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POSTWAR ECONOMIC STUDIES
No. 2, October 1945

AGRICULTURAL ADJUSTMENT
AND INCOME




ARTHUR C. BUNCE
WILLIAM H. FISHER
EARLE L. RAUBER

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON




Published October 1945

CONTENTS
PAGE

PREFACE

Inside Front Cover

OUR AGRICULTURAL POLICIES

BUNCE

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Summary
The Need of Agriculture for Special Policies
Characteristics of Agricultural Production and Prices
Protracted Agricultural Depression after First World War. . . .
Low Incomes of Farm Families
Postwar Problems of Agriculture
Output of Agricultural Products
Prices and Income
Domestic Food Requirements
Agricultural Exports
Objectives of Agricultural Policy
Present Agricultural Policies
Difficulties Inherent in Parity Price Support Programs
Production Adjustments
Agricultural Exports
Methods of Supporting Prices
Rural Poverty and the Objectives of Policy
Postwar Policies for Agriculture
Full Employment
Expansion of World Trade
Soil and Water Conservation
Maintenance of Adequate Diets
Alleviation of Rural Poverty
Crop Insurance
Storage of Nonperishable Products
Other Policies
Policies to Maintain Agricultural Income
Freedom vs. Control
Modified Programs to Support Parity Prices or Income
A System of Forward Price Floors
A Method of Supporting Agricultural Income

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CONTENTS
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FARM LAND VALUES AND RECONSTRUCTION
WILLIAM H. FISHER

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Summary
Farm Land Values in the National Economy
Land in the Total Economy
Land and the War Economy
Land Values and Postwar Adjustments
Comparison of World Wars I and II
Basic Differences
Prewar Land Values
Farm Prices and Incomes
The Farm Real Estate Market
Conclusions
Current Forces and Future Development in the Farm Land Market
The Present Situation
The Immediate Postwar Period
The Later Postwar Period
Methods of Preventing a New Land Boom
Education
Control of Demand through Allocation
Restrictions on Purchasing Power
The Control of Liquidity
Methods of Credit Control
Price Ceilings
Capital Gains Taxes
Forced Savings of Receipts from Sales

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LOW INCOME GROUPS IN SOUTHERN AGRICULTURE
EARLE L. RAUBER

Summary
The Geography of Rural Poverty
Some Foundations of Rural Poverty in the South
Population and Land
Cash Cropping
The Tenure System
Programs and Policies




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OUR AGRICULTURAL POLICIES
by
ARTHUR C. BUNCE
Division of Research and Statistics, Board of Governors
The farm population of the United States was approximately one
quarter of the total before the war. The total net income from agriculture
was about 8 per cent of the national income for the 1935 to 1939 period,
and the average per capita income of persons on farms was less than half
the average of all other groups. Programs to maintain full employment
and a high level of purchasing power in the total economy, therefore,
must include agricultural policies because of their implications to the
total national income and the welfare of both the farm and nonfarm
population. This essay presents a brief analysis of the problems that
agriculture will face at the end of the war, the weaknesses of present
agricultural programs, and the basic essentials of more constructive
programs for the future.
SUMMARY
During the war agricultural production has been expanded one-third,
although the number of persons engaged in agriculture has declined.
This has been made possible by the technological changes which have
taken place during the last 20 years. Higher prices, Government guarantees, and patriotism have also stimulated farmers to expand production
rapidly to meet wartime requirements.
The major determinant of the level of agricultural production and
income in the postwar period will be the level of domestic purchasing
power. Even with a high level of employment and consumption in this
country, however, production will exceed demand at "reasonable" prices
unless our exports can be expanded above the prewar level.
At present the prices of agricultural products are guaranteed in terms
of "parity" relationships that existed 30 years ago. In many cases costs
of production have changed greatly during this period and will continue
to change in the future. Parity prices that remain unchanged for long
periods do not reflect economic changes; the retention of these rigid prices
in the postwar period will tend to prevent needed production adjustments
from taking place and they will also tend to limit both domestic and
foreign consumption.




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AGRICULTURAL ADJUSTMENT AND INCOME

To solve the postwar problems of agriculture we must (1) maintain
a high level of consumption in this country, (2) expand our agricultural
exports on a permanent basis, and (3) assist agriculture to adjust its
production pattern so that the benefits of low-cost mechanized production can be passed on to consumers while the level of living of our farmers
is maintained or improved.
In order to attain these ends we need to maintain a high level of
employment and income in this country and to develop means of maintaining or improving the food consumption of families whose incomes
are not sufficient to provide an adequate diet. To expand our exports we
should initiate and support agreements to reduce tariffs, cooperate in the
development of flexible international agreements for those problem
commodities where production adjustments must be made slowly if
serious economic repercussions are to be avoided, and support policies
designed to stabilize exchange rates and facilitate international lending
on a sound basis.
To assist agriculture to adjust production and maintain a high level
of income, \ye need greater flexibility of prices than exists under present
laws. In addition to a system of flexible forward prices and price floors,
other programs are needed (1) to help farmers on inefficient farm units
to move into more productive employment, (2) to train remaining farmers
to develop more diversified production, and (3) to assist farmers to adjust
crop production from that required for war purposes to that required to
meet peacetime needs and establish a sound soil conservation system.
THE NEED OF AGRICULTURE FOR SPECIAL POLICIES
During the present war agricultural production has expanded rapidly;
not only have civilians been better fed, except for a very few items, but
vast quantities of food have been supplied to our armed forces and to
our Allies. This increased production occurred in spite of a reduction in
manpower and reflects the cumulative effects of a technological revolution
in agriculture. In the postwar period production can be expanded still
further even with a smaller farm population. The problems that agriculture will face after this war are problems that have been intensified
rather than created by the war and, for the reasons discussed below, the
farm problem presents special features and requires special programs in
addition to those applied to the rest of the economy.
Characteristics of Agricultural Production and Prices. Agricultural
production expanded about 10 per cent during the First World War and




OUR AGRICULTURAL POLICIES

3

continued to expand a further 10 per cent during the 1920's. This was in
the face of lower prices and a decline in foreign demand. The index of
agricultural production for sale and use in the farm home (1910-14 base)
showed remarkable stability all through the depression; at the depression
prices of 1932 it was still 117 and the lowest point reached was 111 in 1935,
in spite of the drought of 1934 and 1936 and all the efforts of the Government to reduce the "surpluses" through production controls. Actually
production was cut in the two drought years much more than the index
indicates because the index does not show the reduction in inventories.
The index tends to obscure annual fluctuations in yields, although it
presents an accurate picture of longer run trends. In contrast to agriculture, the prices of industrial products fell much less while production
was cut drastically and serious unemployment resulted.
This disparity between agricultural and industrial production and price
behavior is the result of several major influences. Production costs in
agriculture are almost all fixed costs. Taxes, rent, capital, and family
labor are all essentially fixed. The farmer cannot gain by "laying off"
his own labor. The only variable costs are hired labor, power, fertilizer,
and seed; these, in the aggregate, form a very small percentage of total
costs. In industry, on the other hand, most labor, raw materials, and
power are variable costs and form a large part of total costs; when prices
fall it is possible and often cheaper for the individual firm to cut production rather than maintain it. Another important factor is that the
total demand for agricultural products is relatively inelastic, compared
to the demand for most manufactured products, and even large decreases
in prices do not increase consumption greatly. In addition to these major
factors, agriculture is extremely competitive; there are millions of farmers
and each individual raises a crop regardless of the aggregate effect on
farm prices. Compared to this condition, there is a large degree of monoply
and monopolistic competition in industry. Furthermore, since some major
agricultural products are dependent on world markets the tariff is less
effective in protecting prices in agriculture than it is in industry. Finally,
production in industry is under human control and largely based upon
forward orders while agricultural production is indeterminate because of
the weather and cannot quickly or easily be controlled because of its
biological nature.
Because agricultural production is so remarkably stable it is not a
basic cause of cyclical fluctuations. Booms and depressions arise from
factors existing in industrial organization; agricultural income reflects




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AGRICULTURAL ADJUSTMENT AND INCOME

and intensifies these cyclical changes. The maintenance of farm purchasing power in a depression may act as a cushion and modify the downward
swing somewhat, but it cannot be a major factor in eliminating cycles.
Agricultural policies, therefore, must be considered only as a supplement
to general policies affecting the whole economy. Once fluctuations in the
rest of the economy are controlled, the need for special agricultural policies will be reduced; until this is done, however, special policies are needed
to prevent cyclical fluctuations from disorganizing and penalizing the
most stable segment of the economy.
Protracted Agricultural Depression after First World War. After the
boom that developed during the First World War, agricultural production did not decline but prices dropped 41 per cent by 1921, while the
prices paid by farmers, including taxes and interest, dropped only 18
per cent. Agricultural prices remained low all through the 1920's while
prices paid, taxes, and interest charges remained relatively high. This
meant that net farm income remained low and, while industry was experiencing an expansion of almost boom proportions, agriculture was experiencing the pains of deflation that followed the collapse of the land
boom. In the early thirties came the second blow; prices received by
farmers fell to an index of 90 in 1931 and to 68 in 1932 while the index of
prices paid, taxes, and interest declined only to 142 in 1931 and 124 in
1932. Moreover, the migration from farms to cities, which had absorbed
some 6 million farm people in the decade of the twenties, was reversed
because of widespread unemployment in industry.
Low Incomes of Farm Families. Reflecting the relatively low prices of
agricultural products that continued after the last war and through the
depression, the incomes received by many farm families were very low.
The National Resources Board study of consumer incomes showed that
in 1935-36, a year between depression and war prosperity, almost onequarter of the 6}4 million farm families received less than $500 a year
and about 38 per cent received less than $750 a year. This income included the retail value of farm products consumed at home and the rental
value of the farm home. Only 8 per cent received over $2,500 a year. Of
those in other occupations only 16 per cent received less than $750 and
17 per cent received over $2,500 a year.
In addition to its handicaps from low incomes, the rural population
lacks many facilities available to urban dwellers. Only 25 per cent of
farm homes have electricity and only 30 per cent have water piped into
the house while 95 per cent of urban houses have both^these facilities.




OUR AGRICULTURAL POLICIES

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Medical and dental care is much less adequate. These disadvantages are,
of course, partly offset by more fresh air, greater freedom, and lower
living costs. On the other hand, we need to remember that the rural
quarter of our population accounts for one-third of all the babies born
in this country and that the maintenance of the city population depends
upon migration from rural areas. Poverty, of course, is not confined to
rural areas and it may be more endurable in a rural setting than in a city;
but in both cases it should be eliminated by the most appropriate means.
Rural poverty, however, does not respond quickly to generally improved
conditions because of lack of mobility, lack of training, and lack of resources; at the same time farmers do not share proportionately in social
security programs since they are largely designed for industrial workers.
It is because of their experience after the last war that farmers organized and became a more vocal and powerful force in politics. Farmers
are now in a position to demand special consideration and, because of
the implications that agricultural policies have to the well-being of all
consumers, these policies are the concern of all parts of the economy.
POSTWAR PROBLEMS OF AGRICULTURE
There is a widespread fear that agricultural production after this war
will be so large that prices will again collapse and surpluses pile up. Essentially there are three closely interrelated questions that need to be
answered: (1) Will our total production be too large in view of our domestic requirements and probable foreign trade? (2) What specific adjustments will be required in the production of various commodities and
how will they affect the farm organization in various areas? (3) What
adjustments are required in order to increase the returns to low-income
families engaged in agriculture? In this paper only the general problems
of agricultural production and price policies are considered in detail. Adjustments in farm organization with respect to conservation are briefly
mentioned while methods of raising the level of living of low-income
farmers are considered in another essay.
Output of Agricultural Products. Agricultural production has expanded
much more rapidly during the present war than it did during 1914-18.
Compared to the prewar average (1935-39) production in 1944 showed
the following percentage increases: food grains 48, feed grains and hay
57, oil-bearing crops 173, truck crops 35, vegetables 6, meat animals 55,
poultry and poultry products 53, and dairy products 16. Sugar production
decreased by 18 per cent and cotton and cottonseed decreased by 7 per




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AGRICULTURAL ADJUSTMENT AND INCOME

cent. Total production in 1944 was 36 per cent above the 1935-39 average
and the indications are that production in 1945 will be equally high if
good weather prevails.
The rapid increase in production has been due to several factors. Expansion in livestock has been aided by the fact that we entered the war
period with large stocks of grains that could be rapidly drawn upon.
Weather conditions have been exceptionally favorable and yields have
been above normal. Mechanization had advanced to the point where
acreages of crops could be expanded or maintained even in the face of a
diminished labor supply and farm families worked longer hours in response to higher prices and appeals to patriotism. If we assume more
normal weather conditions than those experienced in the war period and
also assume that farmers and their families will want to work less intensively, it does not follow that total output will fall in the postwar
period. Improved seed, fertilizers, insect and disease controls, and conservation practices can offset the effect of normal weather, while further
improvements in machinery and techniques can maintain or expand our
present output even though fewer hours are worked and fewer people
are employed. In the past it has not been easy to shrink production once
it has expanded and the tendency will be for agriculture to continue a
high level of production or to expand it as more machinery, fertilizers,
and improved techniques become available after the war.
Prices and Income. For 1944 the index of prices received by farmers
showed an increase of 95 per cent over 1940; cash income from farm
marketings was greater by 137 per cent; and net income from agriculture
had increased about 160 per cent. In April 1945 the index of prices received was 103 per cent above 1940.
Notwithstanding the large increase in income resulting from higher
prices and increased production, the problem of rural poverty has not
been eliminated. In 1942 the average cash income from farm marketings
was over $5,000 per farm in seven States and less than $900 per farm in
three States. Within States the disparities are even greater and range
from bare subsistence to very high cash returns. This unequal distribution reflects the fact that a large percentage of families living on farms
produce only small commercial surpluses and, unless they receive other
labor income, their labor is not effectively utilized.
A broad approach to the postwar problems of agriculture is through
attempting to estimate what proportion of an estimated total of national
income will be distributed to farmers. Such estimates depend upon as-




OUR AGRICULTURAL POLICIES

7

sumptions regarding the size of the national income, total agricultural
production, domestic consumption, agricultural exports, and the relation
of prices of farm products to prices of goods purchased by farmers for
production and consumption. If prices of farm products drop from the
1944 level of 115 per cent of parity to 90 per cent of parity while over-all
production and consumption remain at the present level, cash income from
farm marketings would be about 14.5 billion dollars. This would be 25
per cent below the 1944 level but over 80 per cent above the 1935-39
average. This assumes constant 1944 prices for products purchased by
farmers for production and consumption. To the extent that other prices
fall or rise, parity prices and income would also vary. This estimate also
assumes that, if necessary, the Government would purchase the amounts
required to maintain these prices and does not indicate how large or small
these purchases might have to be.
The Bureau of Agricultural Economics has shown that there was a
close relationship between nonagricultural income payments and cash
farm income from 1921 to 1943. The average relationship was such that
a change of 10 billion dollars in nonagricultural income payments was
associated with a change of 1.6 billion dollars in cash farm receipts. If the
national income in the postwar period is assumed to be 140 billion and
nonagricultural income payments to be approximately 124 billion, gross
cash farm income will probably be about 18 billion dollars if this relationship holds true. This would mean that the index of all farm prices
would be considerably above 90 per cent of parity if production remained
at the 1943 level. While agricultural income is unquestionably closely
related to nonagricultural income, certain dynamic factors make it difficult to use this historical relationship to forecast the future. During the
war years food exports have been exceptionally high while imports have
remained low. At the same time the absence of many consumer goods
from the domestic market may have led people to buy more food than they
normally would even with a high level of national income, and after the
war people may prefer to buy other goods rather than spend as much on
food as they have during the war. It is evident that the approach to agricultural problems by estimating national income, while valuable as an
indication of national purchasing power, throws no light on the major
problems of the relationships between the volume of production, domestic
requirements, and foreign trade.
Domestic Food Requirements. The Department of Agriculture has
published estimates of the quantities of various foods required for dif-




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AGRICULTURAL ADJUSTMENT AND INCOME

ferent levels of diet for the population of the United States. These quantities have been converted into acreages of harvested crop land. While
all such estimates are subject to a wide margin of error they nevertheless
indicate the approximate amount of crop land required to produce the
food and fibre required for domestic consumption under different assumptions. With an estimated population of 137.4 million in 1945 and
no change in the efficiency of production, the approximate acreage required for various levels of diet, plus allowances for nonfood products,
may be summarized as follows:
Consumption equal to the average for 1920-29 period
Moderate-cost good diet
Expensive good diet

