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For Release on Delivery Approxim&tely 8:30 a0m a CST, Tttesday, September 24, 1957«) FARMERS AND THE BATTLE AGAINST INFLATION Address of C, Canby Balderston, Vice Chairman, Board of Governors of the Federal Reserve System, at the National Farm Credit Directors’Conference, in Omaha, Nebraska, on September 24, 1957* FARMERS AND THE BATTLE AGAINST INFLATION You and your colleagues in the Farm Credit Agencies are grappling with some of the most difficult economic analysis of our times. and vigor of your component organizations testify The size to the need for your services, and to your past success. One of your troublesome problems, doubtless, is to appraise what is "normal". To you this is not an abstraction as it is to many people be cause you have to interpret in specific terms the "normal value" of the farmland on which you are asked to lend. And since the purchase of land is a long-term investment, and farm mortgage loans run for many years, you must concern yourselves with long-run trends as well as with the immediate future o In land appraisals, I would imagine, you must often find yourselves ''leaning against the wind". For there are periods when the normal value of land is less than the going price, and other periods— at least this has been true in the past-— when normal values are higher than those that people are currently willing to payt, Your pioneering work in gaining acceptance for this concept of "normal value" has aided farmers and the economy generally« It has helped to prevent imbalances from being built up during periods of excess that will contribute to weaknesses later on. It has served also to stabilize the situation during recessions, In some ways your job is like that of the Federal Reserve System. The System's over-riding objective is to promote monetary and credit con ditions that will foster continuing economic growth and at the same time protect the value of the dollar. This implies a "normal" rate of growth, which has to do with the saving that people are willing to set aside from their earnings and to invest in productive facilities. The System, too, must often lean against prevailing tendencies* At times it should encourage the greater use of credit than would otherwise occur; at other times— aa at present— it should restrict the amount of credit that businesses and consumers seek to use. The Federal Reserve is by no means the only agency of Government whose policies influence the course of economic events. Fiscal policies of the Government are also of great importance in combatting inflation. My remarks concerning inflation and the cost-price squeeze in which farmers are getting pinched will cover: first, how continuing inflation would damage our economy as a whole, to the long-run detriment of all parts of our society; and second, the impact of inflation upon agriculture, with special reference to the current cost-price squeeze. This fight against inflation is so vital that the interests of farmers, as well as of other groups, are well served by restraining inflation. In fact,all citizens are benefited if is prevented from running away with our economy. There is the matter of fairness, especially to those with fixed incomes and to those with accumulated savings0 But beyond this, there are the dislocations of cost-price relationships, the distortion of business incentives, and interference vdth the incentives to efficiency that have been responsible for so much of American economic progress. In short, one evil effect of inflation, if continued on a 3.arge scale, would be to impair the standard of living of the people as a whole. It would reduce the size of the whole pie that citizens share» is, in truth, the "pickpocket of prosperity", Inflation Furthermore, as an inflation continues, more and more instabilities become built into the economy. In vestments are less carefully planned, loans are made on less secure basis, and situations develop that could contribute to sharp declines in production and incomes whenever the boom falters. Farmers would suffer initially more than many other groups from further price advance because of the tendency of their selling prices to lag behind their costsj if a downturn follows great excesses, farmers would be hurt very severely. The deterioration of their position, under such cir cumstances, would depend in large part on the imbalances built up during the previous boom period. In studying economic developments, it is often difficult to deter mine what is part of a longer-run trend and what is only a passing event. Like you, those of us in the Federal Reserve System try to base our policies upon the best information we can secure. portant field of economic activity. with trends in the different regions. watches developments abroad. We have specialists in each im Our Reserve Banks keep in close touch We have in the Board a Division that Happenings in foreign countries not only have a direct impact on the domestic situation, but foreign experiences with in flation and efforts to control it often provide helpful case studies. In the last two years one development in our economy has become crystal clear— the continuing rise in prices. We have been undergoing the third major price advance since the end of World War II, these stemmed directly from warj this one does not. The first two of It stems from other - 4 - less obvious causes, which, as you know, are being debated widely« In my opinion, this price advance constitutes the gravest threat to our continued prosperity of any which we have faced in the postwar period. For a couple of years, demand has pressed hard upon our resources, thus boosting prices* Even though production bottlenecks have generally disappeared, the desire to raise money f o r capital investment purposes still appears to outrun the savings available» This third wave of price advances has been evident in all major countries of the world, and like France and Spain, some have re sorted to drastic measures, such as the re-imposition of price controls. In our own country, perhaps, inflation was more unexpected than in some others, partly because of the belief that our tremendous industrial and agricultural productive capacity, expanded greatly during and since the war, offered adequate protection against runaway prices. Also, as in other countries the memories of the suffering and loss in values of the great de pression have left a strong imprint