making meetings and going to those meetings, he also had to recruit, interview and hire a staff.

Because similarly chaotic conditions afflicted the Pay Board, there was little coordination between the two agencies. The autonomy of the three Phase II Stabilization agencies was, in part, too, caused by the "Meany memo" discussed above. But with or without the "Meany memo," effective coordination of the two agencies' activities would have been difficult.

Coordination problems surfaced immediately. The Pay Board affirmed a substantial wage increase for coal miners to avert a strike. The CLC, knowing that management would sign the contract if it could pass through the cost increase, urged the Price Commission to guarantee the pass-through. The Commission refused, stating that the case was precedent-setting and that no case decision could be made until the general policies had been established. After this incident Grayson described the Commission's relations with the Council as "strained."9

Besides operating conditions, Price Commission policy development was further hampered by the lack of guidance either from the CLC or the Administration's top economic advisors. The "Meany memo" made the CLC reluctant to "interfere" with PC policy formulation. After all, development of the details of price controls was the Commission's job. The Commission took the general goal of "two-to-three" percent, translated it as "2.5%" and proceeded to build a regulatory strategy around it.

From a Freeze to a "Normalized Freeze" to Cost Pass-Through

The Commissioners were acutely conscious of the limited time that they had to formulate a policy; and from the first, they were struck by the size and complexity of the American economy. As a result of this complexity, the Commission treated separately certain sectors of the economy with obviously unique characteristics, such as rent, public utilities, and health services. Most of their efforts, however, were devoted to fashioning comprehensive standards for the largest sectors of economic activity-retailing, wholesaling, manufacturing and services. Understandably, their first reflex was to buy time by extending the Freeze. Through the planning of PC policy, this alternative always figured as a possible refuge in case time ran out before a policy could be created; it was not fully rejected until November 8-the day the Pay Board told the PC of its 5.5% wage standard.

However, a continuation of a freeze was, for planning purposes, shelved at the first policy-formulation meeting, after a consideration

of the effect the Freeze had had on the economy and what its projected impact would be. Lou Neeb, at this first meeting, delivered a report, "Legacy of the Freeze," which detailed various distortions that had occurred during Phase I and would occur if there was no relaxation of the standard. Neeb's bleak predictions convinced the Commission that the cost pressures that had built up during the Freeze would have to be eased; consequently, the Commission considered "normalizing" the Freeze, by permitting relaxation of the rules in specific cases where the most glaring inequities were occurring.

At the end of the first week, with the understanding that some relaxation of the Freeze was necessary, Chairman Grayson instructed each of the Commission members to formulate his own recommended scheme. Seven Commissioners and the PC staff produced eight proposals which, while differing widely in specifics, all agreed on some form of modified cost pass-through and various levels of controls on profit margins.

The Commission met during working hours throughout the second week and had one evening session with well-known economists. At their last meeting of that week, they learned that the Pay Board planned to announce its policy on Tuesday the 9th, and that the Price Commission was expected to make its announcement on the 10th. This discovery revitalized the Commission's need to compromise and reach decisions; but the policy was still in a state of disarray. To clarify and verify their tentative policies and to reconcile their differences, they scheduled a series of meetings for Monday and Tuesday of the next week with hopefully expert representatives of consumers, retailers, wholesalers, manufacturers and labor. As they later discovered, the meetings were of limited value in terms of adding substantively to the policy, though they did alert the Commissioners to the peculiar problems of various sectors of the economy.

Over the weekend, before the meetings with the private interests, a task force of CPA's (who had prepared an option paper earlier for the Commissioners use) developed in conjunction with the PC staff an overall price controls scheme, which they presented to the Chairman on Sunday, November 7. They suggested a gross percentage markup for retailers to be applied to aggregates (i.e., departments, product lines, whole stores) depending on customary practice. For manufacturers, they advised price increases only if costs went up, limited by a cost-justification formula and a net profit margin or a flat percentage maximum.

On Monday morning these tentative policies for manufacturers and retailers were presented to the attendees at the meetings and revised incorporating the attendees' concerns. For retailers, an overall profit

limitation was added. For manufacturers, it was proposed that price increases could not exceed 2.5 percent a year and would be allowed only to cover increased costs; also, the increased price could not result in an increase in the firm's pretax profit margin.

Wilson Newman, a Commissioner, strongly objected to the inclusion of the 2.5 percent ceiling arguing that it would be confusing and inequitable. When Herb Stein, later that day, echoed Newman's objections, it was decided that the 2.5 percent limit should be an overall goal, not a regulatory standard.

Most of Tuesday and Wednesday were spent discussing the basic policy statement; the Thursday, November 11, announcement was in constant flux up until the press conference.10 Superhuman effort resulted in the regulations being published in the Federal Register on Saturday morning.

Price Commission policy evolved in the context of the need to permit relief from the stringency of the Freeze, even if the Freeze officially was continued. Initially, this relaxation of the Freeze standard would take the form of "normalization," i.e., granting exceptions to the standard in hardship cases pursuant to some formula. This interim normalization, "Basic Regulation 1," would be followed by "Basic Regulations 2, 3, 4," etc., for specific sectors of the economy. Basic Regulation #1, in a more sophisticated form, became PC policy: a more flexible freeze.

