Price Fixing without Tears?

April 14, 1952

If the government does not increase the money supply, price ceilings are unnecessary. If the government substantially increases the money supply, price ceilings are futile. They represent a hypocritical effort by the government to “protect” the consumers against the consequences of its own inflationary policies.

But price ceilings, though in the long run futile, are never harmless. They curtail and distort production, encourage wasteful consumption, and intensify shortages. They give a set of government bureaucrats life-or-death powers over industry. They are used as a political weapon to try to distribute economic favors and penalties. And when wage controllers and price controllers (usually two different sets of officials loath to recognize each others’ existence) try to push up wages and hold down prices, they put dangerous strains on the economy.

What Congress ought to do now, of course, is simple. It ought to allow the whole network of price fixing and wage “stabilization” to expire on June 30. The Controlled Materials Plan in its present form should expire with it. War contractors could be granted enough “tickets” to get priorities for the strategic metals or other raw materials they need for themselves or their subcontractors. The remaining supply of such materials would then be “allocated” by supply and demand working with free prices in free markets. Today the rationing and allocation problem is created by price controls. Arbitrary ceilings hold these materials below the prices to which free markets would bring them. This creates shortages both by reducing production and by encouraging wasteful consumption.

But confused economic ideas and the present political atmosphere combine to make it highly improbable that Congress will do anything so simple and sensible as to allow price-and-wage control to expire. Too many congressmen honestly believe that under present conditions price fixing is really necessary. Others will vote for its continuance for purely political motives. They are afraid of being accused of favoring the “profiteers,” and of refusing to give the President the “weapons” to “fight” inflation. They are afraid of being blamed if prices actually do continue to go up.

If price fixing is destined to be prolonged, therefore, at least two main safeguards are necessary to minimize all the harm which it would do.

The first is to extend the price-control powers only for a short term (not more than a year at most), and in addition to put several emergency triggers on their termination. Congress should provide that the price- and wage-fixing powers can be terminated at any time by a vote of either House of Congress or by Presidential proclamation. With Congress always in a position to terminate the powers, the control officials would have to pay constant regard to sentiment in Congress and refrain from arbitrary rulings in defiance of that sentiment. Mr. Truman, on the other hand, could not argue that he was being forced to continue price fixing by Congressional edict, and his successor would be free to terminate the powers as soon as he wished.

But even more important would be an amendment to deprive the Federal government of its present power to inflate. This could best be done by depriving the central Federal Reserve authorities of their power to lower the rediscount rates or to order the purchase of government securities in the open market by the Federal Reserve Banks. (See this column of Nov. 26.)

If the Federal government no longer had the power to inflate, it would have no excuse for using its price-fixing powers to “combat” inflation. Prices would not rise (or at most very moderately), and therefore Congress would not be blamed for a price rise. Price-fixing powers would lose their popularity with the Administration, because they would be accompanied by deprivation of the power to inflate. In fact, in order to get back its power to inflate, the Administration might itself order termination of the price control law. But this action would educate the country in the real economics and politics of inflation.