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, тo HOUSE COMMITTEE ON BANKING AND CURRENCY, ON VALIDITY OF RETAIL. PRICE DATA USED BY GOVERNOR ÅRNALL

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 Index, 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 tag" 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 eventsare 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 for 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

War II and that it should be applicable again now. One member said the OPA regulation was developed very painstakingly, and represents an enormous amount of work. MPR 426 was the result of considerable experience, both Government and industry, and in addition it has had the benefit of practical operation for a number of years, members said. Under it, grower-shippers and distributors were able to operate. The wording, however, should be studied carefully in order to have a regulation which would be applicable to conditions today."

OFFICE OF PRICE STABILIZATION,
Washington, Thursday, May 29, 1952.

Advance release for use in morning papers

RETAIL GROCERY CEILING PRICES

(CPR 15, Amdt. 14-Increases in Certain Markups) (CPR 16, Amdt. 14-Increases in Certain Markups)

Director Ellis Arnall of the Office of Price Stabilization today announced increases in the percentage mark-ups which retail grocers may add to their net costs in determining ceiling prices for a selected list of dry grocery products.

Mr. Arnall acted on the basis of data which showed that 1951 earnings of food chains and supermarkets were below the OPS industry earnings standard, or less than 85 percent of the average of earnings in the best 3 of the 4 years 1946-49, before taxes and adjusted for changes in net worth.

It is OPS policy to grant price relief to an industry when it appears that ceiling prices have caused earnings to drop below the earnings standard.

Mr. Arnall estimated the effect of the mark-up adjustments would be to increase the $31.6 billion annual gross sales of retail grocery stores by approximately $100,000,000.

Translated into terms of the family budget, this would be an average increase of from 3 to 7 cents a week for the Nation's 45,000,000 families.

Although the information on earnings was obtained only from large chain stores and supermarkets (group 3 and 4 stores) mark-ups of group 1 and 2 stores (small independents) are also being adjusted to prevent price distortions between groups and to continue reasonable price relationships between the mark-ups for all groups.

The adjustments are granted by amendment 14 to CPR 15, which covers group 3 and 4 stores, and amendment 14 to CPR 16, which covers group 1 and 2 stores. The amendments become effective June 2, 1952.

OPS said the group 3 and 4 mark-up increases are designed to increase the overall realized mark-up over cost for these stores by approximately 1 percent.

Mr. Arnall said the new mark-ups will result in an increase in the price of some grocery items bearing on the cost of living.

"However," he added, "the earnings data which OPS has obtained makes a clear and unequivocal showing that the chains and supermarkets have suffered such a decline in their net earnings before taxes that it would not be fair and equitable to require them to continue using the old mark-ups."

The OPS Director emphasized that the increase in mark-ups is an interim step and will be reexamined in the light of results of Nation-wide surveys of food margins and earnings, now under way.

"If downward or upward adjustments are warranted on the basis of the results of the survey, they will be made," Mr. Arnall said.

The food margin survey, scheduled to be completed in late June, was undertaken to determine how mark-ups originally used by OPS compared with those used by retailers in the period before Korea. The survey is one of the most comprehensive of its kind ever undertaken.

The higher mark-ups announced by Mr. Arnall will apply to the following grocery items:

Breakfast cereals; coffee concentrates, but not coffee; cookies, toast and crumbs, but not crackers; processed fish, except salmon and tuna; 5-pound or less container sizes of flour, but not other sizes; frozen foods, except frozen juices; canned fruits and berries, except fruit cocktail, pineapple, peaches and pears; jams, jellies, preserves and honey; canned meat, except luncheon meat; oleomargarine; pickles and relishes; canned vegetables and vegetable juices, except corn, green beans, peas, tomatoes and tomato juice; vinegar, and cheese.

Explaining why they were selected for mark-up adjustments, Mr. Arnall said: "OPS regards the industry earnings standard very seriously. If an industry is entitled to relief under that standard, it will get it. If, measured by the standard, no relief is called for, then an increase will be denied.