Phase III

INTRODUCTION

Several months after the imposition of Phase II, planning for Phase III began, not because of public disaffection with the Program, but because policy planners recognized that wage and price controls would grow complex and unworkable over time. Phase II was intended to be a temporary measure. After the labor members walked off the Pay Board, it was considered important to regain labor participation in the Program. A change in the Program was also thought to be an opportune time to initiate a program of sectoral reform (i.e., changing Federal policies which diminished competition or kept prices artificially high).

George Shultz, Secretary of the Treasury, and Donald Rumsfeld, Director of the Cost of Living Council, initiated a program of informal contingency planning. Because the Program was popular and functioning satisfactorily, disclosing, in the early planning stages, that a new phase was being considered would have undermined the existing

program. Secrecy was also maintained in the planning process because there was the possibility that the post-Phase II policies would call for modification of the existing organizational arrangement and the Pay Board and Price Commission would be parties at interest.

The approach to Phase III planning was different from earlier and subsequent Phases: a wide spectrum of possible actions-some controversial, some impracticable-were to be considered. The planning was to be based on a thorough analysis of a wide variety of suggestions; public discussion or public disclosure of the more controversial alternatives, it was felt, would have impeded policy development. But after the initial possibilities were arrived at, a period of time equal to the entire Phase II planning process was spent discussing the proposed plan with business and labor; wide support was found for it.

In the preliminary "brainstorming" meetings, two complementary approaches emerged: A CISC-like approach to deal with "troublesome sectors" coupled with reform initiatives designed to improve the workings of the market. It was determined that inflation was a sectoral problem-particularly acute in health, food, transportation, construction and state and local government-which could be best treated by focused, individually-designed attacks rather than a broad approach. The success of CISC in construction prompted planners to explore the possibility of using that approach in other sectors. While the CISClike agency would help stabilize wages and prices, the reform initiatives would help restore competition and, more broadly, put downward pressure on prices. This preliminary plan marked a departure from previous planning efforts in that it aimed at the root causes of inflation rather than stopping with temporary, direct restraint of wages and prices.

DECISION TO START INFORMAL,
CONTINGENCY PLANNING

By mid-1972, Donald Rumsfeld, Director of the Cost of Living Council, and George Shultz, Secretary of the Treasury and Chairman of the Cost of Living Council, had decided independently that there should be some organized effort to consider major changes in the Phase II controls program. A termination date for Phase II had not been fixed, but they felt that contingency planning was desirable on a more or less continuous basis; after all, the Administration had made it clear that wage and price controls were to be temporary. There was also an acute awareness that wage and price controls tended to grow complex and unworkable over time. If Phase II began

to wear out, there would be a need to make changes to retain necessary public support, particularly from labor unions.

In June, Rumsfeld had decided that because of concerns about confidentiality of the planning effort and the heavy workload related to ongoing administration of the Phase II program, a special staff should be created to begin thinking about these changes. Donald Murdoch, then Deputy Director of the Bureau of Domestic Commerce and a former Special Assistant to Rumsfeld, agreed to become an Assistant Director of the Cost of Living Council for Program Development. He brought with him Henry Perritt from the Bureau of Domestic Commerce, Peter Monroe, then a Special Assistant to the Under Secretary of HUD, and, after some negotiation, Roland Droitsch from the staff of Edgar Fiedler, Assistant Secretary of the Treasury for Economic Policy. This small staff functioned throughout the next six months as the primary analytical support for the policy planning process which led to Phase III.

Murdoch, Monroe, and Perritt arrived early in July and began to sketch out for Rumsfeld matters which should be considered in evaluating possible change in the program. Murdoch also developed a preliminary milestone calendar to permit meshing of necessary analyses with possible scenarios for announcing changes in the program. The schedule would permit sending recommendations to the President by September 14.

This effort had hardly begun before George Shultz contacted Rumsfeld and indicated his desire that some thinking begin about modifications in the program. Accordingly, on August 2nd, there was a meeting in Shultz's office, where it was decided to constitute a small task force composed of Shultz, Rumsfeld and Herbert Stein, Chairman of the Council of Economic Advisers and the chief planner of Phase II. Each of these principals was to have a second. Marina Whitman would serve as Stein's alternate; James McLane, Deputy Director of the Cost of Living Council, as Rumsfeld's alternate; and Edgar Fiedler as Shultz's alternate. Marvin Kosters, Assistant Director of the Cost of Living Council for Economic Planning and Analysis would also be a part of the group because of his role in the planning of Phase II and his duties as chief staff economist for the Program. Murdoch would serve as Executive Secretary of the group. Rumsfeld designated the group "C-8" 11 and it was decided that it would meet approximately weekly, subject to Shultz's availability.

The Planning Process

The planning effort was to be subject to two stringent limitations. First, it was to be conducted in the strictest secrecy and second, it was to be conducted entirely by the Cost of Living Council.