uary 21. The Council judged that the need for flexible decision making in the period ahead was of paramount importance in order to protect the nation's jobs and income.

In retrospect, the energy crisis may have influenced the public perception of controls and decontrol. At first, it was feared that the inflationary surge caused by the tremendous increase in crude oil prices would stiffen public resistance to decontrol. However, it was the shortage aspect more than price increases of the petroleum situation that influenced the public consciousness. People became aware that, in shortage situations, controls can be more disruptive than the price increases that would occur in a free market situation.

The auto industry was the first beneficiary of the energy crisis; its most recent prenotifications for price increases were pending before the Council in late November.

AUTOMOBILES

On November 20 and 21, the Council held public hearings on these proposed price increases. Under the Council's regulations permitting pass-through of allowable costs, the auto industry was eligible for large price increases across its product lines. In an Executive Committee meeting held to discuss these proposed increases, a senior staff member half-joked that the Council should decontrol the automobile industry. This comment started Conlan thinking about the possibility of exempting autos if the proper commitments could be arranged.

Autos had been considered a late or middle target in the original decontrol plan. The impact of the energy crisis, however, was expected to generate an unusually sudden shift in demand for smaller cars beyond the immediate capacity of the industry to produce them. Most manufacturers had announced layoffs of production workers; and unless the industry could produce additional amounts of smaller cars in the near future, auto production could be expected to decline markedly for the remainder of the production year.

Although it was likely that decontrol of the giant automobile industry would not be popular, the danger of economic recession as a result of the energy crisis loomed sufficiently large that it justified exploring decontrol possibilities. Over and above the relief that might accrue to the auto industry itself, the overriding concern of the Council was the impact that a serious slowdown in the auto industry could have an overall economic activity. The large numbers of workers and businesses that are, in some way, economically dependent upon the automobile industry, is dramatized by the fact that

the automobile strike of 1970 was largely responsible for the recession at the end of that year. The cutbacks in auto production and employment, announced by the industry in the late Fall of 1973, raised the spectre of a repeat of such an occurrence. This, in combination with possible energy-related industrial shutdowns, could prove to be economically disastrous for many more industries than simply the automobile industry. If the Council could obtain the major auto companies' consent to limit their price increases for the rest of the 1974 model year and to shift as rapidly as possible to small car production, decontrol would provide the best arrangement for achieving the goals of economic stability in a broader context than the Program had ever before been forced to operate. Furthermore, this was a true "target of opportunity" to get on with the business of decontrol. However, the Council's organizational attitude had not yet changed from a mode of continuing, to one of removing controls.

A staff expert on the auto industry, with responsibility for drawing up an option paper on alternatives for the auto situation, left out the exemption option. After reviewing the draft, Conlan insisted that the decontrol option be reinstituted for presentation to the executive Committee. The option was not taken seriously there. The exemption of such a large and relatively untroubled industry would perhaps raise the hue and cry of big business favoritismunless satisfactory commitments in the public interest were a part of the action. Dunlop was intrigued enough to take the idea to Shultz, who liked it. Conlan and Bert M. Concklin, Administrator of the Office of Price Stabilization, were quietly assigned to explore the possibility of agreements with the auto industry.

After days of marathon telephone negotiations with the surprised auto industry, an agreement was finally hammered out in which all of the companies, except Chrysler, had independently agreed to the same conditions. On any number of occasions during the delicate and confidential negotiations, the possibility for the successful completion of the process nearly broke down as the companies and the Cost of Living Council would come together and drift apart on a variety of issues. Various parties would become hesitant. At each step Conlan and Concklin would work to salvage the deal, seeing it as an important economic step as well as a step towards decontrol of the economy.

The biggest threat to derailment of the plan came when Chrysler finally refused to go along with the commitment arrangement. They preferred to take their chances with existing regulations under which higher prices could have been charged than under the terms of the commitment. For a moment, it looked as if the opportunity had

escaped the Council, but it was quickly pointed out that the agreement could proceed since Chrysler would be forced by the market to keep its prices in line with the other major manufacturers. Further, it would be to Chrysler's disadvantage to be restricted by the market and not have the public relations advantage of having made the agreement the others had. With this reasoning, Chrysler's recalcitrance did not prevent the exemption from taking place.

When it appeared that the agreement was finally "cooked," Dunlop canceled a weekend trip and went, on Saturday, December 8, with key senior staff members to see Secretary Shultz who approved the agreement as it then stood.

The exemption was announced to a surprised press on December 10, 1973. The largest manufacturing industry in the nation had just been exempted from controls, but had promised price restraint. The broad, macroeconomic exigencies of the energy crisis presented an opportunity for the Council to begin the decontrol process and defuse the criticism that it was not serious about getting out of controls. The action was widely construed to be a signal that the Council was serious about decontrol. On the day the action was announced, the Cost of Living Council's Consumer Counsel, Mary Kay Ryan, was at a consumer meeting and reported the reaction to the exemption as favorable.

