Forty Centuries of Wage and Price Controls

6

The Nineteenth Century: One Success, One Failure

In the industrialized nations, at least, the nineteenth century, as we all know, was the great era of relatively free trade. For a brief period in world history, the ideas of Adam Smith were widely accepted in the most prosperous parts of the earth.

During the Victorian era, extensive wage and price controls were imposed in only a few situations, mostly during protracted wars, such as the American Civil War. In this chapter, therefore, we will briefly examine two major examples of controls in action: one famous success and one resounding failure. The success, of course, was the well-known repeal of the British Corn laws. The failure was the attempt by the Confederate States of America to, first, finance the war through inflation and, second, to restrain the inflation by price and wage controls.

THE REPEAL OF THE CORN LAWS

In Britain, one of the most spectacular reforms of the nineteenth century was the repeal of the Corn Laws, which (in the Act of 1815) prohibited or (in the 1828 Act) regulated the import of wheat and other cereal crops into the United Kingdom except when the home price was higher than a certain level. The original aim was to protect the national defense during the Napoleonic Wars (about the same time, incidentally, that an income tax of 5 percent had been brought in as a “temporary” wartime measure). The Wars had demonstrated the dangers of British reliance on foreign grain imports and were naturally supported by the landed interests which controlled Parliament at that time.

The merchants who dealt in manufactured goods resented the Corn Laws, since they worked to keep up the price of corn (wheat) and hence made living a little more expensive for workers in all sectors of the economy; this not only dampened demand for manufactured goods, but made necessary wage payments higher than would otherwise have been the case. From about 1820 onwards, the Manchester Chamber of Commerce called again and again for free trade which would enable the industrial revolution to proceed unhindered. Every year in the House of Commons, Charles Villiers moved repeal, with the support of Cobden and Bright, the famous free-traders of the time. Every year the landowners in Parliament defeated the move.1

When the potato crop failed in 1845, causing widespread famine in Ireland where the crop was most widely grown and consumed, import of foreign grain was allowed, and the crisis was (to some extent) alleviated. Sir Robert Peel then proposed that the Corn Laws should be repealed on a permanent basis, a move which split him and his closest supporters from the landowning classes of his Tory Party. But his move was successful and from then on, the United Kingdom enjoyed a great prosperity which could not be directly attributed to any other single source.2

RAMPANT INFLATION IN THE CONFEDERACY

Although, as is generally known, the nineteenth century in Europe and North America, at least, was the great era of free trade and relatively liberal government regulations, there was a notable exception to this general rule. The embattled Confederate States of America, in desperate attempts to control raging inflation, continually attempted various kinds of wage and price controls.

“The worst inflation in American history since revolutionary times,” according to economic historian Eugene Lerner, “plagued the South during the Civil War. For thirty-one consecutive months, from October 1861, to March, 1864, the Confederate commodity price index rose at the average rate of 10 percent per month. In April, 1865, when Lee surrendered and the Civil War ended, the index was ninety-two times its prewar base.”3

Why did this inflation take place? Why were Southern efforts to control it worthless? The answer boils down to the fact that the Confederate States financed the war by printing money and issuing bonds, rather than by taxation. “In the first year of the war,” reports Dodd, “hardly any attempt was made to get money by internal taxation, and the blockade prevented any revenue accruing from the customs duties.”4

There were many factors which made taxation a difficult political task. The property taxes at the start of the war were low—half a percent—and so the base for tax collection was naturally limited. Furthermore, the mechanism for collecting these taxes itself was rusty and the prospect of a conflict in the northern part of the Confederacy did not always encourage the more southern tax authorities to apply special effort in taxing their own citizens. Lerner quotes a philosophical objection to the principle of taxation stated by Governor A. B. Moore of Alabama, who was probably not alone when he declared that “The collection of this tax by the State would be an onerous and unpleasant duty, as it imposes upon the State the necessity of enforcing the laws of the Confederate government against her own citizens.”5

