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October 2 9 , 1940 Chairman Eecles E n i l e Despres A t t a c h e d i s a memorandum prepared by M r . S h e r r a r d o f t h i s s e c t i o n r e v i e w i n g "Wartime C o n t r o l o f P r i c e s " by C h a r l e s 0 . Hardy o f t h e B r o o k i n g s I n s t i t u t i o n . H a r d y ' s book i s r a t h e r a c o n v e n t i o n a l d i s c u s s i o n o f p r i c e c o n t r o l i n war t i m e and i n c l u d e s a s i m p l i f i e d and p o p u l a r i z e d d e s c r i p t i o n o f t h e methods o f p r i c e r e g u l a t i o n used d u r i n g t h e l a s t w a r . The a u t h o r b e l i e v e s t h a t i f p r i m a r y r e l i a n c e i s p l a c e d on monetary and f i s c a l c o n t r o l s , t h e most i m p o r t a n t source o f p r i c e i n c r e a s e s can be e l i m i n a t e d ; the r e m a i n i n g s i t u a t i o n s c a n , he b e l i e v e s , be r e a d i l y d e a l t w i t h by d i r e c t c o n t r o l s a t a few s p e c i f i c p o i n t s . Hardy seems t o us imich t o o o p t i m i s t i c i n t h i n k i n g t h a t t h e p r o b l e m can be so s i m p l y and e a s i l y d e a l t w i t h and t h a t monetary and f i s c a l c o n t r o l s can c a r r y out the major p a r t of the j o b . Attachment October 29, I9/4O HARDY* S "WA&fXKI CCKTRCt OF F&ICSS" Kr. hsrcy** h o o i i s d i v i d e d i a t o two p a r t s . The f i r s t i t * d i s - cussion i n general term* o f the problen o f wartixas p r i c e control, while the second i s an analysis o f experience i n the United States during the ^©rld r*ar# The discussion i n Part I i s centered shout a d i s t i n c t i o n between price rises due to the scarcity of p a r t i c u l a r coaaaodities end those due t c a general increase of purchasing power. Hardy believes t h a t the l a t t e r ere by f a r the x&ort important end that they can be prevented only by appropriate noa-iaflatlonary f i s c a l policy. I f t h i s has been scocrsflished, he f e e l s that d i r e c t price control can safely be confined to those eenaodlt i e s for which Govenaoeut demand 1® p a r t i c u l a r l y heavy or the supply o f which has been sharply curtailed as a r e s u l t of special war or enar^cney conditions. This d i s t i n c t i o n between s c a r c i t y and i n f l a t i o n i s taken for granted throughout the book, but i t s nature i s never explained. i n a t i o n i t becomes b l u r r e d and tends t o disappear. Upon exam- A general price r i s e i s nothing but a s u m a t l o n of i n d i v i d u a l p r i c e r i s e s . &ach of the i n d i - v i d u a l r i s e s aay be based cn a shortage o f t h a t p a r t i c u l a r eoracdity i n r e l a t i o n t o the demand f o r i t . (Although i t nay a l s o , o f course, be based on nothing isore t h a n the price-tanking d e c i s i o n s o f producers.) la the easae way purchasing power a f f e c t s p r i c e s o n l y as a r e s u l t of s p e c i f i c spending acts by s p e c i f i c i n d i v i d u a l s . Thus the w a r t i a e p r i c e problem i s DO® of controlling a eerie6 of scarcity situations, / « i.rcoaraenfcs expendi- t u r e * inereese, tho mcater of such situations w i l l increase and e change i n methods for dealing with them may be deeirable. I n p a r t i c u l a r , monetary instruments of control, which are necessarily of an o v e r - a l l and cooperat i v e l y unseleetive nature become appropriate when scarcity situations ere the rule rather than the exception. Hardy recognizee th.it i n e f f e c t when pointing out thet there i s an important difference between cireus&stanee* new and these i n 1917* ^hen war wee declared i n 1917 the l e v e l of business a c t i v i t y i n t h i s country was already high. The defense program of 19^0, on the other hand, i s being inaugurated at a time of eooparatlve depression. "The conditions which heve led the "United States to pursue f o r the past few years an expansionary e r e d i t policy without an undesirable degree of i n f l a t i o n may not change overnight, and u n t i l the unemployed resources of the country are substantially taken up, some expansion of the flow of money may continue t o serve a useful purpose, financing output instead of merely boosting r r i c e s . * (pp. J^M+S) Whether an increased expenditure stream leads t o expanded output r a t h e r t h a n higher p r i s e s does n o t , however, depend o n l y upon the abundance or s c a r c i t y o f resources. Business men have a good deal o f d i s c r e t i o n a r y c o n t r o l over prices i n most industries, and whether they respond t o a n t i c i p a t e d prosperity by increasing output or by raising prices i s determined l a many eases by the a t t i t u d e of Government. To essusae, as Hardy does, t h a t h i g h e r prices tend to c a l l f o r t h as increased supply, i s t o ignore -3- the p o s s i b i l i t y i n i^sny manufacturing induatries of increasing p r o ! i t s by raising