If you emphasize production somebody says you are apathetic about inflation. If you emphasize inflation control, somebody says you are apathetic about production.

Now, the real job that needs to be done is to take a balanced perspective which recognizes that we have to do both.

Senator BENTON. Do you think we took the controls off too fast after the last war?

Mr. KEYSERLING. Senator, may I say that I will neither add to the strength of my testimony nor to the capacity to solve current problems by entering now into a rather heated matter with respect to 1946, if you will pardon me.

Senator BENTON. Do you think the 2-year duration is about right on the bill we are considering?

Mr. KEYSERLING. I certainly don't think it should be less than that. Senator BENTON. I asked Mr. Wilson whether it should be to the end of 1953, so that the new Congress coming in 1953 in the first 6 months, wouldn't have this big, critical, and crucial problem again, whether it wouldn't be better to make it December.

Mr. KEYSERLING. I think that is a matter for the judgment of Congress. I don't want to be pretentious by indicating that as an economist I can have a calculus as to whether it should be 2, 22, or 3 years. In a general way I would say 2 years is a reasonable minimum period, unless somebody is so hyperoptimistic as to think that in less than 2 years we will be through this whole problem.

I don't think people are.

I will say this, from the viewpoint of the economist: that I think it is very important for the Congress, if I may say so and since you have asked the question, which is a policy-making body, to recognize that policy cannot be made and changed every month.

An individual businessman who is trying in a small way to adjust to the currents playing upon his business, can try every day to adjust his policies and his business to what he reads in the newspapers or gathers elsewhere about what is going to happen the next day.

On the other hand, when you are dealing with national policy, you have to recognize first, since it takes many months to formulate a policy and then takes a long time to evaluate it, that if the Congress tries to keep up not with reasonable time spans of development such as a year or two, but to keep up with what is happening every month, you will also get the policy after the situation is over.

One of the reasons I have tried to bring this kind of testimony before you is that I think there is danger in the tendency to look at the daily outlook or the monthly outlook rather than the outlook over a reasonable span of time.

Now, I recognize, not knowing what the Russians and others are going to do, that we cannot be sure about the distant future. But I say, unless we can think in terms of a year or two-a reasonable period of time—rather than a month or two, it is terribly hard to formulate a policy.

Now, I want to emphasize this even more in connection with what I am going to say now about the inflationary problem.

Senator BRICKER. Before you go on to that, I have a very sincere, a very real fear of a situation that could easily come about as a consequence of this program. Granting the necessity-and I do willingly

83762-51-pt. 1—19

grant the necessity for a control program-I think the element of necessity ought to be the controlling factor at the present time. I am fearful that if these controls are imposed which go beyond the absolute necessity for the program immediately ahead of us, the American people will become anesthetized. Sooner or later certain segments of our society will begin to get the desire for Government control of our business functions, control of the lives of our people beyond the necessity of ordinary society. Then, you are going to approach either the British socialistic system, or the totalitarian philosophy of some of the rest of the world, and if we do we will have destroyed the ability of the American people to produce. Freedom, and therefore ability to produce, has been running through our whole business structure throughout the years past.

Mr. KEYSERLING. I agree with you entirely, Senator, in your statement of philosophy. I subscribe to every word of it. We always get to the question of how it applies to concrete situations.

Now, let's not fall into the trap of feeling that the emphasis at one point obscures another. Let us remember that the greatest period of production growth that we ever had in this country was during World War II, when, as I have shown in chart 1, we increased our total national output by about 80 percent in 5 years, which was an annual rate of increase of approximately 15 percent a year, which was about three times as good as we had ever done over a span of years in peacetime. Now, we did not do that without controls.

Senator BRICKER. No; but we were able to do it because we availed ourselves of the initiative, the resourcefulness, the creative ability of the people of America, and that is a direct consequence of the freedom which we have had.

Mr. KEYSERLING. I agree with you. You can't get any dissent from me on that, Senator; but I still say that was done during World War II, and not without controls.

Senator BRICKER. That is true.

