For this lecture I'm going to drop my usual mask of cool, scientific, dispassionate, value-free science,
because I happen to be hopping mad, and the thing which makes me hopping mad, well, there are two conditions for making me hopping mad.
One is that a monstrous injustice is being done, which is almost always, in fact I can't think of any other counter examples, almost always by the government,
and secondly that everybody's in favor of it. In other words, the no voice, at least the no voice that I read or hear, comes out against it.
So these two, I mean, yeah, no voice comes out against it. These two conditions being fulfilled, that's when I sort of get activated.
My anger glands will be, you know, like a little Abner sort of thing, start getting moving at a high speed.
Well, it so happens the last two things that have activated my anger glands have been both
connected with a topic for tonight, which is basically price controls and its attendant
evils.
The last time was August 15th, the Black Day of August 15th, 1971, when President Nixon
reimposed price control for the first time since the Korean War, and really basically
for the first time since World War II, that means the first time in, quote, peacetime,
unquote, after many years of saying, and he and all his economic advisors have put together,
saying time and again that they will never impose controls, that it wouldn't work, and
it's terrible, and it interferes with free enterprise, and so forth.
So that was, and since then we've had many phases, some of which I'll talk about, none
Part of which have worked phase one, two, three, three and a half, and four.
And now we have the final sort of conclusion of this, the price control, which those of
us free market economists have predicted for many years that after price control come shortages.
And so of course we have shortages all around us now, all over the place, and after shortages
have come rationing, and there was sort of the icing on the cake.
The thing that's got me hopping mad now, of course, is the announcement of imminent gasoline and fuel rationing.
And as the announcement came pouring off the presses, as President Nixon made his announcement on the subject,
for some incredible reason, which really, to understand it, I think you need a psychopathologist rather than an economist,
For some reason, this buoyed up his credibility, which had reached about zero or minus something,
the President's credibility, and it rallied the disenchanted masses of Americans to the Nixon banner.
The fact that he gets on television and tells everybody they have to tighten their belt and suffer and stop using electricity and turn down the heat and stop using gasoline and all the rest of it.
For some reason, this sort of pronouncement activates the siege mentality, which is somewhere
in the American psyche, and everybody says, yes, yes, we have to rally behind the cause
of the great strong statement to make, and yes, sir, we've got to tighten our belts.
Of course, now we're in the sphere of, phase one of belt tightening is always the voluntary
belt tightening.
That's when everybody says that you and him go out there and tighten your belts.
And that, of course, never works. I mean, it's done with a great deal of enthusiasm and voluntary bell pining, and you and him turn down the heat.
Some enterprising reporters, the day after the Nixon Statement, went to the White House and several other federal buildings and sort of thermometer,
and checked on and found out that the thermometer, the temperature range from 71 to 74, that the old, the 68, you know, sphere of 68 degrees had not been imposed yet.
That's of course the typical line-house is their comeback to this as well. It takes several days for the thermostat to change the temperature.
So you and him go out there and sacrifice. That's sort of the phase one. And phase two is of course when this doesn't work,
and then you turn it to the coercive arm of the government to make sure that everybody sacrifices and everybody's supposed to shape up.
And usually with a coercive arm, everybody says, yes, yes, you're right, voluntary methods don't work.
This sort of ties in a little bit with the Galbraith stuff, the attack on affluence I was talking about last week, and I'm going to get back to the whole conservation movement later on, after we talk about capital, and we start talking about private property and capital.
Because the conservation movement, the environmental movement in general, is the old joke or the current joke, just about my second favorite movement.
But my first favorite movement is, I don't know, something like Genghis Khan or something like the restoration of the Hapsburg or something like that.
And it ties in with the attitude, and this I think ties in with everybody's willingness to belt-tighten, or at least proclaim willingness to belt-tighten.
It ties in with the attack on comfort, on consumption, on any sort of really human survival above the barest subsistence level, otherwise really attack on man, period.
If you think this is overdrawn, attack on human beings, period. If you think this is overdrawn, I'm going to get back to that scene later.
If you think it's overdrawn, read some of the conservation movement literature.
It's an instructive, some years ago I had to, it was part of my job to read some of it.
It's an instructive lesson because what really animates the conservation of the environmentalist movement is not really worried about sulfur dioxide and that sort of stuff.
This stuff is only grist to the mill.
Man, the Destroyer, Man, the Garbage Can, Man, the Polluter, Man, the Evil, whatever.
And the theme is basically that nature, before man existed, everything was great.
Everything was terrific.
Nature was harmonious and balanced and ecologically.
The animals were eating each other to the proper optimum.
and all that, and the plants were whatever the plants do, and everything was going great
and it was a circular world, as I like to put it, in other words, the planets went around
the sun and everything was sort of balanced, nothing much happened, obviously it was a
pretty boring world, but we didn't have to worry about it because there were no people
anyway, the concept of boredom didn't even come into the picture, so it was a circular
world, everybody was sort of happy and contented and the beaver was doing the beavering and
and all that. And then, into this pleasant and happy, ecologically balanced picture,
people enter. Right, evil man enters the picture, an evil man entering the picture, not having
any instincts, not working within a given environment, not bound by the temperature
of wherever he happens to be born in, moving around, changing the environment, chopping
down trees, catching fish and all the other stuff, altering the environment in a linear
Manor, a manner of progress. The man progresses from a caveman, from dying at the age of 21 or whatever, builds stuff, builds factories, increases the standard of living, builds capital equipment, builds medical techniques and all the rest of it, and survives and prospers and flourishes.
And this is a linear thing. By doing that, the beaver tend to die out, and the trees are chopped down, and all the other terrible fish are fished, and all the other terrible things that happen to the other species.
And I confess, right here I have a value judgment. I am a human chauvinist. In other words, if there's a choice in the old lifeboat between people and caribou, I'll go for the people any time.
And I think it's rather bizarre to take the other position, that if there's a choice between the people in the caribou and the old lifeboat, you dump the people and you bring in the caribou.
But I really think that this is the gut core of the environmentalist movement, and so anytime there's any kind of a clash between the interests of human beings on one hand
In the interest of trees, plants, fish, caribou, aesthetics, in other words, the landscape,
on the other hand, people are always supposed to lose out.
And this is, of course, very relevant to the energy crisis, which I'm going to talk about
tonight anyway.
So, getting down to the price control, this was a topic, which up until a couple of years
ago, up until two years ago, the topic of price control is the sort of thing I've done
World War II
The Theory of Price Control and Rationing
It's fairly clear and fairly simple, and as far as I know, it's not really contested by anybody.
Even the economists who don't say anything or favor pipe bills may come in.
Basically, going now to figure five, we have our supply and demand curve for any product.
Pipe is on the y-axis.
There's a quantity purchased from the x-axis.
The falling demand curve and the rising supply curve, or it could be a vertical supply line in the short run, equilibrium point of the intersection, equilibrium price.
As you remember, we have sort of a feedback arrangement, a built-in feedback arrangement in the free market so that any temporary shortage is eliminated because the price rises,
and any temporary surplus is eliminated very quickly because the price falls to the equilibrium free market level where demand is equal to supply or the market is cleared.
So then what happens if some outside agency, namely the government, there's really no
other, it's possible it's going to be done voluntarily by businesses, but it's very
unlikely.
An outside agency using coercion, namely the government, steps in and prevents this process
from working.
In other words, prevents the market from reaching the equilibrium point.
Well, let's take the above market price. Say that we have a price above the market, which the government says, thou shalt not sell below X amount.
And if you think this is rare, it isn't. I'll get to it in a minute.
So the government says, enforces a minimum price floor, minimum price control, above the...
Well, presumably it's above the free market price. If it's below the free market price, it doesn't matter.
I mean, in other words, if somebody says, the government passes an edict saying,
the General Motors, thou shalt not sell Cadillacs for less than $500, new Cadillacs,
it's not going to make an imprint on the market. It's going to be sort of a dead letter rule.
If on the other, so the only relevant edict is minimum price controls above the market.
So, we have a minimum price control above the market, we have a horizontal line above the
equilibrium price.
What happens is that at that minimum price, the public will only buy this much up to the
point A, but pouring out on the market in response to this high price is the amount
B, which is much greater.
We now have an unsold surplus, a gap between A and B, which the market doesn't, unless
you engage in black market illegal activities, is rather rare with a four minimum price.
The government is now, by outside coercion, preventing this natural equilibrium process
from taking place.
So what you have then is a situation of a permanent unsold surplus.
You're sitting there then with the government saying, okay, thou shalt not sell widgets
for Below $10 a Case, Soybeans for Below $X Dollars, Bushel, or whatever.
So what happens then is that we have this unsold surplus which somehow sits there aggravating the situation. Something has to be done about it.
The most famous example of the unsold surplus, well let me finish the theory before getting to that.
In other words, the minimum price control brings about a permanent, aggravated, chronic, miserable, unsold surplus.
What happens when the price is set below the free market price?
In other words, we have a maximum price control below the free market.
Again, a maximum price control above the free market price would be meaningless.
So in this situation, when the price is set below the free market price of government, saying, thou shall not sell catallacts for more than $500, a new catallact, then you have some trouble, the opposite kind of trouble.
Then the free market again prevented from reaching the equilibrium point, from clearing the market, from equating demand and supply.
Now we have a permanent unsold, a permanent shortage, permanent excess demand over supply.
We have demand permanently greater than supply in the case of maximum price control and supply
permanently greater than demand in the case of minimum price control.
So we have another chronic, miserable, permanent shortage.
People are clamoring to get Cadillacs, the government says Cadillacs are now $500, you
can't sell them for more than that.
Where are they?
Boy, I want my Cadillac.
I went and find all the Cadillacs.
Ain't got them.
Sorry, not there today, and so forth and so on.
There's a sudden disappearance in the Cadillac.
So prices are nice and cheap, but you can't find anything to buy the stuff at, at the
cheap price.
And we'll see what happens with that.
And then you have this chronic, I'm going to say, shortage problem.
Okay, this, the minimum, the famous example of permanent minimum price control, which apparently
is just this year going to be eliminated.
I don't really believe it.
I mean, I believe it when I see it, but that way.
The famous case is the, there's also a case of the minimum wage law, but we'll get to wages a little later.
It's very similar. The famous case is of course the foreign, the American, all other foreign programs, the foreign price support program.
The foreign price support program began, well first of all the story is, starts really with World War I.
World War I. During and before and during World War I, the American farmer had the biggest
bonanza in his history, because he was in a situation where European countries were blockading
each other, and then they were at war with each other, so they didn't buy from each other.
So all the European countries turned to an American farmer to buy the wheat and the cotton
and so forth. So there was an enormous increase in demand for American agriculture. So the
American farmer had the biggest, let's say, the biggest fun time, the biggest boom time
and the relationship to other prices, non-farm prices, as they were on the good old days of 1914.
And of course this is an absurd and idiotic demand, because economic conditions are not the same as they were then.
You don't have this peculiar wartime boom.
Also, the chronic situation with farms in general is, obviously we start with the world.
In 1789, almost everybody was a farmer.
Either everybody was a farmer or they were selling farm products.
So you had 95% of the population was farmers.
Then as the world progresses and the industry comes in, and services come in, and all the rest of it, people leave the farm and go to the big city, Sin City, and do other things.
And so we now have a situation where 5% of Americans are farmers, something like 5%.
Well, I mean, I suppose in a sense it's too bad if you're an agricultural romantic, which I am not.
So if you're an agricultural romantic, you could pine for the good old days of the young men, the sturdy young men.
But, I mean, you know, you're willing to pay the price for this, the price largely being
smashing all of the production that's been going on for the last 150 years and going
back to the production conditions of the old farm where I'm afraid most of the public would
die out because we can't, we're now geared to a population, the population and our economic
level, our standard of living is geared to a highly industrialized world, not a world
by the old sturdy yeoman farmer.
So the farmers tend to die out.
And what usually happens is that not so much
of the old Ezra leaves the farm at the age of 60.
