A Bogus Example of Controlling Inflation with Price Controls

As the U.S. government prepared for and then engaged fully in World War II, it made increasingly stringent efforts to control inflation by imposing price controls. Late in 1942, these controls were strengthened substantially, and from early 1943 through mid-1946, when the controls were allowed to lapse, the consumer price index rose very little. These data have often been trotted out to prove that the government can successfully control inflation if only it makes the laws severe enough and the monitoring agency sufficiently large and powerful.

In reality, inflation was not controlled; only the legally revealed prices were controlled. This experience does not require rocket science to understand: if the government makes it illegal and punishable to raise legal prices (or to raise them by more than a stipulated small amount), then sellers will not set legal prices that violate the restrictions.

But legal prices need not be, and during World War II certainly were not, the same as actual prices. Sellers and buyers used a variety of subterfuges to make transactions in violation of the government’s price controls. Sellers might reduce the product’s quality, as many did at the time; require the buyer to wait longer for an order to be filled; require the buyer to purchase unwanted goods in order to purchase wanted ones; require the buyer to pay for bogus goods, as when tenants were required to pay the landlord a hefty sum as “key money,” ostensibly to compensate him for keeping a spare key in case the tenant lost his key; require the buyer to forgo services normally associated with the goods, such as routine maintenance of rented apartments; or require gifts or other ostensible gratuities not ordinarily given to a seller. Sellers might also simply disregard the posted prices and refuse to sell to anyone except at higher (unlisted and unreported) prices. The methods of evasion were legion.

Milton Friedman and Anna Schwartz and other economists who have made corrections for the understatement of the price level during the war years have shown that even partial corrections are sufficient to establish that the government’s price controls were far from the success claimed at the time and often gullibly swallowed later by economists and historians. (For sources and more detailed discussion, see pp. 89-93 of my book Depression, War, and Cold War.)

Economists are trained in theory, statistics, modeling, and other skills. Historians are trained in the careful scrutiny and interpretation of historical sources. Neither economists nor historians, unfortunately, are trained to use common sense in their work. Postwar proponents of the reimposition of price controls have often pointed to the success of such controls during the war. Yet, despite thousands of employees and an army of volunteer monitors associated with the Office of Price Administration and despite the U.S. Attorney General’s prosecutory zeal in hauling alleged violators into court, the government’s price-control efforts during World War II failed to stem the tide of rising prices set in motion by the huge contemporary increases in the money stock.

Price controls, at most, only create a population of liars. True prices continue to do what the existing economic conditions cause them to do. No one can control the amount of precipitation by passing a law against reporting more than a stipulated amount of rain and snow.