REFORM OF THE AGRICULTURAL SECTOR

With the onset of the Great Depression, farmers began to suffer a severity of economic distress that only a few would have believed possible. In three years, the average price of corn at central markets fell from $0.77 to $0.19 per bushel, and the average price of wheat dropped from $1.08 to $0.33 per bushel. Table 24.2 shows the key averages. Between 1929 and 1932, prices received by farmers declined 56 percent. True, prices

TABLE 24.2 FARM PRICES AND INCOMES IN THE DEPRESSION, SELECTED YEARS

Source: Series K344, K347, K352, and K137.

Farmers paid declined as well. Even taking this into account, however, leaves the farmer’s “terms of trade”—prices received by farmers divided by prices paid—down 37 percent. The net income of farm operators fell from a total of $6.2 billion in 1929 to $2 billion in 1932. Again, adjusting for the price change helps a little, but net real income fell from $6.2 billion to $3 billion in constant 1929 dollars.

Farmers with fixed indebtedness were particularly hard-hit: In 1932, 52 percent of all farm debts were in default. From the previous record high of 15 farm foreclosures (lenders taking back properties because mortgages were not being paid) per 1,000 farms in 1929, foreclosures jumped to 18 per 1,000 farms in 1930 and 27.8 per 1,000 in 1931, finally peaking at 38.1 per 1,000 in 1932 (Johnson 1973-1974, 176). Mortgage foreclosures sometimes reduced the owners of farms that had been in the family for generations to the status of tenants or, in the depths of the depression, forced them on to relief rolls. Many states under aggressive pressure from farm organizations, and concerned about threats of violence by farmers, imposed moratoriums on foreclosures (Alston 1984; Alston and Rucker 1987). The foreclosures have often been blamed on the overexpansion of agriculture in World War I. Farmers went into debt to acquire land, it is said, and ended up defaulting when the postwar economy failed to sustain the high prices of the war years. A careful study by Lee J. Alston (1983) shows, however, that this problem, although important in the 1920s, had been worked out by 1929. The high levels of foreclosures in the early 1930s were mainly the result of the fall in agricultural prices.

Farmers had long pushed for government measures to maintain “fair” prices for farm products, but these demands were frustrated by opposition to the large expenditures or far-reaching government controls on production that it would take to achieve this goal. Most federal aid for farmers had been for disease control, the provision of information about best practice, and so on. Things began to change, however, with the passage of the Agricultural Marketing Act of 1929, which was the outcome of Republican campaign promises in 1928 (Libecap 1998). This predepression law committed the government to a policy of farm price stabilization and established the Federal Farm Board to encourage the formation of cooperative marketing associations. The board was also authorized to establish “stabilization corporations” to be owned by the cooperatives and to use an initial fund of $500 million for price support operations. With the onset of the depression in 1930, the Federal Farm Board strove valiantly to support farm prices, but between June 1929 and June 1932, the board’s corporations bought surplus farm products only to suffer steadily increasing losses as prices declined. The board itself took over the operation and accepted the losses, expending some $676 million. Meanwhile, however, farmers faced with catastrophically falling prices increased output. At the time, it seemed that prices could not be supported without production controls.

The Roosevelt administration was prepared to go much further than its Republican predecessors. But initially it was unwilling to undertake the enormous outlays that would be required to raise prices by increasing demand through government purchases. Consequently, the Agricultural Adjustment Act, passed in May 1933, provided for the Agricultural Adjustment Administration (AAA), which was given the responsibility of raising farm prices by restricting the supply of farm commodities. The AAA’s most important tool was “acreage allotment.” The AAA would determine a total acreage of certain major crops to be planted in the next growing season. The total acreage would then be subdivided into state totals, which in turn were allotted to individual farms on the basis of each farm's recent crop history. To secure the cooperation of the individual farmer, an “adjustment payment” was made. The payment was made by check from the federal Treasury, but in these early New Deal days, it still seemed too much to expect the

Agricultural poverty sent thousands fleeing from the Midwest to California, with belongings piled in the family jalopy. America had become, as beloved humorist Will Rogers said, a nation that “drove to the poor house in an automobile.”

Taxpayer to foot the bill—at least directly. The benefit payments were financed, therefore, by taxes paid by the first processor of any product (millers, for example, had to pay a tax for each bushel of wheat that was ground into flour), although it was assumed that the tax would be shifted forward to the consumer.

