Official U, S, Government 
 Information Program on 
 
 ECONOMIC STABILIZATION 
 
 APPENDIX I 
 THE ECOT'CMICS OF imATTON 
 
 Not for General Pist ribution 
 
 For the use of media presenting 
 information to the pu"blic 
 
 The Office of War Information, 
 I'Omes'i'ic Branch 
 
 January 
 
,^ ■/',/ Appendix 1 
 
 — — 
 
 ■i^/' THE ECOMICS OF imATION 
 
 wartime inflation is nothing, njore --l^^^^'^^X.^^I'^o^'^ 
 prices generated l.y the Pf-^-.^^^^Lw^s ^Sy reSuse! as a result of 
 ?re^r!Teye Se'^^or^.o^ey affti™: whenVhere are less goods for 
 them to "buy. 
 
 There was no real danger of ^^^-^l^^^'-'^rrlL'increaL^ln V- 
 oomtry's reooveiy from the 1929-33 ^f'^^f';??-. through the production 
 chasing power "hich occurred then could he .*?!°'^„iiUons of men 
 
 of more goods. Production f«"l^*^"rf,^^,^S'^„rtcuitural products. It 
 rpSi:^'fnd prLrirf»trrL°L^S%.e growing demand at 
 a reasonalole price level. 
 
 As will he developed later, even ^ring the early years of the war 
 there was no critical danger in the pi=e situation n »° * 
 
 the economy, there was ^-'f- ^^^f^^ZvTo^^l^l- in a few instances, 
 ■hTr +v,e> ripfpnqp "aroeTam , Some DottlenecKS occuiitiu., -lh ^ 
 demlnd for goods efSeded supply. There was some rise m P"ce^.^:^t "° 
 morHhan might occur in a peacetime upswing of husiness. .enerally, 
 pressure on prices was localized, not general. 
 
 Later the situation changed. Total war led to °J/;5gJr3. 
 demand imhalance which could result in a serious general rise m prices. 
 
 The danfer is not vet over and is not to he taken lightly. Rapidly 
 rising prlS coi^d enoLously complicate the task of ""^"^J'f 
 ?tev fould cause such havoc with our social and economic stmcture as to, 
 cheat us out of the fruits of victory. 
 
 But there is no occasion for panicky fe.r. If f ^.^^^^^^^^.^o't^ 
 not tegin to minimize the danger of rising prices and if they all do 
 part in the hattle against them, that hattle can he won. . 
 
 Tf i hardl- likely that the American people will do any less , once 
 they re^LfuSied^w^t?. the danger and told their ^i^^J^^' 
 
 ^hlch'can^e licked hy the -- soH of determination and co- , 
 operation they are exhihiting in their fight against the Axis. 
 
 The ArnericcTn xDeoole will win the hattle against rising prices. But to 
 win il jusras'o^win the war, they must recognize the enemy and no 
 ^derestimate his power, Without ever losing confidence in their ability 
 To handle the situation, they must take their opponent's measure. 
 
 In a wo-d, without he ing frightened, they must he ^^^^^^^^^^ "^^^^^^^'^ 
 danger which cinlF^Hrae^-iFTTnThe war ^^f-^^^^f^^f^f ^ ation 
 the hattlefront , leads to defeat and disaster, ^^^^^^^f^^^*. ^f^' ^a,s 
 is inevitable makes it inevitable hy generating a huymg ^^^f ^ 
 h^ai^Lg. And conversely, the recognition -^-^^^^^^/^ej:'3:::: - 
 
 he averted generates the resolution and social intelligence necessa^ 
 
 avert them. 
 
- 2 - 
 
 The paragraphs helovr provide a more detailed explanation of the econo- 
 mics of inflation than could "be gi.ven in the Information Program Sook 
 itself. It is essential that this explanstorj^ material he used vdth dis- 
 cretion to inform, not to frighten. The object of the entire informa- 
 tion program is not the negative one of alarming the American people; it 
 is the positive one of securing a continuation of the active, intelligent 
 support of policies that for a year and a h^lf h-ave prevented any serious 
 rise in prices from occurring.. 
 