His sons and daughters coming up, growing up,
leave the farm and go to the big city.
And that's the usual process by which
labor migration takes place.
So you can't freeze this.
You can't say, oh, we gotta have as many farmers
as we had in 1910 and all the rest of it.
However, this has been the farmer's great green,
to restore the world with old age of parity.
Well, finally, in 1928, Herbert Hoover, one of the most disastrous of our presidents, was elected and pledged to enact the farm block program, the program of farm price support, which he promptly did.
The important thing here is that he was enacted before the Depression. Most historians get this little blur and they tend to think that the farm price support program was a response to the Great Depression.
It wasn't. It was enacted in March or February 29 or April, and the depression came in October. So there was no hint of it.
This is a boom, but the farmers want it there. They want to restore the good old days.
So we have the farm price support, which Hoover starts off, especially in wheat and cotton.
Wheat has always been the big one, and cotton too, because that has the most political clout.
And so the federal government established grain stabilization corporations and other things.
is headed by the Federal Farm Board to buy up wheat and cotton and keep it off the market.
Increasing demand curve artificially for wheat and cotton raises prices.
That's the theory.
They raise the demand curve.
Well, what happened there was, presumably to the desired level, the parity level,
well, they found out it was a problem.
Incidentally, who was responsible for this farm block program, farm pie support program,
for a program has been responsible ever since.
Two groups at the beginning of the third group, I'll tell you about, one of the large farmers,
and I'll go back to that in a minute because the small farmers, the thing has always been
a push of the forms program, has been pushed as a, have to help out the poor farmers, the
poor farmers are suffering there in Iowa, have to help them out.
Actually, the poor farmers have nothing to do with this program, get very little out
of it, it's the large farmers get a lot out of it, number one, and number two, the farm
Farm Equipment Manufacturers, the manufacturers of combines, tractors, and all the rest of
it, who, as we'll see, we'll see why they get there, especially subsidized by subsidizing
a large farmer.
And the beginning, the origins of the farm block, the farm block program, farm price
support begins in 1921 with George Peek and General Hugh Johnson, both of whom were chairman
of the board and president of the Moline Plow Company, the second biggest farm equipment
manufacturer.
And then the first head of the Federal Farm Board in 1929 was Alexander Legge, who was the chairman of the board of the International Harvester, which is the major farm equipment manufacturing.
So it's the farm equipment manufacturers that usually don't get talked about in this connection, plus the large farmers get back to that.
So anyway, they raise the demand curve for wheat and cotton, they're buying it up like mad, but there's a problem here, the problem is that the market, being fairly intelligent, realizes that they're sitting there, the Federal Farm Board,
The people sitting there with this enormous amount of wheat and cotton, they're scared they might sell it someday and the whole market will collapse.
So this sort of damoclase is hanging over the cotton and wheat market.
As a result, nothing ever happened. The price kept falling. And then the depression comes and the price is falling even more.
So that didn't work. It began to dawn. I organized farmdom.
And on the farm block, there's only one way in which the government can raise the price.
They got to buy the wheat and cotton up and so forth and keep it somewhere off the market
and they have to start doing something about restricting production.
In other words, because of the unsold surplus that's piling up, which they realize is piling
up, they got to do something to cut production, cut the supply curve down, say, to point A.
While they've been trying that for a long time, ever since, it hasn't really worked.
First they try the, guess what, voluntary methods.
This was typical Herbert Hoover flim-flam, Herbert Hoover specialized in doing things
which were really coercive and on the guise of being voluntary.
So he sent his people out to stump, his secretary of agriculture said to stump the country,
telling all the farmers, look, here's the situation, he didn't use these terms, that's
essentially what he said.
You've got an inelastic demand curve for wheat, I mean the demand curve for each farmer is
almost horizontal.
But for wheat in general, it's inelastic, so all you guys get together and cut production
by 20% or whatever, and slaughter every fourth pig and that sort of stuff, you will raise
the price and all of you will benefit, you'll share a much higher income.
In other words, a classic cartel situation.
We'll get to cartels later, too, but anyway, it's obvious how that happens.
There's something in the country telling you, and all the farmers are saying, yeah, yeah,
great, right, we understand this, that's all coproduction by 20%.
And then you see what would happen is the old Ezra would go back to his back home after
The Form Holiday Movement started vigilante activities that were trying to burn the tobacco,
night riders in tobacco country, going around burning the tobacco of those farmers who were
fusing along with tobacco cutting, and they dumped the milk, they did that just a few
years ago, milk strike, where they dump other people's milk.
In other words, private violence and private criminality, as opposed to the usual government
Criminality, and that didn't work either. It's a big country and there's a lot of farmers, a lot of tobacco, a lot of milk, so that didn't work. So there's only one thing left, that was the turn of the government to force the farmer to cut production, to enter the New Deal. By this time, Roosevelt enters the picture. But the thing is, by that time, the Hoover administration was willing to go along with this. It was not the Hoover people. It was sort of a logical step. The next logical step, while volunteerism doesn't work, we have to turn to coercion. So FDR, of course, is very willing to turn to coercion, and then we have the next phase.
This is phase two of the program, the EAA, the Agriculture Adjustment Administration, headed up by essentially by farm equipment manufacturers and people of that sort, the farm block in general, and so they kind of introduced, the fifth buses were piling up, there's always a big problem, first of all it's an embarrassment, right, and here's the depression, people are starving in the cities and out there on the farms, the government's piling up in the warehouses, piling up all this wheat, all this hogs and pork and wheat and cotton,
that's going, it's rotting away, and what are you going to do with it? It looks bad.
And so they say, the fact that it's in the extreme left, I think correctly coined the
term poverty, and it's depleted. In fact, here you have all this, the government piling
over all this wheat and cotton and meat and all that stuff that's not being used, and
here the people in cities are starving. There's something wrong with the system. Well, you're
darn right there was something wrong with the system. It wasn't capitalism, it was the
government obviously. So, so then they, well the next step was to introduce coercive controls
on production, limit production. Well the thing is they couldn't exactly, there's too
many forces, they couldn't say, okay from now on there's only a certain number of bushels
a week can be produced and you, you and you produce, you know, one percent of that. They
couldn't, they couldn't introduce production controls on old lesera because they just didn't
have the manpower to enforce it. I mean, how can you control how many bushels of wheat
All Ezra is producing. It's almost impossible. You have to have a vast 10 million man gestapo
going to each farm and checking up. So, the only practical way which they could do it was
impose acreage controls, because it's easy for the county agricultural agent to go around
in a car and see how many acres All Ezra has under the plow, how many acres is devoted
to wheat, how many acres is devoted to fallow and all that. So, the New Deal imposes acreage
He suffers from a restriction of supply, and the price goes up.
He suffers as a consumer, and then he suffers as a taxpayer, because the taxpayer has to pay for this.
The government taxes him in order to get the money to buy the wheat and the cotton
and the meat and store it somewhere and have it rot.
So it's a double burden on the average American.
So who suffers from this program, the average American? Who benefited from it?
Well, the first place, the small farmer, which was always the person held up as a beneficiary,
The subsidy the government paid was per pound and per bushel.
So you had to really be a large wheat farmer, a large cotton farmer or a planter to really
benefit from this.
As a matter of fact, with the acreage control coming in and limiting acres, you know, putting
down the number of acres the farmer could have under elevation, the result of that was,
what do the farmers do?
What were the responses?
Very shrewd.
Okay, I have a thousand acres and they're making me cut out two hundred, here's what
I'm going to do.
I'll take the 200 acres of rocky land, which doesn't produce anything anyway, concentrate all my efforts on the best land, the best 800, and mechanize and put in more fertilizer and stuff, and then raise production anyway, which is what they did.
So they cut out the land, and they raised production on the... they wound up with more production than they had before, and surplus was piling up.
This was incidentally helped by the federal government. Here's an interesting example of political science at work.
The Department of Agriculture, paying farmers not to grow wheat, and paying them handsomely
to take the wheat and put it in a store, useless warehouses, paying them not to grow wheat.
At the same time, another wing of the Department of Agriculture, down the horse, paying farmers
a lot of money to include their fertilizers, to mechanize, to irrigate the dry land, and
so they can grow more wheat.
Now you might consider this as irrational.
So you look at it from the point of view of the consumer,
but from the point of view of pure logic, it's irrational.
Because why is it a part of agriculture, on the one hand, paying the farmer to grow more wheat,
on the other hand, paying them to grow less wheat?
It seems pretty crazy, right?
That's not crazy, however, from the point of view of two groups of people.
One, the bureaucrats on the part of agriculture.
They're doing great.
You need two divisions, whether there were no divisions before.
And secondly, it's not so crazy from the point of view of the farmer.
He's raking in it and getting paid for more wheat and less wheat.
So, the farmer, however, who benefits was really the large farmer, because as the farmers
contracted the acreage and mechanized, they kicked off their land, the sharecroppers, the
small farmers, the tenant farmers, who now become, you see, a stumbling block, an obstacle
in this drive to concentrate and mechanize.
So what you had then, the result of this was the famous sharecropping problem in the South,
particularly Negro sharecroppers, Negro tenants in the South
as a result of which an enormous immigration of Negro, Southern Negro sharecroppers
were now unemployed, disemployed, kicked off the land and coming north to the cities
so a large part of the famous Negro migration in the 30s is directly caused
by the New Deal Farm Program, which is supposed to benefit the small farmers
I actually did just the reverse
well, eventually, as we get to the 50s
What the farmers are doing is, okay, we take the land out of wheat and cotton, we'll put it into something else, put it into soybeans, lettuce, whatever it happens to be, corn, and as they do that, the supply curve of lettuce, corn and soybean increases and the price falls.
Another headache, what are we going to do about the soybean price going down?
So then in the Eisenhower administration, we had the brilliant idea of the so-called soil bank.
It's a great phrase, the soil bank. It had rings with thrift and all that, and Protestant virtues.
The government was paying the farmers to take the land out of wheat and keep it out of anything,
don't grow anything on it, called the soil money.
So that's what they did.
They got paid for not producing wheat, they got paid for not producing cotton, and so forth.
Senator Eastland for many years as a large cotton planter in Mississippi,
reaped a handsome fortune out of the farm price, cotton price support program,
which he was instrumental in keeping on the books.
So, another group of people, incidentally, I mentioned the farm equipment manufacturers
and large cotton and wheat farmers, another group very interested in the perpetuating
the farm price support program, a group which is not usually mentioned, are the warehouse
operators.
The government's got all this wheat and cotton they don't know what to do with, they rent
that from private warehouses, and it's a sort of guaranteed demand, I mean, they're forever.
So if you're a warehouse operator, you're in great shape, you have the federal government
always using, always renting out your space, and so the warehouse operator, the grain elevator
men in the case of wheat, are one of the big lobbyists for the continuing of farm price
programs.
Well, as I say, the result of this is, of course, to keep farm prices up, and when we
had the 1971, the phases coming in, the present price control program, we had an interesting
So you can see what's going to happen very quickly to process food as it starts disappearing.
So this was, well, that's basically the farm price support program.
And one of the results of this, and this ties in with a lot of other stuff, is the famous wheat deal with Soviet Russia.
The wheat deal, which is one of the big things, gave a great impetus to the current 1973 food price boom, food price inflation, if you want to call it.
The wheat deal was consummated in the summer of 1972, and the United States sold the Soviet Union, I put soul in quotes,
sold the Soviet Union 440 million bushels of wheat, amounting to 30% of the average annual wheat crop, almost one third.
Well, since Russia didn't have the money to pay for this, presumably, the U.S. taxpayer
kicked in $750 million to pay for this.
Incidentally, this is typical of foreign aid, here you see the essence of the foreign aid
program.
