An Ever-Normal Granary

One aspect of the "Farm Problem" was that farm incomes were uncertain and fluctuated widely, and, accordingly, one aim of farm policy was to stabilize farm incomes. A policy that aimed at doing that was inspired by the Biblical example of the Seven Lean Years and the Seven Fat Years, and was known as the "Ever-Normal Granary."

The idea behind the Ever-Normal Granary was that the price would be stabilized at the average price over a number of years. In good weather years, the government would buy crop products to stabilize them at the average price, and in bad weather years, the government would sell crop products at the same price, and prevent the consumers' price from rising so high. This is illustrated by Figure 5, below:

Figure 5: An Ever-Normal Granary

In the Figure, S_av is the average supply, S₁ the bad weather supply, and S₂ the good weather supply. The price is stabilized at p_av. In a good weather year, the government would buy Q₂-Q_av to support the price. In a bad weather year, the government would sell Q_av-Q₁ to keep the price down. Since Q_av is the average output, Q₂-Q_av and Q_av-Q₁ are the same amount, and the purchases and sales would balance out.

That might have worked, stabilizing agricultural incomes and prices at a fairly modest cost, had average supply been stable. But average supply was shifting to the right, on the average, and the average price and farm income was steadily falling. To "solve that problem" by price stabilization it would be necessary to stabilize the price not at but above its average. In other words, it would be necessary to keep agricultural prices (on the average) above the supply-and-demand equilibrium.

The term for this sort of policy was and is "price support."

Price Support