 Why War ?rfcao ii^ric^rion 
 
 Stahle prices, in the absence of price-control, depend basically upon 
 a balance between supply and demands Total war involves simultaneous 
 attacks on both sides of this balance. It enormously expands demand. It 
 sharply contracts the supply of goods consumers can buy. The results are 
 likely to be analogous to those which would follow if one simultaneously 
 added a weight on one side end-, took a weight from the other side of a 
 perfectly balanced scale. 
 
 War expenditures increase demand in two ways, directly and indirectly. 
 The direct pressure resulting from Government war expenditures are 
 generally understood, although the magnitude of those expenditures is 
 difficult to grasp and remember. There i.s a job to be done in making the 
 American people aware of the vastness' of the nation's war program. In 
 May, 19^0, defense expenditures were running at an annual rate of $2,0 
 billion. By October, 19^1, they' had been increased tenfold and, including 
 the expenditures of Government corporations, were running at an annual 
 rate of $22,2 billion-, In May 19^3 they were running at an annual rate of 
 $88 billion. By May 19UU the annual rate had risen to billion, a 
 figure which exceeds the total national income of the boom year 1929. 
 
 But the effect of the Government's expenditures upon prices is not 
 exerted only directly through its purchases, or confined to the prices of 
 goods needed for war. The heavy outlays which the arms program requires, 
 being disbursed in the- form of wages, salaries, profits, and other forms 
 of income to the community at large, put more money in the hands of wage- 
 earners, salaried workers, and shareholders ^ Part of this additional income 
 is saved and part is paid in higher taxes, but some is used for the purchase 
 of goods and services. The expenditures of these additional suras in turn 
 causes a further expansion of income and demand end further pressure on the 
 prices of all products. One reason for the pressure on food prices, for 
 example, is that war workers and others are using their expanded income to 
 bring their .diet up to a higher- level. 
 
 The increased demand for goods, furthermore i makes necessary additional 
 expenditures by business to replace, repair or augment productive facili- 
 ties. These expenditures h^ve been kept to a minimum by the more urgent 
 needs of the war for manpower and materials, but to the extent that they 
 occur they lead to further pressure on the price structure < Thus the 
 original increase in Government expenditures results in a v.ddespread ex- 
 pansion of demand throughout the economy. -• . 
 
The Concurrent Rest miction of Supply 
 
 This expansiori of demand would not be dangerous if it could be met by- 
 increased production of goods. But at the same time that waf increases 
 the demand for goods, it limits the supply available to civilians . 
 
 The reason is apparent: Anerica, for all her vast resources, has not 
 a limitless supply of materials, manpower and machinery. At some point 
 in the development of a war economy more "guns mean less butter. The same 
 steel plate cannot be used for both an automobile and a tank; the same 
 sheet of rubber cannot make a tire for both a pleasure car and a jeep? the 
 same tanker cannot carry gasoline both to New England and to the European 
 or Asiatic battiefronts. 
 
 Civilian production is believed to have reached its peak in August, 
 I5U1, Since then, although total output has continued to rise, the pro- 
 duction of civilian goods (when allowance is taken of new capital construc- 
 tion) has declined, as more productive capacity labor, plants and 
 
 material was diverted to war production. Industrial production for 
 
 civilian use, including materials and producers eouipment, in 19^3 ^'^^^s 
 about 8Cfl of the 1935-9 average, 'or Uo^ less than the peak reached in 
 19^1. (FEB Jan. 'W) 
 
 The effect of war in restricting the supply' of things available to 
 civilians is perhaps most clearly seen in connection with production. 
 People realize that there is some limit to the amount of steel or aluminum 
 the nation can produce, Though it is less evident, war also sets limits 
 on the supply of available consumer services. In this area, manpower is 
 the great bottleneck. The nation, 'for example, has only a given number of 
 doctors. As more and more of them are absorbed into the Armed Services, 
 fewer are available to serve the needs of the civilian population. 
 
