Government was bluffing in its threat to take over recalcitrant industries. On this the report stated: "The efficacy of the commandeering power to induce cooperation was further reduced by the belief of the responsible governmental authorities that there were insurmountable practical obstacles to its actual exercise. These were apparently of sufficient strength to dissuade the Government from its application, even where there was an admitted need for it." 19 Similarly, the Senate Munitions Committee pointed out that the control over priorities could not be effectively used to compel compliance with price orders, when the Government needed the output of the plant.20 The Government representatives were aware of the difficulties in controlling prices without the aid of adequate statutory powers, and sought to obtain additional powers through legislation. A request for additional price-fixing powers was included in the report from Mr. Daniel Willard, then serving as Chairman of the War Industries Board, to the President early in December 1917, following a fruitless series of conferences with the lumber industry. The report stated: "I am directed by the War Industries Board to say to you that we are advised that there is now no law authorizing the fixing of prices for the public or the Allies on lumber and no means of compelling obedience to such prices if disregarded. The prices imposed upon the steel manufacturers and copper producers, if resisted, could have been enforced by seizing the mines and factories under power conferred upon the President and upon the Secretary of War and the Secretary of the Navy in certain appropriation acts; and the existence of this power was sufficient to compel obedience to prices without exercising the power. But it is obviously impossible for the Government to seize and manage lumber mills, forests, etc. The Board therefore feels that it should not undertake to fix the prices of lumber and like products of industries which it is impracticable for the Government itself to take over and operate, because if such prices should be disregarded when there is no law providing penalties or other means for enforcing obedience to the order, the result would be to discredit the whole price-fixing program. In short, we think it wise to fix prices only in those cases where there is some means, direct or indirect, of compelling obedience. "For these reasons we are not submitting for your approval prices to be charged the public on lumber. "This situation has led the War Industries Board to make a report to the Council of National Defense (which if approved may reach you) recommending legislation investing the President with power through such agencies as he may select to fix prices during the period of the war on such articles and commodities as he may deem necessary.' 21 He said: President Woodrow Wilson in his address before Congress on December 4, 1917, also appealed for added powers to regulate prices. "Recent experience has convinced me that the authorizing the Government to set limits to prices. "Ibid., p. 113. The report went on to state: Congress must go further in "As we have seen, the steel industry was extremely noncooperative in the price negotiations which were undertaken to lower the speculative high prices that prevailed even after the United States entered the war. It will be remembered that the War Industries Board had passed a resolution declaring that if the steel interests should not be willing to give their full cooperation because of the prices fixed, the War Industries Board would take the necessary steps to take over the steel plants.' Yet this threat was not backed up by any definite plan for concrete action. Mr. Baruch has testified before this committee that in the case of the steel industry threat he did not know how the commandeering power would have been put into execution "Mr. Baruch has also testified before the War Policies Commission that he could not recall a single instance of an important industrial enterprise being commandeered during the entire course of the World War." Ibid., pp. 115-116. The report said: "In addition to the commandeering power, it has been said that the Government was able to exert coercion by means of its control of priorities. "But it must be recognized that the paramount purpose of the priority system was to deal with the problem of shortages. By grantin certificate of preference, essential war industries could be better assured of gaining the raw materials necessiv for pro luction of the goo is required by the military forces of the Nation. An effect of their denial to an in lustry or plant was the retardation of the flow of raw materials and the consequent curtailment of its output. "Invocation of the priority power against a particular plant in an essential industry would be limited by the extent of the unused capacity in other similar plants. Where the company itself furnished a great proportion of the capacity, as is the case of the steel in lustry with such companies as United States Steel and Bethlehem, there would be relatively little opportunity for the diversion of business to other companies The use of priorities as penalties to enforce governmental orders would thus work against the primary need of wartime, increased production." "Minutes of the War Industries Board, December 5, 1917, Senate Committee Print No. 4, 74th Cong., 1st sess., pp. 149-150. 