PRICE-CONTROL BILL

TUESDAY, SEPTEMBER 30, 1941

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee convened at 10:43 a. m., Hon. Henry B. Steagall, chairman of the committee, presiding. The members present were: Messrs. Steagall, Williams, Spence, Ford, Brown, Patman, Gore, Mills, Monroney, Kopplemann, Crawford, Kean, Smith, Kunkel, Rolph, Dewey, and Hull.

STATEMENT OF HON. MARRINER S. ECCLES-Resumed

The CHAIRMAN. The committee will come to order. We have Mr. Eccles with us again this morning. Mr. Crawford is recognized. Mr. CRAWFORD. I wish to ask you one more question.

Governor Eccles, I read in the press this morning an interpretation of your testimony yesterday tying you into somewhat of a criticism of agriculture and wages. I wonder if you would give us a few remarks on your attitude toward corporate profits as related to the remarks that you made yesterday, and toward labor and agriculture.

Mr. ECCLES. Mr. Crawford, I am glad of an opportunity to cover this point. I think that it is extremely important that if morale is to be maintained among the public, the people as a whole, should be made to feel that they are treated with complete fairness.

At the time of a great emergency, such as the present, when we speak of everyone making sacrifices, it does not set well with agriculture or with labor to have limitations on their income, while at the same time many corporations and individuals who are already wealthy are reaping a harvest of further profits and income out of this

emergency.

I feel that the example of sacrifice and the example of being willing to pay in very heavy taxes should be set by the corporate units and the individuals; and I don't know how I can better express my general philosophy in this regard than I undertook to do in a recent publication. It is rather short and I would like to read it. Here is a statement that I made before the Ways and Means Committee, just a paragraph: The excess-profit tax now on the statute books does not give any such assur

ance

That is, speaking of an equitable distribution

If you allow the idea to take root in the public mind that through these vast expenditures a few are being made rich and a few who are already rich considerably richer, the result is bound to endanger the success of our defense effort. In order to prevent an inflationary spiral of price and wage increases, labor should be willing to moderate its demands for increased wages; but labor cannot be expected to follow such a course if employers are permitted to retain excessive profits.

That was before the Ways and Means Committee on this question of

taxation.

Since that time, more recently, the 1st of August, I made this statement-this covered this particular aspect of the problem:

During the emergency we shall have to rely heavily upon the excess-profits tax and the tax on corporate incomes.

That would be the normal and surtax.

This is true because, generally speaking, business units are the greatest beneficiaries, directly and indirectly, from defense expenditures. The profits accruing from the expanding national income tend to become concentrated here in the first instance. Consequently, one of the surest ways to safeguard against price inflation is for the Government to levy on such profits and divert them directly into the defense program before they are distributed into the general income stream through higher wages and increased dividends.

Perhaps the most compelling reason of all for the imposition of the excessprofits tax is that, if not taken by the Government, such profits will lead to further demands for higher wages. If wage increases continue to be freely granted to those who have already received substantial increases, they will swell unduly the volume of private purchasing power. Labor should certainly be willing to moderate its demands for increased wages, but it cannot be expected to follow such a course if employers are permitted to retain excessive profits. Moreover, with increasing personal income taxes, many corporations may be expected to leave a large proportion of their profits undistributed. In the absence of an undistributed-profits tax, therefore, these will be beyond the reach of the Government, unless recovered through heavy taxes on corporations.

The corporate form of ownership is the principal institution through which capitalism functions. Owners and managers of corporations, vitally interested as they are in preserving capitalism, have every reason to favor, not oppose, heavy taxation of their profits, for thereby they will help to protect the country against the inflationary dangers that would undermine the foundations of capitalism. They have the greatest stake in democracy-the most to preserve. They should not expect those who have the smallest stake to pay an unjust share of taxation.

During the emergency the excess-profits tax should, in my opinion, be the keystone of a well-balanced program. Increased taxes, however, should not be imposed on the great numbers of small business concerns and on millions of individual taxpayers until they have been given every reasonable assurance that the funds they are being asked to provide will not go to swell the profits of wealthy individuals and corporations.

