Freedom and Controls
Wriston, Walter B.
Freedom and Controls by Walter B. Wriston for the New York State Bar Journal
Freedom and Controls by Walter B. Wriston for the New York State Bar Journal
Anyone on Wall Street watching the ups and downs of the market would be tempted to embrace a cynical remark once made by George Bernard Shaw. He said: "We learn from history that men never learn anything from history."
Things are not really that bad, but in times of stress memories grow dim and our impatience with the laws of economics develops into deep frustration. In our desire to set right the many things that we see in our society and in our economy which frustrate us, we sometimes forget that other men in other times or other places have tried similar remedies with predictable results.
Many people in our society today, who see no inherent contradiction between the concept of individual freedom and government controls, might be less sanguine if they reviewed a bit of ancient history. In the third century the most pressing problem facing the Roman Emperor Diocletian was inflation and his solution has, in part, its parallel in modern times.
Unable to raise more money for the imperial treasury through additional taxes, Diocletian believed he had no recourse but to debase the currency of the empire. Since the printing press had not yet been invented and there were no central banks to issue notes, he flooded the market with copper coins at a time when precious metals were in short supply. Of course, prices quoted in terms of copper coins went skyward. Although Gresham was yet unborn, his law was already at work with bad money driving out good.
With the empire on the verge of bankruptcy, Diocletian had to come up with what we would now call a new game plan. He finally issued an imperial edict establishing wage and price controls. Price ceilings were set on 900 commodities and 130 different grades of labor. Having little faith in the ability of the people to discipline themselves, he imposed the death sentence or deportation on anyone who dared to buy or sell above the established rates. While many were executed or deported, his edict proved to be impossible to enforce.
The bureaucracy designed to administer the edict grew to be crushingly expensive, and swelling the supply of the currency merely fed the spreading fires of inflation. The combination of these two factors, as we all know, contributed to the decline and fall of the Roman Empire. Nations with worthless currencies, then as now, rarely speak with strong voices in international circles.
Diocletian's dilemma and his remedy have been repeated in one form or another again and again throughout history. In the light of ancient as well as recent history, those among us who hail wage and price controls and other restraints as wonder drugs to cure the ills of our economy should temper their enthusiasm.
Whenever the times are out of joint we look for scapegoats-labor blames management and management blames labor. Often both blame government which, of course, reciprocates. When basic imbalances of power, either economic or political, are created and permitted to persist, there is a tendency to grow impatient with old truths. We begin to hear that old laws no longer work, two and two are no longer four and it is time for bold new initiatives. Those impatient with the pace of change urge that we create new rules and regulations to achieve the ends that used to be the product of the old laws. We even invent new cosmetic words like "guidelines" to blur the blunt fact that we are talking about rigid regulations.
Although some economists perceive this to be a new world with new rules, there are still some basic tenets that have not changed. When a government prints too much money in relation to the economy, in time the value of money declines.
Learned men, of course, can and do develop intricate arguments couched in subtle language to describe the complex factors which influence the value of our money. The truth is, however, that governments and only governments create money. Other factors in our economy, while contributory and even very important, are only peripheral.
I do not mean to suggest that the balance of power between management and labor is not a significant factor in many sectors of our society. When this balance gets out of equilibrium, certain industries do indeed develop what has come to be called the cost-push syndrome. Far from refuting the old laws, this simply proves anew that old laws of economics still work. The cost-push syndrome has helped to produce the wonderfully cosmetic phrase "incomes policy," a euphemism for price controls. Whatever term is used, it is abundantly clear in the simplest economics that the price perceived as income by one man is just as truly another man's cost.
Controls, however, obscure this basic truth and thus appear to many to be an acceptable alternative to proper monetary and fiscal policy for cooling inflation. As each new control fails to operate satisfactorily, a new one is added. The theory seems to be that if you drill one more hole in a leaky boat the water might just run out. It's the old story of not understanding the cause of the trouble.
The experiences of other nations are especially relevant as we look at long-term trends in our own country. We need not go back to the days of Diocletian to confirm the fallacy of controls. Indeed, we can say categorically that controls in modern times-when the goods produced dwarf by far Diocletian's 900 commodities--are virtually impossible to enforce without serious inequity. Even in the Soviet Union only 10,000 of the 40,000 articles produced there actually come within the scope of that country's controls. Drawing on this state of affairs, one international economist came to a very interesting conclusion. He said: "Nowadays no central organism, however far-reaching its powers, is capable of ordering the productive process in detail so as to enable it to fulfill all requirements and expand efficiently ... The clash of interests between man as a producer and man as a consumer is a basic fact ... The only way of getting over that is the free market which prevents the producer from arbitrarily asserting his interests over the consumer... Hence the need to preserve the open market, which is the least harmful way of adjusting production ..."
