Senator BENNETT. What you are saying then is, to use another illustration: Here is a fellow who has appendicitis and gets a temperature. He says, "I am afraid to be operated on, so put ice bags on my head and reduce the temperature and I will be just as well off." Actually sooner or later somebody has to go in and perform that operation.

The thing that bothers me about direct controls is that we treat the symptoms and we persuade the American people that they have not a temperature after all and we put the ice bags on the head, but nobody has the courage to tell the patient, "You are in serious condition and you need an operation.'

Now my position is, I hope we have the leadership that can inspire the American people to face the thing realistically, and I am afraid the ice bags cloud the issue rather than cure it.

Mr. NATHAN. We are going to have a good test in this session of Congress on the tax bill. I would say with the kind of full employment we have today and the production, I think that deficit financing is absurd, from an economic point of view, as much so as any economic policy one can conceive of, but it may well be that that is going to be the policy.

Senator BENNETT. You agree with Senator Lehman that it is impossible to cut the cost of government under present circumstances? Mr. NATHAN. No, I do not. I read the Sarnoff report with respect to military establishments and I agree with that report.

By the way, it is a tough job to go in and do a job in economy in the military establishments but I am sure there are possibilities for savings without interfering with our military strength. I think it could be done.

Whether that could be done and also cut taxes and balance the budget, I do not know. I have serious doubt.

Senator BENNETT. I believe we are in agreement that we should have a balanced budget. I have more hope than you do with respect to cutting of taxes.

However, I am disturbed by this constant implication that because we cannot foresee the future, we have to continue at present at even higher rates of arming for all eventualities.

One of the things my father taught me when I started in business is that if you buy insurance against everything conceivable-every conceivable situation-you have to go out of business. You cannot produce enough money to buy insurance against everything. I have a relative who served his career in the Army who tells me that the Army would fortify the moon if they could get appropriations.

Now we cannot go on that kind of a basis. I think the men who have spent their lives as military men, backed by civilians who have come in to review the situation, can find a balance upon which we can safely proceed.

Mr. NATHAN. I hope so. Just as an aside, I have yet to see effective civilian activity in the military establishments, in my own personal observation and experience. I think it has been awfully tough. I would hope it can be accomplished.

Senator BENNETT. You do not believe we should turn over the Department of Defense to the military?

Mr. NATHAN. By no means. I hope we can somehow work out a technique and mechanism. I think the Secretary had some good

ideas on reorganization that would give civilian control a little greater opportunity.

The CHAIRMAN. Are there any other questions, gentlemen? Senator GOLDWATER. You are convinced that price controls will work, according to your statement.

I would like to get back to my former line of reasoning that they do not work and I would like to cite you some examples.

During the period in which controls were off immediately following World War II, let us take one item of apparel. That is, all apparel, men's and women's and children's. The index in that period ran from 185.8 to 187.7, a very small increase. That was because during that period the textile manufacturers of this country caught up and as you admitted in your testimony, there is no problem about textiles, because our great productive capacity finally got going in textiles and today we find a very good condition in textiles, in spite of controls.

Now after controls went on, apparel went up more than they did in the period when there was a free economy.

Now let us take a look at another segment of our economy, the housefurnishings group, which during the war was occupied in manufacturing war materiel of all types. They were not producing civilian goods such as beds and bedroom suites, and so forth.

In the same period when they stopped making war goods and they started to manufacture civilian goods, the price index in their line went from 184.4 to 210.9. But now, since controls have been on, and in spite of controls, they have started to come down because production caught up with demand, and only that.

Now let me get to two other points. In the case of automobiles, in the case of anything manufactured in steel, iceboxes, washing machines automobiles, anything that has steel in them, during last year we had a steel strike and a rather large one and in the settling of that strike, wage increases were granted. Immediately after wage increases were granted, price increases in a ton of steel were granted. Now where does that go? big steel companies pay that? Eventually you and I pay it, that increase.

Who pays that? Do you think that the Do you think that the unions pay that? and everybody in the United States pays

In the price of automobiles today, because everything connected with automobiles and everything connected with the production of steel has been favored, more or less; salaries have gone up and prices have come up.

And I do not agree with you that in the last 10 or 11 years the lead has been prices. The lead has been wages.

Now it is my argument that you cannot control prices without absolutely controlling everything. We have here excellent examples of it, do you not agree?

Mr. NATHAN. No; I think your period that you are using it seems to me weakens your argument, Senator. You say in 1946, for instance, when decontrol went off, the textiles were soft. That was because at that time, as you said, and I think quite properly, the increase in production of textiles tended to bring it in balance with the demand.

