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Compliance with Price Controls in the United States and the United Kingdom During World War II

Published online by Cambridge University Press:  03 March 2009

Geofrey Mills  and
Hugh Rockoff
Geofrey Mills
Affiliation:
Assistant Professor of Economics at the University of Northern Iowa, 335 Seerley Hall, Cedar Falls, Iowa 50613
Hugh Rockoff
Affiliation:
Professor of Economics, Rutgers University, Department of Economics, New Brunswick, New Jersey 08903.
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Abstract

We are concerned here with the evasion of price controls in the United States and the United Kingdom in World War II. The evidence suggests that controls produced less evasive activity in the United Kingdom. After considering several explanations we conclude that the key was the degree of regimentation. The British controlled all stages of production, limited the range of products available at each stage, and allocated relatively more resources to managing and enforcing controls.

Type
Articles
Information
The Journal of Economic History , Volume 47 , Issue 1 , March 1987 , pp. 197 - 213
Copyright
Copyright © The Economic History Association 1987

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References

Geofrey Mills is Assistant Professor of Economics at the University of Northern Iowa, 335 Seerley Hall, Cedar Falls, Iowa 50613; Hugh Rockoff is Professor of Economics, Rutgers University, Department of Economics, New Brunswick, New Jersey 08903. We must thank Jeremy Mack, Michael Bordo, Louis Cain, Robert Higgs, Richard Keehn, Larry Neal, Elyce Rotella, Anna Schwartz, Eugene White, Geoffrey Wood, G.D.N. Worswick, and the referees for many useful suggestions. We would also like to thank John Downey, Dean of the Graduate College, and Richard Newell, Director of International Studies, both of the University of Northern Iowa for their generous financial support of this project. We also received a number of useful comments from people who spoke to us at the 1985 meetings of the Cliometric Society, at the 1985 meetings of the Western Economic Association, and at seminars at the universities of Indiana and Illinois, but our inefficient memories prevent us from thanking them by name.Google Scholar

1 The delightful movie, “A Private Function,” in which a respectable chiropodist gets mixed up with a not so respectable pig, describes one aspect of the black market in postwar Britain. Bennett, Alan, A Private Function: A Screenplay (London, 1984).Google Scholar

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12 Friedman, Milton and Schwartz, Anna J., Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975 (Chicago, 1982), pp. 101–4, 115–20.CrossRefGoogle Scholar

13 We work throughout with the Net National Product deflator. The British Cost of Living index, in particular, was narrowly based, and manipulated with subsidies.Google Scholar

14 We examined three potential proxies for real income change industrial production (available for the United States only), real consumption of raw materials, and total labor hours worked; and two financial variables, the currency-money ratio and the average denomination of money. None of these, however, was satisfactory in the sense of both having a stable relationship with prices outside the critical period, and of providing plausible estimates of prices within it.Google Scholar

15 Rockoff, Hugh, “Indirect Price Increases and Real Wages in World War II,” Explorations in Economic History, 15 (10. 1978), pp. 407–20.CrossRefGoogle Scholar

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17 Hancock, W. K., Gowing, M. M., British War Economy (London, 1949), p. 158.Google Scholar This is the summary volume in a comprehensive series of postwar reports on the wartime economy. Of the many other useful volumes in this series one of special relevance to this paper is Hargreaves, E. L. and Gowing, M. M., Civil Industry and Trade(London, 1952).Google Scholar

18 Willes, P.J.D., “Pre-War and War-Time Controls,” in Worswick, G.D.N. and Ady, P. H., eds., The British Economy, 1945–1950 (Oxford, 1952), pp. 144–45.Google Scholar

19 Backman, Jules, Rationing and Price Control in Great Britain (Washington, D.C. 1943), p. 61.Google Scholar

20 Friedman and Schwartz, Monetary Trends, p. 118.Google Scholar

21 In the United States, at least, the reported index would have exceeded an index using only legal prices, since some efforts were made to take hidden increases into account.Google Scholar

