Program for the Crisis

July 31, 1950

President Truman showed moral courage as well as good sense in ordering a slowdown in the Federal government’s own program of artificial stimulation to housing. He showed good sense also in not asking for price controls and consumer rationing now.

But it was doubtful wisdom to threaten the imposition of price controls and rationing “if a sharp rise in prices should make it necessary.” Such a threat could help to bring about the very price rise that he fears; because many consumers may take it as a hint to hoard before the rationing starts.

The proponents of price controls completely ignore the vital regulating function that prices play in a wartime no less than in a peacetime economy. Higher prices reward and stimulate the production of the key war commodities at the same time as they discourage and penalize wasteful consumption. As I pointed out in this column of July 10, it is precisely the shift in relative prices that tends to produce the quickest transformation from a peace to a war economy. Prevention of a general rise in prices is to be achieved, not through the imposition of price controls, but through money and credit policy.

The chief result of overall price ceilings is not to speed up a war effort but to entangle it in red tape. The economy then breaks out with all the diseases so familiar under OPA: lopsided and unsynchronized production, delays and shortages caused by dilatory or inept price-control decisions, needless deterioration in quality, discriminatory decisions as among different producers, and other abuses.

Here are some parts of an economic program for the present crisis:

1—No mere token contraction of the government’s own housing program, but the total suspension of this inflationary stimulus for the duration of the crisis.

2—Suspension of our arms aid to any country not interested enough to send even a token force to Korea.

3—Suspension of the whole ECA gift program as at present set up, and its conversion to an exclusively arms-aid program—and then only to European countries which are actually sending military aid to Korea and increasing their military expenditures correspondingly. There is no excuse for scattering money around the globe for the vaguely defined purpose of “halting Communism” as long as the crucial place to make sure that it is actually halted is on the Korean battlefront.

If it is really the “United Nations” that is now conducting a “police action” in Korea, it cannot do this by the mere fiction of having armies made up almost exclusively of American boys fighting and dying under a United Nations flag. The chief hope of preventing a third world war is to convince Stalin right now that if he or his puppets make an aggressive move anywhere, they will have to fight not merely us but the rest of the world. But the other members of the United Nations are most likely to convince him, not by offering to mediate or even by applauding our efforts from the sidelines, but by their own participation in the struggle now.

4—The Point Four program, which even on the rosiest view looks toward a remote future, should be completely suspended until the Communist military adventure has been halted in South Korea. Until then it would be an indefensible dissipation of funds. If there is anybody to whom we need to show our “know-how” at the moment, it is to the North Korean Communists.

5—Put real credit control into effect. Limits to installment buying and curbs on commodity speculation are mere token controls. They divert attention from what is really needed. We must restrict high-powered credit before we worry about merely derivative credit. We must restrict commercial bank credit, and above all Federal Reserve credit. We must put an end, especially, to the highly inflationary government bond-pegging policy.

Until the Federal government is willing to accept these suspensions of its own inflationary measures, it is not consistently entitled to ask Congress for stringent priority and allocation powers over business.