Gary M. anderson is a professor of economics at California State University, Northridge.
Government seems to grow constantly bigger and ever more intrusive in our lives.
Modern history reads like a tale of interventionism run amuck. In a recent Freeman article, Robert Higgs outlines the pattern of government growth in the United States in the 20th century. He explains that national crises (e.g., World War I, the Great Depression, and World War II) have contributed to a shift in public ideology, leading to popular acceptance of ever-bigger government. Increasingly, special interest groups have learned to manipulate the political process for their own ends, and the private economy has become a “cash cow” used as the source of governmental subsidies and other forms of favoritism. Before World War II, it was widely believed that government had no business interfering with the private economy in the absence of dire necessity; after the war, Americans generally assumed that government interference was the rule rather than the exception. Majoritarian democracy has become a kind of handmaiden to Big Government. Higgs concludes his essay on a pessimistic note: “as far as the eye can see, we behold only big government and more big government.”
In his recent book, Higgs discusses a related development that occurred following both world wars: the federal government shrank rather substantially after the close of hostilities. He notes, however, that this shrinkage failed to return the size of the federal government to where it was before the wars started (relative to the overall economy). Government expanded enormously, in both size and scope, during the war, declined significantly after the war, but nevertheless remained on a higher “growth path” than would otherwise have been the case. In short, after hostilities ended and the troops were demobilized, both wars left the federal government significantly larger even in the long run.
This process of postwar shrinkage in the size and scope of government has received relatively little attention from scholars. Even defenders of free markets have largely focused their attentions elsewhere. However, the postwar government shrinkage deserves our attention for two reasons. First, this reduction in intervention and expenditure is interesting in its own right. We do not ordinarily expect to see government growing smaller, because all of the incentives facing politicians and bureaucrats reward those individuals for making decisions that cause government to grow larger. Second, defenders of the free society need to consider this postwar reduction in governmental interventions in the economy as it may apply in more ordinary circumstances. A careful consideration of these episodes provides grounds for optimism. Particularly significant was the demise of price controls after World War II. We know that Big Government can be stopped, because in the recent past, it has been stopped—at least, temporarily.
World War II
The federal government exploded in size during World War II. Spending by Washington grew from $10 billion in 1940 to a (what was at the time) mind-boggling $100 billion in 1944. Obviously, most of this growth was in the form of military spending. For example, the U.S. Army had about 187 thousand men in 1939; this number rose to over 8.26 million in 1945. The United States produced 300,000 war planes, 100,000 tanks and armored vehicles, 124,000 ships, and 41 billion rounds of ammunition during World War II, to mention a few examples.
But at the same time the federal government was buying tanks, planes, and ships needed to fight enemy forces, it was expanding its activities in realms that had a more dubious relationship to the efficiency of waging war. The War Production Board (WPB) became America’s central planning agency, replacing allocation of resources by the market with allocation by Federal bureaucrats. Instead of offering market prices for military items, the federal government used the WPB to force industry to convert to war production from consumer goods. In this way, the government coerced private industry to accept prices for war goods far lower than the free market would have determined. The War Labor Board regulated wages. The Office of Civilian Supply administered the civilian sector. And the Office of Price Administration (OPA) controlled virtually all prices. These various “war agencies” employed 151,551 people in 1945. In that year, the various bureaucracies that controlled prices and wages alone cost $389.1 million to operate.
Federal price controls weren’t restricted to goods directly related to the war effort, like armor plate or chemicals needed for explosives, but were essentially universal. All important consumer goods were price controlled. Rents were especially tightly controlled. All told, about 650 separate price controls were in effect during the war years.
Moreover, these controls were not mere requests, but were strictly enforced. Failure to obey the price regulations was a crime. Between February 1941 and May 1947, the OPA instituted 259,966 sanctions on violators of price regulations, including 13,999 Federal criminal prosecutions and 5,127 local criminal prosecutions. During the period 1941-1945, the federal government seized under Presidential authority (and, in effect, temporarily nationalized) 73 industrial plants.
