Do price controls work to curb inflation? We look at WWII. : The Indicator from Planet Money Inflation reached a 40-year high today of 7%! There's been a storm of debate about an old anti-inflation policy: Price controls. So we dust off the history books and see what happened in World War II.

The beef over price controls

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And I'm Darian Woods. And this year, the world of economics and economists and the people who love them...

VANEK SMITH: People who love them, like us.

WOODS: It started off with a bang. There's been this heated controversy about price controls.

VANEK SMITH: Indeed. And it all kind of got going because of this piece in The Guardian newspaper, this newspaper out of the U.K., which said that we need to have a serious conversation about price controls.

WOODS: Price controls is like a red rag to a bull. The bull in this case is mainstream economists. And one particular economist, Paul Krugman, wrote on Twitter that this was a truly stupid idea.

VANEK SMITH: The man was not mincing words, you know (laughter).

WOODS: No, he was not.

VANEK SMITH: He just - like, give it to us straight, Paul. You know, economists, they are a cultured group. Paul apparently later deleted that tweet and apologized.

WOODS: That's true. And part of the reason why price controls is coming up right now is that prices are rising a lot. The CPI, the Consumer Price Index, came out today. The number is 7% up from last year. That is a 40-year high.

VANEK SMITH: Yes. Inflation - price controls are seen as a way to deal with inflation in an economy.

WOODS: Yeah. And given this whole debate about price controls and inflation, we just wanted to know, like, have we ever tried it out? And we learned that the U.S. has - in World War II. So how did that policy work?

VANEK SMITH: To tell the story, we're going to meet a bombastic bureaucrat, an army of secret shoppers, and we'll learn why the availability of meat is really, really important to politicians.


WOODS: Imagine Congress. It's May 1940.


FRANKLIN ROOSEVELT: These are ominous days.

WOODS: President Franklin Delano Roosevelt is giving a speech right after German forces had made a searing blitzkrieg attack on the Netherlands, Belgium and France. Now, at this stage, the U.S. wasn't part of the war, but it didn't like what Nazi Germany was doing. And it was supplying the allies with equipment to fight the war.

VANEK SMITH: And during the speech, President Roosevelt announces a goal.


ROOSEVELT: I should like to see this nation geared up to the ability to turn out at least 50,000 planes a year.


VANEK SMITH: Fifty thousand airplanes a year - this number was enormous. It almost seemed like shooting the moon. Like, it wasn't even an achievable goal. Nevertheless, the U.S. began retooling its manufacturing towards the war effort to try to reach this goal. President Roosevelt thinks back to World War I. And back then, price inflation had hit double digits.

WOODS: Double digits - so as part of his greater preparations, Roosevelt sets up a new government division that would later spin off into an agency called the Office of Price Administration. The Office of Price Administration is charged with keeping prices under control. And this division is headed by a man named Leon Henderson.


LEON HENDERSON: To control prices...

WOODS: He's an economist with a poetic touch.


HENDERSON: We intend to move in now on speculators, profiteers, sharpshooters and chiselers.

VANEK SMITH: Beware the chiselers.

WOODS: I would never be caught dead being a chiseler.

VANEK SMITH: So all these prices are rising and rising. First, it's paper. Then lumber price is shooting up. And Leon Henderson is using these pointed words, convening meetings with the heads of the paper and lumber industries, warning them, do not be sharpshooters or chiselers. And these conversations do seem to have had some success.

WOODS: But it's not enough. The U.S. is not formally fighting in the war, remember, and it's supplying the allied forces of ships and airplanes. And President Roosevelt is gearing up for a possible entry. A lot of American factories are retooling to make munitions, and there's a shortage of machine tools.

VANEK SMITH: So Leon Henderson issues his first formal price control in February of 1941 - a maximum price cap for second-hand tools.

WOODS: But enforcement of these maximum prices was weak. There was no real power to prosecute in court. Leon would have to just rely on his naming and shaming approach.

VANEK SMITH: And then...


