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For all its bungling of war production, the Administration made a good start in fighting inflation by choking off some of the huge supply of credit which had fed the boom. By tightening up on installment and housing credit, and raising bank reserves to the limit, the Federal Reserve Board had sharply cut the demand for autos, houses, appliances and other retail goods. The same controls will cut buying still more.
But instead of waiting to see if credit controls would do the trick, Economic Stabilizer Valentine blundered into an attempt to freeze all wages and prices by a complicated system of "voluntary" direct controls which no one, including Valentine, seemed to understand. By arbitrarily ruling out price rises for any businessman whose profits were as great as his average in 1946-49, Stabilizer Valentine took the position that profits alone should bear the burden of wage and material increases. All such a program did was squeeze the efficient producer, grant price rises to the inefficient, and harm the entire economy.
The Impossible? Actually, the Administration's attempts to hold down prices by direct controls could not have much effect so long as food prices—which make up 40% of the Government's cost-of-living index—were uncontrolled. And they would be uncontrolled until Congress changed the Defense Production Act, which forbids control of farm prices until they reach the sky-high level of parity. Until then, there was little that Stabilizer Valentine could do about food prices. Even the Administration seemed to see the folly of trying to control everything but food. At year's end, President Truman announced that for the time being, the nation would go along with "voluntary" controls—which, in most cases, meant no controls at all.
Nobody thought that inflation could be stopped completely, since tight controls had failed to do it during World War II. Economists guessed that the U.S. would be doing well if the general price level rises only 10% a year during rearmament. The great danger was that in trying to do the impossible, the Government would so straitjacket the economy with controls that the battle for production would be lost.
This week the President's own Council of Economic Advisers issued a stern warning: "Care must be exercised not to swing between extremes from day to day, asserting one day that everything will be accomplished by voluntary cooperation and asserting the next day that it is too late for anything but compulsion. Under the American system, a constant blending of authority . . . and flexibility is essential ... If we ever lose the desire or ability to achieve this blend we shall have lost the greatest single asset in our total strength as a nation."
Indomitable Spirit. The strength of the nation lay in the fact that the U.S. economy, which had tripled in size since it was formally pronounced "mature" by New Deal hare-braintrusters in 1936, was still capable of gigantic growth. No one thought that it could grow big enough—or fast enough—in the next few years to pour out civilian goods at 1950's rate and also rearm the nation. But most economists and businessmen knew that, barring the sudden arrival of all-out war, it could grow fast enough to keep the standard of living close to the present level and still meet the arms quotas.