Forty Centuries of Wage and Price Controls

20

Summary and Conclusion

The record of governmental attempts to control wages and prices is clear. Such efforts have been made in one form or another periodically in almost all times and all places since the very beginning of organized society. In all times and in all places they have just as invariably failed to achieve their announced purposes. Time after time an historian has laconically concluded, “. . . the plan to control rising prices failed utterly.” Or, “. . . the laws were soon repealed since no one paid any attention to them.”

In Egypt, government controls over the grain crop led gradually to ownership of all the land by the state. In Babylon, in Sumeria, in China, in India, in Greece and in Rome various kinds of regulations over the economy were tried and usually either failed completely or produced harmful effects. One of the most well-known cases of wage and price controls in the ancient world occurred in the time of the Emperor Diocletian. Thousands of people throughout the Empire were put to death before these futile laws were finally repealed.

In the Middle Ages, the city of Antwerp fell to the Spanish largely because no one would risk bringing food to the besieged city if he could not obtain the market price once he had passed by the Spanish guns.

In the American colonies, frequent attempts were made to keep down the price of beaverskins and suchlike commodities. All failed. Indians as well as the European colonists insisted on market prices for their goods and labor.

During the American War of Independence, Washington’s army nearly starved at Valley Forge largely due to what John Adams called “That improvident Act for limiting prices [which] has done great injury, and [which] in my sincere opinion, if not repealed will ruin the state and introduce a civil war.”1 As one economic historian explained, “The regulation of prices by law had precisely the opposite effect to that intended; for prices were increased rather than diminished by the adoption of the measure.”2 The same historian concluded that “Tried by facts, the measure was a total failure in achieving the end proposed by its authors and ultimately had not a defender.”3

With the coming of the Revolution in France, successive governments still failed to learn from experience. A series of so-called “Maximum Price” laws were passed and all proved ineffectual. We are told that in Paris of 1794 one observer reported that “one hundred and fifty women had crowded up to a butcher’s door at four o’clock in the morning. They screamed out that it was better to pay twenty or thirty sous and have what they wanted than to pay fourteen, the maximum price, and get nothing.”4

With the advent of the nineteenth century the Western world was blessed by a happy period of relative peace and prosperity. For 100 years no major wars were fought by the European powers and the principles of free trade reached their ascendancy. Shortly after Victoria came to the British throne, the famous Corn Laws (which for generations kept the price of bread higher than market levels) were repealed. As we have seen, the British authorities in India managed to avert a disastrous famine in 1866 by allowing the prices of food to fluctuate with the market, thus insuring a speedy and equitable distribution of rice and grain where they were needed most.

CONTROLS IN TWO WORLD WARS

With the breakdown of the structure of peace in 1914, however, both the Allies and the Central Powers insisted on returning to the drawing board with entirely predictable results. Even in the Organized State par excellence (the Kaiser’s Germany), economists pronounced price and wage controls to be ineffective. No other nation, democracy or dictatorship, monarchy or republic, managed to make them work.

During the Second World War and shortly thereafter, price and wage controls once again were resorted to by the major nations. Although a supreme patriotic effort in several nations (including the United States) slowed the official rise in wages and prices a bit, it is probable that the real prices and wages were affected little. Besides encouraging a thriving black market, wage and price controls resulted in a reduction in quality of goods and increased “perquisites” for jobs (fringe benefits, overtime, and so on), all contributing to a double system: the “official,” controlled prices and wages and the “unofficial” real prices and wages.

In both the United States and Britain in the 1970s, two governments which were elected by conservatives imposed wage and price controls with essentially the same results. The various “Phases” of President Nixon were completely ineffectual in controlling inflation (in fact, there is some evidence that inflation was actually worsened by the controls themselves, to say nothing of other government policies). The “Stages” of Prime Minister Edward Heath met the same fate except that in Britain, due largely to the Conservative government’s complete lack of monetary restraint, the inflation rate passed 25 percent. Not to be outdone, in 1975, Prime Minister Pierre Trudeau of Canada invoked a similar program for his own nation. The labor unions replied with a general strike and opposition from all economic classes and political philosophies has been very vocal. Canadian controls were ended in April 1978.

PRESIDENT CARTER’S VOLUNTARY CONTROLS

With the election of Jimmy Carter as President of the United States, the former Georgia Governor immediately began receiving advice from many quarters (fortunately by no means all) that wage and price controls might be necessary in the near future. Mr. Hobart Rowen, for instance, in his economic column for The Washington Post (December 12, 1976, p. Ml) began by admitting that

It is of course true that organized labor, as represented by AFL-CIO president George Meany, has vigorously opposed wage-price controls and explicit wage-price guidelines.

But the preponderance of the advice Carter is getting focuses on the need to expand the U.S. economy and reduce unemployment. These efforts involve the risk of a new inflation—if not right away, then when activity moves closer to the economy’s capacity.

