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No. 24 "Price Control: An Analysis of Experimentation under the NRA, and Recommendations for Future Legislation," April 1, 1935. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_24 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 24 "Price Control: An Analysis of Experimentation under the NRA, and Recommendations for Future Legislation," April 1, 1935. American Liberty League. American Liberty League. Washington, D.C. 1935. This electronic text file was created by Optical Character Recognition (OCR). No corrections have been made to the OCR-ed text and no editing has been done to the content of the original document. Encoding has been done through an automated process using the recommendations for Level 1 of the TEI in Libraries Guidelines. Digital page images are linked to the text file. Pamphlets Available â˜… Copies of the following pamphlets may be obtained upon application to the League's national headquarters: Why, The American Liberty League? Statement of Principles and Purposes Progress vs. Change Speech by Jouett Shouse Recovery, Relief and the Constitution Speech by Jouett Shouse American Liberty League Its Platform An Analysis of the President's Budget Message N. R. A. Its Past, and Recommendations for the Future Analysis of the $4,880,000,000 Emergency Relief Appropriation Act Economic Security A Study of Proposed Legislation Democracy or Bureaucracy? Speech by Jouett Shouse The Bonus An Analysis of Legislative Proposals The Constitution Still Stands Speech by Jouett Shouse Inflation Possibilities Involved in Existing and Proposed Legislation The Thirty Hour Week Dangers Inherent in Proposed Legislation The Pending Banking Bill A Proposal to Subject the Nation's Monetary Structure to the Exigencies of Politics The Legislative Situation Speech by Jouett Shouse The Holding Company Bill An Analysis of Proposed Legislation "What is the Constitution Between Friends?" Speech by James M. Beck Where Are We Going? Speech by James W. Wadsworth â˜… AMERICAN LIBERTY LEAGUE NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… PRICE CONTROL â˜… â˜… â˜… An Analysis of Experimentation under the N R A, and Recommendations for Future Legislation AMERICAN LIBERTY LEAGUE T^ational Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… Document No. 24 April, 1935 Price Control â˜… Price fixing, whether by government or by combinations within industries, causes the most vicious inflation, because government-fixed prices are bound to be high enough to sustain the inefficient, while giving excessive rewards to the efficient. They destroy the incentive to invention, enterprise, progress. They protect the laggard, the waster and the incompetent, whose energies are devoted to maintaining higher prices through monopolies, instead of attaining lower prices through reduced costs. Honest competition cannot exist under a regime of fixed prices; it can only prevail in an atmosphere of freedom. Whether prices are definitely fixed or indirectly influenced, their control has been proved by the experience of the National Recovery Administration to be both futile and injurious. Even if helpful in the solution of an immediate problem confronting a particular industry, price control on the whole has tended to retard recovery. Recent experimentation with price control and the experience of other nations point to these conclusions: 1. Controlled prices mean higher prices. 2. With the possible exception of agricultural products higher prices are likely to be harmful rather than beneficial. 3. Higher prices mean reduced consumption, a curtailment of production and an increase in unemployment. 4. Prosperity of an industry is most certain if prices can be lowered and volume of production increased. 5. Industries with the greatest flexibility in prices provide the most regular employment. 6. Controlled prices build up monopoly and prevent the competition necessary to the protection of the consumer and the small producer. 7. Fixed prices encourage inefficiency in business. 8. Interference with freedom of management through fixing of prices tends to destroy individual initiative and to fasten the blight of bureaucratic control upon industry. 9. An increase in price in one industry causes higher prices in related industries. 10. "Chiselers" and "bootleggers" thrive under a system of controlled prices making enforcement impossible. Constitutional Principles Regulation of manufacture and production by the Federal government is repugnant to our constitutional principles. Control of prices as well as of conditions of employment is ordinarily outside the scope of authority of the Congress. Whatever may be said of its control of interstate commerce certainly no one believes that the Congress can either directly or indirectly assume any authority whatever over business conducted entirely within the confines of a single state. The power to fix prices through Federal government agencies has been denied in decisions in the Federal District Courts which are awaiting a final adjudication in the Supreme Court of the United States. The American people have cheerfully acquiesced in measures of control in times of war. In an emergency they will accept measures which overstep constitutional bounds. Experience of the past year and a half, however, has