Price and Wage Controls
PRICE AND WAGE CONTROLS
PRICE AND WAGE CONTROLS. The federal government uses price and wage controls to address the inflation of wages and prices. During wartime, wage and price controls function as a means of mobilizing resources. In a modern economy, inflation is usually stopped only by a recession or a depression, but the government can also decrease, or at least attempt to control, the rate of inflation by imposing price and wage controls.
Price and wage controls were used as early as the seventeenth century. In 1630, diminishing job opportunities and rising wages in Massachusetts Bay caused great consternation among workers and employers alike. To solve the problem, the Court of Assistants put a cap on wages for several categories of skilled workers and for common laborers in general. During the American Revolution, some colonies also imposed a maximum wage in the building trades to counteract labor shortages.
The federal government established price and wage controls during the Second World War by creating the Office of Price Administration (OPA) in 1942. The OPA set price ceilings on all commodities, with the exception of farm products; controlled rents in the areas where key defense plants were located; and held wartime price increases to a relatively low thirty-one percent. The agency also imposed rationing on certain scarce commodities such as automobile tires and gasoline. In the 1950s, President Harry S. Truman used the Office of Economic Stabilization to balance price and wage increases.
In response to the spiraling inflation of the early 1970s, Richard Nixon became the first president to use price and wage controls during peacetime. The strategy did help to stabilize the economy but proved to be only a temporary fix. Unfortunately, Nixon's attempt to subdue inflation and reduce unemployment resulted in limited goods for consumers and increased business bankruptcies, while doing little to curb joblessness. By the time Nixon resigned in 1974, inflation had reached double digits and the American economy was mired in a deep recession. When inflation reached eighteen percent in 1980, Americans clamored for mandatory price and wage controls. President Jimmy Carter steadfastly refused, stating that peacetime controls during the 1970s had proven a dismal failure.
Price controls were employed in 2001, when the Federal Energy Regulatory Commission—in response to the electricity shortage in California—voted to cap the wholesale price of electricity in the state for one year. Under this plan, price controls would be imposed whenever electricity reserves fell below 7.5 percent of demand.