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The American people are faced with a basic national problem in the extensive idleness of men and machines. Resources of manpower and materials and skills are available to establish a much higher level of living than now exists. The serious failure to use these resources to the full is placing our democratic institutions in jeopardy. The maintenance of democracy requires that an adequate solution be found to the problem of keeping resources fully employed. The question must arise as to what national policies appropriate to a democracy can be developed which will insure reasonably full use of national resources, employment opportunities for all workers at reasonable wages, opportunities for the investment of savings with reasonable expectations of profits or a safe return, opportunities for the exercise of the organizing and managing abilities developed in modern industry, outlets for the exercise of initiative in ways which will be of advantage both to the individual and to the community.

This is a problem so broad in its scope and so basic in its character that no simple solution is likely to be found nor can a solution be found in a day or a year. If a democratic solution is to be worked out it will be the product of many minds working through a period of years. It will require an increased understanding of the problem on the part of the leaders of business, labor leaders, farm leaders, political leaders, and other leaders of public thinking. It will require continuing analysis by the technicians of different phases of the problem and a more detailed delineation of the characteristics of the national economy. It will require the careful elaboration and discussion of alternative lines of policy in order that gradually a workable solution can be developed and be gradually put into practice. As a single small step toward the development of such a solution, an effort has been made in this report to sketch in the main structural characteristics of the

American economy. This is done with the idea that such a sketch could throw light on the character of this basic national problem and might disclose the direction in which possible solutions might lie. If the report serves to clarify the problem and help provide a more effective frame of reference for the development of national policies, it will have accomplished its full purpose.

The report attempts to bring all the salient structural features of the national economy into focus in the short compass of a few hundred pages. Such a condensed summary of the economic structure necessarily lacks in detail and has to omit many things which are in themselves important yet of secondary importance to the national economy as a whole. Some essential elements of the structure are not blocked in because of the lack of data or because of the mischances of research organization. As in the case of a report on any subject, the determination of the elements to be treated as essential rests with the individuals responsible for the report and is the result of their judgment. Whatever gaps or distortions occur in this report should be eliminated through discussions and further research. A reasonable measure of general agreement as to the structural characteristics of the American economy would appear to be an essential step toward a satisfactory solution of this basic problem.

In this concluding chapter there is no advantage to be gained in summarizing the content of the foregoing chapters. Each chapter is in itself such a condensed summary of the field covered that further summary is useless. The structure stands as presented in the preceding eight chapters, each sketching in one aspect of the whole economy. It must be left to the reader to combine these separate aspects in his own mind into a unified conception of the national economy as a whole.

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APPENDIX 1.-A CONSIDERATION OF THE VALIDITY OF THE BUREAU

OF LABOR STATISTICS

PRICE INDEXES1

Introduction

The Problem

The present discussion is devoted to an effort to appraise the usefulness of the Bureau of Labor Statistics indexes of wholesale prices for studies of the degree of rigidity and the amplitude of movement of the prices. of the commodities to which they relate.

The validity of these indexes as tools for such an analysis has been seriously questioned. It has been pointed out that, in many markets, price changes take forms which price indexes fail to reflect. Thus, Willard L. Thorp, at a meeting of the American Economic Association in December 1935,2 contended that price indexes could not portray important price modifications achieved through changes in collateral terms of sale, through the granting of special treatment to favored groups of customers, or through changes in the quality of the product.

In view of the fact that the Bureau of Labor Statistics wholesale price indexes have been used as a basis for analysis in this report, it is essential that these criticisms of the indexes be examined and some indication of the reliability of the Bureau of Labor Statistics series be obtained.

Nature of the

Bureau of Labor Statistics Indexes

The validity of such criticism is largely dependent upon the precise nature of the Bureau of Labor Statistics indexes, and the manner in which they are compiled. The 784 individual price series which comprise the Bureau of Labor Statistics weighted price index cover an exceedingly wide range. They include figures for raw materials, for semimanufactured goods and for highly processed commodities; for standardized products and for highly specialized, trade-marked articles. Some prices in the series represent open market prices, uniform. for all sellers and to all purchasers. Others are for commodities whose prices vary widely for different groups of buyers, with each sale a virtually independent transaction. For a few of the products included in the Bureau of Labor Statistics series, there are almost as many prices in actual effect at any given time as there are purchasers in the market.

In its efforts to secure price statistics adequately representative of the breadth of American industry, the

1 Appendix 1 was prepared by Saul Nelson.

The American Economic Review, vol. 26, No. 1, supplement, March 1936, Price Theories and Economic Realities, by Willard L. Thorp, pp. 15–22.

