A history of ration banking

Front matter

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Chapter I.—Rationing in the Wartime Economy__ 1 When and Why Commodity Rationing was Undertaken_ 1

What Rationing Accomplished__ 2

Offensive vs. Defensive Rationing_ _ _ 4

Kinds of Rationing_'_ 5

Ration Currency—Nature and Behavior_ 7

Regulating Ration Currency_ 9

The Dilemma of Expiration Dates_ 12

Two Practical Considerations_ 14

Chapter II.—-The Early Ration Currency “Flow-Back System”_ 17 The Sugar Edow-Back System_ 17

The Gasoline Flow-Back System_ 19

The Upstream Flow of Stamps, Coupons and Certificates_ 19

The Local War Price and Rationing Board Exchange Mechanism_ 21

Chapter III.—The Study of Ration Banking_ 23 The Committee Structure_ 23

The British Coupon Banking Plan___ 24

The First OPA Ration Banking Plan_ 24

Some Basic Unresolved Problems_ 25

Discussions Outside the Agency_■_ 28

The American Bankers Association_ 29

Two Alternative Proposals_ 30

Chapter IV.—The Experiment in Ration Banking_ 33 Selection of the Test Area_ 34

The Trade Education Program_ 34

The Bank Education Program_ 35

The Ration Banking Plan as Installed in New York State_ 36

Cost_ 42

Quantitative Description of the Experiment_ 42

Results of the Experiment_ 43

Chapter I

Ration Banking existed only as a means of facilitating the opera¬ tion of commodity rationing programs. In order to understand it properly, therefore, a preliminary and general discussion of com¬ modity rationing is necessary. This chapter attempts to provide this general background and to serve as an introduction to the more specific discussion of ration banking which follows.

When and Why Commodity Rationing Was Undertaken

The rationing of a given commodity, or group of commodities, was undertaken by the rationing agency (the Office of Price Adminis¬ tration) only when authority to do so was delegated by the appropri¬ ate supply agency. Thus, the Petroleum Administration for War de¬ cided when gasoline and fuel oil should be rationed, and delegated authority to the Office of Price Administration to carry out the ration¬ ing program. Similarly, the Department of Agriculture decided when the various food products should be rationed, and so directed OPA. In spite of the fact that a number of different supply agencies determined whether, and when, a given rationing program should be undertaken, a fairly consistent policy with respect to these decisions was followed by the Administration.

A rationing program was undertaken when (1) the commodity in question was “essential” to the civilian economy and (2) the de¬ mand for the commodity was greater than its supply at the controlled price. “Essentiality” was not subject to precise definition, but gen¬ erally an item was considered essential if inability to obtain it, or if a grossly inequitable distribution of it, would have a deleterious effect on the health or morale of civilians, or impede the war effort. In¬ ability to obtain gasoline, shoes or tires would keep war workers away from their jobs; lack of fuel oil would impair health; and maldistri¬ bution of food would react unfavorably on the war effort.

An excess of demand over supply at the controlled price was caused generally by a reduction in supply coupled with an increase in demand as incomes rose. In some cases one factor predominated, however.

For example, the dislocation in the supply-demand relationship in sugar was almost exclusively attributable to the reduction in supply; because of the low income elasticity of sugar, demand was not ma¬ terially increased as national income rose. A contrasting exception ma}^ be found in the meat situation. For most of the rationing period, the supply of meat was well above prewar averages, but a high income elasticity so increased the demand as national income rose as to dis¬ locate the supply-demand relationship seriously even at the higher supply levels.

But rationing was not always undertaken when a shortage de¬ veloped in an essential commodity. Because the rationing agency worked under such pressure, and because shortages developed so quickly in many cases, administrative difficulties, budgetary, and other considerations frequently played a part in the decision to ration a commodity. For example, coffee was rationed and cigarettes were not, though the shifts in the supply and demand schedules of both commodities were extensive, and a case could have been made out for the rationing of either commodity on grounds of essentiality. Again, bicycles were rationed and apparel was not. The difference in the administrative difficulties inherent in operating apparel and bicycle programs was probably more important in this decision than grounds of essentiality.

