Price Controls, Black Markets, And Skimpflation: The WWII Battle Against Inflation
Price Controls, Black Markets, And Skimpflation: The WWII Battle Against Inflation
With inflation surging right now, U.S. leaders are naturally thinking about how to fight it. In modern times, that responsibility has mostly fallen to the Federal Reserve. The Fed can (and likely will) raise interest rates to cool down the economy, which should — theoretically — lower demand for goods and services and reduce upward pressure on prices. This will also likely bring pain to many Americans as the economy is forced to slow down.
Back during World War II, the United States took a radically different approach to fighting inflation. And the mess that ensued might explain why the Biden Administration, and most other policymakers, are reluctant to try it out again. Planet Money just released a great episode that delves into this history with some different details (and cool archival sounds!), and you should check it out.
The threat of inflation loomed even larger during WWII than it does today. As America became an "arsenal of democracy," we spent massively on machines and supplies for war. The federal deficit skyrocketed, from about 3 percent of GDP in 1939 to almost 27 percent of GDP in 1943 — which is far and away the worst the deficit has ever been. Meanwhile, factories, workers, and materials were all repurposed for the war. Millions of productive workers left the labor force to enlist in the armed services.
This combination of factors — lots of deficit spending boosting demand in the economy, and war measures reducing the capacity of the economy to supply and satisfy that demand — was a recipe for runaway inflation. President Franklin Roosevelt and his administration knew this. They had seen rampant inflation during and after World War I: prices rose more than 80 percent between the war years of 1917 and 1920. The administration wanted to prevent that from happening again. So they embarked on a monumental effort to cool inflation by freezing prices with price controls.
The policy effectively neutralized one of the central functions of the free market, which is the allocation of scarce resources. In a free market, if there's not enough of something, the market responds by raising prices. This reduces demand for that product. It also sends a signal to businesses to produce and supply more of that product. Without this price mechanism, most economists believe, the market struggles to remedy shortages and society scrambles to figure out who gets what.
During the early 1940s, when the federal government began eliminating free-market pricing on goods in short supply, it had to begin allocating these scarce resources in a different way. It created a rationing system where the government assigned ration stamps to citizens.
To buy products in short supply — like coffee, canned foods, dairy, meat, bicycles, cars, tires, gasoline, clothes, and sugar — American consumers not only had to pay money, they also had to use government-issued ration stamps. The aim was to limit the amount of a particular good or goods that any one person or household could purchase, and ensure more equitable distribution during wartime. The government sent each American household ration books containing removable stamps with ration points. And it created a complicated and ever-changing system of assigning ration points to specific products.
To achieve all this, the federal government erected a sprawling and intrusive bureaucratic apparatus under the Office of Price Administration (OPA). During the war, the OPA and related agencies employed hundreds of thousands of federal employees and community volunteers, including twice the number of economists as the U.S. Department of Treasury. It's a lot of work to centrally plan an economy.
But despite the tireless efforts of the government, the system was plagued by all sorts of problems. Nowhere was this more apparent than with meat.
The Beef With Price Controls
On March 29, 1943, the federal government added meat (and cheese) to its system of price controls. This policy may have helped ensure a steady supply of meat for American soldiers, and it may have kept prices in check, but by multiple historical accounts, meat price controls and rationing proved to be one of the most unpopular areas of government intrusion during and after the war.
The meat industry, like other industries that faced price controls, hated the OPA system. And without the ability to legally raise prices, businesses resorted to other tactics to maximize their profits. One is a phenomenon we've dubbed "Skimpflation" at Planet Money. That's when instead of simply raising prices, companies skimp on the goods and services they provide, degrading the quality of the stuff they sell. This seems to be happening now, especially in the service sector, which is struggling to recruit and retain workers. Instead of paying workers enough to attract and retain them, some businesses are skimping on customer service. It's a form of stealth inflation.
During World War II, many businesses couldn't legally raise prices, and skimpflation seems to have been one way they tried to maintain profitability. For example, meatpackers began filling sausages and hot dogs with "soybeans, potatoes, or cracker meal," according to a vivid book by historian Richard R. Lingeman. Meatpackers and butchers added more fat to hamburgers. They sold steaks with extra bone. They began selling horse meat, muskrat meat, and other alternative meats.
