Forty Centuries of Wage and Price Controls

11

Two Democracies in the Second World War

Having already reviewed the many attempts to make price and wage controls work in the two major dictatorships, the Soviet Union and National Socialist Germany (including their wartime efforts), we will examine briefly in this chapter the experience of two of the major democracies, Canada and the United States.

Both Canada and the United States simply followed the lead of all the other wartime powers in setting up various types of economic controls; despite four thousand years of history not one major nation had yet learned the lessons of the past.

CANADA

The Canadian economic controls imposed during the Second World War were among the most wide-ranging efforts at price and wage fixing made by any nation.

“It was a novel experiment, never before attempted in any democratic nation,” said one commentator. “Even the German ‘price stop’ of 1936 had been much less far-reaching . . . .”1

The Maximum Prices Regulations of December 1,1941, provided that no good or service could be sold at a price above that charged during the historical period September 15 to October 11, 1941. The price regulations were part of an overall economic mobilization program that included wage and salary controls, income and excess profits taxation, savings campaigns and a massive conservation program encouraging people to “eat it up,” “wear it out,” “make it do.” Setting of production priorities, production directives, raw material allocation, distribution controls and selective service regulations were also part of the overall mobilization effort. In recognition of the fact that the price of imported goods could not be controlled, the government established a system of subsidies to enable it to freeze the domestic price of imported goods. (A similar stance was taken during 1974–1975 by the government of Canada with respect to the price of oil.)

The system of economy-wide controls that the government installed for the purpose of prosecuting the war effort was consciously designed to remove any semblance of market forces from the process of resource allocation. Canada actively encouraged inter-allied economic planning and the communal use of the raw materials available. In short, there was a total commitment to the war and virtually total sacrifice of personal economic freedoms. As K. W. Taylor noted:

The government, with the overwhelming support of the people, was committed to an all-out war effort . . . .

Reliance on a free price system would have required the government to keep continuously outbidding its citizens. The consequent rapid and accelerating rise in prices would have entailed acute hardship . . . .2

There is an element of self-contradiction in these two remarks. Surely, the very best test of the first of these statements would have been the government’s reliance on people’s free choice in the marketplace rather than on coercion as a means of carrying on the war. The second statement contradicts the first and clearly indicates that, by and large, the population would not have supported the war effort to the extent that it did, without the coercive measures adopted by government. Nevertheless, there was certainly wide-ranging support for the program and people were, it seems, willing to give up their economic freedoms in the short-run for the sake of freedom in the long-run.

As we have seen, mankind has a terrible tendency to forget and hence repeat historical experiences. Human beings also have a tendency to “color” past experiences—the “good old days” phenomenon being a good example of this sort of behavior. In looking back on the war years there seems to be an assumption that wage and price controls “worked”—that they accomplished something that would not have occurred in their absence. It is certainly true that production controls “worked” in the sense that large volumes of resources were devoted to the production of war materiel. It is not clear, however, that this redirection of resources was accomplished without the inflation that would have occurred had there been no controls.

An interesting test of the idea that controls reduced the inflation associated with the Second World War is provided by a comparison of that inflation with the inflation during the period of the First World War. The impression given by the cost of living indices is that, overall, the control program adopted during the Second World War had the effect of preventing the surge in prices that was associated with the First World War. Notably, the controls did not keep prices from ultimately rising by about the same amount. There is reason to believe, however, that there was much more inflation during the Second World War than is suggested by the price index. In the words of one scholar:

No matter how rigidly prices were held in check, costs tended to creep up . . . . The major attack on this problem was along the lines of simplification and standardization in both production and distribution . . . reducing the number of varieties or models, cutting out frills, minimizing the use of scarce materials . . . every class of industry was affected.3

In other words there was a conscious effort to reduce the quality of every commodity that Canadians bought, to prevent the quoted prices from “creeping up.” Since it is clear that quality degradation was used to cut costs, what are we to make of the “reported” price index? K. W. Taylor has explained that:

