VII.Can Price Control Stop Inflation

VII. CAN PRICE CONTROL STOP INFLATION? The United States Government is attempting to control prices for commodities and rents through the Office of Price Administration. Prices of labor's services—wage rates—are controlled through the War Labor Board. Interest rates are controlled through numerous government lending agencies and through the Federal Reserve System. Profits, the price of enterprise, are controlled through excess profits taxation, renegotiation of contracts, and cost-plus-fixed-fee contracts. Can these controls prevent inflation ? What Is "Inflation"? We speak of: currency inflation, gold inflation, credit inflation, price inflation. As commonly used inflation means: a decline in the purchasing power of money arising from the fact that the rate of spending runs ahead of the output of goods. From 1933 to 1939 the United States experienced a considerable amount of credit inflation with little price inflation.

Since the outbreak of war in 1939, however, we have experienced inflation in every sense of the term. The amount of money in circulation has risen from $7 billions in August 1939 to $20 billions in January 1944. Bank deposits have risen from $56 billions to $108 billions. Savings of individuals and unincorporated business are estimated by the United States Department of Commerce statisticians at: $ 7.S billions in 1940 13.6 billions in 1941 26.9 billions in 1942 36.0 billions in 1943 These savings compare with savings of less than $10 billions for the best year prior to 1941.

CAN PRICE CONTROL STOP INFLATION? 57 The excess of money put in the hands of consumers over the value of goods put in the merchants' hands for sale is estimated at $3 billions per month for 1943. This is the "inflationary gap" and it promises to widen as the war continues. When general price controls were established in April 1942, the Administrator of the Office of Price Control said: "There can be no effective price control while at the same time there is so large an amount of excess purchasing power." Yet since that date the rate at which this excess purchasing power is created has doubled. What has been the result? Price Controls Do Not Stop Inflation Official cost-of-living indexes have shown comparative stability since price controls were adopted, especially in the case of specific commodities brought under control. However, these indexes have become increasingly unreliable as measures of the value of money. They do not make allowances for: rising prices of real estate and corporation securities, rising prices of producers' goods, rising prices in second-hand markets, "black market" prices, declining quality of goods, substitution of high-priced for low-priced lines, reduction in services to consumers, increased time and expense of shopping, linked purchases, premiums paid by government agencies, cost of subsidies, depletion of stocks and shortages of goods, costs of operating price controls and rationing.

Adopting a new form of currency—ration coupons—also has helped to conceal the decline in purchasing power of money. However, the purchasing power of this new, ration-coupon currency is depreciating as point values for various commodities are raised or as the goods cease to be available. Results of Inflation 1. Currency inflation encourages waste. Government gets the money first and most easily. Therefore, the waste begins with government spending and is most noticeable there.

58 DO WE WANT FREE ENTERPRISE? For example, easy money enables the government to ship war bond posters by air express while vitally needed war supplies wait their turn. It enables government to clutter up the long distance wire services with the most trivial messages, and to take thousands of workers out of essential industries for trivial government employments. As the easy money seeps down through the national economy it dulls incentive and induces extravagance: hoarding of labor, materials and machines; absenteeism, loafing and f eatherbedding ; costly and unnecessary advertising; increased consumption of luxuries; hoarding of commodities by consumers; increased travel for non-essential purposes. Easy money also permits the waste of continuing unsound economic policies, such as the penalty rates on hours over 35 or 40 per week. 2. Inflation of currency and credit gives government the means for destroying liberty.

When money, together with the power that goes with it, is obtained by consent of those giving it, democratic controls and liberties are preserved. "Control of the purse" has been the people's most effective means for controlling government. Modern governments, however, are able to get funds merely by printing bonds and turning them over to the banks in return for new checking accounts. In the United States the process requires consent of the legislature,* but this consent is much easier to obtain when no new taxes have to be levied and when part of the funds is used to help key legislators get elected by governmentfinanced favors for their constituents. 3. Inflation intensifies conflict between buyer and seller, employer and employee, borrower and lender. It turns attention from producing and working to organizing and bargaining. 4. Most advertised among the results of inflation are the inequities in distribution created by rapid changes in the purchasing power of money. Certain individuals and classes lose through no fault of their own and others gain through no merit of their own.

Chief sufferers from price inflation are fixed-income groups: pensioners, interest receivers and certain salaried workers. Through rent controls urban real estate owners have been victimized. Through disproportionate taxation of profits, stockholders have gained much less than certain other classes in the current inflation. *By huge, lump-sum appropriations for vaguely-defined purposes Congress has givenup much of its control over finances. In the case of the "Occupation Currency" thiscontrol seems entirely lost. (Cf. Walter E. Spahr, "Allied Military Currency," SandersPrinting Co., N. Y., September 1943.) CAN PRICE CONTROL STOP INFLATION? 59 Farmers and industrial wage earners usually gain by price inflation, except in totalitarian or feudal societies, or at least they lose less than other classes. In the deflation which follows, however, they usually lose more than other classes except enterprisers.

