Mr. KLINE. I am dedicated to the proposition that if we take care of this with confidence and courage we can avoid this decline in prices which, after all is recession, depression, or something.

The CHAIPMAN. You think the best situation would be to have prices remain where they are?

Mr. KLINE. I think this is the one we are most nearly adjusted to. The CHAIRMAN. Just have it show that prices remain where they are and not have them go up or down?

Mr. KLINE. As a matter of fact, from a standpoint it is a good thing.

Prices

Now in saying that it is not true, it is true for the short run. rise rapidly and your costs are also a little more sticky, but the heck of it is where the companies come along and decide that after all the easy way was the best way and as they have, the thing always blew up. It would seem that we should be able to determine what we could do. The CHAIRMAN. Are there any other question, gentlemen? Senator DOUGLAS. I just came in as Senator Bush was asking Mr. Kline a question that I would have asked.

My question might be superfluous.

I agree with most of your statement, but I thought I heard Senator Bush mention a factor that concerns most of us; namely, when we get into a war, it comes upon us very quickly. Unless we have some protection, we are likely to have speculative buying of metals and foods and fibers and so forth, which would drive prices up sharply and create a great deal of internal despondency.

While I quite agree with you that general fiscal policy is the best method of preventing inflation in a period of war or nonwar, nevertheless it is just fear of the initial price increase that follows a sudden war of the type that Russia is likely to start, which makes me dubious as to whether credit and physical policy could alone be used.

I think that is your answer.

Mr. KLINE. We have stated in our formal statement, the answer that we have to it, but it seems to me we should state again that we just have this lack in the present control thing, and we point out that a productive America is the kind of thing that is needed if we expect to do something in this situation.

It must be a plentiful supply of a lot of things.

This can be best taken care of by standby rationing authority which makes it impossible for people to speculate at that time. This would have to be done very quickly. I think it makes sense because what it does is actually work on the end of demand while it leaves people free to deal with the inflationary thing according to the circumstance at the time.

The CHAIRMAN. Thank you, Mr. Kline. We always enjoy having you before this committee.

Mr. KLINE. Thank you, sir.

(Mr. Kline's prepared statement follows:)

STATEMENT OF ALLAN B. KLINE, PRESIDENT, AMERICAN FARM BUREAU

FEDERATION

Mr. Chairman and members of the committee, the American Farm Bureau Federation is a voluntary general farm organization composed of 1,492,282 families in 47 States and Puerto Rico.

Our policies are developed through discussion and debate in local, county, and State farm bureau meetings. They are considered by a national resolutions

committee on which every State farm bureau is represented. Finally, they are considered, amended and adopted by the elected voting delegates to an official annual meeting of the American Farm Bureau Federation. My statement today is based on a resolution entitled "National Economic Policies" which was developed by this process. This resolution is a carefully considered statement which has been evolved out of extensive studies dating back to our experiences during World War II. A copy is attached to the statement for your information.

The attached resolution, together with our resolutions on the Federal budget and taxes, outline in detail the economic policies which we believe necessary to achieve a reasonably stable price level that is, a situation in which we avoid disruptively sharp rises or falls in the general average of all prices.

Under present conditions, this is an extraordinarily difficult job. Along with many other countries, the United States has been going through an inflationary period of extended duration. Such a period creates many serious imbalances and dislocations. These in turn, make an economy vulnerable to deflation.

Some evidences of deflation are now at hand, particularly in agriculture. At the same time, with our huge national debt and with the Federal budget unbalanced, we have no basis for assuming that the danger of inflation has passed. To the contrary, we now face the possibility that fears of deflation may bring about the adoption of policies which will lead to further inflation. In the long run this would be disastrous, for inflation destroys the value of money, eliminates the middle class, and forces the adoption of political controls over the individual which are entirely inconsistent with the American way of life.

A severe deflation, likewise would be disastrous to many groups-including farmers and it also would tend to force the adoption of far-reaching controls over the individual. Our goal must be to avoid both inflation and deflation. It is in this setting that I want to discuss the question of standby price and wage controls.

As the members of this committee know, we opposed the inclusion of price and wage control provisions in the Defense Production Act of 1950 and have consistently fought for the earliest possible termination of these controls.