Mr. KEYSERLING. In other words, we needed controls during World War II just as we needed production, and the controls, while they may have been at some points hampering and at some points embarrassing, did not prevent us from making this productive growth.

Senator BENTON. But isn't it true that large areas of American business have been accustomed to controls for years and even decades, and depend wholly on forms of Government controls? I don't want to make a tyranny of words.

Mr. KEYSERLING. I recognize, Senator, that there may be some shading of difference between you and Senator Bricker.

Senator BENTON. Great areas of American business-aviation, the maritime industry, the railroad industry, the second act ever enacted by the United States Congress was the Tariff Act. Everybody who depends on the tariff is living with controls.

Mr. KEYSERLING. I will make a confession to you: I am trying to get a formulation that you and Senator Bricker will be able to agree on. Senator BENTON. I don't think that will be so difficult.

Mr. KEYSERLING. I don't think so, either. I said at the beginning of my testimony that the one thing that might make us unable to measure up to the challenge of the Soviets and their satellites is that, after free debate and discussion of conflicting ideas, we do not ulti

mately arrive at agreements on fundamental points, so we can go ahead and do the job.

Senator BENTON. I might point out that we had enormous numbers of controls prior to the war emergency, many of which I join with Senator Bricker and would like to get rid of.

It is an unhappy fact, however, that a very big segment of American industry is dependent on controls, including our farmers. We live in a greatly controlled society, and have been doing so for a long time. We may call it the free enterprise system, but we should understand it is dominated in very widespread segments by controls that business has gotten so used to they don't even realize they are being controlled. Mr. KEYSERLING. I agree with what you have said, and I agree with what Senator Bricker has said.

Senator BENTON. I think both things are true. I, too, agree with Senator Bricker.

Mr. KEYSERLING. Now we have harmony here.

Let me say this one thing: In stressing production I have not meant to carry the banner of production to the point that some people do of saying if we get production we have no inflationary problem, or if we get production we don't need any controls. That just isn't so. The history of World War II shows it wasn't so. We have to benefit by that.

I think that will be revealed more clearly by getting into a more factual analysis of what this inflationary situation is and what we need to do to meet it.

Before doing that, I want to say in conclusion of the first part of my presentation that I can only ask this committee and other congressional committees in weighng these programs to be very charitable toward those things which have to do with expanding production.

Now, it is perfectly easy, looking back at World War II, or looking back at some of the things that have been done thus far in this situation, to say it might have been done a little more cheaply, it might have been done on a somewhat less liberal formula, it might have been done to scatter the business better to all types of business. I am sympathetic to all those criticisms. That is how we get improvement. Nevertheless, I say, dollar for dollar, there is nothing which will add so much to our strength as those basic things which increase the power of our mobilization base.

I don't think that Mr. Stalin, a cold and calculating man, is going to be tremendously shaken in his determination by getting a telegram which says we have suggested controlling the price of bananas. I think when he gets a telegram which says that the United States, which is already producing about three times as much steel as the Russians, is going to expand its steel capacity by another 15 percent over the next 2 or 3 years, I think that is going to make him and his generals stop, look, and listen, because I think they are cold and calculating.

That is the real source of our strength. That is what you fight a war with, whether it is a hot or cold war; what you supply your needs with is production. If we can get our farm production and industrial production up, and build the kind of military strength we need, then I will take any chances that the American economy is going

to come through. If we don't do those things, I think we may run into real problems.

The CHAIRMAN. Have you any idea how you are going to get the farm production up? I am delighted to know steel production is up, as has been testified, but how are we going to get the farm production up?

Mr. KEYSERLING. I think to get farm production up, Senator-I think you have a problem of selectivity there just as you have in the industrial field. We don't need more of every farm commodity that is produced. We need more of some just as we need more of some industrial things.

I think the central key to getting the right kind of farm production up lies in what I call programing, which I think this committee and other committees of Congress ought to be interested in more than anything else, and which I think thus far has been a relatively understressed part of the defense effort.

If you are going to get farm production up, you have to be sure that in your allocation of manpower, and in your allocation of chemicals, and in your allocation of the materials that enter into machinery, you have a philosophy and a program of how you are apportioning them among the different segments of economy.