64300-41-pt. 1- -16 mand, I am sorry to say, has been replaced by the law of unrestrained selfish No action was taken on the request for additional legislation.23 The Government nonetheless proceeded with its price-fixing program following the creation of the Price Fixing Committee in March 1918. But the lack of statutory powers continued to be a source of weakness. Mr. Bernard Baruch, in his testimony before the War Policies Commission, pointed out that the lack of statutory powers was a serious defect in the price control set-up during the World War. He said: "As Commander Hancock expressed it in his testimony relating to price control through leadership and agreement: 66* * * the President said to Mr. Brookings (chairman of the Price Fixing Committee), 'Let the manufacturer see the club behind your door.' "Now, as I have explained before, the club was of synthetic origin, in that, in all these conferences, our sole authority was the latent threat of commandeering and withdrawal of priority ratings." 24 Mr. Baruch urged that the makeshifts then employed could not successfully be relied on again. In very positive terms, he expressed this point as follows: "It is unwise and unfair to any future war administration to require effective results from a more or less truncated flush after the hand has been so publicly exposed. Price control through such 'leadership' alone will never again be pos sible. We must have statutory authority in the broadest conceivable language." 25 VI. INFORMATION NECESSARY FOR PRICE CONTROL An effective price-control program requires full and accurate information relating to the commodities placed under regulation. The War Industries Board and the Price Fixing Committee, however, lacked statutory authority to obtain information in furtherance of their price control work, and were obliged to rely on the information secured by other Government agencies and on material voluntarily presented by industries with which they dealt. The Federal Trade Commission undertook a number of price studies for the War Industries Board and the Price Fixing Committee.28 Information was also available in the commodity sections of the War Industries Board. Difficulties in securing adequate information proved to be a major obstacle to effective price regulation in a number of instances. The investigations conducted by the Federal Trade Commission commonly lasted from 1 to 3 months." The Price Fixing Committee was also never able to obtain reliable cost figures that were less than 60 days old.28 In some cases, the Government was unable to obtain any cost information and was thereby prevented from taking any action to regulate the prices under consideration. The World War experience emphasizes the conclusion, therefore, that a Government price-control program requires adequate authority to secure the information necessary for regulation and a staff technically qualified to analyze the information available and to prepare recommendations in accordance with the facts developed. VII. PROCEDURE FOR DETERMINING MAXIMUM PRICES The procedure for establishing maximum prices during the World War varied according to the exigencies of the situation and the degree of authority held by the Government. The Government was able to act with speed and precision where there was clear statutory authority. For example, prices of coal were summarily announced by the President a week after the signing of the Food and Fuel Control Act of 1917, his action being based solely upon a study of coal prices made by the Federal Trade Commission.29 The statute provided for serious penalties for violation of the prices for coal fixed by the President. 22 Official Bulletin, December 4, 1917. p. 3. 23 In this connection it is interesting to note, however, that a referendum conducted in 1917 by the U. S. Chamber of Commerce among its constituent local chambers and business organizations shows decisive approval of the price control program. See Appendix A for a summary of the results of the referendum on the Report of the Special Committee on Control of Prices During War of the U. S. Chamber of Commerce. 24 Hearings, War Policies Commission, p. 816. 25 Ibid. 26 See Miller, World War Activities of the Federal Trade Commission (issued by the Federal Trade Commission, July 1940). 27 Senate Munitions Committee Report, p. 79. 2 Ibid., p. 84. The report states: "We find that in the World War, according to the Chairman of the Price Fixing Committee, reliable figures could not be obtained for a period closer than 2 months prior to the Committee's meeting." 29 The power to fix prices of coal was upheld by the Supreme Court in Highland v. Russell Car Co., 279 U. S. 253. The summary procedure followed by the President was upheld in Ford v. U. S., 281 Fed. 298, reversed on grounds of construction of the President's price order in Addy Co. v. U. S., 264 U. S. 239. A much more cumbersome procedure was followed with respect to the prices of basic commodities which did not come under the provisions of the Food and Fuel Control Act. These prices were approved by the President upon the recommendation of the War Industries Board or the Price Fixing Committee. But, as noted above, because of the lack of clear-cut statutory authority to establish maximum prices, the Government improvised the device of fixing maximum prices by "agreement." This entailed the necessity of holding hearings and conducting negotiations with representatives of industry. This procedure prevented rapid and effective action by the Government, and particularly when prices had already begun to spiral upward, protracted negotiations permitted prices to rise to new heights. This was pointed out by Mr. Bernard Baruch in his testimony before the War Policies Commission. He complained of the "long and tedious period of bickering" that accompanied the process of price regulation through negotiation. He referred in particular to the difficulties encountered by the Government in trying to set a maximum price for iron and steel products. Discussions were opened between the Government and the industry shortly after the country entered the It was not until the end of the following September that a maximum price