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BASIC POLICIES

We have studied in great detail a number of such proposals. As a result of these studies we have adopted the following basic policies:

1. For the foreseeable future we are not prepared to take decontrol action in any consequential area. “Decontrol" connotes an outright and permanent casting off of control, which in the present situation would be dangerous. We will, of course, continue to decontrol commodities which are not significant from the point of view of the stabilization program under appropriate standards which were developed early in 1951.

2. Instead of decontrolling important commodities where markets are "soft," we will suspend ceiling-price regulations or lighten reporting or record-keeping requirements, using standards under which we can objectively determine that such action is appropriate.

Because of the variety and complexity of situations, we are firmly convinced that workable standards for suspension cannot be based on a mathematical or "push button" formula. In fact, we feel that no single standard can properly cover all areas which will have to be considered for relaxation or suspension of controls. Therefore, we believe it preferable to commence with the development of preliminary and perhaps limited standards, and with “pilot" action under those standards, rather than to attempt at this time to formulate a comprehensive and permanent program for relaxation or suspension of controls. This also has the advantage of permitting any evaluation of our actions and our standards as we proceed.

3. We will not suspend controls where such action would result in levels of prices or margins higher than permitted under existing regulations. The agency's pricing standards are adequate to grant adjustment where needed and they should continue to be used for that purpose.

4. We will see to it that suspension is always terminated before previous ceiling levels are reached.

To summarize this portion of the report, then, I can say that we have rejected "decontrol”; we have rejected “push-button" formulas for suspension; we have rejected suspension of ceilings as a means of giving price relief, but we have decided that we can and should undertake suspension or other relaxation of controls where appropriate standards are met, and where appropriate safeguards can be provided

Now, what should these standards and safeguards be?

At the outset, our committee faced this problem: careful study convinced it that no one set of standards could be developed to handle all cases; to develop standards in advance for all types of situations would undoubtedly take a long time. Not only would this delay any suspension actions in the easier kinds of cases, but it would also forego the advantages of experimentation and trial and error which would facilitate the improvement of the standards.

Therefore, the committee reached what I believe was a sound decision as to its procedure.

1. It would develop preliminary standards to fit the easiest class of cases;

2. It would test those standards by applying them to selected commodity situations in which suspension had been urged upon OPS;

3. On the basis of careful study of these commodities, the standards themselves could be evaluated and if necessary revised;

4. Some commodities could then be suspended if they met the standards;

5. The results of these suspension actions could then be watched while the committee went ahead with development of standards for a more difficult class of cases.

For many reasons the easiest class of cases was the class of primary products where dollars-and-cents ceilings were in effect. Here "softness" could most easily be measured; price movements after suspension could most easily be watched; there were fewer “mixed” situations in which prices for some grades or types or in some locations are at ceiling and other below; there were few administrative problems for sellers because commodity lines tended to coincide with business lines; and so on.

The preliminary standards developed for this class of cases are outlined in our report, beginning on page 3. I shall merely summarize them,

1. Before we suspend or otherwise relax controls, we must find that prices in an area are materially below ceiling, and that there is clear prospect that they will not shortly rise to ceiling. We have the problem of determining what the area' is for which we make this finding, we must specify what we mean by "prices,'s

and what we mean by "materially below ceiling.” With respect to the last of these, we were unable to set any uniform percentage figure applicable to fall situations. It has to depend on the volatility of prices, seasonal movements, the extent to which individual grades or types vary in relationship to ceilings and other factors. The finding that prices are not likely to rise to ceiling must be based upon a full economic analysis of market prospects. We obviously don't want to suspend this week, and next week find prices back at ceiling levels.

2. Assuming we find an area which meets the above standards, we must first establish certain safeguards before we take suspension or other action. The first one is that we must have an adequate "price watching system to keep us informed of price movements in the suspended area. For the raw materials in our first group this is usually already available. When we come to some other kinds of products, we may have to set up such a system.

