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Special Message to the Congress Recommending Extension and Broadening of the Defense Production Act

April 26, 1951

To the Congress of the United States:

I recommend that the Congress extend for two years the Defense Production Act of 1950, which is now scheduled to expire on June 30, 1951. I also recommend that the Act be strengthened in certain respects.

The Defense Production Act was enacted in September, 1950--two months after the communist attack on free Korea had made clear the peril in which all free nations stand. It was a legislative expression of the national resolve to meet the worldwide communist threat with a vast increase in our military and economic strength.

The Act provides the basic authority for our defense mobilization program. It contains specific provisions for expanding production and for maintaining economic stability--the two essentials of the defense program.

Since last summer, we have made a strong beginning in getting defense production started, and we have laid the basis for an effective program to stabilize prices and the cost of living.

We have doubled the number of men in our active Armed Forces since last June. We have nearly doubled the rate of production of military planes during the past year. Monthly deliveries of military equipment and supplies have doubled since last June. In Europe, we have joined our associates in the North Atlantic Treaty in establishing a unified defense force, to be made up of units from the Treaty countries, under the command of General Eisenhower. The Mutual Defense Assistance Program has been stepped up substantially, and other free nations, particularly in Europe, are rapidly enlarging their defense establishments, as we are.

Since last summer, we have taken initial actions in the fields of taxes, credit controls, price and wage controls, and other measures necessary to stop inflation and keep it stopped.

No one should deceive himself, however, by assuming that we can now relax our strenuous efforts. Quite the opposite is true. What we have done so far consists essentially of laying a solid basis for future effort.

The major impact of the military build-up on our economy is still to come. Our planned expansion of defense production will not reach its peak for at least a year--and the inflationary pressures brought on by the defense effort likewise have not yet reached their peak.

The blunt fact is that the hardest part of the job still lies ahead. Nothing could be more foolhardy than to slacken the intensity of our defense mobilization effort just because we have gotten off to a good start.

When the Congress passed the Defense Production Act and when it passed the military appropriations acts, it clearly intended that we should proceed with all speed to strengthen ourselves and join in strengthening the forces of freedom throughout the world. I have heard no voice raised in favor of turning back before the job is finished.

The full range of powers included in the Defense Production Act will be needed-and needed badly--until we are "over the hump" in our defense mobilization program. We hope that will be about two years from now--always assuming that world war is avoided. All our plans must recognize, of course, that while we hope we can influence the actions of aggressors, we cannot control them--we hope we can prevent general war, but there is no way we can be sure.

For at least the next two years we shall be driving urgently forward in our defense mobilization program. Therefore, it is of the greatest importance that the Defense Production Act be extended for that period.

Defense Production
Titles I, II, and III of the Act relate to production.

Since June, 1950, the Government has placed orders for planes, tanks, guns, and other military equipment, facilities, and supplies in the amount of over 26 billion dollars. As yet, only a small part of these orders have been filled and the goods delivered. Furthermore, over 58 billion dollars more in orders have yet to be placed before the end of June, 1952.

This is a tough production program because we must build our strength as rapidly as we can. The world situation could explode at any time, and we must make every day count.

Consequently, the Government is using extensively the powers granted in the Defense Production Act to divert materials and plants from less important to more important uses. Under these powers, important metals, chemicals, and other materials--including such basic materials as steel, copper, and aluminum--are being controlled and channeled to the places they are most needed.

For the next year, at least, it is obvious that controls over materials will have to become tighter and tighter, as more and more of them will be diverted to essential production. Consequently, the allocations and priorities systems authorized in the Defense Production Act will be even more necessary than they are now.

There is much more to our production program, however, than simply diverting scarce materials and converting existing plants to defense production. As a Nation, we are expanding our ability to produce minerals and fuels; we are building new factories and transportation facilities--we are enlarging the economic capacity of the country, so that, in time, we shall be able to support a high level of military strength, resume our progress in raising living standards, and be stronger for meeting any new military demands.