This statement was made by a man who knew all about central planning, Mr. Ota Sik, a socialist economist and former Minister of Economy in Czechoslovakia.
Attempts at statutory control have been made not only in communist countries but elsewhere by both liberal and conservative governments. They have been tried and found wanting in places as far apart as Canada and New Zealand. Western Europe, of course, has had a severe case of controlitis since the end of World War II with negligible results. More often than not, European controls have caused so large a cut in profit margins as to produce an investment recession which only aggravates inflation by curtailing supply. France, for example, has the longest history of price controls with a massive bureaucracy to enforce them. Yet as the London Economist recently pointed out, "Controls in France have never been anything more than a traditional French farce." None of the controls prevented the French franc from being devalued no less than seven times since the war.
Citicorp operates in about 90 countries around the world and we have been in the international business since 1902. I think it is fair to say that there is probably no set of economic controls, foreign exchange controls or other devices, which we have not seen at one time or another in one place or another. They all have one common denominator. They fail over the long term. If all they did was fail, controls might be worth a try in the short run. But, on the way to failure, controls distort the market, discourage procedures, cause shortages and produce more uncertainty.
Incomes policies, I also might remind you, were hardly a smashing success in Great Britain. After five years of attempting to regulate wages and prices in the sixties, it was discovered that inflation in England had actually accelerated. It is perhaps ironic that after a socialist government abandoned price controls, some Americans advanced them as a super-sophisticated way of dealing with the problem of economic freedom. Englishmen visiting my office shake their heads in wonder and ask how we could embark on this course with British failure still so clearly visible.
In saying this, I do not mean to suggest that the President's action a year ago August was not necessary. The psychology of inflationary expectations had to be broken. The freeze was a way to start that process. Although we were winding down the actual inflation, both absolutely and in relation to other industrial countries, the drumfire in the media suggested the opposite. One could easily gain the impression that controls were imposed on our economy when it was rapidly spinning out of control. It is closer to the truth to say that the August 15th freeze was imposed on an economy that was in fact recovering from a recession. Treasury Secretary George Shultz knew this when he said: "Controls can work if they are first added to accelerate a process already under way." He stressed that they must be supplemented by proper monetary and fiscal policy actions and applied when there is still enough slack to permit strong productivity gains. The freeze was designed to break the inflationary psychology and was regarded as temporary. The freeze achieved its shock value and gave way to Phase II.
The way things usually develop anywhere in the world, however, is that once the process of control is initiated, it spreads to all sectors of the society until at last, if you put a floor under costs and a ceiling over prices, there will be no room for a free man to stand erect. One of the great advantages of private companies operating in a free market is that a company can fail and go out of business. If you cannot make a product the world wants and sell it at a profit, your business will not survive. The marketplace automatically regulates this. If you entrust your fate to the government, you will soon learn that bureaucracies never die. They just grow and grow year after year and, as they age, their initial, very limited risk-taking capability atrophies completely. They want a fail-safe economy. They want a world in which there are no risks and penalties for failure. It is obvious, however, that a society which attempts to protect men from risk just as surely must then bar them from opportunity.
Some people who applauded price-wage controls at their inception dwelt in the dream world that controls would make it easier to deal with large labor demands, but would leave profits free. This unsophisticated view is now overwhelmed by experience, and many who held it are now joining the ranks of those who would abolish controls now.
We are all the product of the velocity of our own experience. Americans have tended to see many things in economic terms which turn into political trends. It perhaps started with Alexander Hamilton, and has run through to Arthur Schlesinger, Jr. One of our great historians, Charles Beard, spent most of a lifetime delineating what he perceived to be the economic bias of the men who wrote our Constitution. Despite all this scholarship, our values are not basically economic values unless they are carriers for political values. It is the struggle for political power today that makes the economy a central issue and not the other way around. Controls, then, are a carrier for political power, and therefore when we think about them it should be in this larger context. Viewed in this perspective, we are talking about the future mix of the American political system.
There are those among us who wish to do away with the free enterprise system and force a new kind of society upon America. If this sounds extreme, perhaps we should speculate for a moment what kind of world we would have if the laws of the United States of America gave the President vast new power over the life of our credit and stock markets. Suppose the President, acting through some government agency, could require every borrower to obtain a license before he could have access to the market. Imagine that before any lender could lend, he must also get a license from an all-powerful federal agency. This power to license both borrowers and lenders would extend to the amounts involved, and, of course, would carry with it the authority absolutely to deny credit to brokers or bakers, to individuals or corporations. Imagine a law like this and then let yourself speculate upon the profound effect it would have on our marketplace and upon the entire fabric of our society. When you have thought about this for a moment, give it even more consideration, for such a law is now on the statute books of our country. It is called the Credit Control Act which was passed in 1969.
