These requests for appropriations will be addressed to the needs of our own military forces. Earlier, I referred to the fact that we must also assist other free nations in the strengthening of our common defenses. The action we must take to accomplish this is just as important as the measures required to strengthen our own forces.

The authorization bill for the Mutual Defense Assistance Program for 1951, now before the House of Representatives, is an important immediate step toward the strengthening of our collective security. It should be enacted without delay.

But it is now clear that the free nations of the world must step up their common security program. The other nations associated with us in the Mutual Defense Assistance Program, like ourselves, will need to divert additional economic resources to defense purposes. In order to enable the nations associated with us to make their maximum contribution to our common defense, further assistance on our part will be required. Additional assistance may also be needed to increase the strength of certain other free nations whose security is vital to

our own.

In the case of the North Atlantic area these requirements will reflect the consultations now going on with the other nations associated with us in the North Atlantic Treaty. As soon as it is possible to determine what each nation will need to do, I shall lay before the Congress a request for such funds as are shown to be necessary to the attainment and maintenance of our common strength at an adequate level.

The steps which we must take to support the United Nations action in Korea, and to increase our own strength and the common defense of the free world, will necessarily have repercussions upon our domestic economy.

Many of our young men are in battle now, or soon will be. Others must be trained. The equipment and supplies they need, and those required for adequate emergency reserves, must be produced. They must be made available promptly, at reasonable cost, and without disrupting the efficient functioning of the economy.

We must continue to recognize that our strength is not to be measured in military terms alone. Our power to join in a common defense of peace rests fundamentally on the productive capacity and energies of our people. In all that we do, therefore, we must make sure that the economic strength which is at the base of our security is not impaired, but continues to grow.

Our economy has tremendous productive power. Our total output of goods and services is now running at an annual rate of nearly 270 billion dollars-over 100 billion dollars higher than in 1939. The rate is now about 13 billion dollars higher than a year ago, and about 8 billion dollars higher than the previous record rate reached in 1948. All the foregoing figures have been adjusted for price changes and are, therefore, a measure of actual output. The index of industrial production, now at 197, is 12 percent higher than the average for last year, and 81 percent higher than in 1939.

We now have 612 million people in civilian employment. There are 16 million more people in productive jobs than there were in 1939. We are now producing 11 million more tons of steel a year than in the peak war year 1944. Electric power output has risen from 128 billion kilowatt-hours in 1939, to 228 billion hours in 1944, to 317 billion

hours now. Food production is about a third higher than it ever was before the war, and is practically as high as it was during the war years, when we were sending far more food abroad than we are now.

The potential productive power of our economy is even greater. We can achieve some immediate increase in production by employing men and facilities not now fully utilized. And we can continue to increase our total annual output each year, by putting to use the increasing skills of our growing population and the higher productive capacity which results from plant expansion, new inventions, and more efficient methods of production.

With this enormous economic strength, the new and necessary programs I am now recommending can be undertaken with confidence in the ability of our economy to bear the strains involved. Nevertheless, the magnitude of the demands for military purposes that are now foreseeable, in an economy which is already operating at a very high level, will require substantial redirection of economic resources. Under the program for increasing military strength which I have outlined above, military and related procurement will need to be expanded at a more rapid rate than total production can be expanded. Some materials were in short supply even before the Korean situation developed. The steel industry, for example, was operating at capacity levels, and even so was not able to satisfy all market demands. Some other construction materials, and certain other products, were also under pressure and their prices were rising, even before the outbreak in Korea.

The substantial speed-up of military procurement will intensify these shortages. Action must be taken to insure that these shortages do not interfere with or delay the materials and the supplies needed for the national defense.

Further, the dollars spent now for military purposes will have a magnified effect upon the economy as a whole, since they will be added to the high level of current civilian demand. These increased pressures, if neglected, could drive us into a general inflationary situation. The best evidence of this is the recent price advances in many raw materials and in the cost of living, even upon the mere expectancy of increased military outlays.

In these circumstances we must take action to insure that the increased national-defense needs will be met, and that in the process we do not bring on an inflation, with its resulting hardship for every family.

At the same time we must recognize that it will be necessary for a number of years to support continuing defense expenditures, including assistance to other nations, at a higher level than we had previously planned. Therefore, the economic measures we take now must be planned and used in such a manner as to develop and maintain our economic strength for the long run as well as the short run.

I am recommending certain legislative measures to help achieve these objectives. I believe that each of them should be promptly enacted. We must be sure to take the steps that are necessary now, or we shall surely be required to take much more drastic steps later on. First, we should adopt such direct measures as are now necessary to assure prompt and adequate supplies of goods for military and essential civilian use. I therefore recommend that the Congress now enact legislation authorizing the Government to establish priorities

and allocate materials as necessary to promote the natural security; to limit the use of materials for nonessential purposes; to prevent inventory hoarding; and to requisition supplies and materials needed for the national defense, particularly excessive and unnecessary in

ventories.

Second, we must promptly adopt some general measures to compensate for the growth of demand caused by the expansion of military programs in a period of high civilian incomes. I am directing all executive agencies to conduct a detailed review of Government programs, for the purpose of modifying them wherever practicable to lessen the demand upon services, commodities, raw materials, manpower, and facilities which are in competition with those needed for national defense. The Government, as well as the public, must exercise great restraint in the use of those goods and services which are needed for our increased defense efforts.

Nevertheless, the increased appropriations for the Department of Defense, plus the defense-related appropriations which I have recently submitted for power development and atomic energy, and others which will be necessary for such purposes as stockpiling, will mean sharply increased Federal expenditures. For this reason we should increase Federal revenues more sharply than I have previously recommended, in order to reduce the inflationary effect of the Government deficit.