Our position has been, and is, that price and wage controls are basically unsound. We oppose the enactment of standby authority for this type of interference by Government with the functioning of our economic system.

Since there still seem to be some people who, sincerely, but incorrectly believe that price and wage controls can contribute to the control of inflation, we feel obliged to restate a few fundamental facts.

The strength of the United States lies in the productive ability of the American people. Our ability to outproduce the rest of the world is a natural and direct result of our American system of individual initiative and a reward based on service rendered. We can out produce those countries which suppress individual freedom, but it is doubtful that we ever could "out control" them. The logical thing for us to do is to build on the techniques that have made it possible for the United States, with 6 percent of the world's people and 7 percent of the earth's land area, to produce one-half of the world's steel and one-third of the world's meat.

This means we must seek to minimize Government interference with the things that have made our economic system the most productive in the world. Carried to their logical conclusion price and wage controls, rationing, subsidies, and the other devices that inevitably are proposed to mitigate the effects of these controls, would mean the complete abandonment of our present economic system. We can do better than that.

The basic causes of our inflation problem lie in (1) the fact that in World War II and again in the present defense program, we have found it necessary to divert substantial parts of our resources from production for consumption to production for defense, and (2) the fiscal and monetary policies which we have been following. We created inflation during World War II when we threw our resources into the war effort, unbalanced the Federal budget, and paid a considerable part of the bill by selling bonds to the banking system-a process which not only adds to the money supply as directly as if new money were printed, but also provides a basis for the expansion of credit since banks can obtain reserves by shifting bonds to the Federal Reserve System. While the fighting lasted, the inflation of our money supply was partially concealed by price controls, rationing, the unavailability of goods, and increased savings. After the war, controls were removed and we went back to a free-choice system. It proved to be productive. Of course, prices rose as people began to use the dollars that had been added to the money supply by the inflationary policies of the war period, but the alternative

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would have been a continuation of controls which would have hampered production and prevented the operation of a free-choice system.

The price- and wage-control provisions of the Defense Production Act of 1950 were written into law in a period of uncertainty, near hysteria, and scare buying which followed the outbreak of the Korean conflict.

The inflationary rise in the general price level which followed Korea was almost entirely the result of two factors-one of which was aggravated by the enactment of legislative authority for price and wage controls. These factors were:

1. Inflation psychology, which developed as a result of statements, irrespon sible and otherwise, from Washington and elsewhere on the magnitude and ultimate cost of the defense program, doubts that taxes would be raised sufficiently to pay the bill, controversy over the need for price and wage controls which suggested that prices were going to "run away," and the rumors which preceded the actual imposition of controls. Quite reasonably, many people became convinced that money was going to be cheap and goods scarce, so they rushed out to get things done while they could. New wage contracts were negotiated, because employees wanted to improve their position before the "wage freeze" and employers wanted to strengthen their ability to hold workers in the event a manpower shortage developed. Stocks of goods were built up all the way from the manufacturer to the consumer as a protection against "hoarding" and expected scarcities.

2. Cheap money policies. We not only stimulated the buying of all kinds of goods; we also followed monetary policies which made it certain that the banks would be able to meet the resulting increase in the demand for bank credit. As a result of the Treasury's insistence that interest rates be kept low to keep down the cost of carrying the Government debt, the Federal Reserve System increased its holdings of Government securities about $2.4 billion between June 1950 and the end of the year. This increased bank reserves and made it possible for the banks to increase their loans and deposits with the result that the supply of money went up about $7.4 billion in the last half of 1950.

We stimulated demand by causing people to think that money was going to get cheap; then we increased the supply of money. Is it surprising that prices

went up?