22 The table treats the conventional measure of real NNP as meaningful throughout the war despite the substantial change in the composition of output. A number of alternatives are discussed in Kuznets, Simon, National Product in Wartime (New York, 1945).Google Scholar

23 The conjecture by Friedman and Schwartz is based on their use of averages for phases of the business cycle. They have two observations for each country. The contraction (1937–1938) to contraction (1944–1946) growth rates of money per unit of real output are almost identical. But the expansion (1938–1944) to expansion (1946–1948 for the United States or 1946–1952 for the United Kingdom) rates differ, 11.08 percent in the United States versus only 7.61 percent in the United Kingdom. The expansion to expansion comparisons, we believe, are less informative. For Britain the average value for 1938 to 1944 essentially reflects the war, but for the United States it still reflects the prewar base. So the growth rate for the United Kingdom is lower because it is measured from a higher base.Google Scholar

24 In his study of controls in the United States Paul Evans did not explore the distinction between reported and actual prices, so his results are not directly applicable. His money demand equations like our price equations reveal considerable suppression of the price level during the war. Evans, Paul, “The Effects of General Price Controls in the United States during World War II,” Journal of Political-Economy, 90 (10 1982), p. 966.CrossRefGoogle ScholarFor a wide ranging exploration of controls in Britain which also concludes that they were effective in supressing inflation see Capie, Forrest H. and Wood, Geoffrey E., “The Anatomy of a Wartime Inflation: Britain from 1939 to 1945” (Paper presented at the Ninth International Economic History Congress). The numbers in the text were calculated from equations similar to those reported in footnote 33, except that CONTROL was omitted.Google Scholar

25 Milward, Alan S., War, Economy and Society, 1939–1945 (Berkeley, 1977), p. 283.Google Scholar

26 See Addy, P., “Utility Goods,” in Studies in War Economics (Oxford, 1947);Google Scholar and Worswick, G.D.N., “Direct Controls,”in Worswick, and Ady, , eds., The British Economy, 1945–1950.Google Scholar

27 Parliamentary Papers (Commons), 1951–1952, vol. 18, Cmnd 8452, “Report of the Purchase Tax/Utility Committee” (Douglas Report, 1952).Google Scholar

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31 Combined Production and Resources Board, The Impact of the War on Civilian Consumption (Washington, D.C., 1945), pp. 27–28.Google Scholar

32 Rockoff, Hugh, Drastic Measures: A History of Wage and Price Controls in the United States (New York, 1984), p. 123; Parliamentary Papers (Commons), 1945–46, vol. 18, Cmnd 6718, “Staffs Employed in Government Departments,” p. 749.CrossRefGoogle Scholar

33 The violations data can be used to construct a variable that should have an independent effect in a price equation. The variable we used was the ratio of cases per million dollars of NNP at 1929 prices, converting at the prevailing exchange rate. The following equations estimated over the period 1915 to 1960 were typical. For the United States:

For the United Kingdom:

where P is the NNP deflator, TIME is the year, M is the nominal stock of money, i is the short-term interest rate, y is real NNP, m –1 is the real stock of money lagged one period, and CONTROL is the caseload variable. The sources for money (United States), income and prices, are given in Tables I to 3. Friedman and Schwartz's Monetary Trends, estimates of the money stock United Kingdom, table 4.9, col. 1, pp. 131–33Google Scholar, and both interest rates, table 4.8 col. 6, pp. 122–25 and table 4.9, col. 6, pp. 131–33 were used. The numbers in parentheses are t–statistics. Two–stage least squares was used with the instruments consisting of all of the independent variables CONTROL, and the share of expenditures (the narrow definition) in NNP in order to control reverse causality. For the most part, the economic variables are signed as expected, CONTROL is negative, statistically significant, and economically meaningful. We experimented with various ways of adjusting for autocorrelation, and found the results reasonably robust. many questions about these results remain, and all that we claim is that the coefficients CONTROL are consistent with the argument.

34 This is also the view of Murphy, The British War Economy, p. 262, who studied British controls at first hand.Google Scholar