Special Message to the Congress Urging Extension and Strengthening of the Defense Production Act

To the Congress of the United States:

The Defense Production Act is now scheduled to expire on June 30, 1952. That Act is essential to the defense mobilization effort of the Nation. I recommend that it be extended for two years and strengthened in a number of respects.

Our need for a strong Defense Production Act is perfectly clear. We are now well along in our program to create invincible defensive strength in the free world. But, in order to complete that program rapidly and effectively, we must continue to have the authority contained in the Defense Production Act.

This law contains. authority to channel materials for defense, to help expand essential production, and to help small business make its vital contribution to the mobilization effort. This law also contains authority to stabilize prices, wages, credit and rents so inflation and high prices will not disrupt production, increase the cost of defense, and cause hardship and suffering among our people.

These powers will be needed for at least two more years. We are just now entering the period of greatest strain in our mobilization effort.

Since the attack on Korea, we have been building plants to turn out large amounts of planes, tanks, and other military items. And we have been rapidly increasing our output of military goods. In many cases, we are now producing equipment three or four times as fast as we were a year ago.

But under the budget program now before the Congress, the peak production rates for complex military items are still ahead of us in nearly all cases. And for some items, particularly the new models of jet aircraft, we will not reach volume production until 1953 or 1954. This means that the military use of steel, copper, aluminum, alloy metals, electronic equipment and many other things will be high for many months to come--and will continue to require substantial diversion from less essential uses.

Within the next two years, under our present plans, most of our new plants for producing military equipment should be completed, and by the middle of 1954 we should have on hand the great bulk of the equipment we need. Changes in the international situation or in technology, of course, could result in changes in our plans at any time, but if the situation develops as we now foresee, it should be possible by then to reduce the military demand for many materials and supplies.

Moreover, during the next two years we should be obtaining substantial results from the tremendous expansion that is now underway in our capacity to produce minerals, metals, chemicals, power, and other industrial necessities. For example, we are now building plants that will allow us to raise our production of primary aluminum from 720,000 tons a year in 1950 to 1,500,000 tons a year in 1954--and additional capacity may be needed. We are building nitrogen plants that will raise our capacity from 1,600,000 tons a year in 1950 to 2,900,000 tons in 1955.

These examples could be multiplied many times. All across the face of our country new plants and factories are being built which will give us additional metals and chemicals and electric power.

In addition to building plants in our country, we are helping to expand the production of many materials abroad--for example, of nickel in Cuba, copper in Chile and Rhodesia, and bauxite in Jamaica. This will help to increase supplies for the whole free world, and will allow us to raise our imports of many materials we need from abroad.

Over the next two years, therefore, we expect progressively to accomplish many of our military production goals, and to add progressively to our basic industrial capacity. We hope to reach a position in two or three years in which we can sustain the continuing amount of military production that we now expect to be necessary, and at the same time support rising living standards for our people.

But in order to carry through our defense production and expansion programs, we must continue to allocate scarce supplies-as long as they remain scarce--and continue to accept curtailment in civilian production where necessary to meet defense requirements.

These facts about the nature of the defense mobilization program over the next few years, require extension of the production features of the Defense production Act. And they also require extension of our powers to combat inflation.

At the present time, there are strong, continuing pressures on prices in many important areas of our economy. Some prices have receded in the past year from ceiling levels. But well over half of the Nation's business today is done at prices held down by price ceilings, and many of these prices are pushing hard against their ceilings. This is true, for example, on such basic commodities as metals and chemicals, industrial equipment and many foods. There are also strong upward pressures on many wages and rents.

We are seeing right now how vitally important it is to have firm price and rent controls if we are to have effective wage stabilization. And we are seeing how important firm wage policies are if price and rent controls are to be effective.

It is clear that, without the controls we have today, a great many prices--and wages and rents as well--would be much higher than they are right now. And our present control powers--seriously weakened by changes in the law last year--enable us to hold the present price level only with great difficulty where demand is large and costs are pushing up.

Moreover, in addition to the pressures that face us now, there are present in the economy two factors which could combine at any time this year or next to start new inflationary fires all through the economy. Inflammable materials are all around us; we must prevent the fires from breaking out.