"Another practice — dubbed the red market — was upgrading or selling a low grade of meat at the ceiling and point price of a top-grade cut," Lingeman writes.
Other meat sellers simply ignored price controls and sold their meat on the black market. The very term "black market" was still new back then — and it "exploded in popularity with the coming of World War II rationing," according to the Online Etymology Dictionary. By all historical accounts, the black market for price-controlled products flourished during the war. The black market for meat became so lucrative that cattle rustling — or cattle stealing — saw a revival. "Sometimes ranchers caught the rustlers in the act, and gun battles ensued in the tradition of the wild West," Lingeman writes.
Meanwhile, many Americans — who ate a lot of meat back then — were pissed. In 1943, lumberjacks in Washington state and miners in Pennsylvania went on strike, largely over a shortage of meat. The government ended up doubling the meat ration for miners (it's unclear if lumberjacks also got an increased ration).
Of course, not everyone was equally affected by meat shortages and rationing. "One group of Americans weather all meat shortages very nicely," Lingeman writes, "the nation's 2,800,000 vegetarians. In war, there is always someone who profits."
However, it wasn't just vegetarians who seemed to do just fine during the OPA system. Some historical accounts actually find that average meat consumption went up during the war. One reason is that many low-income Americans could barely afford meat during the Great Depression, and massive government spending helped stimulate the economy back into action. With plentiful jobs during the war years and a system of equal rationing and price controls, the bottom third of American earners actually increased their meat consumption by around 17 percent, by one calculation. The top two-thirds, however, saw their meat consumption decline by around 4 percent.
As the war came to an end, government officials struggled to turn off the system. In the summer of 1946, congressional legislation that authorized price controls lapsed, and food prices shot up. The cost of meat doubled. Cowering in the face of a public backlash, President Truman and a Democratic Congress reinstituted price controls on meat. This infuriated the meat industry. Once again unable to raise prices, many meat producers and sellers were reluctant to ramp up production, and many actively resisted doing so. Meat sellers, led by livestock ranchers, withheld meat from the market. One reason was anticipation that price controls would soon expire and they could make more money selling meat if they waited. Another was an effort to punish the Democrats before the 1946 midterm elections and deliver a deathblow to the system of price controls. By September of 1946, meat production had fallen drastically, plummeting over 80 percent from the previous year.
The tactic proved highly successful. American voters grew angry with the government. Historian Meg Jacobs (who we spoke to in our recent Planet Money episode) writes that 1946 came to be known as the "beefsteak elections." The Democratic Party was slaughtered (sorry) at the polls. "Voters blamed ineffectual government price controls for their meatless dinner plates," Jacobs writes. "For the first time since 1930, the electorate returned control of Congress to the Republicans. More than that, they rejected the notion that the state ought to play a direct role in overseeing the wage, price, and production policies of private enterprise."
With its byzantine system of price controls, the federal government was able to keep inflation in check during the war. As the sunset of these controls approached, however, a group of 54 respected economists published an open letter in the New York Times warning that — without maintaining price controls — pent-up postwar demand and inadequate supply would unleash a dramatic surge in inflation. They advised Washington to remove the controls slowly and strategically. Policymakers didn't listen. When the government ended up lifting price controls in 1946, it was like it violently awoke inflation from its slumber. In 1947, the annual inflation rate jumped to more than 20 percent. That is far and away the highest annual rate of inflation the US has seen in the last 80 years.
For the most part, most mainstream economists these days are dead set against reinstating a sprawling system of price controls and rationing. They argue it would result in a lot of costly bureaucracy. It would destroy market incentives that boost production of goods and services and could lead to shortages. It would lead to black markets and skimpflation and other forms of hidden inflation.
That said, there are some progressive economists now arguing that some strategic price controls might make sense. Isabella Weber, an economist at the University of Massachusetts Amherst, contends that price controls could help prevent corporations from profiteering from supply chain bottlenecks during the pandemic, and help lower prices for consumers. But even these economists aren't suggesting that we resurrect something as beefed up as World War II price controls.