Forty Centuries of Wage and Price Controls

7

The First World War

With the outbreak of the First World War in 1914 the most widespread and extensive system of economic controls in history began to go into effect. Before the war was over all the major industrialized nations had enacted regulations governing production, distribution, profits, prices and, in many cases, wages.

GREAT BRITAIN: ‘WHY NOT LET IT ALONE?’

In Great Britain, the sudden and dramatic upsurge of government demands for supplies, combined with almost immediate shortages caused by the German submarine fleet, drove prices far above pre-war levels. There were insistent demands, of course, for the government to “do something.”

The new government regulations, however, led to a whole series of difficulties and produced many new problems. The Spectator pointed out that the dangers of government controls are double in character: they are both political and economic. Politically, too much power is concentrated in the hands of the government and the people become accustomed to relying upon government to accomplish goals which can best be done by the workings of individual initiative and the free market.1 As prices are artificially kept down in times of increasing demand and diminishing supply the only results are inconveniences and disappointments. People go to the shops expecting to find food available at the legal prices and go away disappointed.2 Many people are also made to believe that high prices are caused by unseen manipulations which could be corrected by government manipulations.3 They then ask for still stricter controls and yet more state interference.

Economically speaking, The Spectator and other journals observed that in times of increasing demands and decreasing supplies, high prices are necessary. They act as a rationing system, checking consumption and channeling goods into areas where they can be most productively used. Besides reducing waste, high prices act as a stimulant to production and importation. A free price system, in short, works to end a period of shortages and tends to solve economic problems. Government controls or rationing only act to prolong the shortages.4 The Fortnightly warned that by restricting prices the government is “encouraging consumption, discouraging production and preparing disaster.”5 The Saturday Review declared that it is much easier to fix price ceilings than to make certain that there actually will be goods available at such prices. Once government fixes prices it is forced into the position of seeing to it that the owners of goods do not withhold them from sale and that manufacturers and farmers continue production. This amounts to nothing less than industrial conscription.6 The Nation noted that without such conscription, a necessary corollary of government-fixed maximum prices set below the market rates, “a period of acute shortage, even of starvation, for the poor can be easily brought about.”7

As The Edinburgh Review underscored, government regulation of the economy cannot be done without tying up the entire trade of a nation in official rules and red tape. Numerous boards and commissions must be appointed, countless clerks and supervisors employed, innumerable orders, rules and regulations must be issued. Perhaps worst of all, it also “involves endless frauds, including the wholesale forgery of food tickets, together with a general lowering of the moral standards of the community.”8 The Fortnightly Review remarked dryly that a process which begins with the promulgation of a few orders to hold down prices ends by reaching a stage “when practically everything is controlled, and the greater the control the more complete the confusion and the greater the economic loss.”9

After the war, one of the most respected journals in the world, The Economist of London, summed up succinctly the legacy of controls in Great Britain. “Why not let it alone? [It was ] repeatedly said, in response to the shortsighted demand for control of prices, that price was less important than supply, and that if the State prevented prices from rising by artificial interference, it might cut off the supplies that high prices would attract. . . . The State [nonetheless] interfered in every possible direction . . . the country now can view the results. On every side failure is visible and palpable. No single branch of trade which the government has touched shows a success.”10

In fact, the Economist editorial provides an exceptionally pertinent summary of how controls actually operated in wartime Britain, and is worth quoting further.

During the war, they [the Cabinet] had their hands full enough of war problems to satisfy a greater lust for work than any sane man ought to entertain. Yet instead of contenting themselves with dealing with the essential task of defeating our foreign foes, they persistently interfered with the course of domestic business. On each occasion the excuse put forward was that the failure to interfere would produce extravagant prices or bad distribution of supplies, or some other evil to the community which might impair the nation’s war effort.

. . . The blunders began from the very beginning [of price control]. For example, quite in the early days, the Home Government, judiciously pressed by Mr. Hughes, contracted to buy up all the Australian wheat at a high price, forgetting the fact that the difficulty of shipping wheat from Australia with German submarines hovering around was very much greater than getting the same quantity of wheat from Canada or the Argentine. In the event, the Australian wheat was not shipped, and much of it has been eaten by rats. . . .

Next, the government proceeded to interfere with the coal industry; and after first passing an Act which prohibited strikes, then used its authority as a Government to concede every demand which the miners endorsed with the threat of a strike. As a result, the miners’ wages were forced up far above the level of wages payable to men engaged in similar work in other industries. . . . In the same way, the State has used its power to regulate the wages of railway men, without the least regard to the economic results produced. As everybody knows, the railways are now being run at a heavy loss. . . . The excuse put forward was that increased railway rates would have been injurious to trade. The people who made that excuse were apparently incapable of understanding that it was also injurious to trade to create a deficit which would have to be met out of the taxpayers’ money. . . .

