Hon. BURNET R. MAYBANK,

UNITED STATES SENATE, Washington, D. C., July 28, 1950.

Chairman, Banking and Currency Committee,

United States Senate.

DEAR SENATOR MAYBANK: I should like to submit for the record a copy of a telegram which I sent to 15 business, labor, and civic leaders in Delaware yesterday, in which I asked for their comments and opinions relative to S. 3936. In so doing, it is my hope to obtain an accurate appraisal of what steps the people in my State feel should be taken to effect the necessary economic mobilization. With my telegram, I also offer four replies, which I have received up until this time.

Sincerely yours,

J. ALLEN FREAR, Jr.
JULY 27, 1950.

The grave international situation is requiring Congress to give prompt consideration to legislation granting wide powers to the President for mobilizing the Nation's economy. The Senate Banking Committee of which I am a member is now considering such a bill titled the Defense Promotion Act of 1950. The testimony of witnesses so far has varied somewhat as to how far this legislation should go. For example, Bernard Baruch believes an over-all ceiling across our entire economy, including prices, wages, rents, fees and so on, plus high enough taxes to prevent profiteering and to pay all defense costs is essential. The Secretary of Commerce, Mr. Sawyer, believes that the provisions of the bill as presently written are satisfactory to meet requirements of our military and other programs in support of national security and foreign policy objectives. It is imperative that our committee take quick action to report to the Senate a bill which makes adequate provision for our pressing needs. I would greatly appreciate your opinion as to whether the authority proposed in this bill is sufficient or whether it should be broadened to provide for a more complete economic mobilization. This telegram is being addressed to a limited group of business, civic, and labor leaders in our State and I propose to make all replies a part of the record of hearings. I am taking this step in the belief that the opinion of Delaware citizens should be of major importance to me in reaching a decision on this and other urgent matters affecting our national defense.

Hon. J. ALLEN FREAR, Jr.,

United States Senate, Washington, D. C.:

Senator J. ALLEN FREAR.

WILMINGTON, DEL., July 28, 1950.

Re your telegram the difficulties of forming a judgment without knowledge of facts and full situation are apparent. I think the President should be given maximum powers which the situation demands and therefore incline to view that the powers advocated by Baruch should be given. They need only be exercised as the situation requires this. Telegram addressed to me as president of the state bar association. It is obviously impossible to submit this question to association immediately. Opinion herein expressed is my personal one.

Hon. J. ALLEN FREAR, Jr.,

E. ENNALLS BERLE, President, Delaware Bar Association.

WILMINGTON, DEL., July 28, 1950.

Senate Office Building, Washington, D. C.: In answer to your telegram of July 27 I can only say that I have to rely on judgment of highest Washington officials. The members of the Cabinet I understand have discussed at length and approved the proposed Defense Production Act of 1950. If they think that the controls authorized therein are sufficient to meet present and early future needs, I have no contrary opinion to offer. I have to assume and do assume they are acting from an exact knowledge of the situation.

HENRY T. CLAUS, President, News Journal Co.

Senator J. ALLEN FREAR, Jr.,

Laurel, Del., July 28, 1950.

Senate Office Building, Washington, D. C.: Re telegram July 27, recognizing seriousness of international situation, we urge mobilization of nation's economy. We do not feel that the bill as now drafted is sufficient to cope with the situation and that the proposal of Mr. Baruch as outlined in the press should offer a much safer method of handling this matter. In the face of rapidly rising prices and artificial scarcities we believe that the people of Delaware will back you in any action to insure all-out control for war purposes. C. C. OLIPHANT & SON, INC., W. FRANKLIN OLIPHANT.

STATEMENT OF WILLFORD I. KING, ECONOMICS PROFESSOR EMERITUS OF NEW YORK UNIVERSITY AND CHAIRMAN OF THE COMMITTEE FOR CONSTITUTIONAL GOVERNMENT

Gentlemen of the committee, I consider it a great privilege to have the opportunity of presenting to you at this time what I believe to be some of the pertinent facts and principles applicable to the present situation.

