Economics and the Public Welfare. Benjamin M. Anderson
in Washington that the competition of the bankers might prevent an effective policing of the loan situation and that with many thousands of independent banks it would be impossible to hold down nonessential loans. The proposal was once made that the Capital Issues Committee of the War Finance Corporation should pass on all loans made by banks exceeding $100,000, but this naive suggestion was promptly dropped when a great New York bank showed its loan transactions of a single day, which included one $5,000,000 loan to an essential industry made in fifteen minutes as a necessary part of meeting a rush order by the government. The great banks did scrutinize loan applications with respect to their essentiality with great rigor, and the smaller banks over the country were rapidly educated in the matter.
Of course a great deal of ordinary activity was precluded by the enormous cost of such activity. Construction, for example, dropped to a very low level in 1918. The Index of Construction stood at 111.3 in 1916. It dropped to 64.9 in 1918, and of the 64.9 a very high percentage indeed was essential construction for war purposes.
Commodity Control and Price Fixing. But we did not rely upon financial restraints only in holding down the volume of nonessential production, consumption, and construction. Construction itself was directly controlled by the denial of essential materials and by the requirements of a license for any building costing more than $500.
Price fixing we engaged in cautiously. There was a pretty clear recognition of economic fundamentals. Prices have work to do. Prices have the important function of accomplishing priorities, allocations, and rationing. That is their regular work. It is the work of free prices and freely moving wages to determine whether labor and supplies shall be drawn to the production of commodity A or of commodity B. Rising prices mean more production. Falling prices mean less production. Rising prices mean less consumption. Falling prices mean more consumption. With freely moving
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prices, commodities are divided among consumers in accordance with the relative urgencies of demand. With freely moving prices and freely moving wages, the goods in most urgent demand are produced, and the production of the less urgently demanded goods declines.
When prices are fixed by government, the government should step in to do directly the work that free prices would otherwise do. The government should allocate commodities. The government should give priorities. The government should ration commodities. If wages are fixed, the government should take steps to divert labor from less urgently needed production to more urgently needed production. Price fixing by itself tends to derange perversely the control of production and consumption. Holding prices down and doing nothing else encourages the depletion of supplies which would last longer if their prices were higher.
It follows from this that price fixing ought not to be pushed in advance of the development of machinery for commodity control.
In World War I we knew these things very well. Proposals for the fixing of all prices met very little sympathy from President Wilson, who was a good economist. We established a pretty comprehensive system of commodity control of scarce essentials needed for war or for the life and health of the people. We had priorities. We had allocations. We had rationing. We denied coal and freight cars and raw materials and capital to nonessential industries, or we restricted sharply the amounts of these things that they could get.
As part of this we had price fixing. We had no price fixing without priorities, allocation, and rationing. We had a great deal of priorities, allocations, and rationing without price fixing. We did not try to fix the price of luxuries. We simply denied the luxury industries the materials and supplies they needed.
We did very little about retail prices: “The great bulk of regulation over prices administered by the federal government during the war pertained to producer or wholesale prices. There was no real attempt save in food and fuel to control prices at retail. The task of controlling retail prices was undertaken in a comprehensive manner by the Food Administration after its wholesale control was well under way.”6
Seeing the problem primarily as a problem of commodity control rather than of price control, we did not try to do it by one comprehensive organization which would do all the price fixing. Rather we had separate boards for different industries. We had a separate grain and flour administration and a separate fuel administration, for example. These handled both price fixing on the one hand, and allocations and rationing on the other, in their particular fields.
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The need for having the good will and cooperation of the industries was in general recognized. And the need for using the brains of the industries and for having administrators trusted by the industries was in general recognized. As far as possible we used the existing machinery of the markets.7 The one serious failure in price fixing came in bituminous coal, where this principle was not recognized in 1917, where the knowledge of the men in the trades was not used, where prices were fixed arbitrarily on the basis of imperfect knowledge, where production was as a consequence radically curtailed, and where a great deal of unnecessary disorder arose.
The Fuel Administration in 1917 apparently did not know that there were such things as differentials based on quality of coal, and apparently had never heard of British Thermal Units. The result was, in certain cases, that companies with both high-quality mines and low-quality mines and scarce labor shut down the high-quality mines and produced only coal with high ash content.
When Harry Garfield took charge of the Fuel Administration, he recognized these difficulties, called in the skilled men of the industry, softened the animosities that had arisen, radically improved the machinery and the practices, and finally made the fuel control successful.8
Wages we did not try to fix in World War I. Efforts were made to reduce the competition for labor, particularly interstate competition for labor, by the industries. Nonessential industries were made ineffective competitors for labor by being denied coal, freight cars, and capital. But wage fixing was not attempted. Wages continued to rise during the war, even though the general average of commodity prices was held down.
Price fixing was thus a factor, but not the dominant factor, in controlling the level of commodity prices during World War I. As previously shown, the curve for commodity prices at wholesale flattened out after July 1917, reacting slightly from 189 percent of 1913 prices in August to 182 in December, and then gradually, under very heavy pressure, rising slowly to a peak of 204 in September 1918, after which it again receded. This was an amazing achievement. It was accomplished by four main policies. First, there was a sudden imposition of very heavy taxes, taking up a great part of the income of the people. Second, the Treasury’s borrowing policy got
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investors’ money, got the current savings of investors. The banks took some of the bonds, but every effort was made to keep the banks from doing much. Third, we had a progressively firm money market, with tightening interest rates, which held down bank expansion. Fourth, we had price fixing for scarce essentials. There was a great deal of functional control of prices. There was very limited direct control of prices. There was a great deal of direct control of commodities and a great deal of wartime planning of production and consumption.
The Verdict of Charles Evans Hughes. Governmental economic planning in World War I was highly intelligent and very honest. There were blunders made. One blunder was in the cost-plus contracts, which made it to the advantage of a corporation that had such a contract with the government to incur unnecessary expenses, since the profit was a fixed percentage of the outlay. There were many blunders incidental to the haste and confusion. The army, in its haste, ordered unnecessary goods. Thus, among the surgical instruments sent to the front line hospital bases there were a large number of obstetrical instruments—an inexcusable and incredible thing, but readily enough explained when it appeared that the order for surgical instruments had been based on the standard supply of surgical instruments at an army post in the United States at which there had been a good many officers’ wives.
There were some cheating and some gouging. But on the whole the record was amazingly clean and efficient. And when charges of great abuses were made after the war, President Wilson called upon his opponent in the 1916 election, the Honorable Charles