"In the present case, information available to us suggests a need for price relief. We have therefore made an honest effort to put food retailers in position to realize returns that meet the industry earnings standard. We have not provided a mere paper increase.

"To give real relief, we had to choose those products on which it is believed retailers can obtain higher mark-ups than those that have been permitted.

"If we had selected a product on which retailers could not realize a higher mark-up it would have been meaningless, insofar as enabling food retailers to meet the earnings standard is concerned."

Increased earnings retailers will realize on products with the higher mark-ups, Mr. Arnall emphasized, will depend upon the "effectiveness" of the new markups-the ability of grocers to obtain them under competitive conditions.

In computing the adjustments, the Director said OPS recognized that "some of the individual items will not bring the authorized ceilings.

"In determining the extent to which the adjusted mark-ups will probably be applied," he added, "we used the estimates of OPS consultants and industry representatives.

"At the same time, however, we gave recognition to the real possibility, in view of unsettled international conditions, that there may be a sudden tightening on retail food prices in the future.

"Any significant change in international conditions could result in a greater application of the mark-ups than is now estimated."

Mr. Arnall said it was the agency's judgment that the new mark-ups meet the requirements of the Herlong amendment to the Defense Production Act. This amendment requires OPS to give retailers and wholesalers the customary percentage mark-ups over cost they had during the month immediately before the outbreak of hostilities in Korea.

The adjustments are being made by splitting certain food categories into two groups with a higher mark-up provided for one of the groups, and providing slightly higher mark-ups for some other categories.

Changes in the group 1 and 2 store mark-ups are not quite so extensive as those for the group 3 and 4 stores.

The following table compares the new mark-ups with the old ones for food items where adjustments are being made:

1 Does not include canned fruit cocktail, pineapple, peaches, and pears.

2 Does not include canned corn, green beans, peas, tomatoes, and tomato juices.

OPS emphasized that the effect of the higher mark-ups on prices paid by consumers will depend upon the cost of the product to the retailer and competitive conditions.

It is the agency's opinion that selling prices to consumers will not change on all the products affected due to competition and the fact that some of the percentage increases are so small that when applied to a low cost product the increase is not sufficient to raise the ceiling price due to fractional breaks.

As a result, the ceiling prices in a few instances are expected to remain the same. On other products the ceilings may be increased by 1 cent a package. On some merchandise with a relatively high cost, ceilings may be increased as high as 2

cents.

The following table lists OPS estimates of possible increases in ceiling prices (not selling prices) for supermarkets:

Packaged breakfast cereal, 10-ounce

Coffee concentrate, 4-ounce

Processed fish, except salmon and tuna:

Maine sardines, 34-ounce..

Codfish cakes, 10-ounce

Flour, 5-pound bag (does not apply to sizes above 5 pounds).

Frozen foods (except frozen juices):

Peas, 12-ounce..

Strawberries, sliced, 12-ounce.

pears):

Grapefruit juice, No. 2 can.

Increase in cents over present ceiling price

Fruits, berries, canned (except fruit cocktail, pineapple, peaches, and

(1)

2

1

1

Applesauce, 17-ounce

Preserves, honey:

Strawberry preserves, 12-ounce.

Honey, strained, 16-ounce

Canned meat (except luncheon meat) spaghetti and meat balls.

Oleomargarine, 1-pound package, 4-pound prints.

Pickles, relishes:

Dill pickles, quart_.

Relish, 16-ounce__

Vegetables and juices, canned (except corn, peas, green beans, tomatoes,

and tomato juice):

Pork and beans.

Sauerkraut.

Vinegar, cider, quart....

Cheese:

2-pound package American cheese-

5-ounce jar cheese spread.......

INone in most instances.

Estimated expenditures on new plant and equipment by United States business

Total..

Manufacturing
Mining.

Railroads.

Other transportation

Electric and gas utilities.

1951

Commercial and miscellaneous....

1 In terms of physical volume the change over this period is expected to be almost as great. Source: Securities and Exchange Commission, Washington, D. C.