View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FormF.H. 131

BOARD OF
OF

GOVERNORS
THE

FEDERAL RESERVE

O f f i c e

C o r r e s p o n d e n c e

To

Chaiiraan Eccles

SYSTEM

F

t

Date
Siihject;

Apnx i s .

i w .

Cotton Problem

Lauchlin Currle

You may p o s s i b l y b© i n t e r e s t e d i n the attached memorandum on t h e
c o t t o n problem, which was prepared a t my request by Mr* Sweezy.




Form F. R. 131
BOARD OF
OF

GOVERNORS
THE

FEDERAL RESERVE

O f f i c e
Tn
I

C o r r e s p o n d e n c e

Date

Mr. C u r r i e
a

SYSTEM

Subject;

A P n i m , 1959

The Cotton S i t u a t i o n

A l a n R. Sweezy

MCKGROUHD

The c o t t o n s u r p l u s presents a more s e r i o u s problem a t t h e
present time than ever b e f o r e . At t h e same t i m e , c o t t o n p r i c e s have
f a l l e n so as t o endanger s e r i o u s l y the income o f t h e Cotton B e l t , The
f o l l o w i n g t a b l e shows c l e a r l y how the present s u r p l u s came i n t o e x i s t ence.

Crop Tear
(1922-23
A v e r . (through.
(1928-29
1931-32
32-33
33-34
34-35
35-36
36-37
37-38
38-39

(Millions)
Govt.*
|
| Domestic
|
1
I1 P r o d u c t i o n 1 Consumption 1 Exports Stoeks
13.8

6.3

7.6

16,9
13.0
12.7
9.6
10.5
12.4
18.4
11.9

4.7
6.0
5.6
5.2
6.2
7.8
5.6
p6.5

8.7
8.4
7.5
4.8
6.0
5.4
5.6
p3.0

—

3.4
3.6
4.0
5.5
5.1
3.0
6.5
11.0

Acreage

40
38.7
35.9
29.4
26.9
27.6
30.0
34.0
25.3

*January 1
p Preliminary
1 . The g r e a t e r p a r t o f t h e r e s p o n s i b i l i t y must be assigned
t o the w magnificent , t crop o f 1957. The 1 8 - 1 / 2 m i l l i o n bales produced i n
t h a t year i s the l a r g e s t crop on r e c o r d . As compared w i t h the f o u r
preceding years i n which the c o n t r o l program had been i n o p e r a t i o n , t h i s
r e c o r d crop can be a t t r i b u t e d p a r t l y t o increased acreage and p a r t l y t o
an e x t r a o r d i n a r i l y h i g h y i e l d . The acreage i n 1937, l a r g e l y because o f
t h e weakening o f p r o d u c t i o n c o n t r o l f o l l o w i n g the Supreme Court d e c i s i o n
a y e a r e a r l i e r , was, r o u g h l y , £5 percent h i g h e r than the average o f
1933-35. The c r o p , however, was over 50 percent l a r g e r , showing t h a t
the i d e a l weather c o n d i t i o n s i n 1937 played an even more important r o l e
than t h e expanded acreage.