The essence of the foreign aid program is the American taxpayer gets a lot of money,
the money goes to the American government, the American government takes out a handling
charge for operating the program, bureaucrat salaries, ships the money to some foreign
The foreign government takes the money and uses it on American export products, either
automobiles or computers or wheat or whatever, cotton or whatever, and they of course take
out their handling charge, the foreign government, and the result of all this process is that
the American taxpayer has subsidized the American export industry, with a partial subsidy going
The American government and the foreign government pay for their handling costs.
This is what happens here.
The taxpayer pays for this process.
This kicks off an enormous increase in the price of wheat.
The supply drops by one third.
There's also an enormous increase after that in the price of livestock.
The livestock eat the wheat as part of the feed grain.
The Restriction, the supply curve of livestock pushes to the left and farmers start killing
the cattle at a very young age and that sort of stuff and getting rid of them.
The result of this whole process was a big food price boom.
There were other causes of it, but that was the major one in 1973, but the thing is, the
reason why we did a program to begin with was undoubtedly the wheat surpluses were piling
up and boy oh boy, because you have these surpluses, I'd say they're an embarrassment,
and so the American government's attitude towards surpluses all this time since 1933
Let's get rid of them, someway. How do we get rid of them? We dump them, give it away, or sell it, or get the taxpayers, anything to get the stuff off the warehouse, and get more weed into the warehouse.
There were other causes of the food price boom. That was basically, I think, the major one.
There was other, I'd say, sort of temporary things. There was a sharp decline in the Peruvian fishmeal production just about the same time.
The anchovies left the Peruvian coast for some obscure reason. That's not the far line I was figured at, and so forth.
That also caused a drop in animal feed, but that was the basic.
also another one is something which we'll get to later
the value of the dollar, the famous devaluation of the dollar on the foreign exchange market
leading to
American exports becoming cheaper and therefore stimulating
exports of all sorts of stuff including wheat
uh...
well
okay that's uh... that's sort of that's the sort of the
Minimum Price Control Program
This is also the maximum price control program, which is more beloved. I mean, there are a lot of minimum price control here and there,
but the maximum price control program is the way to really go all out.
Let's say, when it sets up with a shortage, and there are several reactions to the shortage.
First place, if the demand is greater than the supply, it means there's a shortage. How do you allocate whatever shortage is available, whatever
the scarce supply, so to speak, available?
Well, there are various ways of allocating. Usually in the free market, it's allocated by the fight system.
Here are other ways to allocate it. As you can see, it's less produced now.
There's even less than there was in equilibrium.
Various ways come up of doing it. One, there's favoritism, the classic method.
During World War II, and I say which now becomes very relevant, when we had meat rationing,
there was a big meat shortage. There was always a big meat shortage. There was always blame on the war effort.
and the people swallowed this until the war was over and there was still a meat shortage and then it began to get edgy so there was a big price controls on meat were way below the equilibrium in market price
and so favoritism is one way of allocating it, in other words, for example, during the war, during World War II, if you had an old neighborhood butcher, this was of course before the days of the impersonal supermarket, you had neighborhood butchers
You had an old neighborhood butcher and you knew the old neighborhood butcher from the
olden days and you were a good customer of his, then he graciously allowed you, under
the counter, the hot meat, so to speak, I've got a good beef stand here and don't show
it to anybody and for you, Mrs. So-and-so, I'll give you the meat, sell you the meat.
So that's one way, favorite cousin.
If you had a butcher, if you had a brother, a butcher was your brother-in-law, it felt
better and you had an unlimited meat supply, get a hold of that, relatives, friends in
and the butchered business and so forth.
So favoritism is one classic method of allocating scarce resources.
Incidentally, one of the consequences of price control,
we'll see later when we get to rent control, also follows,
one of the consequences of this is racial and religious discrimination is aggravated by price control.
Because what you're doing here, instead of the consumer being king,
So, instead of the seller or supplier courting the consumer, you know, advertising, market research and all the rest of it,
now we see we have a permanent shortage due to the price control.
Now the seller is in the driver's seat, and the consumer has to go begging to the seller,
please sell me some meat, and so forth, and then you see with the seller in the driver's seat,
he doesn't have to court the consumer anymore, he can tell the consumer to go to hell,
and then his favoritism will come in, okay, I'll only sell meat one to my relatives,
two to the racial or religious group whom I'm in favor of, because now he can allocate it.
So, a room for producer control of the situation now comes into the picture.
So, favoritism is one way of rationing.
Another way is queuing up. Another classic method.
Lining up. The line comes into the picture.
And we'll see that as rationing comes. We'll see the lovable line across the syndrome.
You line up, right? During World War II, for example, there was cigarette rationing.
The cigarette showed up, I think, every Tuesday morning or something like that, and everybody was allocated only one pack per person or whatever.
At any rate, the line formed around a block around four in the morning, and then by eight in the morning or something,
and if you happen to be in the first third of the line or whatever, you could buy cigarettes.
So the great institution of the line comes into the picture. One way of rationing.
Well, that means the first guy that gets to the line has the patience, has the energy, has the stamina
to stay there all night and can buy the meat or buy the gasoline and whatever happens to me.
The other people are out of luck.
Little old lady has to hobble up or somebody's on a night shift if it wasn't in great shape,
but others lose out.
Little old lady who can't stand up for a long time can't buy anything in this process.
Little old lady has had it.
So what you have is a different allocation of, instead of allocating by monetary demand,
you now allocate by whoever can get to the head of the line first.
There are processes in the old days, for example, when Metropolitan Opera used to keep their
various reasons, both I think internal and legal ordinances, they used to keep their
price of their ticket way below the free market price.
It was almost impossible to get a ticket, and one of the things I have, there's a person
in this audience tonight who used to spend one of the Saturday nights online waiting
This sort of phenomenon is no longer true because now the price has been up to more or less the free market level.
So this sort of phenomenon, lining up, queuing up, is always a phenomenon, always an attribute of government activity, government price control.
It comes into the picture as a form of rationing.
Allocation, well favoritism also comes in by the way. Allocation, who's going to get this?
The government rationing comes into the picture. Who's going to decide who's going to get it? We'll get back to that. Government favoritism.
Another process is hidden, well, I should say, decline in quality.
Because decline in quality is very, very difficult on the police. It's not too difficult on police of price.
The OPA, the old OPA or the current IRS forces the grocery stores, the supermarkets to post their price, the prices such as that.
But to check up on quality is an extremely difficult task. You need a multi-million man gestapo of experts in the field,
then you have to have a super gestapo to check up on the experts on being bribed.
The implication is fantastic. For example, when phase one came on, the phase one was the famous freeze. Everything was frozen frozen for about three months.
Nothing was supposed to change. It was supposed to be there, sitting on everything.
Well, the first thing that happened, the first people to break the freeze, by decline in quality, were the heroic ice cream manufacturers in New York City.
I put my hat to them. I happen to be a fan of Carmel Almond Crunch ice cream. There are two brands which I shall not name.
Two conspicuous brands who make them. In both cases, about a month after the ice freeze came into the picture and the quality could be adjusted,
suddenly there wasn't any almonds in the Carmel Almond Crunch ice cream. Where's the almonds?
There'd be like one almond per quart to satisfy the technical requirement, but the almonds tend to disappear.
How are you going to have a Gestapo checking up on you? How many almonds have you got there?
The candy bars are going to have more air in them. Those of you who are candy bar fans, where's the baby roof? Where is it?
It's subtly lower the size of the product. False bottoms began to appear in various lotion bottles.
So, we have a new improved lotion bottle, but it turns out it's less ounces because
the framas is another, you know, it's a false bottle.
So all that sort of, and then another group that broke the freeze was the Heroic Repairmen
of New York, the painters and the repairmen.
We began to find, for example, the landlords would call painters in for painter room, and
the painters would charge much more, 10%, 20%, 30% more than they did in July, before
P
And the shifts begin to change from the so-called freeze set up.
And also finally, of course, is the black market.
The black market is the market.
It's the market popping up again.
It's the hot meat.
It's when you say, well, there's a meat shortage.
You can't find meat, but if you're willing to pay, et cetera, you know, certainly more.
Don't tell anybody, here's the meat.
The black market shows up.
There are several things about the black market, even as lovable as it is.
First of all, the sort of people who engage in the black market, the black market entrepreneurs
are not the same people as the free market entrepreneurs, because people are more attuned
to illegal activity.
And so the quality of the product has to be a little shaky sometimes, you can't really
really be sure as you are with the brand name, second of all they can't advertise, they can't
take a full page ad in the Times and say, hot meat available, so they have to go through
some sort of shady channels, it's costly and the consumer can't find out, you have to be
the sort of person who knows where the hot items are located, most of the public don't
know this, they're sort of excluded from the black market, thirdly there's a heavy cost
and the course involved, not only because there's no advertising, but also because they have to pay off the cops.
And payment of the cops, you know, adds on, cuts the supply, raises the price.
So how do you wind up with something like this? If you take a vertical line up from the intersection point of the maximum price control point
and the supply curve and have a vertical line up from it, you'll see more or less what the black market price will be.
The black market price will be hit to the man curve of the black market price, so the
black market price is considerably higher than the free market price, and again, so
the public is misled and they say, wow, gee, we can't eliminate price control because
then the item will go all the way up and skyrocket. Well, it wouldn't skyrocket that much because
the black market price, for these various reasons, is considerably higher than the free
market price.
All right, so you have the black market, and I say the black market only is really patronized
The Consider Black Market Activity During World War II, as patriotic as the war effort was.
One of the things that happens when you have, well, the way price control was finally eliminated
in World War II, it had hundreds of thousands of OPA people enforcing this stuff, enforcing
price control.
Even our beloved president began, got his start on life as a, in the entire rationing
division of OPA, might be certain symbolism there, at any rate, the, so there are hundreds
There's a thousand people working on this thing, enforcing the regulations and so forth.
Even so, as I say, there were lots of blank markets, and after the war was over, they
eliminated some of the price controls, but the, because the climate went up and the shortages
still remained, and then they said, well, you couldn't blame it on the war effort.
Well, there was a particularly meat shortage, a big beef shortage, as there was this year
for a short time, a big meat shortage, I mean, it's just impossible to find meat.
One of the things I should mention here, price controls in general, before I get to that,
is that usually price controls are enforced at the equilibrium point.
The idea is, well, prices are going up too much, we have to freeze them as they are.
This is what happened on August 15th, 1971. You freeze, try to freeze prices.
Well, the thing that happens is that the next day, when people wake up on August 16th,
it seems like nothing has changed. There's no problem with those shortages, all you guys are alarmists,
because the next day, the equilibrium price on August 16th is not much different than the equilibrium price on August 15th.
So for a little while, for a short period of time,
It looks as if the price controls are working. The public has a mistaken sense of euphoria.
Then what begins to happen is as the time goes on, there's an increasing discrepancy between the official price, the fixed price control, and the free market price, which keeps changing.
It can either go up or go down. Usually in an inflationary period, of course, the free market price keeps going up.
Because the demand curve keeps going up as more money is poured into the system by the government and so you have a sort of a secular increase in demand curves and as the demand curve keeps going up over time, the shortage starts developing against worse and worse.
In other words, the more the price control continues in force, the worse things get.
So by the end of World War II, the public had had it, and the excuse of the war was
now over.
And so by 1946, there was a fantastic meat shortage, meat could not be found, to the point
were insulin, mucundi, diabetics, and so forth. So, President Truman, the clamor came out
was to eliminate price controls, including meat controls, and enormous hysteria came
up. For example, the New York Post, I remember very vividly, for those who are not New Yorkers,
a highly liberal paper, was hysterical about, you must not repeal OPA. If you repeal OPA,
Mises will quadruple, quintuple, go up 200 fold, etc.
There's a fantastic fear of freedom developed.
What would happen?
We can't eliminate price control.
It's part of the American heritage.
And then, the gouging entrepreneurs would charge infinite prices and so forth.
Even the local disc jockey at the time, the late Martin Block, who was the preeminent
disc jockey of his period, was never involved in politics at all, suddenly came on the air,
I remember this vividly personally and pleaded with everybody to write letters to the congressman to keep OPA because otherwise prices would go through the roof.
