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.

(Reference to the following will be found on p. 2059.)

STATEMENT OF ELLIS G. ARNALL, DIRECTOR OF PRICE STABILIZATION, ON ELIMINATING 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.

The

There are hundreds of distributive trades subject to our regulations. 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 percentage 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 OPA 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 is 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

purchase and sales price for each item. Even though he has no records for the goods he sold last week, let alone a year or 2 years ago, he can easily compile these figures for the inventory he has on hand. And that is what he had to do under CPR 7 whenever it first became effective for any particular kind of merchandise. The retail trade is highly satisfied with this kind of regulation. It works well. It is fair to the seller and to the consumer alike. But if the Congress now decided to change the law and to eliminate that one word "hereafter," then it might be found that CPR 7 was no longer legal because its margins are not based on the period from May 24 to June 24, 1950. It might be held that OPS now has to go to work and find out what the margins of that base period were. This would be an even more complex and much larger job than the one that we have under way for the grocery trade. It would cost many hundreds of thousands of dollars. It would take months of work for many Government employees. And it would impose a considerable burden on a great many retailers. We would have to do the same thing for drug stores, hardware stores, lumber yards, distributors of petroleum products, and many other retailers. It would be precisely the kind of needless and expensive red tape that gives the Government a bad name with business.

Now, it may be said that we need not go through any such operation if we only trusted the individual businessman. It has been suggested that all we need do is to have each distributor file an affidavit stating his pre-Korea margin and then catch the few who might try to cheat. That would require each distributor to determine his pre-Korea margin on each of thousands of items he sells, if he could do so. We tried that method in our retail distilled spirits and wine regulation, CPR 78, SR 2, and received so many complaints from retailers that requiring them to determine their individual margins was very burdensome that we are now changing that regulation. In addition, that view simply ignores the salient fact that most distributors don't have any record of their pre-Korea margins. To be sure, the large mail-order houses, the big chain and department stores have such records. But the multitude of smaller distributors just don't have them. The representative of the National Association of Retail Grocers who appeared before this committee told you that retail grocers don't have this information. And every retail expert will tell you that the same is true of the small stores in every line of retail trade.

It certainly would be the rankest sort of discrimination to give pre-Korea margins to the large retailers who can show what their pre-Korea margins were and to confine all other retailers to the same margins or to give them some other margins on an arbitrary base. But that is what we might be forced to do if the law were to be changed so as to make the percentage margins of the Herlong base period the only legal method of price control in the distributive trades.

In summary, therefore, I might say that whatever small number of inequities might now be found to exist can and will be corrected by OPS under the present law, whether you follow my earlier recommendation to eliminate the Herlong amendment, or leave it in the act with the word "hereafter." But an elimination of that word might well lead to much more serious and widespread inequity, and it would certainly lead to a great deal of unnecessary and undesirable administrative difficulty, waste of Government money, and needless bother for businessmen.

PROGRESS REPORT ON "SOFT MARKET" POLICY

The primary responsibility of the Office of Price Stabilization is to prevent the economic dislocations which would result from an upward spiraling of prices during a period of national emergency. This is the responsibility which Congress conferred on the OPS when it originally passed and later extended title IV of the Defense Production Act.

It is also the clear intention both of Congress and the agency to avoid restrictions and procedures which are not necessary to the accomplishment of this primary responsibility. The great productive achievements of the American economy, the success of both direct and indirect stabilization measures, and a normal reaction to a speculative boom, all have combined to reduce, at least for a time, the need for close price control in some areas of the economy. Consequently, the agency has found it possible to proceed with the orderly relaxation of its control program where that will not now interfere with the accomplishment of its primary task, nor weaken its ability to deal with renewed inflationary pressures.

STUDY OF THE PROBLEM

Ever since, in the latter half of 1951, normal market conditions first reappeared in certain parts of the economy, serious consideration has been given to the development of appropriate modifications of price control policies. Early in 1952 the responsibility for development of these modifications was formerly vested in an agency committee. This progress report summarizes the work of this committee on the study of relaxation of controls, and the conclusions of the agency up to this time.

Many outside the agency have urged that OPS embark upon a program of selective "decontrol." Some have even proposed formulas for the automatic decontrol of commodities, or the suspension of controls when certain mechanical conditions are met. Although deceptively simple and superficially appealing, these formulas completely overlook the complex problems of price control administration.

BASIC POLICIES

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

1. For the forseeable 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 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 an 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.

PRELIMINARY SUSPENSION STANDARDS

There must be objective standards for determining when price control in a given area should be suspended. The agency must be able to justify its action or inaction in each case in terms of such standards. The responsibility involved is heavy and decisions cannot be made simply on "hunch" or "feel."

The preliminary suspension standards outlined below were designed to permit immediate examination of proposed suspension at the primary producer level where dollars-and-cents ceilings are in effect. These are the areas where soft markets can be most readily defined and techniques for suspension most readily developed. These preliminary standards will also provide the basis for such modification and refinement as may be necessary to deal with other levels and areas. Under these standards it may be more appropriate to ease reporting or record-keeping requirements for some trades and industries rather than to suspend regulations. These are the preliminary standards:

1. Suspension action or other relaxation will not be approved unless the following standards are met.

(a) Prices in an area are materially below ceilings.

(1) "Prices" include prices in contracts for future delivery.

(2) "Area" has reference to a range of related items. This range will be determined by the structure of the market and of OPS regulations. It will take account of the practicability (both from the standpoint of sellers and of OPS) of separation between suspended and nonsuspended items.

(3) Each level of production, processing or distribution will be considered separately.

(4) Not only must the average level of prices be "materially below" ceilings, but also the prices for the bulk of individual transactions must be below ceilings.

(5) "Materially below ceilings" will take into account such factors as the degree of volatility of prices, seasonal movements, and the extent to which ceilings are realistic in terms of stabilization policy (as would normally be the case with a "tailored" regulations, but not necessarily with general regulations such as GCPR or CPR 22).

(b) There is no prospect that reimposition of controls will be necessary in the foreseeable future.

(1) This finding will depend upon full information concerning current supply and demand, productive capacity, inventories, crop conditions, where applicable, volatility of prices and other relevant factors.

2. Before suspending ceilings or otherwise relaxing controls in any area, the following safeguards must be provided:

(a) An adequate price-watching system must be established to follow the movement of current and future prices and their relationship to ceilings.

(1) For highly volatile prices, this must be on a daily basis; for others, on a less frequent but periodic basis. The kind of price-watching system will depend largely upon the nature of the area and of the applicable OPS regulation.

(2) Under certain circumstances, a report may be required of any offers, contracts or deliveries above presuspension ceilings or within a specified range below.

(b) There must be a determination of the conditions under which controls will be reimposed and of the appropriate recontrol mechanism.

(1) These conditions may involve average prices or particular prices, and

due allowance for seasonal variations.

(2) In any event, these conditions must require the reimposition of controls before a significant volume of transactions has reached the suspended ceilings. (3) These conditions must be published at the time of suspension. (c) There must be a provision that all records required previously will be preserved.

3. If suspension is terminated, the level of ceiling prices will not be higher than that prior to suspension, except as required by law, and contracts at prices higher than presuspension ceilings will be entered into at the risk of the contracting parties.

4. The Director may at any time reimpose controls if he determines that such action is necessary or appropriate to carry out the purposes of the Defense Production Act of 1950, as amended.

"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 staff 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.