Price Control by Default

July 28, 1952

Price control today makes no economic sense; and yet it has been renewed. It is not a cure for inflation; and yet it has been retained. It is not a minor nuisance. It distorts and curtails production. It is a dangerous political weapon in the hands of the regime in power—a weapon by which it seeks to reward its friends and punish its enemies. Its prolonged retention imperils the free-enterprise system.

There was no irresistible majority demand behind the continuance of price control. The House, in fact (as shown by the vote on the Talle amendment), wanted to discontinue most of it. Both the House and the Senate passed provisions that rejected the dangerously harmful controls imposed by the International Materials Conference. Yet the Truman-dominated conference committee succeeded in throwing out all these provisions. The House, after less than an hour’s debate, meekly accepted the committee’s reversal. So we still have a price-control law nearly as bad as the one that expired.

The renewal of the law has already done great harm. It has been responsible, for example, for further prolonging the steel strike. Many of the steel companies were willing from the start to accept even the record wage increase awarded by the Wage Stabilization Board if they were permitted to pass on the increased labor costs by a corresponding increase in prices. But up to a late hour Price Administrator Arnall was still standing in the way of a settlement by refusing to grant such an increase.

Yet if price control makes no sense economically, and if even the political demand for it is so doubtful on net balance that Congress did not want to renew it, how did Mr. Truman succeed in getting it renewed? The answer is that while there has been some public awakening to the futility and folly of price control, this awakening has not yet gone far enough. Congress renewed price control because it was afraid that the Administration would otherwise try to pin the blame on it for any further price rise. And yet Congress failed to put into the law the only provisions that would have prevented such a price rise. The real cause of inflation is the increase in money and bank credit. Congress could have prevented the Administration from inflating further simply by making the Federal Reserve Board independent of Treasury or Presidential dictation; by restoring at least the previous 35 and 40 percent required reserve ratios of the Federal Reserve Banks, and by depriving the Federal Reserve authorities themselves of the power to inflate further.

The statement issued by Mr. Truman when he signed the new controls law betrayed the contradictions in his case. “At a time,” he wrote, “when our defense production is still expanding and necessarily contributing to inflationary pressures, the Congress has weakened price controls.” But defense production does not necessarily contribute to inflation at all. It does so only to the extent that it is not financed either out of increased taxation, or out of reductions in previous nondefense expenditures. It does so, in short, only to the extent that it is financed by deficits, themselves financed by increasing the money supply.

Congress, the President complained, “has virtually canceled selective credit controls.” But selective credit controls are the last refuge of the inflationist and the controlist. They encourage bureaucratic favoritism and discrimination between different firms, industries, and group interests. The only honest, workable, and free-enterprise way to stop inflation is through overall credit controls. In fact, it is merely necessary for the Federal authorities themselves to stop inflating—to stop monetizing government bonds, to stop holding down interest rates to inflation-stimulating levels.

But the Administration wishes to continue to inflate, by increasing the money supply, while pretending to “fight” inflation with price control. And Congress, by its new law, has enabled it to do precisely this. What Mr. Truman was really struggling for was not a cure for inflation but a campaign issue. And Congress, because of its own confusion, gave it to him.