demonstrated that conditions were not improved by price control methods or other interference by government. An early decision on the constitutionality of the National Industrial Recovery Act is highly desirable. The apparent disposition of the administration to avoid a final ruling by the Supreme Court of the United States during its present term may serve to deprive citizens of their constitutional rights. If liberties of citizens have been infringed upon in violation of the Constitution, they are entitled to such protection as may be afforded by a decision of our highest court. The policy of delay places the government in the position of attempting to enforce a law which according to decisions in several District Courts is invalid. Extension of the present statute beyond its expiration date, June 16, 1935, should be on a basis to permit pending litigation to go forward to a final determination. Economic Planning The trend toward price control in the National Recovery Administration, particularly in its early months, illustrates an unavoidable result when economic planning is undertaken by government. Economic planning has little chance of success unless many factors, including prices, are subject to control. No half-way measures are possible. Regulation of one factor requires control of another. If it be assumed that the first control is essential, the second is equally so. In the light of policies adopted by the National Recovery Administration at its inception, the request by many industries for approval of price control schemes was natural. Costs of manufacture and distribution were increased by reason of code provisions relating to wages, hours and conditions of employment. The higher costs could not be absorbed by an already depressed industry. The maintenance of the higher prices was made doubly difficult by cutthroat competition already existing. In these circumstances some increase in prices was necessary to keep industry on its feet, but from the standpoint of the national economic situation the control of prices was a mistaken policy from the beginning and was doomed to ultimate failure. Fallacious Theories Fundamentally the blame for injurious consequences of price control attaches to policies of the National Recovery Administration. The increase of costs was part of a program for hastening recovery by expanding purchasing power. Through higher wages, shorter hours and increased employment, partly provided by specific requirements of codes and partly induced through a strengthening of labor's bargaining powers, the intention was to place new purchasing ability in the hands of industrial employees. The theory was fallacious. The actual effect was to increase unit costs of industry. The higher prices thus made necessary nullified any advantage accruing from larger wages. For those failing to receive greater earnings, the higher prices meant lessened purchasing power. A reduction in consumption was the result. Industry, instead of benefiting from an increase in purchasing power supposed to accompany larger total payrolls, found it difficult to avoid a curtailment of production and a reduction in the number of employees. The cotton textile industry offers a striking example of the effects of attempts to increase purchasing power. This industry, besides having its costs increased under the National Recovery Administration, has been burdened by the processing tax imposed on cotton by the Agricultural Adjustment Administration as part of its effort to increase the purchasing power of agriculture. The cotton textile industry, in order to absorb increased costs, has been forced to raise prices. These prices, maintained with the aid of production control devices, have been so high as to discourage consumption of domestic goods and to encourage the sale in this country of foreign-made goods. In the first two months of 1935 imports of Japanese cotton textiles amounted in yardage to a total three times as great as the total of the entire year 1934. Sixty per cent of the normal export business of the American industry has gone to foreign competitors. The closing of mills with a shifting of thousands of employees to the relief rolls is threatened. Government Statistics What has been taking place in the domestic cotton textile industry is shown by statistics appearing in the March 15 issue of The Blue Eagle, the official publication of the National Recovery Administration. During 1934 the spread-work features of the code kept the number of employees at a level substantially equal to that of 1929 despite a 22 per cent decrease in cotton consumption. The work week ranged from 40 to 50 hours prior to the National Recovery Administration. Under the code it has averaged about 35 hours, dropping to 30 during the summer of 1934 when there was a curtailment of activity because of the large stock of goods on hand. Earnings under the code increased to about 37 cents per hour in 1934 from about 22 cents in 1933 and 33 cents in 1929. Wages paid amounted to 10.4 cents per pound of cotton consumed in 1934 as compared with 7.5 cents in 1933. The industry processed 125 pounds of cotton per worker employed in 1934 as against 150 pounds prior to the adoption of a code. While the industry's costs were rising, the amount of cotton used declined to 2,-540,000,000 pounds