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THE FEDERAL RESERVE BANK OF CHICAGO
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MAY 1949
Farm Leases—I
Important Improvements Needed
Farm leases are important in Seventh District agri
culture. Forty-four per cent of all land farms in the
five states of the Seventh Federal Reserve District was
operated under lease in 1945, involving nearly 400 thou
sand separate farm rental agreements and 42 per cent of
all farm operators.1 Although only 28 per cent of the farm
operators rented all their land, an additional 14 per cent
rented part of the land they farmed.
Many farm leases are written with the assistance and
advice of country bankers. Some rented farms are super
vised by them. This places country bankers in a strategic
position to aid farm owners and tenant operators in the
development of more effective farm leasing arrangements.
The ownership of farm land by nonfarmers and the
operation of such land by tenants has, at times, attracted
much criticism, some justified and some not. Most of the
criticism has sprung from the apparent instability in the
relationships of many landowners and tenants to the land
and to each other. Tenancy has often been associated with
the frequent moving of operators from farm to farm,
unprofitable farming due to failure to maintain soil pro
ductivity or to inadequate farm units, poor living con
ditions for tenants, and progressive deterioration of the
land and its improvements.
Some of the criticism of tenant operation of farms, no
doubt, has reflected the general acceptance in the United
States of the owner-operated family-size farm as the ideal
in farm land tenure. This goal is consistent with our
general economic and political institutions. There is gen
eral agreement that the way should be kept open for the
majority of farm tenants to become farm owners. It is
generally recognized, however, that some percentage of
the farms not only must be rented but should be rented.
Renting permits capable individuals with limited cap
ita], but who desire to operate a farm, to obtain the use
of adequate land. It enables them to capture for them
selves part of the financial return resulting from any
exceptional managerial skill they may have without as
suming the risk of a large long-term debt and is excellent
training for the time when they may wish to assume the
responsibilities and risks of landownership. Also, it pro
vides a productive use for the funds of individuals and
corporations who are not interested in operating farms
but are willing to invest in farm real estate. Many wellinformed farm owners are rendering a valuable service
to society by providing well developed, efficient-sized farm
units for competent tenants. More farm owners of this
type would be a decided benefit to the agriculture in
many communities. A basic problem then, is the develop
ment of farm lease arrangements which will foster the
type of farming adapted to the best long-run interests of
the owner, the operator, and the public generally. Much
progress has been made along these lines.
MANY LEASES ARE INADEQUATE
The major shortcomings of farm leases as they are
commonly used today have been enumerated by many
students of the subject and commonly include the follow
ing: (1) many leases are brief oral agreements with no
written memorandum, often resulting in misunderstand
ings and short periods of tenure; (2) the term of many
leases is too short, frequently only one year, and without
provision for renewal or advance notice of termination,
commonly resulting in “short-run” farming which often
is exploitive of soil resources; (3) terms of leases fre
quently are determined almost entirely by custom in the
area and may not be appropriate to the particular farm
nor equitable to the tenant and the owner; (4) written
leases often are drawn in terms involving unnecessarily
complex legal language which is not understood by either
the landlord or the tenant; (5) provisions for settlement
of disputes which may arise are often lacking; and (6)
provision is seldom made for reimbursement of the ten
ant for unused improvements made by him or of the land
lord for the misuse of land or improvements by the tenant.
These shortcomings, as well as others which could be
listed, indicate three general requirements for a satis
factory lease. A lease should provide: (1) assurance to
a competent tenant that he may continue on the farm
for a period of years; (2) for a system of farming adapted
to the area and the farm; and (3) an equitable division
of the farm income between tenant and owner." The first
two of these are discussed below, the third will be dis
cussed in a succeeding issue of Business Conditions.
SECURITY OF TENURE IS ESSENTIAL
Each year a limited number of farm operators will
find it possible to improve their status by changing to a
different farm. It is doubtful, however, if all the moving
which takes place is desirable either from the viewpoint
of tenant operators, owners,- or society generally. In the
states of the Seventh Federal Reserve District in 1945,
one-fifth of the farm families had been on the farm they
then operated for only one year or less; one-third had
been on the same farm for four years or less. The average
period of tenure of all farm operators was 14 years. How
ever, these data do not tell the complete story. Many
tenant operators continue to operate the same farm for
a long period of years but at no time during their tenure
do they have assurance either that they will continue
to operate the farm for the next several years or that
^Census of Agriculture, 1941, U. S. Department of Commerce.
cThe state agricultural colleges in Seventh District states have developed suggested
lease agreements which are available to those concerned with this problem.
{Continued on Inside Back Cover)
New Farm Program Proposed
Administration Would Raise Farm Benefits
A radically different, if not revolutionary, new farm
program has been proposed to Congress on behalf of the
Administration by Secretary of Agriculture Brannan. If
unexpected and unusual proposals are a fulfillment of im
plied or explicit campaign promises to farmers, the new
program is generally conceded to constitute such a ful
fillment.
Into an atmosphere already supercharged by the heat
of controversy between the extremes of high level man
datory farm price supports on the one hand and advocacy
of lower flexible support levels on the other, the new
plan, a closely guarded secret until it was sprung on the
House and Senate Agricultural Committees, has dropped
like a bombshell. It has provoked a wide range of re
action, running from characterization as “rampant social
ism” to “sound and constructive economics.” Some as
pects of the proposal are so far reaching as to have aroused
fears in the minds of able farm leadership alarmed by
the great degree of regimentation of farmers which they
see implied in the powers requested by and for the Sec
retary of Agriculture.
Before turning to the specific proposals it may be
well to sketch the six point platform or philosophy which
the Secretary sets up as a basis for his proposals:
(1) He says that an effective farm program can help
prevent depressions by slowing down or checking the de
clining farm prices, arguing that most depressions have
been farm-led and farm-fed.
