OFFICE OF PRICE ADMINISTRATION pRITISH WARTIME PRICE RESTRAINING SUBSIDIES GOVERNMENT PUBLICATIONS UNIV OF WASH. LIBRARIES APR 1 4 ?C'-' U.S. DEPOSITORY COPY DIVISION OF RESEARCH Fcgn Information Branch prn Because of the ride interest in the new subsidy program initiated in 'June 1243, it has been felt desirable to reprint the following study covering the important experience of our :British Allies in the use of subsidies to evoid price increases. This document was issued iTovember il and revised June 1943 TABLE O CORTENTS I. Summary.• • • • • • • • • • • • • . • • •0•••••••••••••••••••••• i•• II, Objectives of the Subsidy Program.... ••••••••• OOOOO 3-III,. Results of the Subsidy Program......... •••• .. .. ••• 4-- IV, Types of ..... • . • • ..... • .. • • 5. a. Subsidies to Combat Rising Import Costs....".• 5 b. Subsidies to Offset Increased Transport Costs.. 7 c. Subsidy to Insure Geographical Distribution of Supplies. ••••••••••••••••••••*•••••••••• *op. 8 d. Subsidies to Secure High-Cost Increments of SuPPIY....................... ... . . .. 9 e. Subsidies to Relieve a "Squeeze"„-.... 9 f. Subsidies to Benefit, Especially Needy Consumer. Groups•• • 4.•••••••••••• 000000000000 ••••••• .0 0 10 g. Miscellaneous Objectives of Certain of the Subsidies.... ...... 0006. ******** 00. 000 0 10 V. Techniques of Subsidy... ,...... • • • • • R. The Manner of Payment.......... ....... ***** .... 11 b. The Stage Subsidized.... ..... .. .. ..... .......00 12 c. The Determination of the Need, for and. Amount of Subsidy•••••••..•••••••••••••••••••••••••• 13 VI. The Cost of British Food Subsidies................. 14. VII, Subsidy Policy,of the Ministry of Supply........... 17. TABLES Table I - Ministry of Labour Cost of Living Index........ 6 Table II- Average Weekly Wage Rates. •••• . • • • • • . • . • 6a Table III - British Subsidies to Restrain Food Prices- Early 1940 and Late 1941............. ...... 16 Table IV - British Subsidies to Restrain Food. Prices First Quarter 1942... •••••••••••••••••• 16a 163: APPErDPES nend5x A Detilf' of Br 1:-;_sh Food 3ubs.idies ................... --o. • a n d B r e a d • . • • • • • •••• • • • . • . •. • • • • . • •' • . • O o • • • • • • • • ••••0•. Potatoe• • .4 •••. *.oa ••.•••••• leatsc••••••••••sia• o••••••• t Tlilk .... :,..• • • • • • • • • • • ••• • • ..,•0•••••••••040'4•• IV. Egg8 , • • • soo•o0.4•0••0••••••••••••••••••••••• V • • Bacon ••••••••••••••••••••••••••••••••••••••ao• V .Carrov-1 ••••••••••••••—••••••••.....••••...... ••••000•••••0•044.•••••••1•00.0•0••••••,••••• Vi. autter and Chee5 00•10*•••••O•00440•000•••••••• Transnort.Subsid ••...•••••••••••••••••••••••.• vi Appendix 3 .Subsidies and Rationi:v7, AIDendix C Sulmidie§ and Frice Morement.r. vii • ?ro-%rtion. of the Food Index Subsidized ......• viii • • • . Price ].lovrimento of Sub iidized Products ........ x 2. Appendix I) The. T. 3road. Subsidy in World War. I Appendix E Equalization Scheme. i the Iron and Steel Industry • xiv DLLS. Table A Rationod and Subsidized Items in the Retail Food Index Vanistry ci LabourCost of Living Index ix Table B Wartime Fercefitaz,e Increases in Retail Food Prices September 1 ' - February 28, 1942 xi 2.0656-) BRIT I Ell PR ,e.),IfB Is S13 noiary Although there is no g-n,ra- price ceiling in. Great Britain, the British Treasury. has mad?, extensive sUbsidy payments to 3rovent wnrtime advances in the cost of living. Lar.zoly as a result of these subsidiet. the British cost of living has ruciained virtually ste,ble E-ince Nay.. 1941. The program. has been facilitntel by the comprehcnsive control exercised by the 1;inistYy of 2cod and the Nimisy of Supply over the processes of 1m7)ortatio- ivotir—tion i1 distA.bution. The malor ultimate objeoti7c1 of thn Britich subsidy program havt, been the mintenance of morale and the provision of an souitable basis for the stnbiliation of wage rates by stnbilitton of the cost of living, Since the cost of living was sab1lIzed, upward presauxe upon -wage ratas has subotantially diminished, althowgh further wage advances have been granted in the importan;; agr4cultrxal and mining sectors where manpower problems have been acute, While Treasury suhsidie are now being usod•to restrain the prices of a few key industrial raw materials, the greater part of the program • has a-Di:died to essential foods. At the prr..,sent time about a) rercent by weight of the cost of living index for food is being subsidized,. Subsidized foods include; bread, flours meats, potatoes, milk, tea, sugar, eggs, carrots, butter, cheese,. and oatmeal, Both overseas and coastal transport of foods have also been sutsiclized, and food prices have osen kept down indirect7_y by vollstantial subsidies to enomrage the growing of food-r.tuffs without raising prodacorst selling 1Drice6., • Elifosidize-nen-food prodti.c't;s have incluc7ed wool, hides and. tanning material, anmal feedstuffs, and - by inctuctrial poolthg arrangements - iron and steel, coal, leather, litho-sone and mining timber Of these the wool and leather subsidies are particularly directed to keeping down the cost of living'''. From en annual rate of about yi 58 million ($232 million) in the spring of 1940 the cost of the food T.-,ub21.1y- program to the British Treasury rose to about •B 80 million (320 million) in the spring of 1941, was running at a net annanl rate of above t 127 mIllion ($510 million) in the s'oring of 1942, I/ and has now reached an annual rate Trading inymasubsidir3ed foods was providing profits to the liinistry equivalent to B 10 million per year in the spring of 1942; the gross cost of $absidies was, therefore, L 137 million, of 150 million ($600 million). Data concerning the budgetary cost of non-food subsidies are unavailable, but it is known to be relatively small. Stabilization of imnortant retail food prices has been a cardinal feature of British wartime policy since the war began. During the first .three months of war the cost of living index had increased about 12 percent and its food component almost 15 percent. The original food subsidy program, initiated in December 1939 to combat this rise, had only a limited objective. In the words of the Chancellor of the exchequer, nouncing the original food subsidy program, "Our policy...is to make public money available..to hold retail prices of staple foods, or- at any rate to impose delay and check the abruptness of any rise. " 1/ In April 1941 the price stabilization policy was formalized and extended to the cost of living index as a whole, in which the cost of food represents 60 percent. In the previous year living costs had continued to rise and by April 1941 the cost of living index as a whole stood almost 28 percent, and the food component 24 percent above their levels at the beginning of the war. The Chancellor then announced, in his Budget Speech of April 7, the Government's determination "to prevent any further rise of the cost of livirg index number, apart from minor seasonal changes, above the present range of 125-130 in terms of the pre-war level." 2/ Subsidies were the primary means by which this stabilization was to be secured. This objective has been realized. In April 1943 the cost of living index as a whole (August 1939 = 100) stood at 127.7; the food index number had fallen back to 120.4 from its level of 124.1 in April 1941. Several methods of granting subsidies have been employed: (1) In. the majority of programs the Ministry of Food incurs "trading losses" on its operations; it centralizes the purchase of commodities and sells them to wholesale or retail traders at less than cost to enable them to sell at low prices; (2) direct subsidypayments have been made to retail bakers'and to millers; (3) shippers have been reimbursed for increased transport costs; (4) customs duties have been remitted; (5) direct subsidies have been paid to producers of raw agricultural products to encourage production without raising prices; and (6)-in several programs administered by the Ministry of Supply, cost and proZit equalization among producers has been employed. j Parliamentary Debates, 1165-66) (House of Commons, January 13, 1940, col. 2/ Parliamentary Debates, (House of Commons, April 7, 1941, col. 1321) Since the first payment of ii.bsidies in December 193_ there hnve been five Budget Mezonzes, in each of which the Government could hnve, announced their discontinuroace. Far from discontinuing them, howeve7r, the Government has several times expresseft satisfaction with their •operation, end, in facii, in 4ril 190 e77-fres,„ 7 elevated them to a principal instrument of governmeut policy. Objectives of th (iezr Po gra Unlike Germany, Canada Ex.d the United States, Great Britain has not employe4 the igoneral TJrie-free7eli tec!hnicrie of price regulation, although by th middle of 1941 almost the entire price structure ras regulated, British -price contr.)l has been ;f1.e:d1.1e" and "seleczive". It has always been nossiV.I.e to normit increased costs to reflect thohiseives in higher maximum pri3eo without punctaring a formal overall ciling, In tha case of most subsidized Products, moreover, the. Ministries concerned have themselves sold supPlieo to wholemiers and retaileros regulating the margins on their resn:Le; there has hence bc4en no problem of the squeeze in the form in which it has ai37)6ared in Oanacla or unde.c our .own General Haximum Price Regulation, end no comnulsion to 4roli back" price disparities Upon earlier stave,- of producT;ion and distributio/ Until April 1941 there was not even an official commitment to stabilize the coct of living, the broad objective :before that time being simply to prevent trice increases not justified by increased costs of importation, production, transport or klistribution. ].evertheless, even before April 1941 when the Government und:artoo.k to stabilize the cost of living index, Britain found it advisable to employ price.-restraining subsidies en a wide scale. Following that date subsidies were further extended in order to implement the ne71 price stabilization policy, Subsidy has been, indeed, the fundamental technimte by which the success of that polidj has been ins._lred. The ultimate obje3tives of the British subsidy program have been the 'maintenance of morale and prevention of inflation by stinlilizing Co far as possible the cost of living of the mass of British cong=ers.• Rising costs of living not cnly threatened unity and morale but lea to insistent demands for upward wagc adjustments. The latter, in turn tended to raise prices further, both by increasing costs of enterprise and by swelling income available for consumption° The connection be.4 tween stabilization of the cost of living by means of subsidy and Britainls 'efforts 0 stabilize wage rates has been particularly prominent, inasmuch .as a large part of the British .wage structure is linked 10656 4 by formal, agreement with the cost of living index 1/ and the latter is ,also the most important single determinant of informal wage negotiations and decisions of the official National Arbitration Tribunal, the official agency responsible for arbitration of industrial disputes not settled by collective bargaining. The British attempt at wage stabilization has been, in short, to stabilize the cost of 14ving first, and to stabilize wages on the basis of this' accomplishment. Subsidies were required to take the essential first step. III Results of the Subsidy Program British subsidies have aided price stabilization in two ways. They have directly prevented the full rise in prices which higher import and domestic costs would otherwise have nocessitated. By keeping down the cost of living, they have also reduced demands for advances in wages, other incomes and other prices. As early as June 19,1940, Lord Woolton, The Minister of Food., annaunced in the House of Lords that the prices of food then being subsidized had increased only 8 percent since the outbreak of war, whereas without subsidies their rise would have been 30 percent. By August 1940, before the subsidy program had approached its full development, Government spokesmen claimed that subsidies had already pre-veAted a wartime rise in the Ministry of Labour food index equal to almost 9 percent of the pre-war level. 