would make it difficult for even a New Deal administration to put the whole power into the hands of doctrinaires who lack business experience and economic understanding.

Given stringent enough provisions on these points, I think it very desirable that the Congress should further provide for the very closest cooperation of allocations and price fixing. A possible compromise would be that a central board, concerned both with price fixing and priorities and allocations, should create industry boards for each industry where control is to be undertaken, should give to each of these boards a general policy, and should expect these boards under the authority of the central board to administer the problems of the special industry, always with the power of removal and always with the power of taking independent action if the industry board is too slow.

But the thing cannot be made to work if the industries are antagonized and if the best brains of the industries are not used. A central board should have the power to designate the scarce commodities and the general policies and then appoint a sub-board, made up of men highly skilled in the actual practice in the field, to fix the prices and to allocate supplies.

Now, about inflation: If by inflation one means monetary and credit factors tending to raise prices, we have today inflationary factors which were wholly absent in the last war.

We thought money was cheap in 1915 and the first half of 1916 as many hundreds of millions of dollars in gold came in from Europe, relaxing our money markets. But the average rate for commercial paper through the whole year of 1915 was 3.45 percent; in 1916, 3.43 percent; in 1917, 4.74 percent; and in September and October of 1918, 6 percent.

Open-market commercial paper today is 0.5 percent.

We had, moreover, no concern regarding the goodness of our dollar or the future of the gold standard-I mean during the last war. There is today widespread distrust of the future of the currency. We had in the last war so heavy a pressure on bank reserves, despite the gold that had come in, that as a war measure we reduced reserve requirements in the summer of 1917.

Today reserves are so excessive that the potentialities of bank expansion are fearful. We have already had so great a bank expansion that idle bank deposits exist on a colossal scale.

It is difficult to see how the Treasury and the Federal Reserve System dare temporize with the situation longer. And it is to be hoped that the money-market policy of the Federal Reserve System will not be utterly subordinated to the Treasury's desire to borrow as cheaply as it can without respect to the source from which borrowed funds come. The hearings before the House committee give evidence enough of appreciation of the necessity for supplementing a price-fixing program with an adequate taxing program. But they give very inadequate evidence of realistic appreciation of the necessity for a proper money-market program or a proper Treasury borrowing program.

At the same time it is just to credit the Secretary of the Treasury with courage in emphasizing the need for curtailing our very excessive nondefense expenditures.

In the last war we did not undertake to control retail prices at all, except in the matter of food and fuel. I quote from War Industries

Board Price Bulletin No. 3, Government Control Over Prices, by Paul Willard Garrett, assisted by Isador Lubin and Stella Stewart, Washington, Government Printing Office, 1920, page 550:

The great bulk of regulation over prices administered by the Federal Government during the war pertained to producer or wholesale prices. There was no real attempt save in food and fuel to control prices at retail. The task of controlling retail prices was undertaken in a comprehensive manner by the Food Administration after its wholesale control was well under way.

(Thereupon Dr. Anderson left the committee table.)

(The following excerpt was left for the record by Dr. Anderson :)

VALUE AND PRICE THEORY IN RELATION TO PRICE-FIXING AND 1 WAR FINANCE 1

An Address

By BENJAMIN M. ANDERSON

Assistant Professor of Economics, Harvard University

BEFORE THE AMERICAN ECONOMIC ASSOCIATION DECEMBER 29, 1917

Mill

Most economists have given scant attention to legally fixed prices. The active, large-scale competitive market, where prices are free to seek adjustment under the influence of economic values, has received our chief attention. limits himself very strictly: "I must give warning once for all," he says, "that the cases I contemplate are those in which values and prices are determined by competition alone. Insofar only as they are thus determined, can they be reduced to any assignable law." Later writers have added their law of monopoly price, based on the principle of maximum net return to the monopolist, but few writers, in discussing the general theory of value and price, have gone beyond that. Mediaeval theory dealt largely with fixed prices, but from the moral, rather than the economic, viewpoint, for the most part. In discussions of railway ratemaking, we have chiefly discussed legal and moral questions. We have here, however, developed a good deal of economic analysis, considering the influence of rates on different industries, on different sections of the country, and on the volume of railway traffic. The problem of legally fixed minimum wages has led some writers to grapple with fundamentals.

