The Liberty Papers

In barbaric cultures, when people find themselves facing unpleasant changes, like the failure of crops or natural disasters, they look for scapegoats to blame. In the Europe and early colonial America, all to often the quest for a scapegoat took the form of a persecuting old women, who were charged with having used magic to curse their neighbors crops or herds. The fact that many of these old women owned or were squatting on property that was coveted by neighbors or powerful landlords was not lost on the more enlightened thinkers of the time.

Three centuries may have passed since the infamous Salem Witch trials, but the backwards superstition that prompted them is still with us. And Barrack Obama and John Sidney McCain have decided to publicly embrace the superstitions and to lead a modern day hunt looking for witches and sorcerers to punish. their targets are not the old defenseless women that their predecessors hung and burned alive. No, they have decided to target a new scapegoat. The speculator:

Kill the speculators! is a cry made during every famine that has ever existed. Uttered by demagogues, who think that the speculator causes death through starvation by raising food prices, this cry is fervently supported by the masses of economic illiterates. This kind of thinking, or rather nonthinking, has allowed dictators to impose even the death penalty for traders in food who charge high prices during famines. And without the feeblest of protests from those usually concerned with civil rights and liberties.

Yet the truth of the matter is that far from causing starvation and famines, it is the speculator who prevents them. And far from safeguarding the lives of the people, it is the dictator who
must bear the prime responsibility for causing the famine in the first place. Thus, the popular hatred for the speculator is as great a perversion of justice as can be imagine.

Walter Block – Defending the Undefendable

How have these evil speculators supposed to be driving up prices? The International Herald Tribune endeavors to explain – using arguments which would be right at home in the Chewbacca Defense or in A Tryal of Witches.

The “Enron loophole,” a 2000 measure that allowed unfettered oil trading on electronic markets, is now blamed by many for speculation in the tight energy market and is seen as responsible for the rapid increase in prices …

The Enron loophole was “slipped into law by Senator Phil Gramm in late 2000 at the behest of Enron lobbyists to exempt some energy traders from the regulations and public protections applicable to exchange-traded commodities. As a result, the Commodity Futures Trading Commission (CFTC) is unable to fully oversee the oil futures market and investigate cases where excessive speculation may be driving up oil prices,” said an e-mail from the Obama campaign. …

Energy trading giant Enron collapsed in a major corporate scandal in 2001 that sent executives to prison, but not before it won exemption a year earlier from federal oversight for energy commodity trading. Critics claim that measure has allowed speculators to drive up the price of oil well beyond levels dictated by current supply and demand.

The International Herald Tribune, Obama details plan to tax excess oil company profits, end energy trading loophole

So what have these evil speculators done? They have purchased oil today and stored it, hoping to sell it tomorrow for a much higher price. How does this raise the price? To answer this question, we must look at how a speculator acquires his oil. When a company which is pumping oil out of the ground auctions off their oil, the speculator offers more money than anyone else to purchase the oil. Let’s think about the implication of that statement for a moment. The speculator spends his own money and offers more of it to the producer than anyone else. In other words if we are being screwed by the price of oil, the speculator, who is paying more than we are, is even more screwed.

In the short term, this does drive the price of oil up. However, in the end, the speculator must sell his oil. he must sell his oil to people who wish to consume it, and at a higher price than he paid for it. If he guesses right, he can sell every barrel he has for a price higher than he paid for it. If, on the other hand, only when the price is $30.00 a barrel lower than he paid for it, will enough people be willing to purchase his oil for him to sell off all his stock, he may take a huge loss – having made a small fortune by wasting a large fortune. Much like a witch who wastes her time cursing a neighbors sheep by dancing naked under the full moon having drunk a potion made out of fingernail clippings, the speculator who tries to purchase enough of a good to create an artificial shortage is wasting his time and money.

This can be easily shown from the reaction of commodities traders to one of the most blatant attempts by any speculator to corner a market and drive up the costs of agricultural products permanently. This speculator hoped to double or even trebble the price of grain by creating artificial shortages. This dastardly speculator was called the United States Agriculture Department, and it was acting at the behest of many congressmen in the 1920’s to prop up food prices at the levels they had reached in World War I when under Herbert Hoover’s leadership, it tried to corner the world grain market using the American taxpayer as a source of financing.

