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Price Controls, Black Markets, And Skimpflation: The WWII Battle Against Inflation

To control inflation during WWII, the U.S. government resorted to wide-ranging price controls. Unintended consequences may be the reason they aren't used today.

The threat of inflation loomed even larger during WWII than it does today. As America became an "arsenal of democracy," we spent massively on machines and supplies for war. The federal deficit skyrocketed, from about 3 percent of GDP in 1939 to almost 27 percent of GDP in 1943 — which is far and away the worst the deficit has ever been. Meanwhile, factories, workers, and materials were all repurposed for the war. Millions of productive workers left the labor force to enlist in the armed services.

This combination of factors — lots of deficit spending boosting demand in the economy, and war measures reducing the capacity of the economy to supply and satisfy that demand — was a recipe for runaway inflation. President Franklin Roosevelt and his administration knew this. They had seen rampant inflation during and after World War I: prices rose more than 80 percent between the war years of 1917 and 1920. The administration wanted to prevent that from happening again. So they embarked on a monumental effort to cool inflation by freezing prices with price controls.

The policy effectively neutralized one of the central functions of the free market, which is the allocation of scarce resources. In a free market, if there's not enough of something, the market responds by raising prices. This reduces demand for that product. It also sends a signal to businesses to produce and supply more of that product. Without this price mechanism, most economists believe, the market struggles to remedy shortages and society scrambles to figure out who gets what.

During the early 1940s, when the federal government began eliminating free-market pricing on goods in short supply, it had to begin allocating these scarce resources in a different way. It created a rationing system where the government assigned ration stamps to citizens.

To buy products in short supply — like coffee, canned foods, dairy, meat, bicycles, cars, tires, gasoline, clothes, and sugar — American consumers not only had to pay money, they also had to use government-issued ration stamps. The aim was to limit the amount of a particular good or goods that any one person or household could purchase, and ensure more equitable distribution during wartime. The government sent each American household ration books containing removable stamps with ration points. And it created a complicated and ever-changing system of assigning ration points to specific products.

To achieve all this, the federal government erected a sprawling and intrusive bureaucratic apparatus under the Office of Price Administration (OPA). During the war, the OPA and related agencies employed hundreds of thousands of federal employees and community volunteers, including twice the number of economists as the U.S. Department of Treasury. It's a lot of work to centrally plan an economy.

But despite the tireless efforts of the government, the system was plagued by all sorts of problems. Nowhere was this more apparent than with meat.