After several months of this folly, the natural results began to make themselves apparent, even to the official mind. Those results included the withdrawal of the coasting steamers from the previous work of carrying heavy goods, and so relieving the railways. The steamers, with their post-war expenses, could not afford to compete with pre-war railway rates. . . .

It is, however, in the sphere of food that the Government zeal for interference has been most markedly shown, and that the Government failure has been most absolutely complete. . . . Prices are higher than they have been for many generations past, and at the same time the supply of many of our staple foods is imperilled. . . .

If this is the fine flower of achievement of the Food Ministry, with all its rules and regulations, its rationing cards, and its outpouring of millions, surely the country is justified in echoing Lord Melbourne’s question: “Why not let it alone?”

LIMITED CONTROLS IN THE UNITED STATES

The experience of the United States of America with economic regulation during the war was not very different from that of Great Britain or indeed of other industrialized nations. The economic historian, Simon Litman, noted that “Government price fixing during the war was guided little by economic principles. It was not uniform either in its objects or in its methods, feeling its way from case to case. It might be termed opportunist.”11

Oddly enough, no statute authorizing overall fixing of prices was enacted by the United States government during the war. The War Industries Board derived such power as it had to set prices from the power granted to the President to place compulsory purchase orders with any manufacturer and the related power to set priorities. In 1917 the Food and Fuel Administration was given very wide powers over the prices of food and fuel products and later the War Industries Board set up a Price Fixing Committee to establish prices for goods other than food and fuels. Generally, it fixed prices at rather high levels permitting the low-cost producers in an industry to make huge profits.12

In theory, the Price Fixing Committee set prices by agreement with the industry concerned. Bernard Baruch, in his 1921 report to the President on the experience of government wartime economic controls, noted that “the bases in law for different regulations were varied, and in some cases doubtful.” Mr. Baruch himself later pointed out that most of the so-called “voluntary” agreements were in fact imposed on industries under the threat of commandeering.13

Dr. Simon Litman summed up his study of the effects of price control in the United States in 1917–18 by concluding that “The fixing of a’reasonable’ price, when the supply of a commodity is not sufficient to meet the usual demand, cannot prevent hardships and dissatisfaction. Price fixing alone does not solve the problem of keeping the poor provided with commodities; in fact, ‘reasonable prices’ may aggravate the situation by giving people of means an incentive and an opportunity to acquire ahead of their actual needs, thus leaving the less fortunate ones without any supply.”14

It would be fair to conclude that most American economists regarded the experiment with price controls in the first war as having, at best, mixed results. Prices were certainly not kept down, as the figures show.

The picture from the United Kingdom is even more definite; throughout the period of the war, prices both wholesale and retail continued to rise, despite the severe restrictions put upon them.

Such was the lack of effectiveness of controls in wartime that the peaceful use of controls seemed impossible. The American Economic Review, in a special supplement published in March 1919, included an analysis of the possibilities of price fixing in time of peace.

A general policy of price fixing, however democratic the government that adopts it, is an illiberal rather than a liberal policy. If we adopt a general, undiscriminating policy of price fixing as a part of a permanent peace program, we shall be going backward rather than forward; we shall be returning to a regime of authority and compulsion rather than going forward toward a regime of voluntary agreement among free citizens.15

CZECHOSLOVAKIA

Price controls were attempted in the first years of peace by one of the new democracies to emerge from World War I, with results similar to those predicted by British, American and other economists. A study by the Carnegie Endowment for International Peace on the economic and social history of the World War reported that “Not only did the attempt of the Government [of Czechoslovakia] to reduce prices by official order fail—it was bound to fail according to the laws of political economy—but it had the effect of constantly driving prices and costs of production upwards.”16 In December of 1920, “the control of meat and fats was discontinued altogether and that of corn and flour restricted.”17 The author of this study concluded: “All this the people felt to be servitude rather than beneficent rule, so that even the most strenuous champions of economic control were compelled at length to capitulate.”18

RUSSIA

Although price controls seemed to have been something less than efficacious in democracies, it might be expected that they would work better in a dictatorship. The case of Russia at this period provides an almost perfect laboratory. Prior to 1917, that vast country was ruled by a semifeudal despot, but after November of that year it fell into the hands of the Bolsheviks. Under the Imperial government, the bureaucracy issued contradictory and confusing regulations which only succeeded in bringing the economy to the brink of chaos. The enforcement of a consistent policy on prices was not possible mainly because the government itself violated its own rules. “The authorized agents of the Ministry of War,” we are told, “bought up supplies for the army at prices much higher than those officially fixed.”19

When the Bolsheviks seized power from the Social Democrats in November, they “abolished all freedom of trade and inaugurated a severe policy of fixed prices on all necessary articles of consumption. The peasants retaliated by refusing to sell their produce, whereupon the Soviet government began its systematic campaign against the villages, which continued for about two years and ended with the complete defeat of the Bolsheviks.”20 An observer who visited Moscow in 1919 reported that “controlled prices do not, in fact, exist. They are merely issued as decrees to which no one pays the slightest attention.”21

It might be argued that price-fixing in the two kinds of dictatorship in Russia was still not given a fair trial because both the Czar and the communists presided over an essentially weak government ravaged by long years of war and hampered by the inherent problems of a backward nation. For a genuine test of what can be done by a firm dictatorship in a modern, industrialized nation one should examine events in Germany, the leading enemy nation.