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The wide variety of products included in the series virtually precludes the possibility of maintaining uniformity in the character of the indexes, even for those based upon direct reports. In general, the Bureau attempts to present, as nearly as possible, plant net prices for the usual trade sale. The price is, therefore, on an f. o. b. plant basis, with trade and cash discounts deducted. No effort is made to allow for special class discounts to favored groups of buyers, or for quantity discounts on very large purchases.

In the case of prices taken from trade papers, it is often impossible to meet these general requirements. In a large number of instances the quotations are on a delivered basis. In others, the terms of sale are omitted or inadequately stated. Consequently, it is impossible to maintain strict comparability between prices taken from trade journals and those obtained on the basis of direct reports.

The commodity to which each series applies is usually defined as precisely as possible, in order to preserve

price comparability through time. For nonstandard merchandise, such as clothing or machinery, it is often extremely difficult to devise such a definition. For price series taken from trade journals, the description of the commodity given in the source must necessarily be accepted by the Bureau, even though it may lack the degree of precision considered desirable.

Factors Affecting Reliability

of the Bureau of Labor Statistics Indexes

The reliability of the indexes is directly conditioned by the frequency with which price changes take forms. which the indexes fail to reflect, and by the extent to which such indirect changes modify the nominal, reported price.

In the vast majority of business transactions price is but one of the many elements of the sales bargain. The nominal price may be modified by any of a wide variety of discounts, allowances, or extras. Moreover, what the purchaser receives is not merely a physical commodity, but is that commodity subject to any understandings or agreements such as guarantees, services, and the like, which the seller may grant to his customer. Any change in any of these elements affects the net price the true values exchanged-no less immediately than does a change in the nominal price level.

The most important of these indirect price variants

are:

1. Changes in the collateral terms of sale.-Modifications in cash or trade discounts, changes in credit terms, price or quality guarantees, services performed by the seller for the buyer, freight, and advertising allowances and the like all affect the true price of a commodity no less immediately than changes in the nominal or list price.

2. Special treatment of favored customers or groups of customers. Important changes in price may affect only a selected segment of the market. Special quantity discounts may be granted to very large purchasers, or the distinction may be made on the basis of function rather than of size. In some industries, the bulk of the product may be sold on the basis of long-term contracts, with the reported price quotation affecting only a small fraction of the total sales.

3. Secret rebates and concessions.-The allowance of secret rebates and concessions may render the reported prices and published terms of sale virtually meaningless, especially during the prevalence of a buyers' market.

4. Geographic price variations.-The Bureau of Labor Statistics indexes portray price variations at some specific point-usually the plant or some principal market. For some commodities, notably those in the food group, prices at more than one market are reported. Localized price reports may not, however, adequately reflect price trends throughout the nation.

5. Changes in the product. The impossibility of adequately describing complex commodities renders it extremely difficult to express changes in design or in quality in terms of price.

Scope of the Investigation

Two distinct techniques of investigation were pursued in an effort to appraise the extent and importance of these indirect forms of price modification.

1. The detailed price structure of certain industries was studied. National Recovery Administration files and reports, reports and investigations of the Federal Trade Commission, and the congressional investigation. of the American Retail Federation constituted the principal sources of information for this approach.

2. Bureau of Labor Statistics price series for a wide selection of commodities were compared with prices derived from data published by the Bureau of Census and the Bureau of Mines. In general, Census and Mines data closely reflect actual net returns to the producer after the deduction of all direct and indirect concessions. Consequently a comparison of this sort afforded a fairly reliable measure of the ability of the Bureau of Labor Statistics indexes to measure on an annual basis the extent of changes in net price over a period of years.

Changes in Collateral Terms of Sale

The importance of changes in collateral terms of sale was clearly recognized during the National Recovery Administration period. Industries whose codes included some form of minimum price provisions, or which established open price systems, found it necessary to guard against evasion of such provisions by exercising minute supervision over collateral terms of sale. The number of such restrictions ran well into the hundreds.

In interpreting Bureau of Labor Statistics price statistics, therefore, it is necessary to consider the possibility of important changes in price being effected through changes in terms of sale. The Bureau itself makes every effort to secure information as to the most important terms, but it would be a physical impossibility for it to analyze the price structure for each commodity included in the weighted index in complete detail.