Millions of
Acres
280
310
340

If the decline in work stock continues at the present rate only about
33 million acres of crop land would be required to feed horses and mules.
Added to the estimates given above for human consumption this brings
the total acreage for domestic food and fibre needs for 1945 to about
313 million acres for the 1920-29 diet, 343 for the moderate-cost good
diet, and 373 million acres for the expensive good diet.
A further factor to be considered is the increased productivity that has
resulted from improved techniques. While agricultural production in
1944 was 33 per cent above the 1935-39 average, the acreage of crop land
harvested had increased only 7 per cent. The difference was partly due to
exceptional weather, but mechanization, improved seed, and better feeding methods and farm practices were also important. During the war we
have benefited from the cumulative results of the technological revolution
that increased in momentum after 1910. Estimates by the Bureau of
Agricultural Economics show that the crop acreage harvested per worker
increased 34 per cent from 1910 to 1944 and production per worker in
agriculture almost doubled. Factors associated with these changes were
a decline of about 17 per cent in the number of people engaged in agriculture, a drop of 50 per cent in the number of horses and mules, and an
increase from one thousand to almost two million in the number of
tractors. Each additional tractor, when used with the appropriate machinery, will save about 800 man-hours of labor per year. Estimates indicate that increased efficiency alone may already have raised production
per acre 10 to 12 per cent above the prewar levels.
If we assume a minimum increase in productivity of 5 per cent between
the prewar period and 1945, the corrected number of acres required




OUR AGRICULTURAL POLICIES

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would approximate 297 million for the 1920-29 average diet, 326 million
for the moderate-cost good diet, and 354 million for the expensive good
diet.
In 1944 the per capita consumption of food was about 7 per cent higher
than 1920-29 and its nutritive content had improved. It is improbable,
and certainly not desirable, that we should go back to a lower level of
diet in the postwar period. At the same time it is extremely doubtful if
consumption will increase so that the high-cost good diet will become the
average diet at any early date. Food habits change relatively slowly, and
low- and middle-income groups may consider other commodities more
important than a high-cost diet. To be realistic, therefore, we should aim
at attaining a domestic consumption in terms of the moderate-cost good
diet that would require about 326 million acres of crops.
In 1944 about 352 million acres of crops were harvested. The 1945
goals call for a further expansion of crops and the harvested acreage may
reach about 356 million acres. If this level is maintained in the postwar
period we will have about 30 million acres of crops that will not be required for domestic consumption even if the moderate-cost diet prevails.
If domestic consumption shrinks to the 1920-29 level, there will be 60
million acres available for exports.
Agricultural Exports. The decade of the thirties saw large reductions in
our exports of agricultural products. The index of the quantities of agricultural exports fell from 100 for the 1924-29 period to 60 for the 1935-39
period. In the early stages of the war, exports fell rapidly to an index of
40 for 1941. In 1942 and 1943 exports of agricultural products (including
lend-lease) increased and in 1943 the index rose to 74. Food exports and
shipments accounted for most of this rise; these increased 376 per cent
above the 1935-39 average and took over 10 per cent of our total volume
of production for sale and use in the farm home.
In the 1924-29 period our exports of 12 major crops (including feed
turned into pork and lard) used about 57 million acres of crop land (including crop land used for work stock for these products); this was 16
per cent of the average acreage in crops for this period. The acreage required for our exports in the 1935-39 period averaged about 30 million
acres because the volume of exports had dropped 40 per cent, efficiency
had been increased, and fewer horses and mules had to be fed. This represents only 9 per cent of the average acreage in crops for that period.
During 1946 there will be a large demand for our agricultural products
for export and relief shipments. This will tend to prevent production




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AGRICULTURAL ADJUSTMENT AND INCOME

from pressing heavily on demand. On the other hand, agricultural imports that have been dammed up during the war will become available,
domestic purchasing power may drop during the period of readjustment
of industrial production, and foreign demand may be drastically reduced
in later years.
If our agricultural exports return to the level of 1935-39 and only use
30 million acres of our crop land, and if our domestic consumption attains a level between the 1920-29 diet and the moderate-cost good diet,
then we will find our agriculture with at least 15 million acres of crop
land in excess of that for which there are outlets. In the recent study,
What Peace Can Mean to American Farmers (May 1945), the United
States Department of Agriculture estimates that in 1950, with a national
income of 150 billion dollars, our domestic and probable foreign needs
can be produced on about 327 million acres, assuming improvements
in technology continue. If all families receiving less than $1,500 a year
had their consumption supplemented so that they consumed a low-cost
adequate diet, only an additional 5 million acres would be required. The
1944 crop acreage of 352 million acres, therefore, is 20 million acres above
the estimated 332 million required in 1950 even with food supplements
made available to low-income families.
These figures all indicate that in the United States agricultural production can continue to expand more rapidly than consumption. To
solve the postwar problem of agricultural production and income, therefore, we must (1) maintain a high level of consumption in this country,
(2) expand our exports on a permanent basis, (3) assist agriculture to
adjust its production pattern so that the benefits of low-cost mehcanized
production can be passed on to consumers while the level of living of our
farmers is maintained and improved, and (4) develop policies and programs which will modify the violent fluctuations in farm prices and income that have existed in the past. It is within this framework that the
objectives of agricultural policy and the means used to attain them must
be evaluated.
OBJECTIVES OF AGRICULTURAL POLICY
In order to appraise alternative policies which may be used to solve
the problems of agriculture the basic objectives of agricultural policy
must be stated at the outset. Policies which may be used to achieve one
objective may prevent the attainment of another; only as various policies
are analyzed in the light of all the objectives can conflicts be clarified




OUR AGRICULTURAL POLICIES

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and those policies which supplement rather than negate one another be
selected. The broad objectives of agricultural policy may be divided into
those which apply to the economy as a whole and those which are more
specifically limited to agriculture. The general objectives to which agricultural and all other phases of economic policy must be directed are:
(1) An economic environment at home and abroad which will develop and maintain
a high level of production, employment, and purchasing power.
(2) International trade that will permit specialization and encourage the most efficient use of resources throughout the world, thereby raising the level of living at
home and abroad and laying the economic foundations for a lasting peace.

Objectives which apply more specifically to agriculture are as follows:
(3) Efficient production or such a combination of physical and human resources
that the largest possible quantities of goods and services are produced at the lowest
possible cost without exploiting either people or resources. This means balancing the
people and resources employed in agriculture with those employed in other parts of
the economy as well as attaining the optimum allocation within agriculture.
(4) An income from efficient farming which will allow farm families a level of living
consistent with a progressive economy.
(5) Elimination of exploitation of our soil and water resources through the widespread adoption of conservation measures.
(6) A reduction in, and sharing of, those risks which arise from fluctuations in
weather and prices, which make for short-run fluctuations in the production and income of the individual farmer, and over which he has no control. This includes the
maintenance of the stocks of nonperishable products needed for consumers' welfare in
such a way that they will not exert a depressing effect upon farm prices.

In addition to these purely economic objectives are certain other objectives, some of which are partly social. They include improved marketing facilities for agricultural products, greater security of farm tenure,
maintenance of family-sized farms, adequate medical care in rural areas,
and better recreational facilities. The importance and economic implications of these objectives are undeniable, but limitation of space prevents
any adequate discussion of them in this paper.
PRESENT AGRICULTURAL POLICIES
Present agricultural policies are the outgrowth of a long series of attempts to improve the economic condition of farmers after the First
World War. The McNary-Haugen Bill, passed and vetoed in 1927 and
again in 1928, sought to protect domestic agricultural prices from being
depressed by low prices on the world market. This result was to be
achieved through assuring a market for the domestic crop at the world
price plus the tariff and selling the export quantity at a loss. The weak-




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AGRICULTURAL ADJUSTMENT AND INCOME

nesses of the bill were tfcat by raising prices it tended to encourage production erd tr at it cculd be construed as damping by foreign nations.
The sutst'tute fsim legislaticn frally enacted was the Agricultural
Marketing Act of 1929. This Act established the Federal Farm Board to
assist in developing cooperative and orderly marketing and to purchase
surpluses that were depressing prices. The Smoot-Hawley Tariff Act of
1930 raised tariffs to unprecedented levels and undoubtedly made it
much more difficult for us to export our agricultural products by curtailing the imports which provided people in other countries with the
funds to buy our exports. The accumulation of ever-rising surpluses and
the pressure of supply en prices led to the financial collapse of the Board.
In 1933 the first Agricultural Adjustment Act was passed with provisions for establishing parity prices, adjustment of production, benefit
payments to cooperating farmers, processing taxes, and marketing agreements. This Act was partly invalidated on January 6, 1936 by the Supreme Court. In February 1936 the Soil Erosion Act of 1935 was amended
to form the Soil Conservation and Domestic Allotment Act; control over
acreages was again restored without the processing tax provisions. The
failure of these Acts to reduce agricultural production is indicated by the
fact that the index of physical production reached a new high point of
128 in 1937. Even in the case of cotton, favorable yields made the quantity produced that year (almost 19 million bales) the largest crop ever
harvested.
Continuation of these large surpluses led to the Agricultural Adjustment Act of 1938, with provisions for the regulation of interstate and
foreign ccrrmerce. The new features of this Act were the establishment
of marketing quotas, storage of crops associated with the idea of an evernormal granary, crop insurance for wheat, and price support loans to be
made by the Commodity Credit Corporation.
In an attempt to reverse the world trend toward economic nationalism,
Congress enacted the Reciprocal Trade Agreements Act in 1934 following
the devaluation of the dollar between 1933 and 1934. While the devaluation undoubtedly was an important factor in raising the price of cotton,
progress in lowering tariffs was too slow to offset the decline in world
trade and make other agricultural policies unnecessary. Actually there
existed a basic conflict between objectives. On the one hand Government
policies were directed toward expanding world trade, while on the other
they were directed toward raising domestic prices above the world level.
This basic conflict between domestic policy and foreign policy still exists




OUR AGRICULTURAL POLICIES

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and may be one of the most difficult problems to solve in the postwar
period.
Farm Credit agencies were expanded, the Farm Security Administration was developed, and the activities of the Soil Conservation Service
were intensified. These programs were mainly directed toward improving
the production facilities of farm families. The Federal Surplus Commodities Corporation bought up quantities of surplus commodities for distribution to relief families and the Government inaugurated the Food Stamp
Plan and School Lunch Program in order to enlarge the markets for farm
products as well as to improve diets.
The development of programs designed to aid agriculture has been exceedingly complex and further complications have been added by the
measures introduced to encourage an expansion of production during the
war. The most important legislation has been a series of acts which placed
new price floors under agricultural products and extended parity price
guarantees into the postwar period. Prices for cotton are guaranteed at
92^4 per cent of parity; and prices of tobacco, rice, peanuts, wheat, and
corn are guaranteed at 90 per cent of parity for two full years after January 1 of the year following the official termination of the war. In addition
to these so-called basic commodities there is a long list of "proclamation"
commodities on which price floors have been set to encourage increases
in production; these commodities, which include almost all major agricultural products, also have their prices guaranteed at 90 per cent of
parity for two full years after the war, provided funds are made available.
The Secretary of Agriculture is also authorized to support the prices of
other farm products if funds are available to do so. One of the major
problems of the postwar period is to solve the difficulties inherent in any
program committed to the support of rigid parity prices.
DIFFICULTIES INHERENT IN PARITY PRICE SUPPORT PROGRAMS
The disadvantages and difficulties of a system of price guarantees tied
to the parity base period may be summarized under four points.
Production Adjustments. Rigid parity prices prevent desirable production adjustments from occurring in response to changes in demand and
costs of production. Current costs of production vary greatly between
areas and even between farmers in the same area. For example, a recent
study by the Agricultural Experiment Station of Texas shows that the
costs of producing cotton lint vary from less than 4 cents to over 19 cents
a pound in that State. This reflects differences in the physical character-




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AGRICULTURAL ADJUSTMENT AND INCOME

istics of the land which determine the degree of mechanization possible.
A reduction in the demand for cotton which is met by percentage reductions of acreages with the price maintained on a parity basis simply
means that we are keeping high-cost areas in production and at the same
time cutting production in the lower cost areas. This is a misallocation of
resources and prevents basic adjustments in production from taking
place—all at the expense of consumers and often at the expense of depleting our soil resources.
The parity base period for many products goes back to 1909-14 prices
and therefore maintains the relationships between the prices of various
products that existed 30 years ago regardless of changes in the costs of
production. For example, the man-hours required to produce 100 bushels
of wheat were 89 in the 1909-13 period and only 41 in the 1934-36
period. The reduction of 50 per cent in the labor requirements has lowered the costs of production because the savings on labor costs greatly
exceed the increased machine costs. In the case of corn the introduction
of hybrid varieties has increased yields about 15 to 20 per cent with only
a small increase in costs. On the other hand, labor requirements and costs
of production for vegetables have gone up. The relative position of prices
as between products, therefore, should be kept flexible in order to reflect
changes in the relative costs of production.
If resources are to be used efficiently, production must be flexible between different products within agriculture and also between agriculture
and the rest of the economy. There is no absolute level of agricultural
production that is most desirable. The desirable level depends upon
whether we want an expensive diet or a cheap diet (assuming both are
equally nutritious) and people should be permitted to choose between
them; it also depends upon foreign demand and upon available alternative use of resources. At out present stage of technology it appears that
we have too many people in agriculture in relation to the number in other
services and productive enterprises. Within agriculture, adjustments between enterprises are also needed; for example, our production of oil
crops and cotton (in high-cost areas) may need to be reduced while the
production of milk, fruits, and fresh vegetables should be expanded. In
order to direct resources to their most efficient use it is essential that
price relations between different products be kept flexible over time.
Agricultural Exports. The maintenance of domestic prices on a parity
basis makes it difficult to export at world prices without appearing to
dump our surpluses on other nations. When subsidies on exports, as




OUR AGRICULTURAL POLICIES

IS

authorized by Congress in 1944, are interpreted as dumping by other
nations, they usually apply retaliatory measures which offset the benefits
we expected to attain. At the same time an atmosphere of antagonism is
created which may endanger other attempts to broaden and expand
world trade. In the past we have attempted to help agriculture by raising
domestic prices above world prices; this has made it impossible or dimcult to export and, to the extent that pricing our commodities out of the
market raised world prices, we encouraged the expansion of production
in other countries. Attempts to establish a two-price system lead to retaliation and strangulation of trade. In the case of cotton, our unilateral
action to raise domestic prices through loans and through production
controls stimulated cotton production abroad and improved the competitive position of synthetics at home. From 1933 to 1940 Agricultural
Adjustment Administration payments to cotton farmers amounted to
1.3 billion dollars, which was over 25 per cent of the value of the cotton
lint produced in this country during the period. If the price had been
allowed to remain low, high-cost cotton areas would have been forced to
change to the production of other crops. This adjustment would have
been slow and painful because of the high comparative advantage of
cotton in the past; it would have meant larger farms with fewer people
on the land and a diversified agriculture closely in line with conservation
needs. To some extent the AAA program helped this adjustment, but if
we had been willing to spend a billion dollars in adjusting the size of
farms, training people to handle a more diversified agriculture, and providing them with the capital necessary to do this, we might have moved
further toward a permanent solution of agriculture in the high-cost
cotton areas. The AAA has gradually assumed the character of an adjustment and conservation program with acreage allotments related to
soil conditions rather than to an historical base; this emphasis on physical
resources should continue and should be expanded in the postwar years.
The cotton problem has not been solved. Prices, supported by Commodity Credit Corporation purchases and loans, have risen rapidly since
1940 and reached 20 cents in 1943. The November 1944 parity price was
21.20 cents and efforts to raise cotton goods price ceilings so that cotton
lint will reach parity have been successful. After the war we will face the
same problem again; our domestic price will be well above the world
price. Brazilian cotton Type 5 at the Sao Paulo market averaged 0.53
cents above the American Middling 15-16 at New Orleans from 1923 to
1939. From December 1941 to July 1945 the American domestic price