(2) He would require such a farm program on the
grounds that it would help maintain and build markets
among farmers for industrial goods and bolster high em
ployment. Under this head he emphasizes that industry
today is increasingly dependent on the farm market as an
outlet for its products.
(3) He contends that stable farm prices and incomes
encourage a high level of farm output with a maximum
of assurance of reasonable prices to consumers. This point
appears to be based upon the trend of increased produc
tion in part stimulated by the exaggerated demands of
the war period. On the negative side it can also be argued
that unstable farm prices and incomes have not been in
our history a deterrent to all-out production on the part
of farmers.
(4) The Secretary expresses the belief that maintain
ing farm income is of vital importance to the conservation
of agricultural resources, arguing that low prices and
unsatisfactory incomes induce mining the soil, and that
price supports can promote conservation by giving farm
ers a standard of living high enough that they will not
need to exhaust their resources, and particularly if prop
erly managed by encouraging types of farming, specifically
livestock and livestock products which tend to conserve
agricultural resources.
(5) The Secretary holds that an effective farm pro
gram is necessary to national security, that it would give
a reserve stock of products which would protect the
country against crop failure and other sudden emergencies.
(6) He argues that a high level of farm income would
safeguard the economic strength of rural people and pro
vide greater individual opportunity for them. For the
above reasons the program which he recommends is de
signed to produce a maximum volume of farm income and
purchasing power.
WHAT IS PROPOSED
The new proposal would begin by junking the 1909-14
basis for computation of parity for agriculture. It would
also in part dispose of price parity for individual com
modities. The new criteria would be on the basis of income
parity using the average purchasing power of American
agriculture for the 10 years 1939 through 1948 as a
basis for parity. The gross cash receipts of American
farmers during this 10-year period ranged from just under
eight billion dollars in 1939 to 31 billion dollars in 1948.
In arriving at the new basis these total figures for each
year would be adjusted by the index of prices paid by
farmers for goods and services used in living and pro
duction, including an allowance for interest and taxes,
this index to be on a base of 1939-48 equal to 100. After
adjusting each year’s figures and averaging them there is
then obtained an average annual purchasing power of
roughly 18 billion dollars for the 10-year period. To ^et
the parity factor for the current year this base of 18
billion dollars is adjusted upward or downward de
pending upon whether the prices paid by farmers are cur
rently higher or lower than they were on the average in
the 1939-48 period. This gives the income support
level for the current year. The calculation may be
illustrated for figures as of March 15 of this year. Since
prices paid by farmers on that date were 44 per cent
above the base period, the 18 billion dollar base purchas
ing power would be increased by 44 per cent giving in
the example an income support level for this year of
roughly 26 billion dollars. The Secretary suggests that
this base period would be shifted along as time passes
with about a two-year lag in order to gather, compute,
and verify data. Thus the 1939-48 basis would be used
for 1950 programs, while for 1951 the base would be
1940-49.
But in order to translate all of this into a manageable
form and to get standards for supporting prices, the
average of cash receipts for the most recent 10 years
would be used in order to get a price factor. Again to
illustrate, the average cash receipts for 1940-49 were
roughly 21 billion dollars. Since the adjusted income
Page 1
support level for the current year as indicated above was
26 billion dollars, and since this is 25 per cent above the
21 billion dollar cash receipts averaged for 1940-49, the
ratio of income support level to this average of cash
receipts would be 1.25. Therefore, to get the current
price support standard for a commodity its average price
during the 1940-49 period will be multiplied by 1.25.
The Secretary suggests classifying farm products into
two groups for purposes of price supports. In the first
group would be the storable commodities which account
for about 25 per cent of the total of cash receipts and
would include cotton, corn, wheat, other grains, tobacco,
the oil seed crops, dry beans and peas, wool, and peanuts.
The prices of these commodities would be supported as
in the past by commodity loans and purchase agreements,
or Government purchases. The perishable commodities
those which are difficult or impossible to store, in
cluding fruits, vegetables, meat animals, milk, butterfat,
and poultry and eggs, would be supported in an entirely
different manner. These the Secretary would permit
to move through regular markets at whatever prices
the market would bring. The price supports would take
the form of direct payments to the farmer for the amount
of difference between the market price and the price sup
port standard.
Using the above methods of calculation the difference
between the current levels of support at generally 90
per cent of parity and the supports which would prevail
if the proposals were currently in operation can be seen
from the accompanying table.
It is to be noted from these figures that aside from
modest downward revisions in the support levels of
wheat, oats, barley, eggs, peanuts, and oranges the sug
gested revisions give a generally higher level of support
prices than would prevail under the continuation of 90
per cent supports based on current definitions of parity.
Lest it be mistaken from all of the above details that
such changes would be an unlimited blessing for farmers,
it should be pointed out that there is another side of the
coin which was hinted at in the testimony of the Sec
retary before the House and Senate Agricultural Com
mittees. He said that he did not “believe that full ben
efits, if any, should be extended to producers who operate
without regard to the welfare of the general public or
of their fellow farmers.” He then went on to mention the
increasing yields and production and indicated his belief
that high level production would continue and that yields
might increase and that, therefore, farmers have to pre
pare to restrict production of some items to less than
maximum capacity. He requested that marketing quotas
and acreage allotments continue to be provided as a
means of controlling the output of the basic commodities
and that they also be made applicable for other commodi
ties such as soybeans, flaxseed, and dry edible beans and
for feed grains and rye when in effect on corn. Similar
requirements with the addition of marketing agreements
and orders were requested for fruits, vegetables, and nuts.
He also implied that such devices as marketing quotas
might be required for meat animals, dairy products, and
poultry and eggs. He suggested that “eligibility of a
Page 2
producer for participation in the benefits of any price
support program should be conditioned upon compliance
with or adoption of applicable programs of production
adjustment, marketing quotas or agreements, and the
carrying out of reasonable conservation practice require
ments.”