 The Gap ^Between Supply and Demand 
 
 It is the simultaneous expansion of demand and restriction of supply 
 which creates the danger of an explosive rise in prices, A gap arises 
 between the amount of money people have at their disposal to spend and the 
 amount of goods and services available for them to buy. 
 
 There is then a natural tendency for people to compete among themselve 
 to satisfy .their individual wants. In effect, they bid against one another 
 competitively for the things which are available. 
 
 Of course, not all of the money received by individuals as .income is . 
 available for spending. Allowance must* be made for taxes, which have 
 increased sharply since the beginning of the war. But income payments have 
 increased so enormously that even after taxes people have unprecedentedly 
 large sums at their disposal, In I9HU income payments to individuals are 
 estimated to have reached $1^5 billion. Taxes amounted to $20 billion, 
 leaving $135 billion available to people for spending. But there were only 
 $97 billion worth of goods and services available for them to buy. The gap 
 between disposable income and the available supply of goods — sometimes 
 referred to as "the inflationary gap" — amounted to $38 billion,' 
 
 Of course, some of this money would have no-mally flowed into non- 
 inflationary forms of savings, such as insurance and savings accounts, 
 
 O'r 'ilL, LIB. 
 
- k - 
 
 But most of those J,S billion dollars w^re pdtentially dailge'l-ous dollars. 
 To the extent that they were not invested in War ^onds and other forms 
 of savings, they 'could "have heen used mischievously, to'Md up prices, 
 Orle of ■ the primary purposes of the Economic Stabilization Information 
 Program is to see that '^s many of these potentially dangerous dollars 
 as possible are diverted to safe channels, so that there is a minimum 
 of excess purchasing poWel* exerting pressure on the p'rice" structure. 
 
 •Excess spending power is spread amchg all economic groupsv This 
 fact m^ be difficult to grasp at first. The average worker maMr^- 
 $30 or $Uo a week doessn't think of himself as having' "exce'ss spending 
 power," Uor does the farmer, even though he Is getting the highest^ prices 
 in 20 years. One of the big problems of the. informational program' is to 
 
 bring home the danger of excess spending in personal terms to make the 
 
 individual citi2en realize that wan^ings -against buying freely apply to 
 him, u' ■ . / ■■ ' 
 
 H>»w Prices Rise : 
 
 The expansion of purchasing power and' contraction of civilian supply 
 is, of course, a gradual process, not something -which occurs." in- a single 
 day. Economic measures which are effective at a given time may be either 
 premature or inadequate' at another stage of the development of the war 
 .economy. ■• ■ • ... 
 
 Actually, the' economic pressures generated by v.^ar develop continu- 
 ously. -It is conVenien»t, however, to divide the process into stages 
 corresponding to the degree of utilization of productive cat>S(iity. 
 
 As has been said, if ' an exj^ansion of 'demand occurs when there Is 
 still unused productive capacity, it need not result in much pressure 
 upon prices. Its effect is mainly to' elicit an increase of production. 
 This was the case in the first year of the defense program, between 
 May l9to'a'nd'May 19U1 the Federal Reserve Board's index of Industrial 
 pi*oduction rose 3^ percent, while wholesale prices roSe onl^r'e'ight per- 
 cent. This 'Was achieved largely because it was both possible and 
 profitable to- expand operations at the existing price level. Unused 
 capacity existed throughout t|ie economy. 
 
 This situation could not exis-t long in all' industries because of 
 the uneven character of the <?xpanding'demand.' 
 
