Much is being made of the fact that prominent economists, following World War II, urged the continuation of wartime price controls in the U.S. to combat inflation. While President Harry Truman rejected this advice, abolishing such regulations in June 1946, some pundits now lament his decision. A recent essay in the Guardian, for example, argues that controls—once endorsed by such leading economic experts as Paul Samuelson and John Kenneth Galbraith—would have contained costs for consumers, as they did during wartime. This conjecture is then advanced to support the imposition of wage and price controls today.
That factual case involves a sleight of hand. Nominal price increases were limited in the U.S. during the Second World War, but widespread shortages and inefficiencies imposed large real costs on consumers and business omitted in the statistics. While the U.S. Office of Price Administration ostensibly limited charges to March 1942 levels, writes historian Meg Jacobs, “it was not uncommon for local stores to charge exorbitant under-the-counter prices, to sell shoddy merchandise at regular prices, or simply close down and reopen with new higher prices.” Evasion was not difficult: “candy makers reduced the weight of each bar.” Black markets flourished, while legitimate retailers adopted “tie-ins,” selling a desired product only with the additional purchase of something unwanted.
Oddly, today’s recommendation for World War II–style wage and price controls ignores the most serious test. That occurred in postwar Europe, where West Germany’s devastated economy—having lost two-thirds of industrial production and 20 percent of its housing units—was subject to strict price regulations by the U.S., U.K., and French occupation authorities.
Hunger and homelessness were everywhere; the average caloric intake in 1948 was just 1,300 per day. Allied experts sought to protect Germany from further catastrophe. Because shortages were endemic, city workers routinely spent weekends scouring the countryside, looking for bread and milk—an emergency “farm to table” movement. Letting prices go to market levels, it was thought, would worsen the crisis.
This led to one of the most remarkable experiments ever conducted in economic policy. An obscure academic, Ludwig Erhard, was appointed chief German administrator when his predecessor, mocking lifesaving U.S. food aid as “chicken feed,” was fired. Erhard, a liberal—obscure until then, having been canceled by the Nazis—looked to improve the flow of goods to market. Relaxing price controls would be the first step, he reasoned, yet the occupation government made such changes impossible. “All attempts at mending matters were frustrated,” he wrote, “not only by the prevailing conditions of devastation, exhaustion and disruption, but also by the supposed experts, in and outside Germany, clinging tenaciously to their reliance on controls. The people worked on doggedly, tormented by hunger and exasperated by zonal restrictions, corruption and the black market.”
One day in June 1948, Erhard quietly took the initiative: while he could not legally alter the rules, he issued a rule abolishing the entire price regime. The radical action was a shock and was greeted as insubordination. U.S. General Lucius Clay, commander of the Allied forces, summoned him: “Herr Erhard, my advisers tell me what you’ve done is a terrible mistake. What do you say to that?” Ludwig responded: “Herr General, pay no attention to them! My advisors tell me the same thing.” General Clay was won over.
“The historians of postwar Germany,” note Daniel Yergin and Joseph Stanislaw in their epic, The Commanding Heights (1998), would define the episode “as the ‘most fateful’ event” of Europe’s recovery and “the beginning of the economic miracle” in West Germany.
Combined with a currency reform instituted at virtually the same moment, the lifting of price controls did not harm the populace but instead unleashed hope. “The spirit of the country changed overnight,” wrote American economist Henry Wallich. French scholars Jacques Rueff and Andre Piettre described the result with awe:
Shops filled up with goods from one day to the next; the factories began to work. On the eve of currency reform the Germans were aimlessly wandering about their towns in search of a few additional items of food. A day later they thought of nothing but producing them. One day apathy was mirrored on their faces while on the next a whole nation looked hopefully into the future.
Real prices replaced “lying prices,” enabling social coordination. Suppliers and demanders soon reunited. Industrial output advanced 50 percent in one year. When Konrad Adenauer became chancellor in the newly democratic West German government in 1949, he retained Erhard as his minister for economics and the pro-market policies he had advanced. Europe—and the world—reaped the rewards.
Given this history, it is curious that the pro–price control consensus of postwar economic experts would be advanced again today. Ludwig Erhard risked his own reputation in testing their theory, but we don’t have to do the same. Thanks to the bountiful payoff from a German miracle, we can bet his position with house money.
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