Price Controls and Economic Literacy: Colonial Edition

Great post from Bryan Caplan at EconLog.

"As you may know, the American Revolution swiftly led to hyperinflation and price controls.  From Rothbard's Conceived in Liberty, vol. 4:

By the end of 1775, Congress had already increased the nation's money supply by 50 percent in less than a year, and state paper issues had already begun in New England. The Congressional Continental bills followed what was to become a sequence all too familiar in the western world: runaway inflation. As paper money issues flooded the market, the dilution of the value of each dollar caused prices in terms of paper money to increase; since this included the prices of gold, silver, and foreign currencies, the value of the paper money declined in comparison to them. As usual, rather than acknowledge the inevitability of this sequence, the partisans of inflationary policies urged further accelerated paper issues to overcome the higher prices and searched for scapegoats to blame for the price rise and depreciation. The favorite scapegoats were merchants and speculators who persisted in doing the only thing they ever do on the market: they followed the push and pull of supply and demand. In another familiar attempt to deal with the problems of inflationary intervention, they outlawed the depreciation of paper, or the rise of prices.

The consequences:

State and local governments presumed to know what market prices of the various commodities should be, and laid down price regulations for them. Wage rates, transportation rates, and prices of domestic and imported goods were fixed by local authorities. Refusing to accept paper, accepting them for less than par, charging higher prices than allowed, were made criminal acts, and high penalties were set: they included fines, public exposure, confiscation of goods, tarring and feathering, and banishment from the locality. Merchants were prohibited from speculating, and thereby from bringing the needed scarce goods to the public. Enforcement was imposed by zealots in local and nearby committees, in a despotic version of the revolutionary tradition of government by local committees.

Price controls made matters far worse for everyone, especially the hapless Continental Army, since farmers were thereby doubly penalized: they were forced to sell supplies to the army at prices far below the market and they had to accept increasingly worthless Continentals in payment. Hence, they understandably sold their wares elsewhere; in many cases, they went "on strike" against the whole crazy-quilt system by retiring from the market altogether and raising only enough food to feed themselves and their own families. Others reverted to simple barter.

What fascinates me, though, is the contemporary intellectual reaction.  You'd expect Rothbard, cheerleader for the radical Jeffersonian wing of the American Revolution, to exonerate his team.  But he totally doesn't:

Contrary to a general impression, opinion for or against price controls was determined far more by the state of the person's economic understanding than by his social class, or, for that matter, by his generally conservative or radical views. It is simply not true that radicals favored price controls and conservatives opposed them; the pros and cons cut across both ideological as well as occupational lines. Thus, while the conservative James Wilson denounced price controls in Congress-- "There are certain things, Sir, which absolute power cannot do"--the reactionary Samuel Chase defended controls on the ground of necessity.

Pennsylvania provided the sharpest model of conservative-radical cleavage on this issue. Robert Morris joined Wilson in opposing controls, and the Pennsylvania radicals, in their hatred for these two, were driven to supporting controls. It must be noted, however, that the radical price control leaders included such wealthy and eminent merchants and lawyers as Gen. Daniel Roberdeau, William Bradford, and Owen Biddle. Furthermore, among the radical leaders, Tom Paine, seeing the ill effects of price controls, shifted sharply and permanently in late 1779 from supporting price controls to a strong opposition to them.

Those radicals who favored price controls also justified this sharp deviation from their commitment to liberty and property rights by alleged wartime necessity, much as the Jacobins would do in France over a decade later. Thus, Gen. John Armstrong, a highly respected jurist and engineer and a leading Pennsylvania radical (though an early patron of James Wilson), was the most inveterate and zealous advocate of price controls in Congress. He pleaded that necessity required this exception to the laissez faire rule.

In a sense, the proponents of price controls had no economic arguments. Their views were purely superficial and ad hoc: "Prices are going up, they shouldn't, ergo outlaw price rises," was the argument form. In contrast was the sophisticated economic understanding of the opposition. Leading the opponents of controls was the New Jersey libertarian theorist, the Reverend John Witherspoon. He accurately and prophetically warned Washington that the army's severe price and wage controls on the commodities and services it purchased would only aggravate the shortages and lead to starvation for the army. No man, declared Witherspoon, can be forced to supply goods in the market at prices he considered unreasonable; and his concept of what is reasonable is the price "proportioned to demand on the one side, and the plenty or scarcity of goods on the other." And this price that clears supply and demand can only be set on the market by the voluntary interactions of buyers and sellers, not by any outside politician or government official, it being impossible for any authority to know all the nuances and variations that enter into supply and demand and hence into price. Price control, in fact, could only hobble commerce and thereby make commodities scarce and more costly than ever. The prices of regulated goods, Witherspoon pointed out, had already risen faster than those of the nonregulated.

The moderate Dr. Benjamin Rush was an able student of political economy, and he pointed both to economic theory and to the lessons of economic history. Previous price control efforts had always failed because the true cause of the price rise was not, as the unthinking believed, the wickedness or Tory proclivities of the merchants, monopolizers, or
speculators. The cause, he declared, "was the excessive quantity of our money." Only a decrease in the quantity of money, he pointed out, and a rise in the rate of interest, would end the disastrous price increases, and bring value back to the country's money. John Adams was also highly knowlegeable and forthright in monetary matters, and he too pointed to the historic failures of price controls. As early as 1777, he urged a radical and libertarian cure for the inflation: redeeming notes in gold and silver and ending paper money issue.

All of this makes Rothbard's enduring enthusiasm for the American Revolution even more puzzling.  Yes, there's all the high-level libertarian rhetoric.  But if the American revolutionaries took their rhetoric literally, price controls would have blown their minds.  The violation of libertarian principle would have been not only self-evident, but traumatic.  The only debate would have been on "wartime necessity" - and that debate would have taken the collateral damage of price ceilings for granted. 

The lesson to draw: In the 1700s as today, popular opposition to big government was skin deep at best.  Like almost all wars of independence, the American Revolution was fundamentally tribal: "We'll be free when our tribe is ruled by members of our tribe, because that's what freedom is."  Even if you embrace the "Liberty or Death" slogan (which you shouldn't), literal liberty was never on the American Revolutionaries' agenda.  But as always in war, literal death was."