WHAT PRICE INFLATION?
We went on record in this page a few months ago against government price controls. Our observations and conclusions were predicated upon the experience of OPA during World War II when it tried to regulate the price of machine tools.
The reason we object to ceilings is that we have yet to see this type of regulation work satisfactorily. In the first place, the opportunist will always find a loophole; he will later become known as a chisler and a whole industry is penalized for his actions. Second, and more important, pi ice controls are inflationary. They act as floors instead of ceilings—they become the minimum price asked.
While there is no denying the fact that the prices on some critical tools in 1941 had sky-rocketed even beyond the prices of similar new machines, the day that OPA Price Regulation No. 1 became effective, the prices on all surplus machine tools in the hands of users and dealers alike, rose to meet the published ceiling prices.
Once again history is beginning to repeat itself with the tremendous rise in the cost of used machine tools, particularly late models. The beginning of war in Korea started the present inflationary spiral. Everyone became alerted to wartime shortages and the possibility of government controls.
There was a noticeable freeze on the part of machine tool users with surplus equipment on hand. Probably most of them were anticipating an influx of war orders, but we are sure that there were many who, remembering what controls did in 1941, hoped for better prices. Since the Korean war started dealers have experienced a dearth of available tools and naturally the stocks they have on hand have become more valuable because of the artificial scarcity.
It is obvious that a machinery dealer or rebuilder does not welcome an inflationary price situation because his stock in trade is based upon his ability to buy at a price commensurable with the price of similar new machinery. High prices automatically curtail his buying activities because he knows that a warehouse full of high-priced machinery is hazardous.
Let’s take a dealer who normally carries 500 metal-working machines in stock. Say his average cost per machine was $1,000—this represents a $500,000 inventory. Under an inflationary situation his replacement cost (in stock) might easily double. Ultimately he may wind up with a million dollars tied up in machinery.
It is far more difficult to get an order for a machine tool at 90% of the cost of new than it is to sell that machine at a normal 50% to 70% level. As a result, his stock does not turn over as quickly. Then comes the day when the bubble breaks. He might have been able to stand a 50% drop in the market with his $500,000 inventory, but there are not many businesses that could take a half-million dollar loss and survive.
Because we would not want that to happen to any businessman, much less to our friends in the machinery business, we do not favor any influence which is inflationary.
We believe price controls are inflationary. That is why we oppose them.