Price Controls, Black Markets, And Skimpflation: The WWII Battle Against Inflation

Here is NPR / Planet Money's account of price controls during WWII.

"The policy effectively neutralized one of the central functions of the free market, which is the allocation of scarce resources. In a free market, if there's not enough of something, the market responds by raising prices. This reduces demand for that product. It also sends a signal to businesses to produce and supply more of that product. Without this price mechanism, most economists believe, the market struggles to remedy shortages and society scrambles to figure out who gets what.

During the early 1940s, when the federal government began eliminating free-market pricing on goods in short supply, it had to begin allocating these scarce resources in a different way. It created a rationing system where the government assigned ration stamps to citizens."

"To buy products in short supply — like coffee, canned foods, dairy, meat, bicycles, cars, tires, gasoline, clothes, and sugar — American consumers not only had to pay money, they also had to use government-issued ration stamps. The aim was to limit the amount of a particular good or goods that any one person or household could purchase, and ensure more equitable distribution during wartime."

"To achieve all this, the federal government erected a sprawling and intrusive bureaucratic apparatus under the Office of Price Administration (OPA). During the war, the OPA and related agencies employed hundreds of thousands of federal employees and community volunteers, including twice the number of economists as the U.S. Department of Treasury. It's a lot of work to centrally plan an economy."

"without the ability to legally raise prices, businesses resorted to other tactics to maximize their profits. One is a phenomenon we've dubbed 'Skimpflation' at Planet Money. That's when instead of simply raising prices, companies skimp on the goods and services they provide, degrading the quality of the stuff they sell."

"'Another practice — dubbed the red market — was upgrading or selling a low grade of meat at the ceiling and point price of a top-grade cut,' Lingeman writes.

Other meat sellers simply ignored price controls and sold their meat on the black market. ... By all historical accounts, the black market for price-controlled products flourished during the war."

"With plentiful jobs during the war years and a system of equal rationing and price controls, the bottom third of American earners actually increased their meat consumption by around 17 percent, by one calculation. The top two-thirds, however, saw their meat consumption decline by around 4 percent."

"As the war came to an end, government officials struggled to turn off the system. In the summer of 1946, congressional legislation that authorized price controls lapsed, and food prices shot up. The cost of meat doubled. Cowering in the face of a public backlash, President Truman and a Democratic Congress reinstituted price controls on meat. This infuriated the meat industry. Once again unable to raise prices, many meat producers and sellers were reluctant to ramp up production, and many actively resisted doing so. Meat sellers, led by livestock ranchers, withheld meat from the market. One reason was anticipation that price controls would soon expire and they could make more money selling meat if they waited."