From Diocletian to Nixon, Every Price Control Ends the Same Way

One morning a government looks at the price of bread and decides it is too high. So it passes a law declaring that bread shall cost less. The law passes with great applause. The price of bread falls, by decree, to the new number on the sign. And the next morning, the bakery is closed, because it cannot make bread for what the law allows it to charge.

I want to tell you that story as history, not as a joke, because it has been told over and over again for seventeen centuries, with different cast members and the same ending. Emperors have told it. Revolutionaries have told it. And a Republican president, a man I would like to be able to defend on this subject and cannot, told it in the summer of 1971. The plot never changes. Government sets a price below what the market would set. People who want the good show up in larger numbers than before. Fewer people want to make it. And the difference between the two shows up as empty shelves, long lines, a back-alley market and a decline in quality.

Let me walk you through the record, and then I will answer the best argument on the other side.

Rome, 301 AD: the edict with death for a penalty

Start with Diocletian. The emperor came to power in 284 after a century of crisis, and one of the sicknesses of that century was inflation. The empire had spent decades paying its bills with coins that contained less and less silver. When the government waters down its money, prices go up. This is not a mystery. It is what a bigger supply of money chasing the same goods does.

In 301, Diocletian and his co-rulers issued the Edict on Maximum Prices. It set ceilings on hundreds of goods and services across the empire, from grain and wine to the wages of laborers and tailors, and it set penalties for breaking them that included death. Its preamble blamed greedy merchants for the rise in prices. Copies were carved in stone in cities across the eastern Mediterranean, and fragments of those inscriptions survive today.

What happened next is described by a Christian writer named Lactantius, who disliked Diocletian and so should be read with caution, but whose account fits what economics predicts. He wrote that when the prices were fixed, goods vanished from the markets, and that blood was shed over trifles. The edict was widely evaded, was never effectively enforced across the empire, and was left to fade away within a few years. Diocletian himself stepped down in 305.

Keep the lesson of this first case. The government created the inflation by debasing its money, then blamed the merchants who were reacting to it, and then tried to force the symptom to go away by law.

France, 1793: the Maximum and the guillotine

Fast-forward to the French Revolution. The revolutionary government had paid its bills with paper money, the assignats, which lost value as more were printed. Prices rose. The government blamed hoarders and speculators. In May 1793 it set a maximum price on grain, and in September 1793 it passed the Law of the General Maximum, which capped prices of a long list of necessities and also capped wages.

The enforcement was severe, because that was the character of the government at that moment. Shopkeepers who broke the maximum could be hauled before the revolutionary courts. Farmers held back grain or sent it to the black market, and town dwellers queued for bread that was not there. The system survived until after the fall of Robespierre in July 1794 and was repealed in December of that year. The law that was meant to feed the poor had made it harder for the poor to eat.

Again, the same plot: the cause was money creation and a war, the remedy was a ceiling, and the result was a shortage.

The best case for emergencies, and the Second World War

Here is the argument I promised to answer, stated at its strongest.

In a real emergency, the argument goes, ordinary market logic does not work. A hurricane, a war or a blockade cuts supply suddenly. If prices are allowed to leap, the wealthy will outbid the poor for water, food and fuel, and that is unfair. A temporary cap, coupled with fair rationing, spreads the pain equally. And America did this in the Second World War, when the Office of Price Administration, set up in 1941, imposed a General Maximum Price Regulation in April 1942 and ran a rationing system for sugar, gasoline, tires, meat and more. Most Americans accepted it, the argument goes, and the country got through the war without runaway inflation. If it worked then, why not again?

That is a serious argument and I respect it. Here is my answer, in order.

1. Wartime controls came with rationing and with shared sacrifice, and they still leaked. Ration coupons gave every family a share of scarce goods, and the public accepted the sacrifice because the cause was plain. Even so, the war years produced a black market in meat, gasoline and other rationed goods. And when the controls ended after the war, in a messy fight in 1946, prices jumped, which is what you would expect when pent-up demand meets a market that had been held down. The controls had suppressed the signal; they had not removed the pressure.
2. A shortage is a supply problem, and a ceiling makes supply worse. After a storm, the thing the community needs most is for trucks of water, generators and lumber to drive in from other states. A higher price is what pulls them there. A price cap tells the trucker that the long drive is not worth his while. Our piece on price gouging laws sound fair and then the shelves go empty takes this up in more detail.
3. If the aim is to help the poor, help the poor directly. A cash payment or a voucher lets a low-income family pay the market price without distorting the price that tells everyone else how much to produce. A price cap helps whoever happens to get to the shelf first, and that is often not the poor.
4. A temporary emergency measure needs an end date, and the record shows that it rarely has one. Nixon's controls, as we will see, were meant to last 90 days.

That is the whole objection and the whole answer. Now back to the history.

Washington, 1971: a Republican blinks

On August 15, 1971, President Richard Nixon went on television on a Sunday night to announce a new economic policy. Among its parts was a 90-day freeze on wages and prices. Congress had passed the Economic Stabilization Act in 1970, giving the president authority to control wages and prices, and Nixon, who had long resisted using it, now did. The freeze was followed by Phase II, with a Pay Board and a Price Commission, and later by Phase III and Phase IV, each one a rearrangement of the machinery. The program ended in April 1974.

The politics are easy to understand. Inflation was a problem, an election was coming in 1972, and the voters wanted action. The controls were popular at first. But they did not cure the problem. Many economists blame the easy-money policies of those years for the underlying inflation, and with money still loose, the pressure built up behind the dam. In 1973, Nixon froze the price of beef, pork and lamb for a stretch. The result was something shoppers could see for themselves: meat counters with thinner stocks and ranchers who held back cattle rather than sell at the capped price. The ceiling on beef was lifted later that year. By 1974, inflation had reached double digits.

