Commodity Stocks in the Trade Cycle

Ludwig M. Lachmann and F. Snapper (1938)

Lachmann and Snapper’s journal article investigates whether commodity inventories amplify or restrain the trade cycle. Its central distinction is between investment in fixed equipment and changes in raw-material stocks: these need not move together, and treating them as a single investment aggregate obscures their different economic functions. Across seven sections, the authors move from historical statistics through the distribution and financing of inventories to speculation, commodity-control policies, and competing cycle theories. Their evidence concerns unfinished commodities; the probable behaviour of finished-goods inventories remains an important qualification throughout.

The opening poses the question on which the argument turns:

Our main problem is: Do commodity stocks move in positive or inverse correlation with the Cycle?

Positive correlation would make inventory investment an accelerating force in booms and depressions; inverse correlation would make it a counterweight. Tables covering the pre-war period and 1919–37 provide the empirical foundation. The authors compare metal stocks with indicators of industrial activity, but resist correlating agricultural inventories indiscriminately with the general cycle. Harvest conditions give agricultural supply a degree of short-run independence, while demand varies with industrial uses and income elasticity. Wheat and cotton therefore require different explanations. Their preference for graphical comparison over the “dubious niceties of correlation analysis” reflects an effort to interpret commodity-specific mechanisms rather than extract a universal statistical coefficient.

The broad finding is that industrial raw-material stocks generally decline during expansion and accumulate during depression. Production adjusts to demand only after a lag: rising industrial activity draws down existing supplies, while contraction leaves unwanted output in storage. The authors nevertheless examine departures from this pattern, including strikes, speculation, expanding electrical industries, and monopolistic intervention. Investment in raw-material production can itself increase inventories during prosperity, as they argue happened between 1923 and 1929. Inverse correlation is consequently a historically supported tendency, not an exceptionless law.

Section IV asks who carries these inventories. Producers, dealers, and manufacturers face different financial constraints, so aggregate stocks alone cannot reveal the mechanism of adjustment. Although producers might be expected to retain unwanted output, access to credit can shift the burden downstream. Rubber stocks accumulated principally among dealers and manufacturers, whereas copper producers possessed the financial backing needed to hold supplies off the market and support prices.

At any rate, we are entitled to conclude that the stocks will be held in the strongest hands.

Inventory distribution thus expresses financial capacity as well as production requirements. Exhaustion of the resources available to carry stocks can precipitate an additional price collapse; conversely, well-financed holders can buffer changes in demand.

This buffer function grounds the article’s challenge to Keynes’s proposition that surplus stocks must be exhausted before recovery begins. Stocks excessive relative to depressed activity may be indispensable to renewed expansion. Their classification as surplus is therefore conditional on the scale and composition of production, not an intrinsic property of the goods.

On the contrary, the conclusion that seems to suggest itself is that raw material stocks must have reached a certain size if they are to support a lasting recovery.

Reserves allow demand to revive before raw-material output catches up. Their depletion near the upper turning point may indicate bottlenecks, although the authors caution that inventories alone cannot establish the cause of a crisis. Scarcity at one production stage can coexist with unsaleable goods elsewhere. More detailed evidence about holdings across industries and production stages would be necessary to determine the significance of low aggregate stocks.

Inventory accumulation and liquidation accordingly retard the cumulative process centred on fixed-capital investment. During recovery, drawing on reserves delays the expansion of raw-material production; during contraction, accumulating stocks partly offsets disinvestment elsewhere. This also motivates caution toward output-restriction schemes, which may remove the reserves needed for sustained recovery. The authors allow a narrow justification where demand is very inelastic, prime costs are constant or falling, and producers operate under identical conditions. A concluding footnote on Keynes’s newer government-storage proposal accepts subsidies for carrying stocks while maintaining that competitive markets already perform this function more effectively than his diagnosis suggests.

Section VI explains why speculative booms need not produce inventory accumulation. Price movements depend on the distribution of expectations, not simply transaction volume:

If everybody expects prices to rise, they will rise without any transactions taking place.

When optimism is shared by producers, dealers, and consumers, prices can rise without goods accumulating between them. For covered holdings, storage becomes profitable when forward prices exceed spot prices by more than carrying costs. Falling stocks during prosperity may therefore reflect current physical scarcity or relatively cautious expectations among forward-market specialists. The authors present superior speculative foresight as a possibility, not a demonstrated conclusion. Their argument applies only to covered stocks; involuntary, unhedged depression inventories require a different explanation. Tin-market evidence illustrates the connection between price spreads and stocks, while pooling and monopoly operations account for important deviations.

The final section establishes the investigation’s theoretical reach without overstating it. The findings are consistent with theories centred on fixed-capital investment, including over-investment accounts and Clark’s and Harrod’s consumption-acceleration mechanism. They neither verify nor refute Austrian monetary over-investment theory, because the necessary stage-specific evidence is missing. Likewise, testing under-consumption explanations requires knowing which inventories rose first. Keynes’s general cycle theory survives the criticism of his stock-depletion thesis, while Hawtrey’s emphasis on manufactured inventories concerns another category. The article’s lasting contribution is to show why the composition, location, financing, and timing of stocks matter: aggregate inventory changes cannot be assigned a uniform role in cyclical expansion and collapse.