Eighty years ago today, on October 16, 1933, Franklin Roosevelt decided to push up the price of wheat, to increase the income, and purchasing power, of depression-struck farmers. He thought that the way to make wheat more costly was to have the government buy some. But was it the large purchase, which limited supply, that affected the price? Or was it the announcement of a purchasing program that shifted expectations and affected prices?
Roosevelt’s legal basis for wheat-buying derived from his authority to purchase food for Harry Hopkins’s Federal Emergency Relief Administration. Wheat bought could be ground into flour and baked into bread to feed the needy.
On October 16, Roosevelt said to the head of his Farm Credit Administration, Henry Morgenthau, Jr., “Can’t you buy 25,000,000 bushels for Harry Hopkins [head of FERA] and see if you can’t put the price up?”1
On October 17, Morgenthau began buying wheat – and saw the price fall. “I was a pretty sick boy,” he said. He decided to go all in. “I gave orders to buy up all the cash wheat that was offered that day.” Not only did he tell his staff, he made a public announcement to tell the market about his intentions.
“Well,” Morgenthau wrote, “the publicity proved to be the right thing. Wheat began to climb and the stock market followed.” The newspapers agreed with Morgenthau: it was the announcement, not the purchase, that shifted the price. “Advices from Washington indicating that the government was coming to the aid of the falling speculative markets by heavy purchases … precipitated a spirited rally[.]”
The episode was “one of the big moments of my life,” Morgenthau wrote at the time. He had learned the value of managing prices by managing expectations, a lesson the administration would shortly apply to monetary policy in its effort to shift the price of gold.
1Morgenthau was not yet Secretary of the Treasury; officially he would take the office at the new year, though he would begin acting in the role before then.