Now that we are at war, I believe that all patriotic Americans, regardless of party, will agree that our prime goal is to achieve victory with the minimum of sacrifice on our part. Wars are tremendously costly both in human suffering and in monetary outlay.

DESTRUCTIVE EFFECTS OF INFLATION

It has often been observed that the maladjustments following war are, from the purely economic standpoint, frequently as destructive as is war itself, and the chief villain in the postwar drama is usually inflation. It confiscates the savings of the thrifty, thus often thrusting into poverty the most productive and respected classes of the population. By killing the incentive to save, it eliminates capital accumulation, and thus stops repair of the devastation wrought by the war. It brings industrial paralysis, despair, and often violent revolution. It follows that one of the primary problems confronting you today is how to avoid inflation.

PRICE ADVANCES NOT TO BE CONFUSED WITH INFLATION

In dealing with this issue it is imperative that you do not fall into the all-toocommon error of assuming that a broad rise in prices is synonymous with inflation. Price changes are results, not causes, and many occur for many reasons other than inflation. Therefore, it is no more logical to assume that, if prices are advancing, inflation must be present, than it is to conclude that, because the mercury in a thermometer is rising, the city is suffering from a heat wave. The mercury may be moving up merely because one's thumb is touching the bulb.

PRICE CONTROLS FUTILE AND UNNECESSARY

Prices have been jumping up since the beginning of the Korean conflict. Therefore, you have been asked to authorize price controls in order to halt inflation. As a matter of fact, the indications are that most of the price increases have been either speculative or due to panicky buying by persons fearing the advent of rationing. Governmental action to stop such price increases may be helpful to would-be regulators who hope to get jobs at fat salaries, and to bureaucrats desirous of more power. Everyone else would be injured by legislation placing restrictions on price movements.

The effects of speculation upon the price level are evanescent. Overoptimism soon gives way to overpessimism. Speculation is often unwise for the speculators, but there is no evidence that it ever seriously injures the outside public.

Similarly, at the present time, hoarding constitutes no threat to the general weal. Supplies of essential goods are superabundant. The income of the hoarders are usually inexpansible. Therefore, if the hoarders overbuy today, they are almost sure, perforce, to underbuy tomorrow. Legislation to limit hoarding, is therefore, entirely uncalled for, and, if enacted, will do far more harm than good.

INFLATION DEFINED

By contrast, it is essential to adopt policies which will absolutely prevent inflation. But an obvious prerequisite to such action is a clear understanding of the nature of inflation. What is it?

The 150 leading economists comprising the Committee on Economic Accord have defined the term as follows: "Inflation is a change in the volume of circulating medium tending to reduce the purchasing power of the money unit. Inflation may consist either of additions to the supply of money or of additions to the supply of deposit currency-that is of bank deposits subject to checks. In the United States in recent years, inflation has, as a rule, consisted mainly of an increase in the supply of demand bank deposits.

PRIVATE CREDIT INFLATION

In times like the present, when business is borrowing, people are generally overoptimistic about the future, and hence tend to go into debt to buy such things as automobiles and houses. Such buying accentuates the boom, and, by mortgaging the future incomes of the buyers, it lessens their potential future buying power, and hence intensifies the depression which normally follows the boom. Therefore, it is always desirable to impose in boom periods rather drastic restrictions on credit buying. Such restrictions are also especially needed now to lessen excessive demand for civilian goods, thus releasing manpower and material for war purposes.

THE CAUSE OF REALLY DESTRUCTIVE INFLATION

While the inflation brought about by private overbuying on credit all too commonly generates depressions, it is usually extremely mild as compared to that generated by governments which fail to balance their budgets. It is governmental borrowing to meet expenditures which wrecks national economies and often leads to revolution. A government deficit, even if financed entirely by the sale to individuals of nonnegotiable savings bonds, is decidedly undesirable, but a government deficit covered by printing money or by borrowing from the banks should be avoided as a pestilence for it is likely to lead to disaster. This proposition is just as true in wartime as in peacetime.