I think after Korea started, there was a very sharp rise in textile prices, in the second half of 1950, before controls were introduced. From June on, of 1950, textile prices rose-in June of 1950 for a substantial period-because there began scare buying.

Senator MAYBANK. More than that, you had a collapse of the cotton crop which was destroyed by the drought and the bad weather. A prediction of 15 million fell to actual production of 10 million bales. That had a lot to do with textiles.

Senator GOLDWATER. But the overall textile price did not increase. It stayed to 184 clear through 1950. Then it did start to go up, but we have had the introduction of new textiles, too.

Mr. NATHAN. From June 1950, the apparel price index was 96.5, and for a 1951 average, it was 106.9. That is about a 10-percent increase from June 1950 to the average of 1951 in apparel prices.

Senator GOLDWATER. You are using a different index. I am using that of the Department of Labor statistics put out in 1953. There are several ways of figuring cost-of-living indexes and yours would be the same as this if you projected it.

Mr. NATHAN. Supposing we had emergency legislation, Senator Goldwater, at June 1950, and as soon as the war broke out in Korea prices were frozen. I am convinced prices would never have risen in those early months after Korea the way they did.

Now, you raise the second question of these matters of adjustments. That is one of the things, Mr. Chairman, that I think is important in this legislation and why the freeze ought to be of short duration and why I think your bill which provides for adjustment in case of inequities and so forth are appropriate, because as of any single date, no one can say that relationships are stable.

For instance, if I happen to produce copper and I raise the price of copper today, that might not reflect itself in a washing machine for 3 months. Now, if the day after I raise the price of copper everything is frozen, then the washing-machine manufacturer is at a disadvantage and that is why certain adjustments have to be made, and they were made during World War II and they were made after Korea.

Those adjustments usually do allow a creeping rise in prices. You are right, Senator, that that is paid by everybody. But I would hope that the administration of the price controls would keep those little adjustments to a minimum so at least you slow down very substantially the rise in prices.

Senator GOLDWATER. Well, would you call a 100-percent increase in the price of automobiles in a 12-year period a 12-year period a "creeping" increase?

Mr. NATHAN. No; I think it is quite a serious increase.

Senator GOLDWATER. I think it is quite a jump.

Mr. NATHAN. I do, too.

Senator GOLDWATER. I do not quite agree with you in your statement that if we had frozen prices of textiles or anything in June of 1950, that we would have held the price.

The law that we are talking about, of supply and demand, would have eventually worked. It worked in the case of textiles.

Now, if textiles were still short, we would have much higher prices in textiles, in spite of controls.

You see, in the automobile business today where we have higher prices in spite of controls-and one of my main arguments is just this, and I think you have to agree, that if we are going to control, we have to control everything.

Mr. NATHAN. Well, we did control everything during World War II. Senator GOLDWATER. No; we did not.

Mr. NATHAN. Most everything.

Senator GOLDWATER. You say most everything. But you do not control prices by controlling "most."

Mr. NATHAN. Well, we did in World War II. Senator, if you will look at the chart-and I would be glad to prepare a chart of the movement of prices, let us say, from January 1940, when the war emergedit began to have an impact on our economy way before we had any war or appropriations. Foreign buying had already started. You will find from the beginning of 1940 until early 1942 when price controls were introduced, you had a very steep rise in prices. And, when controls went on in the spring of 1942, for the next 3 years of hostilities, or really from the next 4 years until the spring of 1946, you had an almost imperceptible rise in prices, and I think that is significant.

The CHAIRMAN. Many of the Senators wish to go to the floor at 12 o'clock and we want to act on this Cole nomination.

Are we finished with Mr. Nathan or could he come back at 2 o'clock?

Senator GOLDWATER. I am sorry I took so long. It is a very interesting discussion.

The CHAIRMAN. I originally said 12 o'clock and then some of the Senators asked me to do it immediately so they could be on the floor shortly after 12.

I am sure Mr. Nathan would be delighted to come back after 2 o'clock if anyone wants him to.

Senator GOLDWATER. He has answered my questions.

The CHAIRMAN. We thank you very much, Mr. Nathan. You have been a very fine witness and we appreciate it.

Without objection, Mr. Nathan's full statement will be placed in the record.

(The prepared statement of Mr. Nathan follows:)

STATEMENT OF ROBERT R. NATHAN, CHAIRMAN, EXECUTIVE COMMITTEE, AMERICANS FOR DEMOCRATIC ACTION

I am Robert R. Nathan, chairman of the executive committee of Americans for Democratic Action. I appear before you this morning to present the views of ADA on the question of direct controls.