on many minds. The resultant fear that strong action might precipitate a severe decline may have been a factor in delaying or in weakening the measures needed to prevent price rises. Gradu ally, this feeling is being replaced by a belief that the best time to start fighting deflation is when the preceding inflation is underway. I have already observed that the primary task of the Federal Re serve System is both to foster continuing economic growth and to protect the dollar. These are twin goalsj and the first, I believe, is not possible without the second. The experience of foreign countries shows clearly the distorting effects of inflation. rises. People came to expect continuing price And so, for businessmen the extra profit to be made from efficient (as distinguished from inefficient) production became less attractive in re lation to the profit from speculation. In deciding whether or not to increase inventory, or to make a capital investment, or to engage in some other busi ness operation, an important consideration was whether the operation would (or would not) increase the speculative profit. The decision was not based primarily on whether the proposed operation would enable the firm to sell more goods or to produce them at lower costs. As more and more businessmen came to accept inflation as inevitable and to plan their operations accord ingly, their decisions themselves multiplied the existing inflationary pres sures, In effect, inflation began to feed upon itself. The idea that needs to be understood is that inflation in our country would not merely take something away from one group and give it to another. Everybody's standard of living would be hurt. Most people know how inflation harms the groups who are dependent on annuities or pensions or whose savings are in the form of bonds or life insurance contracts or the like. Other groups, however, who operate their own businesses or farms, or own common stocks or real estate, may believe that they would not lose by inflation. They may even think that, on balance, they would gain from it. But in reality, extremely few would end up with any net gain at all, because of the adverse effect of inflationary psychology upon the total size of the national product from which all individual shares must come. It may be worth while to mention, as an example of what vigorous anti-inflationary action can accomplish, the prosperity that the Federal Republic of Germany is enjoying at the present time. There are various causes for this prosperity, but a very important one is the fact that the - 6 - German authorities have been vigorously combatting inflation during a period when prices in many other countries and in various world commodity markets have utien advancing. These official policies have been criticized as being too tough, and so repressive as to throttle the expansion of German business; actually, they have helped Germany not only to develop and expand its export markets, but also to raise output for domestic consumption to record levels» A different kind of example is the experience of the Argentine farmers under the Peron regime. This was a case where general inflationary developments led to increases in the farmers1 costs of production while the selling prices of farm products were held down by Governmental controls. This was an extreme case of the farmers' cost-price squeeze: in selling prices lagged behind the rise in costs. the increases In addition to the losses suffered by the farmers, another result was that agricultural pro duction was so much curtailed that food exports dropped sharply, involving the country in serious balance-of-payment difficulties. In the past, in countries where prices have been set by demand and supply with a minimum of controls, farm product prices ordinarily aid not lag behind in times of inflation. In fact, it has been thought that inflation was a benefit to farmers. But with the structure of the supply and demand for farm products, as it has emerged in the United States, this no longer seems to be the case. How, then, are farmers likely to fare? For the economy as a whole, of course, the price received by a seller automatically becomes a cost to the one who buys from him. When farmers suffer from a cost-price squeeze like the current one, there are obviously two remedies: the prices of farm products may be increased, or the costs that farmers have to pay - decreased. 7 - From the viewpoint of the Federal Reserve System, however, which has responsibilities to the country as a whole and to all of its people, there is a radical difference in the two courses. An objective of recent Federal Reserve policies has been to prevent costs from rising. It seems clear that, from the viewpoint of farmers, this is more beneficial than the inflationary course of letting prices rise still further in an attempt, probably futile, to have them catch up with bounding costs. Traditionally farmers are supposed to have favored inflation and easy money policies. Whether that belief accurately reflected the farmers' true interest, I doubt. But even if it did, many of the under lying factors which may have made the position tenable at one time do not exist today. For one thing, farmers are much more a part of the market economy today than in the past. They produce less of what they use in their homes than they once did; their productive operations are carried on with tools and fertilizers produced by industry to a greater extent than was true formerly. The farmers are a relatively debt-free segment of the economy— and thus the lure to pay off debt in depreciated dollars is less strong. Most important, perhaps, is that farmers are tremendously and increasingly productive, while the demand for their products has grown only slowly, and is not much increased by inflation. This is in sharp contrast with the situation for many industrial goods that are purchased by consumers at large. The expansion in demands that accompanies inflation ordinarily has at least two elements* One is the "real" expansion, as consumers and businessmen, respectively, seek to improve their standard of living and to M 8 •• increase their productivity, often with borrowed funds. These demands are usually for industrial products, automobiles, houses, machinery or the like— products that embody in their making very little of what the farmer grows. Demands for foods and clothing, while perhaps more basic, change slowly. By and large, consumers in