Economics and The Public Welfare

Chapter 79

Price Fixing in World War II

The original intention in the price-fixing legislation was not universal price fixing. The powers which the Congress gave were sweeping powers, but the Congress was assured by the Administrator, Leon Henderson, that he intended only to fix certain prices. His most definite statement upon this point was that, whereas in World War I some thirty groups of prices were fixed, he intended to fix about one hundred.1

Price-fixing Edict Went Far Beyond the Law. The actual legislation gave the Administrator power, when he found a set of facts regarding certain commodities, to fix their prices, but he was required to find the set of facts before fixing the prices.2 In practice, however, the Administrator, Mr. Henderson, went far beyond that. He issued an edict (April 28, 1942) fixing virtually all prices at “ceilings” based on the highest price of the month of March preceding, charged by each individual seller, without even naming the commodities and without finding any facts regarding them.

World War I Used Trade Brains in Fixing Prices and Margins. In World War I we had tried to make use of the brains of the men in the trades with respect to the actual handling of price fixing, with respect to the effect on production of a given commodity of a particular price fixed, with respect to the margins of profit that would be left, and so on. In general, trade brains were used by the Government in this connection, not in blanket orders affecting all commodities, but in detailed orders affecting particular commodities. In the one case of bituminous coal, we saw that bureaucratic brains were substituted for trade brains in World War I with unsatisfactory results.3

In World War II, No Study Given to Individual Prices. In World War II we fixed prices without the use of any brains at all, neither trade brains nor bureaucratic brains being brought to bear upon particular prices or particular commodities. We had a sweeping over-all edict. The object was to hold the price level down. The object was to offset the sweeping inflationary forces which we were creating by the borrowing policy of the Government and the rapid expansion of bank credit and of money in circulation.

Price Fixing and Commodity Control. In World War I the connection between allocation, priority, and rationing, on the one hand, and price fixing, on the other, was definite and close. In general, they were in the same hands. There was far more commodity control than there was price fixing. There were separate bodies for controlling different kinds of commodities, and fixing their prices to the limited extent that price fixing was engaged in. There was recognition of the fact that prices have work to do in guiding and controlling the economic activities of men, and that when the Government fixed a price, it had to undertake to do the work that a freely moving price would otherwise have done—namely, to allocate, to give priority, and to ration the supply—and that it must fix the price high enough to bring forth the needed supply. There was study of individual markets as decisions with respect to these points were made.

In World War II, price fixing for virtually all commodities was done by the Office of Price Administration—the OPA. Allocations, priorities, and rationing were largely in the hands of other bodies, among them the Civil Production Administration. Retail rationing of certain foods, shoes, and gasoline with coupon books was handled by the Office of Price Administration. There was doubtless interchange of opinion among the various Governmental authorities concerned with these matters, but it was informal and loose.

To an extent that could not have been anticipated in advance, we had compliance during the war with the price-fixing edict from the patriotic public, and above all, from an intensely patriotic business community. We had black markets. We had a great deal of difficulty in controlling black markets. But with the war on and with almost every family having sons in the Army or in the Navy, our people made the price fixing effective to an unanticipated degree.

Prices During War. The price history has been interesting and startling. The index of wholesale prices for the United States (1926 = 100) stood at 77 in 1939, and moved up to 99 in 1942. Then effective resistance, so far at least as official prices are concerned, began. The figure for 1943 was 103; for 1944, 104; for August, 1945, 106.

Prices were not held down as much as these figures would indicate. Black market prices were important throughout the war and the quality of goods sold at official prices deteriorated. The actual wholesale price level was undoubtedly a great deal higher than these official price indices would indicate. But the great industries respected the Governmentally fixed prices. The great retail stores, on the whole, did. The organized markets in grain and in livestock and the great packing houses did. Among smaller and less responsible businesses, there was a good deal of breaking away; but even in small retail establishments, partly through patriotic motives and partly through neighborhood scrutiny, the ceiling prices were respected while the war was on, to an extent that one could not have anticipated in advance.

Price Fixing After War. With the end of the war, however, the dam of general price fixing yielded rapidly. By June 29, 1946, the day before price fixing temporarily expired, the general index of all commodities had risen to 112.7. In the month of July, with price fixing temporarily suspended, it rose to 124.2 on July 20, dropping to 124.1 on July 27.

But the resumption of price fixing at the end of July did not stop the price rise. On August 31, 1946 the all-commodity index stood at 128.4, 4 points higher than in the last week in July.

Farm products, standing at 65.3 in 1939, rose to 122.6 in 1943, and held at approximately that level through 1944. They stood at 126.9 in August of 1945, then began a rapid rise, reaching 140.1 in the month of June, 1946. In July, 1946, with the price control suspended, they moved up to 159.2 on July 20, dropping slightly to 157.3 on July 27. Black market prices here came out into the open. Many of the products of the farms had been sold in subterranean markets in the preceding period.