PROPOSALS RAISE PROBLEMS
The ramifications and implications of all the aspects
of the proposed program cannot be covered within these
space limitations. Some of the more obvious aspects can
be briefly touched upon.
In view of the changing costs, technology, and shifting
demands the 1909-14 parity base, a 35 to 40 year old
criterion with all of the fact and fiction, fable and
fancy, and stagnant statistics associated with it as a
base period is quite obviously out of date and ignores a
changing world. Probably only a few producer groups,
such as possibly wheat and peanuts, would mourn its
passing. A more modern base for parity formulation has
long been in order. Unreal results come from the calcula
tion of parity bases for individual commodities no matter
what the base period. They have always tended in the
direction of divorcing price supports from the operations
of the forces of supply and demand.
ESTIMATED ALTERNATIVE SUPPORT STANDARDS
FOR 1950 BASED ON PARITY INDEX FOR
MARCH 15, 1949
(Amounts in dollars)
Commodity
(Grouped according to
present legislation)
Basic commodities:
Wheat.............................
Corn................................
Cotton............................
Rice.................................
Peanuts...........................
Tobacco:
Flue-cured..................
Burley.........................
90 Per Cent
Current Parity
Unit
bu.
bu.
lb.
bu.
lb.
1.46
.2799
2.26
.0945
1.95
1.42
.2745
1.80
.106
lb.
lb.
.492
.496
.406
.393
.582
3.55
16.10
.4(6
.252
3.74
2.12
7.46
1.62
1.88
Specified Steagall
commodities:2
Butterfat........................
Milk, whole....................
Hogs................................
Eggs................................
Chickens.........................
Flaxseed..........................
Soybeans........................
Beans, dry edible..........
Potatoes..........................
lb.
cwt.
cwt.
doz.
lb.
bu.
bu.
cwt.
bu.
.669
4.22
19.00
.458
.290
4.30
2.54
8.45
1.59
Other commodities:
Beef cattle......................
Lambs.............................
Oats.................................
Barley.............................
Apples.............................
Wool................................
Oranges...........................
cwt.
cwt.
bu.
bu.
bu.
lb.
box
16.90
18.40
.825
1.22
2.61
.498
1.96
12.00
13.00
.884
1.37
2.12
.405
3.32
‘1940-49 average prices times 1.25. Prices lor 1949 estimated basis current prices
*Sweet potatoes, dry field peas, American-Egyptian cotton, and turkeys are aiso
Steagall commodities.
SOURCE: Statement by Secretary of Agriculture Charles F. Brannan, Exhibit C.
The radical shift to a purchasing power parity appears proposal dealing with the encouragement of consumption
to come near to the objectives of farm support policy by permitting many products to move into consumption
and legislation. If there is to be “a farm program” it at whatever price the market will bring. In the face of a
should be more effectively implemented so as to achieve truly great productive agricultural capacity it seems
its objectives. But in spite of Secretary Brannan’s ra almost a crime against nature and humanity to throttle
tionalized philosophic basis as discussed in the six points production in the name of “orderly marketing.”
above there is grave question as to whether the citizenry
From the standpoint of human welfare there is also
of this country want or can afford to guarantee farmers much to be said for the proposal if it will, as the Secretary
purchasing power equivalent to the wartime and postwar believes, encourage a high level production and con
prosperity of the 1939-48 period. (Secretary Brannan sumption of livestock and livestock products. A minor
would probably contend that we cannot afford not to dissent can be taken from the Secretary’s contention
guarantee it.) This decade was characterized largely by that large stocks of feed grains would stabilize livestock
distorted and exaggerated demands for farm products as production. They could have this effect only if the admin
a whole and especially for particular farm commodities, istrators had the courage and it were politically possible
giving farm products values materially out of line with to draw on stocks of feeds whenever needed. We did this
normal domestic and world economic conditions. This in wartime when an emergency made it mandatory and
decade was by all odds the best 10 years of purchasing when a rising price level made it possible to show profits
power ever enjoyed by farmers.
on such stocks, but would we do so in the absence of these
One of the most frequently overlooked and at the conditions?
same time tragically distinctive aspects of farm support
It would appear from the Secretary’s statements that
programs is that the more certain, assured, and foresee
the conditions to be demanded of farmers under this pro
able they become the more are they a subsidy to land
posal have been quite obviously soft-pedaled. The hints
owners as of the time they are established and the less of controls from the Secretary’s own words have alarmed
of benefit are they for the farm family as the years pass.
Calculable benefits tend more strongly to be bid into the many observers, justifiable or no, to a fear of degrees and
kinds of regimentation and planned economy far sur
price of land because of the competition for good farm
passing
anything previously experienced in this country,
land. To this extent they become a windfall to landowners
probably even in wartime. There can be no doubt that an
and are greatly diluted as a continuing benefit to farm
extensive bureaucracy to handle all the details of im
operation.
plementing these proposals would be required. The ques
Much good can be said for the proposed methods of tion of what would be the cost of such a program is
calculating price support standards for individual com almost unanswerable except that it seems obvious that
modities. They would represent a marked improvement
with higher income support standards and the inclusion
over present methods. Even though a 10-year average is of more commodities the program can hardly be expected
slow to reflect changing conditions they do, nevertheless, to cost less than the price supports committed under
permit to some extent the forces of supply and demand existing legislation.
