Why the New Controls Act Is Bad

August 13, 1951

After his outburst at Detroit, denouncing all criticisms of his policies as “smears,” “slander,” and “lies” from “doubters and defeatists,” neither the tone nor content of Mr. Truman’s statement on signing the new economic controls legislation came as any surprise. It was a purely political document designed to throw the entire blame for any further inflation onto the Republicans in Congress. Take, for example, his comment on the Capehart amendment. “This complicated amendment will force price ceilings up on thousands of commodities, clear across the board. It is like a bulldozer, crashing aimlessly through existing pricing formulas, leaving havoc in its wake.” This violent simile was apparently considered a complete substitute for bothering to tell the American people what the Capehart amendment actually provides. It is simply intended to prevent the OPS from fixing price ceilings that would deprive retailers and wholesalers of at least their “customary percentage margin of profit” in the month before the Korean war.

If we accept the premises of price control, it might be argued that this amendment is “inflationary” in the sense that it permits a customary percentage mark-up rather than merely a customary dollars-and-cents markup. But this argument is not consistently open to those who, like the President, have supported the cost-of-living escalator clauses in wage contracts.

The new Defense Production Act is really a very bad law, as Mr. Truman insists. But it is bad, in the main, for precisely the opposite reasons from the ones he gives. It is bad not because it has failed to impose price and wage controls that are sufficiently “strong” or “tough,” but because it continues the flagrant fraud of price and wage control. It cannot be repeated too often that price control is not a cure for inflation. It regiments the economy and ties it in red tape. It inevitably has consequences which provoke demands for more and more controls and lead toward economic totalitarianism. It actually prolongs and intensifies inflation because it unbalances production and causes shortages—and above all because it diverts public attention away from the only real cause of inflation, which is the increase of money and credit.

In the whole course of the debate on the new law the only genuine anti-inflation amendment that got to a vote was that offered by Rep. Jesse P. Walcott of Michigan. This declared: It is the further intention of the Congress that none of the powers contained in this act . . . with respect to the stabilization of prices and wages, shall be used unless other indirect means of effectuating such controls and stabilization presently provided in other acts for use by the Secretary of Treasury and the Federal Reserve Board have been utilized. . . .” This merely expressed the intention of Congress that in addition to using the fraudulent “anti-inflation” measure of price control, government agencies should also use the genuine anti-inflation measures involved in raising discount rates, tightening bank reserves, and in ceasing to monetize the government debt.

But this amendment, the only test of sincere and intelligent anti-inflation sentiment in Congress, was turned down, on almost straight party lines, by a vote of 169 to 149.

And yet there is not an economist worthy of the name who does not know that the basic cause of inflation always and everywhere is an increase in the volume of money and credit. Every congressman, not to speak of Messrs. Truman, DiSalle, and Johnston, would do well to read the Federal Reserve Bulletin for July. “Monetary expansion,” it begins, “which had been at a very rapid rate in the last half of 1950, was interrupted in the first half of 1951.” It is this change, and not any miracle of price control, which slowed down the previous violent rise of wholesale prices. Where these had gone from an index number of 157.3 in June of 1950 to 180.1 in January of this year, they had actually dropped back to 177.9 by the week ended July 31 last.