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The CHAIRMAN. We will meet at 3:15 in the old Supreme Court room, room P-63 of the Capitol.

(Whereupon, at 3 p. m., a recess was taken until 3: 15 p. m., in room P-63 of the Capitol.)

(Whereupon, at 3:15 p. m. the committee reconvened in room P-63 of the Capitol.)

The CHAIRMAN. The committee will please come to order. Mr. Secretary, we are very glad to have you here. Will you proceed, sir. STATEMENT OF CHARLES SAWYER, SECRETARY OF COMMERCE

SECRETARY SAWYER. Mr. Chairman and members of the committee, since the enactment last September of the Defense Production Act, events have given ample testimony of the need for the authority granted. Substantial accomplishments have been secured through the exercise of these powers, but the program of mobilization which has been undertaken is only in its initial stages. It is essential that the act, now scheduled to expire on June 30, 1951, should be extended for 2 years, as recommended by the President in his message to the Congress on April 26, so that the actions now under way may be carried forward to successful completion.

Experience has demonstrated that, in general, the basic provisions of the act dealing with expanding production and mobilizing the resources of the economy to meet military procurement needs, the major phases of the program with which I have been concerned, are bringing substantial accomplishments. It cannot be emphasized too strongly that the same military programs which have made necessary the controls provided in the Defense Production Act require its extension and broadening.

In presenting this statement, I wish (1) to review for you the current state of the economy as related to the need for expanding production, and allocating scarce materials and facilities to essential uses which, in my judgment, require extension of the act; and (2) to review the experience we have had in the National Production Authority in working out actions under its authority. This will serve

indicate the kinds of actions taken, their purpose, the curent status of our operations, and future requirements.

The economic situation and prospects are such that we need to continue and strengthen our economic mobilization programs. It is only now that we are beginning to feel the impact of materials and other shortages. The deficiencies will grow as the military procurement programs accelerate toward the attainment of the Nation's security goal.

Let us consider and carefully look at the economic facts. We need to analyze the facts about the size of the total demand upon our resources, the facts about our ability to meet these demands, and then face the probable effect upon our economy.

Outstanding in the current economic picture is the growing size of defense expenditures. These expenditures were running at an annual rate of around $25 billion at the end of the first quarter, roughly double the June rate. But defense orders far in excess of the current rate of payments are being placed each month, in line with the authorizations of $52 billion for all national defense purposes

already approved by Congress for fiscal 1951, and authorizations requested for fiscal 1952 in excess of this total.

Defense expenditures are rising rapidly and expectations are that the rate by this year's end will be about double the present rate, in other words reaching an annual rate of expenditures of $50 billion. Such a rate will represent 15 percent or more of our total national output, and clearly will require an increasing diversion of capacity and materials from civilian to defense industries.

Businessmen, anticipating larger markets stimulated by defense activities, have increased their programs for new plant and equipment expansion in 1951 by around 30 percent from the high total of last

year. Much of this expansion is desirable and has been encouraged by issuance of certificates of necessity and otherwise. But some of it is not essential and we may have to screen the use of resources for such purposes, as well as their use for consumers' products.

Since last June, businessmen have expanded inventories at an annual rate of about $17 billion, a third of which represents real increases. Some increases in the volume of inventories are needed to facilitate expanded output. But inventory controls, as provided for in the Defense Production Act, are necessary to prevent increases in excess of operating requirements, or for speculative purposes. Without regulation, excessive accumulation of inventories adds to the inflationary pressures and makes more difficult the channeling of materials for defense purposes.

Consumers, with their rising incomes, have expanded their purchases substantially. From an annual rate of $186 billion in the second quarter of 1950, consumer expenditures for goods and services were about $20 billion higher in the first quarter of 1951, reflecting both larger quantities and higher prices. It is significant that expenditures for durable goods showed the largest increases. These are the major competitors in the use of essential materials required by the military. That is why we have had to issue orders limiting the use of scarce materials for such purposes. These orders were made possible by the authority of the Defense Production Act.

