than those prevailing on May 25, 1970. Such orders and regulations may provide for the making of such adjustments as may be necessary to prevent gross inequities.

§ 203. Delegation

The President may delegate the performance of any function under this title to such officers, departments, and agencies of the United States as he may deem appropriate.

§ 204. Penalty

Whoever willfully violates any order or regulation under this title shall be fined not more than $5,000.

§ 205. Injunctions

Whenever it appears to any agency of the United States, authorized by the President to exercise the authority contained in this section to enforce orders and regulations issued under this title, that any person has engaged, is engaged, or is about to engage in any acts or practices constituting a violation of any regulation or order under this title, it may in its discretion bring an action, in the proper district court of the United States or the proper United States court of any territory or other place subject to the jurisdiction of the United States, to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond. Upon application of the agency, any such court may also issue mandatory injunctions commanding any person to comply with any regulation or order under this title. § 206. Expiration

The authority to issue and enforce orders and regulations under this title expires at midnight, February 28, 1971, but such expiration shall not affect any proceeding under section 204 for a violation of any such order or regulation, or for the punishment for contempt committed in the violation of any injunction issued under section 205, committed prior ot March 1, 1971.

The CHAIRMAN. The hearing will continue through Saturday of this week and at least 3 days of next week. The bill before us contains three basic issues: One, the removal of the authorities of the present Defense Production Act until June 30, 1972; two, a provision which would require defense contractors to follow uniform accounting standards in reporting their costs on Government contracts. Under the bill, the standards would be established by the General Accounting Office; three, a provision to give the President standby authority to stabilize wages, prices, salaries, and rents. This would be temporary authority which would expire on February 28, 1971.

In addition to these items which are in H.R. 17880, questions have also been raised about the use of the Defense Production Act to bail out the Penn Central Transportation Co. The administration has indicated that it plans to guarantee at least $200 million to this corporation which has been unable to raise funds in the market at 10.5 percent interest.

Many members of the committee have expressed concern over the use of the Defense Production Act for this purpose. Therefore, next week we will have witnesses before us on this question, and I think it should be wise for the committee to fully explore the Penn Central guarantee. I was on this committee when the act was first drafted and the intent was very clear-it was intended to help small defense contractors obtain credit to produce specific defense goods. It was not intended as an all-purpose grab-bag to be used to bail out investors in a huge corporation whose defense business is at best incidental. From many angles, I think there is serious question about the legality of the guarantee that the administration says it plans to make to Penn Central.

In any event, this committee should consider whether an administration should be left free to commit--without restriction-any amount of the Government's credit it desires to any corporation. If the Penn Central case is to be a precedent, the Defense Production Act could become one of the greatest vehicles for Government giveaways in the history of the country.

The witness before us this morning-Prof. John Kenneth Galbraith-will discuss title II of the bill-the section giving the President standby wage and price authority for a temporary period. If he wants to comment on the other parts of the bill, he will be perfectly welcome. I want to emphasize that these are standby authorities, to be used only if and when the President deems them necessary to stabilize the economy. They are a shotgun in the corner.

In introducing this section, none of us were underestimating the difficulties of administering a wage-price program. But at the same time, all of us want to make sure that the Prsident has all the possible tools to deal with the economic crisis that is before us.

We fell into a tragic depression once before because we had a President who did not understand the necessity of using the powers of his office to assist and to stabilize the economy. Today, we have another President who is overly concerned about reactions from the business community and who, therefore, refuses to use the powers of normal suasion-jawboning and guidelines to help stabilize the economy, to bring down interest rates and to hold down prices and prevent unemployment.

I do not know whether the President will see fit to use the standby authority in this bill, but the Congress should follow through on its responsibility and give the President all the necessary economic tools. Perhaps by doing this we can somehow educate the President to the fact that there is an economic crisis and that the people want action. Just in the past few days, I have received a communication from the President in which he assures me that the Nation does not face a mounting economic crisis. This is a sad commentary. We have rising unemployment-now about 5 percent-the highest interest rates in our history, fantastically high consumer prices, and a housing industry that almost has been put out of business. But the President does not see a crisis.

