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Speech by Darryl R. Francis at the 75th Annual
Convention, Kentucky Bankers Association,
Louisville, Kentucky, September 15, 1969

In recent months

we have heard the

repeated suggestions and repeated denials that
direct government controls of wages, prices,
and credit will be necessary to break the inflationary boom.

In testimony before the Senate-

Finance Committee, Secretary of the Treasury David
M. Kennedy said he opposed controls but that
procrastination in renewing the tax surcharge
would bring on these regulations.
Secretary of Commerce Maurice Stans concluded
from letters and conversations that a growing
minority of businessmen are so concerned about
the pace of inflation that they would favor
My contacts with businessmen in recent
months, much to my surprise, confirm the Commerce
Secretary's observation that many are talking
favorably of wage and price controls as a solution
to the problems of inflation.

This line of thinking

is direct and avoids theoretical complications. It
assumes that, since inflation is a rise in the
general price level, direct controls over wages
and prices can stabilize prices, and thereby
prevent the evils of inflation.


Week, July 12, 1969, p. 102.
Business Week, June 7, 1969, p. 49.


The advocates of bureaucratic control of
prices assume that such controls are workable
alternatives to less expansive monetary policies
as a means of halting inflation.

These assumptions

are subject to the same type of scrutiny used by
Professor Yale Br^perfof the University of Chicago


in an article entitled "The Untruth of the Obvious".

the widely assumed "obviousness"

of the workability of direct controls, I contend


under ideal conditions, direct control of

wages, prices

and creditareexpensive to administer

and extremely difficult to enforce,

impair the efficiency of the price system

as an allocator of resources and fail to provide an
adequate substitute,

The arbitrary rationing involved in direct

controls is a major infringement on individual
liberty and is extremely subject to bureaucratic



controls are not a solution to inflation

but only a partial postponement of price increases in
the face of excessive demand.
Some of you will require only a reminder of
the problems of administering the Office of Price
Administration (OPA) during World War II. During the

3/ Published in, The Freeman, June 1968.


- 3 -

all-out war effort much more.favorable conditions
existed, for the implementation of direct controls.
In the face of the common enemy virtually all
citizens were united and willing to make sacrifices
for the successful conclusion of the war.

In this

emotionally charged atmosphere, broad industry
agreements and press releases were sufficient in
early 1942 to limit price increases.
By late 1942 specific price schedules
were necessary.

At this time Price Emergency

Regulation No. 2 noted that rents were climbing
fast and rent controls were put into effect.—
Price Emergency Regulation No. 3 of October 1942
noted that, despite the regulations', wages and,
farm prices had moved up, forcing continuous
amendments and additions to the regulations.
In June 1943, after a hectic 16 months
of operating under intense pressure, the OPA was

The authority for setting prices was

passed from the Washington office to the field

Numerous advisory committees were

appointed, and ration books were issued.
By late 1943 complaints of a black market
Cselling above OPA price limits) and a shortage of
enforcement investigators were noted.

The substitu-

tion of low-quality goods in the higher quality
47 U.S., Office of Price Administration, Renewal of
the Price Control Act, Congress, House Banking and
Currency Committee, Apr, 12, 19-44,


- 4 -

price schedules was also apparent.


to producers became an increasing part of the
price control program in the late war years as
set prices were insufficient to provide the
necessary incentive for production.


subsidized included coal, lead, copper, tin,
petroleum, coffee, and farm products.
The number of workers required to
operate and enforce this program was staggering.
By 1944, 325,000 price control volunteers, in
addition to 65,000 paid employees, were being

This was a period when the country

was faced with a labor shortage, and most of
these people could have worked at productive
jobs, thereby adding to total output. In
addition to the number of employees required
directly by OPA, the program was a burden to
all business establishments.

For example, the

banking system was handling 5 billion ration
coupons per month in 1944.
By 1946 people were no longer willing
to make wartime sacrifices and much of the wartime
price control machinery that limited incomes was

Breaking the law became extremely pro-

Little respect was shown for a law

which banned economic transactions that were
permitted and morally acceptable in pre-war years.
Similar to conditions during the prohibition era, the
number of law-breakers outnumbered the enforcers.