The increases in consumer spending since the second quarter of 1950 have been supported in the first instance by rising incomes, but psychological factors have played a part in the total, and more particularly in the timing of expenditures. The buying waves which reached their peaks in July 1950 and January 1951 were due largely to the fears of future shortages and consequent price rises. They represent the buying power generated by Government and business purchasing.

Over the coming months, incomes can be expected to rise further. Employment and hours worked will increase; shifts of workers to higher-paying industries will continue; and further adjustments in wage rates are under way.

It is true that, despite this rising income, retail sales have slackened somewhat from the peak, and the price rise has moderated. In part, this has been due to the increasing impact of credit controls, and the actions of the Economic Stabilization Agency. As the President rightly emphasized in his message recommending extension of the Defense Production Act of 1950, the lull is temporary, and basic inflationary pressures are still strong.

The increased tempo of our economic activity since June of last year is reflected in the rise in our total production, or gross national

product. This has increased from an annual rate of $272 billion in the second quarter 1950 to around $315 billion in the first quarter of this year, or 16 percent. Approximately half of this increases represented an expansion in the total physical volume of output, which is a substantial rise. Production in the manufacturing and mining industries alone increased almost 14 percent.

We can be proud of the production achievement to date, but the price rises which, until recently, have accompanied the expansion give no cause for rejoicing. The increase of 16 percent in wholesale prices and 8 percent in consumers' prices reflect the tremendous inflationary pressures of the past three quarters.

The basic problem facing us at this time is that further increases in total production will be slower and harder to achieve, since the slack in the economy has generally disappeared, while total demand will continue to grow. Unless the direct and indirect controls encompassed by the Defense Production Act are extended and strengthened, inflation would continue to take its toll, interfering with the expansion of defense production, quite apart from its own disruptive effects.

Attack is necessary on all fronts. While the long-run solution is an expanding economy through increased production, this involves an increase in capacity. But it must be recognized that in the period immediately ahead, such expansion competes for the resources needed for increasing defense production. The problem is one of balance. We have been encouraging expansion in essential industries through approval of loans, certificates of necessity, and allocations. We have also restricted some expenditures through our orders, and shall have to go further.

As we look ahead we can see that we face two critical years. We can ill afford further increases in prices of 2 percent monthly at wholesale and 1 percent at retail. Orderly contractual relations among producers, suppliers, and labor, essential to maximum production, cannot be maintained on the quicksands of inflation.

Credit control is essential to reduce the multiplication of current income. However, by itself it is not enough. Increases in taxation at least sufficient to cover the increased Federal expenditures planned for the coming fiscal year should be provided without delay. Demands upon the market must be lessened.

I make these remarks about the importance of these indirect controls because I know that the production problems with which I am confronted can be dealt with only if we have adequate anti-inflationary measures in effect. The indirect methods of stabilization are essential, but we also need the direct price and wage controls. Cost inflation quickly reinforces demand inflation. The upward spiral must be halted. Direct controls can help while the more fundamental correctives are applied.

As I have already indicated, the period ahead calls for an increasing diversion of materials and capacity from civilian to defense industries. In this connection, I should like to discuss the work of the National Production Authority: I do not propose, however, to cover the NPA operations in detail, since these will be covered later by Mr. Manly Fleischmann, the Administrator.

The National Production Authority was set up promptly on September 11, 1950, within the Department of Commerce, following the dele

gation of functions by the President to me in Executive Order 10161 of September 9, 1950. This prompt action was possible because anticipating the need for it, I began immediately following the Korean outbreak to draw upon the experience of those within the Department and in business who, by their experience in World War II and by their talents, were in position to assist in formulating a program that would bring immediate and effective results.

The Defense Production Act created broad priority and allocation powers with the purpose of insuring that military and supporting industrial demands would be met on schedule. At the same time, it was the intention of Congress that the agency administering these powers should make certain that there would be a minimum disruption of the civilian economy. Meeting these grave responsibilities has been an immensely difficult task. While I cannot say that there have been no mistakes made or that everyone affected by the activities of the Authority has been pleased with its operation, I can honestly say that in the first 8 months of its existence the National Production Authority has achieved a marked success.