To make both goals—greater employment and control of inflation—compatible, fiscal and monetary policy must be supplemented by voluntary wage-price restraints—sometimes called “incomes policies.”

The United States is the only major industrial nation without an incomes policy.

Ralph Nader, in a recent column (The Washington Star, June 17, 1978), warned that “. . . should inflation remain at current or higher levels, Carter will find it difficult to avoid imposing a selective, mandatory price-wage control policy in . . . key industries. ”

And, of course, the talented novelist from Cambridge, Massachusetts, John Kenneth Galbraith (who has never been happier than when he was serving his country in the Office of Price Administration) chimes in periodically with the same advice.

Even the defenders of wage and price controls recognize that they result in distortions in the use of economic resources, add heavy extra costs and at least may still fail to reduce inflation.

When President Carter announced his new program of voluntary wage and price guidelines on October 24,1978, he was careful to say that he still opposed mandatory controls and did not intend to ask Congress for the authority to impose them. The AFL-CIO, however, almost immediately endorsed mandatory controls as preferable to voluntary controls. As this book went to press in late 1978, many were predicting mandatory controls in one form or another in 1979.

Most economists would agree that controls produce uncertainty and hesitation. Many businessmen hold back and fail to expand into new areas and add new employees because they are not sure what will be the latest government regulation. Controls also cost millions of man-hours in both government and industry; the great expense of administering countless regulations (if we assume their effect is negligible or negative) must be recorded as colossal waste. As profits approach legal ceilings, businessmen have less reason to keep down costs; this also leads to waste of valuable resources. Insofar as wage controls actually hold down salaries, employees are not stimulated to do their work or to seek better jobs and employers are restrained from securing as many and as highly skilled workers as they “could productively use.

Although many economists would concede that government controls are able to restrain prices for very short periods of time (by so-called “freezes”), the end result is that pent-up inflation bursts at the first opportunity, giving rise to even higher prices in the long run. This effect has been recognized at least since the very beginning of our Republic; John Adams wrote to his wife in 1777 that “I expect only a partial and temporary relief from [rising prices by means of controls] and I fear that after a time the evils will break out with greater violence. The matter will flow with greater rapidity for having been dammed up for a time.”5

COMING FULL CIRCLE IN EGYPT

And in Egypt, where this book began twenty chapters ago, history (as it sometimes does) has come full circle. Price and wage controls as enforced by the current Egyptian government have resulted in unforeseen (and unwanted) consequences not unlike the effects of such policies pursued by their predecessors four thousand (and five thousand) years ago. Because the government (for “good” reasons) has tried to keep the price of bread below market levels, a good deal of the supply is being fed to animals, since it is cheaper than hay. The result, of course, is that many people in the cities are going hungry.6

In addition to the many economic difficulties which cannot be dismissed with such quips as Lord Keynes’ dictum that “in the long run we are all dead,” there remains an underlying moral problem. The government of the United States was scarcely a year old when a writer in The Connecticut Courant asserted that “the scheme of supporting the money and regulating the price of things by penal statutes . . . always has and ever will be impracticable in a free country, because no law can be framed to limit a man in the purchase or disposal of property, but what must infringe those principles of liberty for which we are gloriously fighting. ”7

As Milton Friedman pointed out in 1971 after President Nixon had imposed his version of wage and price controls:

The controls are deeply and inherently immoral. By substituting the rule of men for the rule of law and for voluntary cooperation in the marketplace, the controls threaten the very foundations of a free society. By encouraging men to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality.8

If an historian were to sum up what we have learned from the long history of wage and price controls in this country and in many others around the world, he would have to conclude that the only thing we learn from history is that we do not learn from history.

As Americas first well-known economist, Pelatiah Webster, observed when describing the effects of the unhappy experiment with economic controls during our War of Independence,

It seemed to be a kind of obstinate delirium, totally deaf to every argument drawn from justice and right, from its natural tendency and mischief, from common sense and even from common safety9. . . . It is not more absurd to attempt to impel faith into the heart of an unbeliever by fire and fagot, or to whip love into your mistress with a cowskin, than to force value or credit into your money by penal laws.10

FOOTNOTES

1. Albert Bolles, The Financial History of the United States (New York, 1896) Vol. 1, pp. 165–66.

2. Ibid., p. 166.

3. Ibid., p. 173.

4. Henry Bourne, “Food Control and Price-Fixing in Revolutionary France,” The Journal of Political Economy, March 1919, p. 208.

5. Bolles, op. cit., p. 159.

6. The Washington Post, April 29, 1978, p. A16.

7. The Connecticut Courant, May 12, 1777.

8. Milton Friedman, An Economist’s Protest (N.J.: Glen Ridge, 1975) p. 129.

9. Pelatiah Webster, Political Essays (Philadelphia, 1791) p. 129.

10. Ibid., p. 132.