What Rationing Accomplished

On April 27, 1942, President Roosevelt sent his Cost-of-Living Message to Congress. It contained the following paragraph : 1

... it is obviously fair that where there is not enough of any essential commod¬ ity to meet all civilian demands, those who can afford to pay more for the com¬ modity should not be privileged over others who cannot . . . where any important article becomes scarce, rationing is the democratic, equitable solution.

In the earlier phase of the war period, this rather elementary concept of the objective of rationing was embraced generally. It was ex¬ panded gradually as it became apparent that other goals could be achieved by rationing. Most of the theory of rationing, and its ad¬ ministrative techniques, developed empirically as the several programs grew. The primary objectives of the several programs were as follows:

(a) Equitable distribution among consumers .—A primary consid¬ eration behind every rationing program was the desire to avoid an inequitable distribution of a commodity or group of commodities considered essential in the civilian economy.

Rationing, in itself, neither reduced nor increased the supply of any commodity, but it had a major effect on its distribution. In the absence of rationing and of effective price control, a commodity in short supply would be rationed by rising prices with the result that only the well-to-do could obtain it. With price control, and in the absence of rationing, the produce would go to the black market or to those who had the leisure to queue for it. In neither case could the resulting distribution be termed “equitable.”

By and large, rationing succeeded in avoiding this type of distribu¬ tion. By giving each eligible person a license to purchase, and by determining eligibility and size of individual rations in such a way that the licenses to purchase approximately equalled the available supply of the commodity, eligible persons were assured of their shares.

(b) Equitable distribution among areas. —Many important com¬ modities are produced in a relatively small number of areas. Nor¬ mally, they move out of these producing areas seeking a market. As the supply diminishes, or as consumer incomes and purchases increase^ the market areas tend to shrink toward the producing areas. More and more, the supply can be disposed of locally, enabling producers to avoid transportation and other costs.

One of the very important accomplishments of rationing was to force a reversal of this trend and to push the product away from the producing areas. The purchasing power of those in all areas, with respect to the rationed commodity, was equalized, with the result that a more general and equitable geographical distribution took place. This accounts for the paradox of rationing in the midst of local plenty, as was sometimes necessary. The most striking examples of this situation are to be found in gasoline and fuel oil rationing.

(c) The conservation of another product in short supply. —The most conspicuous example of this situation was the early Nation-wide gasoline rationing program. 2 A substantial store of the Nation’s supply of rubber was on the wheels of its automobiles; it could not be rationed since consumers already owned it. Nevertheless it was essential that it be conserved if wartime transportation was not to collapse. The result was the gasoline rationing program, launched before any gasoline shortage developed, which slowed the wheels and conserved the rubber.

( d) The protection of a substitute for a produM in short supply .— At times it was necessary to ration a commodity, not because of a shortage in its supply, but because of an abnormal demand for it created by the shortage and rationing of an economic substitute. For example, there were times when the supply of butter would apparently warrant its removal from the ration list. This could not be done*

2 Gasoline was first rationed on the Eastern seaboard only, because of a shortage of the commodity in that area. The reference in the text is to the extension of the program in December 1942.

"however, simply because other fats such as lard were in very short supply. The demand for butter, consequently, was abnormally strong because those unable to buy lard or oleo or unwilling to spend points for them would have turned to butter to satisfy their unfulfilled de¬ mand for fats.

A similar situation prevailed at times among meat products. It was sometimes necessary to continue to ration a given type of meat because the supply, while adequate under normal conditions, would have been insufficient to withstand the abnormal demand which existed because other types of meat were scarce and rationed.

For many months it appeared that coal would have to be rationed; a program was ready to be installed almost at a moment’s notice. The interrelationships between coal and fuel oil are obvious; they are very close economic substitutes. Coal rationing was avoided because, among other reasons, the conversion of heating facilities from fuel oil to coal was costly and sometimes impossible because of lack of materials. The substitutes were prevented from acting in the cus¬ tomary fashion.