The FFB managed to hold up wheat prices for a time. Seeing this apparent success, wheat farmers naturally increased their acreage, thus aggravating the surplus problem by the spring of 1930. Furthermore, as America held wheat off the market, it lost its former share of the world’s wheat trade. Yet, prices continued to fall as the months wore on, and the heavy 1930 acreage aggravated the decline. The accumulating wheat surpluses in the hands of the FFB frightened the market, and caused prices to tumble still further. …

The FFB programs had thus inadvertently encouraged greater wheat production, only to find by spring that prices were falling rapidly; greater surpluses threatened the market and spurred greater declines. It became clear, in the impeccable logic of government intervention, that the farmers would have to reduce their wheat production, if they were to raise prices effectively. The FFB was learning the lesson of every cartel-production must be reduced in order to raise prices. And the logic of the government’s farm monopoly also drove the FFB to conclude that farmers had been “overproducing.” Secretary of Agriculture Hyde accordingly lectured the farmers on the evils of “overproduction.” The Secretary and the FFB urged farmers to reduce their acreage voluntarily.

The first group of farmers selected to bear the brunt of this sacrifice were the marginal Northwest growers of spring wheat-the original agitators for price supports. They were not very happy at the prospect. The farmers, after all, wanted subsidies from the government; having to reduce their production of the subsidized crop had not been included in their plans. A group of economists left Washington at the end of March to try to persuade the Northwest farmers that they would be better off if they shifted from wheat to some other crop. In the meanwhile, in this topsy-turvy world of interventionism, troubles piled up because the wheat crop was abundant. Surpluses continued to accumulate, and wheat prices continued to fall. Legge and Hyde toured the Middle West, urging farmers to reduce their wheat acreage. Governor Reed of Kansas reflected the common-sense view of the farmer when he wondered why the government on the one hand promoted reclamation projects to increase farm production and, on the other hand, urged farmers to cut production.[20] Since the individual farmer would lose by cutting acreage, no amount of moral exhortation could impel any substantial cut in wheat production.

As wheat piled up in useless storage, foreign countries such as Argentina and Russia increased their production, and this increase, together with the general world depression, continued to drive down wheat prices.[21] On June 30, 1930, the GSC had accumulated over 65 million bushels of wheat held off the market. Discouraged, it did little until late 1930, and then, on November 15, the GSC was authorized to purchase as much wheat as necessary to stop any further decline in wheat prices. Bravely, the GSC bought 200 million more bushels by mid-1931, but all to no avail. The forces of world supply and demand could not be flouted so easily. Wheat prices continued to fall, and wheat production continued to rise. Finally, the FFB decided to dump wheat stocks abroad, and the result was a drastic fall in market prices. By the end of the Hoover administration, combined cotton and wheat losses by the FFB totaled over $300 million, in addition to 85 million bushels of wheat given gratis to the Red Cross.

Murray Rothbard – America’s Great Depression

The important lesson from Herbert Hoover’s disastrous experiences as a speculator is that a speculator cannot create an artificial shortage. Why?

1) because consumers of the good will be aware that the speculator has a great deal of the commodity in storage waiting to go back on the market and will make their plans accordingly.

2) because until he is selling the stuff he bought for more than he paid for it, the speculator is losing massive amounts of money.

Thus if the speculator guesses wrong about future demand for consumption, he will go broke. If the speculator is right, and the price of oil will go up much higher, then the speculator has provided a marvelous service. For when consumers are at their most desperate, when the supply of oil is at a low point relative to demand, the speculator adds his stock to the supply. This action alleviates shortages, and thus drives prices down. Furthermore, by taking product off the market now, by bidding up prices now, the speculator encourages producers to increase production helping mitigate the future shortages that the speculator is foreseeing.

The so-called “excessive” profits that Obama and McCain are demogouging against are as mythical as the witchcraft that the British Crown so zealously prosecuted more than a quarter millenium ago. It is ironic that as they make speeches about the downturn in the mortgage industry, a textbook case where speculators completely misread future consumer demand and were financially wiped out as a result, that these politicians turn around and accuse another class of speculator of doing the same thing. It is shameful that just as fellow Harvard alum William Stoughton promoted a superstitious theology that sent people to the gallows, Barack Obama, who really should know better, has chosen to promote a superstitious econology that will inevitably destroy many lives.