chicago, by 
Professor PhUlips of Colgate, and over a period of three surveys scat- 
tered over about 12 years he went to aU the stores in one or two cities 
in New York State and priced some fifty-odd items, and he found that 
cash chain prices the last year were running about 7 percent under the 
independent store average, of course less than that under the most 
efficient independents, and he came to the conclusion that probably 
the efficient offering of the service charge, credit, dehvery, telephone 
order, in those areas was probably approximately 7 percent, because 
the various competitors seemed to be in a healthy condition. 

Dr. Thorp. You have been answering in terms of your feeling 
about the unfair-trade laws. How about the resale-price main- 
tenance and the possibility there that a manufacturer if he wishes to 
do so can force advance of retail prices? 

Dr. Haring. In the food field those are 99^Xoo percent not used. 
As a matter of fact, there have been isolated attempts, I believe, to 
experiment, but in the true food field there has been so Httle use that 
you camiot reach a conclusion. In the field of drugs, liquors, and 
in one or two cases gasoline, more information is available, mostly 
in the drug field. The general conclusion seems to be something 
like this: that the initial effect has been to lower the prices on these 
controlled items as handled by independents, raise them as handled 
by chains and other large scale price retailers with a net result that 
is indeterminable except that many of the big operators may have 


seen Macy's ads about their own line of drugs and put in their own 
private brands. Just what the composite result will be I don't know. 

Dr. Thorp. Is the private brand something which any retailer can 

Dr. Haeing. Any retailer tean try. The difference between a 
private and a national brand amounts to something hke this. The 
national brand is well recognized as standing for a certain standard of 
quaUty and workmanship, style, and durability. We recognize that 
when we pick up an Arrow shirt or Hershey chocolate. Now that 
same item, without any name on it, in the field of textiles represents 
a shirt; you look at it and it looks aU right, you feel of it and it feels 
all right, but you have no guaranty as to whether it will shrink or 
whether it will wear, or as to the purity of the ingredients. 

In other words, the national brand has salabiHty when it is bought 
and the private brand hasn't. If a dealer wants to handle this 
unknown brand and put a name on it, he has to go out and create 
the salabihty and that costs him money. Obviously, the private 
brand without any mark or guaranty has less value, it has had no 
money spent on it. It is a question of whether the dealer can create 
that salabihty as cheaply or less cheaply than the manufacturer. 

Where there is a big operator in a wide profit line — I mentioned 
shirts, to the best of my knowledge Macy's handle only their own 
shirts, I know they did several years ago ; to the best of my knowledge 
they handle none but their own brand today; they have created that 
salabihty. Now in some fields you can; in some fields it is difiQcult. 
It is quite likely that the largest and best-known retail operatives do 
that much more effectively than the smaller and less well known. In 
the food field that is one of the real advantages claimed for joining a 
voluntary chain. A voluntary chain, such as I. G. A., is big enough 
and strong enough to create for a very little expenditure, say, for a 
can of corn, salabUity for I. G. A. com, and in certain areas at certain 
times they foUow the poUcy of saying to their member stores, "Carry 
the leading national brand in your area and the I. G. A. brand, stock 
only the two brands." 

Dr. Thorp. In those cases is any control exerted over the retailer 
as to what price it shall sell at? 

Dr. Haring. It is his own brand and he fixes the price. There is 
no question about his ability to fix it and how he fixes it. Of course 
he has a right to make it as flexible as he wishes, but one of the big 
factors is that he has no competition on exactly the identical brand 
which is controlled. 

Dr. Thorp. Your answer, I take it, in regard to resale-price main- 
tenance is that in the first place there is very Uttle of it in the food 

Dr. Haring. That is correct. 

Dr. Thorp. Of com^e there are some cases, gingerale, salad dress- 
ings, and certain specific items. 

Dr. Haring. That is correct. 

Dr. Thorp. And that if the manufacturers endeavor to use this as 
a method of forcing higher prices upon retailers, the private brands 
will enter the field and prevent such coercion of higher prices. 

Dr. Haring. To a very large extent the private brands exist in the 
field, and that effect will be something like this: The national brand 
is selling for 21 cents today and the private brand for 19 in the super- 


market or chain. Your price control will probably increase the 
national brand price, let's say 21 to 23. That makes a 4-cent 
differential instead of a 2. That v,dll give that private food brand a 
tremendous impetus. I think so much of an impetus that our major 
food manufacturers will be a lon^ while in even experimenting. 

Mr. HiNRiCHs. Am I correct m inferring from what you said with 
reference to private brands that the situation that you have just 
described will put the completely independent dealer at some dis- 
advantage, the smaU-scale dealer, that is he would have some difficulty 
in establishing the status of the private brand and yet might very 
well face, even in a small commumty, the competition of chains or of 
supermarkets that were able to operate with private-brand goods. 

Dr. Haring. That is correct unless he does what is logical for him 
to do under the circumstances, join a voluntary chain. In general 
that opportunity is always open to him. There may be some dealer 
that is so poor and so small that no voluntary chain would have him 
and he is probably due for bankruptcy, but a going dealer can always 
get the voluntary chain. 

Mr. HiNRicHS. Outside of the grocery field, the private brand is 
particularly feasible in the large metropolitan center and the large 
outlets of that center, so that the smaller communities in rural areas 
served by smaller outlets would have substantial difficulty in availing 
themselves of the advantages of the private brand outside of the 
grocery field, which is so open to the voluntary chain method of 

Dr. Haring. That is one of the holes that has been very adequately 
plugged by organizations such as that which Mr. Nelson represents. 
That is where your mail-order house comes in; in general, both Sears 
and Ward handle only private brands. 

Mr. HiNRiCHS. So that it is not the small community that suffers, 
but the dealer in the small community. 

Dr. Haring. That is correct, and where that situation arises you 
will find that your mail order sales will jump. 

Mr. HiNRicHS. Just one other question; going back to your dis- 
cussion of newspaper publicity, in your sentence about "workable 
hes in pubUcity," I thought "lies" was a noun. I wonder, in order 
to avoid making it a noun in the newspaper column, where you ad- 
vocate saying that in some conditions lamb should be 2 cents a pound 
higher but not more, if you were given luch a newspaper column 
today would you feel that you had all of the information at your 
disposal that was necessary in order that your column was not in 
fact a practical and inexpensive solution through possibly workable 

Dr. Haring. The point you make is very well taken, and some 
place some impersonal agency has to step in to analyze the factual 
material which is furnished. I remember my first experience^ in 
watchuig the Department of Agriculture where they sealed the officials 
up and finally sent the report out. That is a drastic way of doing it, 
but somewhere in the process there has to be impartial analysis, all 
the facts feeding into an impartial group, where someone who can 
be trusted absolutely is present at the analysis and probably that is 
a representative of the Government, although it would be my feeling 
that as your factual material for the wholesale markets is fed in, that 
businessmen with a Government representative sitting in would make 


your wholesale analysis, which then follows the projection down 

Mr. HiNRicHS. I am asking a sUghtly different question. I am 
not asldng how this material should be analyzed, but there would 
seem to be an obvious responsibihty on Government if the work is 
not being done by any other agency, to furnish that type of informa- 
tion which is necessary for intelhgent buying in the markets. Our 
whole economic theory presupposes that there are intelligent buyers 
and that decisions with reference to price can be intelligently arrived at. 

I am asking you whether if you were acting as a Government agent 
OT- u,cting in an impartial capacity as a representative of consuming 
Interests or anything else, you would feel that you had at the present 
time sufficiently definite information so that statements could be put 
out in this very specific form that you have suggested, or are there 
large holes in our information that need to be plugged as a prerequisite 
to the kind of solution that you have suggested here? 

Dr. Haring. There are undoubtedly large holes. 

(Mr. HiNRicHs assumed the Chair.) 

Acting Chairman Hinrichs. Would you care to suggest any of 
those that should be filled? 

Dr. Haring. We have a technique for furnishing information, good 
information, on a number of commodities in various States. Prob- 
ably in bread, the furthest we go now is flour pfices. In fruits and 
vegetables and citrus fruits, we have certain telegraphic auctions and 
things like that to furnish information. On wheat, we have similar 
exchanges; for certain types of things hke pork, we get like quotations. 
That coverage is not adequate, and to some extent in giving prices you 
have to consider the quality. One of the movements that any sort of 
control is going to force us toward is possibly not labeling as forcefully 
as some people have recommended but at least dividing our canned 
goods into broad classificaticns. You can't talk about the price of 
canned goods until you talk about at least a broad grade. So this is 
merely one phase of a broad, development which started and is moving 
with minutely rncreasLng momentum toward helping the consumer to 
get better value foj his dollar. 

Acting Chairman Hinrichs. That is, you would feel that informa- 
tion was needed both with reference to the standards of commodities 
and that you would require more with reference to wholesale prices at 
various stages in the marketing process. Is that correct? 

Dr. Haring. That is correct, and in some areas that will be abso- 
lutely the only method of the consumer being able to judge. I dare 
say that if we had dishes of six grades of canned peas or canned com 
or canned beans and tasted them all, we would do a very poor job of 
grading as regards quahty. We must have some standard. The only 
standard we have today is price, and it is quite possible under some 
circumstances for a private brand, particularly, to be highly over- 

Dr. Kreps. I would like to ask just one more question. A good 
deal of testimony which you have been giving proceeds on the theory, 
•^r may I say hypothesis, that price increases are accumulated, pyra- 
mided, to the retailer, who is more or less helpless. Without examine 
ing how valid that thesis is, I want to ask you your opinion on the 
opposite thesis: To what extent do consumers and retailers make 
prices? To what extent can consumer organizations and the pressure 


of retailers — ^and you have indicated in your statement that retailers 
as a group are very much interested in keeping prices down so that 
they can do volume merchandising — to what extent can such action 
in your judgment be effective? 

To phrase the question in another way, is the retailer fundamentally 
a consumers' buying agent or is he merely a manufacturers' selling 

Dr. Haring. Sir, primarily the attitude I have taken has been the 
problem of the rather small food retailer. I suspect that the rather 
small food retailer has little to do with representing the consumer. 
He doesn't do a very good job of it. But when you take retailing as 
a whole, if the consumer doesn't buy, that has repercussions and in 
many cases the consumers, through their reactions, have given 
retaUers the opportunity to serve much better. 

For example, there is the illustration of the grade and quality of 
the tools introduced by the "five and ten," tools running from a 
nickel to 25 cents, contrasted with the hardware tool made for a skilled 
carpenter at, let us say, $1 or $2. 

In that development, undoubtedly the "five and ten" and similar 
outlets did represent the consumer; they located the consumer need, 
picked it up and pushed it back, and have done a very fine job of it. 

The very small retailer in any field is more representative of the 
manufacturer or wholesaler and more or less at his mercy. 

Dr. Keeps. There is nothing further today, Mr. Chairman. 1 
suggest we recess until tomorrow morning, at 10:30 o'clock, when 
Thurman Arnold and Mr. Leon Henderson will testify. 

Acting Chairman Avildsen. Mr. Haring, I want to thank you very 
much indeed for appearing. 

(Whereupon, at 4:30 p. m., a recess was taken until Friday, 
December 8, 1939, at 10:30 a. m.) 



United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:40 a, m., pursuant to adjournment on 
Thursday, December 7, 1939, m the Caucus Room, Senate Office 
Building, Representative Reece presiding. 

Present: Representative Reece, acting chairman; Messrs. AvUdsen, 
Arnold, and Brackett. 

Present also: S. T. Pike, Department of Commerce; Hugh B. Cox, 
and Fowler Hamilton, Department of Justice; D. E. Montgomery, 
Department of Agriculture; and Theodore J. Kreps, economic adviser 
to the committee. 

Acting Chairman Reece. The committee will please come to order. 
The committee shall be pleased to hear Mr. Thurman Arnold, if you 
are ready to proceed. 




