Economics in One Lesson

C
HAPTER
16
“Stabilizing” Commodities
1
A
ttempts to lift the prices of particular commodities permanently
above their natural market levels have failed so often, so disas-
trously, and so notoriously that sophisticated pressure groups, and the
bureaucrats upon whom they apply the pressure, seldom openly avow
that aim. Their stated aims, particularly when they are first proposing
that the government intervene, are usually more modest, and more
plausible.
They have no wish, they declare, to raise the price of commodity X
permanently above its natural level. That, they concede, would be unfair
to consumers. But it is 
now
obviously selling far 
below
its natural level.
The producers cannot make a living. Unless we act promptly, they will
be thrown out of business. Then there will be a real scarcity, and con-
sumers will have to pay exorbitant prices for the commodity. The appar-
ent bargains that the consumers are now getting will cost them dear in
the end. For the present “temporary” low price cannot last. But we can-
not afford to wait for so-called natural market forces, or for the “blind”
law of supply and demand, to correct the situation. For by that time
the producers will be ruined and a great scarcity will be upon us. The
government must 
act
. All that we really want to do is to correct these
violent, senseless 
fluctuations
in price. We are not trying to 
boost
the price;
we are only trying to 
stabilize
it.
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Economics in One Lesson
There are several methods by which it is commonly proposed to
do this. One of the most frequent is government loans to farmers to
enable them to hold their crops off the market.
Such loans are urged in Congress for reasons that seem very plau-
sible to most listeners. They are told that the farmers’ crops are all
dumped on the market at once, at harvest time; that this is precisely
the time when prices are lowest, and that speculators take advantage
of this to buy the crops themselves and hold them for higher prices
when food gets scarcer again. Thus it is urged that the farmers suffer,
and that they, rather than the speculators, should get the advantage of
the higher average price.
This argument is not supported by either theory or experience.
The much-reviled speculators are not the enemy of the farmer; they
are essential to his best welfare. The risks of fluctuating farm prices
must be borne by somebody; they have in fact been borne in modern
times chiefly by the professional speculators. In general, the more
competently the latter act in their own interest as speculators, the
more they help the farmer. For speculators serve their own interest
precisely in proportion to their ability to foresee future prices. But the
more accurately they foresee future prices the less violent or extreme
are the fluctuations in prices.
Even if farmers had to dump their whole crop of wheat on the
market in a single month of the year, therefore, the price in that
month would not necessarily be below the price at any other month
(apart from an allowance for the costs of storage). For speculators, in
the hope of making a profit, would do most of their buying at that
time. They would keep on buying until the price rose to a point where
they saw no further opportunity of future profit. They would sell
whenever they thought there was a prospect of future loss. The result
would be to stabilize the price of farm commodities the year round.
It is precisely because a professional class of speculators exists to
take these risks that farmers and millers do not need to take them.
The latter can protect themselves through the markets. Under normal
conditions, therefore, when speculators are doing their job well, the
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