t

A p r i l 14, 1939

Mr. Chirrie - 2

2 . American exports i n the c u r r e n t crop y e a r , 1938-39, are
the lowest on r e c o r d . Throughout t h e p e r i o d o f p r o d u c t i o n c o n t r o l ,
exports were approximately o n e - t h i r d lower t h a n they had been b e f o r e
t h a t . The 1938-39 r a t e i s l i t t l e more t h a n h a l f t h i s reduced amount.
The excess supply r e s u l t i n g from t h e tremendous 1937 crop
and t h e d e c l i n e i n exports has been moving i n t o Government-financed
s t o c k s . On January 1 , 1939, t h e Government h e l d approximately 11
m i l l i o n b a l e s , which i s about equal t o a normal y e a r f s p r o d u c t i o n .
The f i g u r e s on domestic consumption a l s o b r i n g out the f a c t
t h a t t h e present s u r p l u s i s not due t o a d e c l i n e i n the domestic use
o f c o t t o n . The amount consumed i n 1936-37 was, i n f a c t , the l a r g e s t
e v e r — 7 . 8 m i l l i o n b a l e s , as compared w i t h an average o f 6 . 3 m i l l i o n i n
t h e p r o s p e r i t y p e r i o d f r o m 1923 t o 1929. Even i n the years 1934 and
1935, when the r e s t r i c t i o n program was o p e r a t i n g w i t h a r e l a t i v e l y low
l e v e l o f n a t i o n a l income, domestic consumption was n o t much below the
average f o r t h e Twenties.
I f exports c o u l d be r e s t o r e d t o t h e 1934-37 average, we could
w i t h the present l e v e l o f domestic consumption j u s t about h o l d our own,
p r o v i d e d , o f course, t h a t acreage r e s t r i c t i o n were continued as a t
present and the y i e l d remained " n o r m a l " . W i t h exports a t t h i s y e a r ' s
l e v e l , c u r r e n t p r o d u c t i o n would r e s u l t i n the a d d i t i o n o f 2 t o 3 m i l l i o n
bales a year t o the e x i s t i n g s u r p l u s .
PROGRAM

Any program adequate t o d e a l w i t h t h e s i t u a t i o n must c o n t a i n
the f o l l o w i n g elements: ( l ) continued p r o d u c t i o n c o n t r o l , (2) some way
o f i n c r e a s i n g e x p o r t s , (3) p r o t e c t i o n o f c o t t o n farmers 1 income.
Current controversy centers on a means t h a t should be adopted
t o achieve t h e second and t h i r d o b j e c t i v e s ; i . e . , increase i n exports
and p r o t e c t i o n o f farmers 1 income. E f f e c t i v e techniques f o r p r o d u c t i o n
c o n t r o l have a l r e a d y been developed and t h e r e can be no serious quest i o n but t h a t p r o d u c t i o n c o n t r o l must be c o n t i n u e d . I n a c h i e v i n g (2)
and ( 3 ) , i t i s i m p o r t a n t , however, not t o r e s o r t t o f u r t h e r acreage
r e d u c t i o n , since t h a t would i n t e n s i f y t h e s u r p l u s l a b o r problem o f t h e
South. (That i s , t h e r e i s no good i n reducing excess c o t t o n by i n c r e a s i n g excess l a b o r . )




A p r i l 14, 1939

Mr. Chirrie - 3

Broadly speaking, t h e r e are two l i n e s o f approach t o the
problem o f a c h i e v i n g t h e above-mentioned o b j e c t i v e s :
1.

M a i n t a i n domestic p r i c e s by a continuance o f t h e
present l o a n program ( o r some o t h e r p r i c e - p e g g i n g
device) and s u b s i d i z e exports so as t o increase
t h e American share i n w o r l d markets.

2.

L e t b o t h domestic and f o r e i g n p r i c e s f a l l s u f f i c i e n t l y
t o move a more s a t i s f a c t o r y amount o f American c o t t o n
i n t o consumption and make up t h e d i f f e r e n c e by a d j u s t ment payments t o t h e f a r m e r s . Increased consumption
would be p r i m a r i l y i n f o r e i g n c o u n t r i e s , but w i t h a
lower p r i c e t h e r e would probably be some increase i n
t h i s c o u n t r y as w e l l .

