Carola Binder's "Shock Values"

Carola Binder is associate professor of economics at Haverford College. Her work has been featured in the New York Times, Wall Street Journal, and NPR.

She applied the "Page 99 Test" to her new book, Shock Values: Prices and Inflation in American Democracy, and reported the following:

Page 99 of Shock Values discusses price control efforts in World War I. The Wilson administration relied on new administrative agencies, like the War Industries Board and its Price-Fixing Committee, to develop a pricing system for strategic goods. The agencies had a tendency to expand in their role and scope, and relied on the potential use of government force to achieve compliance; this is why Herbert Hoover, as the head of one of these agencies, became known as the “food czar.”

As I write on that page, “Initially, the Price-Fixing Committee concerned itself only with the prices that the government paid for strategic goods, but its role expanded to also protect the public in their purchases of materials and textiles. Of course, the committee’s powers to requisition goods or take over plants gave it the upper hand in these agreements.”

I quote Bernard Baruch, the financier and progressive Democrat who headed the War Industries Board, who wrote:

“We used a good many euphemisms during the war for the sake of national morale, and this one of ‘price fixing by agreement’ is a good deal like calling conscription ‘Selective Service’ and referring to registrants for the draft as ‘mass volunteers.’ Let us make no mistake about it: we fixed prices with the aid of potential Federal compulsion and we could not have obtained unanimous compliance otherwise.”

On page 99, I also discuss some of the practical difficulties that the Price-Fixing Committee faced as it attempted to replace the free market price mechanism with government-administered prices:

As the committee negotiated prices, one challenge it faced was that different producers had different costs. A particular price might ensure large profits for lower-cost producers but not cover the costs of higher-cost producers. One option was to set a single price that was high enough to cover the costs of higher-cost producers. Another option was to set lower prices for lower-cost producers and higher prices for higher-cost producers. A third alternative was to nationalize the industry. The committee decided on a single-price system to minimize the administrative burden. They worried, however, that lower-cost producers, which received the same price as higher-cost producers, would make “unreasonable” profits. Thus, Congress introduced an act in 1917 that taxed corporations’ “excessive” profits at a high rate.

The Page 99 Test works very well for my book. Page 99 gives a good picture of some of the key themes in my book. First, wars and wartime inflation have had a tendency to lead to a more activist role of the state in the economic system. This has had a “ratchet effect” as growth of the state during wartime does not fully recede after emergency conditions have passed. And this growth relies, at least implicitly, on the government’s ability to use force—which often becomes apparent when citizens’ rights are encroached upon in various manners. By the time readers of the book get to page 99, they will already have read about the Founding Fathers’ concerns about the democratic legitimacy of price controls in the Revolutionary War, and they will get a sense of how attitudes about the role of government had evolved over the decades.

Another theme that is apparent on page 99 and in the rest of the book is the resource allocation problem that arises when the state attempts to interfere in market pricing, and the unintended consequences this can cause. A fun part of writing my book was finding colorful quotes from historical figures like Bernard Baruch, and the Page 99 Test does a good job of capturing this.

What readers will not see on page 99 is any discussion of monetary policy or inflation targeting. Shock Values provides the historical and political account of how the United States eventually came to rely on the Federal Reserve for price stabilization. It discusses the long road to the adoption of inflation targeting, and all of the political and social tensions associated with that decision.

Visit Carola Binder's website.

--Marshal Zeringue