Their historical inspiration is Franklin D. Roosevelt’s administration, which imposed selective price controls from 1941, then a General Maximum Price Regulation at March 1942 levels when those didn’t work, before fresh price regulations on specific products superseded this law.
By crystallizing excess demand for individual products, these price ceilings required extensive consumer rationing to allow people to continue to obtain life’s basics, including dairy products, meat, sugar, tires, gas, and clothes. A vast bureaucracy under the Office of Price Administration (OPA) sprang up, both to police the controls with the help of public volunteer boards, and to assess the regular revisions to price caps required as ceilings became untenable.
The abandonment of market pricing was near absolute. But these policies, Jacobs and Weber assure us, were a “total success,” because a) measured inflation fell during the period they were enforced, b) the real living standards of the poor improved during that time, and c) inflation took off again when controls were removed.
To say this is a Panglossian account of the U.S.’s wartime experience is the height of understatement. But before assessing why, it is worth noting that there are scant parallels between a mass mobilization war period and today.
In an all‐encompassing conflict, the government must direct a range of resources towards achieving military victory and worry about how it will finance these ambitions. This requisitioning and direction inevitably collapse the potential market supply response for many sectors. One also needs to preserve solidarity given the sacrifices the public are making. So, it was obvious that a range of controls were coming – to a large extent, they were telegraphed.
In contrast, today: there is no reason why government activity cannot be financed by ordinary funding means; there is no larger societal ambition for which sacrificing the functioning of a market economy entirely is desirable; and reaching for price controls would be an ex‐post decision with far‐reaching consequences for the credibility of future fiscal and monetary policies. In short, there is no obvious analogy here, beyond both being periods in which aggressive aggregate demand increases combined with supply‐side dysfunction to produce a sharply rising price level.
But I digress…
On the argument’s substance, the fact that large price increases were outlawed from 1941/42 means that, yes, official inflation figures did show slower price level growth after price ceilings were introduced. Simon Kuznets’ calculations for the Commerce Department, as well as indices of wholesale and consumer prices all suggest there was higher inflation before and after price controls. Kuznets’ figures, for example, suggest prices grew by just under 5 percent per year from 1942 to 1945, before jumping to an average of 10 percent per year from then to 1947.
The problem, of course, is that these indices often failed to account for the quality‐ or time‐adjusted product prices people really faced. When producers cannot increase prices to turn a profit, they are incentivized to reduce product quality. A 1943 appraisal for the U.S. Bureau of Labor Statistics concluded, “We believe that consumers’ goods and services, in the aggregate, have since 1939 suffered some loss of quality that is not reflected in reported prices.”
Contemporary wartime letters describe meat quality “that no amount of working can make tender” and a recent NPR report documents how “meatpackers began filling sausages and hot dogs with soybeans, potatoes, or cracker meal,” sold steaks with extra bone weight, or misrepresented the quality of cuts to circumvent price ceilings. Coffee became mixed with roasted cereal, dried grass was sold as tea and there was obvious “shrinkflation” in candy bars.
It wasn’t just food products where quality diminished to reflect the suppressed market price. Clothing was sold that economized on material, soap manufacturers made greater use of the inferior linseed oil, and services usually provided alongside product sales were scaled back or eliminated, as some cheaper product lines or discounts were discontinued entirely. Regulators tried in vain to adjust price ceilings to account for this falling quality, but the sheer scale inevitably overwhelmed them.
Another obvious result of the price caps were shortages of the products. This, of course, was expected, and was the cause of rationing alongside the controls. But it meant shopping became a lot more time‐consuming, as the lack of availability left people roaming stores to find the goods they wanted.
The late Steve Horwitz described how a journalist in 1942, “Mr. Civilian,” documented having to visit seven stores to find soda. Unsurprisingly, people eventually began to give up on buying their preferred goods, making more of their own clothes, or growing their own produce in “victory gardens,” keeping old refrigerators and stoves, and generally substituting lower quality but available products for those they’d ordinarily prefer. Much of this entailed a greater time cost to obtain a given product, increasing its effective price in ways indices would not detect.
There was also a very large black market that does not show up in official statistics, including goods smuggled across the border from Mexico into Texas, or sellers just avoiding or evading official controls or rations. There were large established shadow markets in gasoline and meat, for example, but also in zippers, liquor, used furniture, and tools. The OPA’s Marshall Clinard later wrote that “such extensive conniving in the black market in illegal prices and rationed commodities…” raises “serious questions…as to the strength of the moral fiber of the American people.” As an indicator of the scale of the problem, the OPA itself estimated that 3 to 4 percent of the cost of all food was attributable to black market operations.
The conclusion from all this is that prices, at least in the broader economic sense, really rose much more significantly during the 1942–45 period than official inflation statistics suggest. Adjusting for just some of these factors, the great Milton Friedman and Anna Schwartz believed the effective price level increased by 27 percent during the regulated period, much higher than Kuznets’ 15.6 percent.
This observation already casts doubt on Jacobs and Weber’s claim that price controls enhanced the poor’s living standards. Their evidence appears to be largely based on Harvey Levenstein’s research, which found that meat consumption for the poorest third of Americans increased during the war (by 17 percent), while falling for the top two‐thirds.
Government documents indeed show a big per capita increase in meat consumption during the war for American civilians, with the 1935–39 average of 126.2 pounds per capita consumed increasing to 144.4 by 1945. But this increased further to 155 pounds by 1947, when price controls and rationing had ended, suggesting a structural break in eating habits, rather than a benefit inherent to price controls.
Reading through the general retrogression in economic life, it is unsurprisingly difficult to argue that wartime improved economic welfare, relative to a realistic alternative. Ask yourself: how many people would have genuinely traded peace for the wartime controls? But in truth, holistic assessments based on standard economic indicators are difficult. The real gross national product figures typically used to calculate per capita living standards are misleading given the described problems of assessing inflation. Beyond that, such “real” measures have questionable use as guides in wartime anyway: what does GNP even mean in a world where so many products are being bought by governments at administered prices for the cause of destruction?
My colleague George Selgin has a great post on how these issues can distort our thinking about how war and then peace impacted economic output. To circumvent these problems, historian Robert Higgs thinks we should instead look to real personal consumption per capita over time as a proxy for living standards. This rose only 6.8 percent between 1939 and 1945 – a relatively tardy growth. It was when the war and price controls ended in 1946 that it really accelerated.
Jacobs and Weber are correct, of course, that official measured inflation jumped once again when controls were lifted. But for all the stated reasons, this is not a surprise. The flipside of the undercounting of inflation during the price control period is the severe overstating of it as markets normalized. That’s before we consider the effects of pent‐up demand returning for products that simply couldn’t be produced, and for which capacity had to be quickly rebuilt.
The case presented by Jacobs and Weber might thus be described as a rather “potted” history. The 1941–1945 experiment with price controls produced huge dysfunctions, which very few people today would want to repeat. Indeed, even FDR’s government concluded that the “selective” price controls the pair endorse were hopeless in the face of broader aggregate demand pressures relative to supply (which is why they quickly pivoted to economy‐wide controls).
Inflation is ultimately a monetary phenomenon of too much money chasing too few goods. You cannot solve it by forcing certain prices to tell comforting lies about the products’ availability.