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AGRICULTURAL ADJUSTMENT AND INCOME

has exceeded the Brazilian by from 6 to almost 12 cents per pound; a
number of countries have shifted their purchases from American to
Brazilian cotton partly because of relative prices and partly because of
shortages of dollar exchange. While the United States was reducing the
cotton acreage, Brazil almost tripled her acreage from the 1930-34
average of 2.4 million acres to 6.7 million in 1940.
Methods of Supporting Prices. Guarantees of parity prices can only be
made effective as funds are made available for price supporting purchases
or through other direct Government actions. If the quantity supplied at
the guaranteed price is larger than the market will absorb at that price,
the demand must be increased through subsidized consumption, or losses
through resale at a lower price must be sustained by a Government purchasing agency, or production must be curtailed through direct Government action. The maintenance of parity prices, therefore, makes essential
other programs to affect consumption and production; the desirability,
complexity, and effectiveness of these programs must be considered in
evaluating any rigid price support policy.
In the past we have attempted to control supply through imposing
controls over acreages and through quota allotments. Many claim that
we will have to follow this same policy in the postwar period. This, however, is not easy to do. Acreage controls in the past were effective in
shifting the acreages of various crops but not in reducing total production.
In the case of corn the average acreage from 1931 to 1933 was 108 million
acres and production averaged 2.6 billion bushels; for the three years,
1939 to 1941, the acreage under the AAA averaged only 87 million acres
but production still averaged 2.6 billion bushels. Essentially, therefore,
acreage controls only prevented an expansion of production between
these two periods. Production did not decline because hybrid corn and
improved rotations increased yields: they averaged 25 per cent higher
for the last five years when compared to the 10-year period 1923-32.
In the case of cotton the yield increases have been even more dramatic
and have averaged 50 per cent higher over the last five years compared
to the decade preceding the AAA.
Actually to curtail the production of any given crop requires a much
larger percentage cut in acreage than the desired percentage reduction
in output because the land taken out of production is the less productive
land. At the same time the increased use of grasses and legumes to replace
crops tends to increase both the yields of the controlled crop and the
output of the products of roughage consuming animals. As a result of




OUR AGRICULTURAL POLICIES

17

their fear of this tendency, for example, the dairy interests were successful in obtaining legislation designed to prevent any increase in the production of milk, which they felt might occur as the acreages of hay and
pasture increased; this part of the law, however, was never enforced.
Thus, when only a few basic crops were concerned, the AAA faced serious
difficulties in trying to curtail the production of individual commodities
even though there was no attempt to control total production. Also, the
Commodity Credit Corporation had, in the expectation of war, accumulated the equivalent of a full crop of cotton, half a crop of wheat, and a
quarter of a crop of corn by the autumn of 1941. Without the war much
larger reductions of acreages would have been needed to maintain the
loan rates and avoid the further accumulation of stocks above those
needed to insure a continuous supply for consumer needs.
If all the commodities, the prices of which are now guaranteed for two
years after the war, actually have their prices supported in the face of a
shrinking domestic and foreign demand, the difficulties of attempting to
curtail production will probably be much more serious than before the
war. Almost all agricultural products would be involved and an actual
reduction in total production would have to occur. Farmers do not like
to leave resources idle; if they reduce some crops they grow others. To
place quotas on all crops and livestock products would be extremely
complex and difficult to enforce because of possible shifts in land use
and feeding practices. Corn might be replaced by pasture and a quota
on the numbers of livestock might mean that the stock would then be
fed more grass and less corn and the pressure on corn prices would not
be relieved greatly. If quotas were placed on a product such as milk it
would be almost impossible to prevent shifts in feeding from concentrates
to roughage. Only by rigid quotas for all crops including pasture and
control over feeding practices could total production be reduced.
A further important problem may be the difficulty of maintaining participation in, and compliance with, production control programs. Unless
the price guaranteed is considerably above the market price, farmers may
find it more profitable to maintain production, and they may not approve
marketing quotas, particularly if the production costs fall as a result of
technological progress. Under these circumstances it would be difficult,
and certainly not desirable, for the Government to fulfill the present commitments to support prices. This will become a much more important
problem if the number of commodities brought under control is expanded
and alternative uses of land and labor become more and more restricted.




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AGRICULTURAL ADJUSTMENT AND INCOME

Rural Poverty and the Objectives of Policy. Supported parity prices
in conjunction with other programs have not been an effective means of
increasing the income and efficiency of production of low-income farmers.
AAA benefit payments flowed largely to the higher income farmers.
Even in 1942 the 50 per cent of the farmers in the lower income groups
received only 18 per cent of the total net cash income. These programs,
therefore, while beneficial to the farmers in proportion to their production in the short run, do not solve the basic problem of rural poverty.
As shown later, in "Low Income Groups in Southern Agriculture,"
quite different programs are needed to raise the productivity and incomes
of low-income farmers. However, to the extent that high prices are maintained and production quotas allocated to high-cost areas, the shock of
rapid economic adjustments is lessened. The danger is that a continuance of these programs may maintain inefficient production for too long
a time by making it seem less imperative that more constructive policies
be adopted.
Concerning the attainment of the basic objectives of agricultural policy
suggested in the previous section, we may say that parity price support
programs do not lead to an expansion of world trade nor to a higher level
of living for the low-income farmers; and they lead only indirectly to conservation and more efficient production in the commercial areas. Parity
price supports, on the other hand, do remove some risks of price fluctuations, and temporarily maintain farm income and purchasing power.
Essentially, postwar agricultural policies must aim at achieving more of
the desirable objectives and eliminating the conflicts which exist between
the present policies and the attainment of these ends.
POSTWAR POLICIES FOR AGRICULTURE

Full Employment. If the objectives of agricultural policy are to be
attained, the maintenance of a high level of national income and employment is essential. All agricultural groups and interests should support policies directed to this end. Other papers in this series deal with this
general problem and it is only mentioned here to emphasize its importance to agriculture. Full employment alone, however, will not solve all
of the problems of agriculture; it will only provide favorable conditions
for their solution.
Expansion of World Trade. Agriculture will emerge from the war with
an expanded over-all output above that required for our domestic needs
even at an improved level of domestic consumption. Exports of food




OUR AGRICULTURAL POLICIES

19

products have risen from 2.1 per cent of our total food production in
1940 (including that used in the farm home) to 10.4 per cent in 1943.
Imports of food, on the other hand, have been below the average for
1935-39 by 10 or more per cent every year since 1937 except in 1941.
Net exports have therefore been abnormally high since 1939. Nevertheless, per capita civilian food consumption in this country has remained
well above the 1935-39 average throughout the war period. After the
war several factors will make it desirable to expand our exports. Food
imports will increase, demobilized persons who return to less arduous
work will probably consume less food, other civilian goods will become
available, and people may decide to spend less of their income on food
and more on other goods. Even if we maintain or increase our present
level of civilian consumption of food, we must find foreign markets for
agricultural products if we are to have a high level of production and
avoid the accumulation of surpluses.
When particular commodities such as cotton, wheat, or lard are considered, the necessity of encouraging an expansion of world trade becomes
clear. Unilateral action has failed to solve the cotton problem (many
would argue that it has made it worse) and, since it is a world problem,
we should attempt to solve it through international cooperation as well
as national action. This would entail stabilization of the world price
through a world cotton agreement and positive national measures to develop more diversified agriculture in high-cost cotton areas.
The alternative to a two-price system is to accept world prices for our
export commodities and attempt to affect the world price by action along
the following lines:
(1) Initiate and support reciprocal reductions of tariffs.
(2) Cooperate with other nations in adjusting production to a lower tariff structure.
The adjustment may be particularly serious in the high-cost European grain areas and
our high-cost cotton areas.
(3) Develop and continue commodity agreements, in which both producing and
consuming nations participate, for those problem commodities where production adjustments must be made slowly if serious economic repercussions are to be avoided.
The most important agricultural commodities to which this action would apply are
wheat, cotton, coffee, sugar, and rubber. Such commodity agreements should be sufficiently flexible so that both prices and quotas can be varied each year to encourage
expansion of production in the low-cost areas and discourage it in the higher cost areas.
(4) In addition to these specific actions directed to expanding world trade, agricultural interests should support international actions to stabilize exchange rates and
stimulate capital investments.




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AGRICULTURAL ADJUSTMENT AND INCOME

Over the last two decades the value of our agricultural exports has
declined steadily; this decline has been associated with strong nationalistic policies and high tariffs. Only if we reverse this trend, and abolish
the fear of military aggression that inspired it, can we hope for a permanent expansion of international trade. Assurances of security are
essential and, after this, a high level of industrial prosperity at home
and abroad will be the most important factor in expanding both exports
and imports.
Soil and Water Conservation. The need for the adoption of conservation farming will be greater after the war than it was before. Our expansion of intertilled crops has occurred without the needed increase in
contouring, strip cropping, and terracing. We have drawn heavily on our
soil fertility during the war and in some areas soil erosion has increased.
In the past, conservation and production adjustment programs have overlapped; this has created a great deal of confusion and in many cases
"conservation payments'' have been concentrated in the areas where
they were least needed from a conservation point of view. Conservation
can be attained under a large variety of land-use patterns if different
practices are applied. The crop production pattern, therefore, should
vary in response to changes in demand and costs, and conservation plans
suitable to that crop pattern should be applied. A sloping field may safely
be used to grow a large amount of corn if it is terraced and strip cropped,
or it may be kept entirely in grass. Both uses conform to conservation
needs. I t is essential, therefore, that conservation be separated from
other aspects of agricultural planning. This may best be done by expanding the work in conservation districts under the State conservation district
laws and developing unified regional plans in areas where flood control,
irrigation, forestry, and conservation are interrelated. At the same time
the States should develop tenure legislation which will give greater security of occupancy of farms because insecurity of tenure is one of the
major factors making for exploitive agriculture.
Some enthusiasts have advocated large expenditures on conservation
to maintain employment in the event of a business recession. The field
of such expenditures, however, is limited to projects on which many
workers can be used efficiently. This eliminates one of the most important parts of conservation—the planning of individual farms. For
irrigation, drainage, reforestation, and flood-control projects the use of
unemployed manpower is desirable. In the field of soil conservation on
farms it may be limited to terracing and building retaining dams for




OUR AGRICULTURAL POLICIES

21

water storage and then only when this forms part of a complete plan for
each farm. Apart from large public works programs, therefore, expenditures on soil conservation will be relatively small and probably absorb
only a small quantity of local labor. If the AAA continues to make adjustment and conservation payments, the latter should be made on the
basis of the physical conservation needs of the land and not on an historical crop basis.
Maintenance of Adequate Diets. While measures to improve the diets
of the people of the United States are intended to improve health and
efficiency, they also have important implications for agriculture. The
National Food Allotment Plan introduced by Senator Aiken provides a
method of allocating sufficient food purchasing power to all low-income
families to enable them to obtain a low-cost adequate diet. The Food
Stamp Plan and School Lunch programs are of a similar nature. To the
extent that such programs can expand the total consumption of food
products they will lessen the danger of agricultural surpluses. Preliminary
estimates indicate, however, that if all families with incomes below $1,500
a year (under conditions of full employment) were provided with adequate diets, the products of only about 5 million acres of crop land would
be required. This would not be sufficient to absorb our increased production even when consumption in other income groups is at a high level.
If national income and employment decline, programs to maintain food
consumption will become increasingly important as measures to prevent
food surpluses from piling up while people are inadequately fed. Ideally
it would be better to have all people employed at wages sufficient to permit them to purchase an adequate diet; until that goal is reached, however, a national food allotment plan should have an important place in
agricultural policies. Any such program, however, should be directed at
improving the diet of low-income families and should not be used as a
means of disposing of surpluses or raising prices; these should be only
incidental results.
Alleviation of Rural Poverty. As was indicated previously, the high
farm income received during the war has not eliminated the problem of
low productivity and rural poverty in some agricultural groups and areas.
More resources and alternative uses for their labor must be made available
to the low-income groups. This calls for programs which will enlarge the
size of farms, train the people to operate them efficiently, make the
necessary capital available, and train those who will have to move out of
agriculture to be proficient in other occupations. This problem is discussed




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AGRICULTURAL ADJUSTMENT AND INCOME

fully by Mr. Rauber in his paper on low-income groups and is mentioned
here only because of its fundamental importance.
Crop Insurance. The development of crop insurance against climatic
and biological hazards aids agriculture by reducing the risks inherent in
farming. The program of crop insurance enacted by Congress early in
1945 lays the basis for experimentation in the coverage of many crops.
This program might well be expanded in the postwar period to develop
self-supporting systems for as many crops and regions as possible. This
will remove one of the most important causes of fluctuations in the incomes of individual farmers.
Storage of Nonperishable Products. Fluctuations in yields not only
create uncertainty for the individual farmer through varying the quantity
for sale, but they also cause fluctuations in prices; a bumper crop tends to
depress prices greatly and a short crop to raise them unduly. Insurance
of the individuals' crops removes only one aspect of risk; the risk of low
prices in a good year still remains.
This risk may be reduced in the case of nonperishable products through
a Government program of purchase during periods of low prices with
large crops and sale during periods of high prices and short crops. This
would benefit both producers and consumers. Such a program, however,
can be used to bolster prices and create even a larger carry-over, which
tends to defeat the purpose of the program. This is particularly true when
the purchase program is used to support parity price programs.
In order to avoid this it appears essential that Congress establish regulations regarding storage activities. These might include the following
points:
(1) A "normal" carry-over should be established for each product.
(2) Whenever the amount in storage exceeds the normal by say 10 per cent, it
should be mandatory for the Government authority to reduce its stocks.
(3) Whenever there is a short crop the Government should release stocks in order
to prevent rapid price increases.
(4) When the amount in storage is below normal the Government should purchase
stocks unless production is low and prices high.

Discretion in applying these principles is necessary. For example, the
United States experienced severe drought conditions in 1934 and again
in 1936; the amount in storage could not easily have been raised to normal
in 1935, which was the year in which there was a shortage of feeds. Flexibility in applying these principles over a period of years, therefore, is
essential.




OUR AGRICULTURAL POLICIES

23

Other Policies, In addition to the measures listed above, there should
be provisions for more efficient marketing of farm products, for an adequate system of agricultural credit, and for measures to prevent any
further inflation of land values. Government agencies are already established to improve marketing and provide credit but little has been done
to control the rapid rise in land values. This latter problem is discussed
by Mr. Fisher in a separate paper dealing with the implications of an
inflation of land values to postwar conversion problems.
None of the programs discussed above would introduce rigidities between the prices of farm products or place a floor under farm income;
they leave the farmer with no protection against a catastrophic fall in
prices and income in the event of a business depression. The United States
Department of Agriculture, in What Peace Can Mean to the American
Farmery indicates that in 1950 the index of all farm prices would be almost at parity provided that there was a national income of 150 billions
of dollars, that there was a market for the estimated quantity of exports,
and that production did not exceed the amount calculated. The study
also assumed that no Government controls over prices or production
were in operation. If this nation, therefore, could maintain a high level
of employment and purchasing power, the problem of maintaining a
high level of agricultural income would appear to be greatly reduced.
Long-run adjustments involving larger farms and a smaller farm population would be stimulated because alternative jobs would be available;
flexibility between the prices of farm products could be maintained and
prices would direct production in response to changes in demands and
costs; and, at the same time, total agricultural income would be maintained if the optimistic relationships reported above actually prevailed.
This essentially would meet the long-run objectives of agricultural
policy and the programs outlined above would all facilitate this end. It
is certain that farmers would not wish to relinquish their present parity
price guarantees unless an acceptable method of supporting income in
the event of a business recession were offered. The crux of the problem
of price and income policy, therefore, is to develop a program which will
restore flexibility between prices and yet provide assurances that farm
income will not again be allowed to collapse. To attain this end several
modifications of the present system of parity price supports have been
suggested; alternative systems which relinquish parity prices altogether
have also been proposed. These alternatives and some of their implications are discussed in the next section.




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AGRICULTURAL ADJUSTMENT AND INCOME

POLICIES TO MAINTAIN AGRICULTURAL INCOME

Freedom versus Control. There are many persons who advocate a return to a completely free market price structure; even in a depression
they would not support the prices of the basic necessities of life. The
arguments favoring this point of view may be summarized as follows:
(1) Low-income families, both urban and rural, who do not have a sufficient quantity of these necessities, will be better able to purchase them and thereby raise their
level of living and improve their diet.
(2) Because the demand for necessities is relatively inelastic, a lower price is not
fully offset by increased consumption, and purchasing power is set free to buy other
goods (largely manufactured products); this stimulates employment and investment,
and creates additional purchasing power. This might lead to an upward swing in the
business cycle which would more than offset the loss of income resulting from the
decline in prices.
(3) Lower prices will cause production to adjust by moving resources into other
enterprises which will give higher returns.
(4) Exports will be increased and the benefits of low-cost production will be spread
to other countries.
(5) The elimination of Government price controls permits the free play of competitive forces and moves the economy from one of Government control to one of
free enterprise.

