Friends of Inflation

The most important price news last week was that nothing happened. Plans had been made to introduce in Congress the first price-fixing law in U.S. history. Instead, the whole price-control question was in the President's lap, on the heap with the other defense bottlenecks. The other bottlenecks merely clanked a bit whenever the President stirred; this one smoked. The smoke: inflation.

Leon Henderson was helpless. Most cotton mills last week were ignoring the retroactive feature of OPACS' price ceilings on gray goods, were billing at the old higher prices. Some furniture makers were still defiant of "jawbone" price control, as Chrysler had been (TIME, July 7). The price of cotton rose 3/4-c- to 15.21-c- a pound, a new eleven-year peak. Commodity price indexes paused on their upward flight, but briefly. Montgomery Ward's big fall & winter catalogue came out with 70% of the items showing higher prices than last spring, and a hedge clause on all prices to boot. Sears' new catalogue showed an average price rise of around 6%. Henderson, who has no political status that does not derive from the President, could do nothing without a law. To get a law, he needed outspoken Presidential support, for which he and his friends are pressing. But outspoken Presidential support he did not get last week.

Presidential preoccupation with naval affairs was not solely to blame. An anti-inflation speech would not be the most popular speech the President could make right now. Inflation is an economist's swearword; but a lot of other people are for it so far as it seems to mean higher prices for what they have to sell. Not an organized group, some potential members of the Friends of U.S. Inflation could be counted last week.

Most conspicuous eligibles were the farmers and their Washington representatives: men like the Farm Bureau's lobbyist Ed O'Neal, whose hefty shoulder was behind the Fulmer (85%-of-parity) Act; like "Cotton Ed" Smith of South Carolina, who has already tangled with Henderson; like Senator Elmer Thomas of Oklahoma, who combines a farm constituency with a weakness for greenback schemes. Such men were already talking opposition to any price control until farm prices reach 100% of parity, or even more. But since parity is a variable figure (related to a cost-of-living index) and since higher farm prices mean a higher cost of living, parity is a mirage, and an effort to reach it is likely to result in a price spiral.

Other Friends of Inflation could be found among labor leaders, some of whose wage-increase demands have been based on the expectation rather than the reality of higher living costs. Most wage increases to date have been readily absorbed by falling unit costs on greater volume, thus not directly forcing price rises (though helping to keep prices up). But the limit of that absorptive capacity, admitted Henderson last fortnight, has now been reached "in industries operating at capacity levels."

A third group was made up of the weaker, just-one-more side of almost every U.S. businessman. Henderson regards this as the strongest factor influencing price rises. Although all sane businessmen fear inflation, none regards "a leetle bitsy price rise in his own industry" as responsible for it. To businessmen in certain long-depressed industries, higher prices seem simple justice, reviving dreams of some pre-1929 parity of their own. Example: real estate (whose owners would emerge mortgage-free from any real inflation).

Some people, moreover, regard price rises as not only good business but good economics. Cornell's Professor Frank A. Pearson believes that free prices are the safest means of adjusting supply to demand even in a war economy. Last fortnight, in the Harvard Business Review, Leon Henderson and OPM Purchasing Chief Donald Nelson, in a joint article expounding Government price philosophy ("the results of our thinking thus far"), agreed that free prices were still the best medicine for some defense problems. Example: mercury, where a doubling of price has doubled production, and zinc, where a 60% price increase reopened many a closed mine. Their doctrine: "No price advance shall be prevented when it is contributing to our prime objective of increasing production."

But not all price advances do that. Messrs. Henderson and Nelson defended the need for some price controls (preferably selective) by naming the real dangers in price inflation:

1) It increases the cost of arms to the Government, whose demand for them is absolute (undeterred by price).

2) It is an undeserved hardship on the fixed-income groups (prominent among whom, Professor Pearson cattily notes, are Government employes).

3) Most serious of all, it leads to a post-war deflation. Another of those, said Henderson and Nelson, "would without doubt bring about some profound changes in our economic and social system, changes which most of us certainly do not regard as desirable."

Thus girt with logic, Leon Henderson still had no price weapon last week. There was a strong hint (from Steve Early) that the White House meant to put the whole thing off till next fall. Strategy: by then the cost of living would have gone so high that an angry consumer lobby might be organized to override the Friends of Inflation. But by then also, inflation will be at least a partial fact.

Everybody in Washington expected some inflation last week. To try to freeze and police all U.S. prices now would be a task for a Gestapo, which Washington neither wants nor has the time to put together. Even Leon Henderson, given all the power he wants, expected to be little more than a drag on inflation, stopping advances here & there at strategic points. The problem was seen rather in its overall fiscal aspect: that of increasing total output and keeping consumer buying power down. For the latter, the consumer could count on one thing, whether his prices are controlled or not. His taxes, both on what he earns and what he buys, will hurt.

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