Mr. Arnold. Mr. Chairman, I would like to read a statement and 
then answer questions from the members present about the things I 
propose. This statement is going to be pretty definite and pretty 
concrete, and it is going to be on the lines of remedial action, at least 
on some of the problems that have been presented to this committee. 

A hearing on unjustified price rises must include consideration of 
what should be done in an immediate and practical way. There is 
always danger that practical action may be neglected because of the 
temptation to search for permanent, comprehensive and logical solu- 
tions of economic problems. Such searches are interesting, but they 
belong to the realm of ideas rather than to the field of practical action. 
It is apparent from the testimony given before this committee that 
no drastic and far-reaching price legislation is within the realm of 
possibility today, and I mean political possibility. There has been no 
evidence submitted that any drastic long-term plan for regulation in 
this field would receive any substantial pubUc support. Indeed, the 
planners themselves are not in agreement. 

One thing stands out as a result of these hearings which should be 
accepted as a political fact. It is that the American people believe in 
a competitive system based on maximum opportunity for free enter- 
prise, and that they think such a system can be maintained under 
present laws without fimdamental change. They demand an organiza- 
tion which can make present laws effective. Therefore, I propose to 



present today an immediate practical plan of organization to attack 
the problem of price rigidity by freeing competitive forces. It is a 
program which could be started in a week's time without further 
legislation, provided sufficient funds and personnel were available. 
This plan of organization has four principal objectives: 

1. To make the voice of consumers an effective force as a coun- 
ter balance against pressure groups. 

2. To prevent the unreasonable use by aggressive groups of the 
necessary privileges of collective action, granted by Congress or 
the common law to agriculture, labor, and business. 

3. To attack unjustified price increases in one industry at a 
time in the light of the specific problems of each industry, 

4. To provide access to the legislature for such special problems 
of business, labor or agriculture which demand special treatment 
or regulation in the light of their particular facts and which cannot 
be reached under existing laws. 

The demand for such an organization has been intensified by the 
recent war. Dr. Lubin in his testimony ' at this hearing indicated 
that in the absence of any regulatory action price rises already begun 
will continue; that the cost of Uving will increase, bringing with it 
demands for increased wages; that the result will be the same severe 
economic repercussions that occurred 20 years ago — an economy with 
widely expanded industrial facilities and increased agricultural acreage 
resulting from price advances — an expansion financed at inflated values 
with the consequent burden of high fixed charges and mortgage in- 
debtedness; that the burden of these fixed charges upon agriculture 
and industry imposed a long period of readjustment which was re- 
flected in the depression of 1921, and constituted an important factor 
in the depression of the thirties. 

Dr. Lubin's testimony also shows conclusively that the dislocation 
of prices does not occur by any general rise in all industries, but rather 
by the aggressive and inflationary action of groups of particular 
industries immediately stimulated by the war. 

The conclusion is obvious. It is not general remedies we need 
but the application of a flexible instrument which is capable of taking 
up one industry at a time. Our proposed plan or organization is 
based on the premise that such a flexible instrument can be found 
in the Sherman Act if it is properly coordinated with other activities 
of Government. 

The Sherman Act does not attack unjustified profits of individuals. 
It concerns itself only with the activities of organized groups. It is 
effective because production and distribution in this country are 
operated by organizations and not by individuals. It is flexible 
because it judges the reasonableness of each organization by its 

The Sherman Act can become an effective instrument of price 
control if the following essential conditions are met: 

1. A study of business, industry by industry, giving considera- 
tion to all pertinent facts relating to each industry. 

-2. Investigation of each industry in its entirety, rather than 

« Supra, pp. 11021-65. 


3. Easy contact by consumers of regulatory representatives 
so that complaints of consumers may be made articulate and 
form the basis for proper investigation. Effective consumer 
representation must be created in determining price policies. 

4. Creation of an agency or tribunal before which hearings 
may be conducted in situations wherein existing laws are inade- 
quate, or in which conflicting decisions require immediate legis- 
lative clarification, or in which enforcement of the antitrust laws 
would result in destructive competition. 

Such a tribunal should not be an agency with unexplored power and 
without experience in dealing with business problems. It can be set 
up within the present governmental framework by coordinating the 
activities of the existing governmental bodies which are especially 
devoting their attention to the freeing of competitive forces. These 
organizations are the Antitiust Division, the Federal Trade Com- 
mission, and the Temporary National Economic Committee itself. 
They must be geared to work not only with each other but also with 
consumers' organizations and trade associations in industry. 

In line with these essential conditions I would like to sketch a plan 
of organization which I believe is sufficient for existing needs. This 
plan has developed pragmatically out of our experience in the Anti- 
trust Division in conducting nation-wide investigations upon con- 
sumers' complaints. Our experience during the past 6 months in 
the nation-wide investigation of the building industry particularly 
has furnished what I believe to be the key for future development of 
a permanent organization to investigate and act upon unjustified 
price disparities. 

Let me allude briefly to our building investigation.^ Last July I 
presented to this committee an outline of how we then proposed to 
attack the restraints in the building industry.^ Congress, with the 
active support of this committee and particularly its chairman, had 
provided sufficient funds to make available 80 men for a Nation-wide 
investigation of the building industry. For the first time in the 
history of the Antitrust Division there was an attempt to investigate 
and prosecute on a Nation-wide scale aU the illegal restraints existing 
in a particular industry, from the producer to the ultimate consumer. 
We made preliminary surveys in 26 cities. Limited personnel and 
travel funds compelled us to postpone more intensive investigation 
in half of these cities. Although the investigation has really just 
commenced the results furnish extraordinary proof of the cooperation 
that can be obtained from businessmen when they are assured that 
their complaints will be intelligently considered and investigated 
and that legal action will be taken where required to eliminate abuses 
of power. 

In the broadest sense the building investigation is an undertaking 
for the benefit of consumers. It goes much further than the protection 
merely of a single group of businessmen. Many groups will benefit. 
But the greatest advantages will be the development of more efficient 
methods in low-cost housing which are being hampered by the un- 
reasonable activities of present organization. 

Our experience in this building investigation has resulted in several 
discoveries which make it useful as a pattern for an extension of this 

' See Hearings, Part 11. 
* Ibid., pp. 5152-5156. 


type of activity to the problem of the distribution of other products to 
the ultimate consumer. 

We have discovered that vigorous investigation brings results be- 
yond the actual cases that are prosecuted. These results spring from 
a reaUzation by those engaged in the industry that an actual hazard 
exists if they violate the law. In investigating the building trades 
we are not dealing primarily with the criminal class of our population. 
We are deahng with ordinary law-abiding citizens who are caught in a 
vicious system which they are incapable of overturning without the 
aid of the Government. The presence in a city of an organization 
engaged in antitrust investigational work gives to those law-abiding 
elements in an industry an assurance that they will not be forced into 
Ulegal practices through the necessity of protecting themselves against 
the unlawful aggressions of others, or through fear of retaliation. The 
presence of our investigators, therefore, in and of itself, has been 
sufficient to stop illegal practices. I do not wish to use the names in 
this connection because where we get cooperation, there is certainly 
no object in throwing the names of the cooperators into the public 
press, and therefore I withhold the names of both the city and the 

In one city, for example, since our investigation began, lumber prices 
have dropped 18 percent and sand and gravel prices have declined 22" 
percent. The lo^ bid on a large electrical contract which was re- 
advertised was 21 percent imder the previous low bid. 

A second discoveiy we have made is that when there is an honest 
effort to prosecute impartially every unreasonable restraint affecting 
building costs, whether it comes from manufacturers, contractors, or 
labor, most of the criticism and misunderstanding as to our purposes 
disappear and we get adequate public support. The public under- 
stands the reasons for our action in the building industry. They have 
been brought down from the reahn of abstract law. I do not knc 
of a single city in which our building investigation has been carried 
on that public support has been forthcoming. 

I cite only one from hterally hundreds of editorial and newspaper 
comments, from the Pittsburgh Press of November 14, 1939, entitled 
"Don't Drop This Great Work." The editorial says in part: 

Thus far only an investigation of electrical costs — which resulted in 58 indict- 
ments — has been completed, and the jurors are now studying heating and ventilat- 
ing phases. 

Yet despite the fact that the investigation is far from complete, there has already 
been a sharp drop in building costs wibteh had allegedly been kept up through 
collusion between unions and contractors, bid-rigging and similar practices. 
On the Municipal Hospital, for instance, the low bid for electrical work submitted 
after the investigation had gotten under way was $33,000 under a low bid sub- 
mitted before it started. Sand and gravel prices have dropped from $2.45 to 
$1.65 a ton since the inquiry began, and similar reductions have occurred in some 
other cases. 

We believe that the savings in Pittsburgh alone would be sufficient to pay the 
entire costs of the national investigation. Few efforts undertaken by the Fed- 
eral Government promise such important results at such low cost. 

We sincerely believe that the elimination of racketeering, artificial restraints, 
collusion, bid-rigging, and similar restraints on building would result in such 
reductions in construction costs as to lead to the long-expected and long-delayed 
building boom, which has been nationally acknowledged as the surest way to 
induce economic recovery. The Pittsburgh district, we are cohvinced, would 
receive* more benefit from elimination of unwarranted building costs than from 
any other single economic development. Work would be created for thousands 
of craftsmen, the real estate market would be stimulated, and all forms of business 
would profit directly or indirectly. 


I may say that those are not our observations. I hope they are not 
too optimistic. I am citing, them, however, to show the typical 
enthusiastic reception which this type of activity gets from the con- 
sumers' market. I have also cited an article which has been reprinted 
in 600 newspapers which I think is typical but I will not take the time 
of the committee to read it. It follows on the national scale with 
similar comments to the Pittsburgh Press. 

(The article referred to was marked "Exhibit No. 1524" and is 
included in the appendix on p. 11373.) 

Mr. AviLDSEN. May I ask a question? You mentioned the per- 
centages of saving which have been brought about, reductions^ of 
prices in these building materials. Have you followed the thing 
through to see what has happened to the cost of a typical example? 

Mr. Arnold. We haven't the faintest idea. We are so busy break- 
ing up what we consider these restraints that we don't know, and I am 
citing these editorials and these figures from the commentators simply 
to show the enthusiastic public reception. Actually, of course, it is 
awfully hard to tell. The cagey buyer in a market may be able to 
do much better than the buyer who is not so cagey, and for instance 
in one city there is only one kitchen cabinet which can be put in a 
house because of sub rosa agreements. If you as a buyer knew of 
those sub rosa agreements maybe you could get another, but it is 
very difficult to get statistics about these things. We have made no 
attempt ourselves to make any of those comparisons. 

Mr. AviLDSEN. Have you any guess as to how a man building^ a 
house in Pittsburgh has benefited m actual dollars as a result of tms? 
For instance, gravel has gone down so much, lumber has gone down 
so much. Has labor gone down? 

Mr. Arnold. I would prefer not to make those guesses myself. 
We take this position. The situation in building is a lot like the 
situation in automobiles when they were trying to keep Henry Ford 
out. What is the use of making guesses as to what can be accom- 
phshed by free experimental development of this industry? We don't 
have the force to get statistics. We don't think it is an essential 
matter of proof. 

As I say, we are short-handed, actually, in trying our indictments. 

Mr. AviLDSEN. AH we know is that a man who starts to build a 
house today is going to have a lower cost at Pittsburgh than he had 
6 months ago. 

Mr. Arnold. There is no question but that these restraints are 
disappearing. For instance, in another city, the name of which I don't 
want to give, after calling the contractors before a grand jury they all 
stopped their bid depositories, every one of them. That was all that 
was necessary. We are not publicizing the names. We accomplished 
our objective and we do know that you are going to get actual com- 
petition among those contractors as long as the men are lq there. It 
would be utterly impossible to tell just how much we will save in a 
situation like that. 

