ECONOMIC INFORMATION
No.  12
FOR   INDIANA   FARMERS
July, 1942
THE PRICE SITUATION
National economic policies to control prices may slow down the rise
in farm prices during the next few months but they are expected to become
less effective as the war progresses, due to an accumulation of inflationary
influences.
The government likely will continue to use its power to encourage production of things needed most, including certain agricultural products. In
adjusting their farm businesses to war conditions, Indiana farmers will
find it to their economic advantage as well as to the national interest to
pursue a vigorous production program, taking into account price relationships that will exist under a partially effective program of price control.
Prices Have Increased Substantially
During Present War
Between the outbreak of war in September, 1939, and April. 1942, prices of basic
raw materials rose 66 p:rc:nt, wholesale
prices advanced 31 percent, and the cost
of living increased 14 percent. During this
same period U. S. farm-product prices increased 70 percent. Prices increased rapidly
starting in the early part of 1941.
Why Prices Rise During a War
Prices rise during a war principal'v because consumers have an increasing quantity
of money to spend for a decl'ning quant ty
of goods. No nation ever waged a major
war without a substantial reduct on from
its peace-time standard of living.
The national income of consumers was
71 billion dollars in 1939. 76 billion in 1940,
92 billion in 1941 and it is estimated that
it will be a.bout 117 billion dollars in 1042.
Kuge war expenditures by the government and a higher price level account largely for the record breaking na ional income
anticipated th!s year. Of this amount it is
estimated that approximately 31 b 11 on dollars will be taken for taxes and individual
ravings, leaving S6 bdlion dollars of morcv
income. But at present prices only about
69 billion dol'ars worh of goods w 11 b*
available for purchase by civil ars, bavin";
17 billion dollars excess purchasing pow^r
—the "inflationary gap.'' With this excess
available to civilians for use in bidding
against one another for the goods available, an inflationary rise in the price level
of at least 25 percent could be expected.
Some Consequences of Inflation
Severe inflation causes reckless buying
and hoarding of goods in expectation of
further advances in prices. This increases
ihe violence of the price rise. People fail
to use reasonable business caution. Th?y
borrow unduly and ignore details of thrift.
Speculation in goods is encouraged. Money
incomes of various economic groups are
affected differently. Salaried persors and
these engaged in the professions do not
receive increases promptly. Neither do individuals or institutions that depend on
fixed incomes.
In the past, severe inflation has always
occurred during major wars and increased
the money costs of the wars. But the most
far-reaching consequence of inflation is that
it sets the stage for a deflation extending
over a period of years.
All of the effects of inflation are not
injurious. Some are beneficial. Certain types
of production are increased. Essential industries are stimulated while non-essential
industries are curtailed. Labor is attracted
to essential industries where pay is highest.