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How war bonds and controlled prices helped to beat inflation

RACHEL MARTIN, HOST:

Inflation is climbing at its highest rate in 40 years. And the tool that the Federal Reserve has at its disposal to deal with that is interest rates, raising them. But it hasn't always been this way. Planet Money's Wailin Wong takes us back to a time when we fought inflation very differently.

WAILIN WONG, BYLINE: The way many of us experience inflation, it's something that happens to us, something we don't have any control over. But there was a time when the government called on every American to fight inflation.

(SOUNDBITE OF ARCHIVED RECORDING)

FRANKLIN D ROOSEVELT: If a vicious spiral of inflation ever gets underway, the whole economic system will stagger.

WONG: That's President Franklin D. Roosevelt in 1942. Mobilization for World War II had upended the economy. The government was borrowing and spending huge amounts of money. And manufacturers had shifted away from making cars, refrigerators and other household goods in order to supply the military.

MEG JACOBS: If you're sending half a billion pairs of socks and 250 million pairs of pants to the military, those are goods that consumers are not going to be able to buy.

WONG: Meg Jacobs is a historian at Princeton University. She's describing a classic inflation scenario of consumers having money, but not enough things to spend it on. That mismatch drives prices up. And it's something the Roosevelt administration wanted to prevent. So the government introduced a series of anti-inflation measures that ended up reshaping daily American life. It introduced the mass income tax and direct paycheck withholding. This helped lower consumer spending power by directing money to government coffers for the war effort. The Roosevelt administration also asked Americans to put their money in savings bonds, which it called war bonds. People could help fund the war and earn back their investment, plus a little extra in the future. The propaganda push for the war bonds involved celebrities of the time, like the Andrews Sisters. They recorded a song called "Any Bonds Today?", written by Irving Berlin.

(SOUNDBITE OF SONG, "ANY BONDS TODAY?")

THE ANDREWS SISTERS: (Singing) And bonds today? Bonds of freedom, that's what I'm selling.

WONG: As the war escalated, so did the administration's efforts to fight inflation. It introduced price controls, setting maximum prices on what businesses could charge for things like food, toiletries and clothing. A new agency called the Office of Price Administration - or OPA - ran the system.

JACOBS: You would go into a restaurant, for example. And if you wanted to order a cup of soup, the price of that cup of soup was listed right there on an official OPA price list.

WONG: Price controls essentially got rid of the normal way of setting prices through supply and demand and replaced it with government intervention. But there's a danger with price ceilings. Since businesses can't charge what they want, they might produce less, leading to shortages. So to deal with that, the OPA introduced a rationing system. Americans could only buy certain amounts of rationed goods, like butter and gasoline. All of these things together - taxes, bond sales, price controls, rationing - along with other measures, like targeted wage freezes, did control inflation during World War II. But after the war, America's experiment with central economic planning more or less dissolved. And by the 1950s, another institution had stepped up to manage inflation, the Federal Reserve. For NPR News, I'm Wailin Wong.

(SOUNDBITE OF RIAN MILO'S "NIGHTCAP") Transcript provided by NPR, Copyright NPR.