From time immemorial, governments have tried to set minimum or maximum prices on goods. Recent history indicates that governments have fixed the price of gasoline, rent, and the minimum wage, to name a few, with war usually the reason for general price controls.
A price ceiling will prevent prices from exceeding a certain maximum and will cause shortages. Price floors, on the other hand, will prohibit prices falling below a minimum, thus creating surpluses.
Controls hold out the promise of protecting groups of consumers, especially those having difficulty adjusting to price changes. While controls on prices normally distort allocation of resources, economists usually know how to produce a surplus or a shortage in order to fight inflation and eventually establish a stable economy.
Following the bombing of Pearl Harbor in 1941 and with the onset of World War II, the federal government set out to impose new or expanded controls over the country`s economy. On January 6, 1942, President Franklin D. Roosevelt announced some ambitious production goals to support the war. As a result, all of the country’s economic sectors were then under increased government control. While economists usually oppose price controls, it was a state of emergency.
The government then sought the cooperation of those who controlled the resources needed to conduct the war successfully. It took many agencies to resolve disputes between workers and management, set price controls, and impose rationing on scarce commodities as part of the war effort. Such agencies as the War Production Board (WPB) and the Office of Price Administration (OPA) were created in 1942 to increase total production and to control wages and prices.
Wage and price control measures, as well as regulating the hiring and firing of workers, was also initiated by the government. The National War Labor Board was established by an executive order of President Roosevelt on January 12, 1942. The board was responsible for determining the correct procedures for settling disputes that could possibly affect any war production. It was also authorized to approve wage increases and quickly adopted the Little Steel formula for wartime changes based on the rising cost of living.
The Emergency Stabilization Act was passed in October 1942, which placed wages and agricultural prices under control. There were immediate wage restrictions, and in order to attract labor, the employers offered a range of such fringe benefits as pensions, medical insurance, paid holidays, and vacations. Because the foregoing were not paid out in cash, they did not violate the wage ceiling. Controlling output proved easier than controlling wages.
The Office of War Mobilization then emerged in 1943 to reallocate the production of military matériel. In order to convert to military production, resources for the production of consumer goods had to be diverted. The great surge in munitions production reached its peak in 1943, after such motives as patriotism and financial incentives drew the necessary resources to war production centers.
In June 1943, the OPA established more than 200 Industry Advisory Committees whose sole purpose was to aid the price control effort. The manufacture of such consumer items as refrigerators, automobiles and even housing materials was forbidden at that time. During World War II, many inflationary pressures were created by shortages of both goods and labor. The Consumer Price Index (CPI) increased by more than 35 percent. Strict limits were set on the manufacture of numerous consumer goods.
The public supported price controls, and businesses supported them even before they were implemented. Most labor leaders cooperated with President Roosevelt by pledging not to strike. With their cooperation came an increase in union membership, which resulted in a general decrease in labor militancy.
Despite the efforts of the National War Labor Board, the shortage of labor during World War II precipitated a sharp increase in wages. Congress passed the War Labor Disputes (Smith-Connally) Act on June 25, 1943, which authorized the president to take over plants needed for the war effort, thereby preventing further war production disruption because of labor disputes. Although strikes were prohibited, they still occurred.
Social Security also was affected by the price controls. During the wartime crisis, Congress refused to raise the benefit levels (with the exception of veterans); however, it did increase the number of beneficiaries and contributors (taxpayers). With the war there was a revolution within government finances: Revenue demands led directly to a large increase in income tax rates and withholding on individuals.
During the war, a positive measure began for some when the federal government stimulated and controlled the course of private industry by offering low-interest loans, generous tax credits and guaranteed purchase contracts for business ventures. In some cases the government went to great lengths to construct factories, then hand them over to private interests to operate.
Rent control was another factor. In order to have an effect, the rent level must be below that which would otherwise prevail, because controls prevent rents that attain market clearing levels and shortages result. Many economists agree that rent controls are destructive.
With war came the rationing of food and more price controls. For example, in 1945 the food situation had improved slightly and the statutory price of rice was reduced. In 1946, however, harvest difficulties and inflationary conditions created a widespread demand for an increase in prices. When there was no longer a shortage of food grains, there was no further need for price controls. Unfortunately in some cases, that created artificial scarcity and people under the system suffered substantially.
With the adoption of the Employment Act of 1946, the federal government for the first time acknowledged an ongoing responsibility for formulating budgets that would help maintain high levels of employment. Fringe benefits became more common during the late 1940s as part of the settlements reached in collective bargaining.
By the fall of 1946, most federal price controls had been lifted. Price and production controls may have accomplished many things toward the end of the war, but they did not account for the speed and magnitude of their initial impact. With the onset of war, the American people made various adjustments to price controls that may still indirectly affect people today.
On August 15, 1971, President Richard M. Nixon announced that the United States was abandoning the gold standard and imposed a 90-day freeze on prices and wages.