A strong national economy depends not only upon the welfare of the individual but also upon the health of the business community. One of the best measures of the health of the business community is the number of the business failures each month. Prior to Korea the average monthly rate of failures was equal to 825 per month, involving a liability of something like $23 million per month. During the past 12 months, the number of failures dropped by an average of 20 percent, with a corresponding decrease in magnitude of the liabilities. In the area of manufacturing, which is the segment most subject. to controls, the number of failures before Korea averaged about 190 per month while during the 12 months ending June 1952 the average was 136, or a 30 percent drop in the number of failures.

The great expansion in production of goods which took place during the last 2 years made it possible to keep the dislocation of the economy to a minimum. Physical production as measured by Federal Reserve Board Index averaged 189 before Korea and 215 during the 12 months ending July 1952. Thus, it was largely through the means of expanded output that military production equaling 16 percent of current industrial production was accomplished.

The civilian and defense-supporting economy was able to draw upon current production approximately the same amount received just prior to Korea. Shortages were generated largely from increased demand, not reduced supplies. In the case of the durable goods production area where the demands for conversion to military output and defense-supporting expansion programs were at a maximum, over-all production increased by 20 percent, enabling the conversion of 25 percent to be made to the military, and thus leaving a maximum curtailment of 5 percent production for civilian uses. As will be pointed out later in greater detail, the small drop in civilian production did not mean that supplies to consumers were curtailed, as inventories had been built up during the months immediately after Korea and prior to any major conversion of our productive resources to military production.

The statistical evidence is clear that the priority and allocation powers delegated by the President to this agency for the diversion of productive facilities and material supplies to the manufacture of military goods and defense-supporting expansion have been used in such a way as to minimize the dislocation to the national economy. Unemployment has been reduced; business failures have been reduced; personal income has risen faster than both income taxes and prices. Military production was, therefore, largely achieved by means of increases in total production.

Impact on small business

It was the intent of Congress (sec. 701 of the Defense Production Act of 1950, as amended) that "small business enterprise be encouraged to make the greatest possible contribution for the achieving of the objective of the act." During a period of rapid diversion of supplies and productive facilities to military production serious damage might have been done to the competitive

position of small business unless safeguards were introduced. The procurement policy for small business developed by DPA during the first year of the life of the act had the effect of enabling small business to enjoy a more favorable economic position during the months subsequent to Korea than they did prior to the period of expanded military procurement.

The effectiveness of the policies of this and other defense agencies may be best seen from the statistics on the relative health enjoyed by small companies in the metal-working areas.

Value of shipments.-In 1950 companies with less than 100 employees shipped approximately $1,470 million each quarter of metal products. By the first quarter of 1952 shipments from these small firms amounted to more than $2,000 million, or a 40-percent increase. Companies with from 100 to 500 employees

also expanded their shipments in excess of 40 percent over June 1950. These large advances in sales are in contrast with a 19-percent increases in shipments of the largest firms since June 1950.

Index

SMALL BUSINESS

VALUE OF SHIPMENTS BY SIZE OF COMPANY

1950 QUARTERLY AVERAGE = 100

Rated orders: Conversion to military and defense supporting production among the metalworking industries has proceeded until approximately 50 percent of all shipments made in the first quarter of 1952 were against military and defense supporting rated orders. Companies with less than 100 employees reported that 57 percent of their shipments were against rated orders. The same percentage was reported by companies with from 100 to 500 employees. In contrast, only 47 percent of the value of shipments of the companies with more than 500 employees were against rated orders.

Impact on availability of goods

The diversion of more than 16 percent of our current production to direct military production would be expected to cause a considerable shortage of goods to consumers. However, the ability of the American industrial economy to expand quickly enabled this Nation to build up inventories of consumer goods before it was necessary to introduce material controls.

The large retail sales of durable goods during the last half of 1950 and the first quarter of 1951 are an indication of the rapid expansion of inventories in the hands of the consumer. American industry was capable of not only pouring large quantities of goods into the hands of the consumer but enabled suppliers to increase their stocks. Inventories held by manufacturers, wholesalers, and retailers increased markedly over the pre-Korean period even after adjustments have been made for prices. Undoubtedly the availability

INVENTORIES

ADJUSTED FOR PRICE INCREASE JAN-JUN 1950=100

of these goods in suppliers' hands did much to level off the prices-once the hoarding sprees had subsided.

While military schedules call for higher production during the next year it is now clear that such increases can be made without seriously affecting the supplies of durable goods to civilian consumers because of the existence of wellfilled commercial and manufacturing inventories and of the existence of new productive capacity.

Impact on labor

As a result of the materials cut-back and the conversion problems which developed late in 1951, several areas developed relatively high degrees of unemployment. In order to assist these areas, the Defense Distressed Areas Task Force was created by the administration. This task force, consisting of representatives from nine Government agencies, in cooperation with local groups, emphasized the importance of placing more defense contracts and subcontracts, particularly those with a short lead time, in the distressed areas.

A brief review of the problems in specific distressed areas and the action taken to meet them is included in the National Production Authority report to the Joint Committee on Defense Production.

The unemployment situation in the construction industry became especially serious in certain areas in the latter part of 1951 and early 1952. One of the first areas to feel the impact of restrictions on construction was the metropolitan area of New York and northeastern New Jersey. The curtailment of commercial, residential, public, and recreational construction directly resulted in unemployment because there was little or no military or industrial expansion in the area. To alleviate the situation, every application for construction received from this (as well as other similar areas) was approved except for recreational and amusement projects.

Barly this year Detroit had 125,000 unemployed. Partially as a result of the task force's efforts, it had, by May, moved into a less critical labor area designation, according to the Labor Department's classification. As of this month the situation is reversed from that prevailing in January and there is now a reported shortage of manpower, particularly skilled labor.

The task force was recently abolished and its functions are now being carried on by Regional Defense Mobilization Committees.

EXPANSION OF PRODUCTION CAPACITY AND SUPPLY

It was the intent of Congress that the United States develop the economic strength necessary to oppose acts of aggression and to promote peace. Congress also recognized that the expansion of production facilities beyond levels needed to meet civilian demand was required (sec. 2, declaration of policy, Defense Production Act 1950). Furthermore, it was the intention of Congress that such expansion be carried out as far as practicable within the framework of the American system of competitive enterprise.