The second safeguard is a determination as to when and under what conditions the suspension would be terminated. You may ask why we have to do this in advance. I think there are good reasons. Suppose we suspend without this determination and then the market starts to move up. Immediately. an argument will start. Some, who want to take no chances, will urge that we place the controls back on immediately. Others, who are less timid, will urge that we wait. Some, particularly in the trade,

who may want to see the old ceiling level pierced—will urge that we wait even longer, and will try to soothe our fears by predictions that the situation is really only temporary, that we don't need to worry, and so on. Under such conditions, an objective consideration is most difficult. We would be torn by disputes, and, speaking realistically, I am afraid that we would often be tempted to wait too long. We don't, of course, propose to bind ourselves unalterably to our previous determination; in some circumstances we might get a warning signal and still decide to wait. But we will have a reasoned, objective determination, not hastily made under the pressures and heat of an emergency.

Just as we cannot provide a single uniform figure at which it is safe to suspend, so we cannot fix a single uniform figure at which controls should be reimposed, and for much the same reasons. It will depend upon price volatility, upon the efficiency of our price-watching system, upon the extent to which prices in the area tend to move together or separately, and other factors.

These, then, are the conditions under which we would suspend or relax, and the safeguards we would provide before we act.

3. If suspension action is taken, and then the suspension is terminated, the level of restored ceilings will not be higher than that prior to suspension, except as required by law. (The exception might stem from a rise in parity between time of suspension and reimposition, or a rise in costs which would make the previous ceilings no longer "generally fair and equitable.") Contracts at prices higher than presuspension ceilings will be entered into at the risk of the contracting parties. We shall not hesitate to cut across such contracts if there are good price reasons for so doing.

4. Finally, in the event of new international developments, or for any other emergency reason, I would not hesitate to reimpose controls even before the regular conditions for reimposition have been met.

These are our preliminary standards. For their first application, I now read again from our report.

"PILOT STUDIES" As noted above, these preliminary standards were primarily developed, to permit evaluation of proposed suspensions at the primary producer level, where dollars-and-cents ceilings are in effect. These standards were then tested by their application to certain commodities. Early in March the committee selected the following areas for “pilot studies”: hides, wool, and related fibers, cotton, burlap, and tallow. In the course of this work the study of tallow was broadened to include other fats and oils.

For each of the commodity areas selected for pilot studies, the working statf of the committee, in cooperation with the personnel of the commodity divisions, developed full and detailed reports covering past, current, and prospective production and productive capacity, inventories, demand, and the factors influencing demand, together with detailed statistics on market and ceiling prices, and much other related information. Many hundreds of man-hours went into these reports. These reports were then carefully considered by the whole committee, which often requested further facts.

96818—62-pt. 480

On the basis of all of the information available to it, the committee determined that the following commodities met the standards, and recommended suspension action: Cattlehides

Crude soybean oil
Kips

Crude corn oil
Calfskins

Burlap Tallow

Wo
Lard

Wool waste
Animal waste materials

Wool tops
Vegetable soapstock

Wool noils
Crude cottonseed oil

Alpaca Full. consideration of mohair led to the conclusion that suspension could not be recommended at this time.

The committee is continuing its study of raw cotton with a view to making a report and recommendation in the near future. It was held desirable to delay this report until the committee also had an opportunity to conclude its study of textiles and apparel which are currently on its agenda.

In each case, the committee's recommendations included specific conditions under which suspension would be terminated. These conditions involve both the movement of average price levels for the whole commodity area and movements of particular major grades or types. Recontrol of some commodities is made dependent upon recontrol of a related commodity. The difference between ceiling prices and recontrol points is not the same for each commodity group. The reasons for these variations include the volatility of prices, the availability of current price information, the extent to which prices of various grades move together, and other relevant factors.

In some cases, recontrol points were fixed rather close to current ceilings. In the case of fats and oils, for example, the difference between the recontrol prices and the suspended ceilings is less than 2 days' trading limit on the commodity exchange. But for these commodities, prices are available on a daily, or even an hourly basis. Where information is less readily available, or where there is greater variety of price movements among the various types or grades of the commodity, recontrol points were set rather lower relative to ceilings. We must avoid a situation in which the ceiling level would be breached before recontrol could be instituted, requiring roll-backs, and the cutting across of contracts for future delivery.

It should be noted that all of the primary commodities covered by the first set of actions have a record of sharp price volatility. Recontrol points must therefore be set somewhat further below ceilings than, under otherwise similar circumstances, may be the case for commodities which are less volatile.