to express themselves in the price bases. But if the pro
The Secretary can hardly be blamed for being vague
duction payments and other benefits of the proposed
about estimates of total cost. It is probable that it would
program are to be included in the averages for adjusting
the support standards they can only make subsidies and take two or three years of experience under the program to
the resulting price distortions self-perpetuating by giving get even a general idea of the financial burden to the Fed
eral Government. There is one point however that ought
statistical sanctification to prices that will have been
not
to need clarification for anyone who can add. The Secre
politically determined rather than reflecting economic
tary
has given the impression that both farmers and con
factors. This can best be brought out by an illustration
sumers
would benefit under his proposed program, the
that puts the principles to ridiculous extreme. For ex
farmers by higher prices and consumers by lower food
ample, let us suppose that butterfat became so useless in
costs. Nothing has been said to indicate that the benefits
our economy that its market price fell to say five cents for these two groups would fall upon either the general
per pound for a 10-year average. If the difference between
taxpayer or those who would be hurt if inflationary de
the income support standard of 67 cents per pound and vices are used to finance the program. To the extent that
the five cents market price were made up by direct pro farmers and consumers pay taxes to support the program
duction payments of 62 cents per pound and if in cal the benefits to them would be diminished. If they are to
culating the 10-year average price before adjustment the benefit ultimately from such a program it must be only
67 cents realized by farmers is treated as the price to be because a disproportionate share of the burden will fall
averaged, the effect can only be to perpetuate an artific- on others than farmers or consumers as such.
ally high price for butter and to continue subsidizing its
Finally, it should be recognized that while this pro
production at great public expense. If on the other hand posal goes a long way in correcting some of the defects
the market price of five cents is used in the calculation, in the present paraphernalia for jacking up farm income
the income support standard would continue to fall and it is, nevertheless, still a very slow and cumbersome de
along with it the production payments, thus diverting vice for achieving a happy adjustment or liaison between
farm resources to more profitable outlets.
the social and political assistance to farmers and the
There is much good sound sense in the aspects of his driving urgencies of a dynamic economy.
Page 3
Developments in Social Security—II
Major Changes Proposed
The possibility of major revisions in the existing sys
tem of social security is indicated by the current wide
spread discussion of a number of important proposals.
These proposals, mainly those of the President and the
Advisory Council on Social Security established by the
Senate Committee on Finance of the 80th Congress, stem
from the fact that many important policy problems remain
unsolved after more than 13 years of social security
on a national scale.
Among the most pressing of these problems is that of
the degree of protection provided by the social insurance
programs, in terms of both gaps in coverage and low
benefit levels relative to assistance payments in the public
assistance programs. The half of the labor force currently
not covered by old-age and survivors insurance and
unemployment insurance includes agricultural and dom
estic labor, employees of nonprofit institutions, employees
of the Federal, state, and local governments, members of
the armed forces, self-employed persons, and in the case
of unemployment insurance, workers employed by small
firms. In the absence of insurance protection, the burden
of relieving distress caused by income-loss is borne by
the public assistance programs which are usually financed
out of general taxation. Both the reports of the Advisory
Council on Social Security and the Administration’s
social insurance bill (HR 2893) premise the establish
ment of contributory insurance programs as the main
stays of the social security system, and advocate the
extension of retirement and survivors insurance coverage
to the bulk of that part of the labor force now excluded.
In addition, the Advisory Council recommends extension
of unemployment insurance coverage to approximately
seven million persons now excluded.
Benefit levels in social insurance generally are lower
than the public assistance payments that would be avail
able in the absence of insurance protection. Moreover,
benefits are low relative to previous earnings. Both the
Advisory Council and the Administration’s proposals
contemplate a substantial increase in the ratio of oldage and survivors insurance benefits to past earnings and
large increases in maximum payments. In addition, they
provide for increased family allowances. The Advisory
Council further recommends increases in both the amount
and duration of unemployment insurance benefits. A min
imum payroll tax rate for unemployment insurance ap
proximately equal to the currently low national average
of 1.2 per cent would enable most states to pay higher
benefits for longer periods even under very severe econ
omic conditions. With our aging population, the proposed
higher benefits in old-age and survivors insurance would
require increases in the payroll tax rates and eventually
would require supplemental contributions by the Federal
Government from general taxation. Higher benefits in
Page 4
social insurance would relieve many states of that portion
of their assistance case loads consisting of social insurance
recipients who require supplementary assistance.
DISABILITY AND HEALTH INSURANCE
Proposals for the extension of social insurance pro
tection to new fields, particularly disability and health
insurance, have received more attention than any other
social security problems. On an average day the total
number of persons kept from work due to illness and
other forms of disability is between 4 and 4.5 million.
HR 2893 provides for the establishment of a system
of disability insurance fully coordinated with the present
old-age and survivors insurance system, except that tem
porary disability benefits would be computed in a manner
similar to that prevailing in state unemployment insur
ance laws. The Advisory Council recommends a system
of permanent disability insurance coordinated with oldage insurance, with the proviso that benefits in the former
be substantially less than those in retirement and sur
vivors insurance. The four existing laws providing
temporary disability insurance—three state laws and the
Federal law for railroad workers—are closely allied with
unemployment insurance.
The costs of the state temporary disability programs
have been below the one per cent payroll tax rates im
posed. The Advisory Council estimates the long-range
cost of its proposal for permanent disability at one-tenth
to one-fourth of one per cent; the expansion envisioned
under HR 2893 probably would cost somewhat more than
the Advisory Council’s program. Since almost one-fifth
of the present public assistance case load is composed of
persons dependent due to disability, the added cost of
disability insurance would be in part offset by the even
tual reduction in the assistance rolls.
The issue of Federal insurance for medical services
has been pending for several years. The Federal Security
Administration (FSA) estimates that one-half of the
families in the United States cannot afford comprehensive
health insurance on a voluntary basis; the Administration
bill (S.5) proposes to assure medical care services to this
sector of the population. The main sources of controversy
are the questions of professional freedom and of the cost
of the proposal. The latter is estimated by the FSA at
four per cent of annual earnings up to a ceiling of £4800
per person, with the Government contributing about onefourth from general revenues. In part the contributions
would substitute for present non-insurance expenditures
for medical care, and to that extent would impose a
smaller added burden on contributors.