2/ Since April 1941, subsidies have permitted a virtual stabilization of the cost of living indexe (See Table I). The food component, which had risen to 124 percent of its pre-war levels by April 1941, fell back to 120 percent by April 1943. The total index which was 127.7 percent above pre-war levels in April 1941, was still 127.7 percent in April 1943. Stability of wage rates has increased substantially since the price stabilization program was inaugurated in April 1941, despite the fact that at that date war-time movements of British prices and money wage rates had reduced average "real" wage rates almost 10 percent be-. low their pre-war level. (See Table II). From the outbreak of war to April 1941, when the cost of living was still rising rather rapidly, It has been estimated that roughly one third of Britain's wage agreements are formally based on the Cost of Living Index, New York Times June 28 1942, Sect. 3, p. 4. V J. H. Richter-Altschaffer, "Wartime Price Control in the United Kingdom", Journal of Farm Economics November 1930, p. 685. Professor Bowley s Index of Weekly Wage Rates rose by about 19 percent, or about one percent per month. Prom April to December 1941 average wage rates rose only .4 percent per month, In December a major adjustment of agricultural wages by the official Agricultural Wages Boards lifted the wage index by 3 percent, but from that time through May 1942 wage rates recovered their substantial stability, rising less than .3 percent per month. In June a major adjustment in miners' wages raised the index almost 2* percent. Even including these two major changes, however, wage rates have risen only about half as rapidly since price stabilization was secured as during the wartime months up to April 1941. he index of Average Weekly Wage Rates has net changed more than .7 -'ercent in the last six months of 1942. With the exception of these agricultural and mining wage adjustments British wage increases since the inception of the stabilization policy have been relatively minor changes designed to relieve distress cases and anomalies existing at the time the price stabilization policy was ado-Yted. Even the agricultural and mining wage advances might be placed in that category, inasmuch as wages in those fields had. previously been so much lower than wages in manufacturing that a dangerous movement from the land nnd the mines was taking place; the conscription by which workers were retained and brought back to those occupations could not justifiably have been imposed without bringing agricultural anel mining wages more in line with those paid in fabricating industrie.s. With these major adjustments in the British wage structure now accomp lished, wage, stability shoula be much greater in the future. Iv Types of S bsidies British subsidies vary widely in design in order to meet several causes of cost increases and to secure several specific objectives. They may be roughly classified, into the following general types. 1/ 1. Subsidies to Combat Rising. Import Costs A iharp.rise in costs of imported materials has been perhaps the most important single obstacle facing British price stabilization. Rising international prices, the depreciatibn of the pound sterling, and sharply rising shipping and ingurance costs have combined to raise the costs of essential imports far above the levels upon which pre-wai. British prices were based. Accordingly, many of the British subsidies 1/ Details concerning the subsidies on various commodities will be found in Appendix A. - 6 - Table I UNITED. KINGDOM Ministry of Labour Cost of Living Index - First of Month Indices (August 1, 1939 = 100) 939 1940 1941 1942 1943 Month • Total Total Total Total Total Index Food Index Food. Index Food. Index rood Index Food. January February March 115.5 117.5 127.1 123.4 129.0 118.2 128.4 120.4 April 114.8 115.3 127.7 124,1 128.4 116.8 127.7 120.4 May 116.1 116.1 129.0 124.8 129.0 116.8 June 116.8 115.3 129.0 124.1 128.4 116.1 July 120.6 122.6 128.4 121.9 .129.0 117.0 August 100.0 100.0 119,4 119.7 128,4 121,9 129,7 116.8 September 100.0 100,7 120,6 121,2 128.4 121,2 129,0 116,8 October 106,5 109.5 121,9 123.4 128.4 120.4 129.0 118,2 November 109,0 112.4 123.9 125.5 129.0 120.4. 129.0 119.0 December 111.6 114.6 125.8 126.3 129.7 120.4 129.0 119.7 112.3 114.6 126.5 125.5 129,0 119.0 128,4 119.7 114.2 117.5 127,1, 124.8 129.0 119.0, 128.4 119.7 Source: Great Britain, Bank of England, Str_,tisticn1 Summary. - Ga.. Table II UNITED KINGDOM January 1938 - July 1942, Average Weekly Wage Rates (August 1939 = 100), Year 1939 1940 1941 1942 1943 January 99.3 104.5 116.3 125.8 131.9 February 99.3 105.2 118.7 126.2 March 99.3 108.3 118.7 126.5 April 99.3 109.5 119.1 126.7 May 99.3 109.5 119.1 126.7 June 100.0 110.4 120.8 130.0 July 100.0 112.5 121.0 130.5 August 100.0 112.8 121.3 130.5 September 100.2 113.0 121.5 130.5 October 100.2 113.5 121.7 130.5 November 101.9 113.5 122.0 130.7 December 103.3 114.4 125.5 130.7 Yearly Average 100.2 110.6 120.5 Source: Professor Bowley's Index, from London and Cambridge Economic Servlce have been specifically directed to insulate the domestic price structure from this disturbance. Subsidies in which this objective is prominent include those on flour, bacon, meats, teal butter, cheese, leather and wool, In all the cases above the Ministry concerned centralizes importation and sells the product at a convenient stage to private distri butors at less than its import cost to the Ministry. In addition, in some cases in which the cost of imported raw materials rose above the costs upon which pre-war prices were largely based (e.g. iron and steel and mining timber), the Ministry of Supply has prevented the prices of either the raw material or the finished product from rising by the full extent of this increase by means of 'ilpools" or "equalization funds". Firms using the cheaper domestic materials pay a levy based.' on output into a "pool"; these funds are used to defray the high cost of materials of. those firms which use imported supnlies. Alternatively; the aprrorriate Contrbl Board c) the Ministy of Supply centralizes import rarchaE,as, sellin,:7 below cost and making up the deficit by a similar charge levied on all the users of the materials. In these ways the effective cost upon which prices are based approximates the average cost of all matorial used rather than the higher, 11marginal" cost of imported supplies. No Treasury payments are required. .• Another means of insulating domestic prices from rising import costs has been the elimination of import duties'. This has been done in the case of aluminum, pig iron, a large number of iron and steel products, and tea. The importation of taa is also subsidized direCtly. in the form of a trading loss absorbed by the Ministry of Food. 2. Subsidies to Offset Increased Transport Costs Although the current rental arrangement by which the British railways are'managed probably involve some subsidy to rail shippers generally, particular interest lies in subsidies paid expressly to permit the maintenance of pilce ceiling's despite increased transport costs. The cost of such transport subsidies attributable to food alone reached about L 20 million ($80 inillion) in the fiscpl year ending March 31, 1942 Specific transport subsidies have been paid to keep down oceangoing freight rates, to offset the high.cost of coastal as against normal railway transportati2en, and to insulate pribes from higher domestic transport costs. Following the stabilization of ocean-going freight charges in October 1940, subsidies have been paid to keep them from rising because of higher costs. The amount of subsidy required depends mainly upon the time taken on voyages and the rate of war risk insuraruie. It is unof ficially estimated that 50 percent of the incoming cargoes consist of food and feedstuffs. • Capacity operation of raill.oads has necessitated, the use of higher.. cost coastwise shipping of some foodstuffs and of coal. To prevent food and coal prices from rising, the Treasury since early 1941 has been subsidizing this transport at the rate of about L 7,5 million (30 million) per annum of which about 3.5 million is attributable to coal. Shippers using coastwise shipping facilities are given rebates equal to the extra charge of sea-borne as compared with rail traffic. The Ministry of Supply also pays subsidies on domestic transportation of certain products. For example, transport cost in excess of 15s, per ton on domestic (British Isles) timber for mine supports is paid in order to promote the full utilization of domestic timber without allowing the price of mining timber, and hence the cost of coal, to rise. . Subsidy to Insure Geogranhical Distribution of Supplies While in a sense all the transnort sub-sidles mentioned above tend to affect the geographical distribuion of suprlies, in most cases distribution is so thoroughly controlled, by administrative action that the effects of the altered cost and price relationships is negligible. In at least one case, however, namely that of fish, a coastal transport subsidy has been deliberately employed to Prevent geographical maldis-tribution of food supplies. 1/ So long as fish prices were left uncontrolled, movements of prices served to distribute supplies geographically according to effective demand. When fish prices wore brought under control in June 1941, however, the relatively insufffcicat supplies began to be absorbed ii the areas surrounding the fishing ports, the fixed prices in other areas not being high enough to make it profitable to transport fish to more remote markets, especially in view of the rise of trensport costs. Ac cordingly, a temporary subsidy, by which the Ministry of Focd paid all costs of transport of fish from the port areas, was instituted. in.June 1941. During the three months June to August, this subsidy ran at an annual rate of about L 2 million per year. On September 1, 1941 there was substituted for this direct subsidy a xcheme by which consumers of fish provide the funds necessary to secure the desired geographical distribution of supplies. A levy is collected from coastal fish merchants pries of fish are raised accordingly, and the funds collected used to defray the expense of transportation. 1/ Based on a statement by Major Lloyd George, Parliamentary Secretary to the Ministry of Food, in the House of Commons, November 11, 1941. 10656-12 4, Subsidies to Secure High-Cost Increments of Supply, In order to expand wartime output without leading to serious price increases and unjustified profits to low-cost producers, specific subsidies have been paid to procure increments of high-.cost production. 