That chart conveys two immediate conclusions.

First, that every great war in our history has been followed by a stratospheric rise in price.

If you will look at the chart, you will see the bulges are the War of 1812, the Civil War, post World War I, and now post World War II. It is apparent from the chart that we are today in a new stratospheric price level even after the price break. The January 1948 wholesale price index runs off the chart.

The CHAIRMAN. Are the prices weighted to any particular level of value?

Mr. GAINSBRUGH. Yes, sir; they are stated in terms of 1923 as 100. The same is generally true of both indexes, the wholesale price index, or the consumer price index.

That conclusion is already known to you, and there is very little novel about it.

The fatal overtone comes from the second aspect of this chart. Once that stratospheric level of prices has been reached, there is no gentle descent from the stratosphere; it is precipitous, like a bobsled run.

In the case of the wholesale price index, for example, in 1920, it broke from, as I remember, 158 down to 100, not in a period of years but in less than 6 months.

And it is against that backdrop that I offer the result of the survey we have taken. Never before in our history have we been able to readjust subsequently and without cataclysmic repercussions to a new postwar price level, and certainly anyone in Government or industry who contends we can stabilize our present price levels has the burden of proof on him.

As I said earlier, immediately upon the receipt of Mr. Stam's telegram, we addressed the following questionnaire to all of our membership.

I have copies of the questionnaire with me, so they can be studied. The CHAIRMAN. Do you mind if it is put in the record?

Mr. GAINSBRUGH. No.

The CHAIRMAN. I believe it would be a good idea. (The questionnaire is as follows:)

NATIONAL INDUSTRIAL CONFERENCE BOARD, INC.

247 Park Avenue, New York 17, N. Y.

QUESTIONNAIRE

In view of the speculation regarding the significance or effect of the recent break in certain commodity prices and securities, we are taking another reading of the general business outlook. We are particularly interested in changes in policy and in estimates for 1948 which may have been made recently. In addition to comments on the general business outlook, we would appreciate your answers to the following questions:

1. How do you expect your level of operations for the first half of 1948 to compare with that for the last half of 1947? What do you expect the trend to be in the last half of 1948? (If you can give us estimates expressed in percentage terms, we should like to have them.) How do your current estimates for 1948 compare with those made at the end of 1947?

2. What is the current trend and outlook for new orders? Has any marked change in trend been evident since the break in prices? Have there been any significant developments with respect to cancellations? What, if any, important changes have you made in inventory policy?

3. What is the outlook for net income after taxes for the first half of 1948? What is it for the second half? (Your views on the financial results of opera

What

tions for the first and second halves of 1948, together with comments on any changes in your break-even point, would be particularly appreciated.) do you expect the trend of prices of your products to be in 1948? I know that, as usual, we are asking numerous as well as difficult questions. However, our thought is to provide you with a rough framework within which we would like to get your comments on the outlook for your company and industry as well as business generally. In order to meet our dead line, we would appreciate your reply by March 18.

Mr. GAINSBRUGH. We asked them the following questions, but we did not indicate the results were going to be submitted to this group [reading]:

In view of the speculation regarding the significance or effect of the recent break in certain commodity prices and securities, we are taking another reading of the general business outlook. We are particularly interested in changes in policy and in estimates for 1948 which may have been made recently. In addition to comments on the general business outlook, we would appreciate your answers to the following questions:

1. How do you expect your level of operations for the first half of 1948 to compare with that for the last half of 1947? What do you expect the trend to be in the last half of 1948? How do your current estimates for 1948 compare with those made at the end of 1947?

In a sense, we were getting some readings we could submit to you with respect to business operations for the first and second halves of the calendar year 1948.

The second question we asked this cross section of top management in American industry [reading]:

What is the current trend and outlook for new orders? Has any marked change in trend been evident since the break in prices?

And then, in the light of a great deal of street gossip [reading]: Have there been any significant developments with respect to cancellations? What, if any, important changes have you made in inventory policy?

That was the second series of questions we asked.

The third series of questions we asked related to their profit outlook for 1948 [reading]:

What is the outlook for net income after taxes for the first half of 1948? What is it for the second half? What do you expect the trend of prices of your products to be in 1948?

That questionnaire was mailed on March 3, 1948. Up to midnight, when I was drafting some of this for today's meeting, we had gotten about a third of our response from our membership, but we had received enough so that in rough proportion terms, we do not believe there will be any marked change in the final tabulation. We will, of course, be happy to make the final tabulations available for you within the next week or two.