This extensive price control reduced the efficiency of the economy, and therefore raised the real costs of the war effort. A better policy would have been to interfere as little as possible in the operation of the free market, and pay the prices for war-related goods that reflected the true conditions of supply and demand. However, as Robert Higgs points out, controlling prices had a big advantage for politicians anxious to protect their re-election prospects. Price control made the cost of the war seem to be lower than it really was. Nominal tax revenues collected could be lower. The apparent size of the Federal deficit could be made to look smaller. Unfortunately, while this “shell game” may have reduced re-election anxiety among politicians, it lowered economic efficiency, produced shortages, and led to a massive system of rationing that was rank with political favoritism.
In an important sense, this expansion of the federal government into central planning was more ominous than the rapid growth in actual spending, although the latter was easier to measure and hence seemed more dramatic. It would have been very hard for government to justify such huge military budgets in peacetime, and so there was a strong built-in pressure to reduce spending after victory was achieved. But the regulatory apparatus was much more insidious. Since it had nothing directly to do with the war effort (i.e., it contributed nothing to military strength), it was less obvious why the cessation of hostilities should lead to deregulation. Granted, the heavy burden of regulation was claimed to be a necessity of wartime. But the same arguments (the supposed need for “stabilization,” “production rationalization,” and for “controlling inflation”) that were used to justify the massive increase in regulatory activity during the war could potentially be applied with equal force after the war had ended. More to the point, bureaucrats like to regulate, planners like to plan, and controllers like to control. A huge regulatory bureaucracy was in place and ready to insist that the country could not survive without continued central planning. If the planners had been left to their own devices, postwar deregulation would not have happened. We would be living in a centrally planned economy today.
Fortunately for the U.S. economy, this dismal projection did not come to pass. Simply stated, the voters demanded an end to wartime planning. This was especially the case with regard to price controls.
There was strong public support for the war against the Axis powers, so most people were predisposed to accept any measures the federal government declared to be essential for ultimate victory. Even during the war, though, public support for price controls was lukewarm. Many people had trouble with the idea that granting Federal bureaucrats power to set prices was necessary for military victory. For example, in November 1943, when patriotism was running very high, a Fortune magazine poll found that only 29.4 percent of respondents thought that the Office of Price Administration was doing a good job; 30.8 percent rated its job as “poor,” 24 percent “medium,” and 15.8 percent didn’t know. In other words, at the height of the Second World War, over 70 percent of respondents did not think that the OPA was doing a good job.
The Black Market
Additional evidence of weak public support for price controls was the thriving black market for price-controlled and rationed goods. Naturally, because open violation of price regulations was illegal, “official” data on the size and scope of this activity is hard to come by. But there are indications that the black market was substantial. For example, in 1944 alone, the OPA found 338,029 separate violations of its regulations, and prosecuted 9,260 people (the remainder of the cases receiving some lesser penalty). Food, clothing, gasoline, consumer durables, and even apartments were readily available on the black market. Of course, this is only indirect evidence of the lack of public acceptance of price controls, but such “cheating” was generally viewed by average people as not hindering the war effort in any way. Many patriotic Americans bought sugar and gasoline on the “black market.”
Nevertheless, most indications suggest that the general public at least tolerated the various wartime economic regulations. Most people took the federal government at its word that war regulations were just that, and would be lifted after victory was achieved.
As the war came to a close, much of the Federal regulatory apparatus was lifted, just as the Army was gradually demobilized and orders for tanks, planes, and ships were canceled. This “reconversion” did not, however, secure the enthusiastic support of all the wartime bureaucracy. Many Federal war regulators and administrators fought bitterly, albeit unsuccessfully, to retain their bureaucratic fiefdoms in peacetime.