The inflation, which had already taken place before price ceilings were instituted. confusion as to the cause of his inflation, and the fact that many prices eventually fell below OPS ceilings apparently has caused some people to conclude that price and wage controls helped to curb the post-Korea inflation. This conclusion is erroneous. We have achieved a lull in inflationary pressures in spite of these controls and not because of them. The important factors which have brought about the present reduction in inflationary pressures are a phenomenal output of goods and services; a realization on the part of the people that shortages were not as imminent as had been expected; increased taxes (which led to a substantial surplus in the cash consolidated Federal budget for fiscal 1951 and a small cash surplus in fiscal 1952); increased personal savings; and last, but not least, the general tightening of money and credit which followed when the Federal Reserve System stopped "pegging" the Government bond market in the spring of 1951. Price and wage controls are not a cure for inflation. They are a smokescreen which actually makes the job of controlling inflation more difficult (1) by concealing from the people the fact that inflation is destroying the purchasing power of their money; (2) by interfering with production; and (3) by diverting attention from the things that must be done if we really want to control inflation. We have all heard it said that "we must be strong and control prices and wages," but this is not what a strong government does. A strong government keeps money good by balancing its budget and paying its bills. A resort to controls to conceal the fact that inflation is destroying the value of money is a sign of weakness and not strength.

The evils of price and wage controls are many and inescapable. Reduced production, less efficient processing and distribution, poorer quality products. black markets, rationing, proposals for subsidies in lieu of prices and expanded controls of every sort, are natural consequences.

If there ever was any doubt as to the difficulties which inevitably result from a politically controlled economy as against an economy based on our traditional concepts, the coal and steel controversies of last year should prove that these difficulties are both real and serious. It should also be clear by now that Government efforts to take over responsibility for private arrangements such as prices, wages, and working conditions have far-reaching implications with regard to the private ownership of property. The steel seizure is a case in point. While this particular seizure was voided on constitutional grounds, it helped to male clear

the fact that in the long run, price and wage controls tend to force the Government to take over private property in order to enforce its dictates.

By creating confusion, disrupting normal business procedures and relationships, ceiling regulations make the job of getting production vastly more difficult. Each new order inevitably creates new problems and thereby forces the development of further regulations and still further problems. Each step down this road increases political controls over the economic actions of the individual and brings us closer to the complete regimentation of our entire economy.

It has been estimated that there are 9 million different prices in our economy. It is an obvious impossibility for any group of men to fix 9 million different prices and keep them in a proper relationship to each other. Even if the administrators were smart enough to determine proper relationships between so many prices, they couldn't change their regulations fast enough to keep up with changing economic conditions.

Long continued, price controls lead to a breakdown of respect for the law, and a consequent breakdown in public morality. Price controls create an opportunity for the unscrupulous to make money by violating price-ceiling regulations with only a slight possibility of getting caught. They establish a premium for dishonesty and violation of law. They create cynicism with respect to law. An economic base for the support of a new criminal group in our population is created. The disrespect for law created by price controls and related measures inevitably causes a deterioration of the moral stamina of all citizens.

Black markets and maldistribution are an inevitable consequence of price controls. In the case of meat, this can mean the loss of valuable byproducts, including raw materials for leather and lifesaving medicines. Also in the case of meat, controls can result in health hazards due to the fact that black-market operators may follow unsanitary practices in uninspected operations.

It is totally unrealistic to discuss price control without pointing out that any successful effort to depress prices below the free market level will inevitably lead to shortages, and rationing. Whenever we decide not to use prices to distribute goods, some sort of rationing is inevitable. We must either ration by Government regulation, by voluntary action of sellers, or by a mad scramble in which each customer tries to get there first. The fact that OPS did not find it necessary to institute consumer rationing is definite evidence that price controls have had very little effect on consumer prices. In the few cases, for example, soybean meal, where OPS regulations did force prices substantially below their natural level, severe artificial shortages and dislocations appeared. The difficulties which many packers particularly some of the lower cost operators-had in obtaining cattle while beef prices were pressing against the ceilings are a dramatic illustration of the disruptive effects price controls cause when they actually force prices below their natural level. Experience with slaughter quotas, which were advocated by some as a cure for the disruptions caused by price controls, demonstrated that such controls only create further disruptions.

Not the least of our objections to price and wage controls arises out of the difficulty of getting rid of them. The controllers always seem to want to hang on to their authority long after the conditions which provided an excuse for bringing such controls into existence have passed into history. A recent example is the reluctance of OPS to remove price controls from beef even after it became clear that the cattle industry was experiencing a serious deflation. Here it may be noted that price ceilings seem to have been one of the factors that delayed the decline of retail prices when live cattle and wholesale beef prices fell.

