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OCTOBER, 1947

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USINESS CONDITIONS




A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO

Farm Income Continues High
Domestic Demand and Foreign Outlets Both Important
With gross farm income expected to reach all-time record
proportions in 1947, some estimates running as high as 30
billion dollars, the relative strength and stability of domi­
nant underlying factors in farm income assume increased
importance not only currently but especially also for the
months and years ahead. There is probably nothing new for
most readers in saying that the gross returns to agricultural
producers are very closely related to the level of general
economic activity, and particularly to the level of total dis­
posable incomes of individuals.
1 his relationship, or seeming dependence of farm in­
come on disposable incomes, was most obvious during the
depression and prewar years. An important factor in this
relationship is the fact that agricultural production remains
relatively stable in spite of price fluctuations and, therefore,
most of the variations in farm income occur in relatively
wide ranges of price fluctuations. But in addition to this
relationship the war and postwar years have been marked
by an increase in the importance of agricultural exports to
the level of farm income. While farm income has been en­
hanced in total by a large volume of exports, their impor­
tance to prices, and hence incomes from individual com­
modity groups, has been often underemphasized.
Turning first to the civilian domestic demand situation,
the total of cash receipts by farmers from sales of farm
products in years of relatively low general economic activity,
such as the years 1932 and 1933, has been equal to only
about 10 per cent of the total of disposable dollar incomes
of all individuals. On the other hand, in years of high
levels of economic activity such sales by farmers have been
equal to as much as 15 per cent of total disposable incomes.
In other words, farm income not only rises and falls with
general economic activity, but also fluctuates somewhat more
than disposable income because it is a small part of small
totals and a larger part of large totals. If the predictions of
a farm income of 30 billion dollars for 1947 are correct, that
total will be equal to more than 15 per cent of disposable
incomes. It should be understood, of course, that consumer
expenditures for farm products are much larger in total than
farm income because of the processing and marketing costs
involved. These costs bring the current level of consumer
expenditure to about 30 per cent of disposable income.
Such variations are due in part to the fact that when in­
comes are high consumers are disposed to spend not only
more on food generally, but also for some kinds of farm
products they will spend a larger proportion of high in­
comes than they will when incomes are low. In addition
to this relationship it has been made obvious by the experi­
ence of the last few years that when periods of high totals
of disposable income are associated with high levels of em­
ployment and wages new customers are added to the total
number of consumers buying some kinds of farm products.




This is true of some “luxury” or “semi-luxury” foods which
are bought only by consumers whose income is high enough
to afford such expenditures.
An indirect measure of these relationships may be seen
from an examination of the farm income from selected com
modities. For example, in 1929 and 1930 the farm income
from sales of cattle and calves was equal to IV2 per cent of
the total of disposable incomes. By 1932 and 1933 the pro­
portion was only 114 per cent, but for the past two or three
years it has risen again to lVi per cent. An even more
marked change is shown for hogs. At the 1929 peak of
disposable incomes the proportion was 1.8 per cent, dropped
to 1.2 per cent in 1932, and since 1944 has been above 1.8
per cent again. Income from poultry and eggs shows less
extreme variation in relation to incomes. The comparable
ratio to total disposable incomes ranged from 1.7 per cent
in 1929 and 1930, to 1.5 per cent in 1932 and 1933, and
back to 1.7 per cent for current levels. For wheat the pro­
portion of cash income to disposable incomes was 1.0 per
cent in 1929, 0.6 per cent in 1932, and 1.2 per cent recently.
An interesting picture in this respect is presented by
comparable figures for farm income from the sale of milk
and dairy products. The ratio of farm income from the sale
of milk and dairy products to disposable incomes has re­
mained quite constant through high and low levels of the
latter. In 1929 and 1930 the ratio was 2.8 per cent. Again in
1932 and 1933 the ratio was of the same proportion. For the
last two or three years the ratio has been only 2.4 per cent,
but if allowance is made for production subsidies paid to
milk producers, the ratio would be again about 2.8 per cent.
It would seem from this stability of the proportion between
farm income and disposable income that as consumers we
tend to allocate a fairly constant proportion of income to
milk and dairy products as a whole. This is the only major
class of farm products for which this is true. It should be
emphasized that this conclusion would not hold for each
dairy commodity, such as fluid milk, butter, cheese, etc.,
separately. Levels of income have a pronounced effect on the
proportion spent on such items.
In the case of wheat, farm income equalled one per cent
of disposable incomes in 1929 and 1930, but for 1932 the
proportion was only 0.6 per cent. For the past three years
the proportion has been higher than in 1929 and 1930,
ranging up to 1.4 per cent. This record high ratio is due in
large part to the very great rate of wheat and flour exports
in the past several months.
IMPORTANCE OF EXPORTS MAGNIFIED

Total exports during the first half of 1947 reached record
levels, and the annual rate for May was above 16 billion
(Continued on Inside Back Cover)