in 1934 from 2,910,000,000 pounds in 1933. The figures with respect to the cotton textile industry emphasize the effect of increased costs due to the National Recovery Administra- 5 4 tion. The cotton textile situation proves the difficulty of overcoming natural economic forces, including world competition, in any regulation of either prices or costs. Code provisions, which are intended to facilitate experimentation with fallacious theories and which in the process have led to price control measures, are injurious in effect. Economic recovery requires that industry shall not be unduly handicapped as to costs so that there may be no occasion to resort to price control. Reduction in costs with accompanying reduction of prices will make possible greater consumption which will lead to more production, wider employment and profits justifying higher wages. Control Retards Recovery Viewed broadly, price controls under codes have aggravated and prolonged the depression. They have prevented the free play of competition which is best calculated to keep prices at the proper point. Competition preserves the rights of the purchasing public and in the long run in the interest of sellers. Leon Henderson, Director of the Research and Planning Division of the National Recovery Administration, in a statement at price control hearings in January asserted that the impression that industries with the greatest stability of price have contributed most to employment and recovery is erroneous. Actual statistics show, according to Mr. Henderson, that (1) industries with records of the greatest price declines during the depression maintained employment best, that (2) after 18 months of experimentation industries with the best reemployment records are those whose prices are below the average and that (3) industries with the smallest price advances during these 18 months have the largest gains in employment. It has proved impossible to control prices without also regulating many other items associated with prices. Mr. Henderson has listed 37 such items, including guarantees, discounts, premiums, rebates, standards, trade-in allowances and methods of shipment. Production control ordinarily accompanies price control. There grows up a bureaucratic control which makes impossible the exercise of individual initiative. If industry fails to prosper under such conditions, the next step demanded by bureaucracy will be complete nationalization. In the inevitable ramifications of price control, once commenced, there will arise new maladjustments. Relationships between commodities make it impossible to advance the price of one without forcing up proportionately that of others. A higher price for a raw material is reflected all the way down the line to the finished product. An increase in prices of commodities, including those related to the commodities involved directly in price control, means decreased consumption, particularly if cheaper substitutes are obtainable. The adverse effect upon an industry brought within the range of influence of prices of another industry may be very great. Effect upon Agriculture Low prices of industrial products are desirable from the standpoint of agriculture as well as of other groups. The trend toward higher prices under the National Recovery Administration has nullified in part the larger income obtained for the farmer through the subsidies of the Agricultural Adjustment Administration. An example is the increased charge for ginning levied against the farmer because of higher costs imposed under a code. The higher charges cut heavily into the increased price received by the farmer for his cotton. Policies which promote a larger volume of industrial production and greater employment contribute to an improved market for farm products. At the end of 1934 prices of farm products were slightly above the' pre-war level. Prices of industrial products which the farmer must buy were 26 per cent above the pre-war level. The purchasing power of farm products was 80 per cent of pre-war. The farmer would have greatly increased his purchases of farm implements and household furnishings if prices had been held on a lower basis. Both outright price fixing and more moderate price control schemes under the National Recovery Administration have retarded the recovery of agriculture. Enforcement Difficult Just as is true with many other factors entering into economic planning, enforcement of price 7 control is exceedingly difficult. Chiselers and bootleggers in an industry thrive and their activities make it impossible for those who observe price regulations to get the full benefit. In numerous cases where some measure of price control has been attempted enforcement has completely broken down. The compliance machinery, however efficient, cannot act quickly enough. By the time an investigation is made the transactions have been long completed. The only action that can then be taken is criminal prosecution which usually is not desirable and rarely successful. In the case of a manufacturer who sold below cost an investigation was in progress from May to October, 1934. Finally it was decided that the manufacturer was probably justified in his cost calculation which differed from that forming the basis of the complaint. Accounting problems in connection with the determination of costs