Of these two ways o f t a c k l i n g t h e problem, the second o f f e r s
d i s t i n c t advantages. I t would avoid the appearance o f dumping, which
i n e v i t a b l y would go w i t h the f i r s t , and would have the h i g h l y d e s i r a b l e
e f f e c t o f g i v i n g American as w e l l as f o r e i g n consumers the advantage
o f the lower p r i c e . From a more t e c h n i c a l p o i n t o f v i e w , i t would a l s o
seem t o be p r e f e r a b l e .
The s u b s i d i z a t i o n o f exports would n e c e s s i t a t e t h e i m p o s i t i o n
o f a t a r i f f t o keep t h e subsidized c o t t o n from being brought back i n t o
t h e country and would a l s o probably n e c e s s i t a t e a subsidy t o American
producers o f c o t t o n goods i n o r d e r t o enable them t o h o l d t h e i r place
i n t h e w o r l d market• As c o n t r a s t e d w i t h t h i s cumbersome setup, t h e
a l t e r n a t i v e approach would preserve a u n i f i e d w o r l d market and would
o b v i a t e t h e n e c e s s i t y f o r s p e c i a l d u t i e s o r bonus o f any k i n d .
I t i s i n t e r e s t i n g t o note t h a t t h e p r i c e - a d j u s t m e n t o r p a r i t y payment method seems t o be f a v o r e d by Secretary Wallace h i m s e l f .




" W i t h regard t o c o t t o n , M r . Wallace admitted
t h a t t h e l o a n programs have, w h i l e m a i n t a i n i n g
domestic p r i c e s , caused exports t h i s year t o f a l l
o f f f a l a r m i n g l y * w i t h t h e i n d i c a t i o n t h a t they w i l l
be l i t t l e more than h a l f what they were i n previous
years.
111

I f t h e c o t t o n l o a n i s t o be continued, and
I t h i n k we should f r a n k l y face t h e f a c t t h a t i t s
discontinuance would probably p e r m i t t h e p r i c e o f
c o t t o n t o f a l l by 2c o r 3c a pound, then some means

Mr. Chirrie - 4

A p r i l 14, 1939

must be found t o move t h e c o t t o n i n t o e x p o r t , f lie
continued.
"He s a i d continuance o f the l o a n on t h e present
b a s i s would be almost c e r t a i n t o reduce our exports
t o a s t i l l lower l e v e l probably below 3,000,000 b a l e s ,
n e c e s s i t a t i n g a r e d u c t i o n i n acreage from 27,000,000
acres t o 20,000,000.
"The Secretary warned, however, t h a t i f c o t t o n
i s kept out o f t h e l o a n , t h e n *probably #200,000,000
a year o r more 1 w i l l be needed i n a d d i t i o n t o present
c o n s e r v a t i o n and p a r i t y payments t o m a i n t a i n even the
present low l e v e l o f income i n t h e South. He added
t h a t t h i s would not be so d i f f i c u l t i f t h e o r i g i n a l
T r i p l e A system o f f i n a n c i n g payment from a t a x on
d o m e s t i c a l l y consumed c o t t o n could be resumed."
The c h i e f argument advanced against the parity-payment method
o f moving l a r g e r q u a n t i t i e s o f American c o t t o n i n t o both f o r e i g n and
domestic consumption i s t h a t i t would cost more than t h e export subsidy
p l a n . T h i s i s c l e a r l y based <m a v e r y narrow d e f i n i t i o n o f c o s t .
If
American consumers are f o r c e d t o pay a h i g h e r p r i c e than f o r e i g n consumers
i n order t o m a i n t a i n farmers 1 income, the cost t o t h e American p u b l i c i s
o b v i o u s l y j u s t as g r e a t as i f the same amount o f money were p a i d out o f
the Federal t r e a s u r y . The cost would be e x a c t l y t h e same i f the p a r i t y
payments were f i n a n c e d , as Secretary Wallace proposes, through a processi n g t a x . I t would be f a r l e s s i n r e a l terms, however, i f the general
funds o f t h e Treasury were used i n s t e a d o f a processing t a x . i*ram the
p o i n t o f v i e w o f i n c r e a s i n g the purchasing power o f consumers i n g e n e r a l ,
as w e l l as o f t h e f a r m e r s , the l a t t e r method i s c l e a r l y the most d e s i r a b l e . I n f a c t , the use o f processing taxes would l a r g e l y n u l l i f y the
b e n e f i t t h a t could be obtained by the parity-payment method o f d e a l i n g
w i t h the problem. Payment o f b e n e f i t s out o f t h e general fund would
mean, o f course, t h a t the money would be borrowed u n t i l the r e v i s i o n
o f t h e e x i s t i n g t a x system o f a s o r t t h a t would increase revenue w i t h o u t
burdening consumption could be c a r r i e d t h r o u g h .