The protests of the price controllers against peacetime deregulation were more successful than many of the similar efforts by their regulatory colleagues. Predictably, the professional price controllers were not eager to set prices flee—and put themselves out of jobs. Almost immediately following the cessation of hostilities, the OPA bureaucracy began to insist that many price controls were still necessary in peacetime. OPA argued that the retention of strict price controls (combined with detailed regulations restricting clothing style changes) was “indispensable in upholding its stabilization program.” In October 1945, OPA’s price controls on building materials were actually strengthened. Price Administrator Chester Bowles strongly opposed removing price controls on housing. In November 1945, price controls remained in effect for rubber, tin, lead, various chemicals, housing, newsprint, containers, textiles, clothing, leather goods, and other products. The price-control law was due to expire in June 1946, but the OPA let it be known that “at a minimum” price controls would be “required” until at least the end of June 1947! The clear implication was that, in the OPA’s view, controls might be “needed” indefinitely. At the end of July 1946, this extension was duly enacted.
Instead of leading the fight for the restoration of free market prices, economists had almost all joined the other side. One historian notes that the “unanimity” of support for continuing controls among professional economists was “remarkable.” The list of prominent economists who signed a petition favoring extension of price controls makes for surprising, and depressing, reading. Ludwig von Mises was a courageous exception, and voiced his strong opposition to price controls. So the system of peacetime price controls met with the approval of both the price controlling bureaucrats and professional economists. Politicians in Washington, too, thought price controls were a good idea. Continuing controls had strong support in both Congress and the Administration. Congress approved the “emergency” extension of price controls until June 1947 and, although there were various political squabbles about specific price controls, generally supported the idea of continuing controls in peacetime. President Truman also found continuing controls attractive, again with various political caveats.
Significantly, one important group refused to join in approving perpetual price controls: the voters. Ordinary citizens subjected to “price stabilization” without end grew increasingly angry. Industrialists began to become alarmed; the National Association of Manufacturers ran a vigorous advertising campaign promoting decontrol, A September 1946 Gallup Poll showed that majorities now favored decontrolling meats and other foods, and only a minority favored continued controls on autos, radios, and other manufactured goods. The fall of 1946 saw a de facto farmers’ strike, with meat producers refusing to bring meat to market until controls were lifted. The average voter wasn’t trained in economics, didn’t understand the ill consequences of interfering with the price system, and accepted the official view that price controls during the war were necessary for victory. But after the war ended, they grew annoyed that the price controls continued.
The 1946 Election
Fortunately, the voters had a chance to voice their objections where they counted most—at the ballot box. On November 5, 1946, many sitting Congress members were firmly told by their constituents to find other lines of work. In the House of Representatives, a Democratic majority became a Republican majority, with the latter picking up an astounding 57 seats. In the Senate, the Democrats also lost their majority, with the Republicans garnering 13 seats.
What is important to note here is that the new Congress members were overwhelmingly committed to ridding the economy of price controls, and other lingering wartime regulations, once and for all. Former President Herbert Hoover was perhaps guilty of slight hyperbole, but nevertheless on the mark, when he commented: “The whole world, including the United States, has for years been driving to the left on the totalitarian road of ‘planned economy.’ America is by this election the first country to repudiate this road.”
Surely price control was only one of many issues in the 1946 Congressional elections. Furthermore, price controls were being gradually lifted on various items before the election, although not as a matter of principle; the OPA and other regulators made clear that decontrols allowed on particular items were basically “temporary,” and that controls might be slapped back on at any time. Rather, price control was important as a symbolic issue. The existing group of elected officials in Washington had demonstrated a weak commitment to a complete transition from war regulation to a peacetime free market, and an eagerness to retain as much of the wartime regulatory apparatus as they could get away with. The response by American voters, who had voted for the same politicians in 1944 (a year considered a significant victory for the Democratic Party) that they voted against in 1946, was swift and decisive.
The turnabout by Federal bureaucrats and politicians in their expressed opinions about the wisdom of continuing price controls was equally swift. Nothing strikes fear in the hearts of politicians like an election. Price Administrator Chester Bowles, who on November 4 (the day before the election) had called for a halt to price decontrol “until supply and demand came into balance,” had a sudden change of heart and approved immediate removal of virtually all remaining controls on November 10 (five days after the election).] The day before, President Truman had ordered the immediate removal of all remaining controls. This policy shift must be one of the most abrupt on record.