Opposed to those who advocate a free market are those who wish to
retain Government support of parity prices and production controls.
The arguments supporting this opinion may also be briefly summlrized
in parallel statements:
(1) Low-income families should have their consumption increased by higher incomes and not through the impoverishment of agriculture.
(2) Cutting the income of the producers of basic necessities curtails their purchasing power and brings an added downward pressure on the business cycle. Because
there may be a lag before lower producers' prices are passed on to consumers, the
initial impact will be to reduce the purchasing power of producers and increase the
middlemen's margins of profit and probably savings. While it may be desirable to have
lower prices for food products in a depression, this may be achieved by other means
than by allowing prices to producers to fall. If the prices of manufactured goods fall
together with wages, then agricultural prices should fall proportionately.
(3) Agriculture does not contract its production very greatly even in response to
catastrophic falls in prices. The maintenance of production is a great social benefit
and producers should not suffer because of it. In a depression there is no alternative
use for agricultural resources and the problem should be attacked through increasing
industrial employment.
(4) Lower prices might stimulate exports but a sudden fall in prices would disorganize both the domestic and the world market. To avoid this, production and price
changes should be spread over time through cooperative international action.




OUR AGRICULTURAL POLICIES

25

(5) Competitive forces play an important part in determining agricultural prices
but industrial prices are more rigid and production fluctuates more in industry than
in agriculture. The competitive nature of agriculture leaves it at a grave disadvantage
in an economy where industrial production is subject to rigidities. The alternative to
maintaining Government controls in agriculture is to introduce flexibility in industrial
wages, to renovate the patent laws, and to modify our corporation law and our policy
toward corporations with a view to preventing monopoly practices, and to eliminate
all tariffs.

These opposing positions are fundamentally based upon different concepts as to the type of economy we have and should develop. The first
assumes that we have and can perpetuate a competitive economy. The
second assumes that we do not have and cannot develop a competitive
economy that will function effectively in the industrial segment of our
economy and, therefore, extensive Government action is necessary. The
challenge to industry and labor to give up all forms of protection is not
based on any hope or expectation that this will be done; it is used purely
as a form of justification for the maintenance of rigid controls in agriculture. It is outside the scope of this paper to discuss the validity of
these two assumptions but the ability of private enterprise, in the absence of extensive Government controls, to maintain employment and a
high level of productivity in the postwar period will probably determine
the trend we will follow.
The validity of many of the claims and arguments on both sides cannot
be evaluated by objective measurements and any theoretical analysis
depends upon the assumptions made regarding the framework in which it
is developed. If we assume that the export and domestic demand is not
sufficient to maintain farm prices or incomes near parity levels with
present expanded production, it is quite probable that farmers will demand support of prices and that the necessary measures and funds will
be provided by Congress. The basic problem of agricultural policy, therefore, is to develop a practical program which will support farm income
without resulting in curtailed consumption or a misallocation of resources
such as may occur under the present rigid parity price formula.
In seeking a practical solution, we cannot ignore the institutional and
political framework if the analysis is to have more than academic significance. At present it seems very unlikely that all countries will abandon
national programs designed to protect or assist their farm people. The
recent agreement in which Great Britain guarantees to purchase all the
agricultural export products of New Zealand for a four-year period at
prices determined for two years in advance is indicative of the kind of




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AGRICULTURAL ADJUSTMENT AND INCOME

world in which we will have to operate. This agreement reflects two basic
factors—the need of New Zealand for an assured export market for her
products and the shortage of foreign exchange in Great Britain. In the
case of Russia, international trade will be completely controlled by the
State and there can be no "free" market as we understand the term.
When we turn to Western Europe it seems highly improbable that the
high-cost grain producers will immediately relinquish their protected
market because it will take considerable time to change old established
production patterns; no matter how desirable the change may be, it may
only occur gradually unless drastic changes are made in the early postwar
period.
One of the most important political factors in this country is the
farmer's attitude toward parity prices. To him they have become what
wage rates are to labor. Farmers have associated with "parity" the concepts of "fair" and "reasonable"; they do not think of support measures
as a subsidy, no matter what form they take, any more than protected
producers think of the tariff as a subsidy. On the other hand, subsidies
or subsidy payments are not welcomed because these have the connotations of relief. At the same time the farmer believes that prices determine
his income and that supported parity prices have been of benefit in the
past.
A second important factor is the rather general antagonism in Congress
to delegating the authority to make administrative decisions, especially
when these may affect the incomes of large numbers of their constituents.
Historically, the representatives of agricultural interests have always
opposed revisions of the parity price formula which would lower prices;
and they have supported revisions which would raise them. At the same
time they have reduced the range of administrative decisions until almost none is left in the determination of support prices.
These factors appear to rule out the possibility of this country's returning to a free market; it also appears unlikely that a complete delegation of price determining powers to a board, as in New Zealand, will
be acceptable. On the other hand, an attempt to maintain rigid parity
prices through Government purchases and production controls may be
so costly, because of the impossibility or extreme difficulty of reducing
production, that the program will have to be modified to prevent collapse.
The cost of any price support program is a function of the prices supported, the control of production that is possible, and the demand situation. If production is maintained at its present high level and a business




OUR AGRICULTURAL POLICIES

27

recession occurs, the spread between market prices and support prices
may become very wide. The cost of maintaining farm income will then
become very large and the difficulty of disposing of accumulating stocks
and supplies will increase. Thus as the need to maintain farm income
increased, the cost and difficulty of doing it would also increase, and the
necessity of more flexibility than exists under the present laws would
become greater.
Modified Programs to Support Parity Prices or Income. Several programs that effect a compromise between free market prices and rigid
parity prices have been suggested. These may be briefly summarized as
follows:
(1) Guarantee to farmers a "parity income" for agriculture. This means
retaining the same relationship between the net per capita income of
persons on farms and persons not on farms that existed during a given
base period. The fact that farm income is the result of the quantity produced as well as the price is basic to this concept. As production increases,
prices may fall and parity income can still be maintained. Similarly, a
reduction in the number of people on farms with constant production
would also permit lower prices, while an increase in the incomes of persons not on farms would raise the amount of income that should flow to
agriculture to maintain parity. Since the concept applies to net income,
the costs of production are deducted and as costs fall, then prices could
also fall while parity income would be maintained. Since parity income,
according to this definition, is an aggregate magnitude, the prices between products could be varied freely. The main criticism of this proposal
is the extreme difficulty of developing a practical program of action to
implement it.
(2) Another method of maintaining parity income has been suggested
which requires that basic quantities of each crop be established and the
difference between the market price and the parity price be paid to all
producers on this quantity. Thus all products would sell at free market
prices and parity payments would be made only on the base quantity.
This would limit the quantity on which payments would be made without
restricting production. It would allow prices to reach a competitive level
and clear the market so that more than the required carry-over would
not be stored. Several alternative methods of determining the base quantity have been suggested but these are too detailed to be discussed here.
Like all two-price systems this could be interpreted as dumping by other
countries and retaliatory measures might be applied.




28

AGRICULTURAL ADJUSTMENT AND INCOME

(3) A third method suggested is to establish a minimum income base
for each commodity; this would represent the income that would result
from selling the quantity the market would absorb at parity prices. This
minimum income would be guaranteed and production controls removed.
If more of a commodity were produced than could be sold at parity prices,
market prices would be allowed to fall to the point where the quantity
produced multiplied by the price would give parity income. The advantages of this system are that it would permit adjustments in both
prices and production in line with changes in costs and demand. A major
disadvantage is that the final level of prices cannot be determined until
production is known; over the years, however, more accurate forecasts
and fairly stable price relationships could develop.
Both the second and third approaches limit parity price supports to
the quantity that would be sold at that price. Thus they escape the
dilemma of either having to enforce rigid production controls or to purchase the quantities which could not be sold on the market.
(4) A simpler compromise would be to provide much greater flexibility
in the law designating the parity loan rate for each commodity; this was
achieved in the original Agricultural Adjustment Act of 1933 which set
no limits on loan rates and merely authorized the Secretary of Agriculture
to support agricultural prices. In the 1938 Act the loan rate on wheat,
cotton, and corn was specified at between 52 and 75 per cent of parity;
in 1941 the single rate of 85 per cent was used and a single rate at higher
levels has been maintained ever since. This completely removes the possibility of making the needed adjustments between commodity prices
and a return to a range of 60 to 110 per cent of parity for specific commodities would be a great improvement in the present law.
A System of Forward Price Floors. The suggested alternatives presented in the previous section may all be criticized because they either
retain elements of rigidity inherent in any support of parity prices or
they develop exceedingly complex methods of circumventing it. These
difficulties may be overcome by continuing the system of forward price
floors initiated during the war with the support prices separated from any
relationship to parity.
To do this Congress would have to enact legislation appointing an
Agricultural Price Board with authority to establish price floors extending over one production period (a year in the case of most products) for
agricultural commodities. Such price floors would assure the farmer that
prices would not collapse during a production period and he could plan




OUR AGRICULTURAL POLICIES

29

his production knowing what the relative prices of various products
would be. This would encourage better production planning and remove
a major uncertainty.
The basic objective of the Board would be to establish price floors at
such a level that supply and demand would balance at that price. In
order to attain this end and avoid pressure from special interest groups,
Congress could establish a series of regulations which would limit the
freedom of action of the Board. The following standards are suggested
as being essential if the basic objective is to be attained:
(1) The price floor for export commodities should not exceed the world price expected to prevail over the next year.
(2) When a storage program for nonperishable commodities is in operation, the
Board should lower the price floor of any commodity when the carry-over exceeds the
established "normal" by 10 per cent. When the carry-over is below normal by 10
per cent the Board should raise the price floor for the following season.
(3) In the case of perishable commodities it should be mandatory for the Board to
lower the price floor when the Government had been forced to purchase a commodity
on the open market and dispose of the product at a loss.
(4) When the market price of a commodity exceeds the price floor by 10 per cent
the price floor for the following season should be raised.

To make such a system of forward price floors effective the Board
should have the authority to authorize the Commodity Credit Corporation
to purchase any commodity on the open market and store it or dispose
of it through resale at a loss. Since such actions would have to be followed by a lower price floor the next year the program could not be used
to maintain prices and the cost would not become excessive either for
perishable or nonperishable products.
Such a system of forward price floors appears preferable to any system
of modified parity price supports because it allows complete flexibility
between prices over the long run but removes the fear of a sudden drop
in prices during a production period. A further advantage of this system
is that it can be easily modified in such a way as to maintain agricultural
prices and income in a depression without introducing rigidities which
might again become entrenched and difficult to remove.
A Method of Supporting Agricultural Income. Any method of supporting agricultural income during a depression should conform to the
following general principles:
(1) It should prevent agriculture from bearing more than its share of the burden
of the depression.




30

AGRICULTUEAL ADJUSTMENT AND INCOME

(2) It should return the income to the farmers through the prices received for the
commodities produced.
(3) It should retain flexibility between the prices of various products and not lay
the foundations for postwar rigidities.
(4) It should be simple to operate and automatic in its application so that no declaration as to when it should be applied is required.
(5) It should permit lower prices to consumers and not restrict production.
(6) It should be financed in such a way that total purchasing power is increased
rather than curtailed.

If a system of forward price floors is in operation these principles can
all be attained through a Congressional mandate to the Price Board to
control the rate of decline in prices over a period of years. It is suggested,
therefore, that the regulations established by Congress direct the Board
not to permit within one year a decline in the price of any commodity
greater than 20 per cent of the average price of the preceding three years.
In the event of a business recession, prices could decline to 80 per cent
of the pre-depression level during the first year; in the second year they
could be at 74 per cent, and in the third year they could be 68 per cent.
It would take five years of depression before prices reached 54 per cent
of the pre-depression level. It is unlikely that any future business recession will be permitted to last for more than two or three years and,
if it did, Congress could authorize the Board to prevent further declines
in the prices of agricultural products.
Between 1920 and 1921 the index of prices received by farmers fell
from 211 to 124 or over 40 per cent in one year. From 149 in 1929 the
index again fell rapidly to 68 in 1932; this was a decline of about 55 per
cent in three years. If the system of control suggested here had been in
force the initial postwar decline from 1920 to 1921 would have been only
20 per cent, and from 1929 to 1932 prices would have fallen only 32 per
cent.
To make such a system effective the prices paid to farmers would have
to be supported through purchases by the Commodity Credit Corporation; the commodities could then be sold on the open market at a loss.
The annual deficits could be financed by Congress through measures
which would be part of the national policy to maintain or expand purchasing power; at the same time lower prices for food and raw materials
would reduce consumer expenditures for these items and permit an expansion of expenditures for nonagricultural products.
The conflict of opinions regarding agricultural price policies can only
be resolved by accepting some form of compromise between a^completely




OUR AGRICULTURAL POLICIES

31

free market system and the present system of rigid prices related to parity.
From the long-run point of view, the prices of farm products must be
made flexible in relationship to each other, in order that agriculture will
adjust its production pattern to make full use of modern technology.
On the other hand the violent short-run fluctuations in farm income must
be moderated for the welfare of both agriculture and the rest of the
economy. The fundamental issue is not whether Government programs
are needed, but whether the programs followed create rigidities which
prevent long-run adjustments from taking place, or whether they restore
the necessary flexibility without leaving farm income subject to the
violent fluctuations of the past. The policies presented here suggest means
through which these long- and short-run objectives may be harmonized.




FARM LAND VALUES AND RECONSTRUCTION
by
WILLIAM H. FISHER
Research Department, Federal Reserve Bank of Richmond
In the postwar period agriculture needs to adjust the pattern of production if it is to make full use of technological progress. In many areas
the size of farms needs to be enlarged and inflated land values will act
as a barrier to this adjustment. The pressures leading to inflation of land
values and the methods of combating them are, therefore, major factors
that must be considered in the development of postwar agricultural
policies.
*
SUMMARY
All signs at the present (mid-year 1945) point to the rapid rise of farm
land values for one or two years after the end of the war. Although this
rise may not reach levels attained in 1920, there is no assurance of this
fact, and there are many factors in the market which easily could lead to
a repetition of that earlier boom. So far during World War I I the financial
position of farmers has been far sounder than at comparable periods of
the last war. Mortgage debt has been reduced to a new low point, the
formation of new debt has been below the World War I rate, and farmers
have accumulated record holdings of liquid assets. There has, however,
been an upswing in the formation of new debt, whether judged by total
volume or the size of individual mortgages; speculative activities in the
land markets are increasing; and the delayed demands of servicemen
(with their easier access to mortgage credit) are beginning to be felt.
An inflation of land values can have serious repercussions on all phases
of the economy and, especially if accompanied by a high level of farm
debt, can seriously penalize the agricultural segment. Not only would
such an inflation make the task of maintaining stability in the transition
period much more difficult, but it would also seriously hinder any attempt
to restore long-run prosperity to agriculture.
In some parts of the United States, particularly the cash crop regions
of the South, prices of land have been related to the prices of certain
high-cash-value crops for which future prospects are not very bright.
In these regions, the dangers of a land boom are increased by the fact
that its occurrence can result only in a prolongation of already serious
maladjustments.




