Response to Kupiec’s Review of ‘Shock Values’

I am grateful to Paul Kupiec for reviewing my book, Shock Values, here at the Daily Economy yesterday. Kupiec describes my book, which comes out in May, as "a concise recounting of all of the legal forms of money, tariffs, wage and price controls, and an abbreviated (if somewhat idiosyncratic) history of the evolution of the Federal Reserve."

Kupiec's most substantive criticism of the book, I believe, concerns my assessment of price controls. He has "the impression that Professor Binder does not think that wage and price controls are such a bad thing," and writes that this leaves him "mildly shocked."

He points, in particular, to my chapter on World War I, in which I write that: "under the wartime price controls, the production of munitions in American factories increased, other wartime objectives were achieved, and the US economy expanded. Compliance with price controls, according to economists' estimates at the time, was generally good." This is just part of my longer discussion of World War I price controls, which emphasizes the high political costs of industry compliance and the adverse economic consequences of controls.

In particular, I cite economic historian Hugh Rockoff, who explains that: "Behind much of the 'voluntary' compliance lay the threat of seizure. It was not so much the willingness of Americans to comply that made controls work, but their willingness to tolerate extraordinary interference with traditional rights" in wartime. I also note that Herbert Hoover became known as the "food czar" for his broad powers to enforce price controls or revoke firms' licenses for alleged noncompliance. "In cases of alleged violations," I write, "the burden of proof was on the merchant-a standard that is not the norm in peacetime."

I explain how prices were negotiated "by agreement" with industry in name only; the federal government always had the upper hand. Here I quote Bernard Baruch, who served as chairman of the War Industries Board:

"We used a good many euphemisms during the war for the sake of national morale, and this one of 'price fixing by agreement' is a good deal like calling conscription 'Selective Service' and referring to registrants for the draft as 'mass volunteers.' Let us make no mistake about it: we fixed prices with the aid of potential Federal compulsion and we could not have obtained unanimous compliance otherwise."

As far as the economic effects of the controls, I discuss the "substantial difficulties in [government] efforts to replace the free operation of the price system in World War I," including the suppression of price signals, which allocate resources in a free market. This means that controls had "unintended, even perverse, consequences." As an example, I cite a contemporary observer's description of price ceilings on wheat, which

"made it more profitable to feed wheat than corn to hogs . . . when the world was urgently calling for bread. In other words, the regulations of the food commission, instead of accomplishing one of its chief purposes - namely, an increased production of wheat for human consumption, tempted the farmer as a matter of self-preservation to divert his wheat to his stock."

I explain that, with price signals suppressed, "The Price-Fixing Committee and the Food Administration both faced the extremely complicated task of resource allocation," for which they relied on a "priorities system." I note that the priorities system was in place for a relatively short time in World War I, and its problems became more apparent when a similar system was implemented in World War II.

Indeed, I am more critical of the World War II price controls than of the World War I controls, because they were more heavy-handed and longer-lasting. While the Roosevelt Administration described the Office of Price Administration (OPA) as "big democracy in action," a Time article described it as "still unworkable, still unlovable." The price control system severely restricted freedom of contract and delegated a huge amount of legislative power to the executive. The Emergency Court of Appeals, which had exclusive jurisdiction over price controls cases, "was staffed with New Deal judges who almost always sided with the [price] administrator," making judicial review of the OPA's regulations nearly impossible.

The World War II price controls also had perverse economic consequences, including shortages of consumer goods. A salient example is when price controls were reimposed on meat shortly after the war. I explain that "In response, meat producers chose to hold their product back from market rather than be subject to the controls. Consumers, facing bare shelves, grew frustrated with the apparent inefficiencies and invasiveness of the controls."

By the time of the Korean War, price controls were politically disastrous. Legal scholars William Burt and William Kennedy wrote in 1952 that "the role of the Congressman dealing with price control legislation is not a happy one," for "He is besieged by delegations from industries affected by price regulations; he receives telegrams and letters from scores of influential constituents; he is under constant, relentless and unceasing pressure to protect the interests of particular constituents within his Congressional district." Consumers were dismayed by the apparent injustice in price-control regulation, especially when they saw beef prices continuing to rise, and public support for the controls collapsed.

Price control systems are necessarily complicated, because coordination and resource allocation without price signals is such a difficult task. In the United States, each experiment with price controls has been different. I think it is useful to acknowledge that some have been worse than others, and even that some consequences have been good.

Kupiec also takes issue with my claim that in the 1950s, "Chairman Martin and the other Fed officials were highly inflation averse, viewed low and stable inflation as a top priority for monetary policy, and had a pretty good understanding of how to achieve it." Here, I cite research from Christina Romer and David Romer, who review Fed transcripts and also estimate a forward-looking Taylor rule to show that the Fed acted aggressively to control inflation from 1952 through 1958.

Kupiec argues that "Throughout the 1950s, the Fed was constantly defending itself from attacks by influential voices arguing that the Fed's policies were too restrictive." This is true, but I'm not sure how it counters my point about the Martin Fed. Low and stable inflation was his priority, and he knew that tighter monetary policy was sometimes what it took; that subjected him to a lot of political pressure, which I discuss. Kupiec points to "a speech Chairman Martin gave in 1953, discussing the problems the FOMC faced when formulating its reserve management monetary policies." These problems did not stop the Martin Fed from keeping inflation stable in the 1950s. Romer and Romer show that free reserves played an important role in policy in that decade, but "find no evidence that this focus on free reserves was predominant or led to persistent mistakes. The narrative record shows that the FOMC also paid close attention to interest rates, and goals for key interest rates were often used as a supplement to instructions about free reserves."

Kupiec writes that "Shock Values pays special deference to Irving Fisher's contemporary critique of the Gold Standard in its discussion of the Congressional debate surrounding the passage of the 1913 Federal Reserve Act…While Irving Fisher was an important economic voice, other well-respected economic historians discount Fisher's influence on Congress as it debated the 1913 Federal Reserve Act. According to Allan Meltzer, '[Fisher] worked hard to get his ideas about money and monetary standards adopted. …Central bankers seem generally to have regarded Fisher as a bright but annoying crank.'"

I focus on Fisher's critique of the gold standard in that episode because Fisher is a recurring character throughout subsequent chapters of the book. He supported numerous price-level stabilization bills that were debated in Congress during the Fed's first few decades, and the Congressional records of these debates provide useful insights into policymakers' views about the economic and political challenges of price-level stabilization and monetary policy. I do emphasize that Fisher's monetary policy ideas "were considered quite radical, because they implied a departure from the gold-standard orthodoxy, in which the dollar was to be kept convertible to a fixed weight of gold." Shock Values explains how, over many decades, the radical idea (of a central bank with a price stability mandate) became orthodoxy. (A note of hope for bright-but-annoying cranks everywhere?)

My book is too short for Kupiec's taste. He says that "entire books have been dedicated to a discussion of President Roosevelt's decision to suspend domestic convertibility, revalue the dollar, and abrogate domestic gold clauses." Yes, those books already exist, and many of them are fascinating. My aim is different. I focus on how public beliefs about the legitimate role of the state in price stabilization has evolved over a very long sweep of United States history. I think that for many readers, the bigger-picture, interdisciplinary view will be welcome, even if it necessitates omitting lengthier treatments of some monetary and financial episodes. The book should be interesting and enjoyable for students and a popular audience.