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against any and all attempts to limit the inflation which the extensive defense program inevitably tends to generate.
It was first argued by the NADA that the demand for cars is so weak that no ceiling price need be maintained. It was next argued that OPS is holding down car prices and thereby cutting the dealers' profit margins to unreasonably low levels. If OPS is holding down car prices, as charged, certainly the market is not so soft as to justify the dealers' demands for abolition of price controls. The inconsistency of these statements reflects the general inaccuracy of NADA's charges.
NADA has stated that used cars are selling below ceiling prices and that therefore price controls should be abolished. In evaluating this observation, it is relevant to note that used car prices were frozen at a time when they were extremely high, namely January 26, 1951. These ceilings have been reduced by 2 percent each quarter to allow for the depreciation that takes place in used cars. Since this rate of reduction is somewhat low and the original ceiling prices were relatively high, today's ceiling prices are quite high. Despite this situation, the current market prices for used cars, as shown in the NADA and National Used Car Market Guide Books, are on the average less than 5 percent below their ceiling prices. This indicates the relatively high prices of used cars today. Furthermore, many used cars are at ceiling while those not yet at ceiling have been moving up toward their ceiling prices. In view of these facts it does not appear to be in the interests of economic stabilization to suspend price controls on used cars at this time.
It was said that production will be high enough this year to make price controls unnecessary. However, a careful analysis of the major economic factors which influence car prices presents quite a different picture. Under present XPA allotments, car production will be down 14 percent from 1951, and 32 percent from 1950. At the same time, the Federal Reserve has estimated that disposable personal income will be greater in 1952 than it was in either of the past 2 years. Furthermore, dealers' inventories of new cars have declined from 10.6 per dealer on May 1, 1951, to 7.8 on May 1, 1952, or more than 26 percent. The average age of cars on the road in 1950 was 7.8 years as compared to 5.5 years in 1941 and this is adding to the demand for new cars. The recent elimination by the Federal Reserve of credit controls on purchases of cars has further broadened the upward pressure on prices in this industry. Should an increase in international tensions or domestic spending take place this year, the very great weight of the inflationary pressures could casily tip the present delicate balance between supply and demand forces in favor of sharply rising prices. Since there can be no certainty that such eventualities will not become realities, it seems manifestly clear that ceiling prices on cars should not be suspended at this time.
While it is true that OPS is limiting the increases in car prices, it is not true that the agency has cut the dealers' margins unreasonably. In accordance with the Defense Production Act, dealers' margins today are generally in line with those they had in effect in June 1950, with the exception of the reduction in margin that occurred on March 2, 1951, when the wholesale ceiling prices of cars were raised by 372 percent. Dealers, at that time, were not permitted to raise their retail prices by 342 percent, but were permitted to increase them by the dollar and cents amount that factory prices were increased. This resulted in a reduction of about 1.1 percent in the dealers' customary mark-up. This dollar-and-cents passthrough occurred prior to the passage of the Herlong amendment, which stated that hereafter no reductions in the dealers margins were to be permitted. Therefore, this pass-through was not a violation of the Herlong amendment. Since the factory prices of the cars have been increased on the average by over 14 percent the dealers are receiving a mark-up on the higher cost of cars and, as a result, their gross margins have increased on the average by about $50 per car since June 1950. and are at an all-time peak.
The NADA stated that the elimination of Regulation W by the Federal Reserve was another reason why price controls are no longer necessary. It should be pointed out that one of the purposes of the elimination of Regulation W was to stimulate the demand for cars, and that such a stimulation of demand would tend, of course, to increase the inflationary pressures in the new car field. Since credit curbs have been suspended, it is all the more necessary to maintain ceilings on automobile prices.
The NADA has also complained that OPS rolled back some dealers' customary charges. This complaint appears to be in reference to the dealers' preparation and conditioning charge which, in no case, is to exceed 5 percent of the retail price
1 Automotive News, May 19, 1952, D. 1.
of the car. The car dealers' industry advisory committee recommended that dealers be permitted to levy a charge equal to, but not exceeding 5 percent of the retail price of the car. It was recognized by the industry advisory committee that some dealers had charges that exceeded 5 percent, but it was the consensus of opinion that 5 percent was a fair return for the services rendered. The agency has permitted each dealer to use his actual pre-Korean charge insofar as it was related to preparing the car for delivery, and as long as it did not exceed 5 percent of the car's retail price.
