Early in the war, the Roosevelt administration decided that it would combat rising prices with direct controls. It would try to persuade firms not to raise prices by appealing to their patriotism; if persuasion failed, it would simply make price increases illegal.
In May 1940, President Roosevelt set up the National Defense Advisory Committee and chose Leon Henderson, a crusty, cigar-smoking New Dealer, to head its Price Stabilization Division. Henderson sought voluntary agreements from producers in key areas of the economy not to raise prices. This policy met with little success. Prices continued to rise. In April 1941, Roosevelt strengthened Henderson’s hand by creating the Office of Price Administration and Civilian Supply, later simply the Office of Price Administration (OPA). Eventually, OPA would become the wartime agency most familiar to the average American because it set the prices and determined the quantities of the goods and services consumed every day. Of special interest to economists was the creation of the Price Division of OPA under the direction of John Kenneth Galbraith. After the war Galbraith would become a leading advocate of the liberal view that America’s social and economic problems could be solved by expanding the role of the federal government. Undoubtedly, his experience at the OPA, with its enormous—and in Galbraith’s (1952) view favorable— effect on the economy, profoundly influenced his thinking.
Initially, the OPA hoped to control the general price level by applying controls in only selected sectors, but uncontrolled prices continued to rise, and at an increasing pace.
In April 1942, OPA issued the General Maximum Price Regulation, affectionately known as General Max, which put a ceiling on most prices. Even this measure was only partially successful. One problem was that each seller was responsible for setting its own prices according to the rules issued by the government. It was altogether too easy for a firm to justify charging a high price by pointing to an unusually high price in the base period or an unusually high price set by a competitor in the base period. Effective price control required that the OPA set specific dollars-and-cents prices that its employees or its boards of volunteer price watchers could check.
In April 1943, President Roosevelt issued his famous “hold-the-line” order requiring OPA to refuse all requests for price increases except in extremely limited circumstances. This approach, economically problematic because it did not provide for the adjustment of relative prices, but easy to defend in the court of public opinion, worked surprisingly well for the remainder of the war. The official consumer price index rose only 1.6 percent per year from April 1943 until February 1946, when the policy began to come apart.
World History
