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An Address before the
Working Seminar
Alabama Bankers Association
August 21, 1970
Monroe Kimbrel, President
Federal Reserve Bank of Atlanta

Does Anyone Really Want Controls?

Each time our economy is faced with an extended period of infla­
tion, calls are heard for direct controls on wages, on prices, and on

Those voices are calling now.

"Let no one raise wages, or raise

prices, or borrow money," say the voices, "unless such actions fit into an
overall scheme of controls administered by the government."

Controls have

become a political issue in an election year, but the debate is prompted
by more than just a scramble for election.

Controls are an issue in which

there is room for debate among honest men, all of whom have the interest
of the nation in mind.
For my part, I am against direct controls over wages and prices.
I am against direct controls because they would be unnecessary.
against direct controls because they would be ineffective.

I am

I am against

direct controls because they would be costly— costly in terms of ineffi­
ciency as well as dollars and cents.
Are direct controls now necessary, as those calling for them would
have us think?

The advocates paint a gloomy picture, arguing that the

results to be expected from monetary and fiscal policies present an unsatis­
factory choice.

If policies are restrictive enough to curtail inflation,

they say, then those same policies will cripple employment and business

But if the policies are not so strong as to cripple employment

and business activity, then there will not be enough restriction to cure the
nation’s inflationary ills.

Thus we need additional measures, say the


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advocates— additional measures like direct controls over wages and prices,
and perhaps on the issuance of credit.
I don't agree with their dilemma.

Our recent monetary and fiscal

policies are indeed working— working on schedule, working to avoid the twin
pitfalls of "too much" and "not enough."

When monetary and fiscal policies

are doing the job, as I think they are, then controls are unnecessary.
Let's look at the facts and the prospects.
the wholesale price index has decelerated.
apparently turned around.

On the inflation front,

The consumer price index has

We see more and more price cutting of the kind

that is not reflected in the official indices, like the car dealer who is
discounting below the sticker price, adding extras, and giving higher tradeins.

I'm especially curious to know whether you see the same things happen­

ing in your areas.
Wage increases are continuing, and probably will continue, through
the end of this year.

But the labor market is not nearly as tight as it was

a year or two ago, and this fact is already exerting its influence on wage
ing again.

Moreover, I am encouraged to see that productivity is increas­

Increased productivity will enable producers to absorb wage in­

creases without raising the prices of their own products.

So the inflation

situation is encouraging and is likely to become even more encouraging in
coming months.
What about the other part of the dilemma mentioned by the advocates
of direct controls?
has slowed down:

Has the economy been crippled?

It has not.

The economy

Real production failed to increase in the last quarter of


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1969 and the first quarter of 1970; unemployment has risen to 5 percent.
There seems little prospect, however, for a cumulative recession.


slowdown we have experienced is the price we pay for eliminating wageprice inflation.

This price, although unpleasant, has not been disastrous.

So it seems to me that our general monetary and fiscal remedies are work­
ing on schedule, and therefore that controls would be unnecessary.
Controls would be more than unnecessary, however.
quite costly.

They would be

I fail to sympathize with the argument of "Why not try con­

trols; they won’t cost us anything?"

In fact, controls, if they were to

be at all effective, would cost us quite a lot.
First would come the administrative cost of setting up and adminis­
tering a wage-price control program.

During World War II, 64,000 persons

worked to administer the controls, and they were supplemented by more than
100,000 part-time volunteers.

Many firms devoted 10 percent of management's

time to compliance with control procedures.
One reason for this, now as much as then, is that controls by them­
selves are not enough to assure the orderly functioning of our markets.
Artificially low prices encourage consumers to buy more goods, but the low
prices do nothing to encourage production of those goods.

Shortages inevi­

tably develop, bringing with them black markets, rationing, and similar

Do you remember the rationing books of World War II?


you recall the gasoline stamps, the gasoline boards, the pleas to drive

Those were not "the good old days," as far as I'm concerned, and

I'm not anxious to repeat them by imposing wage-price controls once again.