(e) Rationing as an aid to price control .—In the commodity areas in which rationing was undertaken, price control was simpler to maintain than it would otherwise have been. This was the case simply because rationing reduced demand and thus relieved the pressure on the controlled price.

To be truly effective in controlling the general level of prices, how¬ ever, rationing would have had to be far more extensive than it was. 3 So long as only a segment of the national product was rationed, the tendency was to reduce pressures on those products rationed but to increase the pressure correspondingly in the unrationed areas so that the net increase in the cost of living would still be considerable. True general price control through rationing would have been achieved only by “expenditure rationing,” whereby each individual in the domestic economy was given a fixed sum of spendable income which was related to the supply of commodities produced at the desired price level.

Offensive vs. Defensive Rationing

Rationing can be used as a positive technique for the regulation of the wartime economy, or it can be used as a defense against short supply for essential commodities. In the United States, the latter policy was followed. The Administration did not ration unless ab-

8 The Research Division at OPA estimated that, at the height of rationing, commodities which in 1941 accounted for 20 to 25 percent of consumer expenditures were subject to rationing. Memorandum, R. H. Riley to J. A. Kershaw, “The Extent of Rationing,” December 30, 1946.

solutely essential and followed the policy of terminating rationing programs at the earliest possible moment. To a considerable extent this policy can be explained by the desire to avoid pressures from in¬ terested trade groups, from Congressmen and from budget limitations. Basically, however, it stemmed from the novelty of the whole idea of rationing and America’s experience with it. The rationing picture can be understood only in view of the fact that at the time of the Pearl Harbor attack the Nation was totally unprepared for any form of consumer rationing. Not only was the idea alien to the people, but, except for a handful of men in Washington, practically no thought had been given by the Government to the possibility of having to ration consumer goods. 4

The contrary policy might have been economically more desirable. For example, an apparel rationing program installed in 1942 or 1943 would certainly have made possible greater stabilization of prices in that field and quite possibly would have avoided the supply and dis¬ tribution crisis that arose in the winter of 1945-46, particularly in meij’s clothing. Or again, the wisdom of abandoning meat rationing in November of 1945 might be questioned, not on the basis of avail¬ ability of supplies at that time, but because of the deteriorating effect on meat price control, an effect that quickly developed.

Kinds of Rationing

Given the varieties of products rationed by the Office of Price Ad¬ ministration, it was natural that a number of different kinds of ration¬ ing programs were developed. The programs were not devised ac¬ cording to any preconceived pattern, but on an ad hoc basis.

(a) Universal vs. differential rationing .—In some rationing pro¬ grams, ration currency was issued to everyone in equal amounts. This was generally true of all the food programs, except that coffee ration currency was not issued to children. Such programs came to be characterized as universal rationing, since no attempt was made to vary the ration according to past usage or need.

Other programs, such as tires, rubber boots, and fuel oil provided that only certain members of the community would receive rations and that the rations would vary according to the needs of the recipient. Thus, rubber boot certificates were issued only to certain types of work¬ ers and then only if need could be conclusively demonstrated. This type of rationing came to be known as differential rationing.

4 Paul M. O’Leary, “Wartime Rationing and Governmental Organization,” The American Political Science Revietv, December 1945. O’Leary, who was the first head of the rationing organization, states (p. 1089) : “Pearl Harbor found the United States with no rationing plans, no rationing organization, and no real appreciation of the indispensability of ration¬ ing in an all-out war effort.”

The theoretical categorization drawn above is not absolutely clearcut. Under all the universal rationing plans, some persons received more than others. For example, the food rationing regulations all provided that additional rations could be issued on a doctor’s pre¬ scription, and the shoe regulations made it quite simple for additional rations to be obtained for growing children.