Some of the more important terms of sale include the following:

1. Discounts and allowances—
(a) Cash discount.
(b) Trade discount.
(c) Quantity discount.
(d) Freight allowance.
(e) Advertising allowance.

(f) Promotional allowance.

(g) Extras, small quantities or unusual size. (h) Trade-in allowance.

2. Services and guarantees

(a) Price guarantees.

(b) Quality guarantees. (c) Sales assistance.

3. Other terms

(a) Credit terms.

The importance of each of these elements varies considerably from industry to industry. In the sale of automobiles and radios, for example, the nominal price may be greatly modified by the granting of a generous allowance on a used car or radio set. Extravagant quality guarantees were at one time a favorite method of cutting prices on automobile tires without any change in the nominal list. Similarly, in the coal industry, certain producers endeavored to evade code price restrictions by issuing guarantees of heat content which they knew were impossible of fulfillment.

The extent to which changes in terms affect the list price may be illustrated by examining a specific industry. The National Recovery Administration files contain an excellent record of the price quotations of fertilizer producers during the code period. These can be compared with the Bureau of Labor Statistics quotations for the same product.

Under the fertilizer code, all producers were required to file a complete list of their prices and terms for all grades of fertilizer. Mixed fertilizer is commonly sold on a delivered "to the farm" basis. The price quoted is uniform for a defined geographic area and freight charges are absorbed by the producer.

The price structure of the fertilizer industry is somewhat complex-though not more so than that for many other industries. The quoted list price during the code period was subject to a number of collateral terms, of which the most important were the following:

1. Cash discounts and credit terms.-Large discounts from the list price, ranging as high as 15 percent were allowed for fertilizer purchased on or before certain dates. Thus, one company allowed a discount of 15 percent for fertilizer purchased and paid for before March 15, 14 percent for payment before April 15, 13 percent for payment by May 15, and 12 percent for payment by June 15. In addition, a further discount of 1 percent for cash was allowed. If payment was made prior to March 1 the seller paid interest at the rate of 8 percent. For payment after July 1 the purchaser was required to pay interest at the rate of 7 percent.

2. Trade discounts.-Most fertilizer was distributed through agents during the code period. On cash sales these agents received a discount of 5 percent, while on

credit sales, when the agent guaranteed payment of the note, he received an additional 5 percent.

3. Quantity discounts.-Agents received additional discounts ranging from 1 to 3 percent if they handled over 500 tons during the season. (As in the case of a few other industries, it did not matter whether the agent secured all the 500 tons from one producer or handled an aggregate of 500 tons from a number of producers. The same discount was allowed in either case.) On direct sales, consumers received quantity discounts of 3 to 5 percent.

4. Packaging allowances and extras.-If instead of specifying that fertilizer be packed in 200-pound burlap bags, the buyer was willing to accept delivery in bulk, he was granted a discount of from $1 to $1.50. If, on the other hand, he specified smaller bags, or preferred cotton bags to burlap bags, the price was increased from 50 cents to $2 per ton.

5. Transportation allowances.-If delivery was accepted at the plant, or at a railway station, instead of at the farm, varying allowances were granted, depending on the distance trucked. If, on the other hand, the quantity purchased was less than a carload, an added charge was made.

6. Price guarantees. In addition to these quoted terms, it has at times been the practice in the fertilizer industry to guarantee prices against decline during the selling season. In other words, a farmer who ordered fertilizer in March would be assured the benefit of any cut in prices announced prior to, say, July. The guarantee might also insure to the buyer as low a price as that charged by any competing producer. Apparently these guarantees usually consisted of informal understandings between the agent and the purchaser.

It would be completely impracticable for the Bureau of Labor Statistics to express each one of these terms of sale in its price quotations. Instead, it reports prices for a single set of conditions. In the case of fertilizer, the price quoted is that which an agent is required to pay on cash sales. This represents a net cash price on carload lots of 200-pound bags. Average freight from the plant to the farm is deducted, thus making the price an f. o. b. plant price rather than a delivered price.

Table II compares the price quotation of a leading producer3 with the Bureau of Labor Statistics price quotations during the code period. The grade of fertilizer in each case is the same. The price is for 3-8-3 fertilizer, which contains 8 parts of phosphorus and 3 each of potash and nitrogen to each 100 pounds. of mix. The Bureau of Labor Statistics price is for the South Atlantic region as a whole, while the National Recovery Administration price is for South Carolina only.

3 This producer was an acknowledged "price leader" in this territory. The prices and terms of most competing producers followed his with few and minor variations

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