1/ This type of subsidy has been extensively used to encourage expanded agricultural production. For example, L 2 ($8) later increased to L ($12) per acre has been paid to farmers who shifted from grassland to food crops, a payment designed to increase vital domestic food supplies without raising the price of raw foods to all producers. Similarly, potato growers have been paid L 10 ($40) for each acre of potatoes grown and sold to licensed potato buyers of the Ministry of Food. Although this flat payment is made to all potato growers regardless of their differential costs, and whether or not they previously grew potatoes, its character as a stimulant to incremental production and as a substitute for a price increase is evidenced by the fact that the introduction of the acreage payment was accompanied by a sharp reduction in the price of potatoes per ton. 2/ The "bonus" was thus in effect withdrawn from those already ehgaged in potato growing who harvested normal yields or better per acre. The uniform acreage payment encourages growers with low yields, and reduces the financial risk of crop failure to farmers without previous experience in potato growing. 5. Subsidies to Relieve a Squeeze Inasmuch as there is no "general price freeze" in Great Britain, there has been no "squeeze" in the technical sense that buying and selling prices are out of line on. the date prices are frozen. There have, however, been many cases in which the costs of converters or distributors of. .essential goods have risen to such an extent that continued sales' at previous maximum prices would have entailed, losses. In some,. of these subsidies have been paid in order to relieve the "squeeze',, Usually this has been adcomplished by the Ministry's lowering of the price, at which it sells Supplies as a trading body, thus incurring a •• UMW For certain industria'iaw materinls (e.g. iron and steel, and coal) this has been accomplished 'by the "pooling" of receipts of the entire industry in such a manner that the law cost producers defray the excessive costs of the higher. See Appendix E. Other cases, in which the higher costs have been the result of higher transport expense, and have been combatted by transport subsidies, have been mentioned in (2) above. Parliamentary Debates. (House of Commons, 20, 1942, Col. 228) 10 - "trading loss In at least one case, however, a direct subsidy has been granted to traders. A subsidy of 1/2d. (10) per 4 lb. loaf of bread has been paid to bakers to compensate for increased baking and delivery costs which, it was adjudged, made the prevailing retail price inadequate. A. Subsidies to Benefit Especially Needy Consumer Groups Milk is the most important of such cases. When increased production costs made it necessary to raise the "pool" price of raw milk in early 1940, retail buying and selling prices were held down to th6ir previous levels, the Ministry of Food making up the difference by subsidy. Since milk prices remained standard for all purchasers, a subsidy was thus given to all milk consumers. A fundamental change was made in July 1940, when the so-called National Milk Scheme was introduced. From that date, prices of milk for manufacturing and for ordinary fluid consumption were raised to bring them in line with the increased costs to the Ministry, but a lower subsidized price (one-half the standard) has been charged for fluid milk for children under five and for expectant and nursing mothers. These classes of consumers have been issued coupons permitting them to buy specified amounts at this price. Milk is even distributed free to these giou-9s where need is shown. Children at school continue as before to get 1/3 pint of milk at a subsidized price. Recently, it is reported, more than three million persons, or about 77 percent of those eligible, have benefitted under the scheme; it reaches one member or more of about one-.fourth of all British families. This system has the advantage of concentrating subsidy payments upon those whose need is greatest, and, because of the differential pricing, giving the needy somewhat more of the supplies. This last objective is primarily secured, however1 by granting 'priority" to eligi-blesunder -the scheme. Similar arrangements have helped to concentrate the benefits of subsidies upon certain groups of consumers of cheese, eggs and meats - primarily via differential rationing but also by the encouragement of industrial canteens and other masz-feeding establishments which are permitted larger supplies of subsidized foods than are other restaurants or most individual consumers. 7. Miscellaneous Objectives of Certain of the Subsidies. Subsidy payments have in some cases been linked to objectives of wartime economic policy other than price stabilization alone. The link between subsidies and nutrition is clear in the case e.inilk described. above. In another case, eggs, subsidies have been employed as an aid to control over supplies in connection with rationing. Control of the supply of eggs is obviously difficult, and their great scarcity naturally encouraged black market operations. In order to encourage producers to sell to the rationing authority (The Ministry of Food) rather than Ii toblack market operators, the Yinistry has paid a very high price for eggs, at one time more than 50 percent above the fixed retail level. The Ministry absorbs the loss in order to provide rations within the limits of poorer consumersi incomes. The subsidy to bakers of bred has been used to aid enforcement of the price ceiling on retnil bread sales. Bakers who do4not abide by the maximum price agreed upon between the bakers and the Ministry of Supply do not receive the subsidy. This illustrates one advantage of subsidizing at the level, at which price stability is most difficult to enforce. The subsidy on flour is so arranged that bakers using it for baking standard breads receive a subsidy which other users do not enjoy, thus encouraging the making of ordinary bread. and discouraging that of pastry, fancy breads, etc. The special subsidy to meet increased operating costs of bakers has also been made contingent upon the offering of an 85 percent (whole cereal) loaf, thus eneouraging economy of grain and stimulating the consumption of the raore nutritious varieties. in these ways subsidy policy has been of aid not only to price stabilization but also to price enforcement, rationing, better nutri- tion, relief of destitution and economy in the use of scarce resources.!/ V Techniques of Subsidy As indicated broadly above, and in more detail in Appendix A, several differnt techniques have been employed in the 3ritish price-restraining subsidy program. 1, e MannQr of Payment The "tradin„, loss on the part of the appropriate supply ministry is the most used technique. Since the Ministries of Supply and Food themselves purchase at the import or raw material levels most of the It should perhaps be noted that certain subsidies connected with importation have fulfilled a strategic function. Foreigh supplies have sometimes been bought at higher than ncempetitive" prices to cement political relations or prevent sup7lies from falling into the hands of the enemy. These 'subsidies" have been paid by special Treasury provision and do not enter into th'e accounts of the *pure chasing Ministry. (See G. B., Fourth Report of the Select Committee on National Ezpenditure, May 7, 1940. 12 - articles which have been subsidized they need not, in most cases, make direct subsidy payments to traders or manufacturers. They fix buying prices for their purchases (or buy at theemarket price or by negotiation), and absorb the loss between their buying price, plus administrative cost, and the prices at which the goods are sold to distributors for resale. The Ministries also fix the prices at which products can be sold to consumers, and thus the margins permitted to wholesale and retail distributors. No special treatment o concerns dealing in subsidized products is required. The Treasury provides the . funds to meet the Ministries' losses. It should be noticed that the Supply Ministries' monopolization of dealings at certain stages of acquisition or distribution is the crux of this administrative simplification of the subsidy program. The Ministries have, however, usually availed themselves of the existing channels of trade in making their purchases and in distributing subsidized products. Middlemen who were in the trade before the -Tar are ordinarily retained to act as the Ministries' agents, and are raid negotiated commissions for performing their service;. These co;emissions appear to be based on pre-war levels, adjusted for chaeed costs where necessary. The Ministries have not, however, confined their subsidies to cases in which the trading loss technicues could be used. Numerous techniques have been employed in other cases. Straight subsidies per acre have been paid to growers. Rebates from standard grain prices have been granted millers, these rebates being a stipulated amount per unit of flour. Straight subsidies per physical unit of output have been paid to bakers of bread. Coastwise shippers of food are refunded the difference between the actual cost of their transport and the lower price of railroad transportation. Customs duties have in some cases been remitted, thus shifting this component of price from the consumers thereof to the Treasury. The "industrial pooling" or "cost-equilizationl techniques has been used.in several cases by the Ministry of Supply. In one case, carrots, a special Government corporation, the Yational Vegetable Marketing Company, was set up under the Ministry of Food to handle the encouragement of carrot growing and the distribution and sale of the product. Losses of the company were paid by the Ministry. 2. The Stage Subsidieed Where the "trading loss" technique is employed, there is no particular stage at which a direct subsidy payment need be made. Where tub-sidles have been paid directly to private enterprise, the payments have been paid at several stages of production or distribution. Subsidies to stimulate output of cereals and potatoes are paid to growers. The subsidy for coastwise food shipment has been paid to the shirrers. The subsidy on flour, although handled as a trading loss, is paid to the millers as a rebate from the price of wheat, which is based on average cost of wheat to the Ministry. Subsidies to keep down the cost of bread relative to the cost of flour are paid directly to retail bakers per loaf of bread baked. 