The CED on Price Controls

March 19, 1951

We take as our text this week a statement of the program committee of the Committee for Economic Development entitled “Conditions Necessary for Effective Price-Wage Controls.” This statement typifies the views of a large group of business leaders and economists. We choose it for discussion partly to point out what is wrong with it, but also to underline much that is right with it.

The committee specifies four conditions it regards as necessary to make “price and wage controls work as effectively as possible: . . . (1) Drastic steps should be taken to reduce all government expenditures not clearly essential to the defense effort; (2) taxes should be raised sharply and promptly, to restrain consumers’ expenditures as well as to increase revenues; (3) the expansion of bank credit should be checked; (4) a national program to encourage savings should be inaugurated.”

By far the most important of these conditions is the third, which the committee relatively understresses. The increase of $8,500,000,000 in combined demand deposits and currency outside of banks between the end of May and the end of December (together with fears of a still further increase) was the major factor in the inflation of that period.

But the committee argues clearly and courageously for “modification of the present policy of using the government’s monetary powers to maintain a stable market for Federal government securities at low interest rates.”

The first and second conditions specified by the CED committee add up to a demand for a balanced budget. Now a balanced budget is important. But a deficit is an indirect, not a direct cause of inflation. A budget deficit is inflationary only to the extent that it forces an increase in the volume of money and credit. A deficit fully financed by the sale of bonds paid for out of real savings, for example, would not be inflationary. But if the volume of money and credit increases, we can have inflation even with a budget surplus. This is precisely illustrated by what has been happening in the present fiscal year since July 1; for up to March 1 there was actually a budget surplus of $978,000,000.

It is essential, moreover, to insist on drastic reduction of needless expenditures rather than increased taxes to bring about a budget balance. Continued taxes at any such level as $70,000,000,000 a year (in dollars that retain even present purchasing power) would not only retard and discourage production but would make the maintenance of a free economy impossible. A budget of $71,000,000,000 expenditures and $72,000,000,000 taxes would be technically “noninflationary,” while a budget of $55,000,000,000 expenditures and $54,000,000,000 taxes would be technically “inflationary”—but our economy would have a far better chance of survival under the second than under the first. Inflation is a great danger, but it is not the sole economic danger that threatens us.

The CED committee is right in maintaining that price and wage controls will not work effectively unless needless government expenditures are cut, the budget reasonably balanced, and further expansion of bank credit prevented. What it fails to recognize is that if these “conditions necessary for effective price-wage controls” were achieved, the price-wage controls would not be necessary! For given such conditions, the general level of prices simply could not go up substantially or permanently.

It is true that the prices of certain war goods in exceptional demand might go up sharply. But this would leave less money to buy other goods, the price of which would consequently decline. And this change in relative prices is exactly what is necessary. To try to retain the same relative prices, wages, costs, profits (and losses) as those of June 24, 1950, say, is to discourage, retard, or prevent the very changes in the structure of production that we need.

Price control, in short, is not only an unnecessary weapon against inflation, but a positive evil in itself.