limited sense. I use it to include machinery, to include fertilizer, to include everything that goes into making two blades of grass grow where one grew before, and the same thing on the industry side.

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Here I have chart 4 which shows the problem of business investment in the recent past and over the next few years.

When we engaged in World War II, we couldn't do very much on the score of business investment, relatively, because we were in an allout struggle where, at the peak, we had to devote about 45 percent of our resources to the immediate fighting of the war. In other words, an all-out war of necessity and by definition drains down and draws down very heavily and rapidly upon your resources. The conseence of that is if any nation is in all-out war for too long a period,

there isn't anything left. General estimates were, when we got into World War II, it would be a 4- or 5-year proposition, and it turned out to be 4 years. You have to hazard eating up your substance, because you are in an all-out fight.

In the situation we are in now, we cannot afford to eat up sustenance, because we do not know how long it is going to be. We have to strengthen our productive facilities rather than weaken them.

These bars show that by the first half of 1951 we were at the highest level of gross private domestic investment that we have ever been in our history, either in times of peace or war. Again I say, Mr. Chairman, all these figures are at a uniform price level, so this is not just a changing dollar. This is what really happened in the economy, which is fundamentally more important.

By the first half of 1951, we were running in prices of the fourth quarter of 1950, at almost a 55-billion-dollar annual rate of investment, gross business investment. That is divided into three main parts: new construction, producers' durable equipment, which are the tools and implements that you produce with, and changes in business inventories.

Now, what this shows is that running on into the next year and a half, or so

The CHAIRMAN. What was it in 1947?

Mr. KEYSERLING. The increase in inventories in 1947 was 0.8 billion dollars.

The CHAIRMAN. That is all the inventory we had?

Mr. KEYSERLING. The increase was very small. In the first half of 1951, the increase was about 5 billion.

The CHAIRMAN. In other words, you have five times as much? Mr. KEYSERLING. These figures do not represent the total inventories we had for any of these periods but represent the change in inventories.

They show we are accumulating at a very much greater rate. I will say something more about that in the inflation discussion a little later on, and what the significance of that is, because I think it may be overstressed.

What this shows basically is that if we are going to carry out the basic defense program in anything like its projected contours, and if we are going to maintain anything like the level of consumption that we have in mind from the viewpoint of our general strength, then there will have to be an over-all decline in business investment. There has to be contraction somewhere. At any rate, the peak reached in the first half of 1951 was so high that we can well afford to get down to a lower level of over-all investment than that, and at the same time do a very strong job.

However, this indicates in rough figures the general nature of the Job that we ought to do. The cut-backs should come in specific sectors of the enony, and should not be stretched generally over the whole

PCOLOTEN.

The CHAIRMAX. In what segment?

Mr. KEYSERLING. Construction, for example, commercial and resi dential onsration, at the end of last year

The CHAIRMAN. Doesn't this include construction of plants, as well! Mr. KEYSERLING. It includes construction of plants as well estimate bra fly, and these are broad figures, that taking into a the fact that in the last quarter of last year we were rur

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rate of a million or more houses a year, and thus far this year at almost the same level, that there is room consistent with adequate housing for cutting very far below that. And there is even room for cutting of commercial construction. So that we do show, because you have to cut the blanket somewhere, we do have room for substantial contraction there.

Senator BRICKER. That wouldn't include Government construction, or public buildings?

Mr. KEYSERLING. No; that is the bottom bar of chart 1. This chart, No. 4, shows the private investment segment only.

The CHAIRMAN. To get back to this housing, when you say a million or more?

Mr. KEYSERLING. That was the annual rate around the end of last year, and thus far this year.

The CHAIRMAN. We put a limitation in the regulation last year that if applications were in by October they would not come under the regulation, and there was a tremendous rush to get started. Have you made any study as to what would happen when that rush of orders within that time limit expire?

Mr. KEYSERLING. Well, I am not saying anything critically, Mr. Chairman, about the action taken in the past, and let me make clear that the construction figures here include only those for private housing construction, not for public construction.

The CHAIRMAN. I understand that.

Mr. KEYSERLING. I think that when the cycle of carrying through on what was in the mill at the end of last year and the beginning of this year is completed that you will have a considerably lower level of housing, based upon new starts, than you have had. In other words, I believe that the various regulations, which have already been applied, the general situation, materials, and lots of other things, will conspire to carry us to that lower level which would seem to be necessary.

Now, it is never desirable, if you look at housing alone, to cut the level, because housing is a good thing, but it is just one of the cuts that has to be made.

There are two reasons for that. One is to supply the military. The other reason is that, according to our analysis, more materials and labor will have to go into expanding some important segments of our productive capacity. For these there will have to be an increasing volume of construction and of equipment.

Now, tools and equipment-and by that, I say again, I mean in the factory, on the farm, in transport, everything that goes to enlarge the industrial mobilization base―

Senator MAYBANK. When you say in transport, Senator Bricker brought that up today-and I concur with him-that it is shown that we will have a shortage of railroad cars and transportation.

What do you think about that?

Mr. KEYSERLING. Without attempting to cry over spilled milk, our Council started worrying in 1948 about the shortage of freight cars, and there were a lot of people who felt at that time that the shrinkage that would take place in our economy would give us a superabundance of freight cars. We didn't feel that way; we felt there was a fundamental shortage. There was a great need for more freight cars.

I am just as acutely concerned as you are about getting this job done in time. On the other hand, we also have to bear in mind that there are some problems which just cannot be solved within a few months. If we set aside everything that can't be completely solved in 2 or 3 months, we may set aside some of our most important problems.

Now, let me cite an example of that: When we were talking about the steel shortage in 1948, the argument was you cannot expand steel capacity because it takes a couple of years to do it, and by the time it gets done we will be in a recession or depression and you won't need the steel. Actually, as it turned out, that didn't happen, and if the expansion had started then we would have had what we need now; we would have had it at a lower price level; we would have had it when the expansion cost less in terms of drains upon manpower and general inflation.

In the situation we are now in it has to be recognized frankly that business expansion which is so important to carry this load does add to immediate inflationary pressures. Obviously, if you are going to use manpower and materials to build steel plants, or to build anything else that increases our productive power, you are using the resources before you get the product. You are not getting any product while you are doing the building, which therefore increases inflationary strains somewhat to do that.

Nonetheless, we think that is a very important thing to do, which shows the complexity of national policy, because, if you don't move ahead vigorously on increasing that production base, you never reach the point where you can carry the burden that we are going to have to carry. You never will have a long-enough blanket to cover the bed.

Senator SCHOEPPEL. Do you take into consideration in that chart. not exactly depreciation, but the deterioration of your capital outlays there! Is that shown or is that confined to just new production!

Mr. KEYSERLING. This takes into account everything that enters into maintaining and expanding our productive facilities. In other words, it includes outlays for replacement and outlays for new plant and equipment. It includes everything that you need to do to realize what I have called this greatest nonsecret weapon of the United States its productive capacity.

Senator BESTUs. It doesn't show amortization or depreciation, though

Mr. Krysharing. No. I would like to refer to that in just a minute. What we shows that by the first half of this year we were at about a 27-billion-dollar level of producers durable equipment, when again is clearly shown here to be an all-time recori. It compares * 21 225 billion Bidlas – left which was const fered very high. Hoxeser, we recitime peak bow, and it will have to come doth some. Be is may present to keep that ma dle bar, trocar a me

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