Shadow of Price Control

October 30, 1961

In a letter of Sept. 6, Mr. Kennedy warned the heads of twelve major steel companies that if they raised their prices to cover the further increase in steel wages on Oct. 1 they would be contributing to inflation. The President’s policy on this matter could have fateful consequences not only for the steel industry but the whole American economy. It is gratifying, therefore, to find the subject so ably analyzed in the current October monthly letter of the First National City Bank of New York.

The best factual reply to the President’s letter came from Roger M. Blough, chairman of United States Steel. Among Blough’s points:

1—“From 1940 through 1960 steel prices rose 174 percent, but the industry’s hourly employment costs rose 322 percent, or nearly twice as much. I use 1940 as a starting point rather than 1947 [as the President did] because during the war-affected years of 1940 through 1944 steel wages rose substantially as did the level of wholesale prices; but steel prices increased not at all. Any comparison of these trends which starts with postwar 1947 as a base therefore obscures rather than reveals the realities which the steel companies have had to face throughout this entire period of inflation.”

2—“Profits [as a percentage of sales] have only once in the past twenty years equaled the 8 percent level at which they stood in 1940 and have averaged only 6½ percent in the past five years, thus demonstrating clearly that steel price increases during this period have not fully covered the rapid rise in total steelmaking costs.”

3—“The industry’s profit rate is merely an aver- age—and averages can be dangerously misleading. Some companies will earn more than the average, while some may be suffering losses which they cannot sustain indefinitely. So it was in 1960 that among the 30 largest steel companies the profit rate as a percentage of sales ranged from a plus 9.3 percent to a loss of 5.2 percent.”

In addition to such factual points, Blough made some more general observations. He stressed one conclusion from a government report last year, prepared for the Department of Labor by Professor Livernash of Harvard University: “Obviously while price policy can be debated in the short run, in the long run all cost increases must be met. Steel has done no more than this.”

What alarms the City Bank is a broader issue than steel prices. Though the President’s letter was moderate in tone, behind it seemed to lie the threat of a general price control. A few weeks earlier Sen. Albert Gore had suggested that the Federal Trade Commission “could move to police the steel industry,” that the Department of Justice could perhaps break up the big steel companies, and “lastly, if all else fails, steel prices can be brought under utility-type regulations.”

REPRESSED INFLATION

“There are worse things,” comments the City Bank, “that could happen to this country than an increase in the price of steel. One of these is the destruction of the freedoms of the market place and the substitution of political price-fixing, beginning with steel and spreading perhaps throughout industry. If nothing else, our wartime experiences with price-setting bureaucracies, black markets, and deteriorations of quality should warn us against this course.”

From the end of World War II until a few years ago, the same government policy repeated itself depressingly in one European country after another, as it is repeating itself now with even greater violence among our South American neighbors. This is the policy of “repressed inflation.” It consists, on the one hand, in creating inflation through government encouragement of excessive wage increases, huge government spending and deficits, and cheap-money policies, and then throwing the blame on business and trying to prevent the inevitable price rise by price controls. The price-fixing does even more harm than the inflation itself. It misdirects, unbalances, and disrupts production, and breeds class hatreds by directing suspicion against businessmen and producers.

This is the direction in which we seem to be drifting. But with courage and clarity, there is still time to reverse our course.