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Sunday, July 23, 2017

Black Markets Were a Lifeline for Postwar France

"Do not forget that some of the biggest operators on the black market in France are the nationalized government industries."

In a June 8, 1947 NBC radio discussion titled “The Future of France,” Alfred Cobban, visiting professor of political science at the University of Chicago, Milton Friedman, associate professor of economics at the University of Chicago, and Louis Gottschalk, professor of modern history at the University of Chicago, carried on an extensive discussion of France, which was, at the time, facing the threat that Communists would be part of the government.

The most interesting (to me) discussion was on black markets, and the most interesting input was by Milton Friedman:

Friedman: On the one hand, on the moral side, the black market is reprehensible. It involves disrespect for the law, disobedience, illegality, and so on. But, from the coldly economic point of view, my own feeling is that the black market has been a very good thing for France. It has prevented disorganization. It has helped to keep the inflation from leading to a complete stoppage of production all over the place.

Cobban: I suppose that I am naturally law-abiding, but it seems to me that you are giving with one hand what you are taking away with the other. I do not like this implied economic approval of the black market and I must say that it seems to me like curing a disease by a stimulant which consists of small doses of a strong poison.

Friedman: It is not approving the black market; it is saying that it may be the lesser of bad things. The government attempt to regulate prices and to ration by direct controls would have led, if it could have been enforced in France, to a very much lower pace of recovery than had been possible through the stimulus in considerable measure because of the black market. Do not forget that some of the biggest operators on the black market in France are the nationalized government industries.

This episode reminds me of two stories Milton told at George Stigler’s memorial service at Hoover in 1992, both of which involved price controls and rationing after World War II. One was about France; the other about Britain.

Milton told it a little differently in his Mont Pelerin tribute to George. I’ll quote from that and then add the part I remember from the Hoover version.

Here’s the Mont Pelerin version:

We went over [to Europe for the first Mont Pelerin Society meeting in Switzerland, before the Society had been named] on Cunard’s Queen Elizabeth (the first, of course, not the elegant QEII), refitted from its wartime service. (That was long before trans-Atlantic travel by air had become commonplace though George did return by plane.) We disembarked at Southampton and proceeded to London where we stayed for several days. Britain was still in a sad way two years after the war. Food was rationed and poor (when George gave some paid lectures at the London School of Economics a year later, he commented in a letter, “So here I am losing weight and gaining pounds”). Price, wage, and exchange controls were extensive and rigid, and appeared to be widely accepted and respected. There doubtless were black markets but they were small and well-hidden.

The situation was very different in Paris, our next stop. The food was incomparably better and while wartime destruction was plainly evident, there was a feeling of vigor and movement absent in Britain. George loved to tell the story, as he did in his Memoirs, “of approaching the clerk at the Grand Hotel, where we were staying, ‘Could you direct me to the closest outlet for the black market in currency?’ I asked.

‘Go no further, gentlemen,’ was the response as he extracted a wallet from his jacket.”

As we left Paris, George summarized his impressions: “I now know the difference between Britain, France, and the United States. The British obey all laws, the French obey no laws, the Americans obey only the good laws.”

The Hoover piece I remember was about France. Stigler had come across France and a fellow economist asked him, “How did you deal with rationing?” Stigler responded, “There was rationing?”

UPDATE: Hoover archivist Paige Davenport has directed me to Milton’s Mont Pelerin speech, referenced above, here.

Reprinted from EconLog.

  • David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at