The first of these factors is the inevitable limitation on the production of consumer goods--because we have had to cut back the output of some goods, such as household appliances and automobiles, and because we cannot expand rapidly the output of others, such as foods. The second factor is the existence of very large reserves of purchasing power, and of very high personal and business incomes. This potential purchasing power could turn into a sudden flood of demand. If businessmen and consumers were to throw their funds into a competition for the limited supply of goods, the result would be tremendous new pressures on prices.

Only strong controls can give businessmen and consumers assurance that prices will not be allowed to get out of hand, and that there is no need for panic buying. And only strong controls could stop the deadly spiral of inflation if a renewed wave of spending were touched off.

We have had two dramatic illustrations of what can happen when consumers--and businessmen--go on a buying spree. Right after the invasion of Korea, and again in the late fall of that year, after the intervention of the Chinese communists, consumers stopped saving and went into debt to buy goods. Businessmen scrambled for inventories. And as a result, prices skyrocketed. The wholesale price index rose 17 percent in the seven months from June 1950 through January 1951, and the consumers price index rose 8 percent.

All this occurred at a time when we were having the biggest civilian production boom in our history. There were no shortages of any kind. The economy had not even begun to feel the effects of the military expansion program.

Now the situation has been sharply changed--

Military production is high and rising, and is using large amounts of manpower and materials- production cutbacks are in effect for many kinds of consumer goods, though fortunately not for food and clothing.

At the same time, with high savings, high business profits, and 60 million people at work, there is plenty of purchasing power available if consumers and businessmen choose to step up their spending. Moreover, we face a sizeable deficit in the Federal budget, even with the revenue increases I have recommended to the Congress--a deficit which will add to inflationary pressures.

Consequently, the potential pressures toward inflation are now greater than they were when the price upsurge took place a little more than a year ago. The reason that inflation was checked early in 1951, and why considerable price stability was maintained during most of the year, is not that the inflationary danger disappeared. It is rather that the inflationary danger was counteracted and contained by tax increases, by credit controls, by price and wage stabilization, by allocation measures, and by increasing the supplies of some vital lines of production. The inflationary upsurge was halted, not by inaction, but by action.

Voluntary saving by consumers, and voluntary self-restraint by businessmen, contributed much to the halting of inflation. But it was the installation of price and wage controls that induced public confidence, and put an end to speculative buying based upon anticipation of higher prices.

Looking at the record, it is clear that we need strong anti-inflation weapons now, just as we did a year ago.

We cannot take chances with the present situation. We cannot afford to gamble. That is why I have been calling for good, strong anti-inflation laws. That is why it was so damaging last year when the Congress weakened the Defense Production Act instead of strengthening it. That is why it is so vital that the Act be strengthened now.

Now I want to turn to the specific changes that are needed in the present law.

The production features of the Act appear to be generally adequate at the present time. A few amendments are needed, two of which I should like to call specifically to the attention of the Congress.

First, the law now permits the Government to make a variety of loans, guarantees, and purchase commitments where essential to help expand production of critical materials at home or abroad, or to develop high-cost sources of supply without forcing increases in general price ceilings. At present, the law sets a limit of 2.1 billion dollars outstanding at any one time for these purposes. In all probability, this will not be adequate for programs which will be needed, and I recommend that it be raised to 3 billion dollars.

Second, a legislative "rider" was included in the Act last year which unnecessarily restricted imports of certain agricultural commodities. This rider, the so-called "cheese" amendment, needs to be repealed quickly. Otherwise, the friendly countries who are being hurt by this amendment may retaliate-as they have a right to do--against American exports of apples, tobacco and other products.

So much for the production side of the present law. On the anti-inflation side, a great deal more needs to be done.

First of all, I renew my urgent recommendation that the Congress repeal last year's three principal weakening amendments to our price control authority. These amendments are the Capehart amendment, the Herlong amendment, and the Butler-Hope amendment.

All these amendments are bad legislation. All of them are hurting us in the fight against inflation. Each gives special treatment to certain favored groups--lightening their share of the mobilization burden--while saddling a disproportionately heavy burden on the rest of the public, both as consumers and as taxpayers.

