Pincers on the Market

The OPM-automakers' agreement to curtail 1942 production (TIME, April 28) was last week worked out in detail. The over-all reduction was set at 20.15%, from 5,289,972 new. cars this model year to 4,224,152 next. General Motors, Ford and Chrysler, which produce 90% of the nation's autos, agreed to cut their production 21.5% so that their medium-sized competitors would have to cut only 15%, their smallest competitors not at all; thus no company would be forced by quota below the break-even point. It was a good plan, with one failing: it was already obsolete.

Detroit itself felt so. Chrysler's President K. T. Keller said of the 20.15% cut in a letter to his stockholders: "Attainment of this volume of production . . .may prove to be difficult [because of materials shortages]. . . It appears that the activities of your corporation are destined to become increasingly diverted to the needs of the defense program." In Washington, with President Roosevelt calling for production of 500 heavy bombers a month, defense officials took another look at the materials-consuming auto industry, began talking about a 40-50% reduction. Some of them thought the day was not far off when no new automobiles would be manufactured at all.

But cutting production was only half the battle. It dislocated the supply, but left demand untouched. How were even 4,224,152 new cars to be rationed to consumers, when increasing national income has sent guesstimates of next year's potential market for autos up 10% over this year? The gap--1,594,817 people who will want to buy nonexistent new cars--would normally be closed by higher prices. But the Administration is determined that in this war prices shall stay down. Its scheme: a stiff excise tax and a heavy brake on installment sales.

This pincer plan was outlined in a memorandum prepared for the War Department last summer by Rolf Nugent of the Russell Sage Foundation, who since has been doing further work on the problem for OPACS Chief Leon Henderson. Nugent suggested a 25% excise tax on automobiles, coupled with larger down payments and fewer months to pay the balance. His estimate : time purchases of automobiles (which now account for about two-thirds of all new car sales) could be cut in half by requiring a 50% down payment and the balance in ten months.

Last week the tax half of the pincer was laid before the House Ways and Means Committee by Leon Henderson. He urged a 20-25% excise tax on all sales of automobiles, old and new. The installment-sales half was still being studied by OPACS and Federal Reserve economists. Since so many finance companies, dealers and banks compete for the business, best guess was that some form of Federal regulation of installment sales was likely. Possible first move: limitation of installment contracts to 18 months. Consumption of other durable goods besides autos--refrigerators, stoves, furnaces, etc.--could be controlled by the same device.

Since the defense program began to boost national income, installment sales have risen spectacularly. The Commerce Department's March figure for new automobile financing was up 41.6% from 1940. Outstanding credit arising directly from retail installment sales of all kinds was estimated by the Russell Sage Foundation at year's end as $4,036,000,000, up nearly 25% in twelve months to a new alltime high. By last week the figure was even higher and still rising.

In other boom periods, expansion of installment buying has helped push up the production curve. But following depressions have been deepened because consumers had past obligations to meet, thus had less current purchasing power. This time the Administration's goal is to suspend salary-hocking while the defense boom lasts, restore it to cushion the effect of the collapse which will follow.

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