was announced by the President, the intervening time having been consumed by negotiations. Mr. Baruch pointed out that while the discussions were pending the index of the price of steel had taken the following course: 30 war. Thus, almost 6 months were lost in discussion before necessary action was taken by the Government, during which the price of steel rose unchecked. The Price Fixing Committee faced similar difficulties and its minutes also reveal long drawn out negotiations before action was finally taken.31 The inadequacy of the procedure is indicated by the fact that occasionally the necessity for prompt action was so evident that the process of negotiation was dispensed with, as had been done with coal prices fixed under the Food and Fuel Control Act. An example in point is the action taken by the Price Fixing Committee in establishing a maximum price for woolen rags. An anticipated shortage of wool had disrupted the wool market and had induced a price spiral in woolen rags. The chief of the Wool Commodity section on his own initiative fixed a price ceiling and then urged the Price Fixing Committee to ratify his action without further delay. This was done and the minutes of the Price Fixing Committee after noting the situation which preceded its action stated: "In view of the existing emergency, the Price Fixing Committee adopted the maximum prices on rags as in statement (attached hereto and made a part of these minutes) which are to remain in effect until October 1, 1918, and thereafter until further notice pending the receipt of a report from the Federal Trade Commission and the compilation of additional data for the fixation of prices." 32 The World War experience clearly shows the necessity for a flexible procedure, permitting the Government to act swiftly and with precision when such action is required. VIII. THE "BULK LINE" COST METHOD OF ESTABLISHING MAXIMUM PRICES As a general practice, during the World War, the Government adopted the "bulk line" cost method of establishing maximum prices. The maximum price was fixed at a level high enough to permit the profitable operation of high-cost marginal producers, and as a result the low-cost producers, who frequently controlled most of the production, were able to obtain extremely large profits. This 30 Hearings. War Policies Commission, pp. 815-816. "The negotiations pursued in fixing the price of lumber were long delayed and marked by a distinct resistance on the part of the industry to the Government price measures. See Hardy, Wartime Control of Prices, pp. 135-140. 22 Minutes, Price Fixing Committee, August 9, 1918. Senate Committee. (Print No. 5, 74th Cong., 2d Sess., pp. 1094-1095.) appears from the definition of the "bulk line" cost method of price fixing, which reads as follows: "The term 'bulk-line' of production, as it came into use during the war, meant the indispensable amount of any commodity that the war program required should be produced, and the 'bulk-line' of cost meant the unit cost to produce the last unit lot of that requirement by the marginal producer." 33 This procedure was adopted by the Government for two reasons. In the first place, it was thought that the fixing of a high price was necessary to stimulate maximum production. A study of the actual production figures as contrasted with the rise in price levels demonstrates that this theory was not borne out by the facts. Dr. Willard L. Thorp, in his testimony before the Temporary National Economic Committee, said: "By late 1915 operations in most industries were close to capacity, and thereafter in spite of the vigorous demands for goods, further increases in production were relatively slight. The effect of the increased demand was reflected, therefore, after late 1915, in the price level, rather than productive activity, and price increases were tremendous." 34 In fact, Mr. Baruch in his testimony before the War Policies Commission argued that a reduction of prices from an inflated level is necessary to stimulate production, rather than the contrary. He said: "We never found a reduction of prices ever brought a lowered production of goods. My mind may be a little bit hazy, because it was a long time ago, but I think out of the cost of steel we took down, in one fell swoop in the reduction of prices, something like $2,000,000,000. But it did not reduce production; it doubled production. You must realize, Senator, that war will bring an increased production which, even if you do not permit advancing prices, will bring enormously increased profits." 35 The Government also relied on the excess-profits tax to recover the large profits made by the low-cost producers. Mr. Brookings, chairman of the price fixing committee, was reported in the minutes of the committee to have submitted a memorandum expressing this position as follows: "The policy of the committee would be so to shape price that the less efficient or small producer would receive a fair profit, which would probably give the larger and more efficient producer a very liberal profit. It is expected that the new excess-profits tax will equalize this by taking a larger proportion of the liberal profits earned.” 36 The excess-profits tax was based on a percentage of income. The Special Senate Committee Investigating the Mur.itions Industry pointed out the fallacy in this thesis as follows: * * * "Leaving 20 percent of the profits untaxed meant that higher prices and consequently higher earnings ensured larger absolute amounts of profits after tax and consequently higher ratio of earnings to capital It would, therefore, make a great deal of difference to the low-cost producer whether his profits were checked by price control or were left to taxation." 