But I thought it important that you get the preliminary run of our findings on this question. I submit to you a digest of my testimony.

(The digest referred to is as follows:)

DIGEST, TESTIMONY, MARTIN R. GAINSBRUGH, CHIEF ECONOMIST, NATIONAL INDUSTRIAL CONFERENCE BOARD BEFORE SENATE FINANCE COMMITTEE, MARCH 10, 1948

Business activity will continue at a high level throughout the first half of this year, and there is more than an even chance that manufacturing production will not recede even in the closing half of 1948. Ninety percent of the replies of our survey in the business outlook as of March 1 received to date indicated that the

rate of factory operations would be as high during the first 6 months of this year as in the closing half of 1947. Of this 90 percent, 60 percent of the replies placed the level of activity at the same rate as in the last half of 1947, while 30 percent of the respondents believed their output would rise above last year. Only 1 manufacturer in 10 expected the operations to slump below earlier volume; this downturn was confined primarily to output of leather products.

At least half of the group surveyed believed their rate of operations would not decline in the closing months of 1948, while an additional 20 percent anticipated even larger volume in the closing than in the opening half of 1948. Only 30 percent foresaw a lower rate of operations after midyear.

Despite the commodity price break which developed in the early months, only 1 manufacturer in 4 has thus far found it necessary to revise the forecasts upon which his operating plans for 1948 were originally based. In their replies the manufacturing group placed primary emphasis upon the fact that new orders had held up well and that a wave of cancellations, which some anticipated after the commodity break, did not materialize. About 90 percent of all participating in this survey reported there had not been any recent change in the rate or volume of cancellations in their own enterprises.

In almost all instances, however, the manufacturing group warned that a third round of wage increases, if it develops, would again necessitate upward price adjustments. If, however, no material increase occurs in labor costs or in the cost of raw materials, the majority of manufacturing enterprises foresee no rise in the prices of their products. Only about one-sixth believe their prices will decline in 1948 under these conditions, while a like number foresee the necessity for an upward adjustment of their prices. But at least two-thirds of all participants could maintain their present price lines, if the costs of labor and raw materials are kept in check.

Manufacturing profits will tend steadily downward during 1948. Nearly half the group surveyed expected their net income in the opening half of the year to slip below last year's record levels, while 60 percent of the group anticipated lower profits in the closing than in the opening half of 1948.

Virtually all of the replies received indicated that the break-even point in manufacturing was steadily rising. Even at higher levels of operation the costs of doing business are steadily absorbing a rising share of the dollars manufacturers receive from their customers. Even a modest decline in prices or in the volume of output, many manufacturers warned, would virtually wipe all profits because of this very sharp advance in the break-even point. Increasing consumer resistance to higher prices and the shortage of working capital are also among the major concerns of manufacturers today.

RECENT PRICE BREAK A SALUTARY CORRECTIVE

Almost all of the commodity prices which declined recently were unbalanced on the high side, prior to the break. "There have been few if any recent price declines in those commodities whose prices were low or in balance with the general level of wholesale prices. Because the price break was confined primarily to overpriced items it was not contagious. As a result the price corrections were salutary and brought the prevailing price level and the pattern of prices within it into balance with the Nation's inflated money supply, the current high costs of social overhead and high labor costs per unit of output. There is no convincing evidence as yet that the prevailing price level prevents or forecloses a level of consumption expenditures which will support it. Such changes as are occurring in retail sales and consumption expenditures have been steadily in the direction of more stable and desirable relationships between income and specific types of consumption, rather than toward continuance of the abnormal relationships developed during the war and in the immediate postwar period.

We are rapidly moving from the easy, catch-up stage of the initial postwar period into the next unknown postwar period. The next stage will be characterized by more violent competition for the consumers' dollar as backlogs are exhausted and supply approaches prevailing levels of demand. The composition of production and consumption in the next stage needs far more attention in business and market research than it has thus far received. "We know as little about shifts in production, employment, and consumption at a stabilized price level or with shrinking national income, as we know about the upswing from a national income of less than $100,000,000,000 prewar to well over twice that amount currently."

The low proportion of the consumers' dollar spent for optional items of consumption, such as automobiles, is a particular element of strength in the current business picture. "A high rate of optional spending is rightly regarded as a vulnerable element. Such spending rises more rapidly on the upswing of income and contracts more violently on the downswing. Where little signs of weakening of saturation are found in optional consumption, a strong basis exists for the continuation of both high consumption expenditures and sustained high production."