The magnitude of the cost problem is clearer when the
total cost of the proposals for expanding the existing
social insurance programs and inaugurating new ones is
computed. By 1980 the estimated contribution rate nec
essary to support the retirement, disability, and survivor
system proposed in HR 2893, the proposed health insur
ance plan, and the existing unemployment insurance pro
grams would equal approximately 15 per cent of payrolls.
The costs probably would be met through payroll taxes
totaling five per cent each on employers and employees
and Government contributions from general revenues
equal to an additional five per cent of payrolls.
The question of the methods to be used to relieve
possible protracted mass unemployment has been some
what obscured by the boom conditions of the past few
years. The unemployment insurance system as originally
conceived is ideally suited to providing for frictional,
seasonal, and other types of unemployment not likely
to affect very large numbers of workers for extended
periods. During the depression period of the 1930’s, most
of the unemployed were aided by general assistance and
work relief programs; unemployment insurance played
only a small part because benefits were not paid in most
states until 1938. The unemployment insurance system
automatically will be the major source of support for
many persons in the early stages of a period of largescale unemployment. However, as more persons exhaust
their benefit rights by remaining unemployed for long
periods and as additional persons enter the labor market,
other means of providing for them will become necessary!
_ A partial solution which has been proposed at times
is the extension of unemployment insurance benefits at
the same rates to the same persons for an additional 26
or more weeks. Unless such a system is financed by a
separate State-Federal system or by the Federal Govern
ment alone, this proposal would require considerably
higher payroll tax rates. Both the desirability and feas
ibility of substantial increases in payroll taxes in periods
of declining employment are doubtful. It seems most
probable that the recurrence of a severe and prolonged
degression would bring about the development of new work
relief programs by the Federal, as well as state and local
governments. The residual burden on general assistance
undoubtedly would be great. It might become necessary
to institute a Federal emergency relief program similar to
that of the 1933-35 period, with the Federal Government
bearing the major share of the costs.
PROPOSALS FOR PUBLIC ASSISTANCE
lower on a family basis than those for old-age assistance.
There has been no Federal aid for general assistance since
the mid-1930’s. These lags will become much more of a
problem in any possible period of declining income and
employment, since the more neglected programs are more
responsive to changes in economic conditions than are
the other assistance programs.
The Advisory Council’s proposals for the improvement
of the public assistance programs would entail the ex
penditure of approximately 300 million dollars annually
for additional Federal aid; much of this new money
would be spent on aid to dependent children and general
assistance. The Council recommends the extension of
Federal financial participation in the former program so
that the maximums for Federal matching are equal, on
a family basis, to those for old-age and blind assistance.
Federal grants-in-aid for general assistance are also rec
ommended, although the grants would be a smaller portion
of state-local expenditures below lower maximums than in
the other programs. In addition, the Council advocates
that the Federal Government pay one-half of medical
care costs for recipients in excess of the assistance max
imums, up to specified limits.
HR 2892, another Administration bill, proposes the
consolidation of assistance programs into comprehensive
state systems. Federal participation for all types of
assistance would be up to maximums somewhat in
excess of those now existing in old-age and blind assis
tance, and would apply to medical care costs within
limits which are similar to those recommended by the
Advisory Council. In addition, the Federal Government
would make grants-in-aid up to a total of 24 million
dollars for the first year for welfare services provided
under approved state plans.
A major change in financing is proposed; instead of
matching state expenditures to the extent of three-fourths
of a specified amount of average monthly payments and
one-half of any additional individual payments up to a
specified maximum per person, as is done today, the
Federal Government would pay a computed percentage
of total welfare expenditures, the percentage varying from
40 to 75 and computed on the basis of each state’s per
capita income. The increase in Federal participation is
shown by the following comparison of Federal aid per
centages of total assistance expenditures:
Actual
Calendar 1947
43.9
41.9
53.7
50.0
41.2
47.0
Under
HR 2892
55
45
56
60
52
55
United States
The emergence during the past decade of a relatively
Illinois
large “hard core” of dependency requiring large expendi
Indiana
tures for public assistance even in periods of high levels
Iowa
of income and employment has been among the major
Michigan
causes of the current fiscal difficulties of state and local
Wisconsin
governments. The failure of the Federal Government to
Under the Advisory Council’s proposals, the Federal
keep pace by increasing its fiscal participation to the share would be intermediate between these two, except
same extent as public assistance costs have risen aggra that it might be higher than under HR 2892 for Illinois.
vates the problem. The lag in Federal aid has been The increases in the Federal share under HR 2892 are
particularly apparent in two of the four programs. In greatest in moderate-income states with high current
aid to dependent children, the maximum payments which expenditures for aid to dependent children or general
the Federal Government will match are substantially assistance.
Page 5
Prices Decline Slowly
Lagging Sales, Lower Raw Material Costs Promote Reductions
dexes show a resumption of the declines during April,
following the price firming during March.
Continuous wholesale price declines of six or more
months duration and 6.6 per cent or more total drop
have occurred only four times previously in the present
century. Two of these—the precipitous break of 1920-21
in which prices fell 44 per cent in 13 months; and 1929-33,
in which the decline was slower but of longer duration
and extent—were manifestations of important downturns
in all business measures. The third major decline, from
August 1937 through May 1938, resulted in a lesser over
all dip in prices—11 per cent—but was accompanied by
sharply higher unemployment, especially in durable goods
industries. The drop in 1910, however, was smaller and
of shorter duration, eight per cent in seven months, and
was not accompanied by many other indications of a
serious business setback.
Preceding the most recent decline begun last year, the
average of all wholesale prices had undergone a practically
uninterrupted month-by-month rise from March 1941.
The war years of 1943-45 represented the period of most
effective price controls and a total rise of only five per
cent in the official wholesale price index occurred during
these years. Between January 1946 and August 1948,
however, a virtually continuous rise of 58 per cent in
general wholesale prices took place, interrupted only
briefly during the early months of 1947 and of 1948.