For example, the capacity of the steel industry, which was 100 million tons a year last June, will be expanded, within two years, to at least 117 million tons a year. The aluminum industry had a capacity last June of 750,000 tons a year; by 1953 it should rise to 1,300,000 tons. The electric power capacity of the nation--67,500,000 kilowatts at the beginning of this year--is being rapidly increased; we need to add at least 22,000,000 more kilowatts in the next three years.

The Defense Production Act carries powers under which the Government is helping to build new plants and finance additional output. The Government is making or guaranteeing loans to private businessmen. It is buying some critical materials and equipment--particularly imported materials-and reselling them to private businessmen. It is also supporting the development of new domestic and foreign sources of supply for vital materials. These powers will have to be used to an increasing extent as our defense production expands.

In addition to these production aids under the Defense Production Act, under the Revenue Act of 1950 the Government is allowing businessmen, in certain cases, to write off part of the cost of new plants and equipment needed in the defense effort more rapidly than the usual depreciation periods under the tax laws. Some 5 billion dollars worth of new plant construction is being encouraged in this way.

Even with the existing production aids, it may not be possible to obtain the supplies and equipment needed unless the Government is given one power to help expand defense production which it does not now have. That is the general power, which was used extensively and successfully in World War II, to build defense plants. At the present time, with some exceptions, whether or not defense plants are built depends finally upon the decision of private businessmen. Certainly if private businessmen can and will build all the necessary facilities, without excessive cost to the taxpayers, that is preferable. But first and foremost, the Government must have the authority to obtain essential production.

To help expand defense production, the Government also needs the power to give special financial aid to high cost producers in order to obtain essential production from them without increasing price ceilings. Such "differential" subsidies were used very successfully in World War II, and saved American consumers and taxpayers many millions of dollars, because it was much cheaper to subsidize some high cost producers than to raise prices on the entire production of the commodities affected.

In summary, to accomplish our defense production goals, the Defense Production Act should be extended and strengthened, and adequate funds to carry out its provisions should be authorized.

Economic Stabilization
Titles IV, V, and VI of the Defense Production Act relate to stabilization.

It will be a tough job to accomplish the production goals of our defense effort. It will, in many respects, be even harder to prevent our defense effort from resulting in skyrocketing prices--with increased defense costs, disruption of production, and hardship for millions of families.

For the next two or three years, the economy will be running at forced draft. Industrial production and employment will be reaching new records. People will be working longer hours, many at overtime pay. Farmers will be producing and selling more crops. All of this will mean higher incomes--more money available for people to spend. At the same time, much of our manpower and plant capacity will be diverted to building defense plants and producing military goods--leaving that much less civilian goods for people to buy.

More money to spend than there are goods to buy--that creates the so-called "inflationary gap." Without an effective stabilization program, the excess spending power could be translated into higher and higher prices.

If we are successful in preventing another world war, at the end of two or three years we should be able to close the inflationary gap by producing enough civilian goods to match the buying power of businesses and consumers. This can be done when our expenditures for military purposes and for new plants will have leveled off--and the vastly increased productive power of the country can be devoted in greater proportion to civilian goods.

But in the meantime, until we are "over the hump," we face an extremely difficult problem in stopping inflation.

Fortunately, we are now in a relatively good position to prepare for the tough period ahead. After the Korean invasion, and again after the Chinese intervention, there were speculative buying rushes by businessmen and consumers which, coupled with the expansion of defense orders, resulted in prices surging upward. The wholesale price index rose 16 percent from June 27, 1950, to February 6, 1951. The index of consumer prices rose 8 percent from June 15, 1950, to February 15, 1951.