In a survey made of all car dealers in the United States, the dealers' own reports show that their preparation and conditioning charge averaged less than 3 percent of the retail price of the car. In very few cases did the charge exceed 5 percent. Therefore, to have permitted all dealers to charge 5 percent, as was requested, would have amounted to a very substantial and unwarranted roll-forward of charges, whereas permitting dealers to use their actual charges, with the 5-percent limitation, proved to have been generally fair and equitable in view of the results of the survey.
The dealers have stated that OPS is trying to control profits instead of prices. Any attempts to check inflation will inevitably have some effect on profits because of the very nature of a program of economic stabilization. However, OPS has carefully directed its efforts at checking inflation, and has not used the dealer's level of profits to determine what prices that particular dealer may charge. Profits depend primarily on the demand for cars, the number of cars dealers have to sell, and the allowances they grant on trade-ins. Since OPS has not tried to control any of these three factors, with the exception of requiring reasonable allowances on trade-ins, it cannot be fairly said that the Agency is primarily interested in controlling profits rather than prices. The Agency is interested solely in price stabilization and to that end it is attempting to prevent inequitable increases in dealer mark-ups.
It was charged that under OPS regulations dealers' operating profits, before taxes, dropped to 1.9 percent of sales in the first quarter of 1952. This is a misleading statement because first quarter profits are normally low due to model change-overs, and the decline in demand for both new and used cars during the winter months. The entire year of 1951 is a better criterion of dealer prosperity because automobiles were subject to price controls throughout the year and there were no distorting seasonal factors. These same controls are still in effect, with the only exception that dollars-and-cents mark-ups are now higher due to the higher manufacturers' prices. In 1951, net profits before taxes were 4.9 percent of sales. This compares very favorably with profit experience in a normal market.
The NADA has charged that OPŠ is imposing uniform charges, prices and practices on the car dealers, and is thereby eliminating competition. The uniform practices that have been imposed upon the industry are ones which were customarily followed by the bulk of the industry and ones which are necessary to the program of economic stabilization. While ceilings have been set on prices and charges, dealers are completely free to charge less than ceilings, and thereby compete with each other if they so choose. Also, they may try to market their cars more vigorously, try to improve customer relations, or take any other steps that are felt desirable to improve their competitive position in the community. It cannot be accurately charged, therefore, that dealers cannot compete with each other today because of OPs regulations. Furthermore, Mr. Costley himself argued that dealers are competing vigorously, and stated to this committee, "competition, the real price stabilizer, is at work in our industry.”
The dealers have stated they do not know what the term "preparation and conditioning” means, and that the term "delivery and handling” should have been used. In a very extensive study made by the Federal Trade Commission concerning the practices in the automotive industry, the term "preparation and conditioning charge" was used. This study indicated to OPS that the term was understood by the industry. Secondly, the term has been used in OPS regulations since March 2, 1951. At no time during the three subsequent meetings of the industry advisory committee was there any objection to the term. Thirdly, in a recent survey of all the car dealers in the country, they stated what their preparation and conditioning charges were, thus indicating they understood the term.
The NADA has charged that the regulations affecting car dealers were drafted by people who are wholly unfamiliar with the industry. The men who were responsible for the drafting of the regulation have spent many years in all phases of the automotive field, including the manufacturing and retailing sections of the
3 Minutes of the first and second meetings of the Retail Motor Vehicle Industry Advisory Committee May 3, 1951, and September 13, 14, 1951.
industry. These men were unanimously praised by all the members of the industry advisory committee for "the understanding manner in which the meeting had been conducted and for the many courtesies shown them. They expressed their appreciation for the sympathetic consideration which the OPS officials had given them in attempting to resolve their industry problems."'!
The NADA stated that the recommendations of the industry advisory committee were not incorporated into the regulations which affect car dealers. A comparison of the minutes of these meetings with the Automotive Branch shows that the industry advisory committee's recommendations were incorporated into the regulation to the fullest extent possible. In some cases, for administrative or legal reasons, the Branch was required to substitute its recommendations for those by the industry advisory committee. It is, of course, not mandatory, nor would it be proper that every recommendation of the committee be incorporated into OPS regulations. However, the following are some of the committee's recommendations that were incorporated into the regulation:
(a) The classification of “demonstrators” as new cars.
(e) The prohibition against requiring purchasers of cars to finance through the dealer. -(1) The method of determining transportation charges.
The charge has been made that OPS failed to call a sufficient number of industry advisory committee meetings. The records show that three such meetings were called, one of which was a subcommittee meeting. Industry often takes the initiative in calling such meetings and, indeed, is responsible for requesting a meeting whenever it feels that there are certain pricing problems which require action by this agency. Not only have no such requests been denied by the Automotive Branch but none have been received except for the three meetings which were held. It seems apparent, therefore, that the dealers have been given as much of a hearing as they wished to have.