Farm products and food, the items in which prices
rose most during the upswing, likewise have declined most
since last August (see accompanying chart). Despite the
stabilizing effects of Government price supports, farm
product prices, nevertheless, have declined 10 per cent
and food products 14 per cent at wholesale during the
last seven months.
Building materials, although exhibiting a rise almost
as great as farm products and food during the inflation,
have not yet shared importantly in the decline, having
dropped only two per cent. Hides and leather products
reached their peak price level during January 1948 and
had already declined about 10 per cent by August. How
ever, wholesale prices of hides and leather products as
well as those of textiles and clothing products have re
ceded only slightly—i.e., 4.0 per cent and 3.5 per cent
respectively—since the August 1948 peak for “all com
modities.” Chemicals and allied product prices have been
reduced about nine per cent on the average.
Offsetting these declines in part, price trends in the
housefurnishings and metal products lines have continued
generally upward but registered small declines during
WHOLESALE PRICE TRENDS
March. Recently announced price reductions for such
As measured by the U. S. Bureau of Labor Statistics, finished products as floor coverings, furniture, appliances,
wholesale prices of all commodities dropped 6.6 per cent and automobiles, moreover, probably indicate that trends
from August 1948 to March 1949. Subsequent weekly in in these lines now have been reversed.
Despite widespread reports of important price reduc
tions among individual goods and services, the general
price slide-off since last August’s record peak has been
quite orderly and at a fairly slow rate. Moreover, the
months immediately ahead seem likely to be marked by
continuation of the same gradual downtrend for prices
generally, although with more products being affected and
considerable variation, of course, among many individual
items.
During the past eight months consumer prices have
dropped roughly three per cent or an average of less than
.5 per cent per month. The January-February drop was
slightly greater than one per cent, but the fractional rise
in March reduced the extent of the over-all decline. The
reduction in wholesale commodity prices since last August
has been larger, about seven per cent, but still averaging
less than one per cent per month. Because slightly
higher farm product and food prices outweighed minor
declines in other product groups, the all commodities
index of wholesale prices increased from 158.1 in Febru
ary to 158.4 in March. Recent price movements of commodites on the organized exchanges, however, give in
dication that further at least moderate declines may lie
ahead.
Although past history and general reasoning long ago
led most business executives to expect record inflationary
prices to subside after demand backlogs disappeared
and productive expansion programs neared completion,
falling prices, nevertheless, are being interpreted in some
quarters of this District as a sign of major business dis
tress. The underlying fear is that the downward price
trend will not be stopped short of a deep readjustment;
current and future policies based upon such fears could be
important in their realization.
High and relatively inflexible costs pose difficult prob
lems for business managements confronted with shrinking
markets at prevailing prices. Declining sales and com
petitive price cuts, however, promise to force many re
ductions in costs, often with adverse effects upon sellers
but welcomed by buyers. Consumer response to more
than token price reductions during recent weeks strongly
suggests that the buying public is willing and able to
re-enter markets when offered quality goods at prices
it can afford to pay. Industries or firms unable to cut
costs in coming months may well expect greatly increased
sales-price competition from substitute products and other
companies.
Page 6
COST OF LIVING RECEDES
The cost of living as measured by the U. S. Bureau of
Labor Statistics Consumer Price Index (CPI), is down
•about three per cent from the August 1948 peak. The
latest official CPI showed cost of living in March to be
169.5 per cent of the 1935-39 average. Judging by the
declines already recorded in wholesale prices, the current
month’s index when published almost certainly will be
below the March level, and still further below May a
year ago, when the index stood at 170.5.
From the prewar year of 1939 to last year’s peak,
prices paid by consumers in the Seventh Federal Reserve
District’s major cities increased somewhat more than the
average for all major cities in the nation, but the subse
quent price decline has been somewhat greater. Specific
ally, the average increase for the District’s four major
cities was 79 per cent from 1939—a period when average
District prices were almost identical with the national
average—to August 1948. During the same period the
increase in the 34 major cities in the nation was 75 per
cent. The average decline in the District’s major cities
since August 1948 has been 3.9 per cent compared with
3.1 per cent for the nation.
The apparent discrepancy between the amount of in
crease and subsequent drop since the prewar period for
wholesale prices (up 110 per cent, then down 6.6 per cent)
as compared with consumer prices (up 75 per cent, then
back three per cent) is explainable largely in terms of the
differences between what the two indexes purport to cover.
The CPI, by which changes in cost of living for the typ
ical moderate income family are measured, contains
household rents, which have been maintained at low
levels through Government controls. Moreover, the CPI
also measures personal services such as medical and dental
care, barber and beauty service, and street transportation,
for which no comparable wholesale concepts exist.
WHOLESALE PRICES HALT LONG
1939-47, ANNUAL
ADVANCE
AVERAGES; 1948-49, MONTHLY AVERAGES
(1926 =100)
PER CENT
PERCENT
2001------ r
W^ALL
>
COMMODITIES
1943
SOURCE: U.S. BUREAU OF LABOR STATISTICS.
I I I 1-1 I I I I
1947
Since the official CPI bases housing cost upon tenancy
rather than home ownership—plans for removing this
limitation are now being made—it currently fails to
reflect the increased shelter cost for families which have
purchased homes at inflated postwar prices both in the
District and in the nation. Likewise, it cannot reflect the
housing cost of individual families which have moved into
new uncontrolled apartments because of the very small
proportion of such cases. Moreover, since only the major
cities are covered for all items of consumer expenditures—
indexes of food prices are maintained for some smaller
cities—the trends of general consumer prices in the out
lying cities of the District are not now measured.
