More Powers—or More Curbs?

May 28, 1951

The Administration has asked not merely for a two-year extension of the present Defense Production Act, but for a large increase of control powers. And no doubt many congressmen fear that if they do not grant these additional powers, they will be blamed for any further inflation on the ground that they failed to provide the “weapons” to “combat” it.

Yet if it wishes to frame a really effective law against inflation, Congress cannot permit itself to be intimidated. It should allow the present powers of price and wage control to expire entirely. Price and wage control is a fraudulent weapon against inflation. It merely distorts and reduces production.

Nor should Congress grant most of the additional powers for which the Administration now asks. If there were no price ceilings on food, then obviously there would be no excuse for the food subsidies that the Administration wants. Those subsidies would in any case serve no purpose except to conceal the real rise of food prices in an increased tax bill. Again, if other prices are not held down by government edict, there is less excuse for the differential subsidies, the “power to give special financial aid to high-cost producers,” for which the President has asked. Differential subsidies easily lend themselves to favoritism and abuse. With the example of the RFC before it, Congress should be slow to create more opportunities for influence and free mink coats.

Congress should also hesitate to grant a sweeping renewal of rent control. If it insists on imposing more rent control, it should be in the form of permitting no more than a 10 or 15 percent increase each year until rents have caught up with the average rise in other prices and costs since 1935–39.

Jess Larson, who was head of the War Assets Administration after the second world war, has told Congress to act “very hesitatingly” in granting the government the sweeping powers it asks for to build its own new defense plants. Disposing of government plants after the second world war, he points out, cost nearly $1,000,000,000 “just for overhead,” not counting the loss to the taxpayer on the sales themselves. It would not be too much to require the Administration to get specific Congressional approval for each plant it wanted to build.

All this does not mean that the whole Defense Production Act should simply be allowed to expire. Extension of some powers is needed. Even more, some explicit curbs are needed on existing government powers.

Congress should not merely remove ceilings on prices and wages; it should at the same time remove present legal floors on agricultural prices and discriminatory floors on wages (as represented, say, by the Walsh-Healey Act and the penalty overtime provisions in their present form). Congress should continue to authorize material allocations and priorities. These are more effective, in fact, when not accompanied by price and wage ceilings (see Business Tides, April 23).

Most important of all, Congress in the new law must strike at the real cause of inflation. It should: (1) Declare that the root cause of inflation has been the increase in the supply of money and credit, and that the government-bond-support policy of recent years has been inflationary because it has produced this increase in money and credit. (2) Declare that the Federal Reserve Board is not subordinate to the Treasury, and should not be forced to support government obligations issued by the Treasury at inadequate interest rates. (3) Restore the required legal reserve ratio of the Federal Reserve Banks against deposits and notes to at least 35 percent, and authorize the board to increase this reserve ratio even further. And if it permits the board to increase further the reserve ratios of member banks it should do so only on condition that the board orders at the same time a corresponding increase in the required reserve ratios of the Federal Reserve Banks themselves.

Congress can act to combat inflation only by forcing the Treasury and the Federal Reserve System to live up to the responsibilities they have shirked for the last ten years.