Now, however, tax, credit, and price and wage control actions have taken hold. Production has increased substantially, and the buying wave has--at least for the time being--died down. Consequently, the upward rush of prices has been checked. The wholesale price index rose only 0.5 percent between February 6 and April 17, 1951. The latest consumer's price index figures, those of March 15, show a rise of only 0.4 percent in the month following February 15--the first full month of price control. We have made a good beginning and we must now go on to achieve more complete stabilization.

We are now having something of a "breathing spell." But it will not last. This fall and winter the economy will be hit by the full impact of military production. Supplies of civilian goods will be reduced while larger production, employment and military spending will be putting still greater buying power in the hands of the public.

Inflationary pressures, which are serious now, will be critical then. We must therefore use the present period to get prepared for the hard problems which lie ahead. The present "breathing spell" is a fortunate occurrence-it gives us a chance to get hold of the price structure and build a set of controls which will hold firm. This opportunity will not come again. We must not waste it. The Executive agencies will do their utmost with the powers they have and the Congress will need to enact additional legislation.

In taking action now, our simple, central goal must be to bring the rise in prices and the cost of living to a halt--and hold the line. It will take strong and determined measures to do that.

1. Most important of all, we must increase taxes quickly and adequately--paying for Government expenditures as we go, through a fair tax program. This will spread the cost of defense equitably and help stop the inflationary spiral.

2. We must increase personal savings-dollars saved now are subtracted from the buying power pushing prices upward, and will be available later when more consumer goods will be produced.

3. We must reduce borrowing and buying on credit for non-defense purposes--by consumers and businessmen--since borrowed money adds to the pressure on prices.

4. We must have fair ceilings on prices, including the prices of farm products, and on rents, in order to stabilize the cost of living during the defense period, to hold down the cost of the defense program to the taxpayers, and to prevent profiteering.

5. We must stabilize wages and salaries at fair levels, to restrain excessive consumer demand and to prevent rising business costs from forcing price increases.

This is an anti-inflation program that will work. It includes measures to absorb excess purchasing power, and measures to stop prices and costs from jumping upward. This .program will work if all these measures are employed to support and reinforce one another. We must fight inflation on every front and with every possible weapon if we are to succeed.

Taxes

A large Federal deficit would be a powerful inflationary force, because the Government would be pouring more money into the economy than it was taking from it. The effects would be multiplied in a period of rising expenditures, when Government orders and the private borrowing and spending which they stimulate exceed the actual budget expenditure figures.

An effective stabilization program requires that we hold Federal expenditures to the minimum necessary for national security and a strong Nation. The January budget reflects such a policy, and I know the Congress will apply the same standard in reviewing it.

An effective stabilization program also requires that taxes be high enough at least to balance the budget.

The Federal Government will show a surplus for the current fiscal year, ending on June 30. This is a good record. But, unfortunately it does not mean we are on a pay-as-we-go basis. During the present quarter and from here on out, until taxes are raised, we will be operating at a deficit. The latest figures show that to balance the budget as defense outlays continue to rise will require the Congress to enact during this year at least the 10 billion dollars in additional taxes I have recommended.

The people of our country are going to have to pay for the defense program sometime; the sensible thing to do is for us to pay for it as we go, through fair taxes.

Savings

This is also the sensible time to put every possible dollar into savings. Every additional dollar saved helps hold down the cost of living, and puts aside money that will be available later on, when consumer goods are again plentiful.

During World War II, the American people invested unprecedented amounts in savings bonds, thus withdrawing billions of dollars which otherwise would have pushed prices upward during the war; after the war those savings helped many a family. It is vital again now to encourage savings-through payroll savings plans and other regular methods of savings bond purchase, and through encouraging people to hold on to their savings bonds as they come due, and thereby earn more interest.

The most effective way of all to assure adequate saving is to provide convincing assurance to savers that inflation will not cut down the value of their savings. This is one of the many reasons why we need to increase taxes and to extend and strengthen present economic stabilization legislation.

Credit Controls

Credit controls, like taxation and savings, attack inflation at the source, by reducing purchasi