By far the worst and most damaging provision in the present law is the Capehart amendment. This allows manufacturers and processors to demand and get price ceilings high enough to cover all cost increases incurred between the Korean outbreak and July 26, 1951. Though plausible on the surface, this provision in fact disrupts effective price control. Costs and prices obviously do have a relationship one to another. Price increases are sometimes necessary to compensate for cost increases. But it is absurd to conclude from this that every cost increase has to be translated in its entirety into increased prices, regardless of whether they are needed.

Our economy never did, and never should, operate on a "cost-plus" basis. By technological progress and increased productivity and by changes in the volume of production, American business has often been able to hold the price line or even to cut prices in the face of increasing costs. This is a fact of our economic life, and one of the sources of strength of the American economy.

It is true, of course, that price ceilings cannot be maintained without reference to costs, and cost increases cannot be disregarded. That was true before the Capehart amendment was enacted and will be true after it is repealed. Other provisions of the law require that prices be generally fair and equitable and that due weight be given to cost increases.

Our stabilization agencies have long since adopted the principle that if an industry's rising costs are eating too far into profits, the industry is entitled to reasonable price relief. But there is no reason whatever why there should be an automatic pass-through of costs so long as sellers are making ample profits. Yet this disastrous notion of an automatic pass-through is the central--and fatal idea behind the Capehart amendment. All the amendment requires is for sellers to show cost increases occurring before July 26th and higher price ceilings are theirs for the asking. This is not price control, but rather a form of built-in inflation.

It has prices going up when they should be held down.

Let me give some examples of the results of this amendment. One large and highly profitable metal manufacturing company was scheduled, under the previous law, for price reductions amounting to almost two million dollars. That decrease would have been fully fair and equitable to all concerned, protecting the interests of both the company and its customers. Instead, under the Capehart amendment, this company was able to push up its ceiling prices by 7.5 million dollars. Another company that produces vacuum cleaners was scheduled for a 2 percent price reduction; instead it got a 3 percent increase. A producer of gas ranges would have had a 5 percent reduction; instead the Capehart amendment gave him a 2.5 percent increase. A candy bar producer got a 15 percent increase from the Capehart amendment. A producer of household water softeners was scheduled for a 4 percent reduction, but instead came out with a 5 percent increase. These are not isolated cases, they are just a few examples from among the 5,000 requests for Capehart increases already filed.

This is the kind of thing I warned of last August when I urged the Congress to repeal the Capehart amendment before the damage was done. At that time, the Senate did act on a bill which would have removed the worst features of the amendment. But the Congress adjourned without taking final action and the Office of Price Stabilization had no choice but to grant Capehart increases.

A great deal of damage has already been done, as a result. Much of it can never be undone.

Undoubtedly, many of the Capehart increases now in effect could not be revoked because they have already been built into too many costs and prices in the various stages of the production process. Undoubtedly, fairness would require that all firms producing similar items be accorded equal treatment on their prices, to take account of the fact that smaller companies may not have been able to gather the cost data required for the Capehart increases that have already been granted to larger firms.

And, of course, the higher prices required at the manufacturing and processing level by the Capehart amendment must be taken into consideration in allowing fair and equitable price ceilings all down the line from manufacturers to retailers.

Thus, even after the Capehart amendment is repealed, its price raising effects will continue to be felt all through the economy for a long time to come.

On the other hand, prompt action by the Congress would enable us to prevent the spread of Capehart increases to additional areas where they have not yet been granted and where they are not needed. And it would also give us the flexibility we need to get all ceiling prices on a fair and equitable basis. Prompt action is urgent. For Capehart increases are necessarily being granted all the time, and the longer remedial action is delayed, the more completely and irrevocably our whole price structure will be Capehartized.

The price raising effects of the Capehart amendment have been compounded by the Herlong amendment. This guarantees pre-Korean percentage mark-ups to wholesalers and retailers. Naturally, this pyramids ceiling price increases at the manufacturing level into much bigger ceiling price increases at the consumer level.

