Is Taiwan the Next Hong Kong?
China Tests the Limits of Impunity
NUMEROUS suggestions are being made as to how the present business recession in the United States can be relieved. Among the remedies proposed is regulation of prices by the government. It happens that in this particular field of controlled economy Germany has had the widest experience. My purpose here is to examine that experience and, so far as possible, to draw conclusions from it regarding the validity of government price control in general. My own knowledge gained as Reich Commissioner for Price Control will naturally form the basis of this analysis.
Within the last twenty-five years Germany has gone through four different periods of price control: during the World War; in 1931-32; in 1934-35; and since October 1936. The first and last of these four periods differ fundamentally from the other two. Price control systems were set up during the war and in 1936 in order to replace the law of supply and demand by governmental fiat. In the two intervening periods, however, the object of control was to restore the free flow of business, thereby permitting prices to conform to the diminished purchasing power.
Given the nature of the present economic crisis in the United States, it is Germany's experience with price control during 1931-32 and 1934-35 that will be of particular interest to Americans. Basically, the economic situation in America today is very similar to that of Germany in those two periods. On the other hand, Germany's present system of price control resulted from economic conditions purely German and without any American counterpart. Germany is now operating under a planned economy -- her Four-Year Plan -- in which price control plays a vital part. The regulation of prices, along with the control of exports and imports, performs the same function in maintaining the stability of the German currency as does the gold reserve for the currency of the United States.
The particular measures taken when setting up a system of price control should have a very practical basis. They should be based, not on abstract theories, but on the axiom that man is born with the will to live and to improve the conditions of his life. To satisfy this will, he works. And his ambition to achieve is constantly stimulated by the knowledge that upon his own efforts depends success or failure.
Any discussion of price control should start from this fundamental idea. As a general rule, the expenditure of the same amount of energy should receive the same reward and therefore should provide the same standard of living. However, a government can consciously modify the valuation of those energies. This is in fact done in many countries. In Germany the prices of agricultural produce are maintained at an arbitrary high level. This is possible because Germany must import foodstuffs, the price of which she can raise to the higher level of domestic produce. This higher domestic price is set to enable the farmer to stay in business. England and the United States apply similar methods -- protective tariffs -- in order to protect their industrial products. In the United States, efforts are also being made to change the proportion between agricultural and industrial prices in favor of the farmer. There is no question that technical means are available for doing this. However, it should be borne in mind that the valuation of energies must be altered. It is impossible to increase the purchasing power of the farmer by influencing prices while simultaneously granting higher wages to industrial labor. If the ratio is not altered, it would be exactly the same as trying to obtain lower export prices through currency depreciation while at the same time cutting working hours and increasing wages, as France did in the summer of 1936. In such matters it is vital to follow mathematical rules and not vague dreams.
We come therefore to the conclusion that a government may alter the proportions between the various categories of prices by means of tariffs, taxes, wage regulation, buying up surpluses and similar measures. Which of these measures should be adopted depends on the economic conditions prevailing. The employment of such measures cannot, however, be of equal help to all parts of the economic system simultaneously.
We next come to the question: Can a government prevent or rescind undesirable price increases by establishing maximum prices? A rise in prices may be caused by the increased cost of capital, maintenance, labor or of public contributions (taxes, social security, workmen's compensation, unemployment insurance, etc.). Since the cost of capital expenditures depends upon the risk involved, and since maintenance expenses are largely for labor, there are only two important items of cost which are variable: wages and public contributions. Whoever attempts to set a maximum for prices must also be prepared to pin wages and public contributions at a fixed level. And this would mean nothing less than creating a planned economy. Therefore, excessive prices can be lowered only by cutting profits, wages and taxes. In 1931-32 I was successful in reducing German prices by following this method. Our experience showed how important it is for a government to keep taxes as low as possible. It also demonstrated that it is quite impossible to increase wages or taxes without being forced very soon to increase prices.
