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The second point that was developed in most of these letters. (Our inembership has grown accustomed to cooperate with us. When our questionnaires are returned to us, they are not returned to us in figure form. They are usually single-spaced letters of two pages or more; that is, if the question is of interest to our membership. We have learned that through a process of mutual education.)

The second major point that was stressed in most of the letters by way of explanation for the forecasts of diminishing profits was what I will later refer to as the end of the postwar period, the catch-up period, and the beginning of the second postwar period, the period of a coming into balance of supply with demand and the period in which we must solve the economic problem of either stabilization of price or a declining price level which would inevitably bring with it depres

a sion levels of activity.

That was second in most of the responses received, that the cream has been taken from much of the consumer market. More and more goods are becoming available for competition within the market. I will develop that point a little bit later and at greater length.

A third point is one you heard so much about this morning, and perhaps in preceding meetings. That is, shortage of working capital.

With every notch in the price spiral it becomes necessary to carry larger inventories, to carry larger pay rolls.

Small- and medium-sized manufacturers have been in to see us for the last 3 or 4 months, wondering how it would be possible for them to secure working capital to meet their expanding pay rolls, their expanding machines, and their expanding inventories.

The business looks good when it flows in. There is a record here of continuing flow of orders into these businesses.

On the other hand, there is a tightening of credit for carrying inventory and some of the other short-term obligations of industry.

So here we have many manufacturers in this survey, and we will have more as our survey progresses, reporting they are squeezed between two millstones.

One, is that the volume of business operations is rising, and they are glad to have it.

Secondly, the possibilities of financing that larger volume of operations is steadily being foreclosed to them through the tightening of credit.

The CHAIRMAN. Do any of those gentlemen that talk to you or write to you, state specifically that the bankers are getting tighter with their credit?

Mr. GAINSBRUGH. Yes. I do not believe there is any secret about the voluntary program that some of the associations have suggested to their memberships.

The CHAIRMAN. I know it is true as a generality, but I was wondering if it had reduced itself to specific cases that have come to your attention.

Small-business men, for example, have talked to me and have pointed out that the credit line they got some time ago may not be as stable now as they had planned; that the bankers are commencing to urge caution; and there are intimations that perhaps greater credit reductions are in order than was originally counted on.

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Mr. GAINSBRUGH. That is the general impression I have gotten from my conversations with our associates, but I have nothing specific with which I can illustrate.

I can simply tell you it is a growing fact of life, particularly in medium- and small-sized business.

I should say on the whole, the results of our survey run counter to thinking in many areas with respect to the imminence of depression or recession in the

year

1948. I did paint a rather dark picture for you in connection with our long-term historic price position, and I would like next, if I may, to discuss for a minute or two the price and production pattern that will accompany in greater detail this type of study.

Our favorite tool for policy making, both within Government and outside of Government, is our national income.

I lecture on national income at New York University, I am a member of the Conference on Income and Wealth, and have been for 10 years or more. So I am at least conversant with the mechanics of national income computations.

I would like to suggest this simple line of development for your thinking: That national income in its essence is nothing more than the compound of two variables.

On the one hand you have production, and on the other hand you have price.

It is nothing more than physical output of goods and services multiplied by price. That is all it is.

If we look at those two variables, then we have a fairly good idea as to what the future course of national income may be.

We certainly should have no great difficulty speculating about the maximum from the production side, the maximum variable from the production side.

Last year, the Council of Economic Advisers set its goal for 1947 as an increase of 5 percent. It sounds small, an increase of 5 percent in the total physical volume of goods and services during that year.

I happen to be a member of the Business Advisory Committee of the Council of Economic Advisers, and sat with them on Monday. So that, in part, my presentation incorporates the thinking of the Business Advisory Committee.

Five percent, although small, was not attained, was not achieved in 1947.

As best we can estimate, possibly our physical output of goods and services last year rose by about 3 percent, despite the increase of 20 or 25 billion dollars in gross national product.

While there were some other large totals in our national economy, there was only a 3-percent increase in total physical output of goods and services.

This year the Council of Economic Advisers, and the President's economic report, set as its goal an increase of 3 percent in physical output of goods and services.

Again, there is an indication that that will be reached with a great deal of difficulty.

