How to Stop Inflation

ON AMERICA’S FUTURE

SPEAKER: WILLIAM P. WITHEROW

President, National Association of Manufacturers

This year, because of the tremendous and ever increasing production of weapons of war, our national income will rise to a new high and will far exceed the value of available civilian goods. Proposed taxes, plus savings and investments, will absorb some of the excess, but will leave perhaps 9 billion dollars of purchasing power in excess of the value of the available goods. In 1943, we can expect a big increase in this excess purchasing power.

This is wild money, or inflationary gap money. Without economic control, it will explode and blow through any price ceiling. With this excess money, people will bid against each other for the relatively few civilian goods, force prices up, and create an upward spiral that will pull with it rents, wages, and salaries. Then much money will buy little.

We can avert this national disaster only by facing the fact that, to pay the fabulous cost of modern warfare, no one can feather his nest because of the war. We must have a comprehensive anti-inflation and war financing program that demands sacrifice of all of us. Every one of our national groups, without exception, must be subject literally to union labor’s slogan, “equality of sacrifice.”

The President expressed and crystallized this incontrovertible fact when, in his anti-inflation fireside chat of last April, he said in part: “Are you a businessman, or do you own stock in a business corporation? Your profits are going to be cut down to a reasonable level. . . . Are you a retailer or a wholesaler or a manufacturer or a farmer or a landlord? Ceilings are being placed on the prices at which you can sell your goods or rent your property. Do you work for wages? You will have to forgo higher wages for your particular job for the duration of the war.”

We must impose this equality of sacrifice upon every group within our economy without fear or favor. No groups can continue to enjoy increased incomes as of today while the income of another group declines. “Although all the major types of income shared in the rise from 1939,”the August issue of the Survey of Current Business says, “the continuing upward movement in the past six months is accounted for largely by wages and salaries and farm income components.”

Industrial profits decline

The net profits of industry will recede from 6.25 billion dollars in 1941 to about 4.6 billion dollars this year — a decline of 26 per cent in one war year. This decrease, despite a record volume of production, is primarily due to the heavy tax burden on business corporations. Under the present tax bill, they will be paying 11 billion dollars in taxes yearly — 2.5 billion dollars more than all individual taxpayers. There is a limit to industry’s ability to pay and still remain solvent.

The cash farm income, before the payment of taxes, will climb from 11.8 billion dollars in 1941 to about 15 billion dollars this year — an increase of 27 per cent in one war year. Although tax payments will reduce this figure, the farmers will retain a sizable increase in net income over 1941. Farm leaders, nevertheless, insist that any price ceiling on farm products be set at 110 per cent of parity.

The share of national income distributed as wages and salaries, before taxes, will reach 75 billion dollars this year as compared to 61 billion dollars in 1941 — an increase of 25 per cent in one war year. While tax payments will reduce this, the net income will be reasonably higher than in 1941. And ever since the War Labor Board established a wage stabilization formula in July that permits blanket wage increases in an undetermined number of industries, it has been besieged with a big line of applicants at its payincrease window.

The Board’s formula calls for giving wage increases to conform with a 15 per cent increase in living costs from January, 1941, to May, 1942, and for raising substandard wages more than the 15 per cent increase in living costs. Yet the Board, in the Little Steel case, gave the workers, who enjoy an above-standard wage, an additional increase of 2.3 per cent in excess of the 15 per cent increase in living costs. Part of the justification was that the Little Steel workers had asked for the wage increase before the President, in April, called for a stabilization of wages. The Board then gave the same excess increase to the Big Steel workers; apparently, under its formula, it can make its own definition of substandard wages and raise them as much as it wishes. The result is a flexible rather than a stabilized wage program with the object of keeping living standards at a peak — an economic impossibility if we are to stop inflation.

The manufacturers’ proposal

To stop inflation and to avoid widespread economic disaster, the National Association of Manufacturers proposes that: —

1. The government must stabilize prices at a reasonable level on all essential consumer goods and services. This must include most farm prices.

2. All scarce and essential goods must be rationed.

3. The government must stabilize wages and salaries, outlawing inflationary blanket wage increases. This does not mean that individual employees, on acquiring new skills or productive ability, or assuming greater responsibility, should be denied an increase in income. Individual initiative must not be frozen.

4. Additional taxes must be levied to help siphon off the excess purchasing power and pay for the war. Under the pending tax bill, only 26.5 per cent of the income earners will pay income taxes; the other 73.5 per cent will not. (Industry generally recognizes that income taxes, based on ability to pay, are the most equitable of taxes. But because Congress now fears the political repercussions of an income tax designed to sop up all wartime increases in income, we urge the enactment of an 8 per cent sales tax as the next best and least painful tax. It would yield approximately 5.2 billion dollars, on the basis of the anticipated 1943 level of consumption.)

This program would accomplish most, if not all, of the objectives set forth in the President’s anti-inflation message of Labor Day. This program is justified because, as the President so well stated, “Our experience during the last four months has proved that general control of prices is possible — but only if that control is all-inclusive. If, however, the costs of production, including labor, are left free to rise indiscriminately, or if other major elements in the costs of living are left unregulated, price control becomes impossible.” This is precisely the position that was taken by the National Association of Manufacturers in making a presentation on the present price-control act before the Banking and Currency Committees of the House and Senate.

In the event that this program should not stop completely an increase in living costs, we may have to consider the adoption of some such measure as the spending taxes advocated by the Treasury, or plans advanced by others for the compulsory diversion of millions of dollars of excess purchasing power into the purchase of War Savings Bonds. The Treasury long has been prodding us to put 10 per cent of our total earnings into these bonds, but it is now evident that the voluntary sales will total only about 7 billion dollars this year. The goal is 12 billion dollars.

Compulsory savings

Faced with a big increase in the inflationary gap in 1943, we might find it necessary to make the purchase of War Savings Bonds compulsory, although any elements of compulsion should be avoided as long as possible. This might prove an effective supplemental way to sop up billions in excess purchasing power and keep down living costs.

Because of insufficient war revenue, the Federal government already is creating monetary inflation. It is estimated that in this fiscal year it will spend more than 50 billion dollars in excess of tax receipts; and as the war continues, the current expenditures of 185 million dollars a day will increase materially. Unless it gets needed revenue from taxes and War Savings Bonds, it will be forced to borrow ever bigger and more fabulous amounts from commercial banks. The probable result will be greenbacks of uncertain worth, and certain economic disaster.

A sufficiently large and continuous sale of War Savings Bonds can be our salvation. First, they combat inflation; second, they serve the twofold purpose of helping to finance the war and to build individual and national post-war security. They not only serve as a post-war purchasing power reserve for individuals, but taken collectively they act as a vast reservoir of national purchasing power with which to lubricate the wheels of industry and to create jobs for millions of Americans coming back from far-flung battlefronts.

Inflation launched an undeclared war against us long before Pearl Harbor, when the cost of living began to increase gradually. Since then it has continued to rise. We can stop its destructive attack and avoid widespread economic disaster only by establishing and enforcing stringent economic controls.