Encyclopedia of Money: Wage and Price Controls

Wage and price controls freeze wages and prices at a certain point in time, and perhaps establish procedures for gradually adjusting wages and prices. Episodes of hyperinflation and wars have most often laid the groundwork for the enactment of programs of wage and price controls. Inflation is rising prices, but also can be defined as a decrease in the purchasing power of a unit of money.

In 1793 the government of the French Revolution initiated a system of price controls that became known as the Law of the Maximum. A decree of 29 September 1793 empowered district administrations with the authority to set commodity prices at rates one-third higher than the levels of 1790. The decree granted municipal authorities the responsibility for setting wages at 50 percent higher than the 1790 level. In 1794 the Committee on Provisions issued an enormous schedule of the national Maximum, or price list. Each district added transportation costs, 5 percent profit for the wholesaler and 10 percent for the retailer, and then published a catalog of prices. Hoarding commodities to avoid selling at controlled prices was punishable by death. Despite the government’s involvement in the forcible requisitioning of supplies, the controlled economy of the Revolution broke down. In December 1794 the government suppressed the Law of the Maximum.

The American colonies experimented with wage and price controls to cope with shortages in commodities and labor. In 1623 the governor of Virginia issued a proclamation fixing prices and profit rates. The proclamation issued a list of prices embracing goods ranging from Canadian fish to wine vinegar. A war with Indians apparently created a shortage of goods that led to the controls. The colonial government lifted the controls in 1641. In 1630 the Massachusetts Bay Colony enacted a schedule of wages for skilled workers, coupled with a limit on the markup for finished goods. In 1633 a law banning all “excessive wages and prices” displaced the scale of wages and limitation on markups.

The colonists turned again to wage and price controls to protect themselves from the wave of hyperinflation that struck the colonial economy during the War of Independence. The Continental Congress did not have the power to impose wage and price controls and remained split on the efforts of state governments to control prices and wages. The New England colonies enacted legislation to control prices, but the southern colonies demurred. Goods flowed to regions where prices remained free to rise with market conditions, and state efforts to control prices failed.

During the United States Civil War inflation surged in the northern states, and reached hyperinflation proportions in the Confederacy. Neither the North nor the South enacted a system of wage and price controls during that conflict, perhaps reflecting the ascendancy of laissez-faire economics during the nineteenth century.

During World War I virtually all the belligerent powers resorted to systems of wage and price controls. By then inventions such as the typewriter had increased the administrative efficiency of governments. In the United States wholesale prices had risen 60 percent above their 1914 level when Congress declared war on Germany. The United States government made use of as many as eight government agencies to control prices. The War Industries Board controlled the prices of many basic raw materials. The Food Administration set the prices for many staple foods, such as wheat and livestock. Inflation slowed substantially, contributing to a general feeling that the controls were a success. The controls were lifted at the end of the war amid some talk that the controls should be extended to the peacetime economy.

In 1936 Germany imposed a comprehensive system of wage and price controls that remained in effect for 12 years. This system of controls was part of Germany’s centrally planned economy that was directed toward military mobilization. When the Allied occupation governments kept the controls in place at the end of World War II, black markets sprang up to meet the needs for certain supplies. Germany’s rapid economic growth began after the controls were lifted in 1948.

During World War II many countries established some form of wage and price controls to contain inflation. The United States went to a comprehensive system of wage and price regulation in 1942. The Office of Price Administration had to approve of price increases and a National War Labor Board approved of wage increases. The main effect of the controls in the United States lay in the postponement of inflation until after the war. The United States briefly turned again to wage and price controls during the Vietnam War.

The use of wage and price controls to suppress inflation runs the risk that black markets will emerge, and that producers will secretly reduce the quality of products to save money. The reduction in the quality of products, which forces consumers to buy them more frequently, defeats the purpose of the controls.