On the whole, one gets the impression from the textbooks that legally fixed prices are either futile or harmful, apart from the case of monopoly, where there is a surplus above cost to bear the shock. The discussion of usury laws is typical. The doctrine there is that usury laws are either ineffective, because the legal rate of interest is put high enough not to interfere with the natural rate, or else are evaded, or else drive capital away from the community where the legal rate is enforced. The difficulty of enforcing fixed prices, the danger of forcing merchants to close their shops, the danger of driving supplies away from the market, or of stopping production, have all been emphasized, and have, moreover, been abundantly illustrated from the history of such attempts. Most economists have had grave misgivings about the policy of price-fixing which the present war has brought upon us in America, and there has been no clear statement of theory from those engaged in fixing the prices which would serve to reassure them. Writers in trade journals have been much perturbed by the "repeal of the law of supply and demand." There can be no doubt that practice is ahead of theory in the present situation. One gentleman engaged with regulating prices is reported to have said: "We have no theory. We are merely meeting, with a new ruling, each new contingency as it arises." This paper cannot pretend to offer an adequate theory for the new situation, but it can raise some questions, based on the developments in the actual course of price-fixing, which will pave the way for a more comprehensive view of the new problems.

1 Reprinted, by permission of the American Economic Association, from Papers and proceedings of the Thirtieth Annual Meeting, December 1917, American Economic Review Supplement, March 1918.

In the six or seven weeks that have been available for the preparation of this paper, it has been impossible to make the detailed investigation of the facts that would be required if the conclusions here presented made pretense to finality. The chief attention has been given to wheat and flour, copper, and coal. I am far from sure that I have an adequate grasp of the facts regarding these commodities. Men in the trades express widely varying opinions. The trade journals likewise present a wide range of opinion. Even the government officials seem far from agreement as to what has been accomplished, and what may be safely expected. The tentative conclusions reached are as follows: the price-fixing policy has been a success in wheat and flour; it has been successful in copper; it has done good in the case of anthracite coal; it has done much harm and little good in the case of bituminous coal, but the situation is improving there, and there are possibilities of further developments-later to be mentioned-which may make the regulation of bituminous coal one of the most important parts of the whole program.

Economic values are primarily concerned with the guidance of production and consumption. When values are rising for a given commodity, the tendency is for labor and capital to flow into the industry which produces that commodity, and away from industries where values are falling or are stationary. When values rise, moreover, the tendency is for consumption to be checked, for existing stocks to be more economically utilized. But economic values are only part of a wider social value system, concerned with the guidance and control of social activity. This wider system includes social moral values, and legal values, as well. All these values manifest themselves to a given individual as objective pressures or lures. They are psychological in character, but they grow out of the complex interplay of the minds of many men. They represent, to a given individual, the minds of the rest of the group, putting pressure on him, or offering him lures. Legal values, or laws, are that part of the social will which will be backed up, if need be, by the organized physical force of the group, through the government. Social moral values are values which the group enforces by praise or blame, by cold shoulders and ostracism, or by honor and approbation. Social economic values are values which the group enforces, under a system of free enterprise, by profits and losses, by riches and bankruptcy. Under a socialistic system the economic values would not immediately guide production, but would guide the bookkeeping and planning of the government, and lie behind the laws or authoritative commands which immediately control the activity of labor, and the utilization of the land and capital of the group.

We have been used to think of two main types of social organization, and two main ways of guiding the employment of labor and capital. The system of free enterprise, where prices, controlled by economic values, guide production and consumption, we think we understand. Our economic theory has been worked out to explain it. We have also devoted much theoretical analysis to the socialistic system, where the `state owns the land and capital goods, and where labor is subject to authoritative control. It has been assumed that these two systems are mutually exclusive, that you can have one or the other, but that you cannot mix them.

In fact, however, we do find them mixed. In the socialistic utopias, we often find schemes for the automatic guidance of labor under a system of varying wages, working on commercial principles; and in our system of free enterprise we have many cases of state activity, and cases where the state commandeers property or even life. The conscripted army, or the conscripted posse comitatus, would, of course, be extreme cases of this.