For example, when manufacturers' excise taxes were raised last fall, most wholesalers and retailers had to be permitted not merely to pass the amount of the tax on to the consumer, but to add on top of this a percentage of the tax as profit for themselves.

The Herlong amendment actually required that these sellers be allowed to charge a profit for collecting a tax from the consumers.

Just as in the case of the Capehart amendment, the sellers whom the Herlong amendment seeks to protect have their interests well safeguarded by other provisions of the Defense Production Act. Wholesalers and retailers have a right, under these other provisions, to obtain treatment that is fair and equitable for all concerned. If the Herlong amendment is repealed, that does not mean all percentage mark-ups will be abolished. Quite the contrary, they will be retained where they are needed to assure fair treatment to the sellers.

But there are a number of cases where maintenance of pre-Korean percentage mark-ups under changed conditions is unnecessary to assure equitable treatment; in other cases, like the excise tax example, they are downright unconscionable.

The Capehart and Herlong amendments have one thing in common. They are both aimed directly at raising prices. And they do just that. Capehart increases recently obtained by automobile manufacturers, together with Herlong mark-ups for the dealers, will cost automobile buyers up to 400 million dollars in the coming year.

The Butler-Rope amendment, on the other hand, does not directly aim at higher prices. Instead, it was intended to free certain groups--the cattle growers and the meat packers--from administrative controls which they incorrectly feared would hurt them, but which in fact gave us a most important means for assuring a fair distribution of livestock--and thus of meat--among both sellers and buyers.

This amendment bans the use of slaughtering quotas on livestock. In periods of tight livestock supply, such as occurred last summer and fall and will in all probability occur again, lack of quotas can cause chaos in meat distribution--and that's just the sort of situation made to order for the black marketer.

As the law stands now, without any authority for quotas, the orderly distribution of meat can be completely upset by some packers grabbing up a disproportionate share of the livestock while others are squeezed out of the market.

We need authority for slaughter quotas. I urge the Congress to restore it to the law, either in its original form or in the form now pending on the Senate calendar. That is the best way to make sure we have the tools we need to ensure a fair distribution of our meat supply.

If the Congress acts promptly on the Capehart, Herlong and Butler-Hope amendments-together with one or two other improvements which will be presented by the stabilization agencies--our price control powers will be substantially stronger. By and large, they will be adequate to do that part of the anti-inflation job which price controls reasonably can be expected to handle. But we will still lack other anti-inflation powers needed to do a completely effective job.

In particular, we need stronger controls over credit. Last year, the Congress seriously weakened the Government's powers to limit the availability of credit to finance purchases of consumer goods and real estate. In periods when supplies of goods are necessarily restricted, the dangers implicit in relaxed credit controls are great. We dare not take the risks involved in a loose policy on consumer and real estate credit. The Congress should close this inflationary loophole by restoring full authority for flexible administration of credit controls--so that they can be expanded or contracted quickly to meet any eventuality.

If these steps are taken, we will be far better equipped to keep our economy reasonably and effectively in balance, despite the stresses and strains inherent in our defense mobilization drive.

Businessmen then--and only then--will be protected against sudden unstabilizing increases in their costs of operation, including their wage costs.

Farmers then--and only then--will he protected against a loss in real income as a result of skyrocketing prices of the things they must buy for their farms and their families.

Workers then--and only then--will be protected against a soaring cost of living to which their own wages might never quite catch up.

I am sure I do not need to remind the Congress that what we are dealing with here are not abstract economic principles, but the welfare of men and women and families. The over-all rise in incomes and the great increase in consumer savings conceal the fact that millions of our people have suffered losses in real income, or barely held their own, over the past two years.

Most people are already having trouble paying present prices. For their benefit, we should be working, not to legislate formulas for raising prices, but instead to find ways of moving prices downward, as increasing productivity and more production makes that possible.

We can prevent inflation from weakening us if we have the will to do so and the courage to take the necessary steps.

I am glad to know that the Banking and Currency Committees of both Houses of Congress are planning early hearings on the needed legislation. I earnestly hope the Congress will act as promptly as possible to extend the Defense Production Act and to strengthen it along the lines I have recommended.

HARRY S. TRUMAN