Controls waste manpower-our scarcest resource-not only in the Government where millions of man-hours must be spent on the unproductive job of writing regulations and the impossible job of enforcing them, but at every level of industry where people subject to regulations must try to interpret and comply with them.

In time, price controls lead to subsidies, because special incentives become necessary to get needed production. Subsidies increase Government costs in a period when the Federal budget is already inflated. They conceal the true cost of an item and give the public an unrealistic idea of its worth. Costs become fixed at one level and prices at another and relatively lower level, with the result that it becomes very difficult to go back to a free market. Subsidies aggravate inflation by increasing the Government deficit if the Government is not balancing the budget and by increasing the purchasing power available to the public for the purchase of other items.

Those who sincerely believe that price and wage controls do some good-even if they don't work very well-will, of course, argue that we are over-stating the We cannot agree.

case.

Experience with OPA and more recently with OPS produced concrete evidence of all of the difficulties and undesirable trends that we have cited. That we have not experienced far greater difficulties under OPS merely reflects the fact, that with a few exceptions, OPS actually has been able to have very little effect on price and wages. Real difficulties have arisen wherever the control program succeeded in exercising any real effect on prices for any substantial period of time. The continuation of price and wage controls on a standby basis is undesirable for a number of reasons including the following:

(1) Since controls of this type are basically unsound, and harmful to a freeenterprise economy, we ought to get rid of them while we can, and concentrate our efforts on policies that can make a real contribution to economic stability.

(2) It is impossible to write a satisfactory standby law, when we cannot possibly anticipate the economic conditions under which such a law might be called into operation. The idea that a small staff, operating under standby authority, could work with advisory committees and keep a set of regulations up to date for instant use is not well founded.

Economic conditions change so rapidly that it is impossible to determine in advance the type of regulations we would want to impose if we should ever again attempt to control prices and wages.

It would be impossible, not to say fruitless, to get industry or farm groups to cooperate in the development of ceiling regulations, in periods of price deflation such as the cattle industry is now going through. In periods of rising prices, the existence of standby-control authority would encourage everyone who could, to jack up his prices and margins as high as possible in order to get ready for a possible freeze. This, of course, would be inconsistent with the achievement of economic stability.

The task of maintaining standby regulations also would be made difficult by the almost certain difficulty of getting well-qualified people to take jobs in a standby agency.

As a matter of fact, it seems to us that the impossibility of maintaining standby regulations is recognized by the section in S. 753, which provides that a "freeze" shall be imposed whenever controls are invoked, and then allows 3 to 6 months for the development of adjustments.

(3) The maintenance of a price- and wage-control staff on a standby basis, inevitably would mean continued use of Government facilities to propagandize the people on the alleged need for such controls. The OPS, for example, wrote me under date of February 13, 1953, and advised that they were sending us, without cost, and without our having requested such material, 25 copies of 1 document and 150 copies of another for further distribution. The basic document, which is entitled "The People Versus Inflation" contained an overall statement of the case, which is about what one would expect from the Office of Price Stabilization. They do, of course, have considerable confidence in direct price and wage controls. It is worthy of note that their treatment of credit and investment controls indicates a complete lack of understanding of what can be done with indirect controls over credit. There is no suggestion whatever as to the impact which the support of bond prices had on the credit expansion which followed Korea. Certainly, if we are going to do a real job of helping people understand the inflation problem this area ought to be covered.

Most of this statement has been devoted to price and wage controls because we feel that these controls are the most objectionable feature of the present Defense Production Act.

We supported certain other features of the original Defense Production Act. It is our present recommendation, however, that any further extension of this act be confined to a limited extension of the priority and allocation authority "for use only (1) in the event of an emergency declared by the Congress, or (2) with respect to specific commodities which may be found by Congress to be in actual or prospective short supply."

AMERICAN FARM BUREAU FEDERATION, 1953 POLICIES ADOPTED BY THE OFFICIAL VOTING DELEGATES OF THE MEMBER STATE ORGANIZATIONS AT THE 34TH ANNUAL CONVENTION

Price-level stability

NATIONAL ECONOMIC POLICIES

Along with many other countries, the United States has been going through a prolonged period of inflation that began with the Second World War. Such a period creates imbalances and dislocations which add to the instability of our