13 - 3. The Determination of the Need for and. Amount of SubsidY The determination as to which food products shall be subsidized is made by the Food.Prico Corpmitteg, an Inter-Departmental body composed of representatives of the Ministry of Food, the Ministry of Health (for *coordination with nutrition policy), the Treasury, the Ift.r. Cabinet Secrp-tariat, and the Prime Ministerts Secretariat. Attached to this Committee, and comprising the same membership with the addition of representatives of the Agricultural Departments, is the Agriculture Pes Committee, which makes recommendations as to the prices to be paid to agricultural producers. The Agricultural Departments have no direct-voice in determining the prices at which food products shall be sold or in the decision as to the use of subsidies to keep retail prices from rising to reflect the cost of raw agricultural products. General subsidy of the Ministry of Supply is apparently determined by the Treasury. The actual fixing of prices for most individnal items is the responsibility of the Ministry itself. In most cases these decisions fix the amount of subsidy, since that consists of a trading loss. Necessary costs of supply, necessary transport costs, and necessary distributive margins are analyzed, Since no direct subsidy is paid to any trade, the standerds applied in gratiting subsidies are simply those applied in fixing the prices, and the, determinations involved are little different from those connected with normal wartime price regulation. Where subsidies have been paid directly to the trades, it is necessary, however, to insure that they are of a proper character and neither more nor less than sufficient to insure the objective sought in each case. There is little information on the manner in which these decisions are made. The determination of the amount of subsidy Paid agricultural and other producers for additional output was presumably based on the amount considered necessary to stimulate it. Since they have been paid primarily to induce emergency production, in many cases by persons who had not previously produced the products, little reliable cost data could have been available, and the amounts were probably generous. • The rebate ede to millers is a flat amaunt per physical unit and is paid to all millers. Its amount is based upon estimated milling and delivery costs and an agreed rate of remuneration for the industry in general. The rebate is, however, only a payment On account, and is subsequently adjuSted annually for each miller separately in the light of his actual trading results, the aim of the adjustment being to provide each miller with an.undisclosed proortion of his average pre-war profit. The amount of subsidy to balers is agreed upon in advance as a certain amount per loaf; independent of the individual baker's profits or loss. The subsidy per loaf falls as a function of output. The basis 1065617 - 14 - for the determination of the amount of this subsidy is unavailable, but its form indicates it could not have been based on the needs of particular bakers, :but rather upon an analysis of the position of the industry in general and the general relation between cost of production and scale of output in individual bakeries. VI The Cost of British Food Subsidies As mentioned above, the cost of the British food price subsidy program was running at en annual rate of about 5 58 million ($232 million in early 1940 had reached a net annual rate of about 11 127 million ($500 million) in mid-1942, and an annual rate of L 150 million ($600 million) by 1943. These figures exclude the cost of the 'plow-up campaigns° to encourage cereal production. The amounts Paid by the Ministry of Supply to subsidize industrial raw materials are not available, but since most of these subsidies were paid by the industries concerned, the amount of Treasury funds involved. must be relatively small. 25y the expenditure of'.. the equivalent, of about $500 million-per year Britain was, in early.1S42, stabilizing the retail prices of about 89 percent 1/ of the weighted cost of living food index, or roughly 50 Percent of the total cost of living index. The food subsidy represented about 2.6 percent of the h 4,775 million ($19.1 billion) spent by the British Government in the fiscal year 1941-1942, and roughly 3.1 percent of the L 4,085 million spent in that year for war Purposes, Available data covering the distribution of funds among the subsidized products are incomplete. There are unofficial estimates covering most elements of the food program for early 1940, soon after the program began, and for late 1941, when the program was well developed. There is also a somewhat different breakdown, provided by the Minister of Food, for the first quarter of calendar 1942, These data are presented in Tables III and IV. The subsidy on flour and bread has been the most expensive part of the program, absorbing t 42 million ($88 million) per year, or one-third of the total funds, in late 1941. The cost of this part of the program has since declined somewhat. Flour, bread, oatmeal and feedstuffs combined were absorbing 13 40 million per year, or about 30 percent of the gross total, in early 1942. / The figure would be 94 percent if bacon were included. There is evidence, however, that the bacon subsidy is now nominal. The concentration of subsit funds upon these products appears fully justified by the objective of the program, A stable price for bread has been a cardinal feature. of British food policy since the b,-ginning of the war. Bread and flour combined are weightea.24 percent in the cost of living index for food, which gives them a weighting of almost 15 percent in the total cost of living index. 1 It is the most important staple food, in the British wartime diet. The sought-for stabilization of bread prices has been substantially achieved. The prices of flour and bread have remained at roughly their pre-war levels since the beginning of the subsidy program. It is estimated that the average price of bread without subsidy rould have been about lid, per 4 pound loaf, as compared with the fixed price of 8d., and with pre-war prices ranging from 6d. (10 cents) to 1 shilling (20 cents) with an average of about 8-1d. (14 cents), The second most expensive subsidy has been that for meats. If bacon is included, meats represent slightly over 27 percent (and if ex-clacled, almost 22 percent) of the weighting of the cost of living index for food. Meats, including bacon, absorbed S 20 million; or rolaghly 34 percent of the subsidy funds being spent in early 1940, In March 1941 the bacon subsidy was withdrawn, but the subsidy en other types of meats was increased unIstartiElly as the subsidy program developed, so that towards the end of 1941 and during the first quarter of 1942 the meat subsidy was running at the rate of about L 23 million ($92 million) per year. Early in the war it was estimated that the meat subsidy‘had prevented a rise of 2d. (3-1/.3 cents) per lb. in home-killed, meat or Id. (1-2/3 cents) per lb. for meat in general.2/ Since meat prices have remained fairly stable since that time, while costs have risen substantially, the effective reduction by subsidy must now be much greater. An eqenditure of about L 63 millions ($250 million) per year on flour, bread, oatmeal and meats combined was, during the spring of 1942, stabilizing the prices of 45 percent of the British food index and 25 percent of the total cost of living index. "It has been estimated that bread and flour represent, some 20 percent of the total expenditure of poor families on food, and that the addition of la..(1-2/3 cents) to the price of the 4 lb. loaf, along with the corresponding rise in the price of flour, represents an increase of over 2 points in the cost of living index." Paul de II,evesy, orld.Wneat Plannin and Economic Planning in General.. Oxford University Press. 1940, p. 49. EconoLiet, February 17, 1940, p. 286. —1 BRITISH SU_ TAILB III DIES 0 RESTRAIN FOOD PRICES 1940 and. Late 1941 (EzpresGed as Annual Rates of Expenditure) Early 1940 Originally aubsidid rodacs L Million T u 1941 Million Flour and. Bread Meat Milk Bacon Cheese Subsequently Added Products Food Transport Potatoes Eggs Tea Feeds 26„0 42.0 16.0 22,7 12,0 17c0 4,0 Abandoned 0.6 0.6 20,0 14.6 3.1 2.7 25 58.6 125.7 16f, ABLE IV BRITISH SUBSIDIES TO RESTRAIN FOOD PRICES First Quarter 1942 1/ (pressed as Annual Rates of Expenditure) . Million Percent of Gross Total Flour, Bread, Oatmeal, Feedstuffs 40. 29.2 Meats 2/ 23. 16,8 Potatoes 20. 14.6 National Milk Scheme le. 14.6 Other Milk Subsidy 2.1 Sugar 3/ 13. 9.5 Eggs 11. 8,0 Tea 3. 2.2 Milk Products, Bacon, Ham, Vegetables 7. '5.1 Gross Total...—. • • • • • . • • • • • , • 137, 100.0 Less Profit on. Unsubsidized roods 10. Net Total ***** .............. 127. •• 1/ British Price Control, British Information Seririces,. April 1943. 2/ Of which about 25 represents the pre—war cattle subsidy. 3/ Of which about 50% represents the pre—war beet sugar subsidy. The milk subsidy, as exnlained above, was in Ju.y 1940 converted. from a general Plan to ono aimed prima:eily at rede.cing the cost of milk to those especially in need of it. Ii late 1941, L 17.5 million ($70,0 million) per year was being spent ut;on the subsidization of milk. Combining the •gabsidy involvea in the rational Milk Scheme with additional subventions on milk, 20 millien ($8J million) per year or almost 15 percent of the gross total of gabcidies, -fere being paid on milk in early 1942 kilk represents about 2 percent in the food cost of living index, The potato subsidy has grown to large magnitude since its intro- duction in the spring of 14l One year later potatoes, which ere wei,3hted 5-1/2 percent in the food inclee,: were 'ceding subeidized to the extent of L (%)0 million), receiving about 10 percent of the total eubsidyfanas. Tha eneollragement of conzumption of this home-prbduced feed hae been the majer objective of this apparently dis-ero-pertionate expenditure. Sugar and eggs have also accounted for e_p-ereciable portions of food subsiay expenditure. Sugar, which is weighted 6.7 percent in the food index. receives 13 million, and eggs, which have similar weight are subsidized to the extent of 11 million, In the latter case, a primary objective of the expenditure is to. buttress. rationing by strengthening control of egg supplies. Subsidy of food transportation, the distribution of which among different foodstuffs is not available (and which is apparently allocated in the breakdown given by the Minister of Food for the goring of 1942) had become an important element in the program by ate 1.C41, absorbing L 20 million ($80 million) or about 16 percent of the total subsiO,y funds,, Subsidy Poi - of the Ministry of Sunplr -------- Until recently the use of Treasury funds to keep down the prices of industrial raw materials was ebjured. Each aCentrol Board of the Ministry of Supply was made respensible for the provision, pricing and distribution of an industrial raw material or group of materials. Each Control was set up as a separate "trading organization°. By Government instructions issued in October 1939 Controls were directed to fix selling prices so as to avoid trading losses, Indeed these early instructions suggested that Controls aim et a substantial profit if conditions permitted, in order to provide funds to assist the conduct of the war Even before April 1941 when the Government announced its deter mination to stabilize the coet of living, this "profit-making" policy was found to. be unwise. Since the Government became the purchaser of a very high proportion of the products made from the controlled ma-terialst it was found that the consecuent rise in procurement costse - 18 - aggravated by "pyramiding", actually increased the net cost to the Exchequer above the level which would obtain were only cost-prices charged by the Control Boards. The policy also aggravated the rise in prices which was in any case occuring at too rapid a rate. Accordingly individual Control officials had already mitigated the strictness of the rule that they should aim at "profitable results even before the general Government policy was' altered. In April 1941, with the advent of the cost-of-living stabilization program, the general policy became one of breaking even on government trading in industrial raw materials. Moreover, where it appeared that the cost-of-living index would be affected by raising raw material prices, Controls were authorized to sell below cost. Nevertheless, substantial losses were still frowned upon, the Treasury still insisting that, ex cept in unusual circumstances, the Controls balance their accounts. In the spring of 1942 the policy with respect to the use of Treasury funds to prevent increases in prices of industrial raw materials was formally authorized. New instructions to the Ministry of Supply set forth a positive program