The original AAA scheme experienced a setback in 1936 when the Supreme Court, in the Hoosac Mills case, declared the Agricultural Adjustment Act unconstitutional because it attempted to regulate agricultural production—a power reserved to the states. The decision, however, did not end acreage allotments. The administration quickly found a way around the decision by basing allotments on the need for soil conservation.

The severe drought of 1936, with its attendant dust bowl conditions, provided the rationale. The dust storms on the Great Plains were so severe that many people were forced to flee. In particular, the migration of the “Okies” created both fear and sympathy in California and focused attention on the need for such measures as soil conservation to deal with the underlying problem.107 The result was passage of the Soil Conservation and Domestic Allotment Act. Under this act, the secretary of agriculture could offer benefit payments to farmers who would reduce their acreage planted in soil-depleting crops and take steps to conserve or rebuild the land withheld from production.

Farm production was very high in 1937, and there was pressure to supplement acreage reduction with more vigorous measures to raise prices. Since 1933, the Commodity Credit Corporation (CCC) had cushioned the prices of corn, wheat, and cotton by making loans to farmers on the security of their crops. Most of these loans were made “without recourse.” If the CCC extended a loan against a commodity and the price of that commodity fell, the farmer could let the CCC take title to the stored product and cancel the debt. If the price of the commodity rose, the farmer could sell the commodity, pay back the loan, and keep the profit. Thus, CCC support prices became minimum prices in the marketplace (see Economic Insight 24.1).

The Agricultural Adjustment Act of 1938 increased it mandatory for the CCC to extend loans on corn, wheat, and cotton at “parity” prices. These prices were defined as farm prices adjusted to have the same purchasing power as those prevailing in 19101914, a time when farm prices relative to other prices were exceptionally high. The Populist dream of “fair” prices determined by the government had become a reality.

The most concrete steps taken by government to raise farm incomes during the early 1930s were production controls. It was a mistake, however, to restrict output in agriculture and raise prices of food and fiber when the major national problems were massive unemployment and hunger. Far better ways were available to help farmers. This is easy to see now, but it was not so easy to see at the time. Many of Roosevelt’s early advisers believed that restoring the “balance” among the sectors of the economy would restore full employment. In truth, the primary outcome of the New Deal’s farm policies, as with many other types of New Deal legislation, was to redistribute income rather than end the depression.

Clearly, Roosevelt’s New Deal for farmers was far removed from President Harding’s policy advice that “the farmer must be ready to help himself.” The acceptance by the American people of the principle that the government ought to bolster the economic fortunes of particular occupational groups or classes was momentous. Farmers have not been the only beneficiaries of this philosophy, but we cannot find a better example of the way in which legislation, passed at first in an effort to relieve emergency distress,

EFFECTS OF COMMODITY CREDIT CORPORATION PRICE SUPPORTS

The figure illustrates the effects of CCC price supports. In the absence of government intervention, the price would be P0 and the quantity produced Q0. Intervention raises the price to P1 and the quantity produced to Q1. The higher price reduces consumption to Q2 and leads to the accumulation of Q1 - Q2 stocks by the government. Farm incomes (net of production costs) are raised by the sum of areas A + B + C. Total expenditures by the government are (Q1 - Q2) x P1. Area A is paid directly by consumers in the form of higher prices. B + C + D are paid by consumers indirectly through taxes. The change in direct expenditures by consumers is Q2 x P1 - Q0 x P0. (Whether consumers spend more or less than before depends on the elasticity of demand.)

A number of losses are associated with this program. First, the resources used to produce Q1 - Q2 are wasted. Storage costs for the surplus (not shown) are also

Price

Incurred. Second, consumers are deprived of farm products that they value more than the costs of production. Their loss on this account is measured by area B. The attempt to minimize these losses then leads to other programs described in the text: production quotas, surplus removal programs, and export subsidies.

Economists often recommend direct income supplements to farmers combined with a free market in agricultural products as a way to help farmers without incurring these losses. For a number of reasons, however, farmers usually prefer price supports. Three are worth noting: (1) direct income supplements may be viewed as demeaning, (2) direct income supplements may go mostly to poor farmers, and are therefore opposed by rich and influential farmers, and (3) direct income supplements tend to remain fixed over time. The subsidy delivered through price supports may grow as technological advances shift the supply curve to the right.

Has become accepted as a permanent part of the economic system (Walton 1979) (Economic Reasoning Proposition 4, institutions matter).