"As German forces launched what would become
their final major offensive on the Western Front in March 1918,
President Woodrow Wilson’s Food Administrator, Herbert Hoover,
identified what he called “one of the most vital problems confronting the nation”:
a shortage of sugar. Demand had surged. Soldiers needed sugar in their
rations, while producers and civilians relied on it to preserve and can
food for the war effort. At the same time, supply had collapsed due to
Europe’s engulfment in war, the disruption of Cuban cane fields during
the 1917 Chambelona War, and German U-boats threatening Atlantic
shipping.
What followed became one of the clearest
examples in American history of price controls spiraling into creeping
interventionism — and a textbook demonstration of why such schemes fail,
even when administered by capable and patriotic officials pursuing a
common wartime goal.
Hoover was commissioned as Food
Administrator of the United States on August 10, 1917. A successful
mining engineer and humanitarian, he seemed the ideal public servant for
such an important task. He wasted little time, setting out to “assure to the American consumer a fair and just price” of sugar. Blaming rising prices on speculators rather than on underlying economic conditions, he ordered the suspension of trading
in sugar futures on August 16 until “further notice.” And, by the end
of the month, he had pressured American beet sugar producers “to limit the price of their product” with an expected savings of $30 million within the next year.
But replacing the flow of information and
the structure of incentives supplied by the price system was far more
difficult than Hoover, a graduate of Stanford University, imagined.
Hoover’s attempts to adjust the system to unexpected changes in economic
conditions were frustrated by the sugar industry’s attempt to divert
the program to their own benefit. Hoover ultimately created a tripartite
bureaucratic apparatus: the Sugar Division of the Food Administration,
the International Sugar Committee, and the Sugar Distributing Committee.
He set prices by signing agreements with producers and refiners under
the threat of revocation of their license if they charged “excessive”
prices.
But artificially low prices did exactly
what economics textbooks predict: they encouraged consumption while
discouraging production. Pre-war per-capita consumption stood at roughly
85 pounds annually, much of it in candy, soft drinks, condensed milk,
canned goods, ice cream, and ketchup. Even at the beginning of the
program, administrators acknowledged the predictable difficulties of
holding prices low by urging consumers to limit consumption in the face of increased demand and decreased supply. By mid-October, a sugar famine was already causing sugar-using factories to shut down, and Hoover was forced to order cuts in candy production. The low price of sugar discouraged retailers from stocking it, especially given that it would not cover the increasing costs of transporting it from refineries.
Under Hoover’s informal price ceilings,
demand stayed high while beet growers watched competing crops become
more profitable. As economist Joshua Bernhardt (1919) noted,
mounting production costs and unregulated prices for other foods made
sugar beets progressively less attractive. In desperation, Hoover tried
to enlist schoolchildren and boys’ and girls’ clubs in sugar production,
offering families an allotment of sugar in exchange for planting an
acre of sugar beets. Pledge cards, circulars, and monetary incentives
were deployed with patriotic fervor.
Hoover also formed local commissions to
investigate spiraling production costs, producing thousands of pages of
testimony from planters, nearly all of whom recommended higher prices.
Testimonies from over 100 planters in California alone filled nine thick
volumes (Bernhardt 1919). Planters rejected a flat price because it
gave an advantage to low-cost producers, especially foreigners. Cuba
could deliver sugar for about 5.5 cents per pound, while domestic beet
sugar planters required nine cents and Louisiana cane sugar planters
needed ten. Hoover’s political solution to these competing special
interest groups was to buy cheap foreign sugar, along with domestic
output purchased at higher prices, and then resell it to American
refiners at an average price.
Price controls on sugar gradually expanded
the scope of intervention. Transportation priorities, refinery
allocations, export quotas, and distribution zones were imposed.
Louisiana sugar failed to reach New England refineries because regulated
prices made it more profitable for Louisiana mills to sell lower-grade
sugars directly to confectioners than to ship to Atlantic refiners.
Centrally prioritizing sugar allocation without market prices led to
accusations of misallocation. While households went without sugar for
canning and baking, Hoover argued in Senate testimony that the candy
industry employed 250,000 Americans and that further diversion of sugar
would put them “entirely out of work.” Yet, as Blakey (1918) notes,
the knowledge problem cuts the other way: candy might have deserved a
higher priority “in view of the national campaign for prohibition,”
given its potential as a substitute for alcohol.
The Food Administration proudly claimed it had saved consumers millions. Yet as Roy Blakey (1918) observed,
gratitude evaporated when sugar simply sporadically disappeared from
tables in regionalized shortages. Senator Henry Cabot Lodge’s mocking
refrain captured the public mood: “What comfort is there in a low price
when no sugar can be obtained?” Searches for “Sugar Famine” on Newspapers.com
yield over 20,000 matches during the years 1917-1920, the years
Hoover’s sugar programs were operative, yet only 284 in 1916 and 370 in
1920.
The dilemma Hoover faced was classic: he needed
“capable and informed representatives” who inevitably had skin in the
game, or “uninformed ones who were disinterested.” Neither produced
efficiency. Instead, the plan spawned a clerical army, including
state-level certificate systems classifying industrial sugar use into
five categories (A through E), population-based allocations, and
transportation zones, which required a system of prioritization as well,
designed to match supply to “equitable” demand. As Frank Rutter (1902)
earlier recognized about attempts to regulate the sugar industry, any
regulation would pit the concentrated interest of producers against the
dispersed costs faced by consumers, “Opposed to these demands [of the
sugar industry] there is only the diffused interest of the consuming
public, with no detailed knowledge concerning trade conditions or the
inner workings of the tariff, and without organization….”
The sugar episode was not an isolated wartime curiosity. It was a microcosm of the broader logic of Ludwig von Mises’ interventionism.
Regulate the price of one commodity and you must regulate its inputs,
its substitutes, its transport, and its distribution. “From the few
instances cited,” Blakey wrote, “as well as from one’s daily
observation, it is easy to see that the regulation of the price of one
thing involves the regulation of the prices of all constituent factors
and competing commodities, which in the last analysis means the
regulation of wages, as well as the regulation of the prices, the supply
and the distribution of everything else.”
Today’s policymakers would do well to
revisit this forgotten chapter before reaching for price controls,
“equitable allocation” schemes, or industrial policy boards. Price
ceilings create shortages, which in turn necessitate rationing.
Rationing requires bureaucracy, which opens the door to lobbying and
favoritism. The consumer — the very citizens Hoover was commissioned to
serve — ultimately pays in empty shelves and higher overall costs.
Herbert Hoover was a brilliant engineer
and a sincere public servant. He believed he could “stabilize” markets
through expert administration. The sugar famine suggested otherwise.
Markets are not problems to be solved by committees; they are discovery
processes that coordinate millions of decisions without central
direction. When governments try to override that process, even with the
best of intentions and the full powers of wartime emergency, the result
is not order but the very chaos they sought to prevent."