Further, we find many cases, both under the system of legal control and under the system of free enterprise, where men perform services, and perform them well, under the influence of values which are neither legal nor economic. There are many unpaid, or inadequately paid, governmental officials who find their reward primarily in prestige, in the approbation of the group. There are positions of dignity and honor in the world of business, and very especially in the professions, which men prize more for the sake of prestige and dignity than for the income they bring. Every day, in every trade, commonplace men are more upright than the law requires them to be, because they wish the esteem of their fellows. It is no mere pious wish that is expressed in the saying, "A good name is rather to be desired than great riches." Most men live by that. Social expectation is the most powerful steady motive force in social life. It is only when great riches, regardless of how they are obtained,

command the respect and awe of the group, that the normal man will sacrifice other forms of honor to gain the honor which great riches confer. We cannot begin to understand the possibilities of the present governmental program until we have given attention to the power of these values, which are neither legal nor economic, on the lives and activities of men.

Where the state contents itself with a fiat, fixing retail prices, but leaving the rest of the economic situation uncontrolled, we may well expect the law to be a failure. Some merchants will obey it, but if the price fixed is below the wholesale price, bankruptcy will prevent their obeying it very long. The temptation to evade the law, to sell secretly to favored customers at higher prices, or to shut up their shops entirely, will be irresistible. History is full of such cases. But we have a different problem when the state undertakes to control the whole chain of prices leading up to the retail price. Clearly if the retailer can buy at a wholesale price which allows him a living profit, he will be able to sell at the legally fixed price. Will he sell at that price? He has more demand at that price than he can supply. The answer given by our conventional demand and supply analysis is, therefore, that he will raise his price anyhow. His customers, competing for the inadequate stock, will bid up the price. But we have been seing a different situation in the case of sugar in recent months, particularly in New England and New York. In Massachusetts, where I have been able to watch the thing most closely, the retailer has, in general, kept pretty close to the price suggested by the regulating boards. There has been, for the retail market, informal suggestion rather than strict legal control. But it has been effective. When supplies have been exhausted, consumers have waited for more. Stocks have been rationed out, sales being limited to ten pounds, and finally to two pounds, or one pound, for each customer at a given time. The preference has been given to regular customers as a rule. I have found no evidence at all that rich customers have been favored, though probably that has occurred at times. Customers have themselves withheld their purchases. Anxious and able to pay high prices to get more sugar, they have restrained themselves, and put pressure on their neighbors, to help make the inadequate supply go around. The retailer has felt some pressure from the law, more from public opinion, a good deal from the wholesalers, who have at times refused to sell more sugar to the few retailers who have ventured to raise their price. On the whole, the retail price of sugar has been held far below the level that would have obtained had there been no effort to control it. Nor is there any reason to believe that higher retail or wholesale prices of sugar would have hastened by one day the inflow of sugar from Cuba, Louisiana, and the beet-sugar sections. Unrestricted bidding for the inadequate stock, town against town, and rich against poor, would have led to a different distribution of the existing stocks, and a much less satisfactory distribution, but not to more sugar. It was a case of temporarily strictly fixed supply, and the price-fixing policy, accompanied by the rationing out of the stock, was the best solution that could have been quickly devised.

We need not go far in the explanation of the success of the efforts to restrain the price of sugar at retail. It is explicable on ordinary commercial principles, when the various factors we have been considering are taken into account. The retailer views his business as a whole. His "good will" is a valuable thing, which he has built up slowly, and which he doesn't care to put in jeopardy. If he had sold his sugar at high prices to his richest customers, he would have lost more than he would have gained. How far this would apply, however, in restraining him if a dozen staples were involved is not so clear. More is involved than the balancing of profit and loss. But the larger the percentage of his business involved in the price-fixing policy, the harder it will be to hold him. In the case of retail coal dealers, for example, whose whole business is in the one commodity, there is evidence enough of a great deal of profiteering, in the absence of definite legal restraint. Even here, however, the force of public opinion has been very great, and coal dealers have shown great moderation, and a real sense of public responsibility in rationing out their stock, so that all of their customers might have consideration.

