Farewell to Price Controls

February 23, 1953

President Eisenhower recommended the removal of price and wage controls for the right reason—because “free and competitive prices will best serve the interests of all the people, and best meet the changing, growing needs of our economy.” But the termination of controls has probably met its widest approval for the wrong reason—that they are “no longer needed” except for prices “pressing upward against their ceilings.” People who now acquiesce in the removal of price controls only for this reason will be demanding their reimposition at the first sign of another price rise. What we need to understand, if we are not to be easily stampeded into taking controls back, is that wherever conditions of real competition exist price fixing is always harmful. It is never more so than when “prices are pressing upward against their ceilings”—i.e., when they are being arbitrarily held substantially below the levels to which the free play of supply and demand would bring them. For prices have constant and indispensable functions to perform. Their changes give the quickest and best information obtainable concerning the existence and extent of surpluses and shortages of supply in relation to shifts in demand. They also promote the quickest and most efficient adjustment of supply to meet a new pattern of demand. A higher price for a scarce commodity is an immediate deterrent to its wasteful consumption and an immediate incentive to its increased production. The free play of prices, in brief, can bring a quicker conversion from peacetime output to war-needed output than any set of bureaucratic regulations.

Why, then, is there so much clamor for the imposition of price controls when a war breaks out? One reason is embodied in the specious slogan: “No one must be allowed to make a profit out of war.” But any control that slows down war production and brings shortages of vital goods merely aids the enemy.

Another reason for the clamor for controls is a predilection for price “stability” for its own sake. But price stability at the cost of shortages and disrupted production is too dearly bought. That a free price sometimes shoots up and then falls again is never a proof (though price controllers invariably regard it as one) that the price flurry was unnecessary. It probably brought about the very increase of supply that corrected it. A more sophisticated argument for price control is that the supply of some goods is “inelastic,” so that even a great increase in their price will not lead to an appreciable increase in their supply or rate of output. Only in rare cases does this academic contention describe actual facts. What those who make it usually have in mind are such things as housing, where the supply is not really “inelastic” but tends to respond to changes in price, rent, or demand only after a production-time lag. Yet the existence of such a lag is not a good reason for losing further time by forbidding any price incentive at all. And whether or not a rise in price brings an immediate increase in supply, it forces more economical consumption. A favorite analogy of those who argue that price control is indispensable in “total war” is that of a city under siege. The analogy is misleading. A city under siege cannot produce its own food, water, or fuel; a nation at war usually can. Price ceilings are usually harmful, moreover, even in a city under siege. They remove one of the chief deterrents to wasteful consumption. Priorities, allocations, and rationing may, of course, prove indispensable in a city under siege and in a nation engaged in total war. But priorities and rationing best achieve their purpose without price ceilings. Such ceilings merely give compulsory rationing more work to do.

But the rise in the average level of prices in wartime is caused chiefly by an increase in the supply of money and bank credit that the government has deliberately encouraged or enforced. But if the money supply is firmly controlled, there can be no spectacular general price advance and no excuse for government price ceilings.