GERMANY

“The most comprehensive experiment in Europe in direct price-fixing,” according to one scholar, “was that carried out by the German government subsequent to the outbreak of war in August, 1914.” After discussing all of the many regulations designed to lower prices, he concludes that the Imperial government was simply not effective in preventing a large increase in the cost of food.22

An English economist, writing in 1916, concluded that “the German experiment in the State control of food prices is not that maximum prices must inevitably fail in all circumstances. All that can be definitely asserted is that in this outstanding instance, Germany, the organized State par excellence, showed itself unable to make maximum prices work to any sort of national advantage.”23

One of the most eminent economists of this century, the distinguished author of Human Action and fifteen other books, Ludwig von Mises, spent the war years in the Austrian army and had many friends in Germany. Writing a few decades later, he summed up the German experience of controls with his usual clarity and precision:

It has been asserted again and again that German experience has proved that price control is feasible and can attain the ends sought by the government resorting to it. Nothing can be more erroneous.

When the first World War broke out, the German Reich immediately adopted a policy of inflation. To prevent the inevitable outcome of inflation, a general rise in prices, it resorted simultaneously to price control. The much-glorified efficiency of the German police succeeded rather well in enforcing these price ceilings. There were no black markets. But the supply of the commodities subject to price control quickly fell. Prices did not rise. But the public was no longer in a position to purchase food, clothes and shoes. Rationing was a failure. Although the government reduced more and more the rations allotted to each individual, only a few people were fortunate enough to get all that the ration card entitled them to. In their endeavors to make the price control system work, the authorities expanded step by step the sphere of the commodities subject to price control. One branch of business after the other was centralized and put under the management of a government commissary. The government obtained full control of all vital branches of production. But even this was not enough as long as other branches of industry were left free.24

The record of government attempts to control the economies of the industrialized participants in the First World War, democracies and dictatorships, Allies and Central Powers, seems inescapable. In the words of a Canadian economist who examined the systems of price-fixing in Great Britain, France, Germany, the United States and Australia during this period, “The policy of fixing maximum prices. . .fails to accomplish the objects sought and it has a multitude of unforseen consequences which are frequently worse than the original evils.”25

FOOTNOTES

1. The Spectator, January 23, 1917, p. 692.

2. Ibid., March 31, 1917, p. 382.

3. A. Shadwell, “Food Prices and Food Supply,” The Nineteenth Century and After, April 1917, p. 736.

4. The Spectator, February 6, 1915, p. 181.

5. Fortnightly Review, March 1917, p. 438.

6. The Saturday Review, September 9, 1917, p. 242.

7. The Nation, January 2, 1917.

8. The Edinburgh Review, July 1917, p. 50.

9. Fortnightly Review, July 1918, p. 45.

10. The Economist, Vol. 89, September 6, 1919, pp. 387–388,

11. Simon Litman, Prices and Price Control in Great Britain and the United States During the World War (New York: Oxford University Press, 1920) p. 318.

12. Struve Hensel and Richard McClung, “Profit Limitation Controls Prior to the Present War,” Law and Contemporary Problems, Duke University, Autumn 1943, p. 195.

13. Ibid., p. 196.

14. Ibid., p. 319.

15. T. N. Carver, “The Possibilities of Price Fixing in Time of Peace,” American Economic Review, March 1919, p. 247.

16. Alois Rasin, Financial Policy of Czechoslovakia During the First Year of Its History (New York: Carnegie Endowment for International Peace, Division of Economics and History, Economic and Social History of the World War, 1923) p. 15.

17. Ibid., p. 77.

18. Ibid., p. 153.

19. Kussiel Leites, Recent Economic Developments in Russia (edited by Harald Westergaard) (New York: Oxford University Press, 1922) p. 47.

20. Ibid., p. 115.

21. S. P. Turin, “Market Prices and Controlled Prices of Food in Moscow,” Royal Statistical Society Journal, May 1920, pp. 478–479.

22. H. L. Wilkinson, State Regulation of Prices in Australia: A Treatise on Price Fixing and State Socialism (Melbourne: Melville Mullen, 1917) pp. 106–116.

23. John Hilton, “Germany’s Food Problem and its ‘Kontrolle,’” Nineteenth Century and After, January 1916, p. 29.

24. Ludwig von Mises, Inflation and Price Control (Irvington-on-Hudson, New York: The Foundation for Economic Education, 1970) p. 6.

25. W. C. Clark, “Should Maximum Prices be Fixed?” Queen’s University Departments of History and Political and Economic Science, Bulletin (Kingston, Ontario: Queen’s University, 1918) No. 27, p. 25.