prices sad c u r t a i l i n g supply. The moro © f : a c t i v e control over sll individual p r i c e s can he made, ths nor© purchasing power can be expanded without incurring tit© ©r 11 effect® associated v i t h th© word " i n f l a t i o n * . I f prices even of nonessential foods can b© k©pt down, th© flow of ord©rs w i l l ©xert a pressure on buslnesa ia©s for increased production ar-4 w i l l lead thei.: to s t r a i n t h a i r resources and t h e i r Ingenuity to increase output and thus maintain p r o f i t s . Restraint on prices may lead to sec© sque«slng of p r o f i t margins, but t h i s should be o f f s e t by th© expanded voluzs© of business. By t h i s seeaas th© time when consumption oust be curtailed i n the interests o f defense can bo postponed u n t i l resources are r e a l l y being used to capacity. Furthermore, resources i n geasral have as l i t t l © meaning as prices i n ^©neral or demand i a ganoral. Hesourc©« consist of psrtieular raw materials, p a r t i c u l a r siachinery, and p a r t i c u l a r workers — a l l located i n p a r t i c u l a r places, ^ay attempt to prevent i n f l a t i o n by eurfcailinc th© flew of purchasing power i s bound to lead to sotm unnacessary unscoploy^ont. A shortage of housing for shipyard workers i n Newport News i s not i n any useful sense o f f s e t by r e s t r i c t i n g fsrm isortgag© c r e d i t i a I ewe. Hi© l a t t e r would simply m©an t h a t jsen and ©qui|m»nt w i l l remain i d l e that might otherwise have been employed i n making goods and services. I n the lat©r stages of a war or eraaments program, when meet eoesa&ditles have becoes© scarce, the creation of such local pools of unemploynent jaight be j u s t i f i e d because of t h e i r comparative unimportance i n r e l a t i o n to the areas of s c a r c i t y , and because of the administrative simplicity of o v e r - a l l c r o d i t r e s t r i c t i o n re opposed t o attempts t o c o n t r o l th© demand f o r each scarce eog&odity separate!y (by tas.ee* r a t i o n i n g ; , or other d e v i c e s ) . I n s p i t e o f h i s underlying misconception as t o tha nature o f p r i c e i n f l a t i o n , Hardy has several u s e f u l suggestions f o r preventing it. He f i r s t discusses steps t o increase th® supply o f scarce eoosnodities by encouraging i i p o r t e . Under t h i s heading are suggestions f o r lowering t a r i f f s , e x p o r t i n g g o l d and s i l v e r , and u s i r ^ exchange c o n t r o l i n order to increase the buying power o f the d o l l a r i n terms o f f o r e i g n c u r r e n c i e s . Passing t o p r i c e c o n t r o l p r o p e r , he stresses the Importance o f c e n t r a l i s e d purchasing by the (hminana ill (and i t s a l l i e s , i f any). In th© ease o f cos-isodities made t o Government s p e c i f i c a t i o n s , p r i c e c o n t r o l saxst take t h e font, o f s t e m bargaining by th© purchasing a u t h o r i t y . D i f f i c u l t problems a r i s e c h i e f l y i n t h e ease o f standardised ccceaodities having an iiarortenfc c i v i l i a n market * Hardy i s c r i t i c a l of the b u l k - l i n e sethod used i n the World War* since I t l e d t o excessive p r o f i t s f o r but the h i g h e s t cost producers. all He p o i n t s out t h a t r e l i a n c e on the excess p r o f i t s t a x t o recapture these high earnings was net j u s t i f i e d . Instead o f t h i s procedure he suggests a " p u b l i c u t i l i t y * method under which the p r i c e p a i d t o each f i r m would be determined by an i n d i v i d u a l c o n t r a c t based on i t s coats. That i s , standardised cesrasoditlea would be bought as i f they were being produced t o specification. After Sovercaasnt requirements had been s e t , the remaining supply would be sold on the c i v i l i a n uarket l o r whatever price i t would bring. (Presumably i t would be necessary t e require low-oost producers to accept Government orders instead of s e l l i n g t h e i r supplies on c i v i l i a n markets a t the higher p r i c e s obtainable t h e r e . ) mPjm Hardy i s opposed i n general t o the f i x i n g of c i v i l i a n prices, although recognising that i t any in sobs© cases be necessary* ?fheu control i s to be undertaken, he suggests adoption of a method sisdlar to that used i n the case of sugar i n 1910* ?he Sugar Actual i t at ion Board bought sugar at various prices fro.% producers and resold i t to the public at a u n i f o m price, thus i t was possible to adjust the receipts of producers to t h e i r varying costs without t r y i n g to s e l l the sase cc&ffiodity at d i f f e r e n t prices I n the ease n a r k e t . Hardy concludes t h a t , although f i s c a l policy was i n c o r r e c t , price control during the World f a r V a s b a s i c a l l y sound and t h a t , i n view of the d i f f i c u l t conditions under which i t was applied, i t was reasonably effective.* (p. 211)
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