5. Inflation sooner or later ends in deflation. The deflation need not last so long as the inflation or bring about a return to pre-inflation levels of prices, currency or credit. Nevertheless, deflations are periods of more or less painful readjustment, usually in political as well as in economic matters. Price Control Aggravates Inflation Evils 1. Price ceilings increase tendencies to waste and inefficiency when money and credit are being inflated. a. They encourage wasteful buying and consumption as long as stocks of goods hold out. b. Cost-plus contracts—a method of putting a ceiling on profits —create the belief that "Costs don't matter; the only thing that counts is speed in production." This attitude causes indifference to waste of a most serious sort—the waste of lost opportunities to make better use of materials, labor and equipment. Producers try to increase output merely by hiring more labor and machinery instead of trying to use more efficiently what they have.

c. Redtape, delays, labor freezes, complicated and conflicting orders, pressure politics, and difficulties of enforcement slow down production, destroy initiative and incentive, and throw new obstacles in the way of producers. No matter how competent the administrators may be they cannot adjust prices with sufficient rapidity and accuracy to keep production flowing smoothly.* d. Decisions concerning prices and production come to be determined more and more by political considerations—the number of votes involved—rather than the true merits of the case. 2. Price ceilings and wage controls destroy liberty. They make necessary the development of bureaucratic controls to do the work of the price system and they can be used to reward friends and punish opponents of the government's policies. *One common criticism of the Office of Price Administration is that it contains toomany college professors. But what would have been the problems if the O.P.A. had beenturned over to representatives of organized labor, or to representatives of organizedbusiness, or to joint committees? Bad appointments could have been made from anytrade or profession, no one of which has a monopoly of good or bad judgment. Theresponsibility for such appointments rests on those who made them, not on the groupfrom which thty were selected.Secondly, k is said that the ceilings should have been applied earlier and more generally. But frozen prices do not mean frozen costs. Therefore, regardless of when orhow applied, they squeeze producers and check output as costs rise Decause of decliningefficiency of personnel, resort to higher-cost sources of materials (e.g., in mining and agriculture), resort to inferior substitutes, more rapid wearing-out of machinery, longer working hours, and wartime regimentation, 60 DO WE WANT FREE ENTERPRISE?

Freezing of wages means that transfers of labor from less essential to more essential jobs are governed by bureaucrats instead of by the changes in wage rates as between occupations. Bureaucracy becomes a vested interest logrolling for power, buying support with unlimited funds and jealously striking at the roots of free enterprise by discriminatory taxes and by fostering monopolistic restrictions on behalf of its political supporters. 3. Government price control merely transfers the conflict over prices and rates of pay from the economic to the political field without reducing its intensity. Fixed prices do not mean fixed costs. Costs change with changes in materials, technique, volume of output, and character of labor force, especially in wartime. Under government price fixing, however, the process of adjusting prices to costs requires constant dickering with government officials, resulting in delay and uncertainty for producers.

This encourages organization of political pressure groups representing every important economic interest. These war with one another, as well as with various government agencies. Even the government agencies are brought more and more into conflict with one another. The result is growing contempt for government, increasing class warfare and spread of evasion. 4. Government price control does not abolish the inequities of inflation. Whether or not it increases them cannot be determined. Certainly without rationing it does little or nothing to prevent inequities because commodities go to first comers who may be the least meritorious consumers. It also leads to favoritism by sellers towards customers. Even under rationing, great inequities persist. A ration system, for example, may give a day-old infant as much meat and sugar as a hardworking lumberjack. This is the spurious "arithmetical" equality of coercive communism, not the "proportional" equality of freedom and progress.

Metropolitan New York normally consumes three times as much canned goods as the residents of our Southeastern States. New Englanders use twice as much as the people of the West Central States. Yet all are treated alike by price controls and rationing. This is "proportional" inequality created by a policy of "arithmetical" equality. Price controls also have frozen and intensified certain inequities which otherwise would have corrected themselves under the free play of demand and supply. For example, wage rates increased 50 to 100 per cent for some lines during the conversion to a war economy, while wages in other lines no less essential increased CAN PRICE CONTROL STOP INFLATION? 61 little. The premium for industries which had to be greatly expanded was useful in the first months of the war effort. It is detrimental after the industry has attained its growth. 5. Price ceilings promise only to intensify the difficulties of the deflation which always follows inflation of currency and credit such as the United States is now experiencing.

