The Drive against ‘Gambling’

October 20, 1947

President Truman had no legal power to order the nation’s grain exchanges to increase their margin requirements to 33⅓ percent. But he forced them to do so by threatening to exercise the legal powers he and the Commodity Exchange Authority did have to do something else. This is a technique of executive usurpation which deserves the careful attention of Congress. The purpose of the present column is merely to examine the economics of the Administration’s action. Its chief effect, like that of the 75 percent margin insisted on by the Federal Reserve Board for stocks, will not be to lower prices, but merely to make the market narrower and day-to-day fluctuations more erratic than otherwise.

When crop shortages or the government’s own monetary or other policies have brought about high prices for food, it has been the technique of governments from time immemorial to blame the result on “speculators” and “gamblers.” What we are dealing with here, therefore, is not something that has merely happened within the last few weeks, but something that happens repeatedly. Let us, therefore, call in some expert witnesses from the past.

“Hasty attempts to control speculation by simple enactments have invariably proved either futile or mischievous.”—Alfred Marshall, in 1890.

“The result of regular speculation is to steady prices . . . A good example of this is afforded by the Gold Law during the Civil War. The discount on greenbacks was mistakenly ascribed to the speculation on the gold exchange, and a law was enacted to prohibit all such transactions. As a result, the premium on gold jumped at once from 195 to 285, with wild fluctuations day by day, to be followed, after the hasty repeal of the law fifteen days later, by just as sudden a recession of the price.”—E. R. A. Seligman, in 1905.

“Speculation . . . tends to make daily market prices conform to the seasonal market price. . . . The general effect of speculation is to lessen fluctuations. . . . For the ultimate consumers, say of wheat, the early and exact adjustment of price brings more even utilization of the available supply. If the crop is short, some lessening of consumption is inevitable; and it is better that the deficit be spread through the season. The sooner and the more exactly the higher price is reached, the more likely is this result.”—F. W. Taussig, in 1911.

“[Blaming speculators] is the recourse of governments in search of a scapegoat. . . . Price fluctuations are reduced by speculation, not aggravated, as the popular legend has it.”—Ludwig von Mises, in 1924.

While Washington is now pointing toward “gambling in grain” in Chicago, Kansas City and Minneapolis as a cause of high food prices, its own direct responsibility might be profitably considered. Passing over its inflationary policy in general, the government is committed to lend the farmer 90 percent of parity on his wheat. At the present time this comes to $2.08 a bushel at Chicago.The result of this, as already pointed out by Edward H. Collins in The New York Times (Oct. 6), is that the trader “has a speculation in which his loss is limited, on the downside, by the policy of the government itself, to about 67 cents a bushel. On the upside, by contrast, the ceiling is ‘infinity.’ Can there be any reasonable doubt that this constitutes an open and shut invitation to violent speculation on the long side?”

One more contemporary witness. “Under the law the government supported prices of potatoes—the best possible replacement for cereal foods—last year and this. Most of the potatoes it acquired last year were diverted to non-food uses, wasted, or destroyed. . . . The Department of Agriculture this year reduced potato acreage goals and stipulated that support would be given only to producers who complied with lower goals. As a result harvested acreage this year will be about 15 percent smaller and the potato crop in prospect is below normal consumption requirements. The potato policy therefore has turned out to be a mistake of the first magnitude.”—National City Bank of New York October Letter.