WARTIME DEFICITS AND INFLATION INDEFENSIBLE

Many people are inclined to accept Government deficits in wartime on the ground that wars have been thus financed in the past. The same kind of logic led many people in the last century to accept with complacency epidemics of smallpox and bubonic plague. But proper scientific measures have almost eliminated such epidemics of disease. It is just as feasible by scientific procedure to eliminate Government deficits in wartime, and hence their destructive aftermaths.

BURDEN OF WAR CANNOT BE SHIFTED TO FUTURE

We

One of the commonest but entirely indefensible excuses for running a Government deficit in wartime is that it will take part of the burden of the conflict from the shoulders of the present generation. This idea is pure moonshine. cannot draw on the future. Our soldiers today must use food, clothing,_guns, tanks, planes, and ammunition already produced. Whatever our Armed Forces use up lessens by a like amount the supplies available for consumption by civilians. The entire burden unavoidably rests upon the people of today. They must pay the bills. Taxpayers give to the Government parts of their incomes. Bond buyers receive in exchange pieces of paper which will shrink in value of the currency if the currency is inflated. Thus, since 1939, inflation has caused bonds to lose about half their value in terms of commodities in general. This inflation was caused by the Federal Government's trading of its bonds to commercial banks in exchange for "deposits." These "deposits" have been used by all of us as money substitutes. We check them out to buy goods. When deposits become more abundant, prices normally rise. The doubling of our price level between 1939 and 1949 was then due to one cause only-borrowing from the banks by our Government. This doubling of the price level took away half of the value of all bonds, mortgages, insurance policies, annuities, notes, and bank deposits. Most of the owners of these things did not know that they were being subjected to a 50-percent capital levy. And those so subjected were our most substantial citizens-the thrifty people whose savings furnish the capital that makes national progress possible. Those were the ones who were penalized by the policy of borrowing to pay the cost of World War II.

BUDGET SHOULD BE BALANCED EVERY YEAR

Since borrowing postpones to the future none of the cost of the war, since it discourages thrift and lessens capital supply, and since it brings an aftermath of economic disturbances, often more costly than even war itself, logic says that our Government should avoid borrowing in wartime as well as in peacetime. In brief, the budget should be balanced every year.

How can this be done? The United States Government, if it follows a sound policy, can obtain the funds to pay for its war expenses in two ways:

1. By cutting other expenses.

2. By increasing the tax burden.

Were the Federal Government to confine itself to its legitimate functions, huge savings would result, for the following expenditures would be lopped off:

If we came to recognize the fact that our European relief money is mainly going to bolster up blundering socialist governments which hamper production and impoverish their inhabitants, we would cut off another 2.5 billion dollars, making a total saving of 9 billion dollars. This would enable us to cover our present deficit and still have 4 or 5 billions left over to spend on our Armed Forces.

WHAT TAXES ARE LEAST BURDENSOME

Of course, if the "police action" in Korea should develop into a full-scale conflict with Russia, the amount just mentioned would be mere "chicken feed." Heavy additional taxes would be necessary. What type of taxation would be least burdensome?

Experience during World War II demonstrated that excess-profit taxes and confiscatory taxes on upper bracket incomes eliminated much of the incentive to produce in the case of the most efficient executives and technicians, and hence reduce materially the output of our factories. Any taxes on profits put a brake on efficiency. By contrast, excise taxes fall with equal weight on the efficient and the inefficient producers. It follows that, when it is necessary to use a large part of the Nation's income for war purposes (half of our income was thus used in World War II), excise taxes are the best sources of funds. It is relatively easy to collect them from the basic producers or wholesalers. By making rates on luxuries very high, the production of such articles can be reduced to a minimum. Rates on fundamental necessities should be low; rates on all other goods moderate. Excise taxes have the merit of yielding revenue promptly-there is no waiting to the end of the year to settle accounts. Excise taxes minimize hardship, for the needy person can largely avoid such taxes by buying necessities only. Unlike income taxes, excise taxes penalize neither efficiency nor thrift. It follows that sound economic policy requires today:

1. A drastic curtailment of governmental expenditures for nonmilitary purposes. 2. Avoidance of borrowing by the Government.