A rise in prices can also be caused by a scarcity of goods. Sufficient supply will never lead to unreasonable prices. The fact that the storage of goods involves loss and additional expense, pushes them onto the market. Only in the case of non-perishable goods does speculation enter the field; and as a rule it is best disposed of by letting it die of its own accord. In 1934, the supply of pepper in Germany suddenly ran short and the price consequently started going up. We soon discovered that an English concern was trying to corner the supply, probably in the hope that Germany would be obliged to establish a maximum price. But, since fixing a maximum price would have been useless and would only have pleased the English concern, we managed to do with less pepper for a few weeks. In a short while, the speculating concern collapsed because pepper, if stored, loses in weight and quality.
As a rule, the setting of maximum prices should be resorted to only if vitally necessary goods become scarce. Even then it is not sufficient merely to establish maximum prices. If the open market price cannot be maintained, it is evident that some other system of distribution will have to be created by the government. But as soon as that is done, the nation's economic system is in danger of becoming a planned economy. Recently there have been complaints that meat prices in the United States are too high. The only possible reason for this is that the farmers do not have enough slaughterable live stock. If there were enough cattle and pigs, the farmer would put them on the market, since for him to go on feeding marketable animals would mean risks and probable loss. Whenever possible a country should not resort to price regulation when it can prevent prices from rising by increasing production. Rising prices will immediately stimulate more production and at the same time will reduce consumption. Prices will then automatically readjust themselves to the best economic level. An intelligent nation should have the patience necessary to permit such a readjustment to take place naturally. Furthermore, the meat packers will soon fill the gap since they usually cover their demand when prices are low. From the political point of view, the only danger is a scarcity of vital goods. This danger cannot be eliminated by maximum prices, but by increased production, higher technical efficiency, lower wages, lower taxes, and so on. Which of the means available is chosen depends on the exigencies of the particular situation.
Then there is the question: Can those who produce and deal in a certain commodity be protected against a dangerous drop of prices if the government sets a minimum figure at which that commodity can be sold? Examples are to be found in the United States. I have in mind current attempts to raise the price of certain farm products. From time to time a "liquor war" -- the drastic cutting of prices in the retail liquor trade -- has led to much trouble in New York and other cities. Similar activities in the oil, cement and bituminous coal industries might also be cited. In some places the amount of oil that can be produced every month is determined. Whether intentionally or not, such measures naturally result in stabilizing oil prices. There are those who justify this by pointing to the high wage standard which results. But precisely here lies a considerable danger, for who can guarantee that tomorrow a second group of workers, and the day after that a third group, will not demand that their wage schedules be protected against competition by governmental limitation of production? Is not something of this sort already under way in American agricultural production? And do not these steps lead in the direction of a controlled economy?
When I was Reich Commissioner of Prices many German producers asked that minimum prices be established. Although production was below the level at which it brought profits, and although competition was in many cases ruinous, I refused to grant this request because minimum prices are against the law of nature. Guaranteeing all producers the same price kills the individual's determination to achieve better results than his competitors. And last but not least, we must not forget man's elemental will to live. Even if producers have come to an agreement among themselves, there will always be some among them who sell below the fixed minimum in order to remain in business. Furthermore, those producers who want to be protected by minimum prices are the first to object when they themselves are buyers. Here again, the only really effective remedies are the adoption of reasonable tax and wage policies and the protection of individual initiative and ability.
If, then, the government ought not to set up either maximum or minimum prices, should it not at least establish a permanent control over the movement of prices in order to make them stable? In countries where scarcities exist in key commodities, or where, as in Germany, the currency cannot be protected with gold, the government has no option but to stabilize the price level by a control system. However, such a scheme requires numerous price controllers whose salaries are an economic burden. Furthermore, the individual business man is subjected to a control which may weaken his spirit of initiative and his sense of responsibility. Men who have never been in business on their own are made judges over those whose livelihood depends on sound business management. Therefore a system of this kind should and can be applied only temporarily. The length of the period in which it is kept in operation will depend upon the education and the discipline of the particular people on whom it is enforced.