And so the Confederate States, which had no experience in monetary management, made up for their naivete with considerable energy. Within five days of the Louisiana secession of January 1861, Southern forces took over the U.S. Mint at New Orleans and confiscated the bullion kept there. This formed the basis of the Confederate treasury, but “Proved to be only a tiny reserve against the billions of [dollars of] Confederate currency that were to appear during the war.”6 In September of 1862, an Act was passed to authorize note issues to any extent that would be necessary to defray public expenses, and from thence the worth of the currency started to decline rapidly. The government profited from such inflation, because it could pay off contracts made when gold was at par with notes which were already depreciating. But as the stock of money rose, so did prices, and so fell confidence in the currency.

Southern efforts to keep prices in check were largely useless against these powerful inflationary pressures. The attempts of the Confederacy to establish official prices for a wide range of commodities were foredoomed. With increasing frequency, the lists of official “fixed” prices had to be revised upward and then revised again. For example, between May 1863 and March 1865, the fixed price of bacon went from $1 per pound to $4 per pound. Beans, another staple item of diet for the boys in gray, rose from $4 per bushel to $30 per bushel.

There is no doubt that such rapid rises in food prices generated much uncertainty, insecurity and misery. Throughout the Confederacy were seen public demonstrations and riots over the price of food and other necessities. A clerk in the Department of War at Richmond recorded his observations of one such riot in 1863. Over a thousand people, mostly women, marched in procession toward the food stores, gathering carts and drays as they proceeded and then loading them with meal, flour and other provisions. It was not long before the mob took to looting nearby shops for silks, jewelry and other valuables. The troops were summoned to the scene, and the mayor of Richmond himself threatened to fire upon the rioters if they did not disperse and leave their takings. An historian quotes a description of the scene as follows:

About this time the President [Jefferson Davis] appeared and, ascending a dray, spoke to the people. He urged them to return to their homes so that the bayonets there menacing them might be sent against the common enemy. He told them that such acts would bring famine upon them in the only form which could not be provided against, as it would deter people from bringing food to the city. He said he was willing to share his last loaf with the suffering people, and he trusted we would all bear our privations with fortitude and continue against the northern invaders, who were the authors of all our sufferings. He seemed deeply moved, and indeed it was a frightful spectacle. . . .7

And so price controls once again showed their ineffectiveness in dealing with price rises, but currency reform achieved much more. The Confederate Congress enacted a currency reform in 1864, which effectively reduced the stock of money in the South by one third. Later that year the general price index stopped rising and then dropped for the first time. But the success was short-lived, for as the Northern forces reduced the area of the Confederacy, Southern currency naturally made its way to the remaining Confederate States, greatly increasing the money supply in that region. As a result, of course, an unstoppable inflation showed itself on a grand scale once more.

FOOTNOTES

1. For a discussion of the corn law debate see Norman Gash, Peel (London: Longmans, 1976).

2. See The Long Debate on Poverty (London: Institute of Economic Affairs, 1973). We have already noted that British Bengal dealt with the famine of 1866 with a policy very different from its eighteenth-century one (doubtless due to the spread of free trade ideas) and attempted to facilitate speculation rather than prevent it. (See page 34). By allowing the price of grain to rise and avoiding controls, the government in fact averted a repetition of the earlier national disaster.

3. Eugene M. Lerner, “Inflation in the Confederacy, 1861–65” in Milton Friedman (ed.), Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, 1956) p. 163.

4. Agnes F. Dodd, History of Money in the British Empire and the United States (London, New York: Longmans, Green & Co., 1911) p. 304.

5. “A. B. Moore to Gentlemen of the Senate and House of Representatives, October 28, 1861,” in The War of the Rebellion, Series IV (Washington, D.C.: U.S. War Department, 1880–1901) I, p. 698.

6. Fred Reinfeld, The Story of Civil War Money (New York: Sterling Publishing Company, 1959) p. 52.

7. Ibid.