of price stabilization through Treasury subvention for two important classes of raw materials, First, the Controls were instructed, that any increase in the price of a raw material which would substantially affect the retail price of an item in the cost-of-living index should be avoided wherever possible. Wool and leather were cited as important examples of such materials. Second, Control Boards were instructed not to raise prices of any raw material used, primarily in Government-purchased goods. Exception was made for cases in which a rise in price of a raw material converted into Government-purchased goods would substantially encourage economy in its use or substitution of a more plentiful material. It was also suggested that where prices were not raised to accord with costs because of Government purchase of the ultimate product, Control Boards might charge a higher price for that portion of the goods used for non-governmental Purposes or for export. In the case of Lend-Lease goods, Controls were instructed, in general, to avoid subsidies, in line with the assurance previously given the American Government that Lend-Lease would not redound to private profit. Lend-leased goods in almost all cases were to be sold by the Controls at prices equivalent to the U.S. costs before shipment plus all subsequent charges and appropriate overheads. While the desirability of using Government funds to prevent prices from rising has thus only recently been extended from foodstuffs to industrial materials, the employment of industry's own funds for purposes of price stability by means of "cost-equalization" and "profit... equalization" schemes has been officially encouraged from the beginning of the trar Coni.cl,erable price stability in important sectors of the economy has ben brought a-cout by these devices, Products affected have included iron and steel, coal, minim timber, leather and lithopone, In the case of leather, the cost ane, profit ecluDlizaticn principle is combined, with a formal Treasury subsidy to keep prices bolo v the levels which would be appropriate to the cost of hides. These :British schemes of coot and peofit equalization vary considerably in detail, In general, howvver, they achieve their objectve by placing levies on all producers of a commodity, proportions ordi-narily to outTait, and using the funds so acquired for either (IL ooth of two purposec: (1) to meet abnormally high costs which would otherwise raise the ';‘,..2.rgin7ran cot for the indastry; (P) for /Dements to high-cost, low-ptofit producers to enal3le them to continue production ,at established I2.ximu.17. 7cricEIc, The descAption of the plan used in the iron and stera "fhich comp:Ases Appendix E, illustrates the general form of the sdhees. APPENDICES APPENDIX A Details of B h Food Subsidies Flour and Bread The IlinIstry of Food buys all imported wheat, through its Cereals Imports Branch, either in the open market or by bulk purchases in Australia, Canada, and other countries. All domestic wheat is also purchased by-the Ministry. Meat is sold to licensed millers by the iiinistry at one fixed price, based on its average replacement cost plus adininis trative overhead expense. 'Me 41.axium prices at which millers are required to sell wheat flour and its by-products are fixed well below levels which would reflect this cost of wheat to the millers. To permit them to sell below cost, millers receive from the TUnistry an agreed standard margin, covering milling and delivery oosts and remuneration, in the form of a rebate from the invoiced value of the wheat purchased from the, Ministry. This rebate is only a payment on account, however, and is adjusted annually for each miller separately, having regard to his actual trading results, so as to provide him an undisclosed proportion 'of his average pre-war profits. . In addition to the subsidy paid on milling flour used to make bread receives an additional subvention. Bakers pay 33s.3d (6.65) per 280 lbs. for flour used for making cakes and flour confectionery and, after rebate, 25s.6d (5.10) for flour to make bread. The special subsidy on flour used for baking bread thus amounts to 73.9d (l.55) per 280 lbs. The rebate from the standard price of flour is paid to bakers on receipt of a certified claim form submitted to the Bread Subsidy Branch of the Ministry. It is paid only if the bread is sold at or under the prescribed maximum price. 1/ This phase of the plan went into effect in October 1941. Before that time the price of flour was 25s.6d 05.10) for all baking purposes. At the time the special rebate was instituted the standard price was in creased to 33s.3d (6.65).. The effect of the change, therefore, Was to reduce, although not to eliminate, the subsidy on flour not used to make bread, while leaving tha4.-on flour for bread at its previous level. This change concentrated a larger portion of the total flour subsidy on bread. The total of these two subsidies on flour baked into bread has been estimated to be equivalent to 2-3Ad (4J) per four pound loaf. War Time Trading Bulletin, Suppiemen Octooer 22,. 1 , J. 543. -- (No special rebate is paid on flour used to bake bread at home, because of the difficulty of checking its disposition, but this flour does receiire the benefit of the general subsidy paid millers for the milling of the flour.) " 11 A further subsidy of -g-d.(about I) per 4 lb. loaf is/paid to bakers to compensate for increased baking and delivery costs. 1/ This rate applies to the first 9400 4 lb. loaves sold per week; the subsidy for the next 9400 loaves is at the rate of 3/3d. (0/). On all loaves in excess of 18,000, the subsidy'is id. (about -k). Bakers must file their claims with the Lilnistry of Food. This subsidy is paid only on bread sold at or below the following fixed retail prices: 8d. per 4 lb. loaf; 4d. per 2 lb. loaf and 2N. per 1 lb. loaf. In sparsely populated and heavily depopulated areas (population decline of 40 percent or more) the maximum aprice is increased to 8*d. (14g) (or 9d.) (1'4) per 4 lb. loaf; 4-1/4d. (77!) per 2 lb. loaf, etc. Bread of the same types sold as part of a meal in a catering business carried on by the baker, or supplied by a wholesale baker, or supplied by* a wholesale baker to a customer but not for resale as complete loaves, also qualify for the subsidy. 2/ The subsidy is not paid to institutions baking bread for their own consumption. Specialty breads, half-pound Vienna loaves, and bread rolls, which are free from price restriction, receive no subsidy. There are thus three subsidies paid to keel down the price of con sold standard breads: the general subsidy on flour at the milling stage; the special rebates given .bakers on flour purchased for bread-makin; and the subsidy on the baking of bread itself. The total effect of thee subsidies, it is estthated, reduces the price of bread by 3id. (5V) per four pound loaf. Potatoes Two types of subsidies have been paid to keep down the retail price of potatoes, while increasing returns to producers in order to stimulate growing. The first is a flat payment of b 10 for each acre in potatoes grown. This subsidy. was instituted in the spring of 1941 and applied to all land devoted to potatoes in June of that year. 3/ The uniform acreage payment favors growers with luu yields. It also reduces the financial risk of crop failure to farmers without previous experience in potato growing, and provides a cash advance which is of great benefit to growers who may be unable to market their crop until late in the season. 4/ It was later announced that the payments might be withheld from bad cultivators. 5/ The acreage subsidy was in part offset by a concomitant lowering OF the guaranteed price paid to growers, 6,/ so that it was, in effect, a substitution of a subsidy to "marginal" producers for a higher price for all. Ministry of Food Bulletin, No. 113, November 21, l)41, p. 3. This subsidy was introduced in December 1940. 2/ War Tine Trading Bulletin, Annual Review, 1940, p. 991. 7/ Liinistry of Food Bulletin, No, 104, September 9, 1941, p. 1. Parliamentary Debates, (House of Commons) ,May 20, 1942, Col. 228. Ministry of Food Dulletin,No. 115, December 5, 1941, p. Z. Parliamentary Debates, (House of Commons) May 20, 1942, Col. 228 ill The second typo of potato subsidy is a tonnage payment made to licensed potato merchants ("first buyers' to offset the seasonal rise in prices they pay growers in order to induce the lat=ter to keep their potatoes until they 'areneeded, thus ensuring a more even .:low to markets without changing retail prices. It is paid from January to July only. Its operation has been described as follows: "Licensed Potato merchants and, licensed potato buyers are required to pay to 0:rowers the fixed price appropriate to thegrade and class of potatoes during the month when the sales take place, but. the maximum whole- sale and retail prices will remain 'at the level proscribed for the period from December 1, 1941. . The subsidy payable to licensed potato merchants will be equal to the difference between the fixed grower's price for such month of Doctember, and the corresponding fixed grower's price for the month of 1941." V In addition to the above subsidies, the Ministry of Food. buys and disposes of any surplus potatoes, the -.Ciinistry absorbinr, any loss incurred, In October 1040 it was announced that a small subsidy was also to be paid to fish-frying rostaurateurs to provide potatoes for nourishing meals in working class districts at reasonable prices, the Ministry"of Food to pay "the difference between the wholesulc, pric of potatoes al-,td what the trade can economically pay", 2/ Meats The Ministry of Food buys domestic cattle and other fat stock at fixed prices -t a number of collecting centers, fro a which the animals are taken to one of the 750 appointed sla,l.htering centers, V Imports are acquired under bulk purchase a4reeuents. The Meat Importer's National Defense Association, Ltd., to which all meat im-)ori,ers may belong, acts as agent for the lanistry of Food, which has a complete monopoly over imports. Although the Association is staffed and managed by its on members, the ',Inistr*,, appoints controlling representatives to the Associations Bord. The Ainistry pays the Association for each ton of meat handl-,d; after deducting the exoenses of the Association the balance is divided -.Among the members in proportion to their pre-mix trade. The wholesalers who distribute meats as agents for the Ministry are organized into eight associations. In return for their remuneratton the associations underoako all expenses of wholesale distribution except transport. Tho Ministry thus retains control over all meat until it reaches retailers. liar T-j.e. Trading Bulletin, ecembr 30, 1941, p. 842. 27 Ministry of Food Bulletins, October, 25, 1940, p. 1 anc.. December 27, 1940, p. 3. 