DEFLATION SETS IN
Accompanying the buying resistance already exhibited
by consumers in their reactions to prices of finished pro
ducts is the tendency of industrial buyers to resist high
prices of raw materials. With steel and nonferrous scrap
leading the field, several primary metal prices have de
clined in recent weeks largely because of buyer resistance
and expanding supply. Lead, zinc, and more recently, cop
per—all have undergone price reductions in the last two
months ranging from more than 35 per cent in the case of
lead to about 23 per cent for copper. Similar price weak
nesses have developed in fats and oils, industrial chemi
cals, and textiles, and appear to be in the offing for
building materials, and hides and leather products. Over
all demand appears to have weakened on a broad front,
but supplies of salable goods and services are generally
becoming very ample, relative to demand at current
prices. Shortages in the sense of wartime and early post
war years are virtually nonexistent, although temporary
and localized conditions of short supply for certain items
can be found and others might well occur in the months
immediately ahead.
In addition to changing supply-demand relationships,
income prospects are more limited for the period ahead
than a year ago. Declining nonagricultural employment,
combined with elimination of overtime and some short
ening of basic work week, already have resulted in lowered
income paid as wages and salaries, placing many family
budgets under even greater pressure. Generally less fa
vorable profit prospects point to smaller incomes for
proprietors of business and dividend receivers. Official
estimates of farm receipts in 1949 portend a 10 per cent
drop in agricultural income as well this year.
Thus, one of the most significant factors affecting
current and future trends of prices, both at the whole
sale and consumer levels, seems to be the growing reluc
tance not to mention mobility—of more 3.nd more
business firms and consumers to spend for other than the
basic requirements. As previously pointed out, resistance
to high prices initiated by consumers has spread to bus
iness managements in making their own purchase com
mitments. The degree to which this reluctance to spend
further develops, and the time period over which it con
tinues, will largely determine how far and how fast the
present price slide-off will go.
Page 7
Declining propensity to spend has extended over a
longer period than that of the actual price decline. The
U. S. Department of Commerce reports that total private
spending declined from 95 per cent of total disposable
income in 1947 to less than 91 per cent in the fourth
quarter of 1948. Preliminary indications from current
income, sales, and savings trends are that the decline
has pursued an even greater rate during 1949. Further
more, downward trends in commercial, industrial, and
agricultural loans, accompanied by recent declines in con
sumer credit reveal an unwillingness of both business and
consumers to borrow funds for current spending to the
extent which prevailed in the earlier postwar years. Fall
ing prices, moreover, have reduced the financial require
ments to handle a given volume of sales or purchases.
As spending declines for any reason, the “next round”
of income also tends to shrink either through reduced
profits or smaller wage and salary income as a result of
the lower sales volume. In addition, when business ac
tivity begins to subside, personal savings generally start
to rise at least temporarily, a development quite apparent
since at least mid-1948. So long as the spending of other
consumers, business firms, or Government continues at
a high enough level, stepped-up savings of individuals
hesitating to buy is offset, and income will continue high.
However, whenever increased savings are not fully offset
directly or indirectly, smaller incomes, added unemploy
ment, and lower prices almost inevitably follow.
Thus, one immediate problem confronting business is
to find means of attracting consumers back into the mar
kets in greater volume. This can only be done by offering
and publicizing combinations of price and quality which
will stimulate total spending. Reductions which appear to
buyers as token cuts will merely cause them to await
further declines and not bring about the desired results.
But if consumer goods prices are to recede in an orderly
manner to a lower but more stable level, business firms
which supply raw and semi-finished products to other
firms also must adopt comparable price policies which will
permit continuing lower costs on finished goods.
Unit labor costs also must come down, preferably by
means of increased productivity per man-hour reflected
in lower prices for the ultimate consumer. Understandably,
no seller rushes to reduce prices, particularly when such
action means concomitant inventory losses. If underlying
demand-supply conditions, however, will not support pre
vailing prices, it would seem prudent to make adjustments
in a forthright fashion rather than wait until badly
weakened markets cause a sharp break in prices.
GENERAL PRICE OUTLOOK
Despite the strong current trend toward lower prices,
potentially inflationary influences have not disappeared
completely from the scene, and promise to exert a retard
ing influence upon future price declines. Government
spending programs—state and local as well as Federal—
now in the planning and/or early development stages,
seem likely to have buoying effects similar to those which
added to the upward spiral in 1947 and 1948. These pro
Page 8
grams include not only the well publicized arms to Europe
and agricultural support proposals of the Federal Govern
ment, but voluminous public works, including resources
development projects. Private expenditures, however, are
now falling, and new strength from Government spending
promises to be an offset to private spending weakness
rather than a powerful supplement to private inflationary
tendencies as earlier. There is doubt, moreover, that
Government planning for the new spending programs has
advanced sufficiently for them to exert much appreciable
new influence on business activity or prices this year.
A very large volume—although below recent record
levels—of private expenditures for modernization of plant
and equipment seems likely to continue, and indeed may
well increase as adjustments in building costs are made
and other aspects of the emerging general cost-price
structure become clarified. Potential cost reduction in
itself is one of the principal stimulants to private capital
expenditures. Furthermore, the long-run increase in pop
ulation, anticipated further rising living standards, and
the advent of the new industries—television is but one ob
vious example—all point to expanded markets helping
to maintain higher average levels of employment, income,
and prices than existed in the prewar years.
Declining price and employment trends have removed
much of the pressure for fourth-round wage demands, but
moderate increases, in some industries at least, still seem
probable. In any event, wage rates constitute a relatively
inflexible item of cost which tend to support rather than
reduce prices.
