Speculation and buffer stocks: the legacy of Keynes and Kahn

Keynes -a speculator who traded behalf of himself, his friends and his college- grounded his theoretical writings on first hand knowledge of speculative behaviour (in particular in commodity futures, which had great weight in his portfolio). Over the years he acquired a thorough, constantly updated, knowledge of the market conditions for each commodity traded which he drew upon in forging his proposals to stabilize the price of primary commodities. As he once explained to Hawtrey: ‘I do speak on this matter ...from an extremely wide practical acquaintance with commodity markets and their habits’. In particular one of his policy recommendations –the buffer stocks scheme - stemmed from his experience in playing on those markets. Kahn, who was introduced by Keynes to the intricacies of speculation and took over the handling of the College’s and Keynes’s finances in 1937-8, was also well acquainted with commodity futures. At outbreak of the war both Keynes and Kahn were engaged in the search of ways to stabilize commodity markets through public intervention. Kahn in particular, spending one year in 1943 at the Ministry of Supply, worked on the post-war scenario for raw materials, in close contact with Keynes who had similar concerns when drafting his proposals for a new international monetary order and payment system. After Keynes’ death it fell on Kahn the task of making the case for buffer stocks schemes for post-war economies, in seeking a middle course between market and intervention. In this paper we will review Keynes’s position as it emerged from his constant concern with commodity prices, both as speculator and as theorist. We will argue that it was never divorced from his general view on market instability and the need to correct it, when it manifested itself in a low level of employment and economic activity. We will then look at Kahn’s original contribution on buffer stocks, which brought to fruition the original intuition by Keynes, refining it with his usual attention to the finest details. Finally, we will draw some general considerations on the relevance of the proposals of stabilization of commodity prices, based on buffer stocks, in the present sentiment of “a return to Keynes” in the attempt to cope with possibly the worst global economic crisis since the 1930s.