It would be impossible to give any quantitative expression to the savings in man-power, materials or money which these orders achieved, but they were very considerable and undoubtedly were of major importance in enabling the Board . . . to “hold the line” effectively.4

Accordingly, all that we can say for sure is that the official statistics for the rate of inflation during the Second World War represent a “considerable” underestimate of the true inflation situation. Therefore, the straight-forward comparison of the official statistics is not a totally meaningful exercise. In spite of this, the statistics indicate that after the “smoke had cleared,” prices had risen by about the same amount over both war periods. We must, therefore, seriously question whether the controls did indeed have much effect. In any event, it cannot simply be accepted that, even under those stringent wartime conditions, controls were succsssful.

THE UNITED STATES

From the time the United States began preparing for World War II, the Roosevelt Administration delayed imposing price and wage controls for almost two years. This reluctance may well have been stimulated by the example of Germany and Italy; restrictions on personal freedom were not altogether welcome in the midst of an all-out war in defense of freedom. From January 1941 until October 1942, the government attempted to restrain the inevitable rises in both prices and wages by “voluntary” controls and moral persuasion.

During that period wholesale prices rose almost 24 percent and consumer prices more than 18 percent. With the establishment of the Office of Price Administration and the imposition of strict controls, however, consumer prices rose 8.7 percent between October 1942 and August 1945.

Wartime price controls proved relatively effective (at least on the surface), principally due to the immense patriotism which shored them up. The rationing system was an important element since it curtailed demand and introduced “point-money” as a factor. Without rationing prices would have risen much higher. Even so, hourly wage rates in manufacturing rose 14.7 percent in that 35 month period until August 1945.5 The rise in prices was not as steep because some manufacturers lowered the quality of goods while not raising the official selling price, and many persons engaged in the black market, paying very high prices to get what they wanted when they wanted it. Such ways of circumventing the official rules have obviously been practiced over the last forty centuries and, when we consider price controls in the modern economy, it will be apparent that quality change makes it much more likely for the nominal (if not the real) prices of commodities to appear to be held down (and hence, for the policy of controls to be perceived as a success).

Milton Friedman, in discussing the results of wartime controls, stressed this phenomenon when he pointed out that, in reality, individual price and wage changes cannot be prevented.

In the main, price changes will simply be concealed by taking the form of changes in discounts, service, and quality, and wage changes, in overtime, perquisites and so on. Even 60,000 bureaucrats backed by 300,000 volunteers plus widespread patriotism were unable during World War Two to cope with the ingenuity of millions of people in finding ways to get around price and wage controls that conflicted with their individual sense of justice.6

But as controls are relaxed and the demand for traditional quality reasserts itself, prices inevitably rise once more.

After the war was over, the pent-up inflation burst and the controls broke down completely. From August 1945 to November 1946, wholesale prices rose more than 32 percent and consumer prices almost 18.6 percent.7 It is entirely possible that the end result would have been almost the same by the year 1946 if controls had never been introduced in the first place. There would have been the advantage also, that this “open inflation,” as Professor Hayek calls it, makes economic dealings and resource allocation much easier and more susceptible to conscious, rational methods. The trouble with “repressed inflation” which one finds under the regime of price and wage controls is that it is impossible to predict what pent-up inflation will spring itself upon the economy when the controls are removed.

FOOTNOTES

1. K. W. Taylor, “Canadian War-time Price Controls, 1941–46,” Canadian Journal of Economics and Political Science, February 1947, p. 87.

2. Ibid., p. 85.

3. Ibid., p. 91.

4. Ibid., p. 92.

5. U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics (Washington, D.C., 1947); Ibid., Bulletin 916 (Washington, D.C., 1948) pp. 107–8 and 54; Monthly Labor Review, November 1943, p. 879; November 1945, p. 1045; November 1947, p. 609.

6. Milton Friedman, An Economist’s Protest, p. 126.

7. U.S. Department of Labor, op. cit.