3/ Foreign Crops and Airket' February p. 158. Before the War there ,,:-ere some 16,000 slaughter housec. in Great Britain. _L.... C.; 5 6 #.e..7 iv Because of its complete control over imported and domestic supplies and their distribution, there are no special administrative problems attached to subsidy payments on meats, such as arise when subsidies are made directly to distributors or producers. The fixed prices charged the retailer are not sufficient to reimburse the Ministry, vhich suffers a corresponding trading loss. Since retail prices have remained substantially unchanged since January 1940, the size of the meat subsidy has been determined by the terms upon which the Ministry can obtain its supplies, and changes in shipping and other handling costs. Milk The major subsidy payments in connection with milk have been made under the National Milk Scheme, described below, which started July 1, 1940. There was, however, a subsidy of 235,000 weekly paid tp producers in January, February and March of 1940, and an additional subsidy in June of that year. This earlier subsidy became necessary because the Milk Marketing Board had increased the "pool price" paid to producers *) offset rising costs. These early payments were estimated to have prevented a price rise of ld. per quart. When increasing production costs made it necessary, in mid-1940, Again to raise the producer's price of milk the National Milk Scheme was introduced to ensure that price did not deprive mothers, and young children of the milk they needed. The Scheme has been directed towards keeping dawn the cost of milk to special groups rather than the stabilization of the price of milk in general. It also confers "priority" status on these classes. It is hence not strictly comparable with the other subsidies discussed. One pint of milk daily is provided to all nursing and expectant mothers, and to children under 5 years of age, at 2d. per pint (compared with a 4lid. standard price in most, areas), regardless of family income. If the family income is not more than 40s. WO per week, plus 6s. (01.20) for each nonearning dopendont, the milk is supplied free. Applicants for milk under the Scheme have to fill in a form indicating their eligibility and have it attested by a responsible person. If they apply for free milk they must also submit a brief statement of family income, suitably attested. Successful applicants receive a permit valid for three months. One part of this is handed to the milkmen selected by the applicant, and serves as the former's authority to supply the milk. A receipt form, retained by the applicant, is signed by him and given to the milkman at the end of each month. This receipt entitles 1/ Parliaraentary Debates, House of Commons, Feb. 8, 1940, Col. 473 Economist, Feb. 17,.1940, p. 286, and Economist, Supplement, Mar. 15, 1941, p. 20. V the milkman to recover the full price, in the case of free milk, or the difference between the current price and 2d. per pint in the case of cheap milk. The Scheme is supervised by a Milk Officer attached to each Local Food Office. He is responsible for the scrutiny of applications, the granting of permits and the accounting arrangements with the dairymen. Full-cream or half-cream dried milk can be obtained in place of liquid milk for the use of babies up to.12 months of age. "Designatedtl . milks, such as "Tuberculin Tested", can be obtained under the Scheme if the purchaser pays the extra price above the price of ordinary milk. After two months of operation, on August 30, 1940, the National Milk Scheme was benefiting almost two and one-half million persons. This figure has since risen to slightly more than 3 millions, or about 77 percent of estimated eligible persons. One or more members of roughly one family in every four is benefited by the Scheme. Thirty percent of the milk handled under it is distributed free. Eggs All producers owning more than 25 birds are required to. sell their eggs to licensed packing stations acting for the Ministry of Food. In order to facilitate control over distribution and provide an inducement not to sell to "black markets", the producers were formerly paid 3s.ld. (62i!) a dozen, as compared with the fixed retail price of 2s. (40%). The Ministry of Food bears a loss equal to the entire cost of collection and distribution, plus the difference between the price paid and the retail price. Imported eggs are also resold at a loss. 1/ The total cost of this subsidy was running at an annual rate of 1511 million (44 million) in the spring of 1942. The subsidy accomplishes the twofold purpose of facilitating control of distribution by paying a high price to producers and keeping the cost of living down. Consumers receive a ration Of only 2 or 3 eggs monthly (children and invalids receive 4 times the basic ration) as compared with an average peacetime per capita consumption of about 15 eggs monthly, but eggs represent about 6 percent in the cost of living index for food. Bacon The bacon subsidy, which was withdrawn in March 1941, was originally intended to ensure the, consumption and prevent the waste of the considerable bacon stocks available early in 1940 as the result of large imports from Denmark. It was announced in March 1941 that, with supplies of all foods dwindling, the Ministry "no longer feels able to justify the employment of Exchequer subsidy to maintain the price at an abnormal level relative to other prices". Cheaper cuts of bacon rose and better cuts 2d. per pound after the subsidy was dropped. Econo:iiist, Commercial History of 1941, Marc 4, 1942, pp. 19-20 'and Economist, June 21, 1911, p. 822. vi Carrots A special company, The National Vegetable Marketing Company, was set up under the Ministry of Food in the spring of 141 to be the sole buyer of all carrots except those produced by holders of less than one acre. Deliveries were accepted starting November 1, 1941. 1/ The Ministry has been encouraging the consumption of carrots because of their relatively plentiful potential supply; a subsidy permitted a low price and aided the campaign. Losses from sales at prices,not high enough to cover the company's costs are absorbed by the Ministry. No data ,are available concerniag the cost of this program. The company was dissolved in the spring of 1942. Tea Besides the remission of import duty, the tea subsidy takes the form of a trading loss to the anistry of Food, the solo importer under contracts with both Empire and non-Empire countries. The Ministry distributes the tea through members of the Association of Selling Brokers. Payments for the services performed by these nembers are determined by their proportionate share of pre-w,lx turnover. On one occasion, when a high price was paid for tea from Java, an additional Treasury grant was secured to obviate the necessity of raising the retail price. Butter and Cheese The subsidy on butter anu cheese consists of a trading loss on imports purchased by the Ministry of Food. Early in the war tl:le technique employed was the purchase and sale of only a part of the supplies, sufficient, however, to control market price movements. It was reported that "The Ministry contn-xtz5d for a sufficient proportion of imported supplies to be able to sot the standard of prices in the hone market by its awn selling prices. At present it is keeping prices down by selling at a slight loss". 2/ Subsequently, the Ministry expanded its purchases and repressed private purchases. The Ministry is now the sole importer of c.11 butter and cheese except some specialty varieties, mainly under agreements with the Dominions. Some butter has also been bought in the open market in Argentina. All domestic output is bought by the Ministry through its agents. Much cheese is now obtained under Lend-Lease acreoments. Transport Subsidy Sea-borne coastal transport of food was being subsidized to the extent of about 15 4 million million) annually toward the end 1 Ministry of Food Bulletin "To. 76, March 7, 1941, p. 1 2/ Fourth Report from the Select Committee on National Expenditure, Yay 7, 1940, p. 26. vii of 1941. Capacity operation of railroads has made the use of this higher -cost type of transportation necessary. Shippers of food who employ it are given rebates equal to the extra cost of sea-borne as compared with railroad transport, so that the higher cost need not be translated into higher food prices. A similar subsidy has been paid on shipments of coal. In at least one case, that of fish, the coastal transport - subsidy has been employed to prevent geographical maldistribution of food supplies. 1,/ So long as fish prices were left uncontrolled movements of prices served to distribute supplies geographically according to effective demands. When fish prices were brought under control in June 1941, however, the relatively insufficient supplies began to be absorbed in the areas surrounding the fishing ports, the fixed prices in other areas not being high enough to make it profitable to transport fish to more remote markets, especially in view of the rise of transport costs. Accordingly, a temporary subsidy by which the Ministry of Food paid all costs of transport of fish from the port areas was instituted in June 1941. During the three months June to August, this subsidy ran at an annual rate of about la 2 million per year. On September 1, 1941 there was substituted for this public subsidy a scheme by which consumers of fish provide the funds necessary to secure the desired geographical distribution of supplies, without geographical differentiation of prices. Beginning on that date the Ministry of Food collected 6d. (10 cents) por stone (14 pounds) on all first-hand sales of fish. 2/ Prices of fish wore raised accordingly and the funds collected used to defray the expense of transportation. A system of controlled distribution of fish has been in operation since the fall of 1942. This reduces the cost of transportation since it restricts the purchase and sale of fish to within certain areas determined by the position of the main ports. Ocean-going freight rates have also been subsidized since October 1940. It is estimated that 50 percent of the incoming cargoes are foods and food.stuffs, and that the total cost to the Treasury of subsidizing ocean-going and coastal food transport combined was about la 20 million (80 million) in the fiscal year ending March 31, 1942. The food transport subsidy is-expected to be higher in the current fiscal year 1942-43. Except for the information with respect to fish, no data are available concerning the particular foods subsidized under either ocean-going or coastal transport programs. it Based on a statement by Major Lloyd George, Parliamentary Secretary to the Ministry of Food, in the House of Commons, November 11, 1941 2/ Starting January 1, 1942, this levy was collected from the coastal fish merchants. viii Appendix B SUBSIDIES AND RAiIMING Several subsidized products are also rationert (e.g. meat, tea, sugar, eggs, butter and cheese); others are not (e.g. bread, flour, carrots and potatoes). In one case, eggs, the subsidy was adopted for the specific purpose of facilitating rationing. In another, bacon, the subsidy was used to lower the price so that consumers could afford to buy their rations. Subsidized goods are not rationed when consideration of nutrition and morale call for making as much of a staple food as necessary available at a low price. In the case cf two subsidized but unrationed foods, carrots and potatoes, the subvention is designed to increase the consumption of foodstuffs which can be domestically grown, thus relieving sone pressure of demands from rationed foodstuffs. Many rationed products are not given subsidies, although their prices are fixed - for example, jams, canned foods, margarine, dried fruits, clothing, soap, cooking fats, tapioca, and rice. The general principle appears to be that when goods are available in reasonably adequate supply they are not rationed, although subsidies may be paid to keep down their pricea or atinfulate consumption. Where shortages of essential products exist the products are rationed, ad subsidies are paid only if it is considered important that cost increases be offset. The importance of a food in the British diet, and especially in the cost of living index, is