The end of August, 1946, with price fixing restored, shows farm products at 157.1.

The rise in the general average of wholesale prices from September, 1945, to August 31, 1946, was 22% in the official index for all commodities of the Bureau of Labor Statistics. It is interesting to contrast this with the postwar rise which took place between October of 1918 and May of 1920, amounting to 20%, in a period when price controls were abandoned. And it is interesting to recall in this connection the testimony of Mr. Leon Henderson in 1941, as he advocated the price control bill, in which he repeatedly spoke of a 40% to 50% rise in commodity prices which took place following the last war (an erroneous statement, because it was only 20%) and urged that price fixing was necessary in order to prevent anything of that sort after the second World War.4 Whatever may be said of our wartime price fixing, our postwar price fixing definitely failed to “hold the line.”

Effects of Postwar Price Fixing. Postwar Governmental price fixing and wage fixing retarded the process of reconversion very greatly. Freely moving prices and wages, responding to supply and demand, are needed if commodities are to be produced in the proper proportions. Wages were pushed up rapidly and prices were held back, endangering profit margins, and in many cases precluding or greatly curtailing the production of parts acutely needed in the productive process. In September of 1946 there was a bad unbalance in the materials and supplies which the manufacturer needs if he is to engage in capacity production. The unbalance was, of course, very greatly intensified by strikes.

It is not easy to disentangle the effects of strikes from the effects of bad OPA pricing where scarce parts were involved. Checking the matter with a number of bankers and some industrialists, one found cases of accumulation of unfinished inventory, really unfinished “work in process,” requiring additional bank loans because one additional part was needed to make the product salable. In many of these cases, strikes were blamed. In other cases, the parts simply could not be obtained at OPA prices. One manufacturer was paying retail prices instead of wholesale prices to get vitally needed parts. Another manufacturer was sending men out with satchels to get the parts where they could get them. It was not easy to obtain information as to the prices he was paying! In other cases, manufacturers were refusing to pay exorbitant prices for scarce parts, but were certainly paying more than the OPA prices. There were very few industries in September, 1946, that did not have complications of this kind, and very few industries where production had not been interfered with by them.

The OPA tried to fix prices from the standpoint of “just price” instead of the standpoint of functional price. Functional prices are needed to bring about and to maintain proper balance in production. And only free competitive markets can work out functional prices.

Another interesting and significant cause of accumulated inventory requiring additional bank loans was found in Los Angeles in September of 1946. Fully finished goods sold and ready for shipment could not be shipped in certain important cases (a) because of the shortage of freight cars, and (b) because of strikes interfering with ocean shipping affecting goods designed for export.

It would be hard to find a more striking commentary on governmental economic planning than that revealed in the business developments from V-J Day in 1945 to September, 1946, where we had, on the one hand, powerful national labor unions backed by the Federal Government, making ever-increasing demands on industry and striking to obtain them, and where we had, on the other hand, continued Governmental interference with the markets and prices.

Testimony Before Congressional Committees on Price Fixing, Spring of 1946. The complaints of the industries of OPA performance that appeared in the Testimony before the House Committee on Banking and Currency (March 9 to March 30, 1946) and before the Senate Committee on Banking and Currency (April 15 to May 10, 1946) were detailed and impressive. The evidence presented, showing that the price increases as registered in the wholesale price index of the Bureau of Labor Statistics were wholly inadequate, when allowance was made for qualitative deterioration, was detailed and specific. For example, in the testimony before the Senate Committee on May 3, 1946, Mr. Robert A. Seidel, appearing for the National Retail Dry Goods Association, gave many illustrations, among them the following. Men’s good grade white shirts sold at $12.80 per dozen in March of 1942, but the lowest price shipment his firm was able to obtain in November, 1945, cost $21.00 per dozen. In addition, he said there was less material in the 1945 shirts and the quality of workmanship was poorer. He estimated the actual price increase in these shirts at 93%, while prices on boy’s shirts were up 90%. These increases occurred under price fixing. Evidence, too, that where price control was effective, there had been radical decline in quantities produced of particular items, was impressive. Evidence of black markets was conclusive.

Price Fixing Interrupted for Twenty-five Days in July, 1946, and Then Resumed. General price fixing was off for the first twenty-five days of July, before the compromise legislation was passed and OPA rent and price orders that were in force on June 30, 1946, were automatically reinstated. But agricultural prices were left subject to the decisions of the new Price Decontrol Board. On August 20 the Price Decontrol Board ruled that ceiling prices should be reinstated on livestock and meats, soy beans, cottonseed products, flaxseed, and by-product grain feeds. Dairy products and grains and livestock and poultry feeds made entirely of whole grain were left free. During the month of July and during August, down to August 20, livestock for slaughter came to the market in great quantities. With the resumption of price fixing on meat and meat animals, the most severe meat shortage the country has ever known came, in September, 1946.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
• 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.