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business, he had this tremendous inventory, and as a result he had to have a reorganization in 1921. He said it always seemed to him that had worked 3 years just for nothing but the privilege of losing his good working capital position.

Senator RADCLIFFE. The increase in income and the increase in the cost of living are not likely to move exactly parallel, anyhow, are they?

Mr. HENDERSON. That is correct. There is a lag between wages in toto and the cost of living.

Senator RADCLIFFE. It might work one way one time and another way another time, but it is not likely to be exactly parallel.

Mr. HENDERSON. That is right. The workers who are well organized into unions and are in the defense industries are the ones who can keep ahead of the procession.

I inserted in the House hearings a chart showing which of the labor groups gained in the last war in this cost-of-living race with wages, and those that lost, and it was one of the most telling things I know of. On page 149 of part I of the House hearings is chart No. 40, which shows which of the labor groups lost and which won in this race with the cost of living.

Senator HUGHES. What do you mean by that?

Mr. HENDERSON. Very many wages did not go up so fast as the cost of living did in that period; and I say that they lost by reason of the fact that our price level pyramided so high that when it deflated it paralyzed the entire country and they lost days and weeks and months of earnings by reason of the inflation that had its genesis in the failure to control prices.

Senator MALONEY. Can you tell us where that difference goes? Mr. HENDERSON. It goes into and comes out of bookkeeping. Senator MALONEY. That does not help me. I am sure it is a good

answer.

Mr. HENDERSON. It is something like the fellow who said he had a $100,000 dog, and he was told that he would never get that much for it. He said later, "Well, I did." They said, "You did get $100,000 for your dog?" He said, "Well, I took two $50,000 cats for it."

And that is about what is happening because of the multiplicity of transactions on the way down. It cannot all be taken at once and it cannot all be lost at once. I think maybe the Brookings Institution, in its explanation of what happened to the stock market, in one of its major volumes, may give the best clue to it.

In the last war it was usually thought, as you will recall, that the building trades, when they got high rates for construction, were really the "silk shirt" group. But the records show that the building trades failed to gain in this race. They also lost 20 percent (chart 17). The farmer loses by inflation. These black marks [indicating on chart 18] represent the number of bushels of corn required to pay interest and taxes on mortgaged farms in Iowa, and I think they tell their own story. They do not tell the full story of what happens to farmers in a deflation, but they give some indication.

It is sometimes said that in order to get increased production you have to have inflation. I want to point out that there was a rise in wholesale prices during the last war, substantially a doubling up to the time of the armistice. However, after America's entry into the World War there was no increase in total production (chart 19).

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CHART 18

BUSHELS OF CORN
REQUIRED TO PAY INTEREST AND TAXES
ON MORTGAGED FARMS IN IOWA

AVERAGE REQUIREMENT PER MORTGAGED ACRE

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BUSHELS
PER ACRE
14

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1921

UNITED STATES DEPARTMENT OF LABOR
BUREAU OF LABOR STATISTICS

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There were increases in some of the individual commodities. As a matter of fact, I consider the maintenance of the level of production a mark of high honor to those who manufactured armaments in the last war, because with the tremendous dislocation which took place it was almost impossible, after they reached the peak, not to lose.

We are likely to lose in steel production now by reason of the transfer from the high level we have attained, and we would be very glad if we could keep that level.

Senator TAFT. The production of armament had just started when the war ended.

Mr. HENDERSON. That is right. We had reached a peak. Senator TAFT. Just as a matter of interest, perhaps not related directly to this matter, I am interested to see what happened to wages and farm prices from the period of 1921 on to the present day. Can you state whether, when wages have gone up in intervening periods, the cost of living has gone up or down on the farms? Mr. HENDERSON. I can get that for you, Senator.1

in.

Senator TAFT. Sometime during your testimony you might put that

Mr. HENDERSON. Yes, sir; however, Senator Taft, as to the matter of production, I was speaking of total production, and I have presented in the House hearings individual industries, such as textiles, where the prices skyrocketed but we did not get any additional production. I am speaking now to the thesis that not only can you not get increased production with inflation, but that you are likely to lose control over your productive effort.

That is probably what is going on in Italy today. The general demoralization that is taking place in the price structure is probably interfering more with the failure to maintain the rate of production than British bombings or anything else.

I should like to point out here our experience to date, because I think it subsumes a lot of the background that we need for the consideration of a price control bill, taken together with the rate of the Victory program or defense spending, or whatever you want to call it. We have had the most substantial increase in production that this country has ever experienced since the beginning of the defense program. We have gone from, roughly, 115 to a peak of about 165, and that, of course, takes us above the previous points of 1929-1937. In the corresponding period we have had about a 23-percent increase in wholesale prices. There is a tendency for prices and production to stay in balance (chart 20).

Senator BROWN (presiding). I think, Mr. Henderson, we had better suspend now and meet again at 2:30 this afternoon.

(Whereupon, at 12 o'clock noon, a recess was taken until 2:30 p. m. of the same day.)

1 See table 1, p. 47.

See Hearings before the House Banking and Currency Committee on H. R. 5479 (superseded by H. R. 5990), 77th Cong., 1st sess., pp. 205-207.

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