Even disc jockeys were becoming political pundits, economic pundits at the time.
Well, so Truman was faced with the following choice, which he reported to the public.
He said, well, there was no meat to be found. What are you going to do about it?
Well, he said he was faced with a choice of mobilizing the National Guard, drafting and sending the troops, calling the troops out and nationalizing the meat industry, going out into the farms.
He said, well, he thought of confiscating a lot of the meat packers, you know, that would have been easy, but he admitted the meat, that wouldn't make much point, but the meat packers didn't have any meat either.
And Swift and Ormer said they didn't have any meat, they couldn't nationalize them.
He said, well, I would have had to go mobilize the troops and nationalize all the farms and go out there and nationalize the ranches and livestock farms and drag the cattle out.
He said he gave serious thoughts of this.
He said, well, he figured it was impractical.
Fortunately for the American public, fortunately for freedom, it was election year, 1946, congressional election year, the Democrats were in grave trouble.
You can imagine what would happen on the farm vote if suddenly soldiers with fixed bayonets
would come in and seize the cattle.
So with great reluctance, President Truman reported, well, because it was impractical
and probably the public wouldn't like it too much, I hereby, gave up this whole term,
I hereby eliminate price controls on meat and within a week the whole meat shortage
was over, only to reappear for this year when price control came back again.
So one would have thought that was a lesson for the government, for economists, but I
guess memory is fairly short in this whole area.
One of the things about when price control breaks down, when the shortages increase in
their black markets, well the temptation of government, the government is faced, as my
late mentor Professor von Mises would say, all government intervention in the market
creates extra problems. It doesn't solve anything. It finally creates some more problems and then the government has to intervene more or else give up the whole business.
So Truman was faced with this sort of crunch. Either send the troops out and nationalize the farmers, or draft the farmers or something like that, or give the whole thing up, eliminate the whole control regulation, which is what the government hates to do.
So usually the temptation is to escalate enforcement, that penalties are only 10 years in jail and they get 30 years, execute them, kill them, torture them, you think I kid you on this, but in other climes, in other cultures, which did not have the American reluctance to inflict this sort of punishment, all stops were pro-lapped, the famous case for example is the Emperor Diocletian,
The late Roman Empire, who was inflating like mad, I'll get to the causes of inflation later on,
but he was inflating the currency by clipping coins, that was the ancient primitive method of doing it.
And so prices kept going up, but finally Emperor Diocletian issued his decree, freezing everything.
All right, from now on, the so-and-so is the three drachmas and such-and-such is two denarii and all that.
He had a completely very detailed list. He even had things like writing of the first quality, five denarii,
writing of the second quality, Friedanari. Who decided how, you know, the quality of the writing is an interesting point.
At any rate, he has a whole detail list, and he made no bones about it. He wasn't limited by any American Civil Liberties Union or the Fifth Amendment.
He said anybody who disobeys this regulation, death, you know, immediate capital punishment.
and he killed a lot of people but it didn't work even the death penalty could not hold back the tide of black markets
and the price controls finally fell apart and so forth and he had to give it up and he said okay, heck with it
that was the emperor, that was the first big example of price control and unfortunately that was not heated very well either
we all know about the guillotine and the French Revolution when the Jacobins were killing a lot of people, aristocrats
and so on.
But we don't know what isn't focused in on is that probably the majority of these killings
were killing none of the aristocrats and Tories and Bourbons, but poor merchants were violating
the price control regulations.
The government was inflating like mad, this time paper money, the law of the maximum price
control regulations on food, etc. and there was a shortage of food in the cities due to
this and then the regions were starving and rioting and all that, and of course who gets
blamed?
First the mobs loot the stores of the merchants, get rid of all the food, and then what? That's
the next step. Then you shoot the, well, in those days you guillotine the merchants for
violating the price control regulations, engaging in black market activities. So when the Jackabins
tried to guillotine, that didn't work very well either. The more recent example of escalated
Enforcement, the old pal Chiang Kai-shek in China. One of the reasons for the so-called
loss of China is again something which only economists know about. The Chiang Kai-shek
was engaging in very severe inflation of money supply, pumping in money like mad, and prices
were engaged in a runaway escalation upward. And if that were not bad enough, Chiang then
and then imposed very severe price control, no, no, we have to freeze prices at such a level
and then it didn't work and they had black markets and price controls were being disobeyed so he escalated the enforcement
and the result of this was the food didn't get to the urban areas and the urban areas were starving
and the peasants couldn't get manufactured goods and so forth and the whole thing, the economic process was breaking down
and then Chang kept escalating the punishment, finally he decided to shoot the merchants in the public square of Shanghai
The Chinese government is trying to shoot all black marketeers and line them up as a public example.
Well, I mean, that tore it. That was about it, because the merchants, the last support of the Chiang Kai-shek regime,
then figured, well, you know, Communists aren't going to be worse than this guy shooting us.
Also, the Communists were quite shrewd on this, and when they took over an area, they stopped inflating the money supply and the inflation problem was licked.
One of the key reasons for the Chinese loss of confidence and Chang's credibility we call it now, and that was that he had it.
As a matter of fact, using this insight, I think it was, I forget now when it was, about three, four years ago, I think when Marshall Key was then the head of the South Vietnam,
started shooting merchants in the square of Saigon for disobeying the Pice Control Regulation, I figured that was it, he'd had it.
That was the end of the Vietnam paper because he was following almost classically the route that Chiang Kai Shek had followed.
So escalation, so even if we're going to wind up enforcing the gas rationing with immediate death on site, it's not going to help the situation, it's not going to help enforce the situation.
Another interesting story about price control is that Hitler of course had price control during World War II because Hitler wanted to follow the modern economic science and when American forces of occupation came and occupied Germany the American theoreticians, the idea at the time, the so-called Morgensau Plan was to de-industrialize Germany, punish Germany by turning Germany back into a pastoral country.
So, as a method of doing this, as a conscious method of de-industrializing Germany and turning it back to a pastoral society, we impose severe price controls.
It was the same economists and theoreticians who in favor of price controls in the United States in order, quote, to save capitalism, unquote,
were doing the same thing in Germany in order to crush it, to smash Germany forevermore.
So they imposed severe price control. They tried to roll prices back to the 1939 level.
And of course, prices are going way up. The free market price is going way up since then.
The result of this was the following. I guess you all know the stories. I don't know.
Maybe I'm the only one old enough to remember them. The stories about buying girls with candy bars, that sort of stuff, in Germany.
Well, because the Germans were starving. The reason why the Germans were starving is not because the German industrial machine had collapsed.
The reason why the machine had collapsed was because all the stuff that had been produced before the war,
in other words, before 1939, fantastically, the price controllers were way, way below the free market price.
They had to suffer severe financial losses to produce them.
As a result, the Germans didn't produce any food, didn't make any candy bars, didn't make any clothing or any of the necessary.
Instead of that, they only produced, they shifted their resources to producing goods which were new,
and which therefore were not under any price control regulation, because the price control
regulation usually has a historical base. We freeze it as of August 15th or whatever
it is, or freeze it as of 1939. Well, if the new product wasn't around on August 15th or
wasn't around on 1939, how do you set the price for it? As a result, the new products
were free of price control and so the Germans were producing toys like mad, all sorts of
new toys, hula hoops, whatever, instead of producing food, clothing, shelter, etc. So
So in 1948, after two, three years of this horror, finally sanity won out, largely through
the influence of a couple of students, as a matter of fact, and they said, look, the
only way you can ever solve the German economic situation is repeal of price control, which
they did, and very shortly after that, the whole shortage was over, girls were no longer
available for candy bars, and you have the so-called economic miracle of West Germany
following shortly after that.
So once again, the price controls were the villain, but here the interesting sidelight
is that we did it consciously to crush the German economic system.
Okay, when phase one came in, as I said, there was the reaction of the Carmel-Ohlmann crunch
and the servicemen, etc.
The controls, the price controls obviously had not worked very well, to be clear.
Phase one, everybody sort of hailed it, terrific, fantastic, beautiful, strong president, all
the rest of the malarkey.
And then after a while, things began to happen.
So the freeze wasn't working so well.
We went over to phase two, which was sort of a moderate control program.
You allow certain increases.
Again, of course, it was politically allowed.
And then what happened was, for example, in phase two is that you have things like this.
You know, the government would allow a business to raise its price if it was making low profits.
If, on the other hand, it was making high profits, you force them to lower the price.
So what began to happen with phase two is that firms began to look around desperately for ways not to make profits.
It's easy not to make profits. You just sort of let her rip.
Businessweek reported, not for its position, but as a news magazine, for its ideological views.
Businessweek reported, wow, firms would do things like this. First of all, the old expense accounts are rolling back.
Well, live it up, Jim, because we don't want to make too much high profit to go to the Havillon and Hilton, etc.
First Class and Planes, etc. Also, businesses started having their annual meetings in the
Bahamas instead of in New York. As one executive said, well, if we have to be inefficient,
we may as well enjoy it. So that sort of attitude comes in. Of course, this means the system
begins to crack. And phase three then comes in, which was a little bit better, and then
phase four, phase three and a half, freezing everything again with a little control, with
after the inflation of food prices and then the severe freeze coming in in 1973, the time
when the economy was booming as a scarcity anyway, as a result of which we suddenly have
a beef shortage, can't find any beef, suddenly gasoline shortage, and we begin to have, then
we go into phase four which is slightly better than phase three and a half and not as good
as phase three and whatever. So we're still in a situation where there's heavy price controls
throughout the system.
One of the ways in which a shortage, which, as I always say, always appears when the pipe
control is held for a while underneath the equilibrium point, one of the ways of allocating
this scarcity is government rationing, which, of course, we're now beginning to see in gasoline,
etc.
Rationing sets in its own interesting system, which again we saw in World War II.
Rationing is very peculiar, in the first place it means that you have a second money.
It's bizarre just from that point of view.
Instead of just having money, usually if you want to buy something, here's the price, you know what the price is,
if you have the money you buy it, if you're willing to spend the money or if you don't, you don't buy it.
In addition to having the money in there, you also have to have ration tickets, so the ration
ticket becomes sort of a second, a parallel money.
Also, the ration ticket means that the government is allocating the resources by its own favoritism,
by political favoritism.
You, you and you are, for example, during World War II, the big thing was to be an essential
war worker.
If you were an essential war worker, engaged in essential war work, then you get unlimited
amount of, vast amount of ration tickets.
If on the other hand, you were poor schlepper, nothing much to do with the war effort, you
For example, on the gasoline front, there were several kinds of ration tickets. Everybody
was supposed to share equally, suffer equally. That was always the slogan of the rationers.
In World War II, people suffered unequally because there were several degrees of ration
tickets. The average citizen had an A ration ticket, which was titled with very little
and Natural Gasoline. As a matter of fact, by the way, this is a point of mild interest, the government highway thing, the speed limit during World War II was 35 miles an hour.
We might see that again, who knows. At any rate, the A ticket was just a few gallons a week, was allowed to the person.
Then there was the B and the C was the sort of unificent, and the X ticket was unlimited.
In the first place, the congressmen, over 200 congressmen asked for and received from the OPA, the ex-brand, in other words, unlimited gasoline for congressmen.
Absolutely, boy, they were obviously engaged in essential war work.
The top priority.
Second of all, you have things like, the truckers had unlimited amounts, so there's a T-ticket, and the truckers began to sell their excess T-tickets to other people.
You're going to have leakages, this is, Henry Hasen, a great novel, a great economic political
novel called The Great Idea, it's now called Time Will Run Back, has a whole story about,
starts it with a communist system of the future and winds up with a free market by logical
deductions.
And the first thing that happens is some brain in the communist system says, hey, why don't
we allow people to exchange their ration tickets, it's sort of a big new thing, why don't we
allow the people who don't smoke cigarettes to sell their cigarette tickets for the guys
People, the exchange would be the market, the ugly head of the market would suddenly
rise up again, we got to clamp down on it.