32

FARM LAND VALUES AND RECONSTRUCTION

33

The ideal approach to the control of a potential land boom would be
one which simultaneously reduced the number of prospective buyers,
eliminated speculatively motivated purchases, and cut down on the supply of disposable liquid funds. In its perfection such a plan would be completely integrated with the controls applying to the rest of the economy,
so that pressures turned away from one market would not be directed
into another. At the present stage a perfect control is impossible; time is
not available for working out all the interrelationships which should be
observed.
There are, however, certain controls which if applied would do much
to prevent further increases in land values. These may be summarized as
education, taxation, capital gains taxes, credit controls, and permit systems. It is doubtful if any one can be effective under present conditions,
and a combination of education with some form of a capital gains tax
and credit control appears to be the minimum required to reduce the
dangers of a serious inflation of land values.
FARM LAND VALUES IN THE NATIONAL ECONOMY

In order to evaluate the current farm real estate market, it is necessary
to understand the part played by farm land values in both the wartime
and the peacetime economy. Generally speaking, both these relationships
grow out of the importance of farm land as a factor of total national production. Agriculture provides the raw materials for most of the food and
fibre industries of the nation and for many lesser processes which aggregate to an important proportion of the total economy. Thus, land enters
into almost every supply process, and the farm population constitutes
one of the most important segments of the nation's labor force.
Land in the Total Economy. The fertility and value of farm land together comprise one of the most crucial portions of national capital.
Land is the basic capital to agriculture, and like any other capital item
its value influences national wealth and the distribution of national income. While land values reflect prices and net returns over the long run,
the price of land is an apparent cost to the farmer, since it is reflected in
payments on mortgage indebtedness and taxes. When a farmer buys land
on a mortgage at a high value his payments will be high; to him this is a
fixed cost of production which justifies pressure for high prices. It is these
interrelationships of land values which make them a crucial problem in
our economy during both peace and war.
Where farm land is monopolized and farmers cannot readily move to




34

AGRICULTURAL ADJUSTMENT AND INCOME

other jobs, the returns from agriculture can be diverted largely to the
landowners, thereby pushing the tenants' incomes down to a low level.
In the United States this danger is met to some degree by widespread
individual ownership of land, and in England and some other European
countries it has been met through legislation controlling rents and giving
tenants added security of tenure.
Rents and land values also reflect the social and economic conditions
of an area. Where there is a dense rural population with few alternative
employment opportunities, rents and values tend to be high relative to
the farm level of living; where industrialization offers alternative jobs at
good wages, farmers demand a higher level of living, and a smaller proportion of net agricultural returns is available to pay rent and to support
high land values. The opening up of alternative opportunities, therefore,
may increase the bargaining power of tenants and profoundly affect rents
and land values, even with no change in prices.
Finally, land is an important part of the total base for alteration of the
money supply through credit operations and for the financing of Government services through real property taxes. Thus, when sudden changes
take place in the value of land, the inflationary or deflationary effects
may continue to be felt long after the original situation has disappeared.
In their effects on the tax structure, land values have similarly profound
and long-delayed consequences. High values established during a land
boom tend to become the basis for long-term assessments. Although these
high tax assessments may temporarily benefit the Government, they tend
to perpetuate improper land uses and, with high mortgage indebtedness,
may cause the loss of many farms through foreclosure or seizure for taxes.
Land and the War Economy. In addition to their general economic
influences, land values have further effects on the nation's wartime
economy. War is an economic stimulant. High levels of employment,
higher incomes, and almost insatiable demands for every type of product
combine to produce inflationary pressures. If not curbed, the economic
optimism and the cumulative forces of inflation thereby engendered may
sweep the economy into an inflationary spiral. Land values play an important part in this sequence, and profoundly influence both efforts to
control the wartime situation and subsequent readjustments to peacetime relationships. With relatively few exceptions it can be said that
inflationary tendencies anywhere within the economy stimulate inflation
elsewhere. During a war rapid increases in retail prices cause land values
and rents to rise after an initial lag; and these in turn result in increasing




FARM LAND VALUES AND RECONSTRUCTION

35

fixed costs of production which, to the individual producers, justify even
higher retail prices. This mutual reinforcement can continue indefinitely
until curbed by Government intervention or the final "bursting of the
bubble."
At the same time, the higher values of farm land increase the amounts
of credit which can be extended upon its security. To the degree to which
this potential expansion of the money supply materializes, the owners of
farm land are able to bid up the prices of scarce goods and services even
further. Thus, farm land values are similar to other capital values in their
tendency either to reinforce inflationary pressures arising in other parts
of the economy or to set up inflationary forces and transmit them to the
rest of the economy.
Even since the outbreak of the war, the Federal Government has
attempted to restrain inflation. This program of economic stabilization
has been an integral part of the war effort, since it had an important
influence upon both the cost of the war and the ease with which necessary
materials could be procured. In addition, the more completely inflation
could be held in check, the easier would be the postwar transition to peace.
Hitherto, no direct effort has been made to control the values of many
important capital items. Some forms of producers' capital (particularly
the costs of new factories and machinery directly involved in war production) have been controlled; but the values of land, standing buildings,
and share capital, to name some of the most important items, have not.
Land Values and Postwar Adjustments. During the transition period
the level of land values can profoundly influence the ease with which
this country returns to a more normal long-run economy. Generally
speaking, these influences will be felt most keenly by agriculture, but they
will have definite indirect effects on the entire economy.
High land values will be looked upon as a fixed cost, especially by those
who have purchased land on a mortgage, and this will increase the pressure of farm groups to have postwar prices supported at a high level. If
prices decline, as seems inevitable, fixed payments on mortgages will take
a much larger proportion of the smaller net income, and the farm family
will be forced to lower its level of living or to lose both the farm and its
accumulated savings.
During wartime, scarcities of fertilizers and farm equipment usually
prevent the maintenance or restoration of land fertility and farm capital
other than land; consequently a considerable part of the abnormal incomes received from the sale of farm products represents the value of




36

AGRICULTURAL ADJUSTMENT AND INCOME

"wear and tear" on productive capital. If this part of farm income is not
placed in reserve against the future restoration of capital but is spent in
the acquisition of high-priced land, it implies the permanent depletion of
the total stock of farm productive capital. After the period of wartime
flush prices is past, there is seldom opportunity to "plow back" this
capital out of current income.
Finally, in those regions, especially in the Southeast, where present
agricultural production is disproportionately centered on the intensive
cultivation of cash crops, high land values will hinder the necessary shift
to more extensive farm enterprises. For example, there are large marginal
and submarginal areas of the cotton and tobacco South at present characterized by small farm units. The production of these two crops should
be reduced and more of the land returned to grass or forests; at the same
time farms should be consolidated into larger units. 1 If these lands are
saddled with high values, such adjustments will be much more difficult
to attain.
COMPARISON OF WORLD WARS I AND II

Basic Differences. One of the most important differences between the
two wars is duration. World War I lasted four years, with the United
States involved for only 18 months. In contrast, World War I I has gone
on for five years, and this country has been an active belligerent for
more than three. Thus, during the latter conflict much stronger inflationary forces have been engendered and have had much longer to make
themselves felt. If the nation's economy during this war had been as
uncontrolled as in the former, the forces of inflation probably would have
already reached unmanageable proportions.
Again, during the first war this country's contribution took place over
such a short period that there were few occasions for manpower and
capital to be greatly restricted, and shortages of farm labor and equipment had little dampening influence upon agricultural optimism. During
World War II, on the other hand, rather acute shortages in these two
factors have made it increasingly difficult for farmers to profit fully from
rising prices; and their land purchases have been moderated by this deterrent.
The efforts which have been made to control inflation during World
War I I stand out in sharp contrast with those of the first. I t is inevitable
1
For an example of such a program, see the testimony of former Secretary of Agriculture
Wickard at the Cotton Conference (Cotton: Hearings before the Subcommittee of the House
Committee on Agriculture, Dec. 4, 1944, pp. 94-102).




FARM LAND VALUES AND RECONSTRUCTION

37

that the educational and restrictive activities of agencies (both public
and private) should make people more aware of the dangers of inflation
and temper the activity even of uncontrolled markets. Another outstanding difference between the two wars is found in the greater promotional
effort now given to the sale of Government bonds. This has brought about
a sizeable flow of purchasing power into assets which may prove somewhat less liquid than others, especially if patriotic holding continues.
Any reduction in average liquidity tends to reduce proportionately the
danger of inflation and to retard the rise of all commodity prices.
During World War II, the psychological aspects of these factors were
modified profoundly by memories of the boom and collapse following the
last war. This is particularly true of the older generation, in whose minds
the effects of the land boom are painfully clear, and of the sections of the
country (the North Central area, especially) in which the highest rises
occurred at that time.
Prewar Land Values. At the time World War I began, land values in
this country had been advancing for more than a quarter of a century.
Agricultural prices and incomes were going up; most of our tillable land
had been settled while the demand for farms still increased; and there
was no sign of any slow-down in the rate of increase of population or of
demand for agricultural products. It is likely that by 1914 farm lands
were already somewhat over-valued in terms of their longer run earning
capacity. Against such a background the wartime rise of land values was
looked on as a normal development. The disillusionment which followed
1920 was all the more severe because of its unexpectedness.
For the nation as a whole, farm values before the recent war tended to
be stable at a level below the 1912-14 level. In only 12 States did the
1935-39 average equal or exceed 1912-14; none of these were interior
States, and most were situated along the Atlantic seaboard.2 For the rest
of the country there was a considerable margin through which values
could rise before reaching previous wartime levels. Furthermore, in 1939
both the farm population and the Government were well aware of the
seamy side of high farm land values.
Farm Prices and Incomes. Prices received by farmers for their produce
have not risen as high during this war as they did during the last war,
but they have risen about as rapidly. The major price rise occurred before 1943, as indicated by the chart on page 38, but the movement is
2
These States were: Vermont, Massachusetts, Rhode Island, Connecticut, New Jerse>,
Maryland, Virginia, North Carolina, Florida, Alabama, Louisiana, and California.




38

AGRICULTURAL ADJUSTMENT AND INCOME

still upward. When the higher level of Government payments and the
greater volume of production are considered, it is easy to see why cash
AGRICULTURAL PRODUCTION, PRICES, AND INCOME,
UNITED STATES, 1910-44
INDEX NUMBERS ( 1 9 1 0 - 1 4 * 1 0 0 )

50

I I IM 1 I I II1M
1910

1915

1920

I 1 1 I I I I 1 IIII II I I I 1 IM
1925

^EXCLUDING GOVERNMENT PAYMENTS

1930

1935

1940

I 1
1945

DATA FOR 1944 ARE TENTATIVE ESTIMATES

NOTE. This chart and the one on p. 39 were provided by the Bureau of Agricultural Economics of the United States Department of Agriculture.

farm incomes (both gross and net) have exceeded those of any previous
period. Furthermore, the farm population has been reduced to its lowest
recent level, making per capita farm incomes also the highest on record.
The Farm Real Estate Market. Beginning at approximately the same
relative levels, farm land values rose very slightly during the first two
years of both wars, as indicated by the chart on page 39. During the
second two-year period rapid upswings occurred in both instances. The
fifth year (1919 and 1944 respectively) brought the two relative values
almost exactly together after a total rise of almost 40 per cent over the
prewar levels. Although World War I had ended the year before, the rise
continued into 1919 to reach a peak almost 70 per cent above prewar. In
World War II, on the other hand, the war was at its greatest intensity
in 1944. As of March 1, 1945, land values were 52 per cent above prewar.
But, should the general pattern of the last war be repeated, the greatest
price rise may still be in the future. By 1944, values in four States had




39

FARM LAND VALUES AND RECONSTRUCTION

reached or passed 1920 levels, the number doubling by 1945.3 During
World War I, the central wheat area was the region of greatest inflation.
At present this is one of the sections of the country where land values
have risen less rapidly. Activity has been centered in other areas, particularly the Southeast.
The depression of the 1930's with its large volume of foreclosures forced
a large number of farms into the hands of unwilling institutional owners,
FARM REAL ESTATE: COMPARISON OF INDICES OF AVERAGE VALUE
PER ACRE, 1910-34 (1912-14 = 100) AND 1935-45 (1935-39 = 100)
PER CENT

J

160

t f
i j
i/
ft

140

193 5-45
r

\

/

-

-|

\

1910-34
(1912-14--100}

^ / /

(1935-:39-100)

\

>i/

-

<

/ /
* /

120

h
100

80

60

\
V

f?^
I 1 I i 1
1935
1910

\

\

1940
1915

\

i

i

. !

1945
1920

1. 1 1

i

1950
1925

i

i

r

i
1955
1930

%
%
%
\
i

~

i i

a circumstance which has restrained the rise of farm land values during
World War II. No such restraint existed before the depression. Much of
the slowness of the rise in land values during the first years of the war
may be ascribed to the fortunate, but fortuitous, presence of this abnormal supply. By 1943, however, most of these holdings had been liquidated, and their prior existence can have no effect on current or future
value movements.
The volume of farm sales during the first war reached its peak in 1919,
but this level was exceeded in 1943 when over 300,000 farms changed
hands. The all-time high rate of transfer (about 6 per cent of the entire
3
States in which 1944 land values equaled or exceeded 1920 were: Rhode Island, Connecticut, New Jersey, and California. In addition, preliminary 1945 values were above 1920
in North Carolina, Florida, Alabama, and Oregon. Compare with footnote 2, p. 37. All comparisons are as of March 1.




40

AGRICULTURAL ADJUSTMENT AND INCOME

country's farms) occurred during the year ending March 15, 1944. I t is
noteworthy that the highest rates of transfer during the present conflict
are not taking place in those sections of the country where the greatest
inflation previously occurred.
Between L914 and 1920, farm buyers borrowed heavily to finance their
purchases, causing agriculture to enter the interwar period burdened with
the heaviest and most disastrous mortgage debt in our history. Since that
time, the debt has been reduced greatly, by foreclosure in the early 1930's,
and since then by repayment. This war has seen nothing like the rate of
debt formation accompanying the last war: a much larger proportion of
farms have been bought for cash, and more substantial down payments
have been made on those for which credit is being extended. This means
a much stronger financial position for farmers at the end of the war this
time than was possible before.
Conclusions. The farm real estate market during World War I I has
not been characterized by a number of conditions which prevailed during
the last war. Speculators have been less active; the supply of farms was
relatively greater during the first part of the war; and credit has played
a lesser part In the financing of farm land purchases. Further, land buyers
have had the discouraging memories of the last boom to temper their
optimism. On the other hand, this war has lasted longer than the last
one; farm incomes have been higher, as have farmer holdings of liquid
assets; the la ad market has been even more active; land prices have risen
almost as rapidly; and the postwar spurt in demand and values has yet
to begin. I t would be dangerous then to consider the threat of inflation
past. Although conditions are different, they are still ominous in many
respects, as the next section will show.
CURRENT FORCES AND FUTURE DEVELOPMENTS IN THE
FARM LAND MARKET
Present supply-demand relationships are by no means the only forces
which are being and will be felt in the farm real estate market. In order
to assess the future prospects of farm land values, it is necessary to consider both present and future developments.
The Present Situation. During the war, rising prices in general have
tended to lower the value of money and to raise land values without any
alteration of the basic supply and demand balance. Since the prices of
land have not been subject to control, and since land is considered to be
a safe asset, the demand for farm land by nonfarm persons has been increased from three different directions: purchase in anticipation of specu-




FARM LAND VALUES AND RECONSTRUCTION

41

lative short-run profits (especially in the vicinity of the larger cities),
purchase as a hedge against general inflation, and purchase by war
workers who want something to fall back on when their present high
incomes are reduced. The first two of these purchase motives will lead to
heavy selling when prices turn downward, but the third will not.
The current occupational demand for farm land has been in part increased and in part decreased by the war situation. The drafting of farm
youths into the armed services and the lure of war jobs have tended to
defer a sizeable segment of demand until after demobilization is begun.
But to offset this there has been an actual increase in the demand for
farms by operators. The rise of farm incomes and the failure of taxation,
bond purchases, debt reduction, etc., to absorb this increase completely
have resulted in a rapid rise of farmer holdings of cash and demand
deposits. Many farmers have expanded their land holdings either as an
investment in a familiar asset or in preparation for the return of sons
now in the service. Farmers displaced by Government land purchases
have often re-entered the market. Many tenants, to whom the war has
brought the first opportunity for the accumulation of funds, are now
purchasing farms. There has been a further increase in the demand for
farms and in the willingness to assume mortgages, because of present
laws guaranteeing farm commodity prices for the first postwar years.
Although their influence cannot be measured exactly, low interest and
service charges on mortgages may be of considerable importance, especially to returning servicemen.
Finally, the demand for farms is increased by nonfarm persons who
desire a "place in the country." These buyers fall into two classes: first,
city people with a yearning for country life and the means of satisfying
it; and second, nonfarm persons who enjoy country life and desire to
enhance their incomes through part-time farming. A continued rise of
urban incomes will probably enhance the first class of demand, while the
threat of unemployment will add to the second, which may act to support the market in the event farm commodity prices fall.
The supply of farms for sale is relatively inelastic, especially since the
same factors calling forth increased demand act to increase the reluctance
of owner-operators to sell. Thus the supply of farms will probably continue to be provided by the death or retirement of operators plus offerings in the expectation of higher prices. But it must be remembered that
many owners have heirs, and that many older owners are deferring retirement because of a sense of public duty, the desire to hold the farm




42

AGRICULTURAL ADJUSTMENT AND INCOME

for an absent son, or the lure of high incomes. There is, therefore, small
likelihood that the immediate postwar supply of farms can be greatly
enlarged to meet the high level of demand.
But it is less a matter of possible expansion of supply, than the lesson
of the last boom and the educational efforts of various interested agencies which has restrained farm real estate activity. One of the most
effective instruments has been the National Agricultural Credit Committee, organized in 1941 through the leadership of the Farm Credit
Administration. The membership of this committee was drawn from
various representative farm organizations, banking groups, insurance
companies, the Federal Reserve System, the Department of Agriculture,
and other Federal agencies interested in farm credit problems. The
Committee has done much to promote sounder agricultural credit conditions, to encourage the use of surplus farm funds for debt reduction,
and to secure widespread publicity concerning the dangers of farm real
estate inflation and means of combating it. The Committee has been
aided by the research and publicity efforts of the Department of Agriculture, the land-grant colleges, and other State and Federal agencies.
The Immediate Postwar Period. For the year or two immediately following the war it is easy to see what the future holds for an uncontrolled
land market. There is no evidence that the total demand for agricultural
products will fall off during this period. Any reductions in military demand should be largely offset by increased civilian demands and the
shipment of foods to devastated areas. Therefore, farm incomes should
be maintained at a high level. At the same time there will be some lessening of the restraints which heretofore have prevented farmers from taking
full advantage of high prices: quickening industrial reconversion will be
accompanied by increased supplies of farm machinery, labor, etc. Returning servicemen desirous of becoming farmers will have easy access
to credit. Finally, there will be an inevitable relaxation of psychological
(and perhaps legal) restraints on the impulse to buy. Unless this is accompanied by a very rapid rise in the flow of civilian goods, it will greatly
increase inflationary pressures throughout the economy.
All of this indicates the probability of a sharp rise in the occupational
demand for farms, both by present farmers of all tenure classes and by
persons returning from service or war industry. Since general prices and
farm incomes will be high, purchases of farms for purposes of hedging
and investment should continue at present levels or increase. Speculative
activities probably will rise, also.