UNIDENTIFIED REPORTER: Our great Pacific outpost in the Hawaiian Islands is ruthlessly bombed as Japan's...

VANEK SMITH: History intervened. The Japanese bombed Pearl Harbor, and President Roosevelt has a pretext to enter World War II. The material shortage gets even more serious. Prices spike, and the public joins Leon Henderson's cause. The National Opinion Research Center asked people if the government should regulate prices, and almost 90% of the people who respond say yes.

WOODS: Roosevelt signs the Emergency Price Control Act of 1942, and this gives the Office of Price Administration sweeping powers to enforce their price caps and also to administer rations. It hires thousands of people, including a young lawyer named Richard Nixon. You might know him.

VANEK SMITH: I feel like I've heard of him.

WOODS: His name will come up later in U.S. history. And at first, the Office of Price Administration is selective in constraining prices. But inflation is now at about 10%. It's a huge jump that hasn't been seen since World War I. So in 1943, President Roosevelt goes all in.


ROOSEVELT: We must fix ceilings on prices and rents.

WOODS: Along with a bunch of other measures, like taxes, the president proposes a cap on all prices across the economy.

VANEK SMITH: So Leon Henderson at the Office of Price Administration announces the biggest measure yet. Prices all across the economy will be frozen at March 1942 levels. While there are some exceptions, this is a massive deal. Shoes, furniture, chicken - basically everything in the economy has to stay the same price. Gillian Brunet is an economist at Wesleyan University, and she says this helped a little.

GILLIAN BRUNET: That gets the annual inflation rate down to, like, the 5- to 8% range, so kind of where we are now. They decide that even that is not enough.

VANEK SMITH: That inflation crept in because businesses would find these workarounds. Like, a business would repackage old products as new and claim that these new products needed a new price. Or, you know, they might be lower quality goods - skimflation (ph). Many exemptions were granted, and that created this kind of complicated patchwork of regulation. So the Office of Price Administration goes with a new approach.

BRUNET: The Office of Price Administration actually explicitly set prices - you know, went around and said charge X for this. Charge Y for that.

WOODS: That sounds like a very big job to do, to go around every single one of the thousands of things out there in the economy and say, you know, for eggs, this should be $4.

VANEK SMITH: It's almost unimaginable, right?

WOODS: To enforce the price freezes, the office scaled up to nearly 60,000 employees, and they recruited around 100,000 volunteers. These people would scout for businesses that seemed to be charging prices that were too high and then report them to the government.

VANEK SMITH: And while inflation did mostly stay in check during the war, there were significant downsides. First, some businesses responded by simply not selling cheaper versions of their products, which was detrimental to people on low incomes. Secondly, without high enough prices to compensate businesses for bringing stuff to people, shortages increased, which brings us to the third downside - the black market.

BRUNET: They had what they called meat-easies (ph) after the speakeasies of prohibition, which is basically...

WOODS: A meat-easy (ph) is - what? - secret butchers?

BRUNET: Yeah, exactly. Secret butchers, black market meat sales - which, if we think about food safety, is probably a terrible idea.

WOODS: But in fact, these meat shortages were a big part of actually what brought down the price control regime. Now, after the war, price controls had stayed in place initially to give factories time to retool back to consumer goods. There was this huge wave of consumer spending that happened, and that pushed huge pressure on prices that couldn't move up. And this created shortages. But the meat shortage - that was the most controversial. A Republican congressional candidate had the slogan, got enough meat?

VANEK SMITH: And the Republicans won the congressional elections in 1946 - basically a referendum on the Office of Price Administration, which was soon disestablished. And look - we do have price controls now in the economy. Some states have rent control, for example. But widespread price controls - those are still frowned upon by many economists.

WOODS: It's not mainstream policy, no.

VANEK SMITH: (Laughter) It might get you names, even.

WOODS: It could get you called names on Twitter.


WOODS: This episode was produced by Nicky Ouellet and engineered by James Willetts. It was fact-checked by Corey Bridges. Our senior producer is Viet Le. Our editor is Kate Concannon. And THE INDICATOR is a production of NPR.


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