3. The use of excise taxes on luxuries and nonessentials as the chief source of revenues to pay for war expenditures.

INDUSTRIAL AND PRICE CONTROLS HARMFUL

The President has asked Congress not only for more revenue and for power to prevent inflation, but also for authority, at his discretion, to control prices, grant priorities, seize plants, allocate materials, and, if necessary, resort to rationing. Many people say, if we are in for a big war, it is of course necessary to grant him these powers. Their reason is usually that such powers were granted in previous This is no reason at all. The fact is that all of these powers, as exercised by our Government in previous wars, greatly hampered production and helped the enemy-not the United States.

wars.

For example, wage fixing impeded the prompt flow of labor to war industries. Keeping down the price of scrap iron prevented the steel industry from getting the needed supply of that basic material.

Rationing wasted billions of hours of the time of regulatory officials, store clerks, and customers. Much of this time should have been devoted to the war effort.

Allocations and priorities resulted in the blundering confusion which gave rise to the phrase “Washington madhouse." All this arose from the fact that those

directing our Government did not know that

With full competition and freedom of trade,
Each dollar, as spent, votes what shall be made.

A thousand commissions, working daytime and night,
Cannot guide production so nearly aright.

Their efforts at direction resembled those of the person trying to plan each of his steps as he goes down a flight of stairs. What automatic control by our nervous system does so smoothly becomes almost impossible when planned. The vital principle which every legislator and Government executive should keep in mind at all times is that untrammeled competitive price is the only force yet discovered which is powerful enough to direct production into the channels which will best serve the public.

But someone will say: "Do you propose to let people waste their efforts producing baubles when the nation needs every available man-hour to turn out war goods?" The answer is: "Competition, if accompanied by sound Federal financial policies, will prevent any such untoward outcome." But how will this work? Here is the logical way of handling the problem.

HOW TO ASSURE SUPPLIES OF SCARCE PRODUCTS FOR WAR REQUIREMENTS

A central recording agency should be set up in Washington. On the signing of any Government contract involving the use of scarce materials, the contractor should be required to specify the maximum amount of each scarce material needed at specific future dates to make completion of the project feasible. All requirements for each material should be entered in a single record book. Thus when an airplane contract was signed, there should be entered on one line in the Aluminum sheet requirement book the maximum quantity of that article needed in each future month to fulfill that contract. The requirements for the next contract should be entered on the following line; and so on. At any time a clerk could ascertain by mere addition the total requirements in each future month to cover all contracts signed. The Government should then order for future delivery the amounts of the various scarce materials called for at the various dates to fulfill all contracts. Suppliers should be required to give such governmental orders precedence over private orders. Insofar as the capacity of the industry permitted the Government would, by this method, always have at its disposal enough of the scarce material to cover all contracts. The Government would from time to time, sell to each contractor enough to meet his requirements.

This procedure would make unnecessary any other system of allotments or priorities. The Government's war requirements would be completely safeguarded Excess supplies of the materials in question could, without any danger of impeding war effort, be sold by producers to the highest bidders. Regimentation would be avoided and individual freedom maintained.

MAXIMIZING EFFICIENCY

If the members of this Senate committee will refuse to be inveigled into hasty action, and will resolve instead to adhere strictly to sound and time-tested economic and financial policies, the burden of financing the war and providing the maximum support for our Armed Forces will be minimized, efficiency will be maximized, and most of the economic difficulties commonly regarded as the inevitable aftermaths of war will never appear. Why not follow this course?