Early in March, the Treasury and the Federal Reserve Board announced that they had reached an agreement resulting, among other things, in the issuance of a new type of bond-a 2.75 percent long-term nonmarketable bond-offered to present holders of two 25 percent marketable issues. More recently, the Federal Reserve Board, jointly with private financial groups, announced a program to apply standards to private lending intended to limit loans to those required for financing defense activities or for meeting the essential needs of agriculture, commerce, and industry in this time of emergency.

Paralleling these restrictions on private credit, the major direct lending activities of Federal agencies have been curtailed and reoriented. For example, at the President's direction the Reconstruction Finance Corporation is giving priority to loans contributing directly to the national defense, with particular emphasis on small business, and has sharply reduced other new loans. Loans under the rural electrification and rural telephone programs also have been cut back substantially.

Taxes. Taxation is a powerful anti-inflationary weapon. It not only reduces purchasing power but also enables us to pay for defense production in a fair and equitable manner. Instead of allowing prices to rise and forcing the burden of our defense program to fall upon those least able to bear it, taxes can distribute this burden fairly and equitably-but this is possible only if we tax ourselves heavily enough.

We therefore need a tax policy which not only keeps the Government from adding to the inflationary pressures by pumping into the economy more money than it extracts, but which also takes as large a bite of the excess purchasing power as possible.

As the defense program got under way, Congress took the first steps toward putting the defense program on a pay-as-we-go basis. In September, the Congress raised personal-income taxes, increased the corporate-income tax rate from 38 percent to 45 percent and extended the 10-percent manufacturers' excise tax to television sets and household deepfreeze units.

At the end of 1950, corporation-income tax rates were again boosted, this time to 47 percent, and an additional 30-percent tax was established on excess profits.

However, the revenue anticipated from these tax boosts will not be sufficient to achieve a balanced budget in the fiscal year starting July 1. With present

tax rates and planned defense expenditures, a sizable deficit could not be avoided in fiscal year 1952. Therefore, in February, recognizing that at least $10 billion additional revenue would be needed and that the sooner a larger tax bill was enacted the more effective it would be in helping to stop inflation, the President recommended to the Congress the speedy enactment of new tax legislation.

Savings.-Funds that are saved, instead of being used to bid for current supplies, are an effective brake to inflation.

The Treasury, under the authority of legislation enacted March 26, has already taken steps to encourage owners of E bonds to hold on to their bonds-large numbers of which will start coming due in 1951. Under the new plan, savingsbond holders may retain their bonds, after they come due, and receive an annual rate of interest about equal to the average interest rate over the first 10 years. In addition, steps have been taken to increase the volume of E bonds purchased under payroll-deduction plans.

INFLATIONARY PRESSURES CONTINUED

The impact of tighter credit controls and higher taxes was significant, but inflationary pressures persisted. Consumers' disposable income continued to rise while business investment plans were successively revised upward. The actions which were taken regarding credit, taxes and savings were not sufficient to harness the inflationary pressures, and it was evident that direct controls were needed.

PRICE AND WAGE CONTROLS WERE INSTITUTED

During the first quarter of 1951, the Government took a series of direct actions to halt the rise of prices and wages.

Price action. On January 26, the General Ceiling Price Regulation was issued, freezing all prices (except prices received by farmers) at the highest point they had reached during the previous 5-week period.

Since that time, the index of basic commodity prices, which had risen uninterruptedly from July, held stable starting the first week in February and declined somewhat thereafter. Wholesale prices, which had risen 17 percent with no appreciable interruption from last June, remained relatively stable during the month of February and the first half of March.

The January freeze was, of course, only the first step in applying price controls. The freeze caught many prices in badly distorted relationships. This applied in two ways. First, generally speaking, wholesale prices had risen more than retail prices since June 1950; and, second, at the wholesale level some manufacturers had shown a commendable willingness to hold prices by absorbing cost increases; others had based their selling prices on current or replacement costs, while others took advantage of the situation and charged all that the traffic would bear.

Consequently, after the freeze, a retailer might well have to buy new supplies at wholesale prices above his retail ceiling, or at prices that would not permit him to cover his costs. Situations like this had to be corrected-either by rolling back wholesale prices or by allowing retailers to take account of higher wholesale prices.

The Office of Price Stabilization has been taking both types of action, in the proceess of changing over from the temporary general freeze order to specific orders "tailored" to the needs of particular products or industries. Since the time of the freeze order in January, about 12 major regulations and 23 supplementary orders and amendments have been issued. Some of the more important actions include the following:

1. A variety of price roll-backs-on hides and skins, on iron and steel scrap, on soybeans sold in primary markets, on vegetable oils and their fiinshed products (vegetable shortenings, salad oils and dressings, etc.), and on tallow and the soap which is made from it.

2. A dollar-and-cents ceiling for raw cotton for all sellers, including producers-the ceiling represents about 125 percent of parity for cotton,

3. A general retail price order, modeled closely after one of the most successful latter-day OPA orders, limiting retailers' mark-ups and specifying permissible margins over the cost of goods sold.