_ 5 Both for those who had blind faith in the
law and for the profit maximizers the choice of action
was easy.

For many other Americans, the choice of

whether or not to live within the law was difficult.
Few, however, became disturbed when two or more people
got together and made a mutually satisfactory deal.
Most individuals and businesses participated
to various degrees in law breaking, including black
marketing, gray markets, tie-in-sales, kickbacks,
upgrading, etc. For example, those who needed a
freezer of beef often went directly to a farmer
friend and made the purchase at an agreed price.
The packing house and retailer, where OPA prices
were enforced, were by-passed.

Store shelves were

often empty and our efficient channels of processing tended to collapse. Nevertheless, those who
had good contacts with producers managed to satisfy
most of their demands but at a higher cost through
this inefficient means of production and marketing.
One OPA official reported that while traveling
through Texas he stopped out in a rural area
where a farmer was slaughtering a steer for illegal

The official asked the farmer if he didn't

know that the practice was illegal. The farmer
replied, "I reckon we ain't heard about that law
out here". Finally, in 1946, after a year of
post-war domestic crises which included numerous


- 6 -

strikes, food shortages, and a high rate of inflation,
most of the provisions for direct controls were ended.
Rent controls were the last to go, with
some lingering on into the 1950's

Owners found it

unprofitable to keep rei
Reep rental property in good condition. By the time rent controls were finally removed.
• By the t
most rental property had already become dilapidated.
Those World War II rental apartments which continued
into the 1950's under controls now comprise our
central city slums.
As an alternative to arbitrary government
control, the price system can be looked upon as an
automatic and impersonal control mechanism.


allocates resources to various types of production
according to demand for individual products, and
output is determined according to consumers' willingness to pay for goods and services. Income is
allocated to individuals and firms according to
their contribution to total output.

These alloca-

tions are made without personal prejudice and with
neutrality with respect to political, religious,
or social affiliation.

In other words, they are

made in a highly objective and democratic manner.
I do not contend that the price system
is perfect in all respects.

In the existing market,

some business and labor groups can exercise greater
power than others. This and other flaws, however,
are relatively minor compared to problems created


- 7 ~

by direct controls. For example, under direct
controls, rationing is generally
order to allocate a minimum of scarce items,and
almost all items are scarce under price controls.
Allocations of labor and other resources among
industries and firms are determined
by arbitrary government rules rather than through
freedom of choice of the individual. Controls
w h i c h m a i n t a i n prices and wages b e l o w market
levels i n a n y industry offer n o inducement for
the increase i n production necessary to alleviate

Arbitrary w a g e setting is n o t likely

to provide f o r payments according to individual
productivity; consequently, there is little or
no inducement to improve one's s k i l l .


government c o n t r o l s , therefore, offer little
inducement f o r the efficient development and u s e
of resources, and contain n o automatic mechanism
for resource adjustments and the alleviation of
shortages or excesses i n production.

Rather than

being a n aid to growth and v i t a l i t y , they lead to
economic retardation and reduced w e l f a r e .
Equally as important as the economic
shortcoming o f direct controls is
infringement o n freedom.
easily to mankind.

their useless

Freedom did n o t come

W e tend to take freedom f o r

granted,but in m o s t of the periods since man's


- 8 -

early history he has been forced to bow in both
thought and action

to harsh taskmasters.


often than n o t , his social position, his income,
his occupation, and his religion were forced upon

Some rays of freedom began to be noticed

in much of Western Europe about the time that
America w a s discovered.

In the late 1600's freedom

of thought and action in the Netherlands was well
ahead of that in other European countries.


economic progress was most noteworthy there. During
this period streams of Western Europe's


migrated to t
the American colonies.

definite ideas about

They came from areas where the state controlled their
economic life and the church controlled their thoughts.
Roger Williams led the way toward freedom in the
American colonies with a constitution in Rhode Island
that provided for relatively little governmental
interference with the daily lives of the citizens.
Jefferson incorporated much of the 18th Century
thinking relative to freedom into the United States
John Locke, about 300 years ago, postulated
a state in which m e n were free and equal before the
law and before each other.

His ideal government was

one which represented majority rule rather than an
exclusive structure for a king or dictator at the top.



- 9 ~

He recognized that most economic problems were selfadjusting.

