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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.
