[IP] Report: biggest decline in prices since the Great Depression

[David Farber <dave@farber.net>]

Begin forwarded message:

From: odlyzko@dtc.umn.edu (Andrew M. Odlyzko)
Date: January 31, 2009 7:56:32 AM CST
To: nelson@crynwr.com
Cc: dave@farber.net
Subject: Re: [IP] Report: biggest decline in prices since the Great  
Depression

Speculation in commodity food was not illegal, not by any means.  In  
fact,
lots of things that are illegal today were not illegal then, such as
insider trading.  An example I like to cite is the (fictional) short
story, "The Glenmutchkin Railway," written at the height of the Railway
Mania in 1845,

  http://www.dtc.umn.edu/~odlyzko/rrsources/glen6.pdf

It's well-written, amusing, and takes about 15 minutes to read.  And
it presents a pretty good picture of the dot-com-like atmosphere at
the height of a bubble.  A key element is that nothing that the two
protagonists do there was illegal in those days at the height of the
laissez faire era.

But to get to your point, yes, "[s]peculators will buy excess in boom  
years
and sell excess in bust years," at least in many cases.  But that will  
not
always even out prices, sometimes it will accentuate the swings.  It's  
not
just that some crops cannot be stored (a much more important factor in  
the
early 19th century than now, since refrigeration was not available,  
and it
was hard to protect stored crops from rats and mice, at least no  
effectively).
The main thing is that it is hard to anticipate the future, and in  
addition
speculators are subject to herd mentality.

Let me cite one example that I am intimately familiar with, since it's  
from
the period of the Railway Mania.  A very simplified version of the story
runs as follows.  (And, as with all history, there are other  
interpretations,
but in my opinion the following is by far the most reasonable, and there
is plenty of evidence to support it.  If you want to read a detailed
almost-contemporary account by a respected financial journalist, on
Google books you can find David Morier Evans' "The Commercial Crisis,
1847-1848; Being Facts and Figures Illustrative of the Events of that  
Important
Period, Considered in Relation to the Three Epochs of The Railway  
Mania, The
Food and Money Panic & The French Revolution," 2nd ed., Letts, Son,  
and Steer,
1849.)  The harvest in the fall of 1846 was horrible in much of Europe,
and the potato crop in Ireland failed almost completely, so over the  
next
year about a million people died there.  Now in early 1847,  
anticipating poor
harvest in that year, grain dealers contracted to buy supplies from  
overseas.
Had that 1847 harvest failed, they would have cleaned up and likely  
saved
a lot of lives (and been reviled as profiteers).  But instead the 1847  
crop
turned out to be very abundant, crop prices went way down, and many of
those grain merchants (and others) had to shut their door.  That brought
on a liquidity panic, with a cascading series of failures that  
threatened
to paralyze the economy.  And that's when the government intervened by
telling the Bank of England (a private corporation, but restricted by  
its
charter, and with a monopoly in certain financial operations) to break  
the
law and make loans beyond the limit that the gold standard allowed.

The bottom line is that had the 1847 harvest been bad, the speculators
would have ended up smoothing the economic swings.  But since that  
harvest
was plentiful, the speculators' activities assisted in creating a  
crisis.

Best regards,
Andrew





	-----Original message-----
	From nelson@crynwr.com  Sat Jan 31 01:40:36 2009
	From: Russ Nelson <nelson@crynwr.com>
	Date: Sat, 31 Jan 2009 02:33:47 -0500
	To: dave@farber.net
	Cc: odlyzko@dtc.umn.edu (Andrew M. Odlyzko)
	Subject: Re: [IP] Report: biggest decline in prices since the Great  
Depression

	Interesting analysis, but I have to ask: was speculation in commodity
	food illegal?  I did a quick check on Google, but found no good
	information.  If there *really* was a substantially free market, your
	explanation makes no sense.  Speculators will buy excess in boom years
	and sell excess in bust years, which evens out prices, assuming the
	crop is one which can be stored.  In 1840, maybe not, but that points
	at the cause of the real problem, which isn't free markets.

	Andrew Odlyzko writes:
	 > And of course, on top of the fluctuations coming from agriculture,
	 > there were the fluctuations caused by the internal dynamics of the
	 > free markets, which led to booms and busts of their own.

	--
	--my blog is at    http://blog.russnelson.com   | Delegislation is a  
slippery
	Cloudmade supports http://openstreetmap.org/    | slope to prosperity.
	521 Pleasant Valley Rd. | +1 315-323-1241       | Fewer laws, more  
freedom.
	Potsdam, NY 13676-3213  |     Sheepdog          | (Not a GOP  
supporter).





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