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The Way to Fight Inflation Without Rising Interest Rates and a Recession

History shows that targeted price caps work when accompanied by a public campaign.

While price controls have a bad reputation politically and a record of mixed success, they worked in one of the most important cases in American history — World War II. And the differences between that case and later failures reveal how policymakers can wield this tool effectively.

As the world descended into global conflict, President Franklin D. Roosevelt made the case that the United States had to serve as “the arsenal of democracy.” To keep American factories operating at capacity, and American workers productive, the government needed to keep a lid on inflation. If the cost of living rose too high, it might trigger strikes that would cripple output.

Roosevelt’s administration responded by imposing price ceilings across-the-board, with particular attention focused on sectors that contributed most to inflation and were vital to the global crusade for freedom. For meat and fuel, for example, consumers received ration coupons that ensured a fair supply at controlled prices.

This special focus on the most critical sectors for the war effort was one of the four ingredients of Roosevelt’s successful use of price limitations.

To bolster this emergency price stabilization, the president also deployed his powerful oratory skills to offer a clear and present rationale for government price setting. As totalitarian tyrants terrorized the world, “General Max” — short for the general maximum regulation act that set price ceilings — linked this domestic economic campaign to the successful defense of democracy on the battlefield. Not everyone could fight enemies abroad, but all could contribute to stabilizing the economy at home — by ensuring compliance and participation in what Roosevelt called “equality of sacrifice.”

Additionally, government boards presented a clear way to determine what was “excessive.” Each company, shopkeeper, landlord or butcher was entitled to make a profit but not to profiteering. They had to “hold the line,” sticking to the same profit margins as before price controls went into effect and obeying ceiling prices on specific goods.

Finally, consumers, as much as the government, served as the shock troops of enforcement. It was up to each housewife not to pay more than ceiling prices, distributed on government-printed shopping lists, in at least 14 different languages. If they spotted a violation, they could report the profiteer to a local volunteer board and he would have to pay a fine.

The result was a total success. Price controls not only kept inflation down but the economy boomed, and those at the bottom benefited most, with the greatest income gains. By the end of the war, the lowest two-thirds of the population was eating more meat, not less, than they had before the conflict began.