Unneeded Stand-By Controls

June 8, 1953

The original Capehart proposal to give the President power to impose a 90-day freeze on prices, wages, and rents in the event of a “grave national emergency” was so transformed as it emerged from the Senate that the House may not even consider it. This would be just as well.

Though the original proposal was approved by the Banking and Currency Committee by a vote of 12 to 3, the minority report ably summarized the objections to it: “It embodies stand-by control provisions for which the President did not ask. It embodies a philosophy counter to the views expressed by the President in his inaugural address. . . . If enacted into law, it would embed an economic fallacy into the functioning of the American economy for the life of the legislation.”

The minority convincingly refuted the contention of the majority report that it was price controls which finally stabilized prices during the Korean war. “If controls were holding the prices from going higher, the wholesale price-index graph should show a horizontal line at ceiling levels. Instead it shows a sizable drop below ceiling levels. . . . Final removal of price and wage controls has resulted in no general or significant increase in either prices or wages despite the forecasts of alarmists.”

It was the political and not the economic objections of the minority to the Capehart proposal, however, that were effective in securing changes in the Senate. The minority pointed out that under the original bill an overall freeze could be imposed “upon a simple finding that a ‘grave national emergency’ exists. . . . The bill would amount to a grant of power to invoke the freeze whenever bureaucratic advisers . . . could persuade the President to make the required finding.” The Senate therefore revised the bill to require a concurrent resolution of the Senate and House to find that an emergency existed before the President could call for a freeze.

But it was because the Senate majority accepted the economic ideology of the bill’s sponsors that it defeated the proposal of Senator Bricker to strike out all authority to impose a price-and-wage freeze. The Senate bill even requires the President automatically to freeze wages, prices, and rents if the United States declares war on a foreign nation.

All such price-and-wage freeze proposals rest on lack of economic understanding. It is significant that the long majority report never once mentions the huge increase in the supply of money and credit that took place after the outbreak of the Korean war. This was the real cause of the price-and-wage rise, which could have been stopped at any time by proper fiscal and monetary measures. Instead the government encouraged the increase in the money and credit supply, and then “fought” the consequent inflation with price control.

The majority report’s argument depends heavily on a false analogy. It speaks of “economic mobilization” for war. Like Bernard Baruch, it identifies such “mobilization” with a price-and-wage freeze. Now mobilization, in the military sense, means “to assemble . . . an army or a fleet.” It certainly doesn’t mean compelling everybody to stay just where he was before the war broke out. A price-and-wage freeze would be, in fact, the greatest obstacle to economic mobilization for war. Price changes are necessary to tell us the truth about comparative surpluses and shortages. They provide the incentives or deterrents that divert production most quickly into the lines where it is most needed. Free prices act faster than fumbling bureaucrats.

One element of sense in the “economic mobilization” idea is that it may be necessary, on the outbreak of a major war, for the government to put into effect some immediate priorities and allocations. But not only can all this be done without government price fixing; it can be done quicker and better without price fixing. When there are shortages, price ceilings make priorities and rationing more necessary, not less. Priorities and rationing, on the other hand, can in themselves restrain price rises.