So as a result of this, he had truckers illegally selling their surplus T-tickets.
You have things like the C-people, you have things like C-tickets were given to, well
let's say the Sharpies would get the C-ticket, so the average Joe would have a Z-ticket and
they'd only have a few gallons a week.
The Sharpies had their almost munificent seat tickets, and the Times or the News would print
pictures from what signs I have of an aqueduct parking lot filled with seat tickets.
This caused a lot of class envy and resentment.
Then you have things like, then you have things, literally, OPA enforcement agents went out
and checked up.
Everybody was, you weren't supposed to drive, you had a seat ticket, you were only supposed
You're supposed to stop at a gas station. You're only supposed to walk 10 feet beyond the gas station and no more.
And you literally had a spy, an OPA spy, going around checking up on your part near a theater.
That means you're going to the theater. If you have a seat ticket, you're not allowed to go to the theater.
And they clamp down on you, arrest you, take your seat ticket away, tear up your seat ticket in front of you.
And that was literally going on.
There's an interesting book by Richard Lingman called You Know There's a War on, which talks about what was going on.
It's not an analytical book, but I think it tells the story of what actually happened.
Well, one of the things that happened was this ration ticket system.
Well, first of all, I would say just on a ration ticket, I think the whole thing is absolutely monstrous.
It's totalitarian, despotic.
Nobody should have a right to tell anybody else how many things to buy, how many lights to turn on,
and how many lights would turn on, what heat you're supposed to have a room at, and all the rest of it, so it's totalitarian, monstrous, whatever, any value judgment you can think of going along with on that.
But one of the things that happened was a heroic mafia came into the picture in World War II to relieve, leading the people to struggle against gas rationing.
And they counterfeited an enormous number of seat tickets.
It was easy to counterfeit seat tickets.
It was estimated that 15% of all the gasoline sold in Morocco was sold to counterfeit seat tickets.
And 30% in New York.
So these things are things to remember as rationing falls in on us.
There's also the, my wife's sweet old grandma, when she died, it was a source of embarrassment
of the family to find out that she had an enormous amount of sugar, this is the great
people's revolutionary movement, the sugar hoarding during the war, we were told never
buy sugar because somehow our boys rely on you're not buying it.
Well, let's go into the, I think there's time to go into the energy crisis and exactly how
the energy crisis, first of all, if there is an, to the extent that there is an energy
shortage, obviously the solution to it, there will not be a shortage if you allow the price
to go up. If you allow the price to go up, this will ration the existing amount to those
who will ration it voluntarily to those who will willingly want to spend more on it, those
for those who consider it more important and so forth.
So you have a smooth form of voluntary rationing
where, as I say, those who are most interested
in buying the gasoline or the heating oil will buy it.
But secondly, by allowing the price to go up,
you'll stimulate more supply after a while.
More marginal wells will come in,
oil wells will come into production.
Distribution will be speeded up, et cetera.
So, by allowing the price to rise, even if there's a scarce supply, the supply curve is going to the left. By allowing a free pricing system, by allowing the price to go up, it will do two things.
will voluntarily ration, so the consumer, in accordance with who is most interested
in most important use, to buy the material for most important use, will voluntarily ration
themselves in accordance with the higher price, and all of those will stimulate an increase
in supply.
So the lease you will allow, there won't be any more shortages, there won't be any more
black markets, there won't be any more need for rationing and so forth, that's the first
thing to do.
The second thing to remember also, going in the energy crisis, the government by various
methods has created it, has restricted supply and increased demand artificially and so the
thing to do of course is to eliminate that.
Well, on the oil caper, it starts with the oil proration laws.
Oil proration laws began in America in approximately 1931-32 when enormous oil fields were discovered
Vast and super abundant oilfields are discovered in Texas and Oklahoma, the Great Texas-Oklahoma
Find, as a result of which the price of crude oil plummeted straight down.
The oil industry got rather historical about this and called upon the state for bail them
out.
This is known as a partnership now of government and industry.
Not all oil men, but enough oil men to count.
The classic cartel situation comes into practice.
The first thing the government did is they outlawed all further production of oil until we can straighten the whole thing out.
They called it an oil moratorium.
And to enforce the moratorium, the governors of Texas and Oklahoma declared martial law and set the troops out into the oil fields.
Especially because at night, you see a lot of the guys were wildcatting, drilling their own oil and taking the hot oil out.
And so they came in with fixed bayonets and guns at the ready to shoot oil, any wildcat oil driller who was drilling his own oil, getting it out of the ground and shipping it out.
They did shoot some people. The governor of Oklahoma, the colorful did this, the colorful Alfalfa Bill Murray, wild Bill Alfalfa Bill Murray.
So there was an oil moratorium that straightened it and stopped production. First thing they did was stop that.
And then the states and the federal government collaborating set up oil proration laws.
The Oil Proliferation Law works something as follows. In Texas, for example, which is the largest oil state, there's an old geezer, usually a retired general, who's the head of something called the Texas Railroad Commission.
As far as I know, it has nothing to do with railroads. It's only involved in setting oil, maximum oil quotas.
So, every month the old geezer decides how much oil is allowed to be produced next month
and he said, okay, from now on, next month you can only produce whatever, you know, million
barrels of crude oil.
And then each oil well in Texas has a quota, like, you know, you're 0.005% of the oil
well in Texas and then you're restricted to that.
So, in other words, the supply curve of oil pushed drastically to the left, the price
of crude oil is raised.
This of course pushes the supply of gasoline and heating and all the stuff that comes out of crude to the left and raises their price.
This has been going on since 1932, and every month, the old geezer puts out this maximum quota.
And the excuse for this, for an economist, the excuse for this is laughable.
I'll say, well, we need the Texas Railroad Commission to do this, because they have to adjust supply to demand.
I mean, that's what the market's supposed to be doing, adjusting supply to demand.
No, no, they need this because otherwise, otherwise what? Otherwise too much will be produced and the price of crude oil will fall and we can't have any of that.
So that's the first, that's the first chronic thing, a very basic chronic thing that raises the price of crude oil and limits the production.
Now this has been done in the name of conservation. I'll get to that, I'll say conservation caper later on.
But it's done in the name of conservation. Well, we want less to be produced because then the future generations will have it and all that jazz.
However, along with the oil production, operation laws, came oil import restrictions. Keep foreign oil out. If you're really interested in conserving American oil, keeping oil out of oil in Texas, then you want to encourage the importation of foreign oil like mad, right? However, they did not. They kept out foreign oil, thereby shifting the supply curve well to the left, starting with tariffs, winding up with oil import quotas. So in order to import oil, you have to buy somebody else's quota right.
In other words, if Shell Oil had 10% of the imports in 1950-something, whenever the thing came in,
if you're a new oil importer, you can't import oil, you haven't got the right.
It's illegal. You have to buy the 10% or the 2% from Shell at a high price.
This, of course, keeps out competitors and keeps out the oil imports from coming in.
This, I think, has been repealed about a year ago, but the point is, this has been the basic policy for quite a while.
So this, that's the restriction on domestic and foreign oil, and then in addition to that, the government has sitting, the federal government of the United States is sitting on an enormous amount of oil, enormous!
They've been sitting on it for 50 years now, and nothing has been done with it, it's called conservation or something, it's called withholding from the market, thereby raising the price.
There's the Elk Hills Reserve, I think in California, which has god knows how many billions and billions of barrels.
and there's a teapot dome which of course is a famous place in American history
where the poor guy was crucified because he wanted to at least get the oil out
so he might have been a crook but at least he was trying to produce some oil
or finally President Nixon's latest speech he's going to start producing a little bit from the Elk Hills Reserve
but the point is it's been kept off the market all this time thereby raising the price of crude oil
and the price of gasoline and the whole business and restricting the supply
Then in addition to this, and this goes for all the shortages, I haven't got time to go to the other products yet,
there are the environmentalists, the environmentalist crazies as I like to call them,
who have now stopped, have stopped with absolute determination and will, have tried to plug
the gap, have tried to restrict production anywhere they can find there and get their
hands on.
So, as a result of this, oil refineries can't be produced for several years because God
knows why.
They pollute the air or they deface the landscape, whatever, so this is cut down on the production
of oil refineries.
Also, of course, the Alaskan Pipeline, which would supply about two million barrels a day, which is pretty hefty,
has been held up for many years because of the environmentalists finally getting going, but it's been held up for many, many years.
As far as I can make out in the Alaskan caper, I've done some reading in the Alaskan question,
the environmentalist problem seems to be twofold. One is the deface of landscape. In other words, a beautiful, unmarked, unmarked by man, that is,
Plato and steps and whatever they got out there in Alaska would be
defaced by the fact that there would be a pipeline running through it. It's really tough.
And I noticed the logical implication of this. If the conservation of the
environmentalists had been in control in 1776, we'd never have anything beyond a little
fort here on the tip of Manhattan, because you couldn't chop down a tree, you couldn't do
anything. So that's one problem. There's a scenic
problem, which is something, I do not find a grabber, I'll put it that way.
The second problem was the caribou. The caribou liked to walk across the pundra. If you have
a pipeline which has to be dug down deep because there's a thermal, whatever, heating it in
the soil, then the poor caribou wouldn't be able to walk across and be confused. They
die out. I swear. Then the oil company said, okay, we'll build a ramp. We'll build bridges
across the pipeline so the caribou can walk. But then they said, well, yeah, but the environmental
The Alaskans themselves are rather annoyed at this whole thing.
The editor of Anchorage Daily Times wrote a letter and said that of the 300,000 people
in Alaska, at least 299,000 are very bitter about this holding up the Alaskan pipeline.
The other people, he said, the other thousand, quote, feel a kinship with all the kooks who
want to lock up Alaska with some sort of permanent wilderness.
It's pretty clear the people in Alaska don't want to live in a permanent pundra.
Okay so that's the oil caper, then a very related sort of thing is for example the crippling
of Natural Gas and Coal. Natural gas is a substitute for oil and heating, et cetera.
Well, natural gas for the last 25 years, for obscure reason, at least I'm sure to me, has
been regulated, the price of which has been regulated at the wellhead and interstate commerce
by the Federal Power Commission way, way below the free market level. Of course, as inflation
proceeds it's even further below. Now, why it's been done that way, whether it's been
The reason this has been done for ideological reasons is because the gas buyers on it, I don't know, or a combination, at any rate, this has created an increasing shortage over the years of natural gas, especially in interstate commerce, plenty of natural gas in Texas itself, in Oklahoma, because there's no price control intrastate.
As a result of this, there's lots of natural gas reserves. Everybody knows there's lots of natural gas on the ground, but nobody's looking for it, because it doesn't pay anybody to look for it, because the prices are held way below the free market.
As a result of an increasing natural gas shortage, as a natural gas shortage, people turn to oil, so you have a cut in the supply of natural gas, an increase in the price of oil, an increase in demand for oil, artificially, which adds to the oil problem.
And it created a fuel oil, a heating oil shortage, as you say, for last year and it will continue.
So natural gas is crippled.
When natural gas is artificially crippled by the government, this raises the demand
for oil and this adds to the oil shortage.
Same thing happened to coal.
Coal has been crippled in many ways.
There's lots of coal around too.
Lots of coal.
Coal has been crippled in several directions.
First place, John L. Lewis, the beloved leader of the coal union for many years, was a very
good economist.
He understood exactly what was going on.
He knew that if unions pushed out wage rights, it would cause unemployment.
He knew that very well.
He was a brilliant economist.
On the other hand, he was in favor of it, since he was in the union and his comrades
were union members for a long time, he said, okay, we'll just employ them.
I said, how about them?
They're not union members.
They're apprentices or whatever.
