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RAWMATERIAI5.
Control by Governments.
(By J. M. Keynes.)
A few months ago Mr. Hoover, Sec
retary for. Commerce i» the Administra
tion of the United States, declared eco
mimi-- -u-flT n!?ain*?fc th*-se foreien finvprn
ments which might control the suppne*
or file ^prices of raw materials. His
declaration bad .special reference to the
schenis of rubber control enforced by
the British Colonial Office and the Gov
ernments of certain Crown Colonies, but
he- also specified cotton, camphor, coffee,
iodine, nitrates, potash, mercury and
sisal. Since few people inside or ont
si-d-eof the United States credited him
with sincerity of principle or impar
tiality in the matter, in the sense of
supposing that lie would have been
equally indignant at similar action taken
on behalf of American interests', but
assumed 'that .bis main object was to em
ploy the preponderating -power of the
United States to beat down the prices of
fo.reign goods imported by them, tie re
sponse which- he evoked, abroad was one
of. outraged indignation at one more
example — so it was supposed — of the
willingness of Americans to cover up
purely commercial and selfish objects un
der high-sounding principles. We some
times forget that the United -States is
still enjoying, more ttncriticaUy than we
are, a phase of civilisation in which, so
far from there being any opposition be
tween commercial greediness ana high
principle, they are practically the same
thing. But -whether or not European
opinion did him an injustice, the indig
nation aroused prevented at the time any
cool discussion of the important ques
tions' at issue — and it may be -oseful to
return to them now.
There arei various' ways in 'which a
coundry may' seek to improve the. terms
on which it exchanges its own products
for those of foreign countries: It may
impose import duties on foreign pro
ducts or' export duties on its own pro
ducts. Its merchants may form coinbinfs
or pools for marketing on monopolistic
lines. Its producers may make forma!
or informal arrangements for limiting
their output -with a view to securing u
better price. Finally its Government
may enforce a -restriction of output or
of export, or may produce the same
Tesult, fo far as the consumer is con
cerned for the time being, by buying up
stocks to hold them off the market.
These measures will be more or less
successful in achieving their intention ac
cording to the urgency of the outside
world's demand for the products con
cerned, and [of 'the measure of indepen
dence of the country adopting them from
tb£ .necessity --for foreign goods. 'But,
further, they -will, in general, be more
successful for a short period after their
first adoption than they -will be in the
lpng run. Por there are very few cases
in which the outside' world cannot mate
other arrangements, given time. TJmg,
more often then not, measures to ' re
strict or control international trade will,
if^they are intended to be permanent or
to secure atoormal profits, defeat them
6e!vc« in the long run and be open to
the double disadvantage that they injure
the customer ;ai the beginning and th«
m'oducer at toe end.
Trade Restrictions.
Tlie important exceptions to this gene
ral principle, where the producing coun
try can expect to ma-ke a -monopoly profit
year in year out by taxes or restriction of
output, can almost be counted on the
fingers of one hand. There is tb-
South African diamond cartel which
keeipss the price of damonJs at * fancy
figure; but in tlis strange trade one
might argue that the restriction -was a?
much in the interests of the consumer as
of the producer; since no one would want
diamonds if they were cheap. There is
the long-established .control of' the price
of nitrates by the Government of .Chile
through an export tax, to which definite
limits are' set by the competition of- syp
thetic nitrate. ' .'There is the case of
Indian jute where -si mi jar opportunities
may exist. ''There is the FrancoGer
man potash combine. And. there are
certain' minor commodities where some
thing .which approaches a world monopoly
exists or ha« existed, euch as platinum,
bismuth, cobalt; aud quicksilver. Whilst
the control of the la-strijsimed of these
by the Rothschilds, at a time when it
was the only known remedy for aNnwrtiil
disease, may be reckoned as an anti
social act, nevertheless the list as a whole
exhibits how relatively -unimportant to
the world such case's am. '
There' remains, however, quite another
category, . to .which-, as it happens, most
of the recent acts of Governments be
long—where the object is neither per.
mapent noraimecTat. securing an excep
tional profit, but is temnorary and is
aimed, on ft? other han/3, at avoiding an
;exoeptional lobs. N'-.The nervous systems
?and financial strength of the markets in
many staple commodities' are such that
'a miscalculation on the part of the body
of . producers as a whole, leading ? lo an
overproduction which amounts to a com
paratively-small percentage — Eay 10 per
cent. — of the -total production, can' cause
so.- altogether disproportionate fall of
price. ? . t
Now, in some cases this fall of price
leads rapidly, without any organised ..or
concerted. action on the part of the pro
ducers, to a curtailment of output; which
wilt soon restore .prices to the normal:
But * in other, cases, where the fixed
plant is a large .proportion . of the , total
cost, .or where the complete process -. of
production is spread over a' long .-perioj,
possibly years as in the case of rubber
planting; so that a-nx curtailment 'will not
take effect for a correspondingly long
tioues to come forward in quantities
time, this is not so. The product con
winch the market is unable to absorb
sad, if nothing is done about it, the
price falls to a level which means a
ruinous- loss and perhaps bankruptcy not
only to the inferior producer* but to
the main body of producers. . »If th.« pro
cess be allowed to. work itself out. forces
will be set in operation which .mil mean
in course of time a' curtailment of output
much greater than is required, with a
corresponding rebound of prices- at a later
date. to a level which, is, as excessive as
the former price Iwas insufficient. In the
long run this vioJent oscillation in price
and in supply. wili.be as injurious to the
consumer as to the producer. Obviously
the -world wiH be better off on the whole
If it can be prevented.