In other words, you can't go ahead and say you are going to give certain priorities to the military, and then engage in some industrial expansion here and there, and let the rest take care of itself. I think you have got to have a rounded plan, and I don't mind using the word "plan" in this context. I don't think Senator Bricker will object to my using the word "plan." In other words, you have to make the parts fit together. You have to have a program to cover the whole thing.

I would advise the committee to get into the question of programing. Have we a rounded program which doesn't leave the legitimate needs of farming out in the interest of other segments? I think that is a phase of the production job which is important, to see that we have emphasis on all sides and don't leave one of the vital links of the chain out in our exuberance about serving the others.

I think that is the traffic system for a defense mobilization program. Unless you have that traffic system working sensibly you are going to have collisions.

I have sympathy for your concern about whether some of the vital links of the chain are going to get the supplies they need to do the job. I think we have the resources to serve the whole thing, but it has got to be thought through, and those who are doing the job ought to be sure that they have made a rounded survey of the whole thing, and are not servicing one sector and forgetting about the other fronts.

The CHAIRMAN. I am glad to hear you say that. You mentioned this expansion of an already expanded economy, which started in 1941 when we had tremendous surpluses and large numbers of farm commodities to carry us along through a shortage.

Mr. KEYSERLING. I think the biggest job we have on the production front is the rationalization of production, Senator. By this I mean the figuring out of your competing demands so that you maximize your strength by getting the right things to the right places, and not forgetting some of the places in the process.

Whether your formula for a certain type of expansion has been 5 or 10 percent too high or too low seems a secondary question. What

ever it is, in the context of a defense effort of this size, and of a 50-billion or 60-billion-dollar budget for that purpose, I would not worry excessively about whether 500 million dollars, inore or less, was conceded in one way or another, if it is tied in with definite precision to points where it is needed. I think in the long run it is going to be shown that those expansion programs have added as much per dollar to our strength as anything else we are doing, and the history of World War II showed that.

Now, coming to the question of inflation. There is a great fallacy in thinking that you are going to solve inflation simply by production. There are two reasons why it is a fallacy. Production is a vital long run solution and is the one we have to place emphasis on, but in the short run it does not solve the problem for two reasons. First, because the very process of building up your productive equipment adds to inflation in the short run. In other words, if you are taking manpower and taking material to build up productive equipment, which takes a year and a half to build before you get into operation, you have to pay the price of those short run pressures in order to solve the problem in the long run.

In the second place, so long as you have a large defense program, an important part of output is not available for civilian use. But the flow of income is generated by total production-production for military use and production for civilian use. The only goods income recipients can buy, however, are civilian goods, and that creates enormous inflationary pressures.

Specifically, if a man is working in a defense plant, he gets just as good wages, and probably better, than if he were working in a plant producing civilian goods. If business is engaged in defense production, it gets just as good profits, and probably better profits, than if it were engaged in civilian production, so that the income comes to business, and comes to civilians from both sources, defense production and civilian production, but the only finished products that they can buy, whether they be business buyers or consumer buyers, is civilian production. The mere fact that you are stepping up production does not in itself solve that problem.

Now, I might just go briefly over some figures on the size and scope of this inflationary danger, which I will do very quickly here. The CHAIRMAN. Do you have a chart on that?

Mr. KEYSERLING. Yes, but I wish to refer to some figures first.

I have here a showing of certain price changes since Korea. If you take spot market prices, 28 vital commodities, both agricultural and industrial, since the Korean outbreak in the middle of last year the general index of these commodities has gone up 40 percent. Now, let us remember that is not 40 percent from the 1939 price level, not 40 percent from the 1942 price level, but 40 percent from the mid-1950 price level, which was a very, very high price level already by any standards of the American economy.

Senator BENTON. How much in the last month or two? Is the Trend still up?

Mr. KEYSERLING. No; the trend over the last month or two has been very different, and I want to address myself to that to get to the question Senator Maybank asked about inventories a little while back. Since the Korean outbreak, to take a specific commodity,