In the economic area., however, we must

come forward to Adam Smith's day,about 200 years ago,
before a harmonious theory was developed showing how
an economy works most efficiently under relatively
free conditions.

In fact, to the confusion of most

people in his day and of our time, Smith showed that
most government efforts designed to improve economic
activity and welfare actually retard growth. He,
along with other great philosophers in later years,
pointed to a free and efficient enterprise economy.
Added to the freedom to select government officials,
this provides by far the greatest freedom from
coercion and from want of any system that has so far
been devised. Most of these ideas were incorporated
into the United States Constitution.
Direct wage and price controls are not
compatible with freedom.

Instead of workers moving

voluntarily from job to job for higher pay, under a
direct controls system they must be moved by arbitrary
action of government.

Under direct controls personal

income, living costs, and the very necessities of life
are determined arbitrarily by government with an army
of enforcers.

Such a system contains the ingredients

for complete dictatorship at the top and complete
subservience at the bottom.

It is certainly not

compatible with freedom as experienced in America
during most of our years since Independence.



In addition to the facts that direct
wage and price controls are almost impossible to
administer, impair important functions of the
price system, and are contrary to our ideals of
freedom,they do not provide a solution to inflation. During the period from March 1942 to
October 1946, in which direct controls were used, the
consumer price index rose 6.6 per cent per year
and there is fairly general agreement that the
index understates the actual rate of inflation
because of declining quality of products and
black market operations. Wages rose at a
slightly faster rate than consumer prices during
this period.

How much prices and wages would

have' increased without controls is questionable.
From October 1946, just prior to the removal
of controls, until May 1950, prior to the Korean I
War, prices rose at the rate of 4.0 per cent, or


slightly less than during the controlled period,
and wages continued up at about the same rate


they did under controls.
Even if controls hold back price and wage
increases, they do not solve

the problem of inflation. If

excess demand for goods and services has been created, it continues to exist. Direct controls, like a new paint job
over a termite infested house, hide the evidence
but do nothing to eliminate the cause of the

Unless the basic causes of inflation


- 11 -

are eliminated, direct controls can only
postpone the inevitable price increases until some
future date.
As suggested in the above discussion of
direct controls, the best solution to the problem
of inflation is to eliminate the cause.


occur because the stock of money (demand deposits
plus coin and currency in circulation) increases
relative to the amount of money that people want
to hold, given their level of wealth and income.
Starting from a position of stable prices,if

4gkJvAjhi ld&h1*#** ^ 4 ^ * ^
additional money is created people will prefer
to spend more,thereby reducing the. proportion of
their wealth held in the form of money.

If the

rate of spending rises faster than production of
goods and services, prices will rise. Prices will
continue up until money incomes and wealth are
pushed up to the point at which the public will
want to hold the increased stock of money. Money
is thus the key to the cause of inflation and
appropriate monetary control is the solution to
the problem.
The current inflation can be traced to
the course of the stock of money. Money grew at
an annual rate of 3.0 per cent from 1961 to early

This rate of growth in the stock of money was

accompanied by generally stable prices, moderate economic
expanison, and a decline in the rate of unemployment.


- 12 -

From the spring of 1965 to the spring of 1966, the
stock of money rose

cent and both spending

and inflation accelerated.

From the spring of 1966

to the close of the year, the stock of money remained
stable and the rate of inflation declined.


monetary expansion was resumed in early 1967 and was
soon followed by an acceleration of spending and

From January 1967

the stock of money expanded at

to December 1968,




cent and since the second quarter of 1967,
the general price index has risen attherateof
4.3 per cent. Since last December the stock of
money has risen at a more moderate rate and I
look forward to a reduction in the rate of inflation
during the months ahead.
Throughout most of man's economic history,
inordinate inflations have been limited because the
stock of money was tied to a relatively stable quantity
of precious metals.

That period in history has largely

passed, as precious metals are no longer a restraining
influence on money creation.