World Dollar Shortage Hits U. S. Exports
Mixed Reactions on Domestic Economy
As the pace of postwar inflation has quickened once more, a short-term fall of from two to 2.5 per cent in this record
the most significant present sign of possible future defla­ GNP total. Export trade at present is estimated to furnish
tion and difficulty for national and Midwest business is the employment For perhaps 1.5 million American farmers and
drop in American exports and in the American balance of over two million industrial workers.
In certain important Seventh District industries and agri­
trade. Some leveling ofF from the 1946 figures had been
expected early this year; contrary to the general expecta­ cultural specialties, the importance of export trade is par­
tion, the export volume and export balance continued up­ ticularly great. In steel, it has been estimated that as many
ward through the month of May (see accompanying chart), as 18 of every 100 workers are currently producing for ex­
with the net balance rising from 49 to 62 per cent of the port; in machinery and automobiles, 12 out of 100; in
export volume. Then came a 12 per cent decline in exports chemicals and rubber, 11 out of 100. The importance of
between May and June and a further drop of 7 per cent in exports to Seventh District agriculture is discussed in an
July. Later figures very likely will show further downward article entitled “Farm Income Continues High” in the
movement as they become available from the U. S. Bureau present issue of Business Conditions.
of the Census.
MARSHALL PLAN POSSIBLE EFFECTS
The initial May-June decline is not highly significant in
itself and is attributable in part to a three-day maritime
The 2.5 billion dollar decline in exports foreseen for the
strike. The July export total of over 1.1 billion dollars still
exceeds the monthly average of any past year except 1944 second half of 1947 is expected to occur in the face of the
and is nearly 50 per cent above the 1946 monthly average 4.3 billion dollars for "international affairs and finance”
of 812 million. The retreat from the May height, however, estimated in the President’s August 1947 review of the
appears to be only the first phase of a steady decline brought budget for the fiscal year 1948, which ends June 30 of
about by a world-wide shortage of gold and short-term next year. (This is less than a billion below the sum paid
dollar balances. Compared with a half-year peak of 7.5 out in the fiscal year 1947.) The Marshall Plan for the
billion dollars in exports during January-June 1947, this economic unification and reorganization of Europe with
decline may amount to 2.5 billion dollars during July- American assistance will perhaps envisage net additional
December of this year. With exports accounting for some­ payments of three to five billion dollars a year in Europe
what less than 10 per cent of our gross national product over an approximate five-year period. If aid under the
(GNP) of 225 billion dollars, such a drop in exports— Marshall Plan or some equivalent in early 1948 is felt
unless offset by expansion in domestic sales—would lead to sufficiently likely, the decline in American exports, of

POSTWAR

U. S. FOREIGN TRADE

AVERAGE

MONTHLY RATES,

1947

1946
MILLIONS

BALANCE

1946 - 47
(1ST

FIVE MONTHS)

MILLIONS OF

OF DOLLARS

DOLLARS

■poo
ALL

COUNTRIES

EUROPE

ASIA

NORTH AMERICA
EXPORTS
SOUTH AMERICA

REST OF WORLD

IMPORTS
BALANCE

SOURCE: U S. DEPARTMENT OF COMMERCE




Page 1

course, will be less great in 1947. Europeans might then
permit their dollar balances to fall to levels which would be
considered dangerously low in the absence of some foreign
aid plan.
No politically feasible program of aid to Europe alone,
however, can prevent a considerable decline in American
exports. The dollar shortage extends beyond Europe, and
Secretary Marshall has rebuffed overtures toward extension
of relief to Latin America.
BREAKDOWN OF FOREIGN TRADE DECLINE

Much publicity has been given to British efforts to re­
duce the volume of their imports from this country in the
“dollar crisis” which ensued on the unexpectedly rapid ex­
haustion of the 3.75 billion dollar loan made by this country
in 1946. All but 400 million dollars of this line of credit,
originally planned to suffice for five years, had been drawn
by September 1. Cuts in British imports of tobacco, motion
pictures, petroleum products, and even “semi-luxury” food
items like dried, canned, and fresh fruit, dried eggs and
milk, fresh meat, and cheese have been planned and in
some cases put into effect, despite resentment of American
suppliers. By the end of October, the British expect to with­
draw from the American grain markets as well, after pur­
chase of approximately half their estimated 1947 demand.
Less well known is the fact that the United Kingdom,
alone of this country’s major customers, continued to in­
crease its imports through June, and that since the first of
May, Argentina, Brazil, Chile, Colombia, Ecuador, Mexico,
Peru, and Uruguay have all moved to reduce their imports
from the United States.
The June downturn, according to the U. S. Bureau of
the Census, affected all the principal commodity categories
of American export trade except crude materials, and the
latter group was the principal element in extending the
decline in over-all exports in July. The May-July drop in
monthly shipment rate for finished manufactures was 160
million dollars or more than 18 per cent; crude materials,
48 million dollars or 34 per cent; and crude and manu­
factured foodstuffs, 41 million dollars or 18 per cent. See
accompanying table for additional details.
Within the finished manufactures group, in which more
than half of the current shrinkage in overseas sales has
been concentrated, two leading Seventh District industries
have been chiefly affected: (1) motor trucks and busses,
with a monthly rate export decline between May-July of 17
million dollars or 35 per cent; and (2) industrial machinery,
off 29 million dollars or 20 per cent. Other principal indus­
tries in this group hit by falling foreign sales have been:
rayon, nylon, and other synthetic textiles; rubber products;
cotton manufactures; and merchant vessels, with percentage
declines ranging from 33 to 19.
Crude materials experiencing the largest export sales de­
creases in recent months have been: raw cotton, 28 million
dollars or 68 per cent; and coal, 18 million dollars or 28
per cent. Declines in foreign sales of foodstuffs to date have
been slightly heavier in crude items than in manufactured
products. Influenced in part by seasonal factors, several
Page 2