- 4 -

Another cost of direct controls is their inequity.

The businessman

or workingman who has not been greedy, who has resisted the temptation to
take inflationary gains, would find his position frozen relative to those
who have not behaved so responsibly.

If the President were to freeze wages

and prices at their late-May levels (as he now has the authority to do),
then those who had raised their wages and prices before that time would find
their actions ratified, in a sense.

Those who had behaved more responsibly

might wonder why they had.
For these reasons, it seems to me that the imposition of wage-price
controls would be not only unnecessary to achieve our economic objectives,
but also costly in terms of distorting the allocation of product in our
I also have a strong feeling that direct controls would be ineffec­

Controls were successfully imposed during World War II, when they

were clearly necessary to the all-out war effort.
prices did not stop rising:

Even then, however,

The consumer price index rose at a 6-percent

annual rate in the face of price controls, and the rate of wage increase was
even more rapid.
to win the War.

This is what happened when the whole nation was geared up
The question in my mind is whether the American public would

now accept the kind of bureaucratic paraphernalia it did then.


would appear, I think, when people found that controls applied to them as
well as to others.

If the businessman believes that controls would hold

his costs down but allow him to raise the prices he charges, I think he
would be in for a surprise.

If the workingman thinks controls would apply


to his grocery store but not to his paycheck, he might be surprised too.
By their nature, price and wage controls would spread through the entire
fabric of our economy.
Suppose that we agreed in principle to control prices and wages only
in the strongly unionized or highly organized production sectors of the

This is what many advocates of controls suggest.

me which industries are in these sectors?

Can anyone tell

Even if he could, controls would

not reach two sectors of the economy which have recently generated the
largest price and wage increases:

One is the private service sector—

barber shops and the like— and the other is the government sector.


we look at the components of the consumer price index to see what kinds of
products have shown the most rapid price increases over the last year, we
find that few of the inflation leaders are the kind of market products that
most people think of controlling with price controls.

The "inflation alert"

report recently compiled by the Council of Economic Advisers bears this
point out.

So it seems to me that direct controls on wages and prices

would not only be unnecessary, and would not only be costly, but would also
prove ineffective as a barrier to inflation.
Let me now turn specifically to the question of selective credit
controls, a question of considerable interest to us in the Federal Reserve

We already have a few selective controls that are used routinely,

like margin requirements on security transactions.

You know about the

ceilings we impose on the interest rates you can pay your depositors.
broader controls over the allocation of credit were imposed during the



Korean War, when their use presumably allowed credit to flow into areas of
the economy which were considered to have a higher priority in the war

Were we to impose consumer controls now, as we have the legal

authority to do, the difficulty would be the same one that was faced then
and never really solved:

How do you tell a good loan from a bad loan; how

do you tell a loan that ought to be made from a loan that ought not to be
The experience of other nations with selective credit controls
reinforces the results of our own experiments.

A number of European coun­

tries tried credit controls after World War II, only to abandon them in
favor of greater reliance on general monetary and fiscal policies by the
early 1950’s.

A number of developing nations have also tried credit con­

trols to promote the development of particular economic sectors.
latter policies are really policies of stimulation.

But these

Our problem is fighting

All of these arguments against controls are convincing to me.

But I

have not mentioned the argument that is most convincing, namely that controls
severely limit the individual freedom of choice so basic to the strength of
our economy.

This curtailment of freedom is by itself an argument that con­

trols should only be imposed as a last resort, when there is no other way

We are not in that situation, and I do not think we will be.
I do not for one minute believe that even the most elaborate, the

most expensive, and the most efficient system of price and wage and credit
controls could work for long.

The black markets, the profiteers, the


shortages would all reappear.

Controls are not needed; controls would not

work if we had them; and controls would impose a considerable cost of ineffi­
ciency on our economy.
So for my part, I am against controls.