are very complex. There is lacking an adequate statistical and factual background upon which to base uniform accounting systems. Evils of Price Control There has been an increasing recognition of the evils of price control under the National Recovery Administration. As long ago as September 30, 1934, the President in a radio speech admitted the need of a review of policies. The President said: "There may be a serious question as to the wisdom of many of those devices to control production, or to prevent destructive price cutting which many business organizations have insisted were necessary, or whether their effect may have been to prevent that volume of production which would make possible lower prices and increased employment." As the President indicated, many business organizations have believed that devices to control production and prices were necessary. It should not be overlooked, however, that the difficulty of maintaining adequate prices was greatly increased by the higher costs due to policies of the National Recovery Administration. An adequate modification of policies under which the National Recovery Administration has operated requires not only elimination of price control but also the avoidance of other action which gives incentive to price control. Kinds of Price Control Among the 720 codes and supplements, 569 contain some form of minimum price regulation. In only 12 codes is there provision for price fixing by the Code Authorities without requiring the declaration of an emergency. In 203 codes the Code Authority or the National Recovery Administration is authorized to declare an emergency during which minimum prices shall be established. In 122 codes destructive price cutting is prohibited. In 420 codes there are prohibitions against selling below cost. In 416 codes there are provisions for price filing. In 295 codes in which the open price filing system prevails there is a waiting period before revised prices become effective. In 184 of these codes the waiting period regulation has been stayed by the National Recovery Administration. In 507 codes there are provisions for uniform accounting methods or cost formulae. In five codes there are specific provisions for basing points for prices, while in several others there are mechanisms by which basing points may be established. It is apparent from these figures that price limitation of one kind or another has been contemplated in more than three-fourths of the codes. Approval of price control devices appears to have been granted on an indiscriminate basis in the early days of the National Recovery Administration. The rigidity of prices provided by the codes first adopted made it seem doubly desirable in later codes to insure maintenance of prices at a level above the increased costs. In more recent months the trend has been definitely away from rigid price controls as experience has demonstrated both the impossibility and unde-sirability of maintaining fixed prices. Fixed Minimum Prices The coal industry is an outstanding example of the failure of price fixing. The natural resources industries are so essential to the nation that extraordinary measures for their development and protection are justified. The bituminous coal industry was in a chaotic condition. It was believed that the fixing of minimum prices would stabilize production and prevent further impairment of capital and at the same time insure adequate wages to the miners. Both the producers and the mine workers joined in ap- proval of price fixing. Nevertheless, enforcement has proved impossible. The code governing production of bituminous coal is one of twelve in which the administrative officials are given power to fix minimum prices at any time without the declaration of an emergency. The code dealing with wholesale coal is another of the twelve. The Retail Solid Fuel Code, under which there also has been a collapse in efforts to control prices, is one of a different group of codes in which minimum prices may be established upon the declaration of an emergency. The Bituminous Coal Code declares the selling of coal under a fair market price to be an unfair competitive practice. Regional marketing agencies are established to determine minimum prices which must be approved by the presidential member of the Code Authority and may be reviewed by the National Recovery Administration. Hearings before the National Recovery Administration disclosed widespread violations of the fixed price schedules. Many producers were reported to be selling more than half their production under contracts made before adoption of t,he Code and at prices lower than the established Code prices. High prices encouraged the opening of small, high-cost mines, operators of which ignored all provisions of the Code. In the hearings it was stated by a spokesman for the Wholesale Coal Code Authority that price control was binding only upon those who were willing to cooperate, that it was destructive to those who conformed to it and profitable to those who evaded it. Emergency Price Fixing Many important industries are in the list of 203 codes and supplements in which authority is given to fix minimum prices upon the declaration of an emergency. Besides retail solid fuel, the industries in which emergencies have been declared and minimum prices established include