The universal rationing programs, without exception, were included in the ration banking plan, because of the fact that they all made use of a large amount of ration currency, the physical handling of which created many problems. Most of the differential programs were oper¬ ated on a certificate basis; that is, when individual eligibility was demonstrated a certificate for the indicated number of units was issued to the applicant. Paper volume was never great; at any given time, the volume of certificates in circulation was not large. Bation bank¬ ing facilities were never considered essential or advisable for these programs. The two exceptions to these statements were gasoline and fuel oil, which, however, were the only differential programs using coupons. In both of these programs the number of units (gallons) of the product sold each month was large and, in consequence, the volume of paper used was also large.

(b) TJnit rationing vs. point rationing .—Most of the rationing pro¬ grams were “unit systems,” that is, the ration currency was given a value of a definite number of units of the rationed commodity. The size of the ration was then changed from time to time by changing the value of the currency, or by changing the period which a given amount of it had to last.

In shoes, a stamp was always good for one pair of shoes. The ration was reduced or increased by lengthening or shortening, respectively, the interval between validation of stamps. In gasoline, on the other hand, the A coupon had a number of different values at different times, and it also had a number of different validity durations. Both meth¬ ods were used in changing rations. To state this another way, the Office of Price Administration could alter the real rationing income in a unit rationing system either by changing the value of the cur¬ rency or by changing the consumer’s income rate.

Point rationing was not basically different. In this system con¬ sumers were given a substantial number of points periodically and the rationed items were given “point prices.” The system was used when more than one item was rationed under one program. At the height of meat rationing several hundred items were rationed on what came to be called the “red point list.”

The ration under point rationing, as under unit rationing, could have been changed by extending or reducing the length of time over which a given number of points had to last, though this method was never used. The ration was actually changed by altering the point prices of the rationed items from time to time, which is analogous to changing the value of a stamp in unit rationing.

Point rationing had as its greatest advantage a considerable degree of flexibility and simplicity. Within a rather broad field the con¬ sumer was given a free choice; she was at complete liberty to spend her periodic allotment of points on any items included in the program. It was simple because she had only one kind of ration currency to under¬ stand, a matter of equal importance, incidentally, when applied to the trade.

To permit a point rationing system to achieve the necessary flex¬ ibility and workability, it was essential that a substantial number of points be available to consumers. Forced multiple purchases, which would result from a point price of less than one point, were avoided. Hence, if the lowest valued item was set at one point per unit, the highest might be 20 or 30. Necessarily, therefore, substantial num¬ bers of points had to be issued. In addition, if points vrere too low, the point pricing task became difficult. The smallest possible point change of an item priced at two points is a 50 percent change, which was frequently too great.

The result of all these considerations was that from 60 to 64 red points per month were issued to each consumer, and from 48 to 50 blue points, except when many items were off the list. For a while this meant 16 red stamps and 12 blue stamps (at an average value of four points per stamp) for each of 130,000,000 ration book holders each month. The volume of paper was tremendous, a fact which had many important implications for the ration banking program.

Ration Currency—Nature and Behavior

While the rationing programs were operating, certain economic areas w T ere in effect served by two monetary systems. In many ways ration currency behaved like dollars, in others it did not. In most instances a knowledge of monetary principles made possible an accurate forecast of the behavior of ration currency in a given set of circum¬ stances.

(a) Stamps and coupons .—The two terms “stamps” and “coupons” had best be used interchangeably to denote the small ration currency issued in large quantities to all or a large number of consumers. Un¬ fortunately, no definition is quite satisfactory since the different stamps and coupons came to be handled variously in the different pro¬ grams. Thus, most stamps and coupons were issued “as is” without being individually marked, but special shoe stamps were marked by the issuing district office, and for a while gasoline coupons were issued only after the local board had inscribed the applicant’s vehicle license number. Again, most stamps and coupons were issued to consumers, but some gasoline coupons (bulk and inventory) were issued to dealers. Finally, most stamps and coupons were small, but food coupons were relatively large. The only truly common characteristics were that they always contained a fixed imprinted value.

(b) Certificates .—In every rationing program some use was made of certificates. These rationing forms were usually check size, and were made out in favor of a specific individual and for a certain number of units at the time of issuance. Generally speaking, they were issued to the trade rather than to consumers, although there were occasions when a consumer received a special ration in the form of a certificate. In those programs that came to be included in ration banking, most of the certificates were eventually replaced by the use of the ration check. In those not included in ration banking, the certificate was the only form of ration currency used.

