First Steps toward Farm Subsidies

During the severe recession of 1920-1921, the War Finance Corporation made emergency loans to farmers. President Harding described the corporation’s actions as “helpful” and called for broadened powers. Although the corporation gradually curtailed its activities after the emergency, it was a portent of much to come (Nash 1959, 458-460). Violent protests from farmers in late 1920 led Congress to create the Joint Commission of Agricultural Inquiry in 1921. The commission reported the obvious—that farm troubles were the result of the recession and a decline in exports—and recommended measures to help cooperative marketing associations, improve credit facilities, and extend the

Department of Agriculture’s research activities. A more radical approach was advocated at the National Agricultural Conference, convened early in 1922 by Secretary of Agriculture Henry C. Wallace.103 In its report, the idea of “parity” was first made explicit: agriculture was entitled to its fair share of the national income and this would be achieved if the ratio of the prices farmers received to the prices they paid was kept equal to the ratio that had prevailed from 1910 to 1914.

Throughout the 1920s, various ideas were proposed aimed at securing “parity prices” or “fair-exchange values” for agricultural products. Most acceptable to professional farm supporters and politicians were the McNary-Haugen bills, which would maintain parity prices through two devices. First, a tariff was to protect the home market from imports, and second, and more important, a private corporation chartered by the federal government (modeled on the War Finance Corporation) was to buy a sufficient amount of each commodity to force its price up to the computed fair value. The corporation could in turn sell the acquired commodities. Administrative expenses and operating losses would be shared among the farmers: For every bale of cotton or bushel of wheat sold, a tax would be charged to the grower. The farmer would gain if the additional amount of income resulting from higher prices exceeded the tax. Refer to Economic Reasoning Propositions 1, scarcity forces us to make choices; 2, choices impose costs; and 4, laws and rules (institutions) matter.

The McNary-Haugen bills were passed twice by Congress and vetoed twice by President Calvin Coolidge. Despite this setback, the agitation of the 1920s did secure some privileges for agriculture. For one, the Capper-Volstead law of 1922 exempted farmers’ cooperatives from prosecution for violation of antitrust laws. The following year, the Federal Intermediate Credit Act provided 12 intermediate credit banks that would rediscount agricultural paper for commercial banks and other lenders. This bill addressed the short-term credit needs of farmers; the Federal Farm Loan Act of 1916 had already established 12 Federal Land Banks to provide long-term loans to farmers through cooperative borrowing groups.

To achieve the broader aims of price and income maintenance, there were two major efforts. A naive belief in the tariff as a device to raise the prices of farm products (which had been traditionally exported, not imported) led to “protection” for agriculture, culminating in the high duties of the Smoot-Hawley Tariff of June 1930. More significant was the Agricultural Marketing Act of 1929, which was passed to fulfill Republican campaign promises of the previous year. This law, the first committing the federal government to a policy of stabilizing farm prices, worked as much as possible through nongovernment institutions. The act established a Federal Farm Board to encourage the formation of cooperative marketing associations and to establish “stabilization corporations” to be owned by the cooperatives, which would use a $500 million fund to carry on price support operations.

Periods of distress in agriculture had occurred before. Why were direct efforts first made to aid farmers made in the twenties? Several things, as shown by Elizabeth Hoffman and Gary D. Libecap (1991), had changed. First, the experiments with price controls in World War I and the use of the War Finance Corporation to aid farmers in the 1920-1921 recession had convinced farmers and their friends that direct federal intervention in agricultural markets would work. The federal government, moreover, had become far stronger—in part because the passage of the income tax had given it a new source of revenue—and this made direct aid to farmers more realistic. Finally, the integration of national markets had made it clear that only federal intervention could help farmers.

Ultimately, the farm programs adopted in the 1920s provided only limited help to farmers. The supply of farm output was highly elastic. Without the means to control output, or buy it on a massive scale, federal legislation could not significantly alter farm incomes. Nevertheless, the policy discussions of the 1920s set the stage for the massive government intervention in agriculture that was to follow in the 1930s.