As a result of which you have a, and he did this in collaboration with a lot of the large
mine owners and one of the disemployed are smaller competitors, as a result of which you
have a deliberate policy of a mine workers union for many years, since the 30s, to cripple
the coal industry, to shift the supply curve to the left, to raise the wage rates for those
remaining, those old citizens that stole the coal, but everybody else is in Appalachia
living in hillbillies or dropouts, forced dropouts in Appalachia.
Well, this cuts with a lot of the coal supplies, one factor.
The main factor is that the environmental is crazy back again in two directions.
One is the story over strip mining. Strip mining is quite cheap.
It's this 40% of the methodical mine of strip mining.
There is a problem with private property of the farmer down the hill on strip mining, but the basic charge seems to be aesthetic.
The strip mining causes an ugly landscape. The hill is grooved forever, or whatever it is.
Again, this is not the sort of thing I find a problem. I find a grabber. I think it's more important to have coal and fuel for the cities and factories than just to worry about the Kentucky hillside.
At any rate, the strip mining hysteria causes losses of law to be passed to restrict strip mining, cripple it, and so forth.
and the second environmentalist thrust there was the air pollution, the dirty coal is a dirty fuel, sulfur is poured into the air and so forth
and the Clean Air Act of 1970, the Federal Clean Air Act, drastically lowered the supply of coal
which means people have to shift the oil for heat, which raises an after oil and again you have to intensify the oil shortage
I'm not really in favor of air pollution, I don't know much about it, I think the public media has really been
One side of the fact that we've only heard the environmentalist side of the story, the anti-environmentalists claim that the sulfur really disappears pretty quickly and doesn't really harm anybody, but at any rate, certainly the restrictions came on awfully fast, let's put it that way, and awfully suddenly, and awfully severely, and again causing these effects.
So coal has been crippled, natural gas has been crippled by government action, and also electric power. Electric power has been crippled. First of all, utilities can't build nuclear power plants because people are worried about nuclear radiation, although experts claim it's no real problem.
Secondly, the camp for example, Con Edison, has been trying to build a Storm King plan
for god knows how many years up the Hudson.
The environmentalists have stopped it because it ruins the Hudson.
The Storm King mountain view is spoiled.
Again, it's not something I, it's not an argument to which I feel I can do full judgment.
So this has stopped the Storm King plan for many years, presumably to finally get it,
but it's held the thing up a lot, cuts down supply of electricity, raises the price, etc.
and finally there's the whole problem of electrical utilities anyway, electric utilities are compulsory monopolies, you can't compete with Connet, Connet has a monopoly, each electrical industry firm in its area has a monopoly granted to it by the government of its area, you can't go into competition, you have a compulsory monopoly and secondly you have a fixed rate of profit guaranteed by the government, so the rate is set by the government action,
The rate of profit is set, it's not very high, on the other hand it's guaranteed, it makes a big difference.
So Mises has no competition in the electrical industry, Mises' research and development and all sorts of technological improvements in the electrical industry is cut out, is eliminated, is restricted.
And also the way the rate is set is, there's a fixed rate of return of capital, in other words, let's say 6%.
This means that if the rate is set in such a way, you've got a certain profit per amount of capital.
This means the higher your capital, the better off you are, regardless of whether capital is any good or not.
As a result of this, the electrical industry hardly ever depreciates its equipment.
It depreciates equipment very, very slowly.
Because why do it if you have your $10,000 machine which is half-dead, so to speak,
doesn't make any difference. It's worth $8,000 on the books and you can get your profit rate determined on that basis.
While IBM, for example, a very progressive company, depreciates its equipment very fast, say in 10 years,
AT&T and ConEd depreciate their equipment over 50 years.
Hang on to obsolete equipment until the last possible ounce of squeeze out of it,
thereby again repressing and restricting and crippling technological developments and improvements
Well, that of course adds to the energy shortage.
Well, as we have political rationing, as I say, we'll see congressmen voting themselves
the unlimited supply of gasoline and so forth, but we'll also see, we'll also already see
and Human Action.
We're actually in an airline flight, which is a beautiful cartel arrangement where the
government and the CAB Civil Aeronautics Board tells the airlines, you've got to cut out
your airline flights.
The airlines, of course, receive this red information with enormous enthusiasm, because they've
been competing, even though their competition is fairly limited, as we'll get to later
on, by the existence of the CAB, still they were competing and they found out that not
Every flight was like a cattle car and there was even some empty seats.
And so we're now, boy oh boy, we're patriarchically going along, we're cutting out half our flights
and every car, every plane will be packed.
So once again you have the government of cartelists restricting airlines' competition, service,
etc.
But we'll get more to the airlines and the cartel thing later.
I'd like to wind up this homily on price control and rationing.
from a column of a journalist who is not distinguished as an analyst or the knowledgeable on the
market, but he's got a great spirit, especially in relation to the government.
This is a Pete Hammel's column on Monday, New York Post, there's a few lines from it.
He's reacting viscerally, instinctively, I think correctly, to the government blackout
and the energy, the gas rationing and all the rest of it.
He says, now they've even taken away our skyline.
It had been hours since that day, 1945, when we all raced to the rooftops of Brooklyn to
see those minion lights blink on again, dazzling, joyous, triumphant and unbelievably beautiful,
signaling to us that the war was over.
I remember a woman crying on the rooftop that time, knowing that the long night of the Second
World War was finished, that New York was blazing again with its electric beauty, the
Blackouts and dim-outs were behind us as the troop ships would soon be home, the New York skyline hours forever, and now it's gone again.
Moving along the city's highways, there's a doorless sense of defeat and loss in the town.
It's as if the malignant hand of Richard Nixon had reached out from the bunker in Camp David and pulled a light switch on all of us, spreading his personal darkness.
The Empire State Building is a blinking red lighter than dark, a great pile of downtown buildings, Truman Caputi's Diamond Iceberg is a hole in the night sky, and by the end of this thing he says we are overdue for a rebellion against the corrupt criminal government in Washington, and now we have one opportunity to make that rebellion overt, turn on all your lights, drive 65 miles an hour, wear Rockefeller water airstrikes on the freeway to stop us, refuse to turn down thermostats, let Washington know we've made them again for liars and let's get back
There's a lot of shortages instead of just the energy shortage.
Incidentally, on the energy shortage, the latest thing is that they're planning to outlaw,
not just have gasoline rationing, but they're planning to outlaw Sunday pleasure driving.
And we're getting back to the World War II thing, the horror stories I was telling you last week
about OPA spies checking up and see if you're parked near a movie, which would imply that you were on a pleasure trip.
Well, it's the same sort of thing. How are they going to enforce this?
If they decide to enforce outlawing pleasure driving, it's going to be a vast gestapo,
wandering around, making sure every car on Sunday is really going to the back and forth of a hospital,
and everything else is going to be clamped down on.
And then they figure, well, maybe it would be easier to enforce it
And by just simply closing out all the filling stations, you won't be able to get gas on Sunday.
So I suppose it's a cute trick. On the other hand, what happens with the so-called essential driving?
You're traveling a hundred miles to the hospital in an emergency. You run out of gas and gasoline isn't outlawed.
Well, I guess it's just too bad, instead of allowing the price system to ration the so-called scarce material.
So we're getting more and more into that sort of situation.
There are other shortages, too. There are several particular shortages I might mention now.
There's steel. Steel was surplus. Only a few years ago, there was a big surplus of steel.
A few years before that, there was a so-called shortage.
Things happened obviously very rapidly in the steel business.
What happened with the steel industry is that there were severe Phase 4 price dealings.
The current, let's look at the current price dealings. There have been severe price
phase two and three and a half also.
The result of all of which was that the
price of steel was held, has been held way below the free market price and as a result you have a steel shortage.
Of course the Living Council, for example, in its wisdom refused to grant a price increase
because the excuse was, you see, the profits were high. If you look at the profit ratio and you say, hey, the profits are pretty high,
Especially compared to 1959-70 when there was a recession, the profits had increased quite a bit.
Then you'd say, well, we don't allow the price increase. Not realizing, of course, that the whole point of prices moving up and down
is not to allow a rate of profit, but to allocate supply and demand in accordance with all market clearing.
No shortage, no surplus setup.
As a matter of fact, the thing that just happened today, November the 20th,
Today, the latest issue of Human Events has come out, a long report of a speech by Steve
Jackson Grayson, who only a short couple of years ago was the head of August's price control
program.
He's come out on a blistering attack on all price and wage controls, saying it won't work
because of shortages, because of hidden upgrading of workers, all the sort of stuff I've been
telling you here.
So, unfortunately, all these guys get great when they're out of power.
When they're in power, they're so hot.
The same thing happened some years ago.
Only the oldest citizens here will remember this.
There was a gentleman who was the head of the IRS, the Internal Revenue Service, named T. Coleman Andrews from Virginia.
After he retired from the IRS, he stumped the country from then on, attacking income tax.
This went to the repeal of the income tax amendment.
So, let's say out of power, I guess they learn from experience or something.
So, there's also a great statement that I found from the executive vice president of
American Standard Incorporated, a certain Bryce Durant, who said, quote, as long as
we have price control, it's hard to assess the true price and availability of alternative
materials.
It's like playing with cards when you can't read the numbers on them, the summation of what happens when there's no price system, no freely fluctuating price system to allocate resources.
So that was the steel problem. Also, of course, there's a big, big shortage in paper, really big, big.
My brother-in-law happens to be a printer in the South, and he has enough paper only because he's stored up a lot of paper.
The problem why is there a paper shortage, well for several reasons, one of the biggest
factors is again price controls.
What happens again, you see, when the phase 1, 2, 3 and a half, etc. came in at a time
during a recession when profits were low and so forth, and then the prices were then frozen
We've been in a very low profit margin and then profits go up and the government says
that's a terrible thing.
Profits are now increased.
We won't allow you to increase prices and so we're stuck with a paper price way below
the free market and this generates the famous paper shortage.
There's no shortage by the way in lumber and plywood, only in the paper part of the industry.
What happened at Lumber of Plywood was a healthy falling off of residential mortgages because
of the building crunch in 1973, so that's the interest rate going up.
So the shortages are a function, again, of the price control setup, again, not exactly
creating a shortage but causing paper to be much less plentiful supply, declining supply.
Again, we have very, very heavily in the picture the environmental crazies, whom I mentioned
in the last week, who, because paper is probably the most polluting of all industries, so there was a massive closing up of paper mills, all the old paper mills in Wisconsin and other areas, New England, etc. were shut down, and of course that led to a dropping off, a shift to the left of the supply curve of paper, which of course created more of a shortage if you have, because the free market price then became even higher.
I thought of a bone mower speech I gave this week, last week on price controls, which I may as well use here also, which is explaining the difference between scarcity and shortage, between the shift of the supply curve to the left and a shortage which means you can't get anything at the existing price.
Rembrandts, for example, are very, very scarce. Nobody ever talks about a Rembrandt shortage.
If you want to buy a Rembrandt, they're always available for the $2 million or whatever you want to kick in for it.
The point is, even though they're very, very scarce and not likely to increase in supply,
nobody worries. There's no griping about a Rembrandt shortage because you pay the free market price, which balances supply and demand.
Also, there's a cement shortage, which again, there are two things involved.
and again we have almost a litany here, you know what the two things are, one is price control, imposed during a period of recession, locked in with a very low rate of return and so forth and preventing new plants from being built and cement plants, and second the environmentalists who are worrying about the pollution caused by cement plants, leading to a closing down of a lot of the old cement plants and decreasing the supply.
The other thing is the final icing on the cake is that cement factories tend to use a lot of natural gas as fuel and there's a big natural gas shortage caused by the government's price regulations.
So one thing about the market is everything impinges and everything else.
All right.
I come now to a couple of special areas of price control which, apart from the current disaster,
There are certain areas of price control which have been going on for many years and where we have shortages almost as a permanent fact of life in America and almost accepted as such because the people who have really gotten to this point don't know any better.
There is, for example, in New York City we have a special, it leaves a path, a special permanent shortage which most of the public doesn't know about in America and that's an apartment shortage.
You can't find apartments very easily, if at all.