This arrangement was announced as a conditional exemption. In the most explicit terms up to that point, the Council asserted its right to recontrol the industry if the auto manufacturers did not abide by their voluntary commitments.

Following its exemption, the auto industry made several efforts to obtain additional price increases citing the "unforeseen economic events" clause. However-with the exception of permitting American Motors to increase its wholesale prices by $150 instead of the original $100 figure-the Council held firm to its perception of the original commitments. A clarification in the treatment of destination charges was permitted and resulted in some price adjustments that the Council deemed to be within the bounds of the agreement, although this was subject to some controversy within the Council.

As the Program drew to its statutory conclusion in the Spring, a series of price increases were announced and implemented by the auto companies in violation of the agreements they had made. The Council responded angrily in public statements, but with statutory authority expiring in a short time, considerations of recontrol were not implemented.

The next major exemptions, semiconductors and mobile homes, did not occur until more than a month after the auto exemption. One reason for this delay was that the Council wanted to gauge public reaction to this landmark exemption. Another cause for the lack of exemption action was that the Council's decontrol analysis process was being developed and refined at this time, and had not yet provided the Council with many finished products. Studies had been completed in mobile homes and semiconductors but negotiation of commitments, especially in semiconductors, was time consuming.

The major factor behind this dormant period, however, was that the Council had to evaluate the impact of the worsening energy situation on the economy, on decontrol policy in particular and on Stabilization policy in general. The original economic scenario that underlay the Phase IV decontrol strategy was in shambles as a result of the explosion in petroleum prices and the possible impact of energy prices and fuel shortages on industrial activity and employment. Knowledge of how and when these affects would work their way through the economy seemed to be essential before moving ahead with decontrol policy.

TRANSITION DECONTROL ACTIONS

The de facto hiatus in major decontrol actions did not extend to all decontrol activities. A number of smaller and economically less significant industries were exempted during this period. Throughout Phase IV there was a strong commitment by the Council to give careful attention to the problems of small as well as large industries. The mere fact that an industry did not, by itself, have a major impact in the economy did not mean that its health was not as critical. Thus, the Council made a point of granting specific exemptions to a number of such industries, as rapidly as possible, wherever decontrol seemed appropriate. In many cases, the industries were already largely exempt through the small business exemption; thus the Cost of Living Council action served to equalize conditions in the industry. These exemptions are described in Economic Stabilization Program Quarterly Reports and press releases covering the December, 1973January, 1974 period.

At the end of January, with the decision having been made to proceed with decontrol despite the energy crisis, a number of significant exemptions took place. After three months of study and debate at the senior staff level, the first of a series of petrochemical actions took place on January 30. On the same day the Council exempted rubber tires and tubes, citing the close relationship of this

industry to the petrochemical problems dealt with the Council's other January 30th exemption. The complex petrochemical actions are described in Appendix III.

Decontrol, Full Speed Ahead

The reassessment of decontrol and decision to proceed in early January was followed a few weeks later by another "stutter-step" in the decontrol policy process. As the retail trade sector, which had been under study since mid-November, came up for Executive Committee decision in mid-January, another decision had to be made. This decision effectively sealed the Council's Commitment to proceed as rapidly as possible with decontrol.

John Dunlop was scheduled to appear on February 6, 1974, before the Subcommittee on Production and Stabilization of the Senate Committee on Banking, Housing and Urban Affairs to testify with respect to the upcoming expiration of the Economic Stabilization Act. There was considerable debate among Council staff as to whether a major exception such as retail trade should be announced before or after formal testimony on extension of the Act had begun. It was unclear how such an action would affect Congressional attitudes towards the proposals that the CLC was about to put forward. Finally, after consultation with Secretary Shultz, it was decided to announce the retail trade exemption as planned, prior to the testimony, thus signaling the Council's intention to the Congress that decontrol was a serious business, but as the testimony would point out, so was the need to deal with inflationary problems.

This decision coincided with the completion of a number of industry analyses relating to decontrol and the maturation of the internal administrative and procedural machinery necessary to analyze, decide, write regulations on and announce exemptions. Thus, by the end of January, the Council's attitude toward decontrol had become the inverse of its thinking during the early Phase IV period. The Council now was concerned with decontrolling the entire economy with the express exception of those sectors where controls could make a positive contribution; whereas previously the Council's bent had been to continue to control the entire economy except for those sectors where decontrol was essential to minimize dislocations and distortions.

RETAIL TRADE

Since the beginning of Phase II, controls on the retail trade sector had often been the focus of debate. Most arguments suggested that retail trade should not remain controlled because it was sufficiently