 ■■ ' Up until' P'earl 'Harbor our economic resources' had been developed to 
 meet the demands 'of peace, not of a nation in- arms. Oui* aluminum facili- 
 ties had been geared for producing- pots and pans and refrigerators, not 
 bomber's. Our shipbuilding capacity had been geared for producing the 
 additional merchant vessels needed for normal peacetime replacement and 
 expansion, hot for the rapid replacement of sunken ships on top of the 
 construction of a seven-ocean Navy. 
 
 A war economy reauires goods in proportions far different from those 
 which are required to satisfy normal peacetime needs. War demand is ab- 
 normally concentrated upon heavy goods; it requires vast quantities of 
 non-ferrous metals, • • 
 
- 5 - 
 
 Thus in the conversion of the economy to wpr our capacity to produce 
 heavy goods "became fully utilized and insufficient much .sooner than our 
 capacity to produce other things. It "became strained while our capacity 
 to produce consumer goods was not fully used, and while millions of ahle- 
 hodied people remained unemployed. 
 
 , At this stage of affairs, prices can increase despite the existence 
 of unused resources. The knowledge that the pT'ogram is a large and 
 growing one, that demand will eventually ess upon capacity, and that 
 the Government must purchase regardless of price, leads to the expecta- 
 tion that prices will rise. The mere expectation induces speculation. 
 Businesses "begin to "buy more than thej'- i'Timediately need in order to take 
 advantage of existing prices. At the same time people who possess a 
 commodity have an incentive to withhold it from the market so that they 
 may sell it later at the expect ?d higher price. Speculative demand and 
 withholding of supply usually constitute the first stage of rising prices. 
 
 Prices of raw materials constitute part of the cost of finished 
 commodities. A rise in raw-material prices means higher costs of pro- 
 duction. At the same time, an expansion of the demand for lahor tends to 
 stiffen wp.ge rates, another important element in costs. In addition, 
 ocean-freight rates, insurance rates, and other factors entering into the 
 price of. imported goods have increased during- the emergency, ■ not as a 
 result of the war. program itself, "but as a result of the emergency which 
 made the program necessary. 
 
 Such increases- in costs may at first "be a"bsor"bed "by "business, although 
 this is unlikely for long without pressure from outside to keep prices do^oi. 
 Total profits may rise despite the a"bsorption. Tven profits per unit of 
 output may rise, the higher volume of operations enabling fixed costs to "be 
 spread over a" larger output. If the increases in cost continue, however, 
 there comes- a time vrhen they can no longer "be a"bsorbed, and the prices of 
 finished goods also go up, " . 
 
 Such increases are in time reflected in the cost of living. Wage and 
 salary workers try to protect their standard of living and want higher pay. 
 Further increases in costs occur, and Drice. increases are required if 
 industries are to continue operation. . 
 
 The continued growth of consumer demand in time hrings a"bout pressure 
 on the capacity i.o produce even nondurable consum.er goods. This is the 
 final and most difficult stage in the chain of developments set in motion 
 "by war: An excess of demand over capacity to produce in all areas,. ''ATien 
 this stage is reached, the upward pressure upon prices is general and can 
 "be effectively combat ted only "by weapons which are equally general in 
 character. 
 
 Our ovotl experience has followed this- typical pattern. The spreading 
 pressure on prices is clearly indicated "by the fact that , of the QOO price 
 series for which quotations are availa"ble since the inception of the 
 defense program in May 19^0, 20 percent had advajaced "by August 19^0, kO 
 percent by February 19^1, and 65 percent by June 19^1. The percentage is 
 now, of course, much higher, ■ " 
 
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 Why -Not Permit Prices to Rise ? ' ...... 
 
 In the back of their minds many people may have a question: Why not 
 permit prices to rise? Ordinarily, rising prices serve to elicit increased 
 production by making profitable the operation of old facilities or the 
 construction of new ones. 
 
