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Senator DowNEY. Certainly.

Mr. HENDERSON. I would like to say, in response to Senator Tobey's question, that we estimate that in September 1941 we were relatively in balance between the supply of purchasing power and the supply of goods. I believe the Treasury Department's estimate, although arrived at in a somewhat different way, is substantially the same. This estimate was based upon the rate of defense spending considered likely before the outbreak of war. The supply of goods in June 1942 would be about $77,000,000,000, and the demand would be about $83,000,000,000; in other words, somewhere up about $6,000,000,000 is the inflationary gap (chart 8).

That needs attention from the standpoint of taxation, from the standpoint of credit control, from the standpoint of savings—a

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greatly increased volume of savings and also very severe and effective price control. Never once in the course of all the hearings have I indicated that I believed price control in itself was sufficient. On the other hand, I do not believe that there is any way of reducing the amount of purchasing power to prevent individual commodities from getting out of line. I will illustrate that a bit later.

Senator DowNEY. May I intervene to ask upon what national income basis these figures are postulated?

Mr. HENDERSON. Upward of 97 or 98 billions of dollars.
Senator DowNEY. For the calendar year 1942?

Mr. HENDERSON. May I ask Dr. Gilbert to answer that?

Dr. GILBERT. This fall the national income has been running at an annual rate of $101,000,000,000. Next year we estimate that the national income will reach $116,000,000,000. The chart does not represent the national income but only that fraction of the national income that is in the hands of consumers and available to be spent for consumers goods.

Senator DOWNEY. Does that represent the annual rate as of June? Dr. GILBERT. The annual rate; yes, sir.

Mr. HENDERSON. Now I would like to show some of the food prices; and, Senator Tobey, I think this chart is one in which you would be interested [indicating chart 9]. It is in this area that the possibility of the control of inflation lies at the present time-the basic foodstuffs. They are wheat, barley, corn, butter, tallow, hogs, steers, lard, sugar, coffee, cocoa, beans and cottonseed oil.

Senator TAFT. Are those wholesale or retail prices?

Mr. HENDERSON. Wholesale. The solid black line shows the course of those basic foodstuffs [indicating]-a 70-percent increase since the outbreak of the war and a falling off recently to about 167, as I recall the last figure. All foods at wholesale, which include foods made out of these basic foodstuffs, plus others, at wholesale, are up to about 133. Foods at retail today are only up 19 percent.

The significance of this chart is that retail prices tend to follow wholesale prices with a lag. For some time the retailer has been averaging his prices of current buying with the stock he had on hand at a lower wholesale price and has done an extraordinary job in this emergency by trying to keep the cost of living down. That is, instead of selling, as well he might, his new goods based on his current wholesale prices, he has averaged those. But the basic foodstuffs have been increasing at a rate of about 2 percent a month. The spread between basic foodstuffs and all foods at wholesale and retail indicated on the chart shows how far the latter has to go before reaching the price level attained by the former. But the more important part of that is that these prices at wholesale have already been paid, and are a cost to the retailer, who has a fairly simple bookkeeping. It means that we are confronted with an increase in price from now on for several months, depending on the lag, which may be from 4 to 6 months. To put it in terms of the cost of living, the cost of living is up about 112 percent, and 812 percent of that has been since March of this year, and in the last 2 months it las gone up 12 percent per month.

Senator TOBEY. Of course, to an amateur or a neophyte that graph depicting a straight line in the basic foodstuffs, wholesale, would indicate to an innocent bystander that the producers have been opportunists?

Mr. HENDERSON. That is the price received by farmers; that is the farm-market price.

Senator TOBEY. The fellows who produce the goods?

Mr. HENDERSON. I thought you said the wholesalers. They started at a very low level. What I am indicating is the dynamics. I am more interested in how we go about mechanically keeping this thing under control.

Senator TAFT. To a certain extent does not that lag have to follow the basic commodity figure, at least a certain proportion of it, just as well as the wholesale price?

Mr. HENDERSON. That is right.

Senator TAFT. So that it is probably not all the way to the top, because you have distribution costs and a great many other things besides the basic cost.