FARM LAND VALUES AND RECONSTRUCTION

43

On the supply side of the market there is little likelihood of great
change. Most farms held by institutional lenders have been sold. Farms
absorbed into military or industrial sites will not be returned to agriculture until well after the close of hostilities, if at all. Retirement of
operators is not likely to be greatly accelerated. Few investors will have
decided to sell their holdings. Finally, there is little chance that farm
subdivision and reclamations can ever add noticeably to the supply of
farms. In fact, in the Southeast, it will become necessary to reduce the
number of farms through consolidations in order to solve basic social and
economic problems.
All in all, the most likely prospect for the farm land market appears
to be a continued upward movement of prices and activity for some time
after the war. If the general price level continues to rise, it will strengthen
inflationary tendencies in the land market. Should the proportion of returning servicemen who desire farms be greater than now estimated, the
increase in* demand may take the form of an abrupt spurt accompanied
by a dangerously rapid price rise. I t is during this immediate postwar
period that the gravest danger of a complete breakdown of market restraints is to be feared. Not only this, but there is reason to expect that
farm purchases during this period will be accompanied by the formation
of excessive new mortgage debts.
The Later Postwar Period. The evaluation of later developments in
the market for farms is much more difficult, j In the first place, if controls
are soon placed on the market, early developments may be less inflationary than those outlined above. In the second! place, much depends on the
degree of success with which the rest of the economy makes a safe transition from war to peace. However, it must, be remembered here that a
high degree of interdependence exists between the future course of land
values, on the one hand, and the general economic behavior of the nation,
on the other. If the rest of the economy is ^ble to maintain reasonably
full employment and a high level of incomes, it will be much easier for
the agricultural segment to make the transition, especially if rapid inflation of farm land values is avoided. However, if this inflation occurs,
it will make the general economic transition much more difficult. Economic maladjustments cannot be confined behind bulkheads—they always spread beyond the area in which they tyegin.
During the transition period there may bejsome falling off in demands
for and prices of farm products. A slight change may take place in the
nature of farm sellers: investors, hedgers, |and speculators will begin




44

AGRICULTURAL ADJUSTMENT AND INCOME

gradually to sell their holdings and retire from the market. But it will
not be until after the transition period that the forces of deflation will
really become apparent. Then the time will come when demand (at existent high prices) suddenly will be saturated, and farm land values will
turn sharply downward. Falling farm commodity prices and falling farm
land values will reinforce each other. It is quite possible that both will
drop well below the long-run normal; but, after the initial sharp decline,
land prices are likely to lag increasingly behind falling farm prices and
incomes. Eventually, if the rest of the economy is healthy and able to
take up the slack, all three should return to stability at levels more in
keeping with long-term prospects. On the other hand, if the rest of the
economy is unable to absorb the shock of violent deflation, a situation
similar to that of the 1930's may again develop.
METHODS OF PREVENTING A NEW LAND BOOM

It has been estimated that more than 2 million involuntary transfers
of farms and tracts have occurred since 1920. This means that the equivalent of one-fourth to one-third of all land in farms has gone through
forced sale in the last 25 years. Tragic and costly as this loss has been, it
is by no means the only effect of a boom in farm lands. The whole agricultural fabric is penalized through the interruption of technological progress and by the stabilization of improper farm practices. In addition to
all the suffering which it brings to the agricultural population, the collapse of a land boom saddles the nonfarm segments of the economy with
the increased costs (through taxes and higher prices) which accompany
a sick agriculture. It is still possible to apply curbs which would do much
to restrain the development of a runaway boom; and the major methods
of control are, therefore, discussed below.
Education. Machinery already exists to carry out an intensified campaign of public information. The potentialities of press and radio, of
neighborhood discussion groups, etc., have yet to be exhausted. Among
agencies which directly reach farmers, the State extension services,
county agents, and land-grant colleges have done much, but still have
not tapped all their resources. Likewise, it should also be possible to enlist more intensive efforts on the part of farm cooperatives, production
credit associations, and similar rural organizations. In the areas where
the greatest harm would result from a land boom, particularly in cashcrop regions, a last ditch attempt to create added awareness of the effects
of high farm land prices might be implemented by the joint efforts of




FARM LAND VALUES AND RECONSTRUCTION

45

these agencies plus schools, churches, and the like. The need is certainly
great enough to justify the broadest approach. It is probable, however,
that these methods, by themselves, cannot curb inflationary tendencies
as strong as those now operating.
Since the greatest single factor in the present rise of land prices is the
willingness of buyers to pay increasing amounts for their land, an effective curb on inflation would be a more skeptical attitude toward the
value of specific properties. It is not enough to tell people that land is
over-valued—they must be shown that the specific property they desire is
over-valued. This can be accomplished through appraisal clinics to which
potential buyers of farms could bring their problems and receive assistance in planning land purchases, in appraising the long-term value of
specific properties, in budgeting their credit needs in terms of future
income prospects, and in determining the alternative uses to which land
could be put if bought at a given price per acre. This approach has not
been utilized as fully as its potentialities merit. Such clinics also could
act as central clearing points for the most authoritative information on
prospective changes in prices, alternative opportunities, and competitive
position, with respect to the specific farm enterprises of importance in
the community. Finally, when the acquisition of more land is necessary
for the achievement of a proper farm balance, the alternative local possibilities of leasing and buying could be explored.
Control of Demand through Allocation. In Australia, the farm land
market (as well as that for urban real estate) has been controlled quite
effectively through a permit system which operates upon prospective purchasers. The basic law has proved sound and land prices have been held
to moderate increases. In this country, such an approach might be taken
along the following lines. In order to purchase land, the individual would
be required to prove need, ability to use it properly, and reasonableness
of price. The priority of different classes of buyers could be so defined
that it would not work undue hardship on legitimate purchasers (tenants
desirous of buying farms, small owners who need to expand, etc.), while
keeping speculators and other nonoperating buyers from the market.
This would curtail or altogether eliminate some of the most inflationary
present demands and tend to bring demand in line with the supply of
farms without a rise of price.
Restrictions on Purchasing Power. Since excess purchasing power in
the face of limited supply is a major cause of inflation, means of reducing
or absorbing the free funds of potential buyers are an indirect curb on




46

AGRICULTURAL ADJUSTMENT AND INCOME

inflation. This approach has two phases: (1) the elimination of excess'
liquidity in the hands of possible farm buyers, and (2) the control of
credit extensions on farm mortgages.
The Control of Liquidity. In general the control of individual liquidity
during World War II was left to voluntary methods. That these methods
have at least partly failed is evidenced by the large volume of demand
deposits now outstanding and the record amounts of currency in circulation; but partial success is demonstrated by sizeable individual holdings
of Government securities and by the phenomenal reduction in outstanding debts of all sorts. So far as the farm land market is concerned, any
further reduction of individual liquidity through voluntary methods will
be worth while; but these methods can hardly prove sufficient to absorb
all the cash and demand deposits which have accumulated.
There are two methods by which the several levels of government can
restrain the future expansion of liquid funds. The first consists of simultaneously raising income taxes and reducing evasion and avoidance. The
lack of farm business records and the difficulty of determining the taxable income of any farm enterprise is responsible for the failure of farmers
to report all taxable income. Tighter collection of farm income taxes
probably would take effect too slowly to affect present farm land prices.
Still, it might restrain the farm land market—and it should be done in
the interest of fair play in all events.
A different approach would be through local land taxes. In order to
obtain maximum impact on farm land prices, it might be worth while to
institute automatic reassessment of farm lands for tax purposes whenever
resold, with the new price furnishing the assessment. In this manner, farm
owners who held their land would pay prewar taxes, but buyers would
know that higher bids would mean higher assessments. This might help
to discourage speculation in addition to draining off purchasing power
from those willing to bid up the price of land. Provision for a peacetime
reassessment should be made.
Methods of Credit Control. Emergency powers possessed by the executive
branch of the Government would permit the institution of credit controls
for the period of transition. It would be a mistake, however, to think that
curbing farm land credit can remove the threat of inflation: farm incomes
are at record levels and there is too much liquid purchasing power in the
hands of potential farm buyers. There would be no serious difficulty in
raising barriers against easy institutional credit.
Generalfy speaking, lending institutions have followed a fairly con-




FARM LAND VALUES AND RECONSTRUCTION

47

servative policy in appraising land and in extending credit; but individual
lenders have accounted for almost half of the recently recorded farm
mortgages. Thus, to be effective, credit controls must cover at least a
major part of the individual lenders. This can be done under existing
law, which permits individual lenders to be classified as "banking institutions.' ' I t appears, however, that any individual who makes just a
single loan, and engages in no other lending transaction, could not be
regulated under existing statutes. This limitation probably would not be
serious, since "lending institutions'' could be prohibited from participating in any transaction or taking over any loan in which an individual
lends an excessive amount. Such a provision would make excessive loans
less attractive to both individual lenders and borrowers.
The primary credit controls should act through appraisal and through
the proportion of appraised value which could be encumbered. A further
effective curb might be the raising of interest rates, service charges, etc.,
on all land-secured loans.
Credit control cannot be completely effective in halting the land price
rise as long as potential buyers have large cash holdings. However, the
controls outlined above could curb part of the rise and hold farm mortgage debts to a reasonable proportion of long-run value and income. This
last is particularly pertinent, for one of the greatest dangers in the immediate future is an increasing mortgage debt on many farms.
An argument often advanced against credit controls is that they would
be subject to wide evasion. Any law may be so criticized. In the final
analysis, it is popular acceptance rather than power of enforcement which
makes a law effective. A regulation of this sort, well publicized, would
have a strong deterrent effect even if strict enforcement were impossible,
especially if the regulations were so framed as to place no undue burden
on legitimate extensions of credit.
Price Ceilings. Price ceilings have been placed on many goods (both
consumption and capital) and services during the war. Some were imposed early in the conflict and have proved very effective in slowing down
the rise of commodity prices. Others were delayed until after price rises
were well under way and still have been effective.
There are several possibilities as to how land price ceilings could be
determined (assuming the new legislation necessary to authorize them):
(1) All farm land, whether or not for sale, could be appraised and therewith placed
under ceiling. This would be extremely costly and time consuming, and can be ignored as a feasible possibility.




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AGRICULTURAL ADJUSTMENT AND INCOME

(2) No farm could be sold (other than, say, to heirs in settling an estate, or in
some similar sale formality) without an official appraisal and the setting of a ceiling.
Once set, this ceiling would apply to all resales during the period of control. The large
proportion of credit-financed sales would make this method of determining ceilings a
logical corollary to credit control, since one appraisal could serve both purposes.
(3) The price set in the first sale after a given date would be recognized as the
ceiling. If different time intervals elapsed between the reference date and the first
sales of similar pieces of property, this method would allow inequitable price differentials to develop.

The major effect of ceilings would be to discourage speculation and
hedging by removing the possibility of pronounced price rises. Although
the ceilings might still be so high as to penalize persons buying for occupational use, this would have resulted from the price rise, in any case.
If this control were applied in conjunction with a permit system of land
sales, the greatest single opportunity for evasion would be eliminated,
although administrative effort would be greater than under a system of
allowing sellers to decide which of several ceiling bids to accept.
Though the use of ceilings is one of the most effective methods of curbing future land price inflation, there is, unfortunately, little likelihood of
its being politically acceptable. Too many influential groups are of the
opinion that current increases in the price of farms are justified by prospects of high future farm product prices.
Capital Gains Taxes. A less direct method of removing the speculative
motive from the farm land market would be to tax away the profits from
all early resales. There have been three suggestions as to how this could
be done: the use of a special capital gains tax, the extension of the holding
period required before this capital gain could be taxable at less than
ordinary income tax rates, and an increased transfer tax.
As outlined by its advocates and incorporated in bills already introduced into Congress, the resale gains tax would be administered under
regular income tax procedures. Like the extended holding period, legislation would be required to instrumentalize it. This tax would be based
on two variables: (1) the profit, excess of resale over purchase price, on
any capital sale transaction, and (2) the period intervening between purchase and sale. As embodied in a Senate bill (S.1584, 78 Cong., 1 Sess.)
introduced in December 1943, the capital gains tax was to apply only to
the sale of farm real estate and took the form of an amendment to the
Internal Revenue Code. The base of the tax was defined as the net gain
from resale (allowing deduction of costs of improvements and other costs
covered by the Code) of farm properties acquired after November 1,




FARM LAND VALUES AND RECONSTRUCTION

49

1943, or within three to four years following the end of hostilities, by
means other than "inheritance or devise or by gift," but excepting executor or administrator sales and sales through condemnation "or the
threat or imminence thereof." The tax rate varied downward from 90
per cent on gains from sales taking place within two years of purchase,
to 30 per cent on gains from sales taking place five but less than six years
after purchase. These taxes would be, in effect, in lieu of regular income
tax on such gains. On property held six years or longer, the tax did not
apply, but the regular income tax re-entered the picture.
I t is obvious that such a tax would go far toward eliminating either
speculation or hedging in farm land, since it would prevent the realization
of major profits through appreciation. Handled as a part of regular income
tax procedures, it would involve no great administrative difficulty. Even
the usual non-coverage of agricultural incomes, mentioned above, would
affect it little, for most short-run speculating and hedging activities are
carried on by nonfarm persons. The tax would cover a period long enough
to reach well past the transition period, affecting all lands purchased
within three or four years and sold within nine or ten years following the
war's end, with few exceptions. Finally, since it would not affect longterm holdings of farm land, it could not interfere with the legitimate
profits of owner-operators or true investors.
In the administration of a capital gains tax, it would be important that
allowances be made to cover certain sales by farmers. For example, if a
farmer found that he could improve his income and opportunities by
selling his present farm and buying another, perhaps at a higher price,
it would be unfortunate if he were prevented from shifting by reason of
being forced to pay the tax if he sold his old farm. Similar situations can
be visualized which might necessitate some degree of flexibility in the tax.
A comparatively mild deterrent would be merely to extend from six
months to a longer period (usually placed at three years) the holding
period necessary to define a gain on farm resale as a "capital" gain, taxable as such, rather than as ordinary income. Since income tax rates are
the higher, it is thought that this redefinition of gain would be sufficient
to restrain land speculation. Unfortunately, the income tax rates which
would apply are relatively low in comparison to the rates applicable
under the proposed resale gains tax and would provide far less restraint.
Although far better than nothing, the extension of the holding period
cannot be effective in a strongly speculative market unless supplemented
by other measures. This tax has the advantage that, like the resale gains




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AGRICULTURAL ADJUSTMENT AND INCOME

tax, it could be administered through existing machinery acting under
the Internal Revenue Code.
The suggestion has also been made that the present real estate transfer
tax be greatly increased. The rates usually recommended have been in
the neighborhood of 20 per cent ad valorem on property sold. There is no
doubt that this tax could be administered, probably as well as is the
present low tax, but its fairness and feasibility are quite another matter.
The biggest objection is that it would affect all transfers regardless of the
degree to which they were inflationary. Distress sellers would be taxed to
the same degree as speculators. In order to absorb a large part of speculative profits without hurting legitimate sellers, this tax would have to
be rendered impotent by many exemptions and qualifications.
Forced Savings of Receipts from Sales. The idea of making all sellers
of farm land accept some proportion of their sales price in the form of
nontransferable Government bonds, redeemable at some future date, has
received some discussion. Advocates of this control contend that it would
be less punitive and more flexible than other controls, and could be administered more simply. Although this approach would have considerable
virtue at the beginning of a land boom, its slow cumulative effect is hardly
adapted to the control of later stages of inflation. Further, there are legal
complications to requiring the acceptance of any special form of tender.
Finally, the singling out of a particular group of sellers and the application to them of a forced saving plan would hardly be acceptable.