A third discovery is that a staff in the field equipped to investigate 
thoroughly the complaints in a given locahty, obtains an amazing 
amount of volimtary assistance from groups who otherwise might 
not have taken the initiative to complain. A display of activity 
invariably causes businessmen and consumers who have been the 
victims of improper practices to take heart and offer their active 


cooperation. In one large city, for example, there were a number of 
bid depositories operating in a way which we considered to be in 
restraint of trade. The members of these depositories were inter- 
viewed by our investigators. In a short time every one of them 
informed us that he was ceasing the practice we were investigating. 
This was done before we had developed any case against them. They 
told us they were doing it because they believed that if other unlaw- 
ful restraints were cleared away from the building industry they would 
be better off without these depositories. Although it would be unfair 
to announce publicly the names of the individuals concerned or the 
city where this happened, I think I can safely say that this is typical 
of what is happening in many places. 

I am using the building investigation as a pattern for activity in all 
fields where prices are behaving unreasonably. 

A fourth discovery is that these results will not be permanent, in 
building or any other industry, if the staff is withdrawn. If we were 
to withdraw our investigators from any locaUty where we have already 
accompUshed beneficial results, it is almost certain that within a year 
the old abuses would reappear. As we have often asserted, the prob- 
lem is 'similar to that of controlHng trafl&c. There must be a traffic 
poUceman on a crowded comer. If the pohceman is there the law 
will be obeyed. If we have an adequate staff in the field to receive 
and investigate complaints we will get the complaints and the investi- 
gations will accompUsh beneficial results. If the men are not there, 
nothing will happen and the consumers will get discouraged and the 
law will be ignored. 

The problem of enforcement, therefore, requires two things: 

1. An adequate prosecuting group sufficient to break up the orga- 
nizations imposing restraints, which can be withdrawn after the prose- 
cutions are over; and 

2. One or two men assigned permanently in each State to preserve 
the gains by hearing complaints and keeping in close contact with 
the situation. 

A large permanent staff in the field is not necessary. One or two 
men located in the larger cities to receive complaints and make 
investigations would be sufficient, if the public knows that we have 
men in reserve who can be called out in the event a local situation gets 
out of control. The men permanently allocated to each State could 
act as a clearing house for consumer information and complaints. 
With such an organization we could change what is now an unorga- 
nized protest into an intelUgently organized enforcement movement. 
With various existing consumer groups, such as farmers, consumer 
associations, trade associations, women's clubs, State and Federal 
officials, retailers, manufacturers, wholesalers, and unemployed persons 
disseminating information gathered by the resident field staff, profi- 
teering would become unprofitable. 

America is being organized rapidly into various types of associations. 
These include trade associations, labor unions, fair trade conjmittees, 
collective bargaining agencies among farmers and laborers,^ and so 
forth. Each of them, either by common law or statute, is given 
certain reasonable privileges of organization to meet its particular 
problems and to raise it to the level of an effective competitor in a 
highly organized industrial society. The purpose of the antitrust 
laws is to furnish a brake or a balance wheel to see that the privileges 


of organization granted either by the courts under the rule of reason 
or by Congress are not distorted into instruments to maintain the 
arbitrary power of a few. 

I may say that my assistant, Mr. Fowler Hamilton, has prepared 
just one example which I will ask him to give at the end of this state- 
ment, which shows how such privileges may be abused and how simple 
it is to stop the abuse of such privileges. 

One principle of antitrust enforcement mentioned briefly heretofore 
needs amplification. There is need for a body that can hear cases 
involving situations which the antitrust laws appear to be inadequate 
for such treatment as the facts require. To illustrate, let us suppose 
that a huge surplus exists in a particular industry which disorganizes 
it; that to dispose of the surplus an agreement is made to restrict the 
production of 95 percent of the industry. The combination would 
go far beyond any reasonable extension of the principle established 
in the Appalachian Coal case} From an economic view, however, the 
industry would be entitled to a hearing on the question of whether 
it was confronted with some pecuhar problem requiring special treat- 
ment. It is obvious that a treatment which will throw men out of 
work and decrease the supply is the natural course for private industry 
to take. It may be the only solution, but certainly this conclusion 
should not be reached without exhaustive study. Other methods of 
dealing with the surplus should be examined. This is a typical case 
where some sort of tribunal which has the confidence of Congress and 
a close connection with the executive branch of the Goverment is 
imperatively required. 

Other particular cases might arise out of reconciling conflicting 
legislation or conflicting decisions. In some cases a business problem 
might be cleared up which otherwise would take years of litigation or 
which might involve such a threat of pending litigation as to deter 
the industry from attempting to solve it. Another type of problem 
which such a body might consider w^ould be one in which liasion with 
Congress is needed, as in the case of abuses of various privileges such 
as patents and copyrights. 

Business should be provided with at least an opportunity to present 
its contentions before a regularly organized committee with experience 
in monopoly problems whenever it feels that the existing law prevents 
efiicient operation. And what is true of business men is true of con- 
sumers also. Such a tribunal with power to investigate facts and make 
recommendations to Congress in specific cases could exist anywhere in 
the Government. Nevertheless, it seems to me obvious that the 
present Temporary National Economic Committee has already estab- 
lished an organization which would be admirable for that purpose. 
It is the only committee on which there are representatives not only of 
the Senate and the House but also of executive branches of 'the 
Government. It has already developed experience and technique in 
hearings on problems of parlicular industries. I would suggest, 
therefore, that sufficient appropriation be provided to allow this 
Committee to continue as a tribunal to hear and investigate facts 
regarding any particular industries w^iich have difiiculty operating 
under present laws and in connectioiy with an antitrust enforcement 

» 288 U. S. 344. 

124491— 40— Dt. 21 20 


Obviously, without a Nation-wide antitrust enforcement program 
such a tribunal would have no important business before it. People 
do not ordinarily run to Congress except with special axes to grind. 
Antitrust enforcement, however, inevitably compels businessmen to 
face the particular problems which would be presented to this com- 

So much for general discussion. I have set forth what I conceive 
to be the objectives of a practical plan for dealing with unjustified 
price increases. 

Mr. AviLDSEN. Could you explain a little further just what this 
tribunal would do? Would it in j^our opinion have power to say to 
these businessmen after investigation, "You may go ahead and do 
so-and-so and you will not be prosecuted under the Sherman Act?" 

Mr. Arnold. No; I think such a delegation would be impossible. 
I am seeking no legislation, whatever. I am simply stating that this 
committee should use its present powers of recommending to Congress 
special legislation. This is simply a tribunal which can hear special 
facts as it is now doing and recommending legislation to Congress. 
The only difference between the activities contemplated and the 
present activities is that the committee would take up instead of the 
entire economic field, such special cases is it thought needed allevia- 

Mr. AviLDSEN. Let's take the example you gave of this industry 
with a 95 percent surplus, and so forth. Suppose they came in here 
and told their story to the committee. Do you mean the committee, 
if they were inclined to agree with these men, that they should have 
some relief would make a recommendation to Congress for special 
legislation for that particular industry? 

Mr. Arnold. Yes. Let me illustrate the technique actually going 
on, not in an organized way. We are prosecuting Western Union 
and Postal Telegraph. It appears that efficient distribution of written 
communications is imperiled by the fact that there doesn't seem to 
be any way for either of those companies to prosper. There is also 
the problem of the A. T. & T. with its teletype and the radio with its 
radio tubes; there is also the problem of 18,000 men who would be 
thrown out of work if the Postal Telegraph disappeared. There was 
a resolution to investigate that in connection with the antitrust 
prosecution, introduced by Senator Wheeler and I don't wish to 
comment on it because the matter is now pending before the Inter- 
state Commerce Committee, but if there are inequities in that situation 
which cannot be solved by the antitrust prosecution, and I suspect 
there are, it will receive ad hoc specific treatment from Senator 
Wheeler's resolution. Now I think that such a thing, which is often 
necessary, should be a regularized procedure, and I can think of no 
better type of committee than this one to handle that. In other 
words, that was accomplished because there was sufficient pressure 
and sufficient interest to do it, but every businessman should have 
that sort of an opportunity and he shouldn't have to have any par- 
ticular axes himself to get it. 

Mr. AviLDSEN. Do you think they are actually getting somewhere 
LQ that telegraph case? 

Mr. Arnold. I don't think that I want to go outside of my field 
in comment. Yes; I hope so, but the hearings have yet to be held 
and I don't want to anticipate Senatoj Wheeler's hearings. In any 


event, that opportunity should be offered for somebody to hear the 
economic side of the complaint; the mere opportunity is worth while. 

So much for the general discussion. I will now get down to a spe- 
cific plan. 

1 . There should be about 50 qualified men immediately employed — 
my suggestion is approximately a man in every State, in New York 
possibly more than in some of the more thinly populated States like 
Massachusetts — by the Antitrust Division and posted at strategic 
points throughout the country to head up the investigation of con- 
sumers' complaints and promote cooperation with consumer groups. 

Dr. Kreps. Wlien you speak of consumers there, Mr, Arnold, you 
mean to include industrial consumers just as much as domestic 

Mr. Arnold. Industrial consumers just as much; for instance, 
automobile dealers who are complaining of impositions, almost any 
of these consumers. 

May I amplify a little this way: Under our present staff and in the 
past, we are taldng up only Nation-wide industries — the Aluminum 
Co., the General Motors Auto Finance Corporation, and that type of 
situation. Now we should carry on the consumer type of investi- 
gation, which does not take up one large company but takes up a 
product from start to finish. 

These men should be economists or lawyers with economic training. 
They should be instructed to inform themselves fully in regard to the 
business problems of the State where they are located and the methods 
of distribution employed there. They should become fuUy acquainted 
with the trade associations, labor organizations, cooperative asso- 
ciations and consumers' organizations in the States to which they are 
assigned. They should become local clearing houses for complaints 
from consiuners and businessmen. In effect, they would function as 
hstening posts and channels for the reference of complaints to the 
Antitrust Division or the Temporary National Economic Committee. 
These men would not have control over policy, but they woidd refer all 
inportant questions of pohcy to the Antitrust Division for decision. 
The Antitrust Division would then make one of the following dis- 
positions of each complaint referred: 

a. Clear violations of law would be referred to a grand jury for such 
action as seemed warranted. While I beheve that civil penalties 
would afford a more effective method of enforcement for violation than 
the present criminal process, I have already stated to this Committee 
that under present statutory provisions the criminal process is the 
most effective one. 

Dr. Kreps. Isn't it a rather effective deterrent just to summon 
businessmen for investigation? 

Mr. Arnold. That really is, Dr. Kreps, one of the most effective 
deterrents we have; for instance, in one city, there was going to be an 
increase in restaurant prices during the recent flurry. I suspect if it 
had occurred, it would never have come down. We had pretty good 
information that the boys were aU set for that increase. We simply 
called them before a local grand jury and aU desire for the increase 

Now, the advantage of that is this: No one knew anything about it; 
the grand jury was completely secret, there was no necessity of those 
men having to save their faces. If we were wrong, there was no harm 


done. Had those men been publicly called before this Committee, 
they would immediately have been put in a position where, if the 
Committee was wrong, whether or not the Committee was, they would 
have to put in a defense and a fight would have developed. So the 
mere existence of this grand jury touches the man with a guilty 
conscience, or makes the man who is really going too far, reconsider 
his position, without any publicity whatever, and there certainly 
wasn't enough to indict anyone in that situation. The whole thing 
was cleared away. 

(Mr. Avildsen assumed the Chair.) 

Acting Chairman Avildsen. "What business did you say that was? 

Mr. Arnold. This happened to be restaurant prices. 

Acting Chairman Avildsen. Restaurant prices? 

Mr. Arnold. Yes. Now, I don't want to give the name of the 
city or the individual. 

Acting Chairman Avildsen. No. 