Wherever such an emergency situation does not exist any system of price control seems to me to be out of place, with one exception to be discussed later. As a rule, competition itself provides a sufficient supply of commodities at the best economic price. It is a mistake to speak in this respect of a free flow of forces. Under the law of supply and demand these forces are controlled by the individual's recognition that a wrong price policy means the ruin of his business. It is objected that this economic law subjects the individual to constant price fluctuation. This also is an erroneous opinion, for in reality a system of maximum and minimum prices, after it has temporarily brought about an apparent stabilization, will in the end lead to ever more frequent and disturbing changes in both prices and wages. The eternal law of nature that any vital demand seeks to be fulfilled must be given effect by the bureaucratic measures of central price authorities. When Italy depreciated the lira in 1936, Mussolini ruled that all prices had to remain as they were. However, in May 1937 he had to increase wages by 15 percent because retail prices had gone up as a result of the rise in the cost of imported commodities. Nature cannot be ordered to renounce her principles.
The rule that offer has to cover demand governs any exchange of commodities and must be obeyed in all economic systems. The only question is whether it should be left to the individual or to the government to enforce the rule. The wisest thing is to leave it to the individual, for better results will always be obtained if the producer realizes that his very life depends upon his own efforts. If everyone is subjected to the law of offer and demand, then all will work like bees to avoid the penalty for breaking it. In any case, there is no possibility of completely eliminating all price fluctuations, for in this field man may propose but nature disposes. One thing is of decisive importance: if an individual makes a mistake, then others, by profiting from his experience, can act all the more intelligently. Individual failures are never so disastrous as mistakes made by the government.
There is everywhere manifest today a dangerous tendency to shirk the responsibilities involved in the struggle for economic survival and to shift to the government functions which private business can carry out more efficiently. If the government will only leave prices alone and not confront business with new uncertainties, the different parts of the economic system will protect themselves against too frequent changes by accumulating stocks. Therefore, it cannot be too strongly recommended that the government let the individual decide how best to cope with this problem. Economic activity, like life itself, means struggle for existence. There are no completely satisfactory solutions for the maladjustments of our economic system. The most dangerous thing any government can do is to promise its people a life without risks. Experiments of that kind will inevitably be futile and will merely end in great disappointment. The standard of living can be improved only by economical public administration, by a reasonable tax system and by increased production. At the same time, the government must keep the struggle for existence within certain well-defined limits. In sport, we have the supreme law of fair play. In business, the government should concentrate on enforcing honesty and preventing unfair competition.
In certain fields, it is true, competition may advantageously be eliminated. In the first place, competition has no apparent raison d'être whenever it leads to a waste of capital. For instance, no sensible person would suggest that both gas and electric facilities be installed for lighting the same street. But wherever reasonable monopolies come into existence, the government, or some other independent body, should see that fair rates are charged.
Secondly, there are fields in which competition may be eliminated for other reasons. For many years it has been possible in Germany to extinguish competition through special governmental authorization. Governments may, for instance, be interested in having the producers of sugar or steel participate in international price control agreements, though such a policy cannot fail to bring about reactions in the domestic market. Again, it may be sound public policy to protect a certain industry in a certain part of the country, such as the German glass-blowing industry. Many people are of the opinion that competition should also be eliminated when necessary in order either to prevent the wastage of natural resources or to keep wages at a high level, as for instance in the bituminous coal and oil industries in the United States. My own experience leads me to be very skeptical of this policy. If one group is given help, other groups demand it; and if they too receive it, a process is begun which only ends by private business manœuvring itself under complete government control.
Thirdly, there are times when in the interest of the whole nation the government subsidizes the development of certain business enterprises, for instance, commercial shipping lines. In such cases, the only thing the government can do is to supervise the manner in which the subsidy is spent; and this includes the regulation of wages and rates. Once embarked upon a subsidy policy, a government is confronted with more and more people asking for aid. For these reasons, I strenuously opposed governmental subsidies in my country, though not always successfully.
Lastly, in time of depression competition may have to be eliminated when it becomes ruinous, as was the case in the American liquor business. Prompted by their instinct for self-preservation, such industries will themselves ask for price agreements. As long as these do not destroy competition completely, producers, wholesalers and retailers may be allowed to enter into them.
