erp 1949 january erp

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  • To the Congress of the United States:

    THE people of the United States have just enjoyed another year ofbountiful prosperity. This has enabled us further to strengthen oureconomy at home, and further to supplement the recovery of freedom-loving peoples elsewhere who seek lasting peace.

    The resourcefulness of American business, the skill of our labor force,and the productivity of our agriculture have lifted our standards of livingbeyond any prewar expectation. We have achieved these blessings throughthe happy combination of our free institutions, our system of private enter-prise upon which we primarily rely for economic results, our vigorousGovernment, and the mutual respect and trust that we all hold for oneanother. My pledge to all elements in our economic system is that theirGovernment will continue to steer a course guided by full recognition ofthese values. Toward this end, I ask of all the cooperation and confidenceupon which our way of life depends.

    Let us all remember that our unparalleled prosperity has not been main-tained by chance, and that we can lose it if we leave the future to chance.Courageous and positive action has contributed to our progress, and someof the most serious difficulties still confronting us exist because our thoughtand action have not been sufficiently clear and vigorous.

    As we work together in 1949 to combat the remaining dangers of postwarinflation, we should bear always in mind that our purpose is at the same timeto build strong bulwarks against deflation and depression, and thus to con-solidate our past gains and move forward to new levels of sustained prosper-ity for all.

    This third annual Economic Report, under the Employment Act of 1946,affords not only the President but also the Congress and the whole countrystill another occasion to look to our current economic position, to drawcourage from our progress, and to benefit by our mistakes. Now is thetime to formulate and execute a practical program of immediate andlong-range economic measures pointed toward stability and growth.

    Sources of Our Economic Strength

    THE year just ended has tested the strength of our economy, and chal-lenged our ability and willingness to act to protect our prosperity.When 1948 opened, the inflation which had attained threatening propor-tions in the preceding months was continuing unchecked. Prices were risingeverywhere. They brought higher but uneasy profits to business firms.They squeezed the family budget of workers, who in turn sought to press

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  • wages upward as the cost of living advanced. The rising spiral createdmore and more maladjustment among prices, wages, and other incomes.

    Early in 1948, a sharp break in grain prices spread concern throughoutthe economy. Commodity speculation, fed by a world demand of unprece-dented magnitude and intensified by our own short corn crop, had carriedthe prices of wheat and corn to levels which could not be sustained. Themarket structure collapsed of its own weight. On February 13, the priceof cash wheat was 25 percent or 74 cents a bushel lower than it had been amonth earlier.

    But this break did not set off a train of consequences similar to those which,following World War I, had turned the boom into a deflation of unusualdepth and rapidity in 1920-1922. In 1948, the decline of the speculativegrain market did not bring unemployment, cutbacks in production, generalunloading of inventories, or abandonment of plans for capital investment.Our economy showed strength sufficient to withstand shock of a kind whichhad ended earlier inflations with collapse.

    The reasons for this were not just that we were luckier in 1948 than we hadbeen in 1920. Affirmative national policies and greater caution in the busi-ness community combined with other developments to make the economymore shock-resistant. The farm price support program guaranteed thatthe collapse of grain prices would not go far enough to impoverish thefarmers, to curtail the farmers' demand for the products of industry, or tobring about a chain reaction of price breaks in other markets. As theprice drop was localized, it did not cause cancellation of the buying andinvestment plans of businessmen and consumers.

    Nor was the farm price support policy the only source of our strength.Our whole financial and banking structure was stronger and more resilientthan in the early twenties. Our businessmen, having become better in-formed, were more prudent. Our working groups were better suppliedwith current income and accumulated savings. Our social security andrelated policies added to the feeling of stability. The Government had soemployed a large budget surplus as to prevent the inflation from becoming ashectic as it otherwise would have been; and such policies served to moderatethe extent of the reaction. This combination of private and Governmentaction helped us to avoid serious trouble last year, although it was noteffective enough to terminate the inflationary trend which was soon aug-mented by the defense program and by the reduction in taxes. Nor did wedevelop an adequate protective program against hurtful deflation in thefuture. We must now look to an improved combination of basic privateaction and supplementary government action to develop still better remediesand safeguards.

    Our escape from the danger of a general recession in the spring of1948 does not mean that no further dangers will appear, or that we canwait until they descend upon us in full force before taking wise preventivemeasures. We have been granted a breathing spell, but we have not been

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  • granted lasting prosperity without further effort and vigilance. So longas the rising course of incomes and activity continues, there will be inoperation many of the forces which have been responsible for the long-sustained advance of prices. There are a few sectors of our economy wheredangerous inflationary forces continue to be predominant. For example,the shortages of steel and electric power, and the steadily mounting costsof public utility services, add further to the higher costs of production whichup to now have been rather readily passed on to the consuming public.

    The recent appearance of wider areas in the economy where supply con-ditions have improved, where the pressure of demand has been reduced, andwhere price inflation has been halted or reversed, should be looked upon as adesirable development to be welcomed rather than feared. It marks thebeginning of the process by which a more stable condition can be reachedafter a long period of rising prices. But these adjustments have not pro-ceeded far enough to justify a cessation of concern about inflation. Besides,a sharp and uneven adjustment of prices downward may cause dislocationsquite as serious as the sharp and uneven movement of prices upward.Since both factors may be at work in different parts of the economy at thesame time or in rapid sequence, we need to have available a range of gov-ernmental measures which can be applied as brake or as accelerator accord-ing to the need.

    While the prosperity of the postwar years has been great, it has restedin considerable part on somewhat temporary factors which were the after-math of war. In 1949, we are entering a period of harder tests. Themomentum of war-created demand and war-created purchasing power haswaned, and we must now rely more fully on currently generated purchasingpower to absorb a full output of goods and services. We must be morethan ever on the alert, to make sure that withdrawal or lessening of tem-porary demand factors is not accompanied by a reduction of productiveactivity and the mounting unemployment to which this would lead.

    I believe that prosperity can be continued and that, with proper action,the prospective volume of business investment, consumer spending, andgovernmental transactions should promote ample employment opportunitiesfor the coming year. But many adjustments in price and income relationsneed to be made, and these must flow mainly from the wise action of theleaders in our enterprise economy. These leaders should draw sustainingconfidence from the fact that it is the policy of the Government under theEmployment Act of 1946 to use all its resources to avoid depression and tomaintain continuous prosperity.

    These favorable prospects will not be realized automatically. Thestrength of our economy, the strength of our great Nation, depends uponour capacity and willingness to adopt the salutary policies which are requiredby changing circumstances and to put them into effect.

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  • In this Economic Report, drawing upon the more* detailed informa-tion and analysis furnished to me by the Annual Economic Review of theCouncil of Economic Advisers (transmitted to the Congress herewith), Ishall first cover the high points in the current and prospective economicsituation, and then propose both policy guides and a program to deal withthe situation as I evaluate it.

    High Points in the Economic SituationEmployment in 1948 ranged from 57 to nearly 62 million civilian workers

    and averaged more than 59 million. This included over a million workerswho were added to the labor force. Unemployment remained at the lowlevel of around 2 million.

    Production for the economy as a whole was between 3 and 4 percenthigher than in 1947. With bumper crops, agricultural output increasedabout 9 percent. Industrial output increased 3 percent, while employmentin the service businesses rose 3 percent and in government 4 percent.

    Prices ceased the broad upward movement which had persisted withfew interruptions ever since the