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE
by
EARLE L. RAUBER
Research Department, Federal Reserve Bank of Atlanta
Problems concerning the distribution of wealth and income are not
only among the most intricate in economic theory, but they are among
the most thorny in the field of economic policy. Problems of production,
since they are largely concerned with means instead of ends, can ordinarily be viewed with a fair degree of objectivity, somewhat in the way
an engineer can view dispassionately the technical problems with which
he is concerned. The distribution of wealth and income, on the other
hand, involves the ends of economic activity and hence gives rise to questions of a non-economic order—questions that touch the status of men in
their society and thus involve their personal lives and destinies. I t is difficult to consider with scientific objectivity any question so heavily
fraught with social and personal implications. In the real world, such
questions tend to become the focal points of group tensions and political
activity.
The tendency for problems of distribution to become political issues
probably goes far to explain the long history of special aids to agriculture
on the part of Federal and State governments. The socio-political expediency that has been thought to justify special consideration for agriculture as a whole is also invoked to win consideration for low-income
groups within agriculture, for agriculture is far from being a homogeneous
sector of the national economy. On the contrary, agriculture is extremely
heterogeneous and contains groups that follow diverse patterns of production and have very different standards of living.
I t is the groups at the lower end of the present income scale that will
be discussed here, together with the conditions that create and perpetuate
them, as well as policies that look toward the elimination of such groups
or the amelioration of their position.
SUMMARY
Although rural poverty can be found in almost every section of the
country, the degree to which it is concentrated in the South makes this
region a national problem.




51

52

AGRICULTURAL ADJUSTMENT AND INCOME

Three interdependent and overlapping causes are chiefly responsible
for the prevalence of rural poverty in the South. These are (1) an unusually high ratio of population to land resources, (2) the overshadowing
importance of cotton as a cash crop, and (3) a tenure system characterized
by a high rate of tenancy. The first of the three is the most fundamental
because it tends to perpetuate the other two, although it is also reinforced
to some extent by them.
Possessing only 17 per cent of the total land in farms, the South has
40 per cent of the nation's farm population. Such a situation results in
an average size of farm that is incapable of supporting a farm family on
any decent level of living under prevailing agricultural practices on land
that is inherently low in fertility. Whereas, in 1940, the average size of
farm in the United States was 174.0 acres, in the South Atlantic States
it was only 90.8 acres, and in the East South Central States it was 75.3
acres. Farms of 15 or 20 acres of cropland per farm family are very
numerous throughout the region.
The high man-land ratio is an historical result of the cash cropping
of tobacco and cotton under conditions of slavery. When land holdings
shrank as a result of the breakup of the slave system, the necessity for
the farmer of a few acres to find the cash for his fixed expenses led to a
perpetuation of cotton cropping. Cotton still possessed, as it had before,
the greatest comparative advantage as a source of cash.
The tenure system that followed the breakup of the slave system was
characterized by a large proportion of tenants, both cash tenants and
sharecroppers. Because of their need for cash and the small size of their
farms, the tenants who pay rent in the form of cash or in a fixed amount
of lint continue the soil-depleting cropping of cotton. Since sharecroppers
who pay rent in the form of a share of the crop have little initiative in
determining what they shall raise and since the landlord's interest lies in
getting an easily marketable crop, they too continue to raise cotton.
As long as these three factors remain important, widely advocated
programs for agricultural rehabilitation that stress soil conservation,
diversification of crops, and farm ownership, desirable though they are,
have little chance of success. Such programs presuppose more extensive
forms of agriculture and hence larger farms; before they can be put into
practice there must be a reduction in the ratio of population to land.
The solution of the problem of low farm income in the South therefore
lies in large part in the realm of the general economy. A level of industrial
activity that will attract large numbers of marginal and submarginal




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE

53

farmers and farm laborers from the land is essential. Industrial development within the South is an important part of this national goal. The
achievement of such a situation will require the intelligent cooperation
of Government, banks, and private business.
When larger farms have become possible, training, guidance, and suitable financing may then be used to effect a gradual shift to more extensive and socially desirable types of agriculture. Failure to bring about
the necessary reduction in population pressure on the land would result,
in all probability, in the perpetuation of rural poverty in the South.
THE GEOGRAPHY OF RURAL POVERTY
The geographical distribution of rural poverty is brought out clearly
in a 1943 study of rural levels of living by Margaret Jarman Hagood of
the Bureau of Agricultural Economics.
With 1940 figures, an index of rural farm living is constructed, based
upon such components as the percentage of occupied dwelling units with
fewer than 1.51 persons per room; the percentage of dwelling units with
radios; the percentage of farms with gross income of more than $600 per
year; the percentage of farms reporting automobiles of 1936 or later
models; and the median grade of school completed by persons 25 years
of age and over. From these series, each of which is indicative of a much
wider range of data, an index is computed for each county. The county
index is then related by percentages to a similar index for a nation-wide
sample of counties. The county indexes thus express the level of living
of the farm population of counties relative to the level of living of the
farm population for the nation as a whole.
In terms of this index of rural farm living, it was found that most of
the counties falling below the national average were confined to 12
Southeastern States. The only other areas having an index below that of
the nation were some counties in northern New Mexico and Arizona, and
a small cut-over area in the Great Lakes States. To an overwhelming
extent, therefore, the problem of rural poverty is a problem of the southeastern part of the country. Since the greatest concentration of rural
poverty is found there, this paper will confine itself to that geographical
area.
Within the 12 Southeastern States, as might be expected, rural levels
of living vary considerably, the index ranging from a high of 86 per cent
of the national average in Virginia to a low of 64 in Alabama and Louisiana. In 4 out of the 12 States the index was below 70, and in 7 States




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AGRICULTURAL ADJUSTMENT AND INCOME

—Alabama, Louisiana, Mississippi, South Carolina, Georgia, Arkansas,
and Tennessee—it was below 80.
If the farm population of the country suffers from a standard of living
lower than that of the urbanized industrial population, then the farm population of the Southeast as a whole and particularly of the 7 States named
is at a still greater disadvantage. What such a position means in terms of
inadequate diet, housing, health, education, and the infrequency of all
those facilities ordinarily associated with our ideas of a desirable standard
of living is sufficiently well known to require no elaboration here. In the
South, these inadequacies were so marked that in 1938 the National
Emergency Council in its "Report to the President" gave to this region
its now famous appellation—"the Nation's No. 1 economic problem."
SOME FOUNDATIONS OF RURAL POVERTY IN THE SOUTH

The fundamental elements of the South's problem of rural poverty are
simple and obvious and have long been recognized by all observers. They
are (1) a high ratio of population to land resources, (2) the overshadowing
importance of cotton and tobacco as the region's leading cash crops, and
(3) a land-tenure system that represents a more or less incomplete adjustment of the antebellum system of slave labor to the condition of
legal freedom brought to the South's labor system as a result of the Civil
War. These fundamentals, of course, are not independent of one another.
On the contrary, each conditions and reinforces the others.
The apparent simplicity of the problem, however, does not make the
solution any easier. Indeed, it is because these fundamentals are mostly
historical products, because they involve elements of social lag, and because, in addition, they are colored by prevailing racial attitudes that
the problem becomes extremely obdurate.
Population and Land. The relative overpopulation of rural areas is not
a condition confined to the South. That 50 per cent of the nation's farmers
produce 90 per cent of all farm products sent to market is sufficient evidence of a large surplus farm population in the nation as a whole. More
people are evidently trying to get a livelihood from the land than can be
supported by it on any reasonably satisfactory level of living.
In the South, however, overpopulation is especially acute and contributes heavily to the general agricultural problem for the nation. With
the exception of a few scattered States, the Southeastern States comprise
the only major geographical region in which the reproduction rate of the
population exceeds unity, that is, where the number of children being




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE

55

reared exceeds the figure necessary to maintain a stationary population.
With one quarter of the nation's population, the South before the war
was furnishing one-half the nation's natural increase in population. Inasmuch as the urban reproduction rate is no higher in the South than it is
in other regions, the conclusion is clear that Southern farms have become
the major source of the nation's population.
Two-thirds of the natural increase in farm population for the nation
during the period 1930-34 occurred in the South where only one-half of
the farm families were living. Migration out of the region and from farms
to cities within the region has served to relieve the pressure of population
on land resources to some extent but not enough to remedy the serious
maladjustment implicit in the situation. With approximately 40 per cent
of the nation's farm population, the South has only 17 per cent of the
total land in farms. Under such circumstances, unless the soil be exceptionally fertile and unless it be tilled with exceptional skill, the result
could only be a lower-than-average level of living for its cultivators.
The high man-land ratio implied in the foregoing figures is naturally
reflected in the small average size of farm in the South. Whereas, in 1940,
the average size for the United States was 174.0 acres, in the South
Atlantic States it was only 90.8 acres, and in the East South Central
States it was 75.3 acres. Within the 12 Southeastern States, the average
size of farm varied from a high point of 127 acres in Florida to a low
point of 66 acres in Mississippi and Louisiana.
Actually the situation is worse than these figures indicate. Within the
South Atlantic States in 1940 almost half of all farms had less than 50
acres each and in the East South Central States more than half of the
farms were of less than 50 acres. Moreover, not all farm land is available
for providing a current living, some of it being wood lots, some wasteland, and some lying fallow. The result is that farms of 15 or 20 acres of
cropland per farm family are very numerous throughout the region, and
this amount of land is commonly considered insufficient to provide a
decent living for a family under present cropping practices and where
soils are low in fertility.
Cash Cropping. Another fundamental cause of the low farm incomes
of the Southeast is the predominance of cash cropping—chiefly of cotton
and, though to a lesser extent, of tobacco.
Nothing in commercial farming or in specialization in one or more
crops is inherently uneconomic. On the contrary, many economies are
possible where there is such specialization.




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AGRICULTURAL ADJUSTMENT AND INCOME

The evils of cash cropping in the South grow out of the relation of such
a system to the man-land ratio. In one sense cash cropping is the cause
of the man-land ratio, and in another sense it is an effect of that ratio.
The two things are parts of a single whole that has its roots in the failure
of an historic situation to adjust to technological and social changes.
Historically, the South was the nation's first great commercial farming
area. The cultivation first of tobacco and later of cotton on a commercial
basis to satisfy the demands of a world market dates from Colonial times.
These two crops had one characteristic in common; namely, they were
both large consumers of labor time at certain peak seasons.
In a new country, where land is abundant and cheap and where labor
is in short supply, it would be natural to expect that a large amount of
land would be used per unit of labor and that farming would become extensive rather than intensive. These expectations did not materialize in
the South as they did in other areas because the character of the labor
supply under conditions of slavery made supervision a necessity and
prevented the dispersal of labor over very large areas of land. Labor
thus came to be concentrated in the form of plantation gangs. A combination of land and labor that, in view of their respective supplies and
costs, would have been uneconomic in a system of free labor could be
made to pay the landowner financially only if the cost of the inherent
wastefulness of the system could be shifted to labor and land—to labor
in the form of a subsistence standard of living and to land in the form of
the exhaustion of soil fertility. The exhaustion of the soil, however, did
not represent any real cost so long as new land was available to replace
that which had been worn out. The entrepreneur planter could shift the
labor supply to its most profitable place of use. This geographic mobility
of labor, plus the fact that the remuneration of labor was arbitrarily fixed
at a subsistence level and represented no equilibration of supply and
demand, made the concentration on cotton and tobacco financially profitable to the entrepreneur planters.
With the legal freeing of the slaves, the planters lost their power to
shift the labor supply in accordance with their own interests. Indeed,
since slaves had been capital, their emancipation left the planters with
almost no capital except land. When entrepreneurs who possessed nothing but land confronted a labor supply destitute of land and capital, a
modus vivendi was established in the form of a tenure system characterized by small tenant holdings. If anything, this system was more uneconomic than slavery, for the former geographic mobility of labor was




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE

57

lost and the high man-land ratio became more or less permanently established as an institution.
Having lost geographic mobility, the labor supply was compelled, by
its small holdings as well as by the terms under which access to land was
secured, to continue the production of cash crops. These crops were still
the traditional staples of the South. Cotton remained the crop that had the
greatest comparative advantage, for any other crop or combination of
crops would have implied a more extensive type of agriculture and, consequently, a lower money yield per acre. The immediate economic interest
of any individual operator lies in securing the highest value product per
acre. Whether he thus gets enough to maintain a desirable level of living,
however, depends upon how many acres he has at his disposal.
The gross value of farm products per acre, for example, is higher in
the Old Cotton South than it is in the newer cotton-producing areas in
the Southwest. In Alabama in 1940, this figure was $6.25 per acre—the
lowest in the Southeast. In Texas, the value of farm products per acre
was $3.70; in New Mexico, it was $1.23; and in Arizona, it was $1.64.
Nevertheless, the value of farm products per farm amounted to only
$522 in Alabama in 1940, compared with $1,246 in Texas, $1,455 in New
Mexico, and $2,370 in Arizona. The higher money yield per acre in the
Old South was more than offset in its influence on the level of living by
the small average size of farm. The size of farm, in turn, was the result
of the disproportion of population to land resources.
Cotton and tobacco, as well as the corn that is generally raised for
stock feed and farm consumption, have in common another characteristic that works to the disadvantage of the Southern farmer; namely,
their tendency to impoverish the soil. These are all intertilled crops and
so facilitate a rapid runoff of water in rainy seasons. The top soil, which
has never been very thick in the South, is thus subject to a heavy annual
loss from erosion. The "Report to the President" of the National Emergency Council called attention to the fact that 61 per cent of the nation's
badly eroded soil is found in the Southern States. At least 22 million acres
of once-fertile soil, it was said, had been ruined beyond repair. In order
to make other abused and badly depleted lands produce, it is necessary
to make heavy applications of fertilizer. In 1942, the South Atlantic
States and the South Central States purchased nearly 6 million tons of
commercial fertilizers—three-fourths of the nation's total. Meanwhile,
it is estimated, 27.5 million tons of nitrogen and phosphorus compounds
are leached out of Southern soil annually.




