The Inflation Crisis, and How to Resolve It

4

False Remedy: Price Fixing

As long as we are plagued by false theories of what causes inflation, we will be plagued by false remedies. Those who ascribe inflation primarily to a shortage of goods, for example, are fond of saying that “the answer to inflation is production.” But this is at best a half-truth. It is impossible to bring prices down by increasing production if the money supply is being increased even faster.

The worst of all false remedies for inflation is price-and-wage fixing. If more money is put into circulation, while prices are held down, most people will be left with unused cash balances seeking goods. The final result, barring a like increase in production, must be higher prices.

There are broadly two kinds of price fixing—“selective” and “overall.” With selective price fixing the government tries to hold down prices merely of a few strategic war materials or a few necessaries of life. But then the profit margin in producing these things becomes lower than the profit margin in producing other things, including luxuries. So selective price fixing quickly brings about a shortage of the very things whose production the government is most eager to encourage. Then bureaucrats turn to the specious idea of an overall freeze. They talk (in the event of a war) of holding or returning to the prices and wages that existed on the day before war broke out. But the price level and the infinitely complex price and wage interrelationships of that day were the result of the state of supply and demand on that day. And supply and demand seldom remain the same, even for the same commodity, for two days running, even without major changes in the money supply.

In the administration of Franklin D. Roosevelt, the heads of the National Recovery Administration, engaged in overall price control, were asked by a congressional committee how many prices they were fixing. A day or two later they brought in an estimate that there were some 9 million different prices in the United States. Still later they withdrew that estimate as too low. But on the modest estimate of 9 million different prices there are more than 40 trillion interrelationships of these prices; and a change in one price always has repercussions on a whole network of other prices. The prices and price relationships on the day before the unexpected outbreak of a war, say, are presumably those roughly calculated to encourage a maximum balanced production of peacetime goods. They are obviously the wrong prices and price relationships to encourage the maximum production of war goods. Moreover, the price pattern of a given day always embodies many misjudgments and “inequities.” No single mind, and no bureaucracy, has wisdom and knowledge enough to correct these. Every time a bureaucrat tries to correct one price or wage maladjustment or “inequity” he creates a score of new ones. And there is no precise standard that any two people seem able to agree on for measuring the economic “inequities” of a particular case.

Coercive price fixing would be an insoluble problem, in short, even if those in charge of it were the best-informed economists, statisticians, and businessmen in the country, and even if they acted with the most conscientious impartiality. But they are in fact subjected to tremendous pressures by the organized pressure groups. Those in power soon find that price and wage control is a tremendous weapon with which to curry political favor or to punish opposition. That is why “parity” formulas are applied to farm prices and escalator clauses to wage rates, while industrial prices and dwelling rents are penalized.

Another evil of price control is that, although it is always put into effect in the name of an alleged emergency, it creates powerful vested interests and habits of mind which prolong it or tend to make it permanent. Outstanding examples of this are rent control and exchange control. Price control is the major step toward a fully regimented, or “planned,” economy. It causes people to regard it as a matter of course that the government should intervene in every economic transaction.

But finally, and worst of all from the standpoint of inflation, price control diverts attention away from the only real cause of price inflation—the increase in the quantity of money and credit. Hence it prolongs and intensifies the very inflation it was ostensibly designed to cure.