Optional or sensitive consumption is today not as high, relatively, as in previous periods of high employment. As best we can estimate it for 1947, optional expenditures accounted for only 13 percent of total consumption expenditures as compared with 18 percent in 1929 and 14 percent in 1941. The bulge in 1946-47 came primarily in semioptional outlays rather than in the volatile optional items. There is little evidence here of extreme vulnerability of consumption, particularly in light of the backlog for new cars and other durable optionals.

The bulk of our consumption is still in the forms of consumption which will not depart too violently from changes in the rate of income contraction. This backdrop of unparalleled strength in optional consumption which is far from saturated may for at least the immediate short term tower above the foreboding backdrop of the historic pattern of postwar price collapse after previous

wars.

Mr. GAINSBRUGH. Business activity will continue at a high level through the first half of this year and there is more than an even chance that manufacturing production will not recede even in the closing half of 1948.

In response to our first question, which was [reading]:

How do you expect your level of operations for the first half of 1948 to compare with that for the last half of 1947?

Thirty percent of all respondents believed that their volume would be higher than in the last half of 1947, and 60 percent believed there would be no change.

That, then, gives us a total of 90 percent of the replies received to date which indicated that the rate of factory operations would be as high during the first 6 months of this year as in the closing half of 1947. That is the answer to our first inquiry.

The second question we asked was [reading]:

What do you expect the trend to be in the last half of 1948?

Of all the responses received, 20 percent believed their operations in the second half would be higher than in the first half of 1948. Fifty percent believed there would be no significant change in rate of operations for the last 6 months of 1948 as compared to first 6 months of 1948; 30 percent believed there would be a curtailment of operations in the closing half of 1948.

That led me to my conclusion that there is more than an even chance that manufacturing production will not recede even in the closing half of 1948.

In the light of the serious price development, it is also significant to report their findings and their answers on the question we asked as to whether they had to change their budget or change their forecast for 1948: 75 percent of the respondents indicated they had not; 25 percent found it necessary to change their budget.

That, then, I offer in relation to the first assignment: What is the probable level of operations during the calendar year 1948?

Now, what about the outlook more specifically?

Have new orders shrunk since the price break and have cancellations increased very sharply since the price break?

A third of all the manufacturers responding indicated that their new orders had risen in the first 2 months of 1948 rather than declined, and 42 percent indicated no change, which gives us 75 percent in which the new-order position is strong.

Now, on cancellations, I think it a significant finding: In the first 2 months of operations with which our membership has had experience, 90 percent replied there had been no significant increase in cancellations; their backlogs are just as firm as they were at the beginning of the year. Eighty-five percent indicated they had not even changed their inventory policy, shortening their lines.

The only industrial area in which cancellations appeared to be of significance or material size is in the leather industry. There we did get indications of slowing off in new orders and cancellations increasing.

The CHAIRMAN. These questionnaires were made subsequent to the recent break?

Mr. GAINSBRUGH. Yes, sir. This letter did not leave our shop until March 3, after the receipt of the telegram from Mr. Stam.

There has been so much speculation as to business conditions, we found it necessary to go right to industry to find if the price break had yet had a telling effect upon the plans of operations, budgets, and so forth.

That leaves me, then, with the third major area about which we inquired, the outlook for the profits, and the trend of prices. And there the picture is not so rosy as the responses for the two other groups of questions.

There is apparent a shrinking level of profits quarter by quarter for American industry in its report to us.

Comparing the profit, or net income, for the first half of 1948 versus the second half of 1947, we get these results: 40 percent believe their profit will be up the first half of 1948 as compared with the last half of 1947; 45 percent believe their profits will be down, and 15 percent believe there will be little significant change.

The picture grows less rosy in the second half of 1948. There the results show 60 percent believe their profits will be down, 20 percent believe it will bring no change, and only 20 percent believe their profits in the second half will be higher than in the first half.

Now, for the reasons as to why it is that they believe profit margins will shrink despite a favorable level of operations in 1948.

Perhaps the largest single factor that was cited in virtually all the replies that have come in thus far is the steady rise in the break-even point. Their fixed costs are rising. Their variable costs are rising, and their margins on sales have been decreased.

That is evident likewise in the President's economic report, table therein contained, and profit margins.

(See pp. 128-129 of the report.)

The CHAIRMAN. Was there any comment on the increase in competition?

Mr. GAINSBRUGH. That would follow.

The point that was first named was increasing level of the breakeven point, and the figures are startling when they are stated in percentage terms. Some of them indicate their break-even point has risen by 10 percentage points, not 10 percent. Others have somewhat lower magnitude.