Significance of the Break in Prices

February 16, 1948

Last week’s break in commodity prices was not mysterious. The key was wheat. In recent weeks the prospects of the world’s wheat crops, at home and in Europe, had been steadily brightening, and the crops being harvested in the Argentine and in Australia had proved greater than expected. The good news was reflected in prices belatedly, because the world had formed the habit of thinking only in terms of shortages.

Nor was it mysterious that the break, when it came, should have been violent. So was the rise. When March wheat sold at $3.15 a bushel in Chicago in mid-January, that price compared with only $2.06 a year before. Even last week’s break brought the price down only to $2.56. The demand for wheat has always been highly inelastic. Gregory King in the seventeenth century estimated from records that a deficiency in the wheat harvest of one, two, three, four, and five tenths would raise the price three, eight, sixteen, 28 and 45 tenths respectively. Just as a world shortage (combined with our foreign-aid policy) brought a disproportionate rise in price, so the prospect of alleviation of the shortage brought a substantial fall.

For physical, financial, and psychological reasons, the break in wheat precipitated the break in other farm commodities, and even in stocks and metals. Wheat can substitute for corn as a feed. Meat is extremely sensitive to the price of feedstuffs. The meat industry, moreover, had been having its own troubles.

Retail sales had been falling off. Stocks in storage had mounted from 554,000,000 pounds a year ago to 857,000,000 on Jan. 1 last. This was brought about in large part by the Administration’s predictions of a still greater meat shortage and still higher meat prices, used to bolster its demand for rationing powers. The moment a Senate subcommittee turned down the meat-rationing proposal, wholesalers started to unload. This was one more example of the way in which government controls, or threats of them, have exactly the opposite result from the one the planners are trying to bring about.

On the very day when prices were sensationally collapsing all around him, President Truman was lecturing the White House reporters, with the help of charts, on the dangers of further “really alarming” price rises. Just as he and his planners were fearing “deflation” two years ago, he now chose to get really alarmed about inflation in the midst of the greatest postwar price decline. To add to this record of spectacular mistiming, he predicted a possible “crash.” In such a situation particularly this was reckless and irresponsible.

That the general price decline will in any way parallel the great collapse of 1920 seems quite unlikely. The fact that money and bank credit have more than tripled since the start of the war should alone prevent any such consequence. Rightly handled, the fall in the price of foods could prove wholesome. It could restore a more normal relationship to other prices. It could reduce the pressure for a third round of wage increases. It could bury the foolish proposal for a return to price fixing.

The real danger at this time, in fact, is not a continued precipitous general fall in prices. It is rather that Washington may now feel falsely assured that the inflationary threat is definitely passed, and that the politicians may once again return to their always more congenial theme that they really need to protect us from “deflation.” Even before last week’s break the political situation had become demoralized. Republicans and Democrats were competing with each other in adopting policies that could only mean further inflation. The Administration had brought in a budget of $40,000,000,000; it was proposing more than $9,000,000,000 for foreign aid alone; it was determined to keep down interest rates by supporting government bonds. Congress, on its side, was shoveling out still bigger grants to veterans while proposing to cut taxes $6,500,000,000. Most of these things were being done with a bad conscience. The danger of the price fall is that it may be made the occasion for rationalizing such reckless inflationary measures as a patriotic “anti-deflation” policy.