37 The report of the committee then recited figures to show the lack of success of the tax program in recovering the profits made by low-cost producers 38 Adherence to the bulk-line cost method of price determination resulted in the maintenance of an unduly high price structure and in a greatly increased cost to the Government which purchased the output of low-cost producers at inflated prices. The World War experience suggests the necessity of devising other means of securing production from high-cost marginal producers, such as through some form of Government subsidy, instead of adopting the bulk line cost principle. 33 See Senate Munitions Committee Report, p. 56. 34 Temporary National Economic Committee hearings, pt. 21, p. 11066. The testimony continued as follows: "Mr. HENDERSON. In other words, it runs quite a bit contrary to the theory of what an increase in prices is expected to do, so far as bringing into existence a greater production is concerned. "Dr. THORP. That is correct. In fact, I think it might be said that quite as much new capacity in most lines would have been brought into production had the price increases been much less. "Mr. HENDERSON. I think that is very significant in terms of the minutes of the War Industries' Board Price Fixing Committee, which were not published, as you know, until the Nye committee published them. But running all through the considerations of that price-fixing committee, there was very definitely the feeling on the part of the price fixers that an additional price had to be granted in order to get the demanded production. I think that that part of your testimony is very interesting. "Dr. THORP. That is very important, and I think it will be clearer when we get into some of the detailed record of what happened to domestic production and capacity during the war period." 35 War Policies Commission, hearings, p. 62. 36 Minutes of Price Fixing Committee, p. 851. 37 Senate Munitions Committee Report, p. 65. 38 Ibid., pp. 65-66. IX. REMOVAL OF GOVERNMENT PRICE CONTROLS The Food and Fuel Control Act remained in force after the conclusion of the armistice, and in fact was broadened in scope by an amendment approved October 22, 1919.39 It was not until March 23, 1921, that Congress passed a joint resolution which brought to an end all temporary emergency legislation arising out of the World War, including the Food and Fuel Control Act. On the other hand, the price controls administered by the War Industries Board and the Price Fixing Committee were abruptly liquidated following the armistice, and by the beginning of 1919 were completely abandoned. On December 17, 1918, the members of the Price Fixing Committee tendered their resignations effective as of March 1, 1919, the latest date for the expiration of the prices fixed under their authority. The letter of resignations stated: "The War Industries Board, of which the Price Fixing Committee is a branch, is happily no longer needed for the mobilization and regulation of the country's industries, and the occasion for the functions of the Price Fixing Committee has also ceased. No new price regulations seem to be called for, and those which have been made will be allowed by the Committee to expire at the dates severally set." 40 The lack of express statutory authority contributed to the decision of the Government to terminate the emergency set-up. However, the confidence in the future stability of prices proved to be unfounded. The play of blind economic forces brought about severe inflationary pressures and prices shot upward from an index number of 185 in February 1919 to a peak of 240 in May 1920, and then crashed over a hundred points to 134 in less than a year. The precipitous swing of prices up and down in the period following the armistice caused widespread distress and suffering during the difficult period of demobilization and reconstruction. The reason for the renewed spiraling of prices in 1919 to 1920 was that the transition from war production to peacetime production was attended by the same type of shortages that occasioned the price rises during the period from 1915 to 1918. The bottlenecks that developed were permitted through lack of regulation to give rise to sharp inflationary price rises which were averted or mitigated by the World War price controls. X. CONCLUSIONS Price controls established by the Government in the World War period were to some extent effective in checking the spiraling of prices, mitigating the effect of inflation, and as a means of furthering production for national defense. However, the analysis of the World War experience presented above clearly demonstrates the validity of the following principles as a guide to a price-control program in the present emergency: A. There should be a unified price control program with responsibility for price behavior centralized in a single agency. B. There should be a clear-cut statutory authority for establishing maximum prices, supported by appropriate legal powers. C. The price-control authority should be given adequate powers to secure information necessary for the proper regulation of prices and authority to employ a staff qualified to analyze such information. D. The price-control authority should be authorized to operate under a flexible procedure, permitting rapid and decisive action in emergency situations. E. Higher prices arising from a shortage created by war conditions do not evoke more than a negligible increase in production. Price levels, therefore, should be based upon efficient production costs, and the production of high-cost inefficient producers must be secured by other means than a general raising of the price level to meet their costs. F. Price controls must be instituted before a major inflationary movement has been permitted to get under way. 941 Stat. 297, extending control over wearing apparel, and other items. Minutes, p. 1804. |