leading Midwest food products have participated in the
export downturn: wheat and wheat flour, off 16.5 million
dollars or 23 per cent; com, 15 million dollars or 38 per
cent; meat, 12 million dollars or 53 per cent; and lard, 6
million dollars or 67 per cent. Semimanufactured iron and
steel products, and particularly ingot steel, have led in
the export decline among partly finished products, experi­
encing a May-July drop of about nine million dollars or 20
per cent.
Expanding imports of foreign goods into the United
States, of course, would provide a new supply of dollars
for many nations desiring to buy American goods. Actually,
the over-all U.S. import volume also has shown an irregular
downward trend from 536 million dollars in December of
last year. The figure was 455 million dollars in May and 445
million dollars in July, a 2.4 per cent drop during the threemonth period. While imports of manufactured products,
including foodstuffs, have increased, declines in cmde mate­
rials and foodstuffs have more than offset these gains. The
principal decreases have occurred in crude rubber, oilseeds,
and raw wool.
THE DOLLAR SHORTAGE PROBLEM

In a few cases (e.g., shovels in Chile, nylon hose in
Puerto Rico) there are reports of physical saturation of
particular foreign markets with individual items of Ameri­
can merchandise. There are also commodities, such as lard,
steel, and railroad cars, the exports of which have been
reduced deliberately by public or private authority in order
to relieve shortages in the United States. By and large, how­
ever, the principal problem facing the American exporter
is the difficulty which his customer will find in obtaining
dollars to pay for his goods.
Dollars are required by exporters, since only a few Ameri­
can firms which propose the erection of foreign branch
plants and other facilities will accept payment in foreign
currencies. Existing foreign exchange rates clearly under­
value the dollar, temporarily at least, in terms of other lead­
ing international currencies. Occasional devaluations, as of
the Japanese yen and Italian lira, and the widespread black
markets, on which dollars are quoted far above official rates,
are evidences of this undervaluation. In general, foreign
governments are averse to revaluing their currencies down­
ward at the present time, both from prestige considerations
and from fear of the inflationary consequences of increased
prices of their imports from this country.
Foreign holdings of gold and liquid dollar assets (U. S.
currency and securities of American governments and corpo­
rations) are estimated by the Federal Reserve Bank of New
York at 18 billion dollars as of the end of March. This is a
rise of some four billion dollars over August 1939, which
has been offset, however, by the fall in the purchasing power
of the dollar. The March total represents a fall of two billion
dollars since the end of hostilities with Japan. These figures
do not include balances of the Soviet Union or of its na­
tionals, or private gold hoards secreted by individuals else­
where. Foreign gold production (outside Russia) adds ap­
proximately 700 million dollars a year to foreign buying

V

power, although little of it rests permanently in foreign
dollar balances. There has probably been more than a billion
dollar fall in net foreign holdings during the two middle
quarters of 1947.
About two-thirds of all foreign gold and dollar holdings
are believed to consist of gold coin and bullion. Any increase
in the American gold price above the present 35 dollars per
ounce would, therefore, ease the position of foreign gold
holders, at least for a time.1 If the entire 18 billion dollars
of foreign dollar balances could be mobilized at short
notice, this would suffice to finance the American export
surplus for approximately two years at its July 1947 annual
rate of about 8.5 billion dollars. This, of course, assumes
no other sources of financing would be used.
The immediacy of the dollar crisis arises from the im­
practicability of large-scale, short-term mobilization of for­
eign dollar resources. Much of the gold is held as reserve
for currency, and a substantial part of the dollar balances
constitute working funds needed for carrying on current
trade. Many of the assets held by individuals cannot be
confiscated under present laws.
Moreover, foreign dollar balances are not distributed in
the same international pattern as the apparent need for
American resources. The most serious losses have been those
of the relatively needy “liberated nations” of Western
Europe, with the exception of Belgium. The gