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Secretary of Agriculture for the purpose of the administration of the price-support program.

The CHAIRMAN. Thank you, Mr. Johnston. Senator BRICKER. One other question, Mr. Chairman. At the bottom of page 2, you are talking about taxes : We call them sacrifices, actually they are privileges of citizenship in a Nation dedicated to the survival of freedom.

Now, that is a nice phrase, and possibly true to a degree, and yet do not taxes reach the point where they do curb incentive!

Mr. JOHNSTON. There is no question about that, Senator.

Senator BRICKER. When you have war as an impetus, or a danger to drive production, your taxes can reach the point where they will curb production, and are actually inflationary.

Mr. JOHNSTON. In my opinion that is very true. I think that taxes in certain foreign countries have reached the point of confiscation so that they have curbed production, and one of the reasons they are in the difficult position they are is because of the very high tax rates. I think you are thoroughly right about that.

The CHAIRMAN. Senator Douglas?

Senator Douglas. I want to congratulate you on your very able statement. I want to ask if there is no danger that the public and Congress may be living in a fool's paradise at the present time because of the fact that there has been a lull in the upward movement of prices during the last 2 months?

Mr. JOHNSTON. That is thoroughly right, Senator. I stated a little earlier, if you do not mind my repeating, that we do have high inventories now. We have been producing more consumer goods than we have been consuming, but that is a temporary situation, because with the allocation of raw materials in the defense effort, and with the vast step-up in Federal expenditures by the fourth quarter of this year to the rate of $50 billion annually, we know there will be tremendous inflationary pressures. As the old fellow said, “We ain't seen nothing yet,” as far as inflationary pressures are concerned.

Senator DOUGLAS. So you think it would be a great mistake if Congress, not feeling the immediate emergency, were to conclude there would be no emergency in the years ahead?

Mr. JOHNSTON. I feel from the bottom of my heart it would be a serious mistake to remove wage and price controls until we can get increased production in another year or 2 years from now.

Senator DOUGLAS. Thank you very much.

Senator BRICKER. One further question in regard to the Stabilization Board. There is no question but under the law you can overrule, approve, or amend in any way the recommendations of any such Stabilization Board ?

Mr. JOHNSTON. That is right, sir, and the President can overrule me.

The CHAIRMAN. We appreciate your statements and charts, Mr. Johnston, and I certainly want to thank you personally. I certainly got much out of this meeting, and I appreciate your testimony here.

At the convenience of the committee, and Mr. Johnston, we will perhaps sit

around the table in executive session. Senator BRICKER. You will not be here this afternoon? Mr. JOHNSTON. No, sir.

Senator BRICKER. There was a question of the control of profits that we want to take up, but we can do that at a later date.

The CHAIRMAN. Go ahead and do it now, Senator.
Senator BRICKER. It is just a question of the control of profits.

Mr. Johnston. We do not want to control profits. That is not. my idea at all.

Senator BRICKER. Is that not the basis of some of your orders!
Mr. JOHNSTON. No, sir; we think quite the opposite. .
Senator BRICKER. As I said, it is a matter of argument.

Mr. JOHNSTON. We do not want to control profits in any company. I assume you are referring to the basic pricing standard which provides that an industry cannot come in and ask for an industry-wide price increase if it is in excess profits. We are saying an industry cannot come in for a price increase if that industry is in excess profits. If a price increase is granted under this policy, it does not mean that there are not companies in that industry that are way up in excess profits. We want to reward efficiency with greater profits. The more profits the more taxes, and also the greater reward to individual companies for efficiency.

There is one difficulty. I think you can get taxes so high in the excess-taxes bracket that you retard the incentive for production.

Senator BRICKER. I think you have reached it now were it not for the war effort.

Mr. JOHNSTON. I think we would be beyond it if it were not for the defense effort, and you may reach a point even with the defense effort where it is too high, Senator.

The CHAIRMAN. Mr. Johnston, were automobiles included in the manufacturers' order?

Mr. JOHNSTON. The automobile people were excluded.
The CHAIRMAN. Were there others excluded ?
Mr. JOHNSTON. Yes, there were others.

Mr. JOHNSON. By and large, all basic materials were excluded, and a number of other manufacturing areas such as apparel. The complete list is readily available if the committee would like it.

The CHAIRMAN. You sent me the list, but I was asked that question.
Senator BRICKER. Is the list in the record ?
Mr. JOHNSTON. We will put the list in the record for you.

(The list referred to follows:) THE WIAT AND WHY OF THE GENERAL MANUFACTURERS' ORDER CPR 22, OFFICE OF

PRICE STABILIZATION

THIS FACT SHEET TELLS YOUWhat it is

Ceiling Price Regulation 22 is an order of the Office of Price Stabilization setting ceiling prices for many manufactured products at a pre-Korean base plus actual increases in materials costs through 1950 (later for some goods) and increases in factory payroll costs through March 15, 1951.

The base period is April 1 through June 24, 1950, or any one of the three preceding calendar quarters selected by the seller.

Ceiling price is the highest base-period price of a commodity, with adjustments for factory payroll and materials-cost increases.

Sales terms must be wholly consistent with base-period delivery terms, differentials for purchaser classes, discounts, premiums, and other conditions. When it is effective

Effective date of CPR 22 is May 28, 1951. Manufacturers must notify OP'S by registered mail as to proposed ceiling prices higher than those under the general ceiling price regulation and must wait 15 days after OPS receives notification before selling at the new figures. Notification may be given to OPS before May 28.

Who is covered by it

CPR 22 applies to sales by all manufacturers in the continental United States, including exporters, except sales at retail and sales of commodities specifically exempted. Manufacturers with last fiscal year gross sales under $250,000 have the option of using CPR 22 or remaining under the GCPR.

“Manufacturer means a producer, processor, assembler, finisher, printer, or fabricator; it does not mean anyone who merely packages, labels, markets, or sells a commodity or combines commodities without substantially altering them.

An estimated 75,000 industrial concerns are directly affected by CPR 22.
Examples of manufactured products covered:

House and office equipment: Radios, TV sets, refrigerators, washing machines, ranges, sewing machines, furniture, bedding, housewares, office supplies, typewriters, business machines, etc.

Processed food and grocery products: Nonseasonal items like candy, breakfast cereals, crackers and cookies, ice, baked beans, pickles, peanut butter, sauces and seasonings, baking powder, soup mixes, meat extracts, dog and cat food, gelatin desserts olives, yeast.

Miscellaneous : Many building materials, most chemicals, many textile products, tires and rubber products, paper and paper products. (See exemptions.) Who is erempted from it?

CPR 22 does not apply to sales by manufacturers of the following commodities, most of them now or to be covered by other OPS regulations or specifically exempted :

Raw agricultural products.
Raw forest products.

Fuels: Gas, electricity, and steam; petroleum, natural gas, petroleum fuels, and lubricants ; coal and coke.

Industrial materials: Lumber and allied products; metals and minerals, including ores, alloys, scrap, nonmetallic minerals, fabricated structural steel.

Repairs and replacement parts when sold by manufacturer of assembled article for its repair.

Chemicals: Crude and synthetic rubber; synthetic textile fibers and yarns; drugs and cosmetics; household soaps and cleansers; ethyl and butyl alcohol, acetone; paints and varnishes; naval stores ; most fats and oils, including whale and fish oil; natural dyeing materials; inedible tallows and greases; oilseeds and nuts retaining their identity in normal trade practices; others like glycerin, soap stock, glue stock, oleo stock, gums, waxes.

Hides and skins, including cattle, hogs, sheep, horse, deer, alligator, snake. Leather, tanned and finished.

Stone, clay, and glass products, including glass containers, Portland cement, lime, sand, gravel, merchant clays.

Textiles, including wood fibers, wool yarn and fabrics, wood and synthetic yarn floor coverings.

Apparel and footwear except rubber footwear.
"Tobacco products.
Passenger automobiles.

Food and kindred products: Fresh meats and poultry; dairy products; canned, frozen, dried seasonal fruits and vegetables and their juices; canned soups and baby foods ; flour and perishable bakery products; refined sugar; wines and distilled spirits; soft and malt beverages; frozen and dried eggs; chewing gum; others, including mixed feeds, fish feed products, soybean oil meal, cottonseed 'cake and meal, lard, sausage except dry, rice, blackstrap molasses.

Precious jewelry.
Works of art.

Publications, including books, magazines, newspapers, periodicals, motion pictures, maps, charts, globes.

Lead pencils. Purpose of it

CPR 22 has three main purposes :

To roll back margins widened after the Korean outbreak.—Many companies raised prices beyond the point justified by labor and materials cost increases.

To restore more normal cost-price relationships. The price structure frozen by the General Ceiling Price Regulation was unbalanced. Some industries lagged behind cost increases, others outran them in price; competing companies charged divergent prices ; quotations for individual products within a single company were often out of scale.

To grant needed relief to manufacturers from the general freeze order.-Prices lagged behind cost increases in some industries, with the general freeze hampering profitable operations. Companies which followed voluntary pricing standards last December were handicapped as against competitors ignoring them.

The regulation aims to fill the gap between the GCPR and additional regulations designed for separate problems of individual industries: OPS is moving toward ironing out distortions and inequities. Regulations covering many retail businesses have been issued; specific orders for some manufacturing branches have been prepared; a wholesalers' order is in the work stage. Principles behind it

The formula of CPR 22 is a return to pre-Korean prices adjusted for increases in manufacturing costs in the interim : Between July 1949 and June 1950 prices and costs were in general balance yielding satisfactory margins to most industries. If that margin was sufficient, then the formula should be sound for current production.

Increases are limited to advances in manufacturing costs affecting labor and materials actually required for production: Several methods of calculating costs are provided to meet needs of manufacturers with different accounting and record systems.

Increases may not reflect changes in overhead costs such as major repair, expansion, general administration, sales, and research: Such costs cannot be allocated to individual commodities. Unit overhead varies with volume; for most manufacturers, output has gone up since Korea and unit overhead cost has declined.

Calculations will be repeated later to give effect to the impact on costs of CPR 22 and other OPS orders: Products of one manufacturer are raw materials for another; but it would be impractical for each producer to postpone calculations: until other ceiling prices down the line were determined.

CPR 22 provides in most cases only for cost increases up to December 31, 1950: Price increases based on current materials costs which the regulation itself may roll back must be avoided. Decreases since Korea must also be taken into account. For imported materials, basic ores and metals, raw materials, and others not under the order, cost increases may be computed to March 15, 1951.. Provision is also made for farm products selling below parity.

Every increase in cost is not automatically translated into rising prices:
This would mean rubber-stamped inflation. Improved productivity, economies,
and changes in volume unit cost destroy exact parallels between prices and unit
costs.
The cut-off date for labor and materials attempts to break the cost-price cycle:

An earlier date would increase petitions for relief.
A later date would result in unjustifiably high prices in too many instances.

Cost increases after December 31 or March 15 will not be ignored but are not automatically reflected through CPR 22.

Cost increases not recognized under the regulation which reduce profits unfairly, when demonstrated, will be the basis for adjustments.

Tailored regulations will be substituted for CPR 22 as rapidly as possible

to take care of specific industry situations. How to operate under it

CPR 22 deals with repricing methods for commodities delivered or offered between July 19, 1949, and June 24, 1950. In figuring his new ceilings, the manufacturer starts with his base period price and makes adjustments for increases in labor and materials costs. If there have been no increases, he may retain his base prices without calculating adjustments.

Labor cost adjustments may be calculated as in the following example: Net sales for last fiscal year in 1950.

$1,000,000 Factory payroll in same period.

$300,000 Labor cost ratio.-

--percent-

30 Last payroll in base period selected

$6,000 Same payroll at Mar. 15, 1951, rates.

$6,500 Increased "fringe benefits".

100

Recomputed payroll..
Wage increase factor ($600:-$6,000).

--percent-Labor cost adjustment factor (10 percent of 30 percent) --percent.

$6, 600

10 3

The 3 percent is added to a commodity's base period price.

This computation may apply to the entire business or to a unit with regularly maintained separate records.

Factory payroll does not include labor used in general administration, sales and advertising, or research, or in major repairs or replacement of plant or equipment, or in expansion. It does include labor used in factory supervision, packaging and handling, ordinary maintenance and repair, and in mater'als control, testing, and inspection.

Recomputed payroll may include increased cost of "fringe benefits" like insur. ance plans, pension contributions for current work, and paid vacations.

Materials cost adjustments are calculated by any of four methods designated as the aggregate method, the individual commodity method, the production line method using best selling commodity, and the composite bill of materials method.

Example of the aggregate method, the simplest for most manufacturers: Net sales for last fiscal year in 1950---

$1,000,000

Increases in materials costs.
Decreases in costs---

Net increase in costs_-

100,000 50.000 50,000

Materials cost adjustment'factor ($50,000:-$1,000,000) ----percent-

The 5 percent is added to a commodity's base period price.

Materials cost changes up to December 31, 1950, may be included, or up to March 15, 1951, in the case of raw materials, imports, basic ores and metals, and other materials not covered by the regulation.

Increases up to date in costs of farm products under parity may be included.

The other three methods of computing the materials cost adjustment factor are outlined in CPR 22.

Actual transportation cost increases up to March 15, 1951, may be added to the base period price if the latter is a delivered price.

New commodities introduced since June 24, 1950, are priced by relating them to comparison commodities dealt in during the base period.

On new commodities falling within categories handled during the base period, a percentage mark-up over a comparison item is applied.

Hardship appeals may be made to OPS by manufacturers for upward price adjustments if ceilings result in operating losses; they will be acted on within 30 days.

Reports on ceiling prices must be filed with OPS in Washington by every manufacturer by May 28, 1951; forms may be obtained from any OPS office.

Information required includes: Category or product line covered by the report; dates of the base period selected; estimated 1950 dollar sales; labor cost adjustment factor for the product; materials cost adjustment factor; proposed price increases, with a percentage comparison with GCPR prices.

Reports of ceiling prices on commodities in a different category from any sold between July 1, 1949, and June 24, 1950, must be filed with OPS. These commodities can be sold after 15 days unless notifed of price disapproval.

The CHAIRMAN. You further stated you would issue another order. First, as I remember—it was several weeks ago—you gave all manufacturers an order concerning certain manufactures.

Mr. JOHNSTON. There is the interim policy, Senator, the policy before we get to what we call the basic policy. The basic policy is that an industry cannot come in and ask for a price increase if it is in excess profits, but before you get to that basic policy there are many inequities which have to be adjusted, so we have an interim manufacturers' pricing policy which will go into effect the 28th of this month.

The CHAIRMAN. That does not include the certain things you say are exempt.

Mr. Johnston. It does not include basic steel, aluminum; they are already under another agreement entered into on prices.

The CIA'R TAN. This question of issuing licenses on all business firms in America.

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