Mr. Arnold. In another case, a labor union was about to close up a 
Nation-wide industry. The same sort of thing came up there. The 
difference was settled and there was no strike whatsoever, and there 
was no necessity of the labor union being forced in a public position to 
save its own prestige. So the mere existence of these grand juries is a 
tremendous potential enforcement possibihty. 

b. Where further development of the facts seems necessary and 
cannot be obtained by field investigations, the grand jury should be 
used to get additional facts. Such use of the sitting grand jury to 
obtain information or facts is often in itself a most efi'ective method of 
enforcement. The grand jury should be used as a real investigating 
device and not alone as a means of obtaining indictments — and that 
is the historic function of a grand jury, not simply to indict people 
but really to find out what is going on in the community, in such a 
way as not to create public scandal or suspicion on anyone's part. 

There should be no hesitancy to recommend that no true bills 
should be returned where such result is indicated as proper by the 

c. Conditions which have created the complaint should be dis- 
cussed wherever possible with the business organization concerned, 
with a view to removing the source of the complaints. 

d. Wherever complaints indicate a situation in which the antitrust 
laws appear to be inadequate, they should be referred to the Tempo- 
rary National Economic Committee. 

e. Complaints involving intrastate commerce should be referred 
to the appropriate local officials and at all times the local represen- 
tative of the Antitrust Division should be in touch with the State 
enforcement agents so that cooperation between Federal and State 
Governments is always consistent and coordinated. 

For instance, I was informed by a Virginia attorney that no case 
had ever been brought under the Virginia antitrust laws, and that most 
of the Virginia attorneys had never heard of it. Now, that is not a 
statistical conclusion; it is simply a statement, and I think it is ap- 
proximately true. We are going to get that cooperation from local 
officials if we take the lead, 3 these men are in the field, explaining to 
local people what these laws can accomplish for them. 

Now, as to the next question, of intrastate and interstate commerce, 
that can be solved in a very simple way with State cooperation. 


Where someone says intrastate commerce, the local man steps forward. 
When somebody says interstate commerce, our man steps forward, 
and this constant fight over this vague line can be largely eliminated. 

So much for it in general. The 50 men whom we wish immedi- 
ately — and I want to emphasize that we want them immediately, 
because if we are going to pull our five men out of Pittsburgh, we 
want to leave one man in Pennsylvania; otherwise, most of the effects 
of om" present building drive are going to disappear. 

Now, second 

Acting Chairman Avildsen. Excuse me, Mr. Arnold, but do you 
know whether all the States have adequate antitrust laws? 

Mr. Arnold. Not all of them; I can't tell you offhand how many, 
but I would say that the majority of them do. We are having a survey 
made of that — wouldn't you say? 

Mr. Hamilton. Yes; and the laws vary. 

Mr. Arnold. They vary a lot. Some of them have jokers in them. 
My belief, however, is that where a State does not have an antitrust 
law, where this unused instrmnent is adequate, the interest of the con- 
sumers themselves who see the ability to get a cheap house across the 
State line, is going to have a tremendous effect upon the development 
of their local antitrust laws, and, at present, they know nothing about 

Well, then, with that organization, a permanent organization, there 
should be about 100 additional men provided who would be located 
in strategic points throughout the country, available to support and 
assist the activities of the men assigned to head up this work in each 
State. These 100 men would be called upon from time to time to 
assist the men in charge of these investigations in each State. They 
would be assigned according to the needs of particular States. Ob- 
viously, there would have to be some flexibility about these assign- 
ments, but our present estimate is that the work could be adequately 
handled by having one key man responsible for handling complaints 
in each State, with about 100 men to assist and support this work 
throughout the country. 

Now, that is from experience, based upon this line. We have not 
quite a hundred men out. How many men do we have out on building? 

Mr. Hamilton. I think somewhere between ninety and a hundred, 

Mr. Arnold, We have about 90 men out on building today. We 
have them in 12 cities. Let's take the case of Pittsburgh, because 
there seems to be so much, at least local, enthusiasm for what we are 
doing. When we have established reasonable business habits in Pitts- 
burgh, those men would be withdrawn and, we will say, put in Phila- 
delphia. The local man, the State man, could maintain the teams in 
Pittsburgh and he could be considered primarily as a contact man, 
as a person to advise, and this mobile group of a hundred men would 
be called on only in a situation where you needed to break a set 
of vicious practices, and a hmidred men can do it. Less cannot do it. 
The hundred men are based factually upon our experience today with 
90 men who are now operating in 12 cities. They can operate in only 
about 12 cities at a time, but that is enough. 

3. The Temporary National Economic Committee should be made 
a permanent organization. It should be announced that this is the 
proper tribunal before which to present matters" where hearings are 
sought not strictly pertaining to law violations, and also when it is 


desired to have consideration given to amending present laws to 
deal with particular industrial problems, 

4. There should be set up somewhere in the Government a bureau 
of industrial economics to furnish an objective survey of the facts of 
any industry for the benefit of the agencies which deal with the anti- 
trust laws. Such a bureau might, of course, have other functions. 
However, I do not wish in this report to go beyond its immediate 
relationship to the plan under discussion. 

5. The total annual appropriation for all these activities for the 
Antitrust Division and the Temporary National Economic Com- 
mittee as a permanent body would not exceed $2,000,000. That 
sum, of course, is in addition to the present appropriation allocated to 
the Antitrust Division. - We are about to spend nearly a billion 
dollars a year on armaments alone. The type of organization out- 
lined herein would permit effective control within reasonable limits 
of prices, and save millions annually to consumers. And I think two 
millions a year would do it. The present building drive represents 
an expenditure of not more than $300,000, doesn't it? 

Mr. Hamilton, Yes. 

Mr. Arnold. That is at its height. It represents an expenditure 
of not more than $300,000. Of course, we are short-handed, we do 
not have enough traveling expenses, but the need for these drives 
will decrease as people get understanding of what we are doing. 

This proposed organization is not directly concerned with the two 
other instruments of Government which have the most effect upon 
prices. I refer to the taxing and spending powers. However, it 
does indirectly affect the results which are to be achieved by the use 
of these powers in the following ways. 

1. It is most important that wherever Government subsidies are 
granted to any industry, the industry be cleared of the restraints 
which prevent experimental competitive development and increased 
volume so that these subsidies will not be the means of establishing 
even more firmly in power aggressive organizations with arbitrary 
control of prices. Government spending without antitrust enforce- 
ment is simply the distribution of bonuses to a favored few. 

There is bound to be a lot of Goveriiment spending in this country 
in the immediate future. Part of it will come from our own Govern- 
ment because our problems of providing low-cost housing, relief, and 
a balance of agricultural with industrial prices are not yet solved. 
Part of it will come from foreign governments in amounts increasing 
as the war continues. In such a situation, our task is to turn this 
spending into a benefit to competitive enterprise, a means of lowering 
prices through increased volume, and a stimulus to business in general. 
If we do not perform that task, the potential stimulus to recovery 
offered by this spending will create an artificial prosperity in a few 
industries whUe other industries are put at an actual disadvantage, 

2. Since the proposed plan of organization provides for direct 
access to Congress, it may be expected the spending power may be 
more carefully used as a stimulus to industry in which the restraints 
of trade have been removed. 

It is my sincere conviction that success or failure of the efforts of 
this committee depends on whether it succeeds in setting up a per- 
manent organization capable of enforcing the antitrust laws through 
the cooperation and understanding of business, labor, agricultural or- 


ganizations, and consumers. We all realize that fundamental changes 
m the law will not be made and that new tribunals with broad and 
sweeping powers to accomplish the task here outlmed have not been 
established. They are political facts. Therefore the question before 
us is whether the antitrust laws are going to continue to be a series 
of crusades or whether we can settle them to an even, steady, fair, 
and consistent application of their principles in cooperation with 
private organizations. 

What the organization I have Outlined will do is to reestablish 
consumer sovereignty in this country. 

The results which these men can achieve may be illustrated by an 
enterprise which, although not similar in purpose, would be similar 
in organization. I refer to the county agents in agriculture, who by 
a process of education have done marvels for efficient production 
and buying through cooperation among the farmers. The same thing 
can be done with the committees of the women's clubs and the 
consumers' associations and the secretaries of trade associations. 
Consumer representation in Government is sorely needed. The con- 
sumers today are interested in price problems as they have never 
been before. The only thing needed is a sufficiently decentralized 
personnel so that their efforts may be directed intelligently. This is 
not enforcmg antitrust laws with a club; it is enforcement by public 
education, interest, and cooperation. 

I am convinced that the rank and file of the members of every m- 
dustry realize the benefits that can come from freedom of independent 
enterprise. For example, the secretary of a large trade association, 
distributing certain basic materials to the building industry, told me 
that he had no doubt his own association was vuhierable in our 
investigation. He added however: 

Nevertheless, I am for your investigation because it is going to clean up the 
conditions which compel us to take action of dubious economic value. 

Take the case of labor as another example. The rank and file of 
no group will benefit more by the volume that will follow the break- 
ing of log jams in the building industry. In one case of a jurisdic- 
tional strike, a smgle labor leader held up a million dollars worth of 
employment, which would have gone to the members of his own 
union in the winter when it was most needed, because of a jurisdic- 
tional dispute over two millrights. Not a smgle member of the 
Central Buildmg Trades Council supported the stnke. Men who 
had worked for 30 years in the plant had to go out against their wiU, 
in spite of the fact that the employer himself had been voted fair to 


We do not believe that the ranlv and file of labor desires to see their 
organizations used for purposes which have no relation to wages, 
hours, health, the speed-up system, or the right of collective fargam- 
mg Indeed, the use of organizations for such purposes has been the 
pmicipal basis for attacks on labor by its enemies. Those who des^e 
to prejudice labor m the minds of the pubUc are constantly citmg the 
occasional case of the employer being prevented from usmg more 
efficient methods and being held up by a junsdictional stnke, or the 
utilization of labor unions by labor leaders to conspire with em- 
ployers for their own personal gain or aggrandizement. Ihe rank 
andf file of labor is at present powerless to stop these practices. A 
fair antitrust poUcy will. do two things for them: 


1. It will prevent them from exploitation by small groups who do 
not have the interests of labor at heart, and they need the same sort 
of protection the small businessmen do. 

2. It will develop case by case the freedom of labor to organize for 
legitimate labor disputes. This freedom has been seriously handi- 
capped by leaving the enforcement of the antitrust laws in the past 
against labor to private groups with no responsibility as has been done 
in the past. The Antitrust Division will utihze its labor prosecutions 
to take the yoke off the back of labor by ridding it of the control of 
those who betray its own fundamental interests. The resulting sound 
trade-unions will draw the teeth of labor baiters. 

Acting Chairman Avildsen. Are there any questions? 

Dr. Keeps. I have none. 

Acting Chairman Avildsen. Have you any? 

Mr. Cox. No. 

Acting Chairman Avildsen. Have you any other statement? 

Mr. Arnold. I should like to have introduced into the record at 
this time an explanation of a single and typical case of the unreason- 
able use of a privilege granted by Congress and the kind of things 
which this type of consumer organization could bring out. It is a 
Robinson-Patman case. 

Mr. Hamilton. Well, it is the various States' so-called unfair-trade- 
practice laws which prohibit sales below cost, and in some of the 
States the statute permits the trade association in an industry to make 
a cost survey and determine what the minimum cost shall be. Then 
the trade association promulgates its findings, but instead of breaking 
them down into the various items of cost, the trade association pro- 
mulgates so-called minimum legal prices. Of course when the privi- 
lege is not abused it may very well constitute a reasonable exercise of 
joint control to eliminate price cutting and destructive competition. 
On the other hand, I have here, which I would like to introduce for 
the sake of the record, some excerpts that we have made from bulletins 
that have been promulgated by trade associations, which show in 
great detail the extent of the control that such an association will 
have in setting prices in a given community. They have here a list 
of several hundred prices that have been promulgated for various 
types of tobacco. Now these prices are enforced by the trade asso- 
ciation threatening any distributor who sells at lower prices than those 
set forth, with criminal action. The price is absolutely uniform, 
absolutely rigid, and apparently makes no variation for varying effi- 
ciency on the part of different distributors and makes no allowance for 
the fact that one distributor may be able to secure his product at a 
cheaper price. 