The apartment shortage in Manhattan, the chronic apartment shortage, this is going on for approximately 1940,
came in, not coincidentally, with the rent control law, which was passed at the same time.
New York City is one of the few cities in America that has rent control.
I think there are a few others that, in a benighted fashion, just put it in again last year.
And all the other cities in the country have removed it at the end of World War II. We kept it, we kept it, continued on with it.
The result of the, the result of rent control, again, is during an inflationary period, so the demand curve keeps going up, and the free market rents keep going up.
The government then decrees the rents should remain the same, let's say, as it has been before.
This means over the years, as the demand curve keeps going up because of inflation, and the rent is frozen at the old rate,
The gap between the man and supply keeps increasing. The apartment shortage, in other words, the shortage of apartment space, which is what has been so long in the market, keeps increasing and being aggravated.
Well, what happened was that before, I like to tell a story, this is a story which I tell my kids and I'm sure it's not going to be repeated in our lifetime.
I told my students the story about the queuing up behind the butcher shop and I'm pretty sure this is going to be repeated.
The other story, I'm afraid, is not going to be repeated.
That's the story of New York City in the Golden Age, before 1940, when everybody moved every year.
It was an incredible situation. Every year, there was a one-year lease, and October the 1st, for some reason, the lease was up.
And, Ma, where are we moving this year? Well, I think we'll move, you know, three blocks down and two blocks over.
And it was a magnificent and beautiful thing. There were vacancies all over the place,
and every income level and every size of apartment. It was just great, just terrific.
And people moved every October 1st, the moving vans, the whole streets were clogged with moving vans, moving from one department to the other.
Immediately bingo comes to record for a long time, bingo, the disappearance of the great October 1st moving fest.
Nobody moves anymore, it's a very rare event.
And the knowledge of this has disappeared from New York life.
And of course the excuse given by the establishment was, well of course there's a form of shortage because population is going up.
Well first place population not suddenly go up on November 1st, 1940 or whatever the date was passed.
Second place, population of New York City is not going up.
It's remained about the same for about 20 or 30 years, the same 7.x million, whatever it is.
It really remains remarkably constant.
So, again, we see the old control devil at work.
What happened was that after it comes about 1947, I think it was,
and there are other people much more expert in this area than I am here tonight,
what happens is that the politicians, they have wisdom, look around and they find out
there's no new houses being built, no new apartment houses.
Hey, this is kind of a peculiar thing. During the 20s and 30s, lots of apartment houses are being built.
How come, here we are in a big post-World War II boom, there ain't no houses being built?
It's dawned on them that maybe there's some relationship between heavy rent control
and the big short, the big holding rents below the free market rate, and the fact that no new houses are being built.
It is, by the way, much easier to get across to the public.
The idea that control, that price control will cause a drop of future supply.
Not too difficult to get over. The really difficult thing to get over is that even given the supply, price control below the market price causes shortages and misallocation.
So that's much more difficult to get over. But the idea that no new stuff will be built is fairly easy to comprehend, apparently.
So what happened is the administration at the time decided, aha, here's what we'll do.
We'll induce new housing to come in by having a free market of new houses, no rent control for new housing.
of Housing. Of course there's no rent control at all for office buildings either. That's
causing one of the biggest office building boom probably in the history of the world
the last 20 years that everybody should turn into this 40 story monster. And so okay we'll
have a new, we'll have free market for new apartment houses to keep the old rent control
in the old apartment house. But all of a sudden the New York City housing market was split
1902, it was bifurcated, markets are usually interconnected, now we had the old housing
market, we still have the big shortage, going bigger and bigger, for old apartment buildings,
these old apartment buildings were built before 1947, the new apartment buildings were free
market.
The result of this was, since the people couldn't find the old apartments, this increase in
demand curve is like substitutes, we now have two markets, this increase in demand curve
Man-Curve for New Housing, a new apartment, just like shutting off natural gas by putting
a maximum price control on that, increase in the man-curve for heating oil.
So this means there's an increase in the man-curve for new apartments, and this increase, the
method of free market rent for the new apartments was much higher than it would have been without
the rent control system.
You have this huge gap.
You have a situation where, for example, an old eight-room apartment on West End Avenue
It was very sturdily built, built like a fortress, with large rooms and so forth, would be going
in something like $125 a month.
On the other hand, a new building built up, built in a rather jerry-built fashion on First
Avenue or something, a three-room apartment, where you can hear the person down the hall
turn the light switch, this goes for $500 a month, something like that.
We have this enormous and crazy disparity between rents, because the demand was forced in, was channeled into these new apartments.
And, of course, then people think that, well, if we eliminate rent control in the old apartments, then the rents will skyrocket up to what it is in the new apartments, First Avenue Center.
It's not true. What would happen would be a rise in the rents in the old apartments and a fall in rents in the new apartments.
and Equalization Tendency, so it was going back to the old one-housing market, interconnected
market, before the split.
Wow, what happened is, so this continued on, pegged along, more or less in this fashion.
Oh, by the way, one of the things that happened, one of the ways in which the housing shortages
have manifested, apartment shortage, is that you have things like queuing up, the equivalence
of Queuing Up, favoritism, black market, all these things show up in New York City apartments.
For example, queuing up, you're on the waiting list, for example, in the building in which
I live, which happens to be one of these old-wall buildings or old-wall building type.
If you want to move to a seven-room apartment, let's say you have a long waiting list, three-year
waiting list or something like that, the point is what moves you up to the head of the waiting
list?
The Lord knows, for the laugh of the gods, if however, you happen to be a brother-in-law of a landlord, or a friend of a landlord, or if a certain amount of money changes hands, either with the super or the landlord, the super never comes to land, sort of his own, he begins to allocate the property, then you go up, you shoot up on the waiting list, it often tends to happen.
You also have a situation where, well for example, and this happened in France, the famous juvenile study, the same sort of thing is happening here to a lesser extent.
In France everything is much more aggravated. You begin to haunt the funeral parlors, people turn into ghouls in other words.
For example, just as an instance of this, a friend of mine, who, as she would say, is sort of lacking in good taste and refinement anyway,
called me up very excitedly one day, I think it was a Saturday afternoon or something like that, and said,
hey, it's a fantastic thing, this old opera singer has died in an eight-room apartment on Broadway,
because there was an article about her on the Times, and apparently she died, and she lives in an eight-room apartment,
and so on.
He wasn't married or anything.
Nobody else was living there.
And he's going to rush over in an hour and grab the apartment, buy the apartment from
the super or whatever the transaction is going to be.
So he rushed over there, as I say, not hampered by refinement.
Rushed over there.
He found out about five couples were ahead of him.
He was way, way down the list.
So ghoulishness comes to the fore.
You haunt the...
Who died an hour ago?
What apartment they have, and you rush over.
And Paris apparently has the regular systematic kind of thing where you put,
you not only put a super or a landlord on a retainer, you put the funeral parlors on retainers.
So the funeral director has the coffin that comes in or the corpse comes in,
check up, you pull you up, give you the quick call, tell you about the apartment.
It just opened up.
So this sort of unhealthy, I think we all agree, kind of system
system is generated by the rent control process.
There's also, I say, the black market and one of the common customers on the west side
of Manhattan, which is sort of the key, probably the most biggest gap in the country between
the pre-market price and the rent control price, you put the super on a retainer, you
go on various billings, you put the super on a retainer and say, call me up and stuff.
That's sort of very common practice.
One of the things that happens is that people get locked in.
If you happen to be in this rent control apartment and the gap keeps increasing because of inflation,
here you are.
You're sort of locked in at something like serfdom.
So what you have, typically on the west side of Manhattan, you have the following kind
of scenario, as I say.
A couple moving with two or three kids moves into an eight-room apartment in Central Park
West, West End Avenue in the 1930s when the apartment was, I don't know, $85 a month.
And then it's, well, what happens is they decided to complete this story.
They decided to, the city decided, well, we can't leave the rents exactly at 1940 levels,
it's a little too much, a little too blatant.
So it will allow a 15% increase every time somebody moves out, and some other family
moves in.
You can imagine what happens then, the economic analysis of that.
Then you have a fantastic class struggle, this initiative between the landlords trying
to get the tenant out and another tenant in, because 15% rise every time you do that, and
the tenant tries to stay in.
So this, instead of the landlord courting the tenant and trying to get more tenants in or
The Landlord is trying to keep the tenant there when he is in and painting and improving the amenities of the place.
The landlord is trying to get the old tenant out, improve the amenities of the new tenant, then get the new tenant out and touch and reshuffle, so he can get somewhere up to the free market price.
Anyway, in the situation of the couple with the two, three, three kids, moving in the 1930s at $85 a month, so the rent goes up a little bit, but the couple stays in, they are locked in.
Since the children grow up and move away, the husband dies and you have a little old widow,
an eight-room apartment paying $120 a month. The free market rate is something like $500.
So the thing is the widow can't move because if she moved any other apartment in a new building,
available apartment would be like one room for $300 a month, something like that. So the little
old lady is locked in and you have this fantastic what's known as space hoarding, so to speak.
Certainly not her fault. I mean, I think that's the situation.
Whereas younger couples getting married, or new people coming in from out of town,
have to go to the Park Avenue or the First Avenue apartment and pay the $400 to the two rooms.
You have this tremendous misallocation of, for a new family, just because they're new,
just because they're newly arrived on the scene, you're penalized.
Whereas an old family, sort of, it's like surgery.
An old family, you've got the seniority, and you're there forever.
The other thing that happens, another peculiar and bizarre thing here is that what the rent is purely depends on how many times people have moved in and out.
So you can have on the same house, the floor above and the floor below, you can have the same apartment, one going for $85 a month and the other going for $400, depending on how many times people have moved out.
The government, in its wisdom, passed a new improved zoning law.
The zoning law is always designed to help the public give fresh air and grass and everything
all that sort of nonsense to the smeltering New York City masses.
And each time, of course, they do that, they impose drastic restrictions on how much can be built.
There have to be setbacks every few feet.
As a result, this cuts down the supply of new houses.
This, of course, is not taken into consideration, presumably by the city planners.
So, because you might, if you could only build a building with, you know, with almost all
the lot, a very expensive lot taken up with grass or something, you might have beautifully
grassy buildings.
The other hand, you might not have too many buildings at all as a result of this imposition.
But anyway, so the real estate business was given several years grace and several years
warning that zoning law was going to go into effect in a few years.
And so, of course, it was a fantastic rush to build buildings quickly, build new apartment
buildings, to get in before the crazy zoning law comes in, when the whole housing market
will be covered forevermore.
So there was this big bulge, a sort of a sudden bulge in the mid-60s, a supply curve to the
right, in new houses, new apartments, as a result, for the first and probably last time
in history in New York City, we had a fall in rents in new buildings.
Almost back to the golden age of the 1930s, not quite, but it was sort of a trailing cloud of glory from the past.
For example, during the 1930s, the way you cut rents, you don't start off by cutting rents, but that's pretty drastic.
What you do is you offer concessions, otherwise you offer one month or two months or three months free rent for the person to move in and sign a two or three year lease.
This is a form of rent cut, but it's not an official form, you can retract the concession much more easily, you can jack the price up again.
So they started offering new buildings, they were offering concessions, rental concessions for the first time since the 1930s, it was a beautiful thing to watch.
There were actually vacancies and signs, vacancy signs instead of the old table bribes, that sort of stuff.
Well, of course this was only a temporary bonanza, because then comes the zoning law, and bingo, the supply of new houses forced to almost zero,
and that means the supply curve of new houses shifts to the left, and it race suddenly, and it's in other words a result of this zoning law kind of situation.
So the result of this is that when the leases come up, two, three-year leases, come up for the post-1947 housing, all of a sudden, the free market price is going way up because of this bulge and then bulge the other way after the zoning law went into effect.
As a result, the new tenants, the new building tenants were asked for a very hefty rent increase on the landlords, 50% in some cases, 30% or whatever.