As I conceive this whole picture, if inflation is to be avoided, it has got to be a well and a completely rounded program. It has got to be a program where everyone is thinking first and foremost of the defense of the country and of the preservation of capitalism; not "How much can I get in increased pay? How much can I get in increased profits out of my business operations?"

Until we can get American labor and American agriculture and American business to look at this problem solely with that point of view, we are not going to succeed by any legislative action in controlling this problem of inflation.

I am not pro-business or pro-labor or pro-farmer. I am trying to be pro-American in this whole picture, to let the ax fall where it will, if in order to get results it is necessary for it to fall.

Mr. CRAWFORD. I think that clearly sets forth your position so far as I am concerned.

The CHAIRMAN. Mr. Spence is recognized.

Mr. SPENCE. Governor, you said yesterday that the first line of attack is to increase production. Of course, you mean the production of consumer goods?

Mr. ECCLES. Yes.

Mr. SPENCE. Mr. Nelson said that about 80 percent of the corporations that were not engaged in the production of defense goods could never be converted into the production of defense goods; that only 20 percent of them could be finally converted into the making of defense goods. Now, what are you going to do with that other 80 percent of smaller manufacturers that are not equipped to produce defense goods and by reason of priorities cannot get materials now with which to produce consumer goods?

Mr. ECCLES. Of course, that is a most serious problem; but it is a problem that other countries have had.

A greater effort, it seems to me, must be made to increase the production of those raw materials where acute shortages exist and that are largely responsible for the closing down or the curtailment of production in civilian goods by many of these business concerns. There is nothing that can be done with those business concerns that cannot be converted into the production of defense materials except either to get them raw materials by increasing the supply or closing them down or curtailing their production.

Mr. SPENCE. It is going to take a long time to get increased materials or substitutes. A good many of these concerns do not have great reserves; and to delay it, it seems to me, will be helping to close them up. I am wondering if you have some idea by which we could assist this 80 percent of people that are not engaged in defense production and cannot be put into it, to tide them over the gap.

Mr. ECCLES. I think that a much greater effort than has been made must be made to get some of the defense business to small

concerns.

Now, Mr. Nelson would know much better than I what percentage can be converted. But I am pretty sure that there are a great many small business concerns that could do subcontracting, that could take on some of the defense business, that have not been utilized.

That is very important, not only from the standpoint of the business units themselves, but primarily to avoid the dislocation of labor and other business concerns in those communities. To close plants in one community and move men out into another creates a housing shortage in one area and a housing surplus in another. That is, of course, another one of the problems.

So that every effort possible should be made-and, as I said, I don't think that sufficient effort over the past year has been made to convert many of the small business units to handling defense business.

Every effort should be made to increase further the production of those raw materials where there is an acute shortage and where civilian supply is called upon at this time to curtail to the extent that they are. In many instances there is an adequate labor supply. Labor could work longer hours. Some of the people are not yet working that could get employment. More women could work. I think that we might meet the labor situation much more readily than the problem of raw material.

There is one other thing that I think is being done that should be done aggressively. That is, the supplies of materials of various kinds and commodities that are in the hands of the speculators should

be taken away from them. That is certainly against the public interest and tends to create shortages and force up prices.

The people, the concerns that have gone out and purchased commodities, materials, that are entirely outside of and foreign to their business, it seems to me, should be deprived of the profits that might accrue from any such a venture.

Likewise, those business concerns that have bought heavily for inventory purposes in order to be sure of supplies and in order to profit as a result of an increase in prices should be required to reallocate those inventories to those concerns that did not protect themselves or did not acquire an inventory.

I think some of those things are being done, at least are being considered. We have been a long time about it. This effort has been going on now for close to a year and a quarter since it was started, and I think that about the only approach which it seems to me we could make to the problem is by these several efforts.