Mr. Curri© - 5

A p r i l 14, 1939

CAUSE OF THE DECLINE I N EXPORTS

Through the p r o d u c t i o n c o n t r o l and l o a n programs, t h e U n i t e d
S t a t e s has, i n e f f e c t , been h o l d i n g a p r i c e umbrella f o r t h e r e s t o f the
w o r l d . By c u r t a i l i n g acreage i n t h i s country and by o f f e r i n g t o absorb
s u p p l i e s i n t h e l o a n program a t a t t r a c t i v e p r i c e s , we have been g i v i n g
f o r e i g n producers a chance t o expand t h e i r output and t h e i r sales w i t h out b r i n g i n g p r i c e s t o a r u i n o u s l y low l e v e l . As American c o t t o n has
gone i n t o t h e l o a n , f o r e i g n sales i n the w o r l d market have i n c r e a s e d .
T h i s p o i n t comes out c l e a r l y i n an examination o f p r o d u c t i o n and c a r r y over f i g u r e s f o r American and f o r e i g n c o t t o n .
Before t h e depression began, t h e w o r l d c a r r y - o v e r o f American
c o t t o n was n o r m a l l y around 40 percent o f the annual p r o d u c t i o n o f American c o t t o n . The r a t i o o f c a r r y - o v e r t o p r o d u c t i o n i n t h e case o f f o r e i g n
c o t t o n f l u c t u a t e d around 50 p e r c e n t . Since 1930, t h e s i t u a t i o n has
changed d r a s t i c a l l y . The r a t i o o f f o r e i g n c a r r y - o v e r t o p r o d u c t i o n has
remained about t h e same, i . e . , 50 p e r c e n t , but t h e American r a t i o has
increased s h a r p l y . I n c l u d i n g l o a n s t o c k s , t o t a l American c a r r y - o v e r a t
t h e end o f t h e 1937-38 season was 74 percent o f p r o d u c t i o n . I f t h e
c a r r y - o v e r o f American c o t t o n a t t h e end o f the 1938-39 season i s 14.5
m i l l i o n b a l e s , as i t probably w i l l be, i t w i l l be 122 percent o f product i o n . Thus, w h i l e American stocks have been p i l i n g up t o a tremendous
amount, f o r e i g n produced c o t t o n has been moving i n t o consumption a t a l most t h e same r a t e as i t d i d b e f o r e the depression and the American
c o n t r o l program began.
I t i s impossible t o say j u s t how much o f t h e w o r l d market
l o s s i n t h e l a s t couple o f years could be regained f o r American c o t t o n
by a p o l i c y o f unpegging the w o r l d p r i c e . Undoubtedly some o f i t i s
l o s t beyond r e p a i r w i t h i n the l i m i t s o f any d e c l i n e i n p r i c e s t h i s
c o u n t r y would be w i l l i n g t o see. The most d r a s t i c d e c l i n e i n imports
o f American c o t t o n has been i n Geimany, which f o r m e r l y took an average
o f a m i l l i o n and a h a l f bales a year but which i n 1938 imported o n l y
300,000 b a l e s . Meanwhile, German imports o f B r a z i l i a n c o t t o n have i n creased f r o m p r a c t i c a l l y n o t h i n g t o 375,000 b a l e s . I n a d d i t i o n , i n c r e a s i n g use o f rayon has brought about a marked d e c l i n e i n t h e t o t a l consumpt i o n o f c o t t o n i n Germany. There seems t o be no reason, however, why
exports t o England and o t h e r c o u n t r i e s where t h e r e are no s p e c i a l
r e s t r i c t i o n s on American c o t t o n should not recover a t l e a s t t o t h e i r
mid-Thirties level.