Mr. HENDERSON. It tends to follow the wholesale price also, Senator.

Senator TAFT. And that lags behind the basic commodity so that the normal process of that retail price would take it somewhere above the wholesale figure, not as high as the basic commodity figure. Is that correct?

Mr. HENDERSON. That is correct.

Senator GLASS. Why does not the retail price keep pace with the wholesale price?

Mr. HENDERSON. The retailer buys replacement stock. He does not replace his whole stock, and he buys at varying prices in the market. He averages his prices. We have an arrangement that started very early with the leading retail organizations in this country who were very acutely aware of the inflation problem-more aware, I believe, than any other group. They have adopted almost as standard practice the averaging of their wholesale prices instead of trying to profiteer because of the jump in some wholesale prices by using their replacement cost as a base for their retail prices.

Senator TOBEY. That is a fine tribute you are paying them.

Mr. HENDERSON. They have done a good job, and it has been a discipline. There is, in addition, of course, greater competition in that field. But as they tend to get into scarce items the possibility of taking advantage of it enormously increases.

Senator BARKLEY. Is it not true that, taking January 1 as the date of beginning the average on that chart, the retailers at that time had their stores pretty well stocked up with goods which they had bought at a cheaper price?

Mr. HENDERSON. That is right.

Senator BARKLEY. They did not increase the price of the goods to the consumer, but they averaged it with the increased prices they were subsequently required to pay. So they have been able to keep the prices a little lower than they would have been able to keep them if they had been compelled to pay the higher prices to the wholesaler? Mr. HENDERSON. That is right.

Senator BARKLEY. But after the retailer has distributed to the public the stock of goods for which he paid the smaller prices, may it not be necessary for him to increase the price of the products to the consumer based upon the higher price he has paid to the wholesaler, even after the wholesaler begins to reduce his prices under some sort of

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control, so that after a while these lines [indicating] will meet somewhere over beyond your chart, and the high retail prices will go above the wholesale prices?

Mr. HENDERSON. That is correct.

Senator BARKLEY. Because that is based upon higher prices?

Mr. HENDERSON. Yes.

Senator SPENCER. Is it not a fact that the prices of these basic commodities started so low that the prices might still be lower than some of these other prices?

Mr. HENDERSON. I intend to cover that point. They did start from a desperately low level.

Senator TAFT. The point is well taken; but a bystander looking at that graph would look at that variation of cost.

Senator DOWNEY. Returning to this chart prepared by Dr. Gilbert, as I understand, showing the differential anticipated in June 1942 between the demand market and the supply of goods of 5.8 billions, if Congress, by some tax or withholding levy or enforced saving could extract out of the demand money of the Nation that goes into the cost of living generally an additional 5.8 billion dollars, would not our problem of inflation, at least as regards the cost of living, be largely solved?

Mr. HENDERSON. In my opinion, it would not be largely solved, because it would fall, like the rain, on the just and the unjust, on those able to pay and on those not able to pay, alike, and I think that in many cases it would be likely to increase our costs. But as for helping solve the problem and making it manageable, absolutely; yes; it would make it manageable.

Senator DowNEY. I understand, Mr. Henderson, of course, that as to goods in which there is an actual shortage for the national need you have got to guard against inflation by rationing or by price control.

Mr. HENDERSON. Yes.

Senator DOWNEY. But if a tax were levied upon the population generally, the wage earners, that took out of the market on the cost of living the differentials shown by Dr. Gilbert, of approximately $6,000,000,000, it seems to me, at least, that from an economic standpoint you have largely got your problem solved on the cost of living.

Mr. HENDERSON. Except for this. In September of 1941 purchasing power and the supply of goods were relatively in balance. Prices at that time were 22 percent above what they were at the outbreak of the war, and there was no real inflationary gap at that time.

I have taken some of the items of retail food on this chart [indicating chart 10]. The black indicates the wholesale price; the white indicates the retail price and shows eggs, butter, which are just about the same; cheese-the retail price is still one-half of the wholesale price. Flour is a little more than half. Rice is a little less than half; coffee is away down.

Senator BROWN. You are talking about the percentage of increase? Mr. HENDERSON. Yes, sir.

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