a. That price controls could prevent the reaction which customarily follows inflation is at best an unproven theory. History records various attempts at price freezing. But as far as we know the price controls always broke down before the currency inflation was brought to an end. This is because price control aggravates the evils of inflation while covering up a chief symptom. Inflation of currency and credit continues as long as price controls seem to be working, and even after they begin to fail the breakdown is attributed to the lack of patriotism or to the greed of the violators rather than to bad government policy.* b. Those who expect price controls to hold down prices "until postwar production catches up with consumer demand" forget that this production will itself put enough new money into circulation to buy the increased output. The war-boom "savings" will remain intact, ready to flood the markets at any moment. "TRYING TO 'OUTPRODUCE INFLATION' IS LIKE A MAN'S TRYING TO OUTRUN HIS OWN SHADOW." (William C. Mullendore.) c. In the long run price controls are more likely to be an unsettling than a stabilizing influence because they interfere with making of agreements between producers. Consequently they discourage production and intensify shortages.

On the upswing this creates keener bidding for commodities and increases the demand for inflationary spending to overcome the shortages. When the inflationary spending ends and deflation begins, price controls interfere with the making of private agreements (bargains) necessary for rebuilding private enterprise. The greatest obstacles to readjustment in a period of deflation are price rigidities. General price controls can only increase these. (i) They build up a huge bureaucratic organization with a vested interest in continued "management" of the economy. (ii) They create in private enterprise many vested interests in price control, rationing and allocations. (iii) Price ceilings to control inflation create precedent for "price floors" to prevent deflation. •Cf. Horace White, Money and Banking (Ginn and Co., 1935), p. 55.

62 DO WE WANT FREE ENTERPRISE? Putting Ice on the Thermostat Subsidies are being used increasingly as an administrative escape from production problems created by price ceilings. These subsidies in their turn create new difficulties and promise only to increase the wastes and dangers of inflation. 1. A subsidy always costs taxpayers more than it saves consumers whenever it is applied to all producers or to most producers in a given line. It might save consumers more than it costs taxpayers if it were given only to a few producers whose costs were considerably higher than average and who could not reduce those costs in other ways. In practice it is usually too costly or too difficult to ascertain what part of the output is unavoidably high cost. 2. Under inflationary conditions subsidies increase wasteful consumption by reducing prices of consumers' goods to all consumers, rich and poor alike.

This is especially obvious when subsidies are applied to the more expensive, semi-luxury commodities like coffee, butter and meats. 3. Subsidies increase bureaucratic control which is all the more difficult to throw off when initiated in a time of rising prices and high incomes. Farm organizations shout "Regimentation!" in protest against subsidies used to keep prices down. Scarcely audible, however, are their protests against even greater regimentation in the form of crop restrictions and crop "loans" used to keep prices up. The argument is used that subsidies must be given to farmers in order to escape inflationary demands of wage earners. But will such additions to farm incomes, which are already at an all-time high, make wage earners more contented? The argument that one unsound policy can only be avoided by another equally unsound represents an abdication of leadership and a betrayal of public trust.

This would soon be recognized if there were general understanding of the fact that the price system is the thermostat of the national economy. To attempt to control inflation by means-of price ceilings is like trying to cool a room by putting ice on the thermostat. What Are Prices For? Numberless adjustments of production and consumption are necessary every hour of every day for efficient operation of a modern industrial economy.

CAN PRICE CONTROL STOP INFLATION? 63 These adjustments call for numberless decisions by producers and consumers, buyers and sellers. Under the automatic workings of a free price system each individual records his decisions on all problems and policies as they affect him and as he knows them. As he buys commodities and as he markets his services his actions affect supply and demand, prices and wages. These prices and wages, in turn, directly or indirectly affect the decisions of employers, investors, farmers, other wage earners and other consumers. Thus, by watching price changes and making adjustments to them, each individual adjusts to the decisions of every other member of the economy without the necessity for knowing or understanding the many factors which entered into the making of those decisions. Such a free price system is essential to efficient operation of the great and complex industrial economy which is necessary to our national survival.

War makes necessary increased government control of the economy for (1) speed, (2) secrecy, (3) unity, and (4) suppression of activity not useful in the war effort. But, even in wartime, efficiency will be promoted by placing the main burden of coordinating and directing producers' efforts on the automatic workings of the price system. 1. The number and complexity of factors which must be taken into account in modern industry far exceed the comprehension of any person or group of persons. The task of making decisions, or planning, must be so decentralized that it is shared by every buyer and every producer, including the humblest wage earner. In no other way can the final result take into account the vast diversity of changing conditions under which millions of producers unite their efforts. 2. Energy, inventiveness, and enterprise are greatly stimulated by the prizes offered under a system of free exchange and free prices.