Low as those figures may seem, a review of the growth of national income in terms of goods and services over the entire span of years for which national income figures are available would indicate an increase of about only 1.9 percent per annum.

That, of course, has a restraining effect on the future operation of the particular business.

So, we cannot expect too much from the production side as an offset to any unfavorable price development in 1948.

That leaves us with the most volatile element—the price element. Lower prices not accompanied by an increase in production would inevitably mean lower national income.

I painted before the bodsled run of prices, both on the wholesale index and the cost of living index.

Once the zenith of price has been reached in a postwar period, what argument conceivably can be advanced to say that the time is not yet in 1948, or perhaps more pertinent even-what are the elements of distinction in the price picture, 1948, as compared to 1920? What exists today that was not present in 1920 that will give stability to the price picture, the price level in 1948 ?

And there one basic fact immediately emerges.

I have here another in my series of charts which compares prices post-World War I and post-World War II.

(The chart will be found facing this page.)

Mr. GAINSBRUGH. What we did in these charts was to compare the course of prices by major economic groups. In other words, show the comparative course of wholesale prices for farm products, raw ma- . terials, semimanufactured articles, manufactured products, and all commodities.

And the essential line of distinction between the price picture now and the price picture then is that the items that are most out of line

up

side are concenrated in the raw material and farm areas. They are not in general out of line in the manufactured and semimanufactured field.

In contrast, post-World War I, the sharpest price increases came in semimanufactured articles and in manufactured products as well as in farm products.

So, when the price bubble burst, correction was needed throughout all sectors of our society.

This time, the pattern is quite different.

We have within recent weeks completed an intensive analysis of the normality of prices by price groups, which prices today are on the high side; which prices are bargains; which prices are in balance.

And from a series of charts that we have set up here, it is readily apparent that for the most part, manufactured goods and semimanufactured goods are in balance with our general wholesale price level, while a few commodities, primarily in the farm area, have been out of balance with our general price level.

On the high side were the cereals, cotton, and building materials.

The significant part of our price development, since the price break, is that few if any prices that were in a balanced position or on the down side have declined.

The decline has been concentrated in those particular commodities which were, let us say, overpriced relative to the existing price level.

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This leads to the conclusion that thus far, at least, price decline has been concentrated in the area in which reduction will be most salutary. They have not spread to other areas in which prices are justified in terms of today's high taxes, high labor costs, and high burden of interest charges on our public debt.

I will leave that study for the record. (The study is as follows:)

[From the Conference Board—Business Record, February 1948]

PRICES: A STUDY IN DEVIATIONS

PART ONE

Price increases since 1939 among the subgroups under study range from 46.8 to 368 percent, as compared with an average gain of 106.9 percent in all prices. Similar differences appear when gains since June 1946 are studied.

These variations in rates of increase within the price structure are often even. more important as a business factor than the corresponding gains in the general average of all prices.

The first step in determining what prices have led the advance is the very simple one of finding out where the percentage increases have been the largest. The last two columns of table 1 show these relative changes from 1939 to November 1947 and from June 1946, when many of the controls were relaxed, to November 1947.

Thus, the largest gains were recorded by oils and fats, hides and skins, lumber, cotton goods, grains, other farm products, and foods. These an one or two others, including leather and building materials, were the leaders in the rise, both over the longer and the shorter periods.

But this kind of simple analysis does not tell the whole story, Some prices and some groups of prices are generally much more subject to fluctuation than are others. They go up faster when all prices are rising and they go down faster when prices are falling. Some groups are subject to influences which do not bear upon prices in general and which may cause upward or downward movements more or less independent of other prices.

Wholesale Price Indexes for Paper and Pulp and

for All Commodities Sources: Bureau of Labor Statistics; THE CONFERENCE BOARD

Index Numbers, 1926=100

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Wholesale Price Indexes for Woolen and Worsted

Goods and for All Commodities Sources: Bureau of Labor Statistics; THE CONFERENCE BOARD

Index Numbers, 1926=100

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Wholesale Price Indexes for Iron and Steel and for

All Commodities Sources: Bureau of Labor Statistics; THE CONFERENCE BOARD

Index Numbers, 1926=100 200

IRON AND STEEL

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