Wartime Wisdom to Combat Inflation

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.