There are two fundamental principles which must guide us in framing measures to obtain these additional revenues:

(a) We must make every effort to finance the greatest possible amount of needed expenditures by taxation. The increase of taxes is our basic weapon in offsetting the inflationary pressures exerted by enlarged Government expenditures. Heavier taxes will make general controls less necessary.

(b) We must provide for a balanced system of taxation which makes a fair distribution of the tax burden among the different groups of individuals and business concerns in the Nation. A balanced tax program should also have as a major aim the elimination of profiteering.

At an appropriate time, as soon as the necessary studies are completed, I shall present to the Congress a program based on these principles to assure the financing of our needs in a manner which will be fair to all our citizens, which will help prevent inflation, and which will maintain the fiscal position of the Nation in the soundest possible condition.

As a further important safeguard against inflation, we shall need to restrain credit expansion. I recommend that the Congress now authorize the control of consumer credit and credit used for commodity speculation. In the housing field, where Government credit is an important factor, I have directed that certain available credit restraints be applied, and I recommend that further controls be authorized, particularly to restrain expansion of privately financed real-estate credit. These actions will not only reduce the upward pressure on prices, but will also reduce the demand for certain critical materials which are required for the production of military equip

ment.

Third, we must take steps to accelerate and increase the production of essential materials, products, and services. I recommend, therefore.

that the Congress authorize, for national-defense purposes, production loan guaranties and loans to increase production. I also recommend that the Congress authorize the making of long-term contractsand other means to encourage the production of certain materials in short supply.

In the forthcoming Midyear Economic Report, I shall discuss in greater detail the current economic situation, and the economic measures which I have recommended. If these measures are made available promptly, and firmly administered, I believe we will be able to meet military needs without serious disruption of the economy.

If we are to be successful, there must be sensible and restrained action by businessmen, labor, farmers, and consumers. The people of this country know the seriousness of inflation, and will, I am sure, do everything they can to see that it does not come upon us. However, if a sharp rise in prices should make it necessary, I shall not hesitate to recommend the more drastic measures of price control and rationing. The hard facts of the present situation require relentless determination and firm action. The course of the fighting thus far in Korea shows that we can expect no easy solution to the conflict there. We are confronted in Korea with well-supplied, well-led forces which have been long trained for aggressive action. We and the other members of the United Nations who have joined in the effort to restore peace in Korea must expect a hard and costly military operation.

We must also prepare ourselves better to fulfill our responsibilities toward the preservation of international peace and security against possible further aggression. In this effort, we will not flinch in the face of danger or difficulty.

The free world has made it clear, through the United Nations, that lawless aggression will be met with force. This is the significance of Korea-and it is a significance whose importance cannot be overestimated.

I shall not attempt to predict the course of events. But I am sure that those who have it in their power to unleash or withhold acts of armed aggression must realize that new recourse to aggression in the world today might well strain to the breaking point the fabric of world peace.

The United States can be proud of the part it has played in the United Nations action in this crisis. We can be proud of the unhesitating support of the American people for the resolute actions taken to halt the aggression in Korea and to support the cause of world peace.

The Congress of the United States, by its strong, bipartisan support of the steps we are taking and by repeated actions in support of international cooperation, has contributed most vitally to the cause of peace. The expressions of support which have been forthcoming from the leaders of both political parties for the actions of our Government and of the United Nations in dealing with the present crisis, have buttressed the firm morale of the entire free world in the face of this challenge.

The American people, together with other free peoples, seek a new era in world affairs. We seek a world where all men may live in peace and freedom, with steadily improving living conditions, under governments of their own free choice.

For ourselves, we seek no territory or dominations over others. We are determined to maintain our democratic institutions so that Americans now and in the future can enjoy personal liberty, economic opportunity, and political equality. We are concerned with advancing our prosperity and our well-being as a nation, but we know that our future is inseparably joined with the future of other free peoples.

We will follow the course we have chosen with courage and with faith, because we carry in our hearts the flame of freedom. We are fighting for liberty and for peace-and with God's blessing we shall succeed.

THE WHITE HOUSE, July 19, 1950.

HARRY S. TRUMAN.

B. Letter, Ambassador Austin to Secretary-General Lie,
August 25, 1950

[From Department of State Bulletin, September 11, 1950]

There has been circulated to members of the Security Council a paper which charges the United States with aggression against Formosa. The paper asks the Security Council to consider the question of Formosa.

The United States Government does not intend to discuss at this time this paper or the ridiculous falsehoods which it contains. It does wish to take this occasion to make a further statement about the Formosan question.

On June 27 the United States representative read at the Security Council the following statement of the President of the United States:

"In Korea the Government forces, which were armed to prevent border raids and to preserve internal security, were attacked by invading forces from North Korea. The Security Council of the United Nations called upon the invading troops to cease hostilities and to withdraw to the 38th parallel. This they have not done but, on the contrary, have pressed the attack. The Security Council called upon all members of the United Nations to render every assistance to the United Nations in the execution of this resolution. In these circumstances, I have ordered United States air and sea forces to give the Korean Government troops cover and support.

"The attack upon Korea makes it plain beyond all doubt that communism has passed beyond the use of subversion to conquer_independent nations, and will now use armed invasion and war. It has defied the orders of the Security Council of the United Nations, issued to preserve international peace and security. In these circumstances, the occupation of Formosa by Communist forces would be a direct threat to the security of the Pacific area and to United States forces performing their lawful and necessary functions in that area.

"Accordingly, I have ordered the Seventh Fleet to prevent any attack on Formosa. As a corollary of this action, I am calling upon the Chinese Government on Formosa to cease all air and sea operations against the mainland. The Seventh Fleet will see that this is done. The determination of the future status of Formosa must await the restoration of security in the Pacific, a peace settlement with Japan, or consideration by the United Nations.