lumber and timber products, both retail and wholesale tobacco, certain classes of cast iron pipe, tires and several others. Under the codes permitting emergency price fixing it is necessary to determine what constitutes an emergency in any given industry and also to calculate the "lowest reasonable cost" which is the basis for minimum prices. Both 10 questions occasion administrative difficulties. The conditions enumerated by the National Recovery Administration as a test for an inquiry to determine the existence of an emergency are impairment of employment or wage scales, particularly high mortality of enterprises, especially small enterprises, and panic in an industry or other special conditions thought to require stabilization by means of minimum prices. Under the Retail Solid Fuel Code more than 150 emergencies have been declared and minimum prices fixed. In many instances there has been a complete breakdown in enforcement. The entire membership of the Code Authority resigned in protest against policies of the National Recovery Administration. Another of the natural resources industries, lumber, experimented with price fixing with a resulting collapse. An emergency was declared and minimum prices fixed. The violations became so general that the minimum prices finally were suspended by the National Recovery Administration for an indefinite period. Evidence offered at hearings before the National Recovery Administration showed that compliance with the fixed prices broke down first in the northwest, the lowest cost region, next in the south and last in the north central and northeastern regions. It was indicated that the general average of cost-protection prices was too high for the movement of lumber in large quantities and that it was not possible to determine proper prices for the thousands of items in all of the regions and divisions of the industry. It was further stated that the high prices encouraged the opening of some new productive units in the industry. Destructive Price Cutting Codes containing prohibitions against destructive price cutting are found chiefly among the manufacturing industries. Many of the food codes have such a provision. In most of the 122 codes in this group there is merely a general statement without qualifications or explanation as to its meaning and enforcement. Some of the codes prohibit "wilfully destructive price cutting" and set up a procedure for a hearing by the Code Authority and for appeals to the National Recovery Administration. There is little evidence to indicate whether or 11 not prohibitions against destructive price cutting have been generally effective. It is not easy to define destructive price cutting. Also, in many of the codes prohibitions against destructive price cutting are coupled with other price control devices. Selling Below Cost In the 420 codes which contain prohibitions against selling below cost, definitions as to what constitutes costs vary greatly. Nearly all of the codes which prohibit selling below cost also provide for cost finding. However, until recently the Recovery Administration had approved only 39 cost formulae and systems out of the 507 codes and supplements that contain provisions for the establishment of such systems. Nearly 250 of the Code Authorities have never submitted cost finding plans. According to assertions by the Consumers' Advisory Board at hearings before the National Recovery Administration the provisions against selling below cost tend toward high, rigid and fixed prices. A considerable part of the increase in construction costs has been attributed to provisions of this character. Mark-up provisions applying to retail stores have furnished a method of shifting to the public increased costs due to codes. The independent druggist has reason to favor the rule under the Retail Drug Code which prohibits sales below manufacturer's list price in dozen lots. At the same time there is ground for the contention of the chain stores, which are better able to exist without price control, that the system permits the manufacturer to fix prices. While not providing for outright price fixing many of the schemes to prevent selling below cost are susceptible to use for this purpose. Open Price Filing The open price filing system, which was adopted voluntarily by many industries long before the enactment of the National Industrial Recovery Act, has been very widely used under codes. Under this system prices, discounts, rebates, allowances and terms and conditions of sale are filed with a Code Authority. The information is available to other members of the industry and to its customers. The 416 codes and supplements which provide for price filing 12 represent nearly 60 per cent of the total. No other price system has been so general in use. The extent to which open price filing constitutes price fixing is a subject of controversy. Undoubtedly, the tendency is toward a uniform price. There is less rigidity where there is no waiting period before revised prices become effective than with such a period. The suspension of waiting periods in 184 of the 295 codes which provided for them has been indicative of a trend away from rigid price control and has made the system less objectionable. Open price filing has been beneficial to individual industries which were subject to cutthroat