The names that originally appeared on these exhibits have been 
stricken off because we don't regard this an investigation. We are 
merely offering it by way of illustration of what may be a troublesome 

Acting Chairman Avildsen. You are not disclosing what State is 

Mr. Hamilton. No; we didn't feel free to do that. Mr. Arnold 
has mentioned here in his memorandum the number of States that 
have the statute, and the exhibits we are offering are drawn from a 
trade association operating in one of the large American cities. 

Acting Chairman Avildsen. All States have this law? 


Mr. Hamilton. Eight States now have this statute: Arkansas, 
California, Kentucky, Michigan, Montana, Utah, Washington, and 

Acting Chairman Avildsen. Have they been in force very long? 

Mr. Hamilton. Well, I think that probably the period of time in 
which they have been in effect would vary from 3 to 5 years in various 

Acting Chairman Avildsen. Yesterday, Professor Haring of the 
University of Indiana testified that an investigation in the State of 
Michigan on the retail food dealers disclosed that practically none of 
them knew of the existence of such a law in the State of Michigan. 

Mr. Hamilton. Well, doubtless, the activity of enforcement 
would vary with the vigor with which the trade association pursued 
the matter. 

Mr. Arnold. In any event, I am using this as an illustration to 
show our attitude toward the laws which are frequently alleged to be 
inconsistent with the Sherman Act. You all will recall that a judge 
in Chicago declared that because of conflicting policies of agricultural 
legislation, the Sherman Act no longer applied to agricultural products. 
Fortunately, the Supreme Court of the tlnited States has just reversed 
that decision, and there actually is no inconsistency. 

I would like to have the various laws which appear to be inconsistent 
with the Sherman Act thought of in this way: Congress and the 
courts share the responsibility of determining what reasonable combi- 
nations are. I do not think the Antitrust Division, as an enforcing 
agent, should take public positions on whether thej^ like the resale 
price-making laws, the Robinson-Patman Act, because it becomes our 
duty, when such laws are passed, to see that they are not abused, 
and the more of them that Congress passes, the more danger there is 
of the various types of abuses of which this is typical. 

Now, if we have agents, men in the field, who are in touch with con- 
sumers, who can explain this sort of activity, we are going to get the 
pressure from consumers to see that these are not abused; we are 
going to get the outlet of the T. N. E. C, where there is' an effort 
that they are abused, and where they are used for improper uses, and 
the antitrust law may take c are of them. 

One final word with respect to what such a man will do, to put it 
very specifically. We hope in the building trades to get out a con- 
sumers' book which covers all of the restraints which we intend to 
prosecute. Now, unless we publish a Government pamphlet, it is no 
good at all. In the hands of a man in the State of Pennsylvania, who 
is in touch with the women's club organizations, the committees from 
the Rotary, the Lion's Clubs and all that sort of thing, that book can 
become the most efficient enforcement you ever saw. All they have 
to do is to explain it, and people are not going to stand up against it, 
and that is the thing, in practical operation, if we can get this extension 
into the field of our activities, that we want. 

(Representative Reece resumed the Chair.) 

Mr. Avildsen. I believe, Mr. Chairman, that this is to be printed 
in the record. 

Acting Chairman Reece. Without objection, it may be admitted 
for printing. 

Mr. Avildsen. This is the exhibit referring to State unfair-trade- 
practice laws. 


(The document referred to was marked "Exhibit No. 1525" and is 
included in the appendix on p. 11374.) 

Mr. AviLDSEN. Do you know, Mr. Arnold, whether any of these 
States have endorsed these laws against merchants? 

Mr. Arnold. Oh, yes; they have been. 

Mr. Hamilton. The most effective method of using this type of 
thing is merely the threat of enforcement. 

Mr. Arnold. Of course, the most interesting case was about a year 
ago in Maryland, where the Treasury received bids, there were iden- 
tical bids submitted to the Treasury; wasn't it on cement? 

Mr. Hamilton. Yes. 

Mr. Arnold. The Treasury withdrew the bids — I mean withdrew 
it, the bidding — because the bids were identical, and submitted it 
again, and they got one low bid and immediately thereafter the low 
bidder was brought before a grand jury for violating the State fair- 
practices law. That was one of the most amusing examples of this thing. 

Mr. AviLDSEN. Are there any other questions? If not, the com- 
mittee thanks you veiy much, Mr. Arnold, for your very valuable 

Is the next witness ready? 

Dr. Kreps. There isn't another witness, Mr. Avildsen, but there is 
a summary which we felt might be useful for the committee, and I 
would like to read it. 

Mr. AviLDSEN. You may proceed with the summary. 




Dr. Krbps. Summarizing the hearings, it is quite clear that 
business. Government, labor, and consumers are united in opposing 
abrupt and disruptive price increases. In the last 4 months, business 
statesmanship has risen to a new high. But the dangers of price "blitz- 
kriegs" still remain. No one expects prices in the near future to get 
seriously out of balance, but everyone that does or must make a forecast 
is apprehensive of price rises. Continued vigilance is necessary. 
It is only the watched pot that does not boil over. 

As shown by price experience during the World War, only a handful 
gain from skyrocketing prices. The losers are Mr. and Mrs. America. 
Consumers are pinched by the rising cost of living. The rank and file 
of labor, particularly the great mass of unoi^anized common labor 
and the vast group of clerical labor in white-collar jobs, are caught 
in a vise. Their wages and salaries lag behind prices. Wages and 
salaries never rise as quickly nor as far as prices. Those managing 
educational and eleemosynary institutions are likewise injured, their 
income from tuition and endowment being relatively fixed. 

Manufacturers also lose, as was shown by the testimony of Mr. 
Hoffman and Mr. Vance,^ because mass production, low cost, low 
gross margins and fair profits depend upon mass distribution and low 
prices. If the price« of the materials or labor they use rise abruptly, 
their costs and prices rise. Fewer automobiles are sold and manu- 

« Supra, pp. 11181-11223. 


factured. Overhead and other fixed costs per unit of output rise. 
Profits disappear. 

Primarily, those who gain when prices are spiraling are the specula- 
tors, and many of them, of course, lose their shirts later, for inevitably, 
the price bubble bursts. Inventory values collapse. Thousands of 
retailers, service enterprisers, and^smaU-business men are liquidated. 
Farmers are saddled with oppressive debt burdens. The spector of 
unemployment and hunger stalks the homes of mOlioiis of workers. 
Post-war depressions inflict disaster everywhere. It is only the 
exceptionally strong and the lucky who are able to grow stronger. 

But we are by no means helpless. As the testimony has shown, 
price inflation is not inflicted from on high. It can be prevented, 
provided, of course, action by business and Government is prompt and 
forceful. At the present time, there is a lull. The threatened emer- 
gency of last September is past, and vigorous fighting abroad and 
consumption of materials there seems unlikely until next spring. 

la this period, calm analysis can be taken. Productive capacity 
here and particularly in our North and South American neighbor- 
economies has greatly increased. European purchases are being 
carefully made, and limited largely to necessary munitions, other 
materials being secured from the Empire and from neutrals who are 
willing to extend credit. 

There does not seem to be a reason for any considerable price rise. 
This is particularly true when you consider costs. As industry ap- 
proaches capacitj^ operation, its overhead costs are distributed over 
more units of product. There are interesting figures to show that 
labor costs have gone down. An article in the United States News for 
November 27, 1939, says, "Signs all point to an upswing," and states, 
"Labor costs in 1938 and 1939 have been declining." They make a 
computation which shows labor cost declining from 94.5 in 1937 to 
93 in 1938 to 88 in 1939. They go on to say, "Labor costs are still 
below anything in the twenties." 

That is what you would expect as business increases its operations, 
and the productivity of labor increases. 

Mr. AviLDSEN. Of course, we did have an increase in labor costs in 
Detroit just recently as the result of the Chrysler strike, I believe, 
3 cents an hour? 

• Dr. Keeps. Yes; there are special situations, but this is a general, 
overall computation. 

Mr. AviLDSEN. But we can't reasonably expect labor to decline at 
this time. We can't expect to find labor decreases since December 1, 
1939, for example. 

Dr. Keeps. The computation will show that even there, with 
capacity operations, labor costs per imit of product are goin§ down. 

Mr. AviLDSEN. But not actual labor rates. 

Dr. Keeps. No. But the labor rates are relatively imimportant. 

Mr. AviLDSEN. You refer then, all through here, just to labor cost 
per unit? 

Dr. Keeps. Yes; the kind of thing that makes employers raise 
their prices. It isn't labor rates that determine employers' labor 
costs ; it is the productiveness of labor. 

Mr. Aenold. For instance, in the Aluminum Co. the labor rate has 
more than doubled and costs have gone down tremendously, while 
the wages were being doubled. 


Dr. Keeps. Exactly. 

Now, therefore, is tHe time to take stock, and the most pressing of 
all is the need for information, and especially information upon 
inventories. The figures now available are fragmentary. At best, 
they give values, although we did gfit some excellent new figures into 
the testimony. Yet, the businessman who wishes to meet and avoid 
buying hysteria, the governmental and industrial purchasing agent, 
the distributor, in fact, all of them need information, commodity by 
commodity, preferably in terms of physical quantities, at each of the 
stages where inventories customarily pile up. It is interesting to note 
that all of the witnesses agreed that it is imperative that the Depart- 
ment of Commerce receive additional funds to collect and distribute 
information on inventories. 

It seems to me that now is also the time to improve governmental 
buying policy. Government procurement inflated prices during the 
World War — that is a matter of record, and some of the witnesses 
have shown that in isloated instances, it may have been a disorganiz- 
ing factor in the present market. 

Next, plans ought to be formulated for meeting the problem of 
abrupt price rises in certain imports, notably, rubber, wool, shellac, 
various botanicals and silk. About the only effective device now 
available, it seems to me, is the trade-agreements program. I know 
that others were cited, but while the category may seem long, when 
you compare or examine carefully what these devices permit, you find 
them of little usefulness. 

Let me turn, for example, to the testimony of one of the witnesses 
who was asked what could be done to prevent or do something about 
a dollar price for rubber.^ He cites, for example, the Antidumping 
Act and, of course, that does not help at all. That protects our market 
against low prices, not high prices. There was cited also the Presi- 
dent's power to stop shipping, by which he is authorized to withhold 
clearance for one or more vessels of such belligerent country or deny 
it commercial privileges in this country. But that is again contingent 
on dollar rubber being charged to us and 50-cent rubber or 20-cent 
rubber being charged elsewhere. 

In other words, that can be used only in event of price 

The Webb-Pomerene Export Act was also cited. Well, of course, 
that doesn't give us any protection against these prices that come in 
the form of dollar rubber. So I want to come back to the 

Mr. AviLDSEN. Who was the witness who made that statement? 

Dr. Keeps. Mr. Raymond Leslie Buell of the Foreign Policy of 

I want to come back to the statement that about the only effective 
device in the foreign field we now have is the trade-agreements 
program and, of course, if that is allowed to lapse, we have none at all. 

But obviously, the most important of all is the cooperative effort by 
business and Government to maintain price balance. Mr. Paiil 
G. Hoffman of the Studebaker Corporation, Mr. Don Nelson of Sears, 
Roebuck, Mr. George Renard of the National Association of Pur- 
chasing Agents — each and every business and governmental witness 

I ^'jpra, p. 11235, 


at this hearing endorsed and emphasized the importance which has 
been consistently attached to the goal of price balance. 

