8 - Lessons for the recent crisis

Summary

It is, however, undoubtedly the fact that price fixing and propaganda against price raising are much more á la mode today than old-fashioned inflation. The political advantages of this policy are obvious. The objection to it is that, unlike old-fashioned inflation, it does nothing to bring about equilibrium, indeed on the contrary.

John Maynard Keynes, 1940

Taming the whirlwind

Can controls help in the fight against inflation? The answer is yes. In certain circumstances, a temporary application of controls can substantially reduce inflation at a reasonable cost. Controls can thus provide a breathing spell in which monetary and fiscal reforms can be introduced. The evidence for this comes from balancing the benefits and costs for those episodes in the past when controls have been used. History in this case is useful, a valuable tool for policymakers.

The record is particularly clear in the twentieth century. Strong inflationary surges originating in the fear of wartime inflation and shortages have been arrested. During World War I the rate of inflation measured by the wholesale price index was reduced from a figure of 32.4 percent per year in the fifteen months preceding controls to an annual rate of 7.1 percent in the fifteen months that were under controls. During World War II from April 1943, when President Roosevelt issued his Hold-the-Line Order, until June 1946, when price controls were suspended, the consumer price index increased at a rate of only 2.3 percent per year, a remarkable performance in a fully employed economy with heavy deficit spending.