 It is. to' be kept in mind, however, that so far as m.any types of ordi- 
 nary cons'jmer goods p-? concerned, we do not want to expand production; we 
 want' to devote our pi*oductive resources to the things we need to win the 
 war. • ■ ' ' ■ 
 
 In the emergency of total war, furthermore, rising prices have only a 
 limited valne in stimulating 'the production of wanted tj^^es of goods. Many 
 of the conditions required for prices to act as a stimulus to production 
 are lacking. Perteps the most im"[)ortant of these is th^.t material and man- 
 power must be available to permit an expansion of output, even at h_igher 
 prices. 
 
 So far as increased production requires more capital investment of a 
 long-term nature, moreover, producers must regard the high demand as more 
 than a temporary phenomenon, or they will not expand their plants. Ordi- 
 narily they expect to recover the cost 'of additional facilities out of the 
 future sales of the product. If they do not have confidence that demand 
 will be maintained for a considerable period , they will be unwilling to 
 make capital expenditures that cannot pay off in a short time. "Sven if 
 they are willing, they are likely to move cautiously and too slowly for the 
 needs of an emergency. Congress recognized these facts in the early stages 
 of the defense program when it granted tax inducements in the form of" 
 special amortization in connection with the expansion of plants for defense. 
 But the proposition applies generally, not merely to war goods, Likevdse 
 the rav; materials required to expand output must be available. This pre- 
 sumes tliat the increase in the price of the -particular final product in 
 question .is greater than other price increases, for if other prices -have 
 increased just as much, there is no particular incent i-ve ■ to shift tbjB - 
 necessary resources in any one direction, ■ ... ■ 
 
 In an emergency +'.iGse conditions ere not sufficiently fulfilled. If 
 ■prices are expected to go higher, the supply available for use, instead of 
 growing, may ev«n be decreased as a result of speculative withholding. 
 
 To some extent price increases do now perform their traditional func- 
 tion of evoking additional production. In agriculture especially prices 
 have been permitted to rise greatly in order to encourage production, • 
 The prices of certain minerals or of the high cost portion of the output 
 have also been permitted to rise to give producers an incentive t-o work 
 mines which had been closed do^^^l or to make it worthwhile to extract low- 
 grade ores previously passed by from mines already in operation. 
 
 But beyond a certain point rising prices becom.e ineffective as a means 
 of expanding output. The stability and the expectation that high demand 
 will continue are absent. The requirements of the Government are for goods 
 not needed in peacetime, or else they so greatly exceed those of normal 
 times that nobody believes profits will continue beyond the emergency, T'nder 
 such circumstances price increases can be almost unlimited without 
 increasing supply or reducing demand. 
 
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 Fow Rising Prices Impede War Production 
 
 "Mot only do rising prices fail to stimulate production in wartime; 
 they operate in numerous ways to retard it . The lag of wages 'behind the 
 cost of living causes unrest among workers, and may have an adverse _ 
 effect upon their efficiency. The knowledge that goods held now p'an "be 
 sold at a higher price later leads to speculative inventory accumulation, 
 whJ.ch interferes with the flow of goods into production. Early in the 
 defense program such a psychology developed in regard to zinc, aluminum ■ 
 and used machine tools. Later, large stocks of copper, alum.inum and other 
 vital materials disappeared from the channels of production to be held for 
 higher prices, or to supply bootleg markets in civilian industries. 
 
 Production may also be retarded by reluctance to make capital in- 
 vestments. Rising costs make business planning extremely difficult. 
 Before a business undertakes to expand its plant, it must be able to estir- 
 mate the costs of expansion. It must also be able to estimate the addi- 
 tional profits from the goods which the contemplated additional plant will 
 produce, and that means it must have some idea of the future costs of raw 
 materials and of the price at which it can sell its product. When costs 
 and prices canr).ot be predicted with any confidence, business men naturally 
 find it hard to know how to plan and are reluctant to take the risks of 
 expansion. 
 
