No Stand-By Controls

April 6, 1953

No sooner have we got rid of the self-imposed incubus of price control than agitation has begun for setting up stand-by wage- and price-control powers to take effect immediately should we ever get into a third world war. The proposal is unsound both economically and politically.

Senator Capehart of Indiana has taken the leadership in pressing for this legislation. He has been supported by the testimony of Bernard M. Baruch. It was Baruch’s testimony in the summer of 1950, in favor of “an overall ceiling across the entire economy,” that was chiefly responsible for the subsequent enactment of price-control legislation. Baruch’s prestige in many fields is richly deserved. But his price-fixing proposals disregard the most elementary economic facts and principles.

In 1950 he proposed that all prices and wages be “rolled back” to and frozen as of June 25, the day hostilities broke out. Now he is supporting the Capehart plan for an across-the-board, 90-day freeze of prices and wages in an all-out war. He has even urged that such a freeze should be extended to a year.

Of all forms of price control, an overall freeze is the most unworkable and the most harmful. To provide that in the event of a total war prices and wages must be absolutely frozen is like providing that in the event of a theater fire everybody must be strapped to his seat to avoid disorder.

Baruch often refers to our control experience in the first world war. The late Benjamin M. Anderson, in his book, Economics and the Public Welfare (1949), pointed out: “Wages we did not try to fix in World War I. . . . Price fixing we engaged in cautiously. There was . . . recognition of economic fundamentals. Prices have work to do. Prices have the important function of accomplishing priorities, allocations, and rationing. . . . It is the work of free prices and freely moving wages to determine whether labor and supplies shall be drawn to the production of commodity ‘A’ or of commodity ‘B.’ Rising prices mean more production. Falling prices mean less production. . . . With freely moving prices and freely moving wages, the goods in most urgent demand are produced, and the production of the less urgently demanded goods declines. Price fixing by itself tends to derange perversely the control of production and consumption.”

At the outbreak of total war, what is desperately urgent is the quickest possible change-over from civilian output to military output. It is precisely this that a blanket price-and-wage freeze would prevent or delay.

And how would a blanket-freeze formula be applied? To wages, for example? If we froze weekly wages we would discourage or prevent overtime work, just when such work was most essential. If we froze hourly rates, but allowed the customary 50 percent overtime premium, we would immediately get more overtime in the production of military goods. But this would raise the unit labor cost of such goods. If we did not allow the price of these goods to go up, we would discourage or prevent their production. If we did allow the price of these goods to go up, the blanket-freeze formula would already be breached. (An overall wage freeze would, of course, also prevent the producers of military goods from offering higher wages to attract labor away from the production of civilian goods. This would necessitate government direction of labor—i.e., telling each worker what job he must take.)

On Jan. 26, 1951, our price controllers actually announced a so-called overall price-and-wage freeze. The very next day an executive of the Office of Price Stabilization said that his agency was working intensely to “cure the absurdities and inequities inherent in such a sweeping order.” In total war we may need quick priorities and rationing—but these work best without price controls.

If the government follows proper fiscal and monetary policies in a total war it will not need price control. If it follows inflationary fiscal and monetary policies, price control will be not only futile but pernicious.