I do not think that the problem of holding dealers, retailers, and wholesalers, to a reasonable margin of profit is a serious one, viewed as a wartime matter, and viewed as a short-run matter. Legal and moral pressures will accomplish it, if the margin be not too narrow, and if the expectation be clear that it is not to last forever. What about the problem, however, as we go

further back in the chain, back to manufacturers, and back still further, to miners, farmers, and lumbermen, who supply raw materials, or back to the laborers, who are "ultimate factors of production" at every stage? How far is it possible to put pressure of a noneconomic sort on them, to induce them to forego the prices they could expect under the free play of economic values? On the whole, we may expect among manufacturers, laborers, mine owners, and farmers the same general human nature, and the same sort of responsiveness to social pressures, that we find among retailers and wholesalers. The questions to be answered regarding them relate to the possibility of applying the social pressures, and the possibility of their being able to respond to them. It is easy to apply social pressure to conspicuous men and to large corporations. If they violate the law, evidence is obtainable, and juries, especially in wartime, will take pleasure in convicting them. The finger of scorn is easily pointed at them, and they can be made to wince before public condemnation. Moreover, the fact that a given man or corporation is handling large enterprises makes it easy to see that the public welfare is really affected, and great praise is given to conspicuous services-as in the case of Mr. Ford.

Where industry is concentrated, therefore, control by non-economic values is easy. The railroads have been operated, since the war began, with a primary purpose of serving the country, and with profits made incidental-very incidental. The banks and stockbrokers have given great services, and services which have cost them a good deal of money, gratuitously. The great copper mines and concentrated copper selling agencies have been brought under governmental direction by an organization within the trade itself, which controls the shipments, as well as the price, and which is really selling, at the price fixed, exclusively to those customers who need the copper for public purposes. Anthracite coal is concentrated in a few hands, and the control of that industry has been fairly simple.

But the farmers are scattered and numerous. Bituminous coal mines are also numerous and scattered. Laborers are most numerous, most obscure, anonymous, hardest of all to bring to the bar of public opinion. It is also hard to bring legal pressure to bear on farmers and laborers. They are so numerous that their political power is great. They have, moreover, definite class feeling and have a sense that they have been much exploited in the past, and these ideas are shared by many of the rest of us. They thus have social values of their own which tend to resist outside social pressures, and the outside social pressures are weaker because many who are not laborers or farmers share the standards of the farmers and laborers. To coerce farmers and laborers is virtually impossible. They must share the collective sentiment and feeling which impel them to sacrifice their economic interests, if they are to make sacrifices. Something of the same sort is true of the grain and flour trade, although there is much more organization there, closely interwoven through boards of trade, private wires, and great milling organizations. It is perhaps not necessary to enlist the good will of the anthracite mine owners, or the steel corporations, or the copper mines and selling agencies. They can be forced to act in the public interest. It is fortunate that their good will has been enlisted, none the less. But it is vital that the good will of farmers and laborers be utilized. A policy of coercion and antagonism would be very harmful there. It is a great misfortune that the bituminous coal trade was violently antagonized and thrown into a state of bitter resentment when the government first took action with reference to the price of bituminous coal. This resentment Mr. Garfield has done much to lessen in recent weeks.

Where it is possible to utilize an unquestioned public ideal, which virtually all men share, as your agent of social control, even the obscure individual can be reached. It is not hard to shame the obscure slacker, who evades his duty as a soldier, because his neighbors and associates condemn him. It is not hard, moreover, to control the obscure retailer, because his customers have an interest in putting pressure on him. But if pressure be put on a whole large class, which the class resents, the obscure individual in that class has a social standard to which he can appeal, finds sympathy among those for whose good opinion he most cares, and can, moreover, hope to escape even legal penalties, because he expects to be dealt with by a jury of his own kind.

The good will of the grain trade, and the flouring industry, seems to have been won. Mills producing well over 90 per cent of the output of flour have signed without question the agreement to keep to the government's price of wheat, and have accepted the government's restrictions on their profits. Wheat has come