PENDING MATTERS As has been indicated, the preliminary standards set forth above were developed primarily for the consideration of commodities at the primary producer level, where dollars-and-cents ceilings were in effect. The committee is now in the process of studying certain "pilot" areas at other levels of production and distribution. As these studies progress, the committee will determine what modifications and refinements of the preliminary standards or what alternative standards are appropriate. Account will have to be taken of the substantially harder problems of precise definition of an "area" the wider diversity of price movements within the area, the greater difficulty in obtaining good current price information, the absence of uniform ceilings, and numerous other complexities.

The committee is making substantial progress, and will make further recommendations.

In this further study, the committee is including the development of standards and procedures for the relaxation or elimination of recordkeeping and reporting requirements where suspension is not appropriate. One member of the staff of the committee is now spending full time in a review of our existing reporting and record-keeping requirements.

It is hoped that the committee will soon be able to develop detailed operating instructions which will permit the processing of suspension actions to be turned over to the individual commodity branches and divisions.

Mr. Chairman and members of the committee, I have given you the report I promised some weeks ago. I sincerely hope that it meets your expectations and that you will approve what we have done.

This is not a completed program; it is a developing program. I wish it were simple and easy to relax controls, and that I could have today given you not just the first chapters of the story but the full plot right down to the denouement and the epilogue. But like most major problems of price control, this is a complex and difficult one, which will tax our ingenuity to the utmost. The flexibility and adaptability of price control administration will be put to a severe test. However, there are few simple problems in this business.

I can only assure you that we are sincerely motivated by the same considerations as I feel certain you are. We want primarily to prevent inflation. But we want to do our job with the least possible burden upon our economy, and the least possible interference with free markets.

Section 401 of the Defense Production Act states the intention of Congress with respect to price controls. It includes the following words which we in OPS keep constantly before us: “It is the intent of Congress that the authority conferred by this title shall be exercised

with full consideration and emphasis, so far as practicable, on the maintenance and furtherance of the American system of competitive enterprise,

and the maintenance and furtherance of the American way of life.”

None of us likes controls, but there are times when a national emergency compels their use. It is my daily and fervent hope that the time is not too distant when we shall be talking not about selective suspension of controls, but about their complete termination.

* *

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(Reference to the following will be found on p. 2059.) STATEMENT OF Ellis G. ARNALL, DIRECTOR OF PRICE STABILIZATION, ON ELIM

INATING THE WORD "HEREAFTER" FROM THE HERLONG AMENDMENT I have been asked to give you a fuller explanation of my recommendation to retain the word "hereafter" in section 402 (k) of the act, the so-called Herlong amendment.

This word “hereafter" was inserted last year by the conference committee so as to make it clear that the Office of Price Stabilization need not change all its regulations affecting distributors merely for the purpose of complying with the Herlong formula.

Following the intent of Congress, OPS has complied with the Herlong provision in every instance when a new regulation for distributors was issued or an old one amended. The long list of these actions has been inserted into your record. A large proportion of these actions was necessary for other reasons but, whatever the basic reason for the action, when it was taken OPS recognized its legal obligation to adjust distributors' margins to the Herlong formula. On the other hand, a good many actions were taken for the sole purpose of giving distributors a wider margin and wherever section 402 (k) was applicable, distributors' margins were based on the Herlong formula.

It is a fact, however, that a great number of distributors are still operating under regulations which have not been adjusted under the Herlong amendment. From this fact the conclusion has been drawn that either the law or its administration is unfairly discriminatory. But this conclusion would be warranted only if the margins allowed distributors under regulations that have not been changed were generally smaller than the margins prevailing during the Herlong base period. There is no evidence to support this assumption. On the contrary, it is believed that the general level of distributors' margins under our unchanged regulations--especially under the general retail regulation CPR 7-is higher than during the Herlong base period.

There are hundreds of distributive trades subject to our regulations. The grocery trade is the only one from which you have received a complaint because the percentage_margins which it has been given are not based on the Herlong base period. Even in the grocery trade, there have been no real complaints from the large numbers of independent retailers.