At the outset last fall, when the pressures induced by the military program began to be felt, the National Production Authority took its first formal actions by limiting inventories of materials in short supply and by establishing a system of priorities assuring the right of way to defense orders. These initial restrictions had the general effect of channeling necessary raw materials into the defense effort, where · they were used, in the main, to create additional industrial capacity which in time would contribute to the production of military end products.

At the same time, the National Production Authority began to plan ahead against the time when simple priority orders would no longer insure military schedules and would have to be supplemented with additional controls. The result of this planning was the recent announcement that a controlled materials plan, based upon the plan used with such success in World War II, would be supplied in the third quarter of 1951. This plan will cover the use of the three metals basic to our economy, steel, copper, and aluminum, in defense and defense-supporting operations. It will have the effect of insuring the orderly delivery of machinery and components to manufacturers; and in turn the orderly delivery to the Armed Forces of end products made by these manufacturers. At present, an extension of the controlled materials plan to consumer durable and other civilian goods is not contemplated, a significant difference from the Controlled materials plan of World War II. It is hoped that sufficient materials will be available after military and essential civilian needs are met to provide for the production of civilian goods at a high level, about equal to that of 1948 or 1949, which were very good years indeed.

In its operation, the National Production Authority has been in constant consultation with representative groups from industry. In forming industry advisory committees we have, in accordance with the act and in accordance with the long-standing practice of the Department, taken care that our industry committees should be representative of all members of the industry, large and small. We have at all times been consistent with the recommendations of the Department of Justice in the selection and use of such committees.

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Through the establishment of Industry Advisory Committees a forum has been provided where the businessmen of the country could present their ideas and their problems to NPA officials. Orders have been issued only after full and frank discussion. Many orders have stemmed from the actual experience of the industries themselves. There has been no disposition on the part of anyone in Government to force unnecessary controls upon the economy. Controls have been applied and willingly followed because industry, by having been in on the planning, has recognized the great urgency of our defense effort.

The National Production Authority follows the policy that our defense program should be built upon the broadest possible base. We must continually recognize the indefinite and indeterminate nature of the demands of defense on our economy and the ever-present danger of the need for total mobilization. In furtherance of this policy the Authority has given special attention to using the resources of small business to the fullest extent practicable.

The Office of Small Business has been established within NPA and the Director of that Office is an advisor to the Administrator of the Defense Production Administration where the small business defense activities of the executive branch are coordinated.

The activities of this Office follow two major lines: (1) facilitating the participation of small-business concerns in Government procurement; and (2) assisting smaller enterprises in the acquisition of materials and equipment. These activities include work with Federal procurement officers, prime contractors and other suppliers, and particular consideration of the needs of small business in the formulation and administration of material-controls orders. Moreover, technical and managerial assistance are provided by the Office of Small Business working with other bureaus of the Department.

This summary of the small-business program reflects my strong conviction that assisting and preserving small business are indispensable elements of the defense effort.

I should like to touch upon one further aspect of NPA's work, which is basic to the current thinking about defense. This is the work that has been done by the agency to expand our productive resources. The Defense Production Act provided for programs of Government aid to business in order to increase capacity. Of direct concern to the National Production Authority was the program of accelerated tax amortization and the program of loans to private business to help underwrite expansion for defense. The agency is charged with responsibility for receiving and processing applications for tax-amortization certificates and loans, and with forwarding these, with a recommendation to the Defense Prouction Administrator for final decision.

As of May 5, nearly 900 tax amortization certificates were processed by NPA, covering plant expansion of almost $4 billion. On NPA's recommendation, these certificates were issued by the Defense Production Administrator. In addition, about $51 million in defense facilities loans were acted on by NPA and granted by the Defense Production Administrator. Obviously, not all of the tax amortization certificates will be used, since the granting of a certificate does not guarantee anything whatever in the way of financing or availability

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