(<?) Tokens .—In the meat-fats and processed foods rationing, pro¬ grams, extensive use was made of ration tokens. They came into use in February 1944. 5 The blue tokens were withdrawn in October 1944, 6 the reds in January 1946. 7 The tokens were slightly smaller than a dime, made of vulcanized fiber, and worth one point each.

Ration tokens were introduced so that it would be possible to make change in rationing transactions, and so that the value of the indi¬ vidual red and blue stamps could be raised. Their introduction made possible a substantial reduction in the number of stamps in circulation, which was its major purpose, and simplified the two point rationing programs by enabling the establishment of a uniform value for all red and blue stamps.

The tokens were the only form of ration currency which circulated freely and indefinitely. All other types were designed to be used once and then removed from circulation. The flow will be more carefully described at a later point; suffice it to say here that a stamp spent by a consumer was eventually destroyed by the Office of Price Administration after having been used for one purchase. The token on the other hand moved repeatedly from consumer to retailer and back, occasionally finding its way into and out of a bank. In this respect the tokens were closer to money than any other kind of ration currency.

( d) Ration checks .—The ration check was the creature of the ration banking system. In behavior and appearance it was similar to ordi-

5 Amendment 108 to Ration Order 16, February 17, 1944. 9 F. R. 1909. Amendment 9

to Revised Ration Order 13, February 17, 1944. 9 F. R. 1908.

0 Amendment 53 to Revised Ration Order 13, September 8, 1944. 9 F. R. 11113.

7 Amendment 1 to Order of Revocation to Revised Ration Order 10, December 17, 1945. 10 F. R. 15173.

nary dollar checks, being made payable to a payee by the drawer, deposited in a bank by the payee or subsequent endorser, and cleared to the drawee bank for debit to the drawer’s account, where it was canceled and returned to the drawer with his statement.

The ration check was designed to facilitate rationing transactions. The other currency (stamps, coupons and certificates) could have moved all the way through the trade channels without being replaced by ration checks, but for reasons to be discussed later, it was more convenient to deposit the rationing “money” as soon as possible and use the ration check to draw against the credit established by the de¬ posit.

The ration check was used almost exclusively by the trade. For the most part consumers were unaware of its existence, though cer¬ tain types of commercial consumers, such as the owner of a fleet of trucks with a large gasoline storage tank, used ration checks exclu¬ sively in buying. They were also used by the Office of Price Admin¬ istration in issuing special rations. A typical example would be the issuance of the bi-monthly sugar ration to a large hotel. The ration check was drawn, of course, only by those with ration bank accounts.

Regulating Ration Currency

It was through the ration currency system that the actual distribu¬ tion of the rationed commodity was effected. Simply stated, the supply agency (Petroleum Administration for War in the case of gasoline and fuel oil, War Food Administration in the case of food, etc.) made available periodically a given supply of the commodity for civilian consumption, and the Office of Price Administration issued that much ration currency to consumers. By equating the outstanding ration currency to the plrysical supply, the Government was theoret¬ ically assured that the supply would be distributed equitably.

Actually, of course, this is a great over-simplification of a complex problem. For a number of reasons it was never possible to achieve such an exact equation. For one thing, consumers never spent all the currency issued to them, so that it became necessary to estimate and allow for this factor, a difficult task. For another, production and availability were generally fairly even over a given period-but con¬ sumption might not be. For administrative reasons it was necessary to issue substantial supplies of currency to some consumers, the cur¬ rency to last a considerable period. For example, all “industrial users” of sugar (bottlers, bakers, confectioners) received their rations at the same time, once every three months. While there would be a sufficient quantity of sugar during the quarter for this currency to be honored, if they all attempted to buy their complete quotas at its beginning,

741926—47 either some of them would be unable to do so, or many consumers with perfectly valid stamps would find it impossible to redeem them.