an important criterion in determining its inclusion in the subsidy program. Appendix C SUBSIDIES AND PRICE 1.10VEITT" Proportionof the Food Index Subsidized The food component is given a weight of 60 percent in the Ministry of Labour's Cost of Living Index. The food index is based on 14 products; eleven of these, accounting for about 92 percent of the weighted food index, are subsidized. The three products not subsidized are bacon, fish, and margarine. y About half of the subsidy now bein paid to sugar is a continuation of a pre-war program designed to stimulate the production of sugar beets, and is not designed primarily to ' keep dawn sugar prices. if As indiciatc:d above, a temporary- subsidy for fish transport was made in the sumtner of 1941. There is evidence that bacon is again being subsidized to a minor extent. See text, Table B. ix The major portion of the subsidy funds are paid on bread, flour, meats, milk, and potato6s, which together account for about 55 percent of the weighted food index. The only subsidized foods not included in the cost of living index are oatmeal and carrots; their subsidies do not involve large amounts, although no' separate estimates could be obtained. That the food index is becoming less significant as a measure of changes in the welfare content of British consumption is indicated by the fact that items having an aggregate weight of more than 70 percent are now rationed; bread, flour, fish, and potatoes are the only,unrationed products in the index. The index retains its importance, however, as a determinant of wage negotiation and arbitration; and bread, fish, and potatoes have taken on additional importance in the wartime British diet. The weights given to particular commodities in the food index, and their treatment -as regards subsidy and rationing, are presented in Table A below. Table A United Kingdom Retail Food Index of the Ministry of Labour Cost of Living Index (Weighting, Products Rationed and Subsidized, and Dates Actions Tal;on) • Article "Tieight" Dates • Dates in Index Subsidized Rationed •• Since December, 1939 Since December, 1939 Fob., 1940-March 1941 48 24 19 9 20 Since December, 50 Since December, 22 19 25 mIM• Since December, 1939 Since June, 1941 rre-war Jan.-Mar., June, 41 10 10 19 18 Since Fall, 1941 034 Beef Mutton Bacon Fish Flour Bread Tea Sugar Milk Butter Cheese Mar garinp Eggs Potatoes Total March 1940 March 1940 January 1940 Not rationed 939 Not rationed 939 Not rationed July, 1940 January, 1940 1940 2/ October, 1941 • January, 1940 May, 1941 July, 1940 July, 1941 Not rationed Source: Ministry of Labour Gazette, various issues 1940 to 1942. On April 3, 1941, it was announced in the House of Commons that tea was being subsidized, but no datc was given for the inception of the progran Butter subsidies, which are not large, apparently began sometime in 1941. National Milk Scheme started July 1940. 10656-33 x 2. Price Movements of Subsidized Products An analysis of price movements of subsidized foods reveals that they have been relatively stable since the institution of their subsidization. V The food index rose by almost 15 percent in the first three months of the war. As the subsidy program developed the index rose more moderately, reaching a maximum of 26 percent above the pre-war level on, December 1, 1940. Since that timesubsidies have substantially and progressively lowered the index, despite further advances in costs of supplies. On August 1, 1942, the fooa index had fallen back to only 17 percent above its pre-war figure, only about 2 percent higher than it stood two years and three months earlier at the end of December 1939, when subsidies first began. By April 19/13, the food index had risen sliKhtly, to 120.4, which is explEdnablo, no doubt, as an economy in the subsidization of the rood index nado possible by the rollback'of the clothing component of the total cost of living index resulting from the removal of Purchasti Tax from utility clothing in the fall of 1942 and-other measures. Yost meats have shown only minor price change- since they wore price-fixed in January 1940; the subsidy pvments started several weeks earlier. Prior to the subsidy on bacon in January 1940, the price had advanced 32 percent; after its introduction ono-third of this advance was cancelled. Bacon prices showed only minor movements thercafter until April 1941, when the removal of the subsidy was accompanied by a 13 percent price rise, to 36 percent above the pre-war level, at which bacon prices, were held through October 1942. The index rose to 50 percent above pre-war levels in November 1942, and has remained at that level to the present time. -Bread and flour prices recorded only minor changes from the outbreak of the war until October 1941, when a revision of the flour subsidy structure resulted in a 15 percent rise in flour prices. This did not, however, affect flour used to make commercially marketed bread. Bread prices have remained stable from that time until October 1942, when an appreciable increase was permitted as part of the Government's policy of increasing the price of bread and reducing the price of potatoes in order to induce the substitution of potatoes for bread. Milk prices clearly reflected the subsidy paid early in 1940, since prices were then only slightly above the pre-war level despit9 considerably increased prices to producers. With the introduction of the National Milk Scheme in June 1940, standard milk prices were increased to 15 percent above the pre-war leVel, and subsequently rose further, readh-ing 33 percent above pre-war levels by the beginning of 1941. Unsubsidized milk prices have been held at about that level to the present. Subsidized milk, however, ha 3 sold at only two-thirds pre-war standard prices since the inaguration of the National Milk Scheme. See Table B. 10656-34 xi Table B United Kingdom Wartime Percentae Increases in Retail Food Prices September 1, 1939 - February 28, 1942 (Percentage change in comparison with September 1, 1939) Jan. 1 Jan, 1, Sept. 1, Dec, 1, Feb. 28, Feb. 1 1940 .. 1941 . 1941 1941 1942 1943 *Beef, British: Ribs Thin flank *Beef, chilled or frozen Ribs 11 34 34 34 34 35 Thin flank 21 26 . 22 22 20 22 *1Jutton, British: Legs Breast *Mutton, Frozen Legs 10 17 15 15 15 16 Breast 19 0 0 0 0 0 Bacon 32 23* 36 36 30* 50 Fish 75 56 42 42 32 *Flour (per 7 lb.) 2 -2 -I .15 15 26 *Bread (per 4 lb.) 3 3 3 -3 -3 9 *Tea 5 7 7 7 7 13 *Sugar (granulated) 50 33 32 32 -1* -1 *Milk (per quart) 4 33 1/ 30 33 32 32 *Butter (fresh) 15 15 15 (22 (22 21 ..... *Buttor (salt) 25 25 24 ( ( 31 Cheese 83 30* 30* 30* 30* 30 Margarine (standard) 4 -23 12 12 12 12 Eggs (each) 25 75 20* 26* 26* 1 Potatoes (per 7 lb.) 4. 31 46 27* 23* 6 All Foods, weighted 15. 26 21 20 18 20 * Subsidized 1/ The National 1111k Scheme was introduced in July 1940. Source: .The Economist (Commercial History of 1940), March 15, 1941, p. 5., and lAinistr:);- of Labour Gazette, various dates, 1941 and 1942. Price data arc those published by The Ministry of Labour. 115 11;* 10 ll 112 17 27 27 27 26 27 8 11 13 13 13 13 13 7 8 8 8, 8 xii The introduction of the egg subsidy in June 1941 was accompanied by a very sharp price decline, from 75 percent to 26 percent above pre-war levels; egg prices remained at this latter level until April 1942, when prices declined 25 percent. - Potato prices fluctuated widely until the comprehensive subsidy plan -Nei adopted in 1941. They reached 46 percent above pre-war levels in early September of that year. In December 1941 they were stabilized at about 26-28 percent above pre-war levels. In October 1942, the Government effected an appreciable reduction in potato prices in order to increase their consumption. Butter and tea prices have remained fairly steady since shortly after the war began, the latter at 7 percent above pro-war levels until February 1943 when an increase of 6 percent occurred, and the former at about 15-25 percent above, depending on the typo, until late 1942 when prices increased by 6 percent. Cheese prices have been held at 30 percent above pre-war levels since January 1, 1941. Appendix D THE BRITISH BREAD SUBSIDY IN WORLD WAR I (From W. H. Beveridge, British Food Control, Oxford University Press, 1928, pp. 108-112.) "The decision to subsidize bread was announced in general terms by the Prime Minister on June 30, 1917. The Food Controller followed a month later with the definite announcement that the price of the 4 lb. loaf would be reduced to 9d., (from is.) as from 17th September, and that flour would be sold at a price to correspond...A cardinal part was played by the control of the flour mills. It was arranged that flour should be sold to the bakers by the mills on behalf of. the Government, at a price which would allow the bakers, while selling the 4 lb. loaf for ,9d. to cover their expenses and make a reasonable profit. The mills themselves were buying ham-grown cereals at the Food Controller's prices and having imported cereals issued to them by the Wheat Commission at prices to correspond; they made a loss in selling flour. The liheat Com mission at the same time made a loss in issuing imported .cereals to-the mills at a parity with the British prices; on 17th September, for instance, No. 1 Manitoba was costing the Commission about 95s. per 480 lb. c.i.f..and was being passed on to the controlled mills at 75s. 6d. per 430 lb. The cost of the bread subsidy, therefore, fell under two headings. One represented the gap between the price paid for imported cereals and their price at parity with British cereals, and appeared in the accounts as trading loss by the Wheat Commission; the other represented the gap between the price of British cereals and the price of flour, and appeared as a loss on working the flour mills. Altogether from beginning to end, that is to say from September 1917 to December 1920, the subsidy cost about L162,500,000, or roughly 1150,000,000 a year. 10656-36 "The determination of the margin to be allowed to the bakers presented great difficult:/. The subsidy was introduced at short notice and there was not time for costly investigations beforehand. The margin was fixed, on information supplied by the bakers, at about 23s. per sack of 280 lb., being the difference between 44s. 3d.--the price at which the sack was delivered by the controlled mills to the 'bakers-and thq 67s. 6d. which he was expected to make by the sale of broad from that quantity of flour. Subsequent costing investigations suggested that the margin when fixed was excessive. Nevertheless it did not seem possible to raise the price of flour and diminish the margin. The less efficient bakeries with costs up to or beyond 23s., 4-eood in the way. Unless the Food Controller was prepared either to risk their going out of business and dislocating local supplies or himself to undertake the reorganization of the baking trade, he must allow a nargin on which substantially every bakery could live. "The subsidy was introduced and always spoken of as a /bread subsidy. A point left open by the original decicion of the War Cabinet, and hotly debated in the Ministry itself during August 1917, was whether flour was to be sold at the reduced price for all purposes or only when it was going to be used for baking bread or domestic consumption. Lord Rhondda-decided that it was not administratively possible to limit the subsidy in this way. It becam.thus in essence a flour subsidy, and all flour except that. used under license for a 1imit0 number of 'precluded purposes' was .sold at the reduced price. -Not anl dopeatic puddings and pies and the 9d. loaf, but all such biscuits, cakes, pastries, or proprietary breads as could still be produced were subsidized, though their price to the public was not limited. The .'precluded purpose's, .included only .such uses as the manufacture of size and other industrial products, the wholesale manufacture of biscuits, custard powders, baby foods etc., and exportation as silip's stores.' .Isstiesof flour.for Ituch•purpoes-were already being made .under license, to limit the amount, used..