competition. It has been especially useful from the standpoint of an industry in protecting high prices necessitated by requirements of codes. Where this has meant an excessive burden upon the purchasing public, the effect has been harmful. As in other price control devices, there would be less occasion to use open price filing if there were no undue increases in costs because of codes. Uniformity of prices under open price filing has been evident in bids received by the government. In a study of bid openings at the Procurement Division of the Treasury it was shown that while identical prices were quoted by two or more bidders in 37 per cent of cases during a pre-code period from January 1, 1933, to the effective date of codes in industries now using open price filing, the percentage thereafter up to July 1, 1934, jumped to 64. Subsequently, by reason of an executive order effective June 29, 1934, permitting vendors to grant discounts to governmental purchasers up to 15 per cent from filed prices, the percentage dropped to 50. For industries not using open price filing the percentages of bid openings with two or more bidders quoting identical prices were 40 for the pre-code period, 38 during the code period up to the issuance of the executive order and 50 thereafter. Production Control Schemes for the control of production have been used to maintain stable prices and particularly to pass on to the public the higher costs under codes. Such schemes not only may contribute to excessive prices but also tend to interfere with the exercise of individual judgment and initiative. 13 More than 175 codes provide for restraints upon production, either by a limitation on current production or on increases in productive capacity. In some instances the operation of productive machinery is limited by specifying the number of hours it may be used or the number of shifts of workers that may be employed. Production control of this type is found in the Cotton Textile Code. The purpose is to assist in the maintenance of prices at a fair competitive level and to lessen the pressure of cut-throat competition. To some extent the limitation upon production has tended to increase costs. Other limitations on current production include prohibitions and limitations on work in homes, elimination of schemes to speed up employee production, and systems of quotas and allotments. Price Control in History The histories of various civilizations record many price fixing ventures, all of which collapsed of their own weight. In China as early as the Fifth Century B. C. an elaborate system of price regulation ended in failure in spite of careful and detailed police supervision of almost every commercial transaction. Examples of economic dictatorship are found in the histories of Egypt and Greece. The Edict of the Roman Emperor, Diocletian, in the Fourth Century A. D. is an example of a very comprehensive scheme of price fixing. Based on the theory that normal, proper and reasonable prices could be established for all things, schedules covering many hundreds of articles were formulated. Severe penalties for violations were included in this compilation of dictated prices. However, even this scheme did not prevent the economic collapse and degradation of the Roman Empire, the harmful effect of which was felt throughout hundreds of years of European history. In the mercantilist economy of the Middle Ages there were many similarities to the trends of the present day. Not only were prices regulated but restraints were placed on all commercial transactions. Wage payments were fixed and many monopolies were granted by the government. The licensed monopolies of that period were much like the codified industries of today. 14 Many of these monopolies began with the production of raw materials. Then groups engaged in fabricating the raw materials found that the monopolistic high prices increased their costs and decreased their sales, and they combined into associations. Associations of this kind entered into price agreements with the result that new enterprises and extensions were discouraged. Modern Efforts In more recent times efforts have been made to control prices. One of the best known is the attempt of the Brazilian government to set the world market price for coffee. Besides resulting in failure it has imposed a severe strain upon the finances of Brazil. Another recent attempt to control prices was the British rubber plan. Exports from British territories were controlled, and prices were kept at a high level from 1925 to 1927. The effect was a stimulation of new planting and a greater use of reclaimed rubber. The demand for rubber declined and there was a sharp drop in prices. Only recently the French government has decided to terminate its unsuccessful experiment with wheat price fixing. Large surpluses of wheat have accumulated. The price of bread has risen, thereby arousing the antagonism of the urban population. The milling business has become disorganized. The condition of agriculture has been aggravated instead of benefited. The French policy has disturbed the world wheat market. In the light of the experience of the National Recovery Administration and of other nations, price fixing or anything that tends toward it should be resolutely avoided. By such a course recovery will be promoted. 15