So hysteria then hit. Of course the free market was blamed for this. See, if you have a free
market in houses, the landlords will gouge you and raise the rents infinitely and all
that sort of thing. It was all nonsense. You can't trust the market and the new building
tenants, many of whom were quite wealthy, of course. I mean, there's a sort of a knee-jerk
response of tenants are always poor and landlords are always wealthy. That's a lot of nonsense.
There are lots of little old ladies who have like one apartment building with two families.
They'll get small income out of it.
There are lots of very, very wealthy tenants.
Nelson Rockefeller used to be a tenant before the Park Avenue building went co-op.
So you don't have to really bleed for the tenant, per se.
So the tenants put enormous pressure on the city government to do something about this.
and the city government put on rent control on new buildings for the first time since 1947.
And now we have two different types of rent control. We have the old-law rent control, the pre-47, the really rugged one,
and you have a peculiar thing called rent stabilization for the new buildings,
where you're allowed a maximum of 15% increase per year or something like that.
So, of course, the result of this was a totally clobber new residential building.
And who emblazes, if you're in the building construction business, who would build a residential building in oral now when you can just as easily build an office building and know that you're going to be free from right-control forevermore, in contrast.
Well, finally, in 1971, a little bit of sanity hit the housing situation when the famous
Urstadt report was issued, the New York State Housing Commissioner, Charles Urstadt, who
said, well, really the whole problem of poor maturities in New York City is the rent control.
And he, I guess he would have likely gotten rid of rent control altogether, that was politically
impossible.
So he pushed through the legislature the so-called vacancy control law, which decontrols apartments as soon as they become empty.
Of course, and continues the old 15% or whatever, some other formula, continues the old severe rent control if your tenant stays in there.
Of course, this sets up a fantastic class struggle, because that means if you're able to kick the tenant out,
When you get a tenant out, the whole thing, you go up to the free market rent, and the tenant claims in there for dear life.
He stays there, he or she stays there, or 40% or 50% below.
So as a result, they passed all sorts of laws.
Special Hotline Housing Bureaus would stay open 24 hours a day or something,
and make sure you know, call up whenever the landlord dumps garbage in your window, whatever it is.
So, well what happened, this has not really been tested very well,
Because as soon as, the thing, the law is only into effect, the legacy decontrol law
is only in effect for about two months when President Nixon passes his freeze, and then
federal rent controls came in, and then everything got messed up.
I'm not really sure what's going on.
I think now for the last six months or years now, the state legacy decontrol law has been
in use in practice.
I don't know the effect of it, except a lot of us barely have eliminated it altogether
and go back to the old rent control, which is essentially the current situation.
So anyway, we've managed to have a 30, because of wartime, the shortage of, the rent shortage
of course was blamed on wartime as well as population.
The war has been over now, World War II has been over for, what is it, almost 30 years,
and the emergency rent control still remains in force, and of course the shortage remains
in force.
All right, there are other areas where, well I should mention, I mentioned France also
and also in passing, Bertrand de Juvenal wrote an excellent little pamphlet on rent control
in France, particularly in Paris, and he wrote it in 1948, and apparently the situation is
more or less the same now, and he got the same sort of situation, except more severe,
where rents have remained not too much higher than they were in 1914, and prices are astronomically
higher, and so people, a wealthy person, for example, might pay one percent of their income
in rent, or one dollar a month or something like that for rent, I mean the whole thing
As a result of this, you can't rent any apartment at all. You buy an apartment, which is happening
on the west side of Manhattan also, where the building goes co-op, in quotes, so that
instead of renting an apartment, you have to buy it. The result of this gets completely
out from under the rent control law. There's no price control on co-ops, on buying the
whole apartment. That means there's plenty of apartments available if you have the money
to buy it. Here, rent control originally is supposed to come in to help poor tenants.
help out the poor tenant. Now we're getting more and more in a situation where the only time you can be a tenant, so to speak, is when you're not a tenant, when you have to scratch to buy the whole apartment.
There's a lot of peculiar kind of reverse effect.
At any rate, coming on to, I should say also that in Europe, rent control is very severe in Scandinavian countries, in France, Israel and so forth,
the result of which is an apartment shortage is very severe, correspondingly severe.
There are other areas where it's not quite as obvious, where price control does its work in causing shortages.
For example, we've had a problem for quite a few years of airport congestion, particularly
at peak hours.
And here I commend your attention to an excellent pamphlet on airports, called Airports and
Congestion, something like that, by Ross Eckerts, put out by the American Enterprise Institute.
What happens is, so what you have is a shortage of airspace there on the airport, all right?
So what's going on here?
Why is there a shortage?
Again, of course, we always look for government.
In the case of airports, airports are universally owned by municipal government.
Currently, it's become part of the American heritage that you can't have a private commercial airport.
I understand that Pan Am, a friend of mine who works for Pan Am, Pan Am several years ago tried to get permission from New York City to build its own airport in the New York area,
in the New York area, which would have relieved congestion, which would have referred to its own planes as being denied, as being evil, immoral, whatever.
So the tradition is you have to have government-controlled airports.
The government, as we'll see later as we get the government in general, as we see what keeps sniping away at government throughout, as we get them all integrated more and more,
government has no particular reason for maximizing profits.
We're operating efficiently or anything of that sort.
Their pricing is, they price them whatever way they want to for political reasons because
whatever happens, the taxpayer is going to pick up the tab after any deficit and of course
there's no competition.
So what happens is the airports have priced their services in a really bizarre way, which
no private airport would ever do.
The problem comes in the fact that the big shortage is in the runways, and the problem
comes in the fact that the price of the runway, that was the landing fee and the take-off
fee, is extraordinarily low, something like $5 for a landing, and it's equal for every
plane that comes in, whether it's a 300 passenger airliner or a private plane zooming in with
one person in it, and it's equal for the time of day, it doesn't matter whether it's rush
Cueing up, in this case. So, cueing up, of course, in the airlines, is stacking up. See, the Pan Am circles for an hour, so the two private planes, they happen to get there first. It's like a line. You can't reserve your space.
Pan Am can't say, I'll reserve runway 5 of Kennedy Airport at 5 o'clock. No, no, you take your chances. If you get there, there happens to be two private planes zooming in ahead of you, which is tough luck.
So this sort of, so this, here we have a system of congestion being a shortage of space, brought
about by this crazy pricing policy of pushing, keeping the airport on its way below the market
price. The Eckerd Pamphlet goes into a whole discussion of what happens, what happens for
example when Kennedy Airport I think raised its price for, its landing fee from something
like $5 to something like $25, and really $25 is pretty small too, but yet just this
to Spend Five Dollars of Land in Westchester, and that was hardly a market-clearing price
increase, but that itself was a point of the way.
Also, of course, the idea of charging passengers, for example, higher fares and rush hours than
an off-hours, the intelligence thing, would help the problem too.
However, the really guts of the thing is the runway caper, which is still way below the
free market level, and as I say, what happens is that since Pan Am is much more willing to pay,
say, a hundred dollars even than a single person, the pleasure of flying on Sunday or any other time,
the pleasure of flying off to Westchester and then take longer to come into the city.
Meantime, while they're doing this, the airports also have another peculiar pricing system.
They give monopoly concessions to all the concessionaires.
The concessionaires then charge monopoly prices.
So the whole study has been done, for example, the price of a sandwich at an airport restaurant,
a comfortable restaurant very close by, if you get sort of a...
And the airport sandwich is a much higher price, probably also poor in quality, although it's difficult for a scholar to gauge.
But, so the point is, you have this monopoly, you have the monopoly concession, the concessionaire
charges the monopoly price and the concessionaire shares the monopoly gain with the airport.
In other words, the airport is sort of like a kickback to the airport itself.
And then, the airport expects to get most of its money to recoup, to break even or make
money on, from the concessionaires and whatever it doesn't, whatever it fails to, whatever
and the number of deficits it has in the concessionaire business, that's what it charges for the runways.
Instead of charging a market clearing price for the runways, it simply charges as little as it can,
what the customers have left over after they've been stocked for the crummy sandwiches.
And the insurance, and there are all sorts of concessions in airports which design the charge monopoly prices.
So, again, if we have private airports and there's no reason why we can't have private airports,
this sort of pricing system would not be going on.
There's another, of course, very prominent form of shortage and congestion, even more
prominent than the airports, and that's traffic congestion in big cities.
rush hour, New York City is getting to the point where any hour Manhattan is congested.
What you have again is a shortage of traffic, a shortage of street space.
And of course this is not unrelated to the fact that the owners of the streets,
invariably and everywhere, are government.
How does government price the streets? Well, they price them in a very irrational manner,
not in a market clearing manner. If they did, there wouldn't be any, there wouldn't be a custom congestion.
The government's excuse is that they're pricing by the user tax on gasoline, so the tax you
pay per gallon of gasoline goes for the highways and all that sort of stuff, so it all balances
out.
In the first place, it doesn't really balance out, but aside from that, the point is you're
spending as much money then, to drive across you, as much to drive around Upper Westchester
at 3 a.m. as it does to drive around midtown Manhattan at 5 p.m.
So the fact that you're spending money per gallon doesn't really mean a darn thing.
It doesn't, it's not a market clearing kind of price.
No private street owner in his right mind would ever price in that manner.
So what kind of pricing would they be?
Well, obviously they'd be, you can't predict in detail how the market would operate, but
obviously it'd be in a way to charge more money for congested streets than for non-congested
streets, for outlying areas.
There can be all sorts of devices to do this. There's various economists, by the way, even non-market economists have got an interest in this area as sort of an intellectual game of how could this operate, come up with interesting suggestions.
One way is to have a special sticker, like a license. So instead of having just the regular license, you have the sticker on the window or whatever, which you have to pay for either per week or per month or per day, whatever can be always adjusted,
shortage.
Plus the fact they're priced a lot peculiar way, so that very often they're priced such
a way that you're subsidized for spending more time there.
In other words, if you park for four hours, of course you're less per hour if you park
for a half hour.
Of course, if you want to get, if you want to have a high turnover and clear the market
for parking, you should do just the opposite.
You charge more for a longer period and try to induce the guy to get out, the new car
can come in.
The governments almost never do that.
So what you would have, and the thing is what the government does, and this is typical government activity,
either they subsidize parking so the price is zero in effect, almost virtually zero for street space.
So you have tremendous congestion.
Or they say, well what we have to do, there's no getting around, we have to ban all cars from Midtown Manhattan, prohibit them.
Stop them, shoot anybody who comes in the 42nd Street.
It's a typical government kind of activity.
Where either something is free or you subsidize it until it's completely free or else you're prohibited altogether.
Obviously what the market would do, if the market were allowed in this situation, is to gauge this thing and price it, and set the price in such a way as to clear the market.
Everybody would be happy, there would be no shortage of parking space, it would be fairly expensive perhaps, but that's the way it should be, since that would be allocating the scarce space for the intense demand.
I don't know what the price of course would be, but it would be somewhere, you know, it would be somewhere in between zero and being prohibited.
So someday if we ever get this kind of market pricing, if we ever get private streets, we will get market pricing.
The funny thing is most people think of the onus, if somebody advocates privately owned streets,
that the assumption is that the government is operating a street so beautifully that the onus on proving that the market can handle it is on the person who advocates the market alternative.
It seems to me it should be just the opposite. Certainly in New York City, the streets are miserable, dirty, and littered, and congested, and it's difficult to see how any private street company can do any worse, just on empirical grounds, one would think they would try it.
So, we should tend to look then at things, not just sort of obvious things like nails
and cement, where shortages can be caused by price control, also in these sort of hidden
areas where people don't think in terms of prices, such as airport space, such as traffic
space and so forth.
We'll get, later on, we'll get on to questions of conservation and go back to the whole thing
And also, the whole question of private property in general in different hidden areas, so to speak, we'll get to later on, the whole things of private property areas where nobody thinks in terms of private property, such as radio, TV channels, we'll get to that later on.