Many complications were also injected by OPA’s inability to con¬ trol the ration currency system completely. Counterfeit currency became important in gasoline, meat, and sugar rationing; each coun¬ terfeit stamp or coupon purchased a unit of the commodity which was therefore not available for the holder of a legitimate stamp or coupon. Currency was sometimes stolen from local boards and other distribu¬ tion points. Sometimes the boards were inclined to be too generous, rather than to follow instructions carefully, in issuing special ra¬ tions; precise supervision of 5,600 local boards was not possible. There were many other tactics for evading the rationing restrictions, most of which will be discussed in later chapters. All of them com¬ plicated the task of equating ration currency to the allocated supply of the product.

The existence of too little currency in the monetary system will cause prices generally to fall. Ration “prices,” however, were always fixed by OPA and could not legally fall. The result of a miscalcu¬ lation putting too little ration currency in circulation, therefore, was that the goods would not move from the shelves. This was always. certain to bring quick recriminations from the trade, particularly if the rationed items were perishable. Such recriminations were cer¬ tainly justified, for a rationing system should not impede the move¬ ment of a commodity already in short supply when it has been de¬ termined that the available supply should move to consumers.

Too much currency in the monetary system will push prices upward. Here again such a result is not possible under rationing where the ra¬ tion prices are rigidly fixed. Too much ration currency in the system created a situation which the rationer dreaded almost more than any other, for it meant that shelves become bare while the legitimate de¬ mands (within rationing) of' some consumers were not satisfied. Queues developed for rationed commodities, and the available supply went to those with the leisure to wait, the very situation that rationing was designed to prevent.

Such a lack of balance developed a number of times in both sugar and gasoline. Frequently it was dne to a series of local stringencies brought about by temporary break-downs in transport facilities in certain areas. No OPA rationing program was able to cope with this problem, since there was no mechanism for reducing rations in small areas. Where the excess of currency was general it could of course be remedied by a devaluation of the currently valid currency (as was done in fuel oil a time or two), by tightening up on issuance quotas (tires), or by elongating the validity period of the current stamp (shoes). Ordinarily, however, these remedies could not be made effective immediately.

The two point programs presented rather special problems. While there was rarely if ever a real excess of ration currency, in the sense that a consumer was unable to spend her points on some items on the ration list, there were frequent shortages or apparent surpluses on the list. In the red program, for example, butter was for most people the most desirable item. People apparently made provision first for their butter needs, and then used their remaining points to what they considered their advantage. The result was that butter was difficult to control through point price manipulation. The effect of a sharp increase in the butter point price was sometimes scarcely seen in the sales of butter, but would reduce markedly the purchases of all or many other items on the red list.

The butter situation was further complicated by the need to keep its point price divisible by four because of customary quarter-pound sales. With a point price of 12, therefore, the smallest reduction possible was by 33% percent, and this could not be risked if the supply was only slightly in excess of demand at 12 points.

Inflexibilities and problems such as these, much more pronounced in the red than in the blue program, meant that some of the items were always slower movers than others and that there frequently appeared to be a shortage or surplus of red or blue currency. Another way of saying shortage or surplus of currency, of course, is to say that the point prices were generally too high or too low. Actually, general over- or under- issuance rarely occurred, but within the list certain prices were undoubtedly in improper relationship with one - another from time to time. This was inevitable, in spite of the fact that they were adjusted monthly, because there were so many items and because supply conditions changed so rapidly and unpredictably.

Because of the difficulty of controlling the-various commodities within the red system, there were maity who urged that butter be removed from the red list and rationed on a unit basis like sugar. While this would unquestionably have afforded better butter ration¬ ing, it was never seriously considered because of an unwillingness to subject the trade and the consumer to still another ration currency system. Interestingly enough, the converse was true of sugar. From time to time it was proposed to include the sugar program in either the red or blue program. Because of the fear of being unable to control sugar adequately in view of its high demand inelasticity, this matter was not considered seriously. Decisions once made in ration¬ ing tended to become institutionalized rapidly.