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AGRICULTURAL ADJUSTMENT AND INCOME

Exhaustion of the soil and the necessity for heavy fertilization implies
higher costs of production, and rising costs place the Old South at a disadvantage in competition with newer producing regions where land is
fresh and fertilization less necessary. In South Carolina, for example, in
1941 the yield of cotton was 166 pounds per acre, compared with the
1934-41 average of 290 pounds, and the cost of production was 16.6 cents
per pound of lint, having risen from 8.7 cents per pound in 1934. In
Arkansas, by way of contrast, the 1941 yield was 342 pounds of cotton
per acre, compared with the 1934-41 average of 297 pounds, and the cost
of production per pound of lint had fallen from 9.9 cents in 1934 to 7.9
cents in 1941.
Not only does the Old Cotton South face a future of increasing difficulty
in competition with newer low-cost areas in the United States, but it faces,
in common with all cotton producers, increasing competition in the world
market from foreign countries. The prospect of the complete mechanization of cotton culture from planting to harvesting with the near approach
of the mechanical picker and stripper may make it possible for the Southwestern areas to raise cotton in competition with foreign countries, for
mechanical equipment is particularly adapted to level land and is most
economical when used on large farms. Such equipment is less adaptable for
use on the rolling terrain of the piedmont region and parts of the upper
coastal plain in the Old South. It is therefore doubtful that this region can
take full advantage of the cost-reducing possibilities of mechanization.
The Tenure System. If population pressure on the land and the system
of cash cropping are two aspects of the strait jacket in which the Southern
rural economy finds itself, the land-tenure system is a third aspect growing out of the others, but at the same time reinforcing them.
The predominant characteristic of this tenure system is the high proportion of tenancy. Tenancy, as has often been pointed out, is not necessarily bad in itself. I t may represent a stage in a farmer's climb up the
ladder to full ownership of his farm. On the other hand, it may represent
a step downward from full ownership to a lower status.
Of all the farm tenants in the United States in 1935, 41.4 per cent were
to be found in the Cotton Belt and 8.9 per cent in the Tobacco Belt. Tenants in these areas are of two kinds—cash tenants who pay a fixed cash
rent or a fixed amount of cotton lint and croppers who pay rent in the
form of a share of the crop, the size of the share varying widely from one
case to another and depending upon the amounts of feed, fertilizer, and
equipment that are furnished by the landowner.




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE

59

The distribution of these classes of tenants differs markedly between
white and colored farmers. Forty-four per cent of the white Cotton-Belt
farmers in 1935 were owners or part owners, whereas 15 per cent were
croppers and the remainder mostly cash tenants. Of the Negro farmers
in the Cotton Belt, however, only 16 per cent were owners or part owners,
while 51 per cent were croppers and the remainder cash tenants.
Theoretically, cash tenants partake of the nature of entrepreneurs, as
do owner-operators, in virtue of their power to control the disposition of
their labor and land among various alternative uses. Practically, however,
this freedom of action is limited by the small average size of tenant holdings. The necessity of earning the cash to pay rent, taxes, and other fixed
charges, as well as to provide items in the family living that are not produced on the farm, causes the small tenant farmer to squeeze his few acres
for their maximum cash yield. Since cotton still possesses the greatest
comparative advantage for the small farmer, the cash cropping of cotton
is perpetuated. Where acres are few, none can be spared for crops that
involve more extensive forms of agriculture.
Economically speaking, the sharecropper partakes more of the nature
of a wage laborer—a laborer, however, who, while assured of a year's
employment, is assured of no definite wage for his year's work. His
wage—his share of the crop—is sharply affected by the yield of the crop
and the price at which it is sold, as well as by the rate of interest charged
by merchant and landlord on any advances that have been made to him.
Moreover, since the landlord usually wants his return in the form of an
easily marketed commodity, and no other commodity so readily lends
itself to a division between owner and tenant as cotton does, the cropper
must perforce plant his land to cotton. Thus, without an entrepreneur's
freedom of choice, the cropper is really a wage worker who must in addition accept entrepreneurial risks.
Since leasing arrangements are typically made for a year at a time
and are often merely oral agreements, there comes about a restless milling
about from farm to farm by the tenants at this lower end of the scale.
Tenants move more frequently than do owners, and croppers move more
frequently than do cash tenants. Of the croppers in the 12 Southern
States in 1940, 22 per cent had moved to their present farms within the
three months preceding April 1 and 41 per cent had been on their farms
less than 15 months.
This instability of tenure, of course, involves a social cost. A tenant
moving from one farm to another each year has little incentive to main-




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AGRICULTURAL ADJUSTMENT AND INCOME

tain the tenant house or other farm buildings in good repair. He has
little incentive to care for the land beyond his own short-run needs. He
has no incentive to plant and cultivate a year-round garden that might
serve to improve the quality of the family diet. The decade of 1930-40
witnessed some spectacular changes in the institutional pattern of farm
tenure in the South. In the first place, farm ownership increased. This
increase, however, was entirely within the ranks of white owners; the
number of Negro owners on the contrary declined. There was also a
sharp decline in the number of tenants of all classes, both white and
colored. Since the decline in tenancy greatly overbalanced the increase
in farm ownership, it did not represent any improvement in the position
of Southern farmers. Indeed, the net effect of these changes was for the
worse. It meant that tenants and share croppers were being forced out
of even the tenuous connection with the land which they did possess. In
part these displaced tenants migrated to the cities, especially to Southern
cities, where the urban growth between 1930 and 1940 was nearly three
times as great as the national urban increase. In part, too, these dislodged tenants and croppers sank down into the class of farm labor
where they were more "marginal" than they had been in their former
status. In either case, casual and seasonal employment and Government
relief became their chief means of support.
In large part, the cause of these changes lay in the Government's
agricultural policy of the 1930's: cotton acreage was retired in an effort
to reduce the cotton surplus and to raise prices, and benefit payments
were made to encourage certain soil-conserving practices. This policy,
working within the traditional tenure system, gave landlords a direct
economic incentive to reduce the number of their tenants even though,
under the policy, they were supposed not to do so. In this way, the social
cost of the policy tended to be shifted to the weakest tenure groups who
were reduced to a still more precarious income status.
PROGRAMS AND POLICIES

The fundamental causes of low farm income in the South have been
recognized for a long time. For a long time, also, a program has been
advocated to deal with some of the more unfavorable aspects of Southern
agriculture—a program that has become almost a tradition of the "New
South." Three major items in this program are (1) soil conservation,
(2) diversification of farm operations, and (3) farm ownership.
The ravages of erosion are so evident throughout much of the South




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE

61

that little argument is needed to justify all practicable measures for soil
conservation. Less obvious but equally deleterious is the exhaustion of
the soil when planted year after year to the same soil-depleting crops.
The plowing of rolling country to follow the contours of the hills instead
of running furrows up and down the hillsides where every furrow becomes a gully to carry off the rainfall is, of course, only rational. Similarly, the terracing of hillsides to check the runoff of water is also essential. The planting of winter cover crops and legumes is necessary to
check erosion and to restore plant food to the soil. Soil is the foundation
of agriculture, and unless it is conserved there will be no profitable agriculture in the future.
The diversification of enterprises on the individual farm has been advocated for a number of reasons. By diversification a farmer can make
himself more nearly self-sufficient; a larger part of the living requirements of himself and his family can be produced on the farm. By engaging in a variety of enterprises, a farmer spreads the risk of failure of any
one of them over the whole group. By a combination of pasture for the
grazing of livestock with crops properly rotated, much can be done to
check soil exhaustion as well as erosion. Diversification also makes possible a fuller use of available labor time. In raising cotton, for example,
the peak demand for labor comes in the spring and the autumn. For at
least four months in the year, labor is idle except for chores. Crops,
therefore, that have somewhat different peak demands for labor can be
raised at practically no cost, since they would be produced by labor that
would otherwise be idle.
As the third part of this program, farm ownership and the family-size
farm have been insisted upon. These are conditions for carrying out the
conservation and diversification parts of the program. Only a farmer who
has the security of tenure that comes with ownership and who possesses a
sufficiently large farm can be expected to engage in these better practices.
Not only has this general program been advocated for years, but the
technical knowledge for putting it into effect has been carried to the farm
leadership of the Southern States by county agents of the Extension
Service of the United States Department of Agriculture with a great deal
of missionary zeal and with the support of Federal and State agricultural
authorities. I t was expected that the improved farm practices would be
adopted by the leading farmers and by imitation would finally reach the
lower rungs of the agricultural ladder.
There is no gainsaying the general desirability of the practices advo-




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AGRICULTURAL ADJUSTMENT AND INCOME

cated in this program, and it cannot be said that its advocates have been
entirely without success in winning a response. Nevertheless, the results
have been far from commensurate with the time and effort and talent
that have gone into the propagation of the plan.
The cause of this disappointing outcome is fairly clear. The program
cannot be carried into effect in the face of the existing disproportion of
population to land resources that keeps the average size of the farm
small. It is idle to preach the desirability of soil-conservation practices
and diversification to a sharecropper who has little or no control over
the use to which his land is put. It is almost equally futile to do so to a
cash tenant or an owner-operator with but few acres at his disposal.
Moreover, such practices require capital that must be invested for
some time before it begins to bear fruit in increased income. The small
owner-operator or tenant, with little collateral to pledge for a loan, experiences difficulty in securing such capital in the first place. In the
second place, he cannot afford to wait for the fruition of an investment
several years hence. The pressure to get a living in the immediate present
is too insistent.
A study made in 1942 by the Agricultural Experiment Station of
Alabama Polytechnic Institute in cooperation with the Bureau of Agricultural Economics of the United States Department of Agriculture
brings out the limitations of such a program as that advocated. This
study was concerned with ways and means of increasing incomes and
conserving resources on cotton-corn farms in Marion County, Alabama.
A typical one-mule farm in this county with a total area of 85 acres, of
which 22.5 acres were cropland, was the subject of one set of calculations.
As it was then being worked, this farm was yielding at 1935-39 average
prices a net cash income of $101.40. An alternative system was outlined.
This included clearing some woodland in order to increase the amount
of cropland and pasture. It included larger applications of fertilizer to
increase yields of cotton and feed crops—the additional feed would make
possible an increase in livestock. Fall oats, cowpeas, kudzu, and vetch
were added. Idle cropland was reduced. Farm garden patches were increased.
These were the kinds of adjustments usually recommended. They
would have involved an investment of about $350 and an increase in
total cash expenses amounting to $140 a year. Net cash income, however,
would have been raised to $186.25—an increase of 82 per cent. If depreciation and interest on the investment are subtracted from these




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE

63

figures and nonfarm income and the value of farm living produced on
the farm are added, the family labor earnings, which were $339 before
the adjustments were made, would have been $449 afterward. That the
owner of this farm would not have been lifted to the class of the wellto-do by any such means is evident.
Similar calculations were made in this study for typical two-mule and
three-mule farms. For a three-mule, cotton-corn farm of 141.5 acres,
family labor earnings under the current system were $327. After the recommended adjustments they would have been $643. Even on a farm of
this size—much larger than the average in any of the Southeastern
States—the results are not sufficient to provide much in the way of a
good living standard for the farm family. The farmer and his family
would still be in the low-income group.
In a capitalistic society, income tends to bear a direct relationship to
productivity, and high productivity presupposes the use of resources in
their most economical combination. If rational behavior on the part of
all concerned is assumed, labor is expected to move from a low-income
area, where its productivity is low, to a high-income, high-productivity
area. Or labor is expected to move from occupations yielding low incomes
to occupations yielding high incomes. The objective conditions for such
a migration of labor from the South to other regions, or from farms in
the South to industrial occupations, are obviously present.
Such a migration has in fact occurred, but not in sufficient volume to
relieve the pressure on the land. In the decade 1930-40, the South experienced 44 per cent of the nation's increase in population. While the
States west of the Mississippi River, except Louisiana, experienced a
decrease in farm population, the South Atlantic States had a 2 per cent
increase and the East South Central States, approximately a 4 per cent
increase.
But what did not happen even under the stress of the economic depression of the 1930's has been brought about to an unprecedented extent by the war. Farm labor has been drained off to the armed forces, to
wartime construction work, to war industries, and into shipyards, and
the population pressure has thus been relieved to some extent. The labor
shortage has caused a great outburst of enthusiasm for cattle raising in
the Southern States. Many an old cotton county in the Black Belt of
Alabama and Mississippi is now green with pasture. War crops such as
peanuts and soybeans have expanded, and other food crops as well.
Diversification has been given a great impetus. The demand for most




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AGRICULTURAL ADJUSTMENT AND INCOME

crops is good and prices are high. Incomes are higher than they have
been for a generation. Even the Negroes—the lowest income group of
all—are enjoying a degree of prosperity they have never known before.
The postwar outlook, however, is not so bright. After one, or at most
two, crop years the foreign demand for American foodstuffs will decline
sharply. Cotton faces a gloomy future because of the loss of foreign
markets to other countries, where production has been stimulated by the
United States policy of maintaining prices above the world level, and
because of the growing competition of rayon and other substitute fibres.
Only 20 million acres were planted to cotton in 1944, the lowest acreage
since 1895. Conditions that seem most likely to prevail in the postwar
period all point to a further decrease in cotton acreage.
On the other hand, the end of the war will see the return of many
thousands of men from the armed services and from war industries. On
their return, these men will find a radically altered pattern of land use
—one in which the need for labor is much less than it was when they
went away. There literally will be no place for them on Southern farms.
In a country that was once a good cotton country but which has been
converted almost entirely to cattle raising, a banker described the situation by saying, "When these people come back, they will have to march
right on down the road. There will be no place for them here."
Under such conditions, the economic problem of low-income farm
groups may be converted into a social problem of quite another order,
especially since it will be darkened by the racial issue. The basic difficulty of the South—the high man-land ratio—will then stand out,
starkly demanding a solution.
Some elements in the solution are clear:
(1) There must be such a demand for labor in the nation's industries at such wages
that the excess population of the rural South will be drained off. Although the inauguration of desirable agricultural programs is not necessarily contingent upon industrialization, to put such programs into effect in the absence of industrial opportunities for the displaced rural population would result merely in trading one social
problem for another of equal gravity.
(2) Better still would be an industrial expansion in the South itself sufficient to
absorb the surplus rural population. If labor were perfectly mobile, of course, it would
not matter where industrial expansion occurred. Labor would be expected to gravitate to the jobs. Practically, however, labor is far from being perfectly mobile. The
result is that an industry presenting a given number of job opportunities in Illinois
has far less capacity to absorb Southern labor than would the same industry located
in the South.




LOW INCOME GROUPS IN SOUTHERN AGRICULTURE

65

(3) To this end, businessmen should be on the alert to discover and develop all
possible opportunities for industrial growth and banks should be prepared to finance
such activities to the limit of their ability, despite a certain element of risk that would
necessarily be involved. Banks might well be encouraged in making such loans by
some form of guarantee.
(4) Vocational and technical training should be provided in order to fit rural labor
to the requirements of modern industry. Access to such training as well as to industrial employment, both skilled and unskilled, should be given without regard to race;
for the Negro, being on the lowest rung of the agricultural ladder, is likely to bulk
large in the surplus population that must be drawn off from the land.
(5) Thorough and systematic efforts should be made by Federal, State, and local
governments to place men in jobs for which they are fitted and, if necessary, to assist
them financially to move to such jobs.

If the farm population of the South could be reduced by these means
to the point where a large increase in the average size of farm could be
effected, then the extensive forms of agriculture that have long been
advocated would have a better chance of success. Soil conservation practices could be more widely adopted. If this condition could be brought
about, then:
(1) The system of tenure should be reformed so that tenants would be placed on a
ca3h basis and under long-term leases, with provision for the recovery at the time
the lease terminates of the unexhausted value of any improvements they may have
made.
(2) Widespread training should be provided in the techniques incidental to new
and unfamiliar farm projects. Ways and means of increasing yields of familiar crops
should also be widely taught.
(3) Banks should stand ready to finance by long-term loans and at reasonable rates
the radical shift from intensive to extensive agriculture as well as the adoption of soil
conservation practices, mechanization, and any other development that would have
the effect of reducing costs. Here, too, bank loans for such purposes might well be
guaranteed by Federal Reserve Banks or other appropriate agencies.
(4) Farmers should be encouraged to carry their product one or more processing
stages beyond the harvest where this is physically possible. This might in some cases
be accomplished on the farm; in other cases it might be done in small local plants,
cooperatively or privately owned.

The key to the solution of low agricultural income seems to lie not in
the field of agriculture itself but rather in that of the national economy
as a whole. If industry fails, nationally or regionally, to provide employment for the people who are no longer needed on farms, because of the
increased physical productivity in agriculture and the inelastic character
of the demand for agricultural products, then the South faces a bleak
future indeed. This is the South's dilemma: Either a large fraction of its




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AGRICULTURAL ADJUSTMENT AND INCOME

farm population must shift to nonfarm employment within or outside
the region, or the South must resign itself to being the most depressed
rural area in the United States in the future as it has been in the past.
In the latter event the rural South will probably have to be supported
to a considerable extent by Federal subsidies of one kind or another or
by the channeling of increasing expenditures for Government public
works into the region.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102