In the words of President Roosevelt's Committee on Price Policy 
nearly 2 years ago in the President's press release of February 
18, 1938 [reading]: 

An important factor that determines whether we shall succeed or be blocked in 
our endeavor to attain full employment and a high level of income is the behavior 
of prices. In this connection, careful attention must be given to (1) the relations 
of the prices of various groups of commodities to each other; (2) the relation 
between commodity price levels and the level of debt burdens and costs; and (3) 
the direction and rate of movement of the general price level. The measures 
employed at any given time to further this policy must fit the needs of that time — 

I want to emphasize that point — ^* 

Prices of different groups of products must be brought in balanced relations to 
one another. Continued high prices of many commodities not subject to highly 
competitive market forces intensify the downward pressure of all other prices 
* * * For industries, such as agriculture, that operate at a high level of 
capacity, even when business activity is at low levels, the restoration of profits 
must come primarily through higher prices. 

I think that fact is stUl true today. 

Our program 

Mr. AviLDSEN (interposing). Excuse me, Dr. Kreps. Your office 
has put out several statements as to price changes, commodities which 
have risen in price in recent weeks and so forth. Is that done on a 
regular basis? Do you do it once a week or once a month? What is 
your program? 

Dr. Kreps. That is done on the 1st and 15th of the month. 

Mr. AviLDSEN. So there will be one out pretty soon now? 

Dr. Kreps. Y^s. 

Mr. AviLDSEN. Are you going to continue that practice? 

Dr. Kreps. As long as the committee orders us to do it. 

Mr. AviLDSEN. You don't know whether the bulletin for the 15th of 
December will show any further increases? 

Dr. Kreps. I would have to consult our staff over in the Bureau of 
Labor Statistics to know that. 

Mr. AviLDSEN. Do you know whether there have been any increases 
in the last 

Dr. Kreps (interposing). I am under the impression that there are. 

Mr. AviLDSEN. You may proceed. 

Dr. Kreps (reading): 

Our program seeks a balanced system of prices such as will promote a balanced 
expansion in production. 

That is the end of the quotation. 

Among the most effective devices for maintaining price balance, as 
Mr. Thurman Arnold has shown this morning, is the enforcement of 
the antitrust laws, for it should be noted with emphasis that prices in 
many instances do not rise ; they are raised. Even at the present time, 
our testimony has shown that most of the prices which have been able 
to maintain the levels of last September are those in which competition 
is restricted by a national or international cartel or control. For 
example, you will remember rubber and zinc, copper and tin, and par- 
ticularlv silk. 


Mr. Pike. One question on that import, Dr. Kreps. Tin is 
thoroughly cartelized, as much almost as anything in the world, and 
pretty effectively so. In my memory, it hasn't risen at all. I wonder 
what method was used there. As I remember it, you speak to one, 
Captain Lyttleton, in London, and he tells you what the price of tin is 
and is going to be. But as I remember it, it hasn't risen. I wonder 
what sort of pressure was put on a cartel, governmental or by, perhaps, 
not over a half-dozen consumers in the United States. 

Dr. Keeps. I haven't looked at the details, but I do not beUeve that 
the operations of the cartel are open to public view, nor is there is any 
pubUc documentation. 

Mr. Pike. Not here, but in London, it is a pretty ofl&cial thing and 
well known, and the operations are fairly open. 

Dr. Keeps. Yes. The information which is conveyed is the kind 
that does appear in some of the newspapers and some of the financial 
magazines ; I agree. 

Mr. Pike. Then, on the rubber thing, while it is cartelized, let's say, 
the price could be controlled up to, we will say ,-3 5 or 40 cents a pound, 
but above that point, half a dozen of these new substitutes, like 
du Poht's Neoprehe or three or four other things, come in and hit that 
price, and as I remember it, from 35 to 60 cents, and probably at a 
lower price if the demands were larger. 

I would think that the control would be automatic around there, 
rather than a^ a dollar. 

Dr. Keeps. Yes, that is true. The dollar figure was not cited 
except as a 

Mr. Pike (interposing). No; but it can scare people if you use it, if 
you don't reaUze that somewhere long before the dollar price comes 
mto effect, half a dozen manufacturers of substantial size can go in 
and make very satisfactory profits and turn out a very satisfactory 
substitute in quite large volume. 

Dr. Keeps. At any rate, we could have prices rise threefold from 
present levels. 

Mr. Pike. Yes. 

Dr. Keeps. Before you could have limitations on price even from 

Mr. Pike. That is better than eight. 

Dr. Keeps. Yes. 

Relative to tin, this exhibit ^ shows that the increase that occurred 
in the price of tin, is now about 20 percent 

Mr. AviLDSEN (interposing). Of course, those are spot prices and 
do not necessarily reflect the cartel price, isn't that true? 

Mr. Pike. I think that is pretty well so. 

Mr. Avildsen. Well, we learned in cases of some of these other 
commodities that they were not cartel prices, they were spot prices. 

Dr. Keeps. That is true, and I would have to examine these to 
make sure. 

Mr. Avildsen. For instance, the rubber chart showed that rubber 
went up 50 percent in a few days. We know that cartels did not raise 
the prices. 

Dr. Keeps. No. In that case the cartel restricts the quantity. 
Cartels operate, of course, in various ways. 

« See "Exhibit No. 1471," p. 11054. 


Mr. AviLDSEN. I understand that, but I mean these prices are spot 
prices, I believe, and not 

Dr. Keeps (interposing). That, I should think, might readily 
be true. 

Mr. Pike. But there is no trade in there, so the spot price is the 
cartel price. On zinc, incidentally, the price has dropped half a cent 
since that testimony. I don't know the percentage, but probably of 
the order of 8 or 10 percent, since Dr. Lubin's testimony was given 
earlier this week.^ 

Dr. Kreps. Yes. I have summarized testimony as given rather 
than what may have happened afterward. 

Probably the most interesting or signific^t fact shown in the hear- 
ings was that shown by Dr. Thorp in this chart comparing prices with 
production.* His chart shows clearly that prices soon reach a level 
where they do not stimulate production. During the World War, 
for example, the economy never reached the levels of production 
attained in 1916. In short, all that the price boom of 1917-20 accom- 
pUshed was a multipUcation of the burdens and the cost of the war, 
on the backs of the post-war generations; for the war debt incurred 
in jSO-cent dollars had to be paid back through years of taxes in 
hundred-cent dollars. Had there been effective and cooperative 
action by Government and business to maintain price balance at the 
beginning of the World War, the total cpst of the war might have been 
halved. Our governmental debt might now be some 15 or 20 bUHon 
dollars lower. 

Now, it is obvious that only with price balance is lull production 
possible, and in modern industrial wars, full production is the prime 
military necessitv. No more effective measure of economic and 
miUtary preparedness exists than that of maintaining price balance 
through enforcement of antitrust laws and the exercise of cooperative 
governmental and business statesmanship. 

Mr. AviLDSEN. Thank you very much. Dr. Kreps. 

Have you any announcements to make as to the next meeting of 
the committee? The insurance hearing will continue this week, is 
that correct? 

Dr. Keeps. The insurance hearing will recess today untU Thurs- 
day, December 14. There will be a hearing on investment banking, 
wmch opens on the 12th, I beheve. 

Mr. AviLDSEN. Are there any other questions If not, the com- 
mittee will stand adjourned until 10:30 Tuesday morning. 

(Whereupon, at 12 o'clock noon, the committee adjourned until 
10:30 a. m., Tuesday, December 12, 1939. 

» See "Exhibit No. 1471," supra, p. 11064. 
» Bee "Exhibit No. 1505," supra, p. 11093. 


Exhibit No. 1450 

(Chart based on following statistical data appears in text on p. 11023) 

U. S. Department of Labor 


[Index numbers] of wholesale prices, 1801 to 1939 


The following Index numbers from 1890 to 1936 are the regular weighted series of the Bureau of Labor Sti • 
tistlcs, computed by the same method throughout and published currently. The number of price series 
included has been changed from time to time, and at present totals 784. The figures for years prior to 1890 
are arithmetic averages of unweighted index numbers of individual commodities, and are here converted to 
the 1926 base in conformity with the Bureau's practice. 

1801 111.8 

1802 91.8 

1803 93.9 

1804 101.5 

iSeS— 104.2 

^806 102.2 

1807 96.0 

1808 93.9 

1809 98.7 

1810 107.7 

1811 104.9 

1812 106.3 

1813 123.6 

1814 154.6 

1815 121.6 

1816 103.5 

1817 104.2 

1818 102.2 

1819 89.7 

1820 76.6 

1821.... 73.2 

1822 75.2 

1823 71.8 

1824 71.1 

1825 71.8 

1826 71.1 

1827 71.8 

1828 68.3 

1929 67.6 

1830 65.6 

1831 70.4 

1832 7L1 

1833 70.4 

1834 65.6 

1836 716 

1836. 83.5 

1837 82.8 

1838 79.4 

18:^9 83.5 

1840 71.1 

1841... 70.5 

1842 65.7 

1843 61.8 

1844 62.1 

1845 62.6 

1846 64.8 

1847 64.9 

1848 61.8 

1849... 60.1 

1850 62.3 

1851 64.5 

1852 62.5 

1853 66.4 

1854 68.8 

1855 68.9 

1856 68.9 

1857. 68.5 

1858 62.0 

1859 61.0 

1860 60.9 

1861. 61.3 

1862. 71.7 

1863 90.5 

1864 116.0 

1865... 132.0 

1866 116 3 

1867 104.9 

1868 97.7 

1869 93.5 

1870 86.7 

1871 82.8 

1872 84.5 

1873 83.7 

1874 81.0 

1875 :. 77.7 

1876 72.0 

1877 67.6 

1878 61.7 

1879 58.8 

1880 65.1 

1881 64.4 

1882 66.1 

1883 64.6 

1884. 60.5 

1885 66.6 

1886 560 

1887 56.4 

1888 57.4 

1889 57.4 

1890. 56.2 

1891-. 66.8 

1892 62.2 

1893 53.4 

1894... 47.9 

1895 48.8 

1896 46.5 

1897 46.6 

1898 48.5 

1899 52.2 

1900 56.1 

1901 55.3 

1902 58.9 

1903... 59.6 

1904 59.7 

1905... 60.1 

1906 61.8 

1907 66.2 

1908 62.9 

1909.. 67.6 

1910 70.4 

1911... 64.9 

1912 69.1 

1913 69.8 

1914 68.1 

1915 69.6 

1916 85.5 

1917 117.5 

1918 131.3 

1919 138.6 

1920 154.4 

1921 97.6 

1922 96.7 

1923 100.6 

1924 98.1 

1925 103.6 

1926. 100.0 

1927 96.4 

1928. 96.7 

1929... 95.3 

1930 86.4 

1931 73.0 

1932 64.8 

1933 65.9 

1934. :. 74.9 

1935 80.0 

1936 80.8 

1937 86.3 

1938 78.6 

1939' 76.7 

> 10 months. 

Exhibit No. 1451 

statistical data for this chart which appears in text on p. 11024, are included in the data for "Exhibits 
Nos. 1452, 1453, 1454 and 1455" under the columns entitled "All Commodities", see Infra, pp. 11334-37. 


124491 — 40— pt. 21 21 


Exhibit No. 1452 

(Chart based on following statistical data appears in text on p. 11025) 

Prices of Farm Products and Food m the War Period 


Year & Month 

All Com- 



Year & Month 

All Com- 




. 99.9 





















































































213. 7 
















































Apr — . 

174 6 













Oct " 









mtr— Jan 































1915— Jan 
























Oct ' 




Nov - 



1018— Jan 



1921— Jan 












June -- 



13a 7 

















1917— Jan 

























Oct " 








> The Farm Products groups includes the following subgroups: 

a) Orains. 

b) Live stock and poultry. 

c) Other farm products. 

d) All farm products. 

