From the article "Why Speculators
?" by Percy L. Greaves, which originally appeared in the November 1964 issue of The Freeman:
"Frequently, the speculator is the first to foresee a future scarcity.
When he does, he buys while prices are still low. His buying bids up
prices, and consumption is thus more quickly adjusted to future
conditions than if no one had foreseen the approaching scarcity. A
larger quantity is then stored for future use and serves to reduce the
hardships when the shortage becomes evident to all.
Since a price rise tends to encourage increased production, the
sooner prices rise, the sooner new and additional production will be
started and become available. So a successful speculator reduces both
the time and the intensity of shortages as well as the hardships which
always accompany shortages.
Likewise, speculators are often the first to foresee an increase in
future supplies. When they do, they hasten to sell contracts for future
delivery. This in turn drives down future prices earlier than would
otherwise be the case. This tends to discourage new production that
could only be sold at a loss. It also gives manufacturers a better idea
of what future prices will actually be. So, here again the speculator
tends to smooth out production and consumption to the benefit of all
A good example of how speculators serve society was provided in the
coffee market a few years ago. A small newspaper item reported a sudden
unexpected frost blight in Brazil. Speculators immediately realized that
such a frost must have killed large numbers of coffee bushes. This
meant much smaller future supplies for the United States. So the
speculators promptly bought all the coffee they could below the price
they thought would prevail when consumers became fully aware of the
approaching shortage. This tended to raise coffee prices immediately.
The effect of this was to reduce consumption and stretch some of the
existing supply into the shortage period. It likewise alerted coffee
growers in other areas to be more careful in their picking and handling
of coffee so that there was less waste. Higher prices encouraged them to
get to market every last bean, which at lower prices would not have
been worth the trouble. Higher prices also speeded up the planting of
new bushes. Since it takes five years for a new coffee bush to bear
berries, the sooner new planting was undertaken the shorter the period
The speculators who first acted on this development served every
coffee consumer. If these speculators had not driven up prices
immediately, consumers would have continued drinking coffee at cheap
prices for a time. Then, suddenly, they would have faced a still-greater
shortage and still-higher prices than those that actually prevailed.
By buying when coffee supplies were still relatively plentiful and
selling later when the shortage was known to all, speculators helped to
level out the available supply and reduce the extreme height to which
prices would otherwise have risen. Speculators make money only when they
serve society by better distributing a limited supply over a period of
time in such a manner that it gives greater satisfaction to consumers.
They thus permit other businessmen and consumers to proceed with greater
safety and less speculation in their own actions."
MP: In the example above, you could easily substitute "oil" for "coffee" and have a pretty good understanding of oil markets and oil prices over the last few months, and perhaps gain an appreciation of the role of oil speculators in helping to determine spot and futures prices for oil and gasoline, in response to changing market forces globally. And you could also understand how the media in the 1960s might have charged/blamed/accused coffee speculators for "high coffee prices," even though they were betting on market forces (falling future supply), not against market forces.