Wartime Wisdom to Combat Inflation

FDR managed inflation during World War II through government policy. Today’s calamities call for a similar approach.

By David Stein

Tagged EconomicseconomyFranklin D. RooseveltInequalityinflationmonetary policyWWII

President Roosevelt was angry. It was winter 1942, and his Administration had spent months sorting through different job titles, deciding what work counted as “essential” and what did not. The United States had just entered World War II. The military needed resources, and it needed them at a reasonable price. To keep resources flowing and prices down, the government was restricting consumer access to a bevy of beloved products, from sugar to tires—unless you could prove your work was essential. An essential worker could buy new tires right away, but a non-essential worker would have to wait for synthetic rubber production to get off the ground.

In this way, wartime frugality became an explosive political flashpoint. The rural South was outraged that preachers and ministers were not considered essential, and so Franklin Delano Roosevelt was too. He called in John Kenneth Galbraith, his lieutenant in price management with the Office of Price Administration (OPA), to ask him to ensure that ministers received their proper designation.

During World War II, pricing and production were too important to let the market bid up the cost of war material. Tires, cars, coffee, sugar—these were issues of critical national security. The size of the OPA reflected this; its staff of 250,000 was rivaled in the federal bureaucracy only by the Post Office. OPA had twice the number of economists as the Treasury Department; its decisions made front-page headlines. Yet today it has been all but forgotten. “[It was] the largest and best known of the civilian war agencies, and then was taken apart and disintegrated as quickly and thoroughly as ever an organization of comparable size was liquidated,” OPA’s official historian wrote in 1947. In the process, we lost—and then forgot—one of our most effective tools for managing inflation.

War isn’t the only time when managing prices is a good idea. Looming climate calamities, pandemics and their aftermath, and twenty-first century foreign policy shifts also all present major economic challenges that markets and corporate-controlled prices cannot and should not address on their own. The current methods of managing inflation—raising interest rates and curtailing demand—are not a good solution to unpredictable economic circumstances producing inflationary supply shortages. Today, we need to revisit the lessons from OPA for our own era of crisis—and look both at what worked and what did not.         

After OPA’s demise, the United States still took a multi-pronged approach to managing inflation. Monetary and fiscal policy both played a role, ideally in coordination. So did gentlemen’s agreements among the federal government, labor unions, and major industrial corporations. These “jawboning” sessions became an unofficial conduit for price control, to ensure the fruits of production were shared between consumers, workers, and managers.

Since the late 1970s, however, the chief agency charged with managing inflation has been the Federal Reserve. The Fed secured its dominance during the ascent of free market ideology, when its administrative independence was seen as a less political alternative to regulatory agencies under the President’s control. But the Fed’s actions were no less political than FDR’s had been. Its leaders just used the language of economic science to shield themselves from political blowback. When Fed Chair Paul Volcker established his high interest rate policy to smash consumer demand and wring inflation out of the economy, he claimed to simply be pursuing a new technical strategy called “monetarism,” in which the central bank would not pick winners and losers in the economy or dictate the price of credit, but simply manage the total amount of money in circulation. As the head of President Carter’s Council of Economic Advisors Charles Schultze emphasized in 1982, this explanation camouflaged a political decision to make workers and labor unions bear the economic costs of breaking inflation. “What monetarism really is for the Fed…[is] a political cover,” he said, as unemployment approached 10 percent.

Monetarism was the brainchild of the economist Milton Friedman, who preached that “Inflation is always and everywhere a monetary phenomenon.” Friedman argued that inflation results from too much money in the economy because central bankers have permitted too much bank lending. Yet the past 15 years has demonstrated, if there was ever any real “scientific” doubt, that Friedman was thoroughly wrong on this point. Inflation is—always and everywhere—a specific phenomenon with specific causes, often related to supply issues and not simply excess demand. In the first six months of this year, car prices shot up not because banks made too many business loans, but because there is a global shortage of microchips. Without microchips, car production was suppressed, causing demand for cars to shoot ahead of supply, driving up prices for cars. As the Council of Economic Advisors emphasized recently, car prices account for about 60 percent of current inflation.

But the recent story of sectoral inflation also goes beyond temporary supply shortfalls. While rising rent slowed in 2020 due to the pandemic, over the past several years, housing rent has been perhaps the most persistent driver of consumer price inflation—routinely soaring past the Fed’s 2 percent overall inflation target. Right now, one-fourth of renters spend upwards of half their income on rent. Recent data show that the national median rent has risen 11.4 percent in 2021. The Fed’s conventional medicine of higher interest rates is not a good tool for combating rental inflation. In fact, it could be directly counterproductive, since by making new investment more costly, housing supply will slow. By contrast, OPA effectively managed rental inflation by using the timeworn, straightforward tool of strict rent control. Rent control kept housing prices in check throughout the war, and it could do so again.

Of course, OPA didn’t get everything right. In its early days, some products like coffee faced strict price controls, while others, like eggs, did not because of lobbying from farmers. Although OPA was decried by business interests opposed to regulation, OPA’s lessons remain crucial.

Monetary policy is not the best tool for every kind of inflation, and—as with housing—can even be counterproductive. Raising interest rates will choke off both the public and private investments needed to mitigate climate change. This was already recognized in 1977 by Congress’s Joint Economic Committee, which wrote that “If interest rates are kept high…the prospects for capital intensive systems in homes, such as solar energy, are diminished greatly.” As during World War II, the climate crisis now demands the government spend what is necessary to match the scale of the emergency. If the large spending is inflationary, we’ll need better techniques to manage it.

President Biden could explore new ways of managing inflation by directing the National Economic Council to analyze the sources and impacts of sectoral inflation, along with possible remedies like credit controls, subsidized production, and boosting the supply of critical goods and services—whether N95 masks, steel, or housing—via government-owned and operated facilities. As they were during the Cold War, these methods may be decried as socialistic. But directly regulating credit instead of relying on the Fed’s interest rate policy was posited as an alternative to raising interest rates by President Truman. President Biden could look to this history, as well as ask Congress for authority to create a new OPA-like agency to implement the Council’s recommendations. Over the past few months, Republican leaders like Mitch McConnell and Kevin McCarthy have hammered President Biden’s spending plans as inflationary. If the President’s critics are really as worried about inflation as they claim to be, they should welcome directing attention to different methods for combating it.

Relying on higher interest rates to manage inflation isn’t just ineffective on many forms of inflation. It’s also a deeply unfair way to regulate the economy. Higher rates always hit Black workers and those who face discrimination in the workplace hardest—they’re the first to be fired when rates rise and the last to get raises when rates eventually come down. It’s time to stop pretending that monetary policy is an apolitical cure-all to rising prices. We must start making real decisions about how to manage an economy and world that will only grow more challenging as the climate crisis unfolds.

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David Stein is a UC President’s Postdoctoral Fellow in the Department of African American Studies at UCLA and author of the forthcoming book, Fearing Inflation, Inflating Fears: The Civil Rights Struggle for Full Employment and the Rise of the Carceral State, 1929-1986.

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