The essential character of the price-control system being worked out for manufactured goods involves a return to the structure-but not the level of prices as they were prior to the Korean outbreak. The level of prices will take ac

count of direct cost increases since that date. This standard implies a reduction of many prices from the freeze level, where prices had been raised by more than the direct cost increase in the last half of 1950, but it also implies an increase in other prices where direct cost increases had not been fully reflected.

In transforming the price freeze into a sustainable system of controls, some prices have moved up, some down. But there is no doubt that, if price controls had not been put on, prices would have risen much faster and farther since January than they actually have. The price-control system is still being worked out, and there are still many imperfections in it, but it has already been of great benefit to housewives and other buyers.

One of the major problems remaining concerns price controls on farm products. The Defense Production Act prohibits setting price ceilings on agricultural commodities below either the parity price or the highest price attained in the May 24-June 24, 1950, period, whichever is higher. Prices of several of the major farm products, including meats, cotton, and wool, are above parity and are consequently subject to price ceilings. It is difficult to work out effective pricecontrol systems for farm products, but work is going forward rapidly. In the meat industry, for example, a program of tailored controls was well along toward completion by the end of March. These controls involve not only dollars-andcents prices at all levels of the meat industry, but also provide distribution controls which are designed to keep distribution within the normal channels of the flow of meat from the farm to the consumer.

Prices of some of the major farm commodities, however, are still below parity; furthermore, parity itself is not a fixed dollars-and-cents figure, but rises with increases in nonfarm prices and farm costs. Careful attention is being given, in connection with the development of recommendations for changes in the Defense Production Act, to the possible need of changing the agricultural price provisions in such a way as to accomplish a greater degree of stability in food prices and at the same time treat farmers equitably in relation to the other elements in the economy.

Wage stabilization.-Simultaneously with the issuance of the General Ceiling Price Regulation, the Administrator of the Economic Stabilization Agency issued General Wage Stabilization Regulation No. 1 which froze all compensation at the January 25, 1951, rates and required prior approval by the Wage Stabilization Board for any subsequent increases.

In this freeze, just as in the price freeze, all the inequities existing at the time were caught when quick action was taken. Some workers had just received wage increases while others were in the process of negotiation. Some contracts had clauses which would provide for cost of living adjustments as the Consumer Price Index rose, or for other increases which were to take effect as of a future date. The greatest difficulty with froezing wages was that the wages of only a portion of the workers had kept pace with the increase in living costs. The Wage Stabilization Board proceeded immediately to the task of recommending such adjustments as would provide an equitable wage stabilization program.

The public and labor members, with industry dissenting, first relaxed the rigidity of the freeze date by establishing a 15-day grace period within which previously agreed upon wage and salary adjustments could still take effect. Then the Wage Stabilization Board issued general regulations permitting adjustments to bring about compliance with minimum-wage laws and exempting State and local governments from detailed control by the Wage Stabilization Board provided they continued to follow national stabilization policies. Finally, in a most important action, the Board issued a regulation permitting the normal day-to-day operation of necessary changes in the existing internal wage and salary structure of a plant, including such actions as promotions, transfers, length of service increases, merit increases, and the establishment of rates for new jobs.

The next problem faced by WSB was to develop policies which would take care of the inevitable inequities arising from a freeze as of any given date. During the year 1950 and up through January 25, 1951, there had been a series of wage-rate increases, mostly during the latter half of 1950, in which only a portion of the labor force participated. The WSB agreed that to ensure as much equity as possible some "catch-up" formula should be devised for those whose wages had not been increased. Differences in the WSB arose on the following major points:

1. What would be the proper catch-up base date?

2. What would be a fair over-all wage increase from this base date to bring the wage structure into proper alinement?

3. What should be done about new "fringe" benefits, as well as existing "productivity" and "cost-of-living" clauses?

As a first step, the public and industry members of the WSB recommended to the Administrator that increases up to 10 percent over the levels prevailing on January 15, 1950, should be allowed without further approval by the WSB. Moreover, it was decided that any future fringe benefits would be included in the allowable 10-percent limit.

The three labor members of the WSB disagreed with these recommendations. They later withdrew from the WSB.

On February 27, 1951, the ESA Administrator accepted these recommendations-regulation No. 6-as a necessary but only an initial step in developing a wage policy. At the same time, he requested that the WSB prepare regulations easing the stringency of regulation No. 6 regarding cost-of-living adjustments and health, welfare, and pension benefits.

In signing regulation No. 6, the Economic Stabilization Administrator also requested the WSB to turn its attention to problems which were not covered by the regulation. These included wage questions involving hardships and inequity cases, wage schedules for new plants, so-called "tandem" wage adjustments, and wage-stabilization procedures for industries exempt from price control.

The WSB, not being able to act without the presence of the labor members, could not develop regulations on the Administrator's recommended revisions to regulation No. 6. It was, however, necessary to develop workable and equitable wage controls to handle the most urgent problems which had arisen. Therefore, the Administrator found it necessary to issue a series of orders. These orders provided for the establishment of wage schedules for plants not in operation on January 25, permitted temporary continuance of escalator clauses which were in effect in contracts before January 25, and established administrative procedures governing the approvability of a limited number of tandem wage in

creases.