 Indeed, such factors as these add to +he difficulty of day-to-day 
 business operations. They make it hard for business men to set prices 
 and to make prodiiction plans. Tliey compel them to devote a great deal of 
 attention to p-^oTecting themselves from price fluctuations and divert than 
 from, what should be their main concern increasing production. 
 
 O ther Crippling Consequen ce s of Rising Pric es 
 
 Besides impeding production, an inflationary.'- -price rise jeopardizes 
 the success of the war effort in numerous other ways. Although many of 
 the consequences of rapidly rising prices have already been touched on in 
 the Information Program Book (see pp. 3-5) some of them are further dis- 
 cussed below. 
 
 Rising price s create or sharpen discord among vario us groups in the 
 population . They lead to a scramble of self -in terest, in which the spirit 
 of sacrTfice and cooperation, so necessary for" "victor;/, is forgotten . 
 
 An inflationary price rise disturbs all customary economic relations. 
 Debtors gain at the expense of creditors. Certain strategically situated 
 groups seek gains for themselves at the expense of the general public, 
 Ever^/body attempts to beat the game by trying to increase his income 
 faster than prices rise. Everyone is irked by the rising cost of living. 
 
 In this scramble of selfishness,- everybody blames the other fellow. 
 Farmers blame the greed of labor and big business. Labor blames big 
 business and the farmers. Business men blame farmers and labor. At a .. 
 time when the national interest demands teamwork, greater exertion and 
 sacrifice from everyone, inflation creat-'p disun-'ty and bickering. 
 
- g - 
 
 PC^fil^eering and inflation are a's -inseparable as Siamese twins. The 
 spectacle of shameless profiteering on the home front undermines the morale 
 of the armed forces. A democracy shapes its policies in accordance vith 
 the ^principle of equality /)f obligation and equality fif sacrifice. No 
 policy, of course, can succeed in- equalising th-^' sacrifices made by the 
 men in the aimed forces and those made "by civili. iis.' I'or is it practicable 
 to achieve absolute equality of sacrifice gn the home front. We can stive, 
 however, to reduce inrauities to an absolute ■ minimum and to bar profiteer- 
 ing,- 
 
 Msing prices mean a vast incre a se in the money cost of the war . The 
 ext ra" T^overnment outlays necessitate3'' by increased prices during the 191U- 
 18 World War amounted to $13.5 billion, or nearly percent of the total 
 imnaediate money costs of $31 billion. Since 1920 the interest compounded 
 on that $13, billion totals more than $15 billion.' • 
 
 In this war appropriations and contract authorization made between 
 July 19I-IO and July 19^^ total almost $375 billion. If prices in this war 
 were permitted to behave as in the last war v we m.ight have tb pay another 
 $15g billion as a needless tribute to, inflatibn. To pay off that $158 
 billion the entire nation might have to work a'year'or lohger — for 
 nothing, ■ _ • 
 
 Rising prices undermine the value of sav ings and insurance. Rising 
 prices m.ean a decline in the real value of money and' of all obligations 
 fixed in terms of money. The purchasing power of a dollar put in the ' 
 bank in 191^ declined 52 percent by 1920. The effect- of inflation was 
 thus the same as if thieves had stolen 52 percent of every dollar used 
 out of every savings account, - of every trust fund invested in bonds, of 
 every life insurance policy. A family which sets aside small sums for 
 many years finds, if it has to use its money, that inflation h^s robbed 
 it of a substantial part of its hsrd-won security. A life insurance 
 policy purchased through laborious economy and intended to provide for 
 old, age. or the educatio-n of children is rendered wholly Inadequate for 
 its purpose if utilized when prices are high, _ .3 weal' hy saver, with 
 access to the best financial advice, may sometimes be- able to avoid the 
 full impact of this ':^iine in the value of money. But the vast -mass of - ' 
 savers are certain to lose, . ■ ^ 
 
 Rising prices plant the seedsof a post-war collapse . - Not orJ.y does 
 a- serious price rise add to the" diff ' Julty ot winning the war; it 
 jeopardizes the winning of ■ the peace as well, 
 
 ■ Inflation carries within itself the seeds of deflation, ^eiT,"- 
 inflationary.' price movement in the nation's history has been followed ■ 
 by a severe deflation. 
 