> The Foods group Qicludes the following subgroups: 

a) Butter, cheese, and mQk. J 
b)" Meats. ' - 

c) Other foods. 

d) All foods. 

Source: Bufeao of Labor Statistics. 
11-3-4-39. J 


Exhibit No. 1453 
(Chart based on foUowIng statistical data appears In text on p. 11026) 
Prices of Textiles and Hides and Leather in the War Period 


Year & Month 



Aug — 




1914— Jan 










1915— Jan 










1916— Jan 












1917— Jan.... 















Hides & 


ucts ' 



Year & Month 
















April. . . 












April. . . 








1921— Jan 












1922— Jan 









































































Hides & 
























184 4 

























' '^'a')^f^*Md^klM^' Products group includes the following subgroups: 

b) Leather. 

c) Boots and shoes. 

d) Other leather products. 

e) All hides and leather products. 
a)'^ott!fn^''°*d"''** ^°"^ includes the following subgroups: 

b) Silk and rayon. 

c) Woolen and worsted goods. 

d) Other textile products. 

e) All textile products. 

Source: Bureau of Labor Statistics. 










































159. 6 










164 3 


17a 2 









Exhibit No. 1454 
(Chart based on following statistical data appears in text on p. 11028) 
Prices of Chemicals and Drugs and Building Materials in the War Period 


Year & Month 

1813— Jan.— 
Apr — 
July.. - 

1914— Jan.... 

1915— Jan.... 





1916— Jan-... 

1917— Jan-... 

All Com- 













































































112. -6 












































176. 1 


cals & 
Drugs ' 


Year & Month 

1918— Jan 











1919— Jan 










1920— Jan 

April . . , 









1921— Jan 











1922— Jan 












All Com- 

184. 8 
133. 6 


209 3 
29a 8 


160 7 

> The Building Materials group includes the following subgroups: 

a) Lumber. 

b) Brick. 

c) Portland cement. 

d) Structural steel. 

e) Paint materials. 

f) Other building materials. 

g) All building materials. 

iThe Chemicals and Drugs group Includes the following subgroups: 

a) Chemicals. 

b) Drugs and pharmaceuticals. 

c) Fertilizer materials. 

d) Mixed fertilizers. 

e) All chemicals and drugs. 

Source: Bureau of Labor Statistic^- 


Exhibit No. 1455 
(Chart based on following statistical data appears In text on p. 11030) 

Prices of Metals & Metal Products and Bituminous Coal in the War Period 


Year & Month 

1913— Jan 











1914— Jan 











1915— Jan.... 














April. . 




Aug. . . 




1917— Jan.... 


























Metals & 



Bit. Coal' 





























































Year & Month 

1918— Jan 










Nov . . . 

1919— Jan... - 



April. . 








1920— Jan... - 











1921— Jan.... 











1922— Jan.... 











Dec ... 


Metals & 





























































































































Bit. CnaP 


' The Metals and Metal Products group Includes the following subgroups: 

a) Iron and steel. 

b) Nonferrous metals. 

c) Agricultural implements. 

d) Automobiles. 

e) Other metal products. 

f) All metals and metal products. 

' The Bituminous Coal group has no subgroup. 

Source: Boreaa of Labor Statistics. 


Exhibit No. 1456 
(Obart based on follovdng statistical data appears in text facing p. 11032) 

Changes in Commodity Prices in the War Period 






1. Caustic potash 




2. Indigo paste— coal tar dye 


3. Ferromanganese 


4. Soda ash 


6. Phenol...... 


6. Steel, plates 


7. Beans, dried 


8. Potatoes, white (four series) 


9. Steel billets 


10. Leather, glazed kid 


11. Wheat flour (short winter patents, Kansas City) 


12. Bituminous coal (composite at mine f. o. b.) 

13. Benzolcacid 


14. Acetophenetldin 


16. Woolen goods— overcoating 


16. Copper Ingot 


17. Leather, sole 


18. Hogs 


19. Sugar 


20. Cotton, raw 


21. Sulphuric acid 


All commodities 




22. Burlap 


23. White pine 1 X 8, #2 buff. 



26. Tea 



27. Tobacco, smoking 



29. Coffee #7 



31. Menthol 


Source: Bureau of Labor Statistics and the Oil, Paint and Drug Reporter. 




Exhibit No. 1457 

(Chart based on following statistical data appears in text on p. 11036) 

Cost of Living, 191^-1921 


Items « 




1914— March 











1916— March , 


June , 


September ... . .. 


December' ...... 


1916— March .... . .. 








1917— March 






December' _ 

1918— March 








See footnotes at end of table. 

Cost of Living, 1914^1921 — Continued 






1919— Marph .... 











1920— March .: 






December* . . 


1921— March 


June !. 


September' .. 


December* ' 


I Estimated; Including fuel and light, house furnishings and misceDaneous items, in addition to PTonp 
' Actual published Indexes. 

Source: Bureau of Labor Statistics. 

Exhibit No. 1458 
(Ctiart based on following statistical data appears in text on p. 11038) 
Average Hourly Earnings 1914-1921 



Group of 
8 Manu- 






Group of 
8 Manu- 









MO. 4 


110. 1 










' Includes cotton textiles, boots and shoes, clothing, hosiery and knit goods, woolens, lumber sawmills, 
worsted and steel, and slaughtering and meat packing. 

Source: Paul Douglas "Real Wages In the U. S. 1890-1926." 




Exhibit No. 1459 
(Chart based on following statistical data appears in text on p. 11040) 
Real Wages — Federal Employees in the District of Columbia, 1914-21 


























Source: Paul Douglas, "Real Wages In the United States, 1890-1926," adjusted to real wages with 
Bureau of Labor Statistics Cost of Living index. 





Exhibit No. 1460 
(Chart based on following statistical data appears in text on p. 11041) . 

Real Wages — Teachers, 1914-21 
[1914=- 100] 
























Source: Paul Douglas, "Real Wages. In the U. S., 1890-1926," adjusted to real wages with Bureau of 
Labor Statistics Cost of Living Index. 




Exhibit No. 1461 
(Chart based on following statistical data appears In text on p. 1104i2) 

Real Wages — Building Trades, 19H-21 

























Source: Paul Douglas, "Real Wages in the U. S., 1890-1926," adjusted to real wages with Bureau of Labor 
Statistics Cost of Living Index. 




Exhibit No. 1462 

(Chart based on following statistical data appears In text on p. 11043) 

Real Wages — Railways, 1914-21 

























Source: Paul Douglas, "Real Wages In the U. 8., 1890-1926" adjusted to real wages with Bureau of Labor 
Statistics Cost of Living Index. 





Exhibit No. 1463 

(Chart based on following statistical data appears In text on p. 11044) 

Real Wages — Bituminous Coal Mines, 1914-21 


























11.3. 1 

Source: Paul Douglas, "Real Wages in the U. S., 1890-1926," adjusted to real wages with Bureau of 
Labor Statistics Cost of Living Index. 




Exhibit No. 1464 
(Chart based on following statistical data appears in text on p. 11044) 

Real Wages — Group of 8 Manufacturing Industries, 1914-21 
























Source: Paul Dou?las: "Real Wages in the U. S., 1890-1926," adjusted to real wages with Bureau of 
Labor Statistics Cost of Living Index. The eight industries included are cotton textiles, boots and shoes, 
clothing, hosiery and knit goods, woolens, lumber sawmills, iron and steel, and slaughtering and meat 




Exhibit No. 1465 

(Chart based on following statistical data appears in text on p. 11046) 

Real Annual Earnings — All Manufacturing, 1914-1921 




















. 103. 8 





Source: Paul Douglas, "Real Wages In the U. S., 1890-1926," adjusted to real annual earnings with Bureau 
of Labor Statistics Cost of Living Index. 






Exhibit No. 1466 
(Chart based on following statistical data appears in text on p. 11048) 
Real Annual Earnings — Selected Manufacturing Industries, 1914-Si 





Iron and steel 

Agricultural imple- 


Actual ' 


Actual 1 


Actual • 


Actual ' 














1917 L 










I Note scale of chart. 



Exhibit No. 1467 

(Chart based on following statistical data appears in text facing p. 11049) 

Pre-War Commodity Prices, 191S-14 and 19S8-S9 

[Aug. 1913-July 1914=100] 


1. Soda Ash 

2. Leather, glazed kid... 

3. Benzoic acid 

4. Ferromanganese- 

6. Common brick (U. S. average) 

6. Phenol - 

7. Woolen goods— overcoating 

8. Steelplates 

9. Caustic Potash 

10. Steel billets 

11. White pine 1 X 8 !!!2 buff 

12. Bituminous coal (composite at 
mine f. o. b.) 

13. White oak boards 

14. Acetophenetidin — 

16. Tea - 

All Commodities-^ 

Sept. 1938- 
August 1939 

162. 7 



16. Potatoes, white (4 series) 

17. Sugar 

18. Wheat flour (short winter patents, 

Kansas City) 

19. Tobacco, smoking. 

20. Hogs 

21. Indigo paJste— Coal tar dye 

22. Sulphuric acid 

23. Burlap 

24. Menthol , 

25. Beans, dried I... ^ 

26. Copper ingot 

27. Cotton, Raw 

28. Leather, sole 

29. Phosphate rock 

30. Coffee #7 

31. Rubber, -Plantation ribbed 

Sept. 1938- 
August 1939 



Source: Bureau of Labor Statistics. 





Exhibit No. 1468 
(Obart based on following statistical data appears in text facing p. 1T061) 
Wholesale Prices of Selected Commodities, January 1916 

[July 1914=100.0] 




Indigo paste— coal tar dye.. 

Benzoic acid 

Caustic potash 


Wheat flour (short winter patents, 

Kansas City) 


Rubber, plantation ribbed 

Beans, dried 


Tobacco— smoking 

All commodities 

Steel billets 

Woolen goods— overcoating 

Soda ash 

Bituminous coal (composite at mine 

f. 0. b.) 









16. Sulphuric acid 

17. Leather— sole 

18. White pine 1 x 8 #2 Buff 

19. Phosphate rock ^ 

20. Common brick (U. S. average) 

21. Steel plates 

22. Copper ingot 

23. Tea 

24. White oak boards 

25. Leather, glazed kid 

26. Burlap 

27. Coffee #7 

28. MenthoL...; 

29. Hogs 

30. Cotton, Raw 

31. Potatoes, wl- ite (4 series) 





> 100.0 

' No fjuotation for January 1915— Relatives before and after constant. 

Source: Bureau of Labor Statistics. 




Exhibit No. 1469 

(Chart based on following statistical data appears in text feeing p. 11061; 

Prices in War Time — August 1939 to December 2, 1939 

[August 1939=1001 


Burlap : 

Winter Patents Wheat, Kansas City 


Plantation ribbed rubber 

Electrolytic copper ingot 


Oak sole leather 

White potatoes 

O vercoatlng woolen goods 

Glazed kid leather. 


Plain white oak 

Granulated sugar 

Raw cotton, New York 

Bituminous coal, mine run, Norfolk. 
Bio #7 coffee... 



Dec. 2 




17. Caustic potash 

18. Indigo... 

19. Light soda ash 

20.*tT. S. P. Phenol 

21. Steel tank plates 

22. Steel bUlets : 

23. Sulftiric acid 

24. White pine 

25. Smoking tobacco 

26. Brick, common building, New York 

27. Phosphate rock 

28. Tea 

29. Benzoic acid 

30. Acetopheneticin 

31. Light hogs.. 

All commodity 



Dec. 2, 



Source: Bureau ofjLabor Statistics and Oil, Paint, and Drug Reporter. 

T. N. E. C. 


December 1, 1939. 



