consumption tend to be associated with large variations in prices'. Short-term price
movements may be the cause of a fresh disturbance of the balance of production
and consumption in a later period `owing to the slowness of production responses
to price changes'. In markets where wide price fluctuations were common, the
behaviour of stocks `may tend to exaggerate the instability of prices even further,
owing to the perverse influence of speculative stock movements' (FAO, 1952b).
Smoothing excessive short-term price fluctuations was not only in the interest of
both producers and consumers but also in the wider interest of world economic
stability generally.
a few primary products. It could also have adverse effects on the economies of
importing countries and may cause disturbingly large variations in the balance of
payments, and on the living standards of consumers everywhere. Concerning what
constituted `excessive' price instability, the FAO report quoted from the report
of a group of UN experts (UN, 1953). `Excessive' referred to both the frequency
and amplitude of price fluctuations. The encouragement of a better allocation of
economic resources, which was the desirable result of price changes, should be
achieved without violent instability. If prices had to change by 15 per cent or
20 per cent from year to year in order to achieve minor allocations in resource
allocation, this would raise serious doubt about the effectiveness of this method
of securing a desirable allocation.
prices. They often tended to amplify changes in supply and demand in the market
and to the `perverse influence of expectations' that may make traders sell when
prices were falling and add to their stock in a rising market. The marginal char-
acter of import requirements for some primary products, especially foodstuffs, was
an additional destabilizing influence on international commodity prices. Many
importing countries produced at home a large part of their total food require-
ments, relying on imports for the remainder. Small changes in total consumption
or domestic production could lead to variations in their import requirements. On
the side of exporters, on the other hand, the proportions of exports to production
of both foodstuffs and raw materials were large for a number of major exporting
countries and their dependence on exports receipts was correspondingly great.
While exporters of raw materials were therefore likely to suffer most from changes
in industrial activity and particularly in the output of capital goods that often
were much more pronounced than changes in economic activity generally, the
exporters of foodstuffs, though catering for a more stable level of world consump-
tion, were affected particularly by the marginal character of their trade. In addition,
there was the influence of national price-support and price-fixing measures and
export subsidies that had a perverse effect on world market prices and rendered
the world market far from being free.