The complaint of the grocery chains is not that they are denied percentage margins and, it must be remembered, the principal purpose of the Herlong amendment was to insure that historical pricing practices of wholesalers and retailers would be preserved. And, that is exactly the method of price control which OPS Ceiling Price Regulations 14, 15, and 16 use for wholesalers and retailers of dry groceries. Every time a retail grocery store, for example, experiences a cost increase for a dry grocery item, that store obtains a full pereentage mark-up on the increase. That means that when his invoice cost doubles, the

retailer is entitled to receive twice as many dollars and cents, despite the fact that it is hardly likely that his operating expenses would also have doubled.

The only complaint, therefore, insofar as the grocery trade is concerned, is that the percentage mark-ups it receives under CPR's 14, 15, and 16 are not based on the May-June 1950 period. That being the case, it is of basic importance to indicate just how the percentage margins which the grocery trades now receive were actually computed. These percentage margins are based on a detailed and costly survey made during the war by OPA. This survey resulted in regulations which were about the most successful ever issued by the OPA and were upheld by the courts. Since that time, prices of goods sold in grocery stores have increased by almost 70 percent. Therefore unchanged percentage margins would give the stores almost 70 percent more dollars and cents for operating expenses and profit even if they did not sell a larger physical quantity of food. Actually, they do sell a larger physical volume. It does not seem likely, therefore, that their operating expenses have increased as much as 70 percent. In spite of that, some of the percentage margins in the OPS dry grocery regulations were increased by 1 or 2 percentage points above the OPĂ margins, and we have no evidence to prove that the OPS margins generally are less than those obtained by the grocery trade during the Herlong base period.

Nevertheless, an extensive survey. now underway to collect all the facts. This is not an easy job. Grocers, like most other retailers, may retain the invoices of their suppliers and thus have a record of the prices they paid for their merchandise. But they do not generally make a record of the prices for which they sell that same merchandise—except the large supermarkets and chain stores. Even for those, there are differences in margins from store to store, from one category of merchandise to another, from season to season, and differences for numerous other reasons as well. These differences, combined with the lack of records, are the basic reason why it is so difficult to determine margins that correspond to those of a particular base period and are at the same time fair to all concerned.

Because of these difficulties, our survey will cost us many thousands of dollars. I hardly need emphasize that such a survey requires a great deal of careful preparation if the money is to be well spent. We have consulted the industry a number of times and we have conducted several advance tests. I have not had the opportunity to watch the preparations for it from the beginning and I can't tell you whether it could have been done faster. But I can assure you that the work is now being completed as expeditiously as possible.

I can further assure you that the results will have our most careful attention, There will be no unfair discrimination against the grocery trade. If the facts show that adjustments in grocery margins are justified, these adjustments will be made. You need not change the law to bring these adjustments about. We only have to complete our collection and analysis of the facts, and no change in the law could speed up that process.

A change in the law, on the other hand, could have very undesirable consequences for our administrafion of price ceilings in other distributive trades. As I mentioned a while ago, there are a number of regulations for distributors providing them with margins that are fair but are not derived from the Herlong base period. Among these important regulations are CPR 7-covering most department stores, variety stores, and mail-order sales, and specialty stores of apparel, furniture, shoes, and some appliances; CPR 14, 15, and 16-covering wholesale and retail sales of dry groceries; the GCPR-covering many groups, including drug stores, hardware stores, lumber yards, building material dealers, wholesalers of most consumer goods (except food), and numerous classes of industrial distributors; CPR 13-covering distributors of petroleum products, and CPR 31covering most imported commodities. I do not know how we could cope with the problem that would be raised in connection with these regulations if the word "hereafter” were stricken from section 402 (k). We certainly would face very considerable difficulties.

Take, for example, CPR 7, which covers department stores and many other retailers selling similar kinds of merchandise. This regulation permits each seller covered by it to use percentage margins--just what the distributors want and what the sponsors of the Herlong amendment had in mind. But the margins allowed under the regulation are not those of the Herlong base period. When the regulation was issued, it was recognized by OPS that most retailers have no records to show their margins as of some past date or period. Therefore, the margins permitted were determined by having each retailer prepare a pricing chart, which in effect is a list of the merchandise he has in stock on a specified date, with the

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