Stabilization or Redistribution?

June 2, 1952

What Mr. Truman calls a “stabilization” program has become in reality a program that attempts to redistribute income.

Since the end of 1939 the government has tripled the supply of money and bank credit. This has been the real cause of the rise in prices. When the money supply is not increased, price control is unnecessary. When the money supply is greatly increased, price control is futile.

As price control is unsound in principle, no formula for it can ever be right. But some formulas are more harmful than others. For present purposes we may distinguish two main approaches, which I shall label respectively the Baruch plan and the Truman plan.

The plan proposed by Bernard Baruch in the summer of 1950 called for “an overall ceiling across the entire economy.” All prices, wages, rents, and fees were to be rolled back to and frozen as of June 25, the day Korean hostilities broke out. This proposal was inspired by fine intentions. But as I pointed out in Newsweek of Sept. 11, 1950, it was economically unworkable and politically impossible. It ignored the whole function that prices, wages, and free markets play in our economy—which is to keep a balance among the output of thousands of different commodities and services, directing production into those that are most needed and away from those that are less needed.

The Baruch Plan would have frozen for war conditions the price and wage relationships that had been adapted to peace conditions. It would have removed every market incentive to change production over to the needs of rearmament. It would have required, instead, a completely totalitarian economy, with the government assigning detailed production and employment quotas, telling every company what to make and every worker what to do.

If carried out consistently, the Baruch plan would have meant that no worker could increase his hourly wage beyond the level at which it stood on June 25, 1950. Demands would have come from every side for the correction of “hardships” and “inequities.” But the moment we began to make these corrections we would be out of the Baruch plan and into the Truman plan. For what constitutes a “hardship” or “inequity” is a matter of opinion. And government inevitably defines “inequities” not in economic but in political terms. The decisions most likely to be made are those that can command the most votes. Politically speaking, profits and prices (except, of course, farm prices) are always too high and wages are always too low. So “correcting inequities,” as I predicted here on Sept. 11, 1950, “becomes an excuse for holding down prices while permitting or encouraging wages to rise.”

And it is as a political device that Mr. Truman has used his price- and wage-control powers from the beginning. He and his agencies have demanded catchup formulas for wages while denouncing even partial catch-up formulas for prices. Though hourly steel wages had already gone up since Korea more than the cost of living, though they were already 14 percent higher than the average of all manufacturing wages, Mr. Truman discovered that steel wages needed still another rise of 14 percent on top of this to “catch up.” But he becomes outraged whenever he speaks of the Capehart amendment, which allows sellers to pass on in prices any additional expenses up to July 26, 1951.

If Congress were now to insist that the same standard be applied to both price and wage control, then either each price would be allowed to go up as much as the cost of living goes up (which would increase the cost of living still further), or wages would not be allowed to go up any more than the cost of living had gone up prior to July 26, 1951—no matter how much further it goes up hereafter. But if Congress continues the President’s existing power to boost wages and to squeeze prices and profits, and adds authority to seize industries, the end result must be to disrupt production and to destroy free enterprise.