this country are already adequately fed and clothedc When supplies of these necessities appear threatened, it is true, prices may rise very sharply» There was a lady who bought sugar during the Korean outbreak "so she would have some before the hoarders got it all4" But such a demand is speculative, not permanent. Unless buyers also increase their consumption rates, or unless a real shortage ensues, their buying will after a time diminish0 When incomes rise, and the demand for farm products shows some increase, this unfortunately seems to call forth a widening of the "margin" between farm prices and retail prices. Thus, even when food demands rise, there are others who share, often appreciably, in the extra returns. Closely related to the demands for farm products are supply pros pects» Any willingness of buyers to purchase beyond their needs for current consumption, i«e*, to satisfy their inventory demands, will reflect their knowledge of agricultural production prospects. Here, the overriding evidence of recent years is that any shortage of farm products is likely to be short lived, so productive is our agricultural plant. The moderniza tion of farms provides a substantial bulwark against the inflation of food prices, for which the country— the non-farm segment at le a s ankful, l ib r a r y - 9 - not in most productive use— that has been held in curb by Federal farm pro grams. As to farm costs, farmers are well aware that the costs of the items they buy for farm operation and for their family living are important to their welfare <> And. it takes no detailed analysis to see the central di rection of these prices, In the past year farm machinery prices have risen 6 per cent, real estate taxes 5 per cent, farm wage rates 4 per cent# This has inflated farm costs. In the past two years of rising prices generally the "parity ratio" has not improved. Neither has it de teriorated further, remaining around its postwar low. But the recent rise in farm product prices may well be coming to an end, and the question is whether this is also true of farm costs. Look at what happened in the Korean upsurge of prices. Prices received by farmers and prices paid by them both rose very sharply for a time, In fact, farm commodity prices rose the more rapidly. The important fact is that these prices then receded rapidly, whereas the prices of things bought remained close to the advanced level. Many farm costs did not decline at all; those of machinery, building materials, supplies, and the like were still at the advanced level of 1951 when the new 1956 advance got under way. The factors underlying the relationships we have just reviewed between farm prices and costs relate to the basic organization of agricul ture as compared with industry. The millions of independent producers in farming can hardly adjust their output to market demands like many industries can do. As a consequence, costs of the goods and services purchased by farmers frequently bear little short-term relationship to the prices farmers are able to secure for their own products. - 1 0 - Since the cost of money is receiving so much attention these days, we might briefly review this aspect of farmers* costs. Of course, farmers paid off a substantial part of their debts during the war« total debts have about doubled. Since then their While interest charges on farm debt have been rising somewhat, the rise appears not to have been very large in rela tion to total farm costs» Reflecting these changes both in the volume of debts and in interest rates, interest costs currently constitute less than 5 per cent of farmers1 total outlays«, Relatively they are less than half as important as in 1929o Fanners thus would gain if an increase in interest costs helped to avoid the even greater cost resulting from higher prices on the other services and goods that farmers must bujr from nonfarm sources. Let me add, this statement is not to be taken as a prediction of further in creases in interest rates on farm loans» I turn now to the impact of inflation on a farmer's asset position. Farming has been described as an occupation in which a person can "lose" money all his life and still die a rich man. If this were true in an era of rising prices, could it provide an offset to farmers' worsened cost-price position during inflation? We need only consider farm real estate, since this is by far the most important property owned by farmers— constituting together with buildings about two-thirds the value of all assets owned by them. As you know, land values have shown a persistent upward trend throughout the postwar periode Present values are around 50 per cent higher than in 1947-49* despite the fact that farm product prices are 10 per cent lower than at that time, and net farm incomes, even on a per capita basis, are little higher» Also interest - 11 - rates are higher than then, so that with a more or less constant income from land, one would have expected land values to decline» That land values have moved counter to what would be expected indicates that other less obvi ous factors have been at work» under constant study by you: The question I ask is obvious and must be how much of the land value increase is "real" (i.e., matched by increased earning capacity), and how much is it based on expectations— perhaps of further inflation? If much of the increase reflects the latter, then to that extent this particular form of instability has already been built into the economy» Perhaps such increases in land values are as likely to cause fanners trouble as they are to benefit them, regard less of how rich they may make farmers feel» I am not going to discuss the remarkable increase in farm produc tivity per i^orker, per acre, and per animal except to observe that the re sultant excess capacity and manpower are more readily absorbed when busi ness is strong and healthy, as it has been since World War II, Individuals and businesses must frequently make economic adjustments— sometimes diffi cult ones— in order to improve their own welfare and, at the same time, to make a maximum contribution to the economic progress of society as a whole0 Therefore, a dynamic economy implies a state of flux if our country is to continue to progress. It is the function of the Federal Reserve to provide the monetary and credit conditions that will be conducive to this dynamic process, and thus facilitate long-run economic growth without either infla tion or deflation.
@FedFRASER