Exhibit No. 1470 
(Obart based on following statistical data appears in text on p. 11052) 

Daily Prices of Basic Commodities, 1939 — Domestic Agricultural Products 
and Industrial Raw Materials 

{August 1939 average= 






Sixteen > 


All Commodity 

100. 72 
104. 30 
118. 89 
124. 02 
121. 75 
120. 12 
119. 11 
lis. 44 
118. 62 


101. 92 

101. 16 
101. 67 
105. 19 
106. 26 
123 92 
115. 98 
114. 02 

113. 17 

112. 10 
115. 73 

124. 36 

125. 37 

125. 22 

126. 67 
125. 90 
125. 85 
124. 98 

123. 76 

124. 48 
124. 86 



Average 100. 

28 (daily) 

29 (daily) 

30 (daily) - 

31 (daily) - 

2 (daily) 

Sept. 2 100.4 

5 (daily) ... 

6 (daily) 

7 (daily) 

8 (daily) 

9 (daily) - 

Sept. 9 104.5 

14 .. .. 

16 105. 7 


23 106. 


30 106.0 

Oct. 7 105. 3 


14 105. 2 


21 105. 9 

26 - - 

28 105.6 

Nov. 4 105.7 


11 105. 7 

16 : - 

18 105. 5 


26 105. 3 


' Domestic Agricultural Products— Com, wheat, steers, hogs, cotton, wool. 

» Industrial Raw Materials— Cotton, wool, silk, point cloth, burlap, steel scrap, copper, lead, tin, line, 
hides, rubber, shellac, rosin, flaxseed. 

Source: Bureau of Labor Statistics. 
November 20, 1939. 


Exhibit No. 1471 
(Chart based on following statistical data appears in text on p. 11054) 
Daily Prices of Basic Commodities, 19S9 — Metals 
(August 1939 average = 100] 


Scrap Steel 





August 3 

100. 07 
106. 38 
138. 83 
136. 23 
131. 62 
131. 62 
124. 41 
124. 41 

102. 64 
114. 75 
119. 63 
119. 63 
119. 63 
119. 63 
119. 63 

123. 02 
112. 77 
102. 52 
104. 57 
108. 67 
109. 70 
107. 13 

104. 17 
109. 13 
109. 13 
109. 13 • 
109. 13 
109. 13 
109. 13 
109. 13 
109. 13 
109. 13 
109. 13 
109. 13 
















Sept. 1 . 







126. 06 


126. 06 


126. 06 


125. 05 







Oct. 5 

134. 83 




134. 83 



Nov. 2 



134. 83 

16 • 

134. 83 




134. 83 

Dec. 1 

134. 83 

Source: Bureau of Labor Statistics. 

Exhibit No. 1472 

(Chart based on following statistical data appears in text on p. 11056) 

Daily Prices of Basic Commodities, 1939 — Textiles 

[Auguiit 1939 average=100] 

Raw Cot- 


Raw Silk 

Print Cloth 



104. 46 

• 98. 65 
> 100. 45 
' 105. 12 
« 100. 46 

* 97. 22 
' 98. 44 
» 97. 33 
> 97. 55 
» 97. 44 
101. 34 
104. 12 
104. .34 
108. 46 

101 07 
101. 92 
« 146. 09 

• 152. 88 

• 152. 88 
» 154. 58 
» 148. 64 

145. 24 
145 24 
145. 24 
144 39 

100. 49 
100. 49 
106. 86 
108. 35 
108. 35 
» 129. 30 
• 128. 93 

100. 63 
105. 93 
108. 68 

* 116. 62 

* 116. 25 

me. 52 


me. 52 

108. 68 











104. 74 




104. 74 

Sept. 1 




5 .. 







130. 24 


130. 24 


142. 08 





Oct. 5 

169. 38 


168. 49 


177. 60 


182. 15 

Nov. 2 




10 i 





Dec. 1 


' (PencDed notation:) Flurry. 
• (Penciled notation:) Sept. 9. 
« (Penciled notation:) Sept. 14 with flurry. 

Source: Bureau of Labor Statistics. 

* (Pencilftd notation:) Sept. 21. 
» (PencildQ notation:) Oct. 19. 


Exhibit No. 1473 
(Chart based on following statistical data appears in text on p. 11050) 

Daily Prices of Basic Commodities, 19S9 — Domestic Agricultural Products 
[August 1939 average =100] 







98. 92 
100. 40 
102. 25 
in. 87 
122. 61 
125. 38 

114. 80 
107. 21 
109. 45 

102. 70 
107. 35 
105. 80 
105. 80 
139. 52 
120. 92" 
121. 69 

107. 74 

108. 51 
104. 25 
105. 80 


101. 65 

101. 66 
103. 72 
120. 51 
116. 39 
114. 32 
103. 13 
100. 18 
106. 37 
107. 55 

102. 16 







28 - 








Sept. 1 




5..: ::.::. 

135. 05 


145. 35 


145. 35 


145. 35 




137. 04 


140. 36 



Oct. 5...^, ., 







Nov. 2 _ 


112. 12 

16...L. . ... 



106. 31 


107. 14 

Dec. 1 


Source: Bureau of Labor Statistics. 

Exhibit No. 1474 
(Chart based on following statistical' data appears in text on p. 11060} 

Daily Prices of Basic Commodities, 1939 — Imports 
[August 1939 average =100] 






August 3. 








Sept. 1... 










Oct. 6 


Nov. 2 

Dec. 1 

100. 18 
116. 63 
149. 52 
134. 57 
134. 67 
134. 57 
125. 60 

125. 60 

122. 61 

124. 10 

121. 11 
124. 10 
121. 59 
121. 59 

100. 13 
100. 13 
100. 13 
104. 37 
104. 37 
102. 65 
102. 65 
102. 65 
102. 65 

101. 40 
102. 10 
102. 10 
102. 10 
134. 62 
134. 62 
134. 62 
132. 87 
12,'). 87 
125. 87 
103. 15 
103. 15 
103. 15 

106. 82 

105. 82 















136. 68 



136. 68 


136. 68 


123. 46 

123. 46 


125. 66 


100. 00 
100. 00 
100. 00 
110. 25 
110. 25 
174. 35 
174. 35 
174. 35 
174. 35 
174. 35 
174. 35 
174. 35 
174. 35 
174. 35 
174. 35 
174. 35 

Source: Bureau of Labor Statistics. 


Exhibit No. 1475 
(Chart based on following statistical data appears in text on p. 11060) 

Monthly Retail Food Price Index for U. S. 



































' Preliminary. 

Source: Bureau of Labor Statistics. 




Exhibit No. 1476 
(Chart based on following statistical data appears in text on p. 11062) 

Retail Prices of Four Foods, 1939 » 
[August 15, 1939=100] 





12 city average (St. Louis Omitted): 

August 16 

Sept. 19 

Sept. 26 

Oct. 3 

Oct. 10 

Oct. 17 

Oct. 24 

Oct. 31 

Nov. 8.... 

13 city average: 

Nov. 14. 

Nov. 21 

Nov. 28 

1104 8 
f 105. 3 
1 105. 
1 101. 6 






119. 8 



1 Preliminary. To be revised to agree with regular monthly reports when they are released. 
' 11 city average— St. Louis and Buflalo omitted. 

Source: Bureau of Labor Statistics. 





Exhibit No. 1 77 
(Chart based on following statistical data appears in text on p. 11064) 

Prices of Five Drugs, 19S9 
[August Average =100] 

Date 1939 





Orange Oil 

Aug. 7 J 

185. 4 

235 3 










Sept 4 








Oct. 2 - 


9 1.. 


16 : 






Nov. 6 








Source: Oil, Paint, and Drug Reporter. 




Exhibit No. 1478 
(Chart based on following statistical data appears in text on p. 11067) 

Exports of Merchandise by Continental Destination, 1913-1919, 1936-39 

United States Exports in Dollars (000,000 omitted) 




N. America 

S. America 

To Asia, 

Oceania & 


1913 . 
















1914 - -- 




1916 - 


1917 - 




1919 - - - 


1936 - --. 


1937 - ..- - --- 


1938 -- - 


1939 t 


« Fiscal years 1913-15; calendar years thereafter. 

« 1939 figure estimated on the basis of the first 9 months' exports. 

Source: U. S. Department of Commerce. 



Exhibit No. 1479 

BILL IONS OF DOLLARS (Logarithmic Scale) 


_; I L_L L_i — I — L 

1906-1910 I 191 I -1915 

-I I I I I I L 

1916-1920 1921-1925 

Exhibit No. 1480 

MILLIONS OF DOLLARS (LoffQr,f/,mic Sca/fJ I 









J— \ 

^\. f' 


f ^*^ 


y^ \ 



1 y"» 

, ^ 


i ^-/* 






L \ ^. 














„ / 

y '^•'' 









1926- 19?0 




124491 — 40 — pt. 21 22 



Exhibit No. 1481 

MILLIONS OF DOLLARS (Logarifhm/c 3co/e) \ 


















». — - f X 







' V 1 



' V 







\ J.^ 


\ ' 








19 26- 19 JO 



Exhibit No. 1482 

MI LLIONS OF DOLLARS (logQr///)m/c Sca/e) 










_ii — J — I — 



Exhibit No. 1483 

MILLIONS OF DOLLARS (Loyor/f/imic Sco/e) I 




















Vf ' 

Jt \ 

«*-^ \ 



^1 / 


*" r 

^. / 



\ / 






1901 - 1905 


1911- (^15 

1916- 1920 



'9)1 -'935 


a at/St 

Exhibit No. 1484 

MILLIONS OF DOLLARS (Logoriffim/c Sco/e) \ 














j ' 







\ -r-1 

'^ \ 





V ,'/ 








r X f 

I / 










F^ ^ 







19)1 -i??5 




Exhibit No. 1485 

MI LLIONS OF DOLLARS rioaa r/fhm/n Sco/eJ 

^oo\ ~i ' — — *■ ^— ^^ 

Exhibit No. 1486 



Exhibit No. 1487 

MILLIONS OF DOLLARS (Logarithmic Scale) \ 


















. ^^^ 










» x> 




\,^ /■ 








1 1 1 1 

1901-190^: 1906-I9IO 





19)1 -i9?5 


Exhibit No. 1488 



MILLIONS OF DOLLARS flcpory//>mic Sco/f) \ 







^— ._/< 

fS. A— -^ 









1 / 






^ _^ 

r ^ 


^- -EXPOR 





/ \^ 


^\ / 



i_,i 1 ' 

1901-1905 1906-191011911- 1915 1 1916-192011921-1925 1 I92fe-i9)0li9)i-i935 1 i936;-j9*oj 1 


Exhibit No. 1489 
(Chart based on following statistical data appears in text on p. 11069) 

Indices of Value and Quantity of Merchandise Exports, 1916-1919 

11911-14 =100J 

Fiscal Year 

Total Exports 

Crude Ma- 

Finished Man- 



Crude food- 



































Source: W. A. Berridge, Reciew of Economic Statittict, 1919. 

Exhibit No. 1490 
(Chart based on following statistical data appears in text on p. 11071) 

Gold and Dollar Reserves of the United Kingdom, France, and Canada, 1914 o.f^d 1939 

(In millions of current dollars] 







Central Reserves.- 





Estimated other holdings 


Total gold 





Dollar resources 



3, 366-4, 666 










Dollar balances 









Grand Total 





1 No estimate available. 

Source: Board of Governors, Federal Reserve System. 

Annual Gold Production of British Empire and France, 1914 o.nd 1938 

1914 , 278,000,000 

1938"I"""II"II"IIIIIIIIIII-"""""ri"I"-"I-I - 760,000,000 

Increase - 472,000,000 


Exhibit No. 1491 
(Chart based on following statistical data appears In text on p. Il073) 

Wholesale Prices in England, France, Germany and the United States, by Quarters, 


[July, 1913-June, 1914=1001 






Year and