Full implementation of this act, of course, would take us well down the road to economic serfdom. Fortunately, we currently have a President who believes in free enterprise and a market economy. The fact that our Congress passed such a monstrosity, however, should jolt us free of any day-dreams. What I find most appalling about this so-called Credit Control Act is that it was in fact a rider tacked on to another more comprehensive bill that passed the Senate by a voice vote. No senator even stood up to have his name recorded on a basic reordering of American priorities. It is, in fact, ironic that credit market controls should even be considered seriously after the credit crunch of 1969 when interest rate ceilings not only hurt borrowers but produced pointless distortions in credit flows. If banks are discouraged from making loans, borrowers who are able will turn to the open market. Here the large, strong borrowers will fill their needs, but the small medium-sized companies are not likely to find the impersonal market as accommodating.
Many of our lawmakers, unfortunately, seek to mitigate a crisis by resorting to more severe regulation. When the crisis recedes, the regulatory restraints often remain. Wage and price controls may be a case in point. They are popular now with some people because they appear to offer an easy escape down the middle road away from inflation on one side and unemployment on the other. They appeal to those who do not understand the complexity of the economy and see the culprits in simplistic terms as big business or big labor. They fail to appreciate that control of wages and prices, if carried to its logical conclusion, could lead to control of all income and of all resources. Such an outcome would destroy freedom for both labor and management in the marketplace.
As each change in our value system is recognized and popularized, there are those who see a new opportunity for fresh regulation. It is curious that controls should gain favor at a time when the consumer movement in this country is gaining momentum. Controls, permanently applied, are bound to dull the competitive creativity of the producer, making him less sensitive to consumer needs. Without the incentive of the free market, as observed by even Ota Sik, the socialist economist, the quality of goods deteriorates. Thus, in the long run, it is the consumer, deprived of both quality and diversity of goods and services, who stands to suffer most.
In the financial world we have seen in our life-time the government fix the price of its bonds, in the forties, and we have felt the enormous trauma which was produced when the so-called Treasury Accord was terminated in 1951. It was repudiated because it forced the Federal Reserve into an inflationary expansion of money. Like those who now fear the lifting of controls, there were many who feared that bond markets would not be able to function without pegging. It was argued that pegging eliminated the risk of buying bonds. This illusion overlooked the fact that in order to peg the bonds, the Federal Reserve inflated the money supply, which over time stole from the value of fixed income obligations.
Perhaps those of us in the banking business are more sensitive to distortions in the marketplace created by controls than are some of our friends in other industries. We have had absolute price control on what we can pay for our inventory since 1933. Since the price that we can pay to individual savers is sometimes less than the price that competing institutions can pay, we have watched the erosion of our marketplace. At the same time we have been keenly aware that the consumer is often cheated out of the income which he would have every right to expect if a free market prevailed.
More regulation is, of course, behind the idea that the way to protect the public is to create a new bureaucracy to do the job that the existing one failed to do. We all know that the massive machinery of bureaucracy is already too antiquated and decrepit to cope with the pace of change in our society. But instead of dismantling a system designed for the Victorian Age, we add yet another corridor to the labyrinth leading away from the free marketplace. The end product of this bureaucratic maze is a world isolated from risk-a world in which the efficient and the inefficient are equally rewarded. Without penalty for failure, there is no incentive for success.
The freedom to win or lose, to succeed or fail, is basic to our way of life. When the marketplace is hobbled by regulation, the distortions created are eventually reflected across the country. First investors worry that controls will continue and thus corporate earnings will be lower; then, they worry that controls will end and inflation will surge ahead. This is not the kind of fail-safe environment they had bargained for when the stock market surged ahead 30 points the day after controls were announced.
Freedom is rarely destroyed by a frontal attack. Freedom more often succumbs to an indirect divide-and-conquer technique.
Controls undermine the resolve of management and weaken the freedom of labor. And their use moves us closer to putting more and more of the decisions that belong in the marketplace with government. It is time to end the control program before our freedoms are eroded beyond repair. John Stuart Mill put it this way more than 100 years ago: "Every function superadded to those already exercised by the government causes its influence over hopes and fears to be more widely diffused, and converts, more and more, the active and ambitious part of the public into hangers-on of the government ... If the roads, the railways, the banks, the insurance officers, the great joint-stock companies, the universities, and the public charities, were all of them branches of the government... not all the freedom of the press and popular constitution of the legislature would make this or any other country free otherwise than in name." As a people, we are not likely to abide for long controls which in the end will destroy freedom. To expect otherwise of our people is the final folly in all attempts to create a fail-safe economy.