Irrational Rationing.

The last issue of TIE discussed oil in a number of aspects, but the one that interested me most was the remark that departing Treasury Secretary Lawrence Summers was notable for independence of thought, illustrated among other examples by his opposition to using the Strategic Petroleum Reserve to counteract a recent price rise. The interest is not in the outlook for oil, which I leave to experts, but the position as applied to stockpiles in general. As a historical economist, I am collecting examples of governments storing important commodities against interruption in supplies. The interruptions were of many kinds: seasonal, outbreak of war, and political or economic embargo.

The practice goes back many centuries. Venice had a Grain Office in 1100, and Florence and Genoa followed suit in the Middle Ages and early Modern Period. E.L. Jones states that ever-normal granaries in China outclassed their European equivalents.

Salt posed another problem. It cannot be stored in the body. It is lost in sweat, tears, and especially urine. A minimum of 5 grams of new salt is needed daily for survival, and 20 to 25 grams is safer. Without salt, blood loses liquid, and the body is weakened by hypertension. Salt hunger was a serious problem and could lead to death from thirst. Fish and meat, plus a few vegetables, had to be eaten flesh or cured in salt to prevent spoiling. Northern countries had trouble producing salt from seawater--for lack of sunshine, and lack of salinity in the Baltic--which sun could evaporate to produce salt. Salt was a major item in bulk trades, but like grain, subject to possible interruption.

The famous Swedish economic historian, Eli Heckscher, has held that before trade in ice and refrigeration, a storage economy prevailed. At one stage, Gustavus Adolphus of Sweden decreed that all food had to be stored for a year before being eaten. In the Eighteenth Century, Sweden established State Salt Stores. Livestock was slaughtered in the fall; large Scandinavian houses had storage rooms. In England, Bristol required professional salt-carriers to keep twelve to sixteen barrels of salt on docks below the city walls.

Handling important commodity inventories is only sometimes a public function. One reason for vertical integration--steel companies owning coal mines, for example--is to ensure that the company will not be cut off, or held up in price, by gaps in supply. Large oil companies want assured supplies in wells and sales in distributional outlets. In planning pipelines, some stored cheap pipe for years as negotiations went on. Businesses with large investment plans have sometimes borrowed money well in advance of use, and put it in the euro-dollar market to have it ready on tap.

The Japanese technique of "just-in-time buying" of inputs was designed to eliminate the need to hold inventories and reduce the need for capital. It depended on being able to count on components from a member of the keiretsu, or a long established and trusted source. In commodities, calls in futures markets are another means of assured access if one can forecast the timing of future need with some safety.

In these questions, the devil is often in the details. Sometimes, however, it is a mistake to hang on to stocks without using them. I have in mind one or two military applications. Admirals have sometimes been criticized for hoarding their capital ships to maintain the fleet in being, rather than risk it, though Admiral Chester Nimitz at Midway in 1942 provides a striking counter-example. General Fred Anderson, the deputy commander of the U.S. Air Force in England during World War II is another. Substituting for Generals Spaatz and Eaker, who were away, and with a week's forecast of clear weather over Germany in February 1944, Anderson ordered the Eighth and Fifteenth Air Forces to attack Germany, day after day, despite the fatigue of crews and mechanics on the ground. When the invasion of Europe began, the ground troops could not take time off to rest. He deemed it necessary to knock out the German Air Force to ensure that it could not defend against the Normandy landing on D-Day in June. This episode is celebrated in the novel Command Decision, later made into a movie starting Clark Gable.

Timing is critical. It may be well to retain reserves if trouble stretches long into the future. If it is near, however, there is a case for using such reserves. As noted, I lack a confident opinion about the use of the U.S. Strategic Oil Reserve last fall. In World War I, British generals made a disastrous mistake in throwing their infantry, regiment after regiment, into battle against the German trenches. On the other hand, a military policy that would excessively fail to risk casualties, even for nearby important gains, could easily be mistaken.

Charles P. Kindleberger is Professor Emeritus at MIT.