Of course, this was but a temporary victory. Take government spending for example. By 1948, Federal expenditures had declined from their wartime peak of $100 billion to a low of $35 billion. But Federal spending did not continue to shrink, and began a 40-year period of sustained growth. Even the victory of voters over price controls was temporary; controls were again implemented during the Korean War and under President Nixon. The price of liberty is eternal vigilance, and the vigilance of American voters has lapsed on numerous occasions. Nevertheless, there was an important victory that we need to recognize: the United States returned to a largely free market economy after its brief flirtation with “war socialism.”
It is easy for defenders of private property and free markets to become discouraged by contemplating the avalanche of government regulation coming out of Washington. Strong pressure for bigger and more intrusive government comes from organized special interest groups, and sometimes it seems voters have abandoned their right to say “Enough!” at the ballot box. But we must remember that ordinary citizens have on many occasions effectively exercised their franchise to stop Big Government in its tracks, or at least slow it down. Proposition 13 in California is one famous example. The voter revolt against Congressional “central planners” in 1946 is another example which is not as well-known as it deserves to be. Government can be reduced by voters; those voters just need to be convinced that less government is the right course. Democracy in itself does not necessarily imply bigger and bigger government.
There is another interesting aspect to postwar government shrinkage that should inspire hope for the future. In 1946, support among professional intellectuals for decontrol and deregulation was virtually nonexistent; economists were almost unanimously in favor of continuing controls. Despite this lack of intellectual support, the “voter revolt” against Big Government succeeded. Today, growing numbers of professional intellectuals, including economists, support deregulation and limited government. The prospects for radical limits on government intervention have probably never been better than they are in the 1990s.
3. The direct cost to the United States government of prosecuting the war against the Axis powers was tremendous. It is difficult to determine whether victory might have been achieved at lower cost by the pursuit of alternative strategies, but there is one piece of convincing evidence that the actual pattern of Federal military spending was fairly “efficient” in a technical sense: the United States (along with its allies) won the war. Whether U.S. involvement in the war was “efficient” in the economic sense, in the long run, is an entirely different question. Ludwig von Mises thought the answer was yes, and wrote of the choice between freedom and slavery in a “Nazi-dominated world” (Omnipotent Government: The Rise of the Total State and Total War [New Haven: Yale University Press, 1944], p. 237).
7. U.S. Civilian Production Administration, Industrial Mobilization for War: History of the War Production Board and Predecessor Agencies, 1940-1945; Volume I: Program and Administration (Washington, D.C: Government Printing Office, i947), p. 956.
9. John L. Blackman, Jr., Presidential Seizure in Labor Disputes (Cambridge: Harvard University Press, 1967), pp. 259-76. Relatively few seizures involved OPA directly, but most stemmed in part from price or wage control violations.
10. Higgs (Crisis and Leviathan: Critical Episodes in the Growth of American Government, p. 209) notes that the 8,000 local rationing boards represented an “empire of petty tyrannies” in which cronyism was rife.
17. For example, in Omnipotent Government (1944), Mises condemned the use of price controls by the American and British governments, and commented: “These men who want to fight Nazism by adopting its methods do not see that what the Nazis have achieved has been the building up of a system of socialism, not a reform of conditions within a system of market economy” (p. 63). Price controls in Nazi Germany were even more oppressive than those promulgated by the OPA in the U.S. See also Mises, “Inflation and Price Control,” in Planning for Freedom (South Holland, I11.: Libertarian Press, 1952, pp. 72-82, originally published Decem ber 20, 1945).
18. Some insight into Truman’s thinking about controls can be gleaned from considering his reaction to the meat shortage that became evident in the summer of 1946. He blamed Congress for causing the meat shortage when it delayed the passage of the extension of price control, accidentally permitting meat prices to be freed for almost a whole month! See Rockoff, Drastic Measures, p. 107.
25. Admittedly, sometimes voter opposition to Big Government ultimately fails. See David T. Beito, Taxpayers in Revolt: Tax Resistance During the Great Depression (Chapel Hill: The University of North Carolina Press, 19.89) for a fascinating account of the forgotten but vigorous “tax revolt” movement in America during the Great Depression. Pro-interventionist historians would prefer to pretend that no opposition existed to the New Deal and high taxes.