I am pleased that we have Professor Galbraith as our lead-off witness in these hearings. There is not another economist more knowledgeable in these fields than John Kenneth Galbraith. Through the years, I have had Professor Galbraith as a witness many times and the Nation owes him a great debt for his tremendous contributions to so much of the good legislation that has passed the Congress. I am just sorry that we have not followed more of his advice.

Professor Galbraith, of course, was Deputy Administrator of the Office of Price Administration during World War II and he has firsthand knowledge of the problems of wage-price stabilization. Professor Galbraith, we are very happy to have you here this morning. I believe Mr. Reuss wanted to say a word before the testimony begins. Would you like to?

Mr. REUSS. Thank you, Mr. Chairman. I just wanted to say that I participated in the sponsorship of the bill, including title II, cost of

iving stabilization. I, too, welcome Professor Galbraith here. The purpose of title II, which authorizes the President to impose a temporary freeze on prices, wages, salaries, and rents, is to enable the President to stop the very grinding inflation under which this counry is now suffering.

The administration's two methods for fighting inflation, one, putting 1.3 million additional men and women out of work and, two, having the highest interest rates in 100 years, have simply not worked. They have not in any way made useful contact with inflation, which continues unabated at a current annual rate of in excess of 7 percent. All the great international organizations, International Monetary Fund, the Organization for Economic Cooperation and Development, the Bank for International Settlements, have recently and publicly been critical of the nonaction on inflation in the United States, and all have called for some sort of policies and measures directed at prices and wages.

In my judgment, if we are going to bring inflation under control we need to do a great many things other than simply have sound fiscal and monetary policies. We need, I believe, to implement the authority to control credit which the Congress gave the administration in the legislation emanating from this committee which became law last December. We need also a supply policy which, operating on commodities such as oil and meat, for example, could, by increasing the supply, lower the price. We need supply deficiency techniques in fields which are highly inflationary like medical care. There what is needed is more physicians, more paramedical personnel, a reversal of the present trend of starving the medical schools.

Finally, we need, in my judgment, to extricate ourselves from the war in Southeast Asia in order to get our economy on a sound basis. In addition to these, we need to do a fourth thing. This is what title II of H.R. 17880 addresses itself to; namely, to get control over wageprice cost-push inflation.

In that connection a subcommittee of the House Government Operations Committee several weeks ago favorably reported a bill authored by myself and other members, which would (1), direct the Council of Economic Advisers to resuscitate wage-price guideposts after full consultation with labor and management, and, (2) would authorize the President, through any executive branch agency he cares to use, to focus the spotlight of public attention on price-wage behavior which transcends those guideposts and threatens the national economic stability.

It is entirely clear from the hearings on that bill that labor's cooperation in fighting inflation is needed. It is entirely clear to me that labor is not going to be willing to cooperate, and should not indeed be asked to cooperate, unless it is assured of something like price stability. Accordingly, the sponsors of this title II of H.R. 17780 believe that during the period in which the wage-price guideposts are being worked out, it may well be necessary and probably will be necessary to impose a temporary across-the-board freeze on prizes, wages, rents, and salaries.

Only by so doing can a handle be obtained on inflation which will enable the working out of guideposts which then have some chance of being observed on a voluntary basis. The language of title II is derived from the battle-tested language of the Emergency Price Con

trol Act of 1942. It would be in effect only for 8 months through February 1971 and it is envisaged that any action to be taken by the President under it would be short-term action, typically for the 2 or 3 months in which permanent wage-price-income guideposts and policies are being worked out. So we are going to be most interested in the testimony.

The CHAIRMAN. Thank you. Mr. Barrett.

Mr. BARRETT. I just want to welcome Dr. Galbraith here this morning and tell the committee that Dr. Galbraith is held in high esteem and high regard by all Philadelphians. Dr. Galbraith, it is nice to have you here this morning.

The CHAIRMAN. Dr. Galbraith, we are glad to hear from you, sir. You may proceed in your own way.