Price declines from the artificially high and distorted
levels of record peacetime inflation clearly are under way
and seem almost certain to continue throughout the re
mainder of the year. Never in the past have prices been
leveled for any extended period at the peak of inflation;
nor is such a development likely now. Nevertheless, a
downturn in prices does not necessarily mean an abrupt
drop from peak inflation to deep deflation. The slow and
extended slide-off to date, in fact, seems to offer some
evidence that the domestic and foreign demands on the
productive resources of this District and the nation are
too great to permit a general price collapse soon. Rapid
completion of physical industrial reconversion from war
to peace, the continuing threat of war, the relative absence
of speculation, and the operation of price support pro
grams—together with the expectation of comparatively
heavy and continuing private and public demands for
goods and services at proper prices—appear to minimize
the possibility of a recurrence of a severe price break as
in 1920-21. '
Price declines to date for the most part have been
gradual, reflecting both the waning influence of inflation
and the underlying strength of private and public expendi
tures. Much can be done to continue the orderly pattern
of further price cuts if pricing and spending policies are
based upon full recognition of the basic economic forces
of adjustment at work, and not merely upon the view
that any price movement which is not “up” is tantamount
to saying a price collapse is at hand. Consumers are having
their first price relief in years and responding well.
FARM LEASES—I
(Continued from Inside Front Cover)
they will be paid for investments in crop and livestock
production operations which carry over for several years
should they be displaced in the interim. Leases which
fail to provide assurance to the tenant that he may con
tinue to operate the farm for a period of years promote
exploitive and inefficient farming.
It should not be inferred, however, that this problem
is limited to tenant-operated farms alone. Many owneroperators, particularly those laboring under a heavy debt
burden or those operating inadequate units, have at times
experienced great insecurity of tenure with similar results
to farm resources. Also, it should be recognized that pro
viding for security of tenure on farms will not automat
ically result in adoption of the best livestock, crop, and
soil management practices. Ignorance and custom would
still continue as major obstacles to the rapid adoption of
improved farm practices. However, since most good farm
plans in the Seventh District states involve crop and live
stock production programs which cannot be brought to ma
turity for several years, the provision of a relatively high
degree of security of tenure is a necessary prerequisite to
the adoption of the most appropriate production pro
grams on the farms of the area.
Unfortunately, insecurity of tenure and the many
ramifications of this problem would not be solved simply
by writing all farm leases for terms of five, ten, or more
years instead of for one year as is common now. Many
landlords and tenants have only a brief acquaintance
with one another at the time they enter into a lease. If
the arrangement should prove unsatisfactory to either of
them a long-term commitment would be a decided dis
advantage in bringing the arrangement to a close. Some
owners of farmland are holding the property for sale at
the first favorable opportunity and do not wish to handi
cap the possible sale with a long-term lease. Nor is the
inhibition against long-term leases entirely on the side
of the landowner. Some tenants do not wish to “tie”
themselves to a particular farm for a period of years in
case they should have opportunity to rent a better farm
or to improve their circumstances in some other manner.
Finally, a lease for a specified number of years without
provisions for renewal involves the same difficulties as
the annual lease but at less frequent intervals.
A workable solution apparently is found in the writing
of leases initially for relatively short periods, possibly
one, two, or three years, but including provisions: (1)
that the lease will be renewed from year to year so long
as the tenant operates the farm in a husbandlike manner;
(2) that in case the lease is terminated by either party
some minimum period of notice must be given and that
the tenant will be given full credit for any unused im
provements he has made to the farm at his own expense;
(3) that the landowner would be compensated for any
unusual deterioration of land or improvements resulting
from negligence of the tenant.
In addition to providing competent tenant operators
with greater permanence of residence in the community,
such arrangements permit them to employ their capital
and managerial ability to full capacity. They can plan
for continuity of operations which is very important if a
good program of soil management is to be maintained on
the farm. While the provisions do not guarantee the
tenant against displacement, they do assure him that he
will not be displaced without some minimum period of
notice which would permit him to arrange for another
farm. Also, he is assured of reimbursement for invest
ments he may have made in the crop and livestock pro
duction program on the farm if displaced before full
benefit has been received. The types of thing for which
the tenant may claim compensation, as well as the rates
to be paid, may be listed in the lease. The objective is
to provide conditions for tenant operators which will
permit and encourage them to organize and operate farms
as though they were to spend their lifetimes there. If
achieved, the landowner would benefit from the superior
farming and the conservation or improvement of his cap
ital investment.
ADAPTED FARMING BENEFITS ALL
Lease provisions should facilitate development of the
type of farming adapted to the soil resources of the farm.
The soil largely determines an appropriate cropping sys
tem. The cropping system, in turn, is an important factor
determining an appropriate livestock program. It is im
portant that the operator plan the farm operation from
the long-run point of view. This will assure proper at
tention to such things as the application of lime and
phosphate, maintaining good crop rotations including at
least minimum acreages of legumes, provision of necessary
fences and minor buildings for effective livestock pro
duction, and the return of manure and crop residue to the
fields.
Improvements such as buildings, fences, drainage, and
the like, may be inadequate to permit development of the
enterprises which would provide the greatest sustained
yield from the farm. The responsibilites of both owner
and tenant relative to the provision and maintenance of
needed facilities and equipment should be outlined.
Many farms are too small or too “run down” to pro
vide income sufficient for a tenant and to pay rental to
the owner, often resulting in overcropping and further de
terioration of the soil. The capacity of such farms must
be increased either by the addition of land or by stepping
up the productivity of the land if good farming and sat
isfactory owner-tenant relationships are to be obtained.
Not all the essentials for the development and main
tenance of good farming can be covered in detail by the
provisions of written leases. It is important, therefore,
that an understanding of the value of fair and reciprocal
arrangements to land operation be built up between
owner and tenant. This can be done best where they both
have a thorough knowledge of farming and a sincere in
terest in maintaining the farm unit as an efficient bus
iness. Where the owner does not have a good knowledge
of farming or is far removed from the farm, employment
of competent management to represent his interest is
often desirable.
SEVENTH FEDERAL
ILL | IND
RESERVE DISTRICT
@FedFRASER