The Holding of Stocks. *
The reader will notice that a combina-'
tion of conditions is required to bring this
Muation about — an inability of the market
to carry surplus stocks and an inability
of the producers, acting separately, to re
strict -production quickly. Now,, it is not
sufficiently realised that the commodity
markets of the world are almost never
ab)e to carry any material surplus of
Stocks at a price anywhere near the esti
mated normal They are organised to
carry the risk and the expense of- looking
after stocks in course of production, in
transit and between harvests — stocks,
that is to say, which are expected to pass
into consumption within the year. ' .
But a. short calculation will show that
it is in the nature of things that they
cannot hold truly redundant stocks unless
they are tempted by a reduction of price
ruinous to 'the producers. Market statis
tics indicate that a pure speculator will
seldom run the risk of carrying stocks,
particularly on a falling market, unless
he has an expectation of profit of at least
10 per cent, per annum, and. if professional
dealers in the commodity have been weak
ened and discouraged by losses on their
normal holdings as a result, of the initial
price fall, the possibility of much -more
profit than this is required to tempt any
one in- In addition to this the actual out
goings for warehousing, insurance, inter
est and deterioration- wi'i often amount
to nearly another 10 per cent, per annum.
Thus if it seems that the stocks may not
he absorbed for more than (say) two
years, there is a reason for prices' to (al
as much as 40 per cent, below the esti
mated normal price.
On the other hand, the producers, act
ing independently, may, if they have laid
their plans for a given sea!© of production
awl have already incurred a large part
of the co6ts, find it better worth while to
continue at a loss rather than to close
down. Curtailment will not be- worth
while unless it result* in- a better price,
whilst one individual's curtailing^ will in
itself scarcely affect the price which he
will get for the balance of his output
Where the industry is in a few strong
hands the necessary curtailment may be
arranged by agreement. But if there are
many, small, and perhaps ignorant, pro
ducers, and if. besides, the industry is the
main occupation of the place, so that its
bankruptcy involves the general' ruin of
the country and no one has any alterna
tive occupation to which he can turn,
then it. seems to me. both inevit
able and right that the Govern
ment should intervene. It is laisscr-faire
gone crazy to maintain the country.
Now. the Government, when it acts,
has to decide in which quarter it will at
tack. It can suppJcment the deficient
carrying power of the market by buying
up stocks — the Bawra organisation for
denVing rath Australian wool during the
war, thn Bandcong tin pool of 1921 by
toe Governments of the Straits Settle
nents and the Dutch East Indies, and the
rarious coffee realisation schemes of the
Sao Paulo and Brazilian Governments
iave been of this character. Alternatively
;t can restrict output or at any rate ex
port, as in the case of the Rubber Re
strictions Scheme and the imminent Cuban
sugar restriction. The Egyptian Govern
ment has applied both methods at differ
jnt times to the case of Egyptian cotton.
The former class of action is, for obvious
reasons, much more popular with produc
srs, and sometimes it may -prove the right
course. But it is much more dangerous
for the Government, since, unless great
skill is -exercised, a lasting condition of
over-production may be encouraged, until
the stocks have reached a level where the
Government can carry no more.
Protection or Exploitation.
I argue, therefore, that there is aU the
difference in tie world between a case
where a Government is endeavouring to
exploit a monopoly or a position of
economic advantage, and where it is en
deavouring to protect one of its staple in
dustries from bankruptcy and the con
sumer from violent, oscillations of price
below and above the normal selling price.
In the former class the cases where it
wiS be successful in the Jong run and will
not in the end defeat its own- objects are
somewhat rare. Anyhow these_ attempts
at national profiteering tend to impoverish
the world as a whole- and are examples, if
anything is, of bad international practice.
In the latter class the consumer is bene
fited in the long run and if they are car
ried out judiciously the world as a whole
is richer. For would it have benefited con
sumers of rubber in the end, if all new
rubber planting had been stopped and ex
isting p)aotatk-ns abandoned to the weeds
nf the tromips?
iLet us examine Mr. Hoover's position
n the light of this agreement. As a mem
jer of the Repnfblkan Administration
vhich is committed to one of the highest
protective tariffs in the world, he cannot
-e opposed to governmental interference
jf this tape to raise prices or to injure
foreign producers. As an administrator
jf the Webb Acts, which provides that
American exporters, should be freed from
the restrictions. , of the Sherman anti
trust law against combines at home, he
eannot be an opponent 9f the eipJoitn
tion of the foreigner by private monopoly.
As a colleague of Mr. Mellon, on the one
hand Secretary cf the Treasury and on
the other hand the power behind the Alu
minium Company of America which con
trols the price of aluminium throughout
the world, he must be able to control his
indignation against «uch practices. As a
subordinate c£ President Cooi'dge, who
supported but a few weeks ago a mea
sure which would advance financial aid to
fanners who desire to hold crops in ex
pectation 'of a rising market, he must at
least have learnt to suffer these notions'
in silence. Finally as art advocate of the
Cuban Sugar. Restriction-, he has seemed
to faJl in with. my argument as to the es
sentially reasonable character of mea
sures of this kind.
If tie Eastern Rubber Producers aim
at maintaining permanently a price level
above the eventual cost of production
elsewhere, Mr. Hoover is justified in en
couraging production in new districts. He
is also en tided to denounce tariffs and all
public and 'private instruments of interna
tional monopoly as examples of bad inter
national practice, provided he is ready to
apply his principles impartially all round.
But I think that, he would , dp well to
make an exception, ifj favour of all
schenies' the primary object of which is
not. to make abnormal profits but to avoid
abnormal josses.
.If Be .is interested in general principles,
he might think the matter^'over again with
this criterion in.vew. ?
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