STATEMENT OF DR. JOHN KENNETH GALBRAITH, PAUL M. WARBURG PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY; ACCOMPANIED BY HAZEL DENTON, RESEARCH ASSISTANT

Dr. GALBRAITH. Thank you very much, Mr. Chairman. I say for my part it is very pleasant to be back here this morning or would be were the circumstances somewhat less serious. I shall address myself, Mr. Chairman, to the economic background of this legislation as well as to the legislation, itself.

Let me begin by summarizing matters relating to the economy as they now stand. First, unemployment is now at 5 percent of the labor force and in fact considering the lag in the statistics, and the nature of the statistics themselves, the underenumeration of those who are not seeking work, who have withdrawn from the labor force because they found the search for jobs hopeless, probably somewhat higher. Production has been stable or declining for many months. Inflation is at a record rate and duration since the years immediately following World War II. The housing industry despite a housing shortage is, as the chairman pointed out, deeply depressed. The financial markets have just had their most severe break in 40 years. This is held to be in accordance with the game plan of the administration or as one of the members of the Council of Economic Advisers said yesterday, to be slightly below the game plan. It is, I think we may safely conclude, not a good game plan.

We have this disenchanting combination of circumstances because a theory of economic management has been tried, fully tried and found wanting. It is always unwise to put theory to a test if it is unsound. The theory was that control of the monetary supply, as most eloquently advocated by Prof. Milton Friedman of the University of Chicago, could, if combined with a reasonable restrictive fiscal policy bring stable prices and without unduly depressive effects on the economy. This doctrine discounted the ability of large corporations and strong unions to shove up prices and wages under conditions even of severe monetary and fiscal restraint. The proponents of this view are men who believe deeply in the market. Not remarkably among men of deep belief, they substitute faith for reality. Though this may be theologically commendable, it can be very hard on the other people who must suffer for their faith.

Wages do shove up prices and prices do pull up wages in the modern highly organized economy. Monetary restraint, while it works rather ruthlessly for the smaller businessman, works very well for the smaller businessman, and especially as I have noted for the home construction industry, does not so directly affect General Motors, General Electric, United States Steel or the other very large corporations. These firms have large cash flows, are favored visitors at the banks and can pass their higher interest rates on to the public. This is precisely the part of the economy which gives leadership on the wage-price spiral. As Dr. McCracken pointed out yesterday in Europe, farm prices, prices of services generally at the moment are stable or even coming down, but prices in the organized sector of the economy-prices in the sector of the economy where large corporations bargain with strong unionsare still going up. In saying a year ago last January that it had no concern for wages and prices the administration may well have done as much to promote inflation as it accomplished in the ensuing 18 months to control it.

The administration has taken extensive refuge in the fact that it inherited an inflation. Dr. McCracken again recurred to that theme yesterday in Europe.

While this is true, economic policy will become excessively easy and attract an inferior class of talent, if it is always possible to blame the failures of one administration through much or all of its life on the errors of the previous administration. Those who are responsible, unhappily, must assume responsibility. But the administration should not be blamed for everything. The financial markets to which they fell heir, to which the administration fell heir, were already in an advanced state of insanity.

The glamour stocks, the jerry-built conglomerates, the go-go funds, the conviction that God had arranged matters so that men of sedentary inclination could get rich sitting down in the branch office of a brokerage firm all of these things invited an eventual day of reckoning. Some of the recent unemployment has been in the aerospace industries. We cannot criticize the administration for this unemployment, if one applauds as I have the need for cutbacks in military indulgence. Finally, the administration inherited an unnecessary war which makes everything much more difficult, although here Mr. Nixon does seem disposed to establish his own responsibility.

Within the framework of its approved measures, monetary and fiscal policy, there is nothing that the administration can now do. The inflation with its punishing impact on those with fixed incomes, on the public services, and on those who are promised a real dollar for dollar return on their savings, that punishment still continues. To ease interest rates and relax further on the budget-some relaxation of the budget is inevitable from falling revenues-would accelerate this inflation. To continue the present policy is to continue for some period the present remarkable combination of inflation and recession. We have long known, Mr. Chairman, that under some circumstances you can have your cake and eat it too. We are now learning from this combination of inflation and recession that you cannot have your cake and not be able to buy it either.

To tighten up sufficiently on money and the budgets to end inflation would, we now know, require a very serious recession. So, disagree