• It was a • simple—if probably illegal--proceeding to requiree licensee to 'pay-6 duty representing the difference between the subsidized and the unsubsi dit.ed price;•the duty was fixed originally at las, a sack, raised•to in March 1918, lowered to 24s. in April 1919, and to 8s. in Septemb6r 1920. During one, financial year (1918-19) the duty..yielded-over 1,3,000,000.. "It appeared that' of the total expenditure .of about L50,000,000 a.year on- the subsidy, 1,14,500;000 went to cheapen flour used for pur-* • . poses other than bread-making; the products were not generally subject to any liinitation of price; there was unfairness as between the wholesale manufaCturers of biscuits who had to pay the precluded purposes duty and bakers rho might make competing articles with subsidized flour. "In being subsidized, as in other respucts, bread, or rather flour, was treated differently from any other foodstuff. The general policy was that the ilinistry of Food *should be self-supporting without 10656-37 xiv making a profit; it was to sell, at prices to cover the prices at which it bought, with freight, insurance, and its own costs of administration added. The losses incurred on British cheese, on potatoes in 1917 and again in 1919, and on sugar from 1920, are exceptions proving the rule by their abnormal character. The broad subsidy vas a deliberate departure from it, and probably a right one, "Certainly the cost of the subsidy was not all pure loss to the State, which, directly or indirectly, had become the employer of nearly all its citizens, and was continually having to adjust wages according to the cost of living. The price of bread entered directly into the cost of living, and, but for the subsidy, wages would have been materially higher. "Finally, it May be observed, that the bread subsidy was, perhaps unconsciously, another link in the chain of measures dictated by the breadstuffs policy. Artificial lowering of its price by a subsidy, relatively to other articles, was an encouragement to its consumption, a means of loading the people to the goal of eating in war more cereals and less of other articles than they had grown accustomed to eat in peace." Appendix E EQUALIZATION SORTIES IN THE IRON AND STEEL INDUSTRY The most elaborAe British scheme of industrial cost and profit equalization for the purpose of preventing prices from rising is found in the iron and steel industry. Its roots reach well back into prewar years, when the British "rearmament pro gram" was just getting underway: In 1936 the British Iron and Steel Federation, the trade associc,tion of the industry, adopted an arrangement for the equalization of the cost of imported scrap among the members of the industry. All imported scrap was purchased by the British Iron and Steel Corporation, the trading organization of the Federation, and resold to iron and steel producers at the lower, industry-controlled, prices of domestic( scrap. To finance the loss incurred by the COrporation on its scrap operations, a levy of 5s. per ingot ton produced was imposed upon every steel producer by the Federation. At the outbreak of war the industry's equalisation scheme was revamped. The Iron and Steel Federation became in effect the Iron and. Steel Control of the Ministry of Supply, and the British Iron and Steel Corporation an officin.1 instrument of the Ministry. Two separate funds, administered by the Control through the Corporation, were created. The so-called "Central Fund", provided by a levy of 10s. per ingot ton on all producers, as devoted to the purpose of equalizing the cost of imported steel scrap and imported iron and steel products with controlled domestic prices of those products. These import and resale XV operatiOns.b7rthe Central_Funct preventod domestic iron and steel prices from rising tc. the "marginal" cost of obaiing foreign imports, and made it unnecessary to raise stoe1.price;1; to'tlie higher levels which the use of the expensive foreign scrap would otherwise have required. After the closure of Continental sources, the proceeds of the levy were used chiefly to enable the Iron and Steel Control to, sell hih cost steel. imports from America at the low/. British controlled -prices. A second fund, designated the "Special Fund", was used for domestic price and cost equalization purposes and to defray the expenses of the British Iron and Stool Corporation nd the Iron and. Steel Control. This fund, provided by a 5s. levy on producers, was employed in a number of ways to increase the domestic supply of iron ore, pig iron, scrap, and steel ingots. Old railway and tram lines wrk; purchased, and scrap. from farms as collected and paid for. The extra costs of shipping scrap by coastwise frt;iglit and of storage at collection yards were also absorbed, and, in c. few eases, high cost producers of pig iron and steel ingots were paid in order to achieve maxi.mum production of those produces. Subsidy payments wore also =de to stimulate the exploration and develop-m.ent of ore-beariiy; areas in th,., United Kin-dom. A reorganization has now boon effected whereby the operations of the Special Fund h,we been transferred to the Central Fund, which now operates all the above schemes, both domestic and import, for subsidization and cost equalization. The total levies have boon very substan- tially increased, and at a recent c!ate were about -10 (10) per ton. A large part .of imported stool is now obtained under Lend-Lease. Proceeds of sales of lend-loasQd steel, while paid into the Central Fund, are not available for subsidy purposes by the Corporation. Under arrangements concluded in August 1941 they are paid over as accumulated to the Ministry of Supply. The operations describel above, which still continue, have not, however, constituteda general subsidy to relieve producers squeezed be-twc:en rising costs and coiling prices. In the main they simply distribute "unusual" costs as that for imported steel scrap or the cost of do,aestic scrap collection, throughout the Lidu8try, in order to "equalize' these special cost climnts vaing producurs. The op:JraLiolis have not, in general, been intended to compensate lo-J-profit firms "squeezed" by iron and steel price ceilings. A scheme for this latcr purpose has, however, recently been inaugurated and ILde effective from the beginnin:-; of 19111. Its purpose is to avoid the necessity of increasing steel prices in order to relieve British producers whose earnings fall bolau their levels. The scheme works as follo.s: A s6-calicd "Prices Fund" is financed from the Central Fund, into which all levies are r.or paid. Each quarter year an authorized representativeof the of Supply receives from a selected list of British producers reports concerning the current costs and, net sales prices of iron and stool products. On the b-sis of those reports ho determines LT.:;thc,r advances in prices are justified by increased cost of tin;s industry. xvi Prices to iron and steel consumers are not raised oven if it is determined that the industry's costs are higher than those of the date on which the stabiliztd prices are based. Instead an amount sufficient to raise aggregate income from iron and steel products produced in Britain during the period to thelevels justified by the higher costs is transferred from the Central Fund to the Prices Fund for distribution to producers as described below. No producer whose aggrogAe profits ,xceed his "standard" profit - 1936-1937 average, plus 10 percent on increased capital - receives any part of this distribution. Producers whose profits arc, lss than "standard" receive payments equal to the rise in price which the Ministry of Supply representative has doomed proper on their tonnage production of each typo of iron and steel product during the period, so iong as their standard profits are not exceeded. In addition, any producer I:;hose profit after these tonnage payments is less than 25 percent .of his standard profits may apply for additional relief from the fund. Additional payments may be made, to a • maximum amount which would ruisc, profits to 25 percent of standard levels, at the- discretion of the Cora:littc which manaGss the scheme. Producers whose operations result in actul loss after adjustraent for the tonnage payment may, at the discretion of the Cosvitteo, rocoive additional payments sufficient, but not more than sufficient, to wipe out the loss. Payments are made quarterly and are subject to annual adjustment. It should be noted that the commitment of the fund is definitely limited and that, whilG the scheme goes a considerable distance towards equalizing the profits of the firms in the industry, there arc distinct limits to the equalization. First, the levy which finances the scheme is a flat amount per ton, independent of individual producers' profits. Second, no firm receives a payment if its profits equal its pre-war "standard" regardless of how these profits compare with pro-war or current profits of other firms. Third, a firm whose profits are bolow "standard" levels, but is earning 25 percent or more of its stand'-rd profits, receives only a fixed payment based on the increased costs of the selected firms inspocted by th Ministry, and not an amount sufficient to raise its profits to any given level. Fourth, firms =king less than 25 percent of the adjusted standard l?rofits, including the tonnage payment, aro not given payments greater than is sufficient to raise profits to that low level. Finally, firms suffering loss can receive, in addition to the flat tonnage payment, only 6.n amount sufficient to eihtinat,, the loss. 1 The Comitteo consist of: the Controllor of Iron and Steel; the two Deputy Controllers; the President of the British Iron and Steel Federation; the Financial Di cctor of the British Iron and Stool Corporation; and such other representatives ;-,,s the Ministry of Supply may consider necessary. 10656-40 xvii Since the levy is a flat amount per ton, independent of the profits of the individual firm, it has no tendency to reduce incentive to efficiency for the profitable producers. In all cases in which a firm's profits threaten to fall below its standard pro-war profits by an amount greater than would be taken care of by the tonnago pc,ymont, it is to its interest to increase efficiency and cut its cost. In addition the scheme tends • to stimulate production of all firms, other than those whose profits exceed pro-war standards, by adding to revenue from expanded output the payments madeas price compensation for each ton of iron and steel Produced. There is so:ae danger that firms whose profits, oven after. receiving the tonnage payment, will certainly fall below 25 percent of pre-war standards may be indifferent both to economy and output becuso of the oxpoctation that Gupplumcntal paymnts will fully offset any loss of net revenue suffered by highe: costs or failure to recove tonnage payments on maximum output. no discretionary authority lodged in the. Committee to vary supplementary .1)..licntis or refuse them entirely tands to discourao such behuvior. 10656-43