The foregoing specific analysis of each of the charges against OPS shows all of them to be without foundation and without supporting evidence. The charges contradict each other, and contain no constructive suggestions. It appears that the industry is demanding nothing other than unreasonable increases in its profit margins, over and above those enjoyed prior to the Korean war. This Agency wants very much to work closely with the automobile dealers and to cooperate with them in every way. We need the constructive suggestions of the dealers and we appreciate all the time and help that representatives of the industry have given us in the past. It is recognized that this industry is composed of tens of thousands of small-business men who occupy important civic and economic positions in their communities. This Agency regrets the criticisms leveled at it which have arisen, out of misunderstanding of the importance of economic stabilization during this period of build-up of our defense program. The Agency will continue, however, to try to remedy promptly all the legitimate complaints of car dealers and to provide the dealers with clear, workable and fair regulations.
MEMORANDUM FOR House COMMITTEE ON BANKING AND CURRENCY, MAY 27, 1952
RETAIL COAL CEILING PRICE REGULATION
On May 7, 1952, Mr. John Schreiber, secretary of the Eastern States Retail Solid Fuel Conference, criticized before your committee the position of the Office of Price Stabilization on the applicability of the Herlong amendment to retail coal dealers. He objected that OPS was not giving retail coal dealers the benefit of the Herlong amendment, and further, that we did not have an automatic passthrough of freight increases for retail coal dealers whereas we had such a passthrough for fuel oil dealers.
This witness offered similar testimony during the hearings held by the Senate Banking and Currency Committee. However, the American Retail Coal Association, a large group with members throughout the country, criticized the position taken by the eastern group and supported the OPS position.
Minutes of the Second Industry Advisory Meeting, September 13 and 14, 1951, p. 7,
This matter was the subject of a letter from Mr. Ellis Arnall to Senator Maybank, chairman of the Senate Banking and Currency Committee (Senate hearings, pt. 2, p. 1269). As stated therein, the hearings and debates on the Herlong amendment indicate that its principal objective was to preserve historical mark-ups and pricing practices for wholesalers and retailers. Testimony had indicated “need for maintenance of the May-June 1950 margins of profit to retailers operating on a percentage discount or mark-up basis” (report of Senate Banking and Currency Committee, S. Rept. 470, 82d Cong., 1st sess., p. 15).
Although Mr. Schreiber states that it is an open question as to whether coal retailers industry-wide are today on a fixed dollars-and-cents margin or on a percentage mark-up, we have not received any substantial information to support the view that the industry as a whole is on a percentage mark-up basis. On the contrary, the information which we have been able to secure clearly indicates that generally retail dealers have customarily used a dollars-and-cents mark-up (though not a fixed dollars-and-cents mark-up).
If percentage margins were guaranteed to sellers who customarily used dollarsand-cents mark-ups rather than percentage mark-ups, the result would be not to maintain historical pricing practices but to create new pricing practices. Such a result would be contrary to the language of the Herlong amendment and the objectives which the Congress sought to achieve.
To take a specific example, suppose that retailers of a particular commodity have customarily added a mark-up of $1 per unit, regardless of whether the unit cost $5, $10, or $20. This group of distributors has thus faced very sharp price fluctuations before, and customarily used a fixed dollars-and-cents margin rather than a percentage margin in setting the sales price. Such a pricing practice generally is true where the prices of the commodities dealt in, fluctuate much more sharply than operating costs. To allow this group now a percentage mark-up over cost would not only have the effect of requiring the creation of a new pricing practice, but it would provide a windfall to distributors whose commodity costs had increased after Korea. For example, suppose the cost of a commodity had risen to four times its pre-Korean level. If distributors of this commodity who have customarily used a dollars-and-cents margin were now to be given a percentage margin in fixing a sales price they would get four times the dollars-and-cents margin which they received before Korea. This would be a fantastic increase, one which is neither required by the Herlong amendment nor by considerations of fairness and equity.
The American Retail Coal Association agrees with our position on this question. On March 19, 1952, B. E. Urheim, executive secretary, sent the following telegram to Senator Maybank:
“The American Retail Coal Association represents retailers of coal in 27 States outside of the anthracite-burning territory. The statement of John Schreiber before your committee as it relates to the application of the Herlong amendment to the retail coal industry has come to our attention. Our organization and the retail coal merchants in the 27 States we represent take a position directly opposite and contrary to that expressed by Mr. Schreiber. Retail coal has always historically been sold upon the basis of dollars-and-cents mark-ups. It is impracticable if not impossible to apply percentage mark-ups to coal sold at retail for the reason that every variation in mine prices either up or down would require a corresponding adjustment in retail margins and prices. The retail coal industry is in a depressed financial condition and is in need of OPS consideration for relief to compensate for increased labor costs but it would not obtain such relief by application of the Herlong amendment and in fact to apply it in the area we represent would have the immediate effect of cutting rather than raising retail margins and would spell immediate disaster for our industry. It is our opinion that the OPS interpretation of the applicability of the Herlong amendment to the retail coal industry is correct and realistic and our organization supports the statement on this subject to be given your committee by Ellis Arnall, Director of OPS, in your committee session the afternoon of Wednesday, March 19.".