Today, the prevention

of inordinate inflations depends upon central banks and
treasuries rigidly limiting the stock of money.
In the United States the Federal Reserve System
has the responsibility of formulating monetary policy.
It is conceded by most monetary analysts that the

System can control the stock of money through its power


- 13 -

to create and destroy bank reserves and the monetary

base (bank reserves plus coin and currency in circulation.
When t h e F e d e r a l Reserve System buys government s e c u r i t i e s ,bank r e s e r v e s a r e c r e a t e dandthe




With a l a r g e r volume of

bank f t e n e r h e s , a bank byFederalReservepurchasese d .
i s o r e s t v c s e , expansion can p r o c e of

As new

l o a securities, n v is t round about way of creating volume
government n s and ithis e sa m e n t s a r e made, t h enew money. of demand

d e p o s i t s , t h e major component of our s t o c k of money,
r s e deficit a e s of without the e c u r i t i e by t h e Fed
Ifithe s . S isl financedgovernment screations of new money,
reverses the process, reducing the stock of money.
it will probably have little
impact on F i s c a l d e Proceedsr e o f t ethea s s o c i a t e d w i t h
prices. f i c i t s a from n sale of
i n f l a t i o n s securities will be removed from the to
government p r i m a r i l y because of t h e method used private
f i n a n c e them. I f d e thei trise in government outlays will
spending stream and f i c sarefinancedinpart,as
be offset by reduced spending in the private sector.
In nearly every country experiencing a major inflation
the cause is the creation of new money to finance
government activities. We have no evidence, however,
that government deficits which are not monetized
will lead to inflations.


- 14 -

It is contended by some that inflations are
caused by "wage push" or "administered price actions".
The argument is based on the belief that some wages
and prices can be arbitrarily increased because of
excessive market power.

"Wage push" adherents point

out that new wage contracts in the steel industry are
followed by steel price increases which are in turn
followed by automobile price, increases. This series
of events, however, does not lead to inflation unless
excess demand has been created through monetary

If through excessive bargaining power

wages are pushed too high in these industries, output
will decline in the absence of monetary expansion.
Resources will then be released to other industries
where prices will fall.

Average prices for all goods

and services will remain about unchanged once resources
are again fully employed. Monetary expansion must
accompany "wage push" tactions for inflation to occur.




our experience during

World War II with direct controls on wages and
prices was a futile exercise in the economics
of admonition and legal restraint.

Both moral

and the law were used in attempts to

old propensity to maximize.

through prices.

Despite the exhortations and legislation, human nature .
didnotchange.Mostpricerigidities set up by the OPA
eithercausedabreakdown in our efficient production and marketing channels or in quality standards. Producers
who had products which were in great: demand and
purchasers who were not satisfied with the rationing process generally found a way to bypass OPA

Disrespect for the law became the

normal pattern of life rather than an\ aberration.
Despite the legal and moral restraints and an army
of controllers, prices and wages continued to rise
at a high rate throughout the war and early postwar
If governments were sufficiently strong
to set rigid controls on wages and prices, man's
freedom would be greatly reduced. Labor and other
resources would be moved from job to job arbitrarily
bythe government rather than through wage incentives.
Much of the managerial function



shift from the individual to the government and the


- 16

need for higher priced managerial talent in the
private sector would probably disappear.


controls impair the functions of the market system.
They provide no incentive for output increases in
areas of rising consumer demand.

They are thus

to economic retardation rather than

Inflations cannot be controlled through
direct controls on wages and prices. Like an
anesthetic given in the absence of medication or
other treatment, direct controls at the most


put the patient to sleep. His malady remains
unabated when he is awakened.
Appropriate monetary policies are the
only means that have proved workable throughout
history in controlling inflations. When kings and
emperors debased their nation's currencies by
reducing the precious metal content of money,
inflations ensued.

Today we debase our currency

by excessive paper money creation.

Our means of

currency debasement is more sophisticated and less
direct than in medieval and ancient ages. Yet,
the result is the same - excessive money created
relative to production of goods and services lowers
its value.

The solution requires a rigid limita-

tion on the stock of money.
Control over the stock of money in the
United States lies with the Federal Reserve System.


- 17 -

Control can be exercised with greater ease when the
Federal Budget is in balance or surplus since the
government will not be forced to borrow additional
funds in a financial market where credit is restricted
by tight monetary policies. Even with irresponsible
System can maintain a moderate rate of growth in the
stock of money and control over total demand for goods
and services through an appropriate rate of money