Bureaucratic controls make use of certain powerful motives, e.g., personal and group loyalties, or fear of punishment. That is, bureaucrats may get a certain amount done by appeals to love of country or to fear of punishment. But even military forces find it worth while to add economic incentives and personal rewards to the other motives used in maintaining individual efficiency. Free enterprise (including free exchange, which is essential to free enterprise) can be our greatest asset in war, as well as in peace. Why Civilians? Efficiency in the civilian economy requires a civilian type of organization. "Total wars" are not won merely by putting everyone under military discipline.

64 DO WE WANT FREE ENTERPRISE? 1. The military forces consist of a selected personnel. Therefore it is easier to make rules which call for uniform treatment of individuals. For example, the waste involved in issuing uniform food rations is much less for the military than for the civilian economy. 2. Civilian tasks are too numerous and complex to be organized and conducted along military lines. Perhaps because destruction is simpler than construction, killing men easier than working with them, freedom of enterprise and inspiring individual initiative are relatively more important in civilian life. (However, increasing complexity of military operations, as new and more complicated weapons are devised, is leading toward greater flexibility in military organization and discipline, especially in wartime.) 3. Civilians are responsible for continuing in many respects the peacetime "way of life" which the military forces are fighting to defend. These include schools, churches and habits of family life which are necessary for the continued life and progress of the nation. They include wise planning for postwar reconstruction.

Wars are not won unless the victorious nation can resume the essential modes of living which it fought to defend. This maintenance of peacetime activities adds to the complexity of the civilian economy and increases the need for retaining freedom and flexibility incompatible with a militaristic form of organization. 4. Much of the regimentation evident in the military forces actually decreases efficiency, but is needed to maintain secrecy, speed in sudden emergencies, and discipline to prevent panic in battle. 5. The feeling of imminent personal danger plays a much larger part in motivating the soldier than the civilian. In fact, only men in prime physical and mental condition can endure the strain of military life, particularly in the front lines. Even these can endure it only for short periods. Economics of Siege and Defeat In case of siege or imminent defeat contrasts between civilian and military life tend to disappear.

Fear of personal injury becomes an important civilian motive. Many civilian activities which are important for the continued life of the nation must be restricted or discontinued. Motivating and directing producers become unimportant compared to careful use of supplies already available. Fortunately the United States is not besieged and is not losing the war. We, therefore, can and should maintain activities and forms of organization which do not show their benefits immediately on the battle line, but which instead may contribute to the war effort and to victory two or three years hence.

CAN PRICE CONTROL STOP INFLATION? 65 1. We should rely more on persuasion than on threats and on economic motives, or self-interest, rather than on fear of punishment or personal injury. These methods and motives may not result in as great temporary spurts of energy as may be obtained from military methods and fear of personal danger. But they do make possible more continuous effort and more intelligent conduct over much longer periods of time. 2. We should retain and encourage activities and institutions which will aid in postwar reconstruction. Our military forces have a right to expect and demand these as fruits of their military successes. This is not to argue that government should pay no attention to the price system in wartime. Sound Price Control in Wartime 1. Taxes should be increased to reduce the inflationary gap sufficiently to prevent rapid price increases in free markets. At the present time this increase in tax rates should fall on incomes below $15,000 per annum. These incomes make up approximately 99 per cent of total personal incomes after deduction of present taxes and war bond purchases.

2. All restrictions on output or employment which are designed to raise or maintain prices or wage rates should be abolished. 3. Mobility on the part of labor and enterprise on the part of management should be encouraged. 4. Automatic price controls sometimes suffer temporary breakdown, or work badly, because of a sudden increase in demand or decrease in supply due to war conditions. When this happens in the case of an essential commodity or service (not including such luxuries as coffee, sugar, butter, or meats) temporary price controls, allocations and rationing may properly be instituted until the cause of the failure has been removed. At the outbreak of a war, for example, a five-fold increase in demand for some important war material may send prices temporarily far above the level necessary to stimulate the needed production. In that case price controls and rationing may be advisable for the few months necessary to increase output.

Government policy should be, however, not to replace the automatic controls of the free price system, but to facilitate their operation. Winning the Peace The war will not be won unless we reestablish the conditions necessary for peacetime prosperity and progress. This means reestablish66 DO WE WANT FREE ENTERPRISE? ing freedom of enterprise, including freedom of exchange and a free price system. The closer we approach the end of the war, therefore, the more imperative it is to begin dismantling the wartime restrictions and burdens on enterprise. This requires an immediate attack on inflation, mainly by increased taxation and by greater economy in government spending. Experience indicates that such an attack will not make headway so long as price controls are concealing the more obvious symptoms of inflation. For this reason, a first step towards winning the peace involves abandonment of the attempt at general price and wage controls.