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Recently by Charles Goyette: Bernanke: Wealth for Wall Street, Poverty for thePeople

     

This is excerpted from The Dollar Meltdown

Wage and price controls are the first refuge of the governing classes in inflationary times. Price increases are first noted by the public at the grocery store and gas pump. When it becomes apparent the household budget is being stretched to its breaking point, a cry goes out: "The government must do something." The call for the government to put a lid on prices by fiat or by edict reflects a confusion of cause and effect, because the government already did do something. It inflated the supply of money and credit. As long as the public perception of inflation is that it is a natural and spontaneous phenomenon, politicians, both the crafty who know better, and the clueless that don't, will escape accountability for it and will propagate schemes to cap prices. Late in his first term, with consumer prices rising at about 5 percent, Nixon announced his distinctly Leninist-sounding "New Economic Policy." He ordered a freeze on all wages and prices in the United States. It is not exactly clear how Nixon derived the authority to do this, but rather than an outcry of indignation, many of the nation's business leaders and the public at large supported the plan. The stock market responded the next day with a record price rise.

Nixon's wage and price controls included a freeze on wages, prices, rents, and extended to calling for a freeze of corporate dividends. He also announced the creation of a "Cost of Living Council," that would be run by Donald Rumsfeld and his deputy Dick Cheney. Although Nixon's August 1971 announcement was for a 90-day price freeze, the program went through four separate phases that lasted ten time that long, until April 1974. An iatrogenic disease is one introduced by the treatment of a physician. If rising prices were the ailment from which the economy suffered, Nixon's prescription of wage and price controls proved to be bad medicine with its own iatrogenic disease. Its most debilitating symptom? Shortages.

Costs of some raw materials such as cotton were allowed to rise, but the costs of finished products made of those materials were not. So the finished goods were not made. Store shelves emptied. Farmers discovered it cost more to raise poultry than they could recoup selling it at the controlled prices. Chickens were drowned before they consumed more costly feed. The same thing happened with ranchers and feedlots that would lose money bringing cattle to market at the controlled prices. There were low prices for beef posted in the supermarkets, but the meat counters were empty. Because Nixon was afraid of political reaction to the creation of swarms of officers and price inspectors crawling under the tables and peering from behind curtains at every American business transaction, he styled the mandatory price controls as "voluntary." But they were only voluntary in the sense that paying income taxes is "voluntary." And he held the threat of IRS audits over businesses that failed to comply.

The wage and price controls required some manufacturers to cut quality and retailers to cut warranties to meet the artificial prices. If balancing your new tires had been free, now it was extra. If delivery had been free, now it cost. As an unintended consequence some prices ended up higher as middlemen proliferated to evade the price controls. Some products were sold to straw men in Canada only to be sold back into the United States at the uncontrolled prices of imports. Oil passed through additional and unnecessary hands as price markups were allowed in the subsequent sales of petroleum. In the end Nixon's burlesque created distortions, inconvenience and shortages, but prices continued to rise. During the period of the controls prices rose at an average annual rate of 6 percent; when most controls expired, prices quickly played catch up and hit an annualized rate of more than 12 percent in late 1974.

During episodes of wage and price controls it is tempting to think that perhaps something has been forgotten in the American character, because price controls really aren't about controlling prices, which after all, have no volition of their own. They are about controlling free people who are now forbidden from engaging in non-coercive commercial activities.

But maybe there is no DNA code for freedom in the American psyche. Maybe the nation has coasted for more than 200 years on the vision of a few of the founders and the experiment with freedom has run its course. Perhaps it is a replication failure of the liberty gene. If so, it began several generations ago. Germany's stunning Economic Miracle took place over American and British objections. In 1948 the German economy was a still as broken and as non-productive has it had been three years earlier when the war ended. The Allied occupation government had a command economy in place complete with wage and price controls and rationing, some of which were remnants of the defeated Nazi government. Goods were scarce. What commerce there was consisted of primitive barter in cigarettes, chocolate, and nylon stockings. It was in this environment that economic official Ludwig Erhard went on nationwide radio on a holiday weekend, knowing that the occupying military governors would be away and not quickly able to object, and abolished the controls.

General Lucius Clay was the American military governor in Germany at the time. He told Erhard that his advisors insisted lifting the controls was a terrible mistake. "Pay no attention to them, General;" said Erhard, "My advisors say the same thing."

The results of lifting price controls were immediate and dramatic. Stores that had been all but bare were stocked full of goods in no time at all. Instead of spending their hours in miserable lines waiting for the scarce staples of life under a command economy, people returned to productive activity. Employment expanded as the economy added 6 million new jobs between 1950 and 1960, while the unemployment rate fell from 10.3 percent to 1.2 percent. Over the decade economic growth averaged 8 percent. Industrial production soared by 25 percent in 1950 alone, and by 18 percent the next year. Germany was rebuilt; prosperity was restored. Truly it was an economic miracle.

During the post war occupation of Germany, the American and British authorities banned F.A. Hayek's seminal 1944 book The Road to Serfdom, for fear it would offend the Soviets. Hayek's work described the way in which a central economic authority's planning put a government at war with its own citizens, how it must become increasingly coercive in order to prevail, and how the coercive machinery of the central plan, once erected, can be employed to any coercive end. Violations of price controls was a capital offense in Diocletian's Rome and in the French Reign of Terror. But those are not the exception; price controls have been accompanied by brutality throughout history. Dr. Murray Rothbard cites more recent episodes, cases that have been widely overlooked:

Why did Chiang-kai-Shek “lose” China?  The main reason is never mentioned.  Because he engaged in runaway inflation, and then tried to suppress the results through price controls.  To enforce them, he wound up shooting merchants in the public squares of Shanghai to make an example of them.  He thereby lost his last shreds of support to the insurgent Communist forces.  A similar fate awaited the South Vietnamese regime, which began shooting merchants in the public squares of Saigon to enforce its price decrees.

Despite these dangers and their demonstrable ineffectiveness throughout the ages, wage and price controls remain a political favorite. It is inevitable that a thunderous demand for them will arise in the high inflation periods ahead. Often in their initial appearance wage and price controls will masquerade as "voluntary." (Question: What's the difference between voluntary and mandatory wage and price controls? Answer: About six months.) The more aggressively they are implemented, the more certain it is that the economy will grind to a halt. As a commercial collapse proceeds it is soon joined by a collapse of the social order.

Charles Goyette [send him mail] is the author of the New York Times bestseller The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments, now available in paperback.

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