I say this as a Republican who wants to be fair to the man. The 1970s were a mess, partly for reasons beyond his control, and the 1972 election was a landslide that tells you voters liked him. But the controls were an error, and the party that has to answer for it is mine. That is part of the case: price controls are not a left-wing or a right-wing product. They are what politicians of every stripe reach for when they are afraid of the voters.

The oil lines, and the man who ended them

Now the part of this story that every driver who was alive in the 1970s remembers. In October 1973, the Arab members of OPEC imposed an oil embargo on the United States and other countries. Oil supply tightened and prices rose sharply on the world market. But America had its own system for regulating domestic oil prices, and Congress had passed the Emergency Petroleum Allocation Act in November 1973, which extended federal allocation and price rules over crude oil and refined products.

The result was one of the strangest price systems in American history. "Old oil," from wells already producing, was held at a controlled price. "New oil" could sell for more. Refiners were handed entitlements that moved money around among them. The price at the pump was held below the level that would have matched the supply, and so the supply could not meet the demand at that price. Drivers waited in lines that stretched around the block, and in some places drivers could buy fuel only on certain days depending on the last digit of their license plates. The lines came back in 1979, after the Iranian revolution cut production there.

President Jimmy Carter, a Democrat, deserves credit here: in April 1979 he announced a phased plan to decontrol oil prices. Ronald Reagan finished the job. On January 28, 1981, about a week after taking office, he signed an executive order that removed the remaining controls on crude oil and refined products at once. The full account, and the people who argued over it, is in Eight Days Into His Term, Reagan Scrapped Oil Price Controls for Good.

What followed is worth stating carefully. The long lines of the 1970s did not return. Oil prices later fell through most of the 1980s, though I want to be honest that many forces were at work, including conservation, new supplies from outside OPEC and the weak economy of the early 1980s. Decontrol was not the only cause. But it did what it should have done, which is let the price tell producers and drivers the truth about how scarce oil was.

The mechanism in plain words

Now let's explain why this keeps happening, using a hypothetical so that nobody has to take my word for it.

Picture a small bakery. After a spike in the cost of flour and fuel, it costs the baker $3.00 to make a loaf. A law then says no loaf may sell for more than $2.50. The baker is losing 50 cents a loaf. What does he do? He has options, and none of them is good for you.

• He bakes fewer loaves, or none.
• He uses cheaper flour, or makes the loaf a little smaller, so the cost falls to what the law allows.
• He sells a share of the loaves under the counter to regulars at the real price.
• He sells the oven and goes into another line of work.

Each of these is an example of a shortage in action. Now multiply the baker by every farmer, miller, trucker and store. A price is not just a number on a sign. It is a message. It tells the farmer what to grow, tells the trucker where to drive, and tells the shopper what to economize on. A price control cuts the wire and leaves everyone guessing. For a delightful account of how many people cooperate without anyone planning it, see I, Pencil and the price system, how nobody plans your breakfast.

The same mechanism applies to housing. Rent control caps what a landlord may charge. In the short run, the tenant in the apartment is better off. In the longer run, the owner has less reason to repair, to build or to rent, and the people who need housing but do not already have a controlled apartment find the market tighter. If you want to see a quieter version of the same thing, read zoning may be the biggest price control you never got to vote on, which makes the case that rules that limit supply act on prices from the other side.

What actually brings prices down

If controls do not work, what does? The honest answer is not exciting, and it takes time. Five things:

1. Sound money. Stop creating more money than the economy needs. Inflation is a monetary event, and the cure is monetary. Our piece on How Paul Volcker broke inflation and why it hurt so much tells the story of a cure that worked and why it was painful.
2. More supply. Let builders build, drillers drill and farmers plant. A shortage is solved by more of the thing, not by pretending it is cheaper.
3. Competition. Entry by new firms does more to restrain a seller than a regulator can.
4. Targeted help for those who need it. Pay the poor family's bill, not the whole market's.
5. Honesty about the cause. When a politician blames "greed" for a price rise, ask what changed. Greed did not change last year. Money, supply and demand did.

The inflation tax is the quiet one, and the reason politicians prefer to blame merchants. We covered that in Inflation is the one tax that never needs a vote in Congress.

The verdict

Here is the verdict, plain and blunt. Price controls are the political equivalent of covering the smoke detector with a towel. The alarm stops, the fire does not. A government that is worried about the price of something should look at why the price is high, which is usually either too much money, too little supply, or a rule that is blocking supply. A ceiling fixes none of those, and it adds two new problems.

And notice who ends up paying. The baker closes. The farmer plants less. The trucker finds a better route. And the family that was supposed to be protected spends an extra hour in line or an extra dollar on the black market, or goes without. In every century, the poor are the ones with the least slack to absorb the shortage. A policy that claims to protect them and produces empty shelves has failed by its own test.

The bottom line

• A price is a message that tells producers what to make and buyers what to save. A ceiling cuts the wire, and the usual result is a shortage, a line, a lower-quality product or a black market.
• The pattern runs through Diocletian in 301, the French Maximum of 1793, Nixon's 1971 freeze and the oil controls of the 1970s that Reagan ended in January 1981. It is not a left or right habit. Republicans have done it too.
• In a real emergency, the better answer is more supply and direct help to those who need it, with any temporary measure given a firm end date.
• When a candidate promises to "bring down" a price by law, ask what happens to the supplier who is now selling at a loss, and who gets the shrunken supply.
• Look at the cause: money, supply or a rule in the way. Support the candidate who goes after the cause rather than the sign.