As to the second point, the Office of Price Stabilization issued on May 19 an amendment giving retail coal dealers an automatic pass-through of freight increases. This order is amendment 6 to supplementary regulation 2, revision 1, and will become effective May 24, 1952.
A survey of the retail solid fuels industry is now being made to determine to what extent, if any, it is entitled to relief under the industry earnings standard. It is expected that the results of this survey will be known within a few weeks. Information thus far received indicates that some relief may be justified. Until further information has been received and analyzed, however, no ceiling price
increases for the industry as a whole would seem to be permissible under the present OPS policy.
MEMORANDUM OF MAY 27, 1952, TO HOUSE COMMITTEE ON BANKING AND CTR
RENCY, ON VALIDITY OF RETAIL PRICE Data USED BY GOVERNOR ARNALL In his statement before the committee on May 16, former Senator Francis Myers, representing the National Foundation for Consumer Credit, indicated that the data from the Consumers' Price Index of the Bureau of Labor Statistics understated the extent of softness, particularly in the field of housefurnishings This was so, it was alleged, because the price quotations represented list prices, rather than actual transaction prices,
A similar statement, with respect to wholesale furniture prices, was made by the representative of the National Retail Furniture Association.
These allegations have been carefully checked with the Bureau of Labor Statistics and they cannot be supported in fact. The pricing methods used in the price indexes of the Bureau of Labor Statistics are designed to reflect changes in average transaction prices from month to month, for goods of comparable quality. In measuring these changes the Bureau takes account of sale prices," "promotional prices," and other price-making practices used in the market, insofar as these can be identified and measured. In pricing for the Consumers' Price Indes, the Bureau takes advantage of the widespread prevalence of the "one-price" system, that is, the practice followed by most retailers of selling goods at the same price to all customers. Thus, by recording the marked "price tay" prices, the Bureau's reports are able to reflect nearly the prices at which the goods are actually sold.
Where special prices are in effect for only a short time or apply to goods of nonstandard quality, which sometimes happens in sales of clothing; or where the actual selling price is different for each buyer-for example, when a trade-in is involved—the prices used in the index are not exactly the same as the average transaction prices. Under these circumstances, the parts of the Consumers' Price Index most affected by such practices-notably the apparel, housefurnishings, and automobile indexes—somewhat understate the increase of prices when they are rising and somewhat understate the decline when prices are falling. The parts of the index most affected have altogether less than one-fourth of the total weight of the index, so that the effect on the total Consumers' Price Index is correspondingly small.
Clearly, there is no way whereby the transaction price can be adjusted to allow for a trade-in. While the index does reflect sale prices, special sales—including odd lots, clearances, 1-day sales, and a number of other promotional events-are ruled out if just a fortunate few consumers benefit from them. The objective is to obtain the average transaction price and sales are included only when the item is available for sale in the usual assortment, and when the item has been or is expected to be on sale at that price 2 weeks (in the case of foods, 1 week).
Data on consumers' prices of the Bureau of Labor Statistics are standard in their field and used in the calculation of wage and salary increases and generally in all studies of cost-of-living trends. In fact, had the Office of Price Stabilization chosen to use other data, including that available from trade sources, not only would it have been impossible to reduce these data to any common denominator of collection and concept but we would have been failing to use the statistical series that has the widest acceptance for validity and objectivity available to us.
CEILING PRICE REGULATIONS FOR FRESH FRUITS AND VEGETABLES ARE
WorkABLE There has been some testimony that it is impossible to have workable ceiling price regulations on fresh fruits and vegetables. Actually, the OPA had effective, enforceable and fair ceiling price regulations in effect for several years. Here is what the industry at the meeting of the Fresh Apricot, Sweet Cherry, Plum, and Fresh Prune Industry Advisory Committee held on April 16, 1952, stated on MPR 426, the applicable OPA fresh fruit and vegetable regulation:
"Committee members generally were of the opinion that MPR 426 would be a satisfactory framework for a possible regulation for the industry. Some members pointed out that the order had been workable for the industry during World