As demonstrated during World War II and in the period subsequent to the invasion of the Republic of Korea by the Communist forces, direct controls are essential to restrain inflation in a period of national emergency. With the termination of existing legislation on April 30, the Government will be without authority to impose controls to prevent an upsurge in prices if another emergency develops. The time consumed in preparing, enacting, and implementing legislation has in the past been of such duration as to permit a serious degree of inflation to take hold before inflation could be brought under control. In World War II effective control was not achieved until early in the spring of 1942, although prices began to rise in the fall of 1940. The war in Korea began on June 25, 1950, but controls were not introduced into the economy until January 25, 1951, and by that time prices had already spurted ahead.

The delay between the initial need for controls and the date of their initial implementation is a consequence not only of the time-consuming legislative process, but also of the establishment of necessary organization and administrative processes.

It is essential to provide legislation which will permit controls to be introduced and made effective immediately, when emergencies arise. As the economy changes the nature of controls may need to be revised. Therefore a comprehensive standby control bill which would fit the present or past economy, might not be appropriate at some future date. Therefore, it should be adequate to enact simple legislation providing for a freeze with some general provisions for essential adjustments. Some adjustments may be necessary even over a short period of only 90 days.

Such simple legislation could be implemented promptly and in the interim there would be time to develop a control law which would be appropriately geared to the needs of the existing situation.

The need for standby controls is dictated by the continuing critical nature of the international situation. We cannot be certain where or when Communist aggression will again occur. We must be prepared to act quickly.

Presumably our recent mobilization efforts have been geared not only to expanding production of armaments at this time, but also to the development of productive capacity which would permit a rapid acceleration in materiel output should it be needed. If this objective has been successfully achieved, then military production could be increased very speedily. That in itself, presents a new situation as compared with the beginning of World War II and the Korean invasion. It means that we must be able to move more rapidly than ever before to prevent inflation. It would be foolhardy to be prepared to step up production and not be prepared to prevent inflation and assure stability. A sound and stable economy is the key to military might.

One element in the cost of living of the average American family which continues to demand Government assistance if stability is to be maintained is shelter rent. All of us had hoped at the end of World War II that one of the major efforts of the economy would be the construction of adequate housing facilities for all the people of the Nation. Housing construction was moving along at an encouraging rate when the Korean conflict started, and while a substantial volume of housing has been constructed since 1950, this construction has done little more than keep up with the dislocations and increased needs presented by the current mobilization.

A serious housing shortage still persists in many American communities, and where this shortage still persists the people need and deserve protection. All those communities now under Federal rent control are so controlled because they are a critical defense area due to extensive in-migration resulting directly from the defense effort, or because their local governing bodies in view of serious housing shortages have requested that the Federal Government continue rent controls Under these circumstances, it would seem to us that Federal rent control should be continued in all those areas now controlled, and should function so as to include areas which might become critically impacted as a result of the defense effort. Standby legislation, providing for other direct controls, should also grant the Executive general authority to impose rent controls wherever, in his judgment, such controls are necessary.

ADA urges that your committee continue the Small Defense Plants Administration as an independent agency and give careful consideration to increasing the authority of this agency so as to make its recommendations as to contract allocation and loan authorization mandatory upon the contracting agency and loan authorities. Experience has shown that small business does not receive adequate consideration, nor are its facilities intelligently utilized, when all decisions are left in the hands of the military.

The Small Defense Plants Administration is in a position to give independent attention to the problems of small business and, at the same time, as a Government agency adequately to consider the role of small business in conjunction with the requirements of the Nation's security. This agency should be regarded as a top policy organization through which administration activity which affects small business should be coordinated. It would seem to us that the agency should not be considered as an emergency establishment as its name implies, but that a more permanent designation such as "The Small Business Administration" might be given it.

We realize that the jurisdiction of this committee does not extend to the matter of taxation and fiscal policy. Yet, we would be remiss in our responsibility if we did not express to the members of this committee and to the entire Congress the importance of appropriate fiscal policies to halt inflation whenever it threatens to become active and serious. Receipts and expenditures of the Federal Government must be reviewed carefully in considering this whole area of fiscal policy. ADA believes very strongly in operating on a pay-as-you-go basis during periods of full employment and high levels of production. Deficits at such times add to the fires of inflation. Deficits can be justified only when there is unemployment and when resources are idle or when the needs of the national emergency are so great as to render impracticable a tax program which will permit a pay-as-you-go basis. Certainly under present circumstances this country can and should operate on a pay-as-you-go basis.