 ■ The inevitability of this sequence is easy to. expB.ain. It is' not 
 simply a question of all prices having to come dovni afterwards because 
 they go up during wartime. The -price increases v^hich occur during a 
 war in the absence of vigorous control are uneven. Violent distortions 
 occur within the price structure, in the relationships between prices 
 of different commodities and services, as a result of - the- uneven impact 
 of demand. ■ . ■ ^ ■ 
 
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 Price relationships, "become entirely inappropriate to the pattern of 
 post-war demand. This complicates the task, of adjusting the economy to . 
 peace. At the end of this war the Government may well "be spending well 
 over $100 "billion a year. When peace comes, these expenditures will 
 contract. War production will decline and the private demand for goods 
 will have to rise sharply if war workers and millions of demolDilized 
 ser^'-ice men are to find johs in peaceful pursuits. The economy will have 
 to "be converted to a peacetime "basis with speed and "boldness. . 
 
 But "business men would feel confused and discouraged if we were to come 
 into this period ^-ith prices of basic materials many times higher, relative 
 to other prices, than is consistent with peacetime demands The demand of 
 the civilian ma:^ket, unlike the Government's demand for war materials, i_s 
 sensi''"ive to pri -^e. Only timorous sales goals will "be projected' if prices 
 are high and ouv of -"balance. Tarthermore, if there is an expectation that . 
 prices will fall, the resulting uncertainties will inhihit or postpone the 
 investment which we shall so greatly need. 
 
 Thus uncontrolled price rises today almost inevita"bly spell uncon- 
 trolled price declines tom.orrow, HTiat these would mean, in terms of human 
 suffering, is not pleasant to contemplate. Some of the consequences of 
 the 1920-21 deflation are described in Part I of the Information Program 
 Book and in Appendix III, A collapse after this war, in view of the size 
 of the national de"bt , might "be more serious still. It is not too much to 
 say that a post-war depression might ro'b us of the .freedom from want for 
 which v/e are fighting and jeopardise our entire social structure. There 
 is only one answer — to prevent an explosive price rise and price' disloca- 
 tions from occurring — which we can do, ■ 
 
 Why Do People Try to Beat the Gam e? 
 
 The consequences of a runaway price rise are so apparent and serious 
 that it may v;ell "be asked, why does anyone try to "beat the game? 
 
 One answer, to "be discussed later, is that sta"ble prices present diffi- 
 culties for certain groups in the economy. These difficulties, are in the 
 present, not in the future. To escape them people choose the inflationaiy 
 path, without looking too closely to see where it leads. 
 
 The fact is, however, that the high road to inflation looks attractive 
 enoi\'?;h at the iDeginning. Inflation comes in an insidious way. It wins its 
 victims over to its ovm side. Farmers. see hogs and cotton and "beef cattle 
 going up in pric -'S. Manufacturers ■ find it possi"ble to advance their' 
 prices. So do miners and oil refiners and landlords. Everyone finds he is 
 getting something more. Ever ;y^on.e is seduced "by the hope that the next 
 increase mil get him just a little ahe ad of the g;ame~ 
 
 When prices are going up, anyone who doesn't get a "boost in the price 
 of the goods or services he sells is falling "behind in the race. Further- 
 more, in seeking to protect themselves against advancing prices "by asking 
 m.ore for what they have to sell, people are using a method which works 
 satisfactorily under noiroal circumstances. Wage earners customarily seek 
 to protect themselves against rising costs "by .demanding higher wages. But 
 they cannot thus protect them.selves unless there are unemployed resources 
 which can and will "be turned into goods and services on which to spend the 
 
- 10 - 
 
 enlarged earnings. I'lhen there are no unused-. resources, the spending of 
 the increased v/ages, instead of leading to the production of a larger 
 quantity- of goods, so tlist higher money wages mean higher real wages, 
 results only in driving up prices, . 
 
