Words speak louder than actions: a natural economic experiment

by Eric on October 16, 2013

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.



Chris Williams 10.16.13 at 4:13 pm

Interesting. One of the key moments in the history of the British empire was when Wavell and Amery failed to persuade the war cabinet to ship 50,000 tons of grains on the market in Calcutta, in an attempt to end the Bengal famine. As I understand it (and my copy of ‘Transfer of Power’ is not to hand) W and A’s reasoning also incorporated a signalling mechanism as well as the immediate effect of the 50kt: if the grain markets in Bengal ‘thought’ that the UK government was going to continue intervening in the market to drive the price down, they’d all begin to unload as well, in anticipation of further falls in the price.

No shipment meant no price falls, but the principle appears to have been understood by 1943.


doug 10.16.13 at 6:57 pm

This account taken from Morgenthau’s diary tells a slightly different story. They drove the price up by continued buying the same day. No mention of managing expectations. See column at left paragraphs near bottom.


Eric 10.16.13 at 7:39 pm

Doug, my account is taken directly from Morgenthau’s diary.


politicalfootball 10.17.13 at 12:56 am

There’s a lesson in here for the Fed, I think, if only it would listen.


Clay Shirky 10.17.13 at 2:14 pm

So what are the limits when, Tea Party-style, you rely on signalling future costly actions to move present conditions? That worked last year, but not last night.

One lesson, I suppose, is that if the people who disagree with you can coordinate, as markets are less able to do, strong signalling can create a strong reaction. (As a mostly Democratic voter, I was slack-jawed to see 198-0 support for *anything*, so last night’s vote held out at least that surprise.)


Eric 10.18.13 at 1:18 am

Clay – it may not have worked in the sense of getting to a defunding of ACA, or anything like that, but it has worked in the sense of driving the discussion down to a point where the Democrats are counting it a victory to get the government funded at sequestrated levels.

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