Following labor's withdrawal from the Board, the Administrator met frequently-in fact almost continuously-with labor and industry representatives in an effort to reestablish the Wage Stabilization Board. At the end of March, while mutually satisfactory agreements had been reached on some issues, the Board was still not functioning.

Rent control. Since 1947, we have gradually relaxed rent control with the basic goal of removing all controls and achieving a complete return to a free rental market at the earliest possible date. These moves have been based on the recognition that after World War II residential construction was booming and was thus alleviating the congestion, and therefore the need for control on rents.

This situation has now been altered. New construction is being limited not only by credit controls but by the allocation of building materials. Workers are moving to areas where they are needed for defense production but where there is not sufficient housing. Military, naval, and Air Force installations are building up their strength with the result that some cities and towns with inadequate housing are experiencing and will experience a tremendous influx of both military and civilian personnel. Under such conditions exorbitant rents may be charged and these are bound to have harmful effects. The morale of Armed Forces personnel is lowered by having to pay exorbitant rents and defense plants are unable to hire and retain sufficient workers to keep plants going at capacity. The present rent-control law is not fitted to our current defense and stabilization needs. In March, the present law, which was to expire on March 31, was extended to June 30. A new rent-control law to meet our new needs will be required as part of the stabilization program.

EACH MUST DO HIS PART

All the parts of the stabilization program-taxes, credit, savings, prices, wages, and rents are interdependent. Failure to take strong enough action on any of these will hurt the whole effort. Some Americans are, unfortunately, still more concerned with loosening one or another part of the program than with tightening all of it. The sole purpose of these measures is to control inflation, which will otherwise damage our economy and hamper our defense mobilization. Until that purpose is achieved, until we know our economy has been expanded to

meet the increased demands of preparedness as well as civilian requirements, we cannot take off controls in any area.

A time will come, if we act prudently and swiftly now, when some or all of these controls will no longer be needed. At that point, we will have more materials and plant capacity available for the production of goods and services for civilian consumption; we will have given our Armed Forces the production machine they must have; we can begin to release resources controlled for defense purposes to the greater satisfaction of our personal civilian needs.

If we act wisely now, that time will come perhaps in early 1953. If we fail to act wisely now, we may be faced with a controlled economy for a much longer time.

SECTION VII. COOPERATING IN THE DEFENSE MOBILIZATION OF THE FREE WORLD

The invasion of Korea revealed the urgency of a rapid strengthening of the whole free world in the face of Communist aggression. It emphasized for each nation the need of collective action. Just as the free nations acted together in meeting the Communist assault in Korea, so must they act together in building up their collective defenses. And they must act together in meeting the common economic problems which are being created by the defense drive. In this collective action each nation has a part to play according to its re sources. The United States, possessing greater industrial strength than the rest of the free world combined, must bear the heaviest part of the responsibility in the joint defense drive. But our effort will be added to the strong efforts of other countries-it will not be a substitute for their own efforts. In both military and economic assistance, this principle is being followed; it means that our strength is multiplied in contributing to the strength of the free world, on which our own security depends.

A MILLION TONS OF MILITARY ITEMS HAVE BEEN SHIPPED

Our principal program of military assistance to other free countries is the mutual defense assistance program (MDAP). Authorized late in 1949, it was greatly expanded immediately after Korea and has now been granted a total of more than $6.5 billion by the Congress.

Despite the heavy demands of our own armed services, we have supplied, under the MDAP, more than 1 million measurement tons of military equip ment to friendly nations since shipments began in March 1950. This figure is exclusive of aircraft and naval vessels delivered under their own power.

The bulk of this equipment has gone to the countries of Western Europe, although substantial amounts have also been shipped to near eastern and far eastern countries.

Already transferred or now moving forward are 3,500 tanks and combat vehicles, 11,000 general-purpose vehicles, 750 aircraft, 100 vessels and small craft, and 3.000 major pieces of artillery. In addition, small arms, mortars, recoilless rifles, communications and electronic equipment, spare parts, and millions of rounds of ammunition have been shipped.

Some 30 to 40 vessels are in continuous use-loading or on the high seascarrying MDAP equipment to more than 20 countries around the globe. In each of these countries, our equipment, added to the military forces and equipment which that country can provide by its own strong efforts, is making a significant contribution to the defense of freedom.

ECONOMIC STRENGTH A BASE FOR MILITARY STRENGTH

Without the economic aid which has been given by the United States to a number of free nations, their present expanded defense programs could not have been undertaken. The largest program of economic aid-our Marshall plan assistance to European recovery-has been a spectacular success. Three years ago the countries of Western Europe were threatened with economic collapse because they did not have the dollars with which to buy the raw materials and food to support adequate living standards or to achieve and maintain high levels of employment, production, and trade. Had their economies been allowed to collapse, a number of these countries would have been prey for Communist subversion.

Today, everything is changed. With the help of American economic aid, and by means of energetic self-help and mutual aid through the Organization for European Economic Cooperation, the people of Western Europe have made