 Today vre face a dwindling supply of consumers' goods, so that the 
 spending of higher wage incomes can result only in increased pressure 
 on prices, Furthermore, in many , industries- 'Wage increases can no longer 
 he absorhed without price increases. Thus in two ways rising wage costs 
 will add to the upward pressure on prices— without resulting in any 
 expansion in the available supply of goods.- ~ ( 
 
 Farmers, too, seek to protect' themselves against rising prices by 
 asking 'for more for the things they sell, But higher farm prices mean 
 higher living costs; food costs constitute almost ko percent of the. 
 average budget. Higher living costs lead to further wage demands, which 
 force up industrial costs. Higher industrial costs, in turn, mean price 
 increases on the products sold to farmers. 
 
 Under wartime conditions the usual means by which individuals -.and 
 groups seek to protect and improve . their position in the econom.y simply 
 defeat themselves. Neither wage earners nor farmers can protect them.- 
 selves in the cus-tomary ways without setting in motion the very forces 
 against wMch'they see : protection. Cooperation in a general program of • 
 price and income stabilization offers the only effective safeguard against, 
 inflation. 
 
 Can anyone win against inflation? Dr. Julius Hir.sch, ^ who had price - 
 control experience in the German "^public and later in Denmark and this 
 country, says that only the most nimble speculator in money has a 
 chance ... and that even he is likely to lose in the end,- 
 
 People in' this country continually ask me- what they can 
 do to protect themselves in the event o^ such a cataclysm 
 here., I tell them there will be none here and that in 
 fact the only way to' protect oneself from it is to .pre- 
 vent it from happening, t ; -. ■ ■ 
 
 Of course, some people seek higher prices for the things they have 
 to sell, not because they want some special advantage for themselves, 
 but simply to protect themselves from being squeezed by . the _ existing 
 price structure. There is real justification, for some com.plaints. To 
 price structure is ever in perfect balance. When prices change in one 
 sector, time is requirfed for the cliange to becom.e effective elsewhere. 
 When costs rise, S'elling prices eventually reflect the change,- but 
 there are lags and delays. Thus a ceiling imposed at any given time 
 is bound to involve some ineauities. 
 
 Where' these inequities are gross, for example when they preclude 
 profitable operation for some particular group of businessmen, they 
 must, of course, be corrected. Various t,^/pes of correctives are 
 possible — "roll backs" of prices which distribute the burden more 
 equitably; cost adjuS' nents which make the imposed price profitable or, 
 in cases where it is r.ocessary, price adjustments. 
 
 ♦Julius Hirsch, Price Control in the^ War "Sconomy , p, 15 
 (New York: Harper and Brothers, iy^3) 
 
- 11 - 
 
 Eut while gross inequities crn and must "be corrected, some inequality 
 of sacrifice is inevitaMe. If one group proves that stalsili nation as of 
 a given date is disadvantageous to it, and is permitted to raise its price 
 sharply, a second group can argue in the same fashion another time. That 
 way lies inflation. All that it is reasonable to try to achieve is a 
 price structure which renders suhstantial justice to all groups in the 
 economy and encourages maximum production. 
 
 Today's price structure fulfills those specifications. It is not liy 
 any menns perfect, but it is a "better price structure than we had when 
 war began in Europe. At that time, there was still widespread unemploy- 
 ment and excess capacity and the price structure reflected this condition. 
 Today's price structure has become adjusted to virtually full employment 
 in all sectors of industry. More nearly than at any time during the last 
 decade, the price structure now approaches the balance that is required 
 for the economy to function efficiently. 
 
J