Mr. SPENCE. It seems to me that in this matter we are between the devil and the deep blue sea. Suppose we could get them into defense industries, then we take them out of consumer goods. And it is consumer goods that we want to increase, isn't it? That is one of the very fundamentals of this situation?

Mr. ECCLES. No. I think that the primary thing is to increase the defense goods. The consumer has got to curtail, and the consumer can curtail.

The standard of living is possibly higher today than it has ever been in our history. I don't think that we could expect to do the defense job, which may require as much as 40 percent of our national income, while at the same time we provide consumer goods to the extent of increasing the standard of living or even maintaining the existing standard of living.

Concerns making civilian goods need to be converted into the production of defense goods. We have got to find ways and means of civilians getting along without certain goods or getting along with a great deal less. The basic necessities we can take care of.

Mr. SPENCE. An increase in the defense activities will not help our inflation situation. What I mean to say is that we will have in the production of consumer goods-to take these organizations out of the production; and even though they were converted, would not help our situation, if you put them into defense industries? Isn't that true?

Mr. ECCLES. I don't think that you could take 80 percent out. I don't think you can take 100 percent of civilian production out.

The point is that the ideal situation would be to have our entire productive capacity being utilized either for the production of defense goods or of civilian goods. The unfortunate thing is that some of it is idle and is not being used for either one or the other.

Mr. SPENCE. The reason I asked that question is this: I had a letter the other day from a manufacturer who has been in business for 80 years manufacturing copper screens and weather stripping. He says, "We are not equipped to go into a defense industry. We cannot get the materials to continue the business that we are in. It will result ultimately in our discontinuing our business unless some help can be given."

Governor, what help do you think you can give to people like that?

Mr. ECCLES. I doubt if any can. I think there are possibly a great many concerns that will have to close down for the duration.

Mr. SPENCE. What percentage, would you say?

Mr. ECCLES. Oh, I don't know. I am not in a position even to guess that.

Mr. SPENCE. You also said that we ought to dampen the civilian demand for goods. You have a great, powerful instrumentality for doing that, have you not, through the Federal Reserve System?

Mr. ECCLES. I think we have a very impotent instrumentality to do that.

Mr. SPENCE. A great many people think that in normal times you could establish and maintain a price level through your reserve requirements, discount rates, open-market operations, and the policies that you pursue in the examination of banks. What do you think about that?

Mr. ECCLES. I think that any portion of the public that has any such view as that is 100-percent misinformed.

Mr. SPENCE. You can have a great effect upon the volume of money, can you not?

Mr. ECCLES. We can have practically no effect upon it.

Mr. SPENCE. You cannot?

Mr. ECCLES. We have no powers

Mr. SPENCE. Isn't the increase of the reserve requirement, that takes that money out of the current of business

Mr. ECCLES. We have no power to increase the reserve requirements. Mr. SPENCE. Now you haven't, but you did have. What effect did that have on the situation when you did increase it?

Mr. ECCLES. Of course, you could create a tight money situation to the extent that you could force the banks of the country to liquidate or to borrow from the Reserve System. That would certainly curtail further credit, and to the extent that they curtailed credit they would curtail further expansion of the supply of money. Bank credit is the basis or the source of our money supply largely.

Mr. SPENCE. What effect would that have on the price situation? Mr. ECCLES. I think that if the curtailment were pursued to the point of increasing very substantially the interest rates and curtailing the use of credit and bringing about a liquidation of credit, that that could have a deflationary effect.

It would depend, however, on other factors. In other words, if that were done, you certainly would create a climate favorable to deflation and against inflation.

On the other hand, I think in the last war at no time were there any excess reserves; and all during the period of the war we had a tightened money situation, which was entirely unjustified, a policy which I don't think should have been exercised. But we had a tightened money situation. The banks were borrowing heavily from the Reserve System throughout that entire period, and the interest rate on Government financing, if you recall, was more than 4 percent on the tax-free securities, and other rates were proportionately high.

Now, in spite of that money situation we still got a very big inflation, showing that the factor of inflation and deflation is the total spending power in relationship to the supply of goods; and while the