No extended and complicated legislation is needed to protect honest business against unfair competition. German experience shows that it is sufficient merely to introduce a few basic rules. For instance, the printing industry in Germany was at one time running at less than 50 percent of its capacity. The result was ruinous competition. Upon investigation, I found that some of the printers who were underbidding their competitors never paid their taxes or other public contributions. To be sure, I did not allow the printing industry to set minimum prices, for reasons that I have already explained. I simply permitted it to establish standard prices. Every printer had the right to ask for more, but he naturally quoted the lowest prices his production costs permitted. If he charged below the standard prices he had to inform his trade association accordingly. This entitled the association to ask him to prove that he always met his obligations in taxes, social insurance and wages. If the printer failed to supply this evidence, the association could give him a warning; and in case of repetition it might turn the case over to the government.
Likewise during my tenure as Reich Price Commissioner certain business circles requested that the government not award a contract to the lowest bidder without first examining whether the prices asked were adequate. It was even requested that the lowest bid be excluded altogether. I naturally rejected any such proposals as being bound to lead to a mad race to raise prices. On the contrary, I forbade price agreements and conspiracies in the submission of bids, and I obliged those who broke this rule to pay an indemnity. Furthermore, I decreed that the lowest bidder should get the contract if he was known to be reliable and proved that he was properly paying his taxes, public contributions and wages. The wages might even be below the minimum; but if they were, they had to be ratified by the employees, who in most cases preferred to remain at work rather than go on relief. Such methods help the small business man as well as prevent excessive concentration in industrial control. For it must be kept in mind that the situation of the small employer is more elastic than that of the larger one because he is always in touch with his employees.
All these measures had the same basic idea: namely, that anyone who seeks to put his competitors at a disadvantage by not paying for the public services he enjoys, is unfair. I authorized the different industries to establish rules of fair competition, subject to governmental approval. These measures are flexible enough to be expanded or restricted according to the degree of competition prevailing in a given industry. They do not discourage initiative and responsibility. In time of emergency it is possible to go even farther, by excluding from competition all who are not paying taxes, other public contributions and the stipulated wages.
When German business men had become accustomed to this procedure, they suggested that the exclusion also be applied against those who wasted either their own or borrowed money. This I refused to do because it is up to the investor to keep an eye on the security of his money. It is impossible by administrative decree to oblige people to conserve their own fortunes. Another suggestion was that a rule be enacted forbidding anyone to sell at a loss. This also was turned down, for, since every economic activity always involves some risk, business would have come to a standstill. If in sports I were to rule that no participant should use any more energy than the others, everybody would arrive at the goal at the same time -- obviously not the object of the contest. By the same token, in economic life the individual must be free to weaken his energies in one field so that he may be stronger in another. If in Germany there had been a law forbidding prices to fall below cost, the development of the large chemical industry would have been impossible. Its enormous progress is due to the fact that in some lines it was able to sell at a good, even excessive, profit and that this profit was then used to develop important inventions, the preparation and initial marketing of which required extraordinary outlays. Thus the law of fair play has to be coördinated with the law of the struggle for survival.
We thus come to the conclusion that fixed maximum and minimum prices are ineffective and eventually lead to a planned economy. While there is no progress, no achievement, without competition, such competition must nevertheless be fair. If, however, competition has already been eliminated, either naturally or artificially, the control of prices is indispensable in order to prevent abuses. But these control measures must be elastic, and they should be administered by only a few highly experienced men rather than by a large bureaucracy. It is the chief duty of every government to establish equal justice, to cultivate good international relations, to insist upon fair play in competition, and to curtail public expenditures and taxes. If carried through, such a policy will stimulate the people to produce a supply sufficient to cover any demand. In the field of international trade, currency stability and a highly developed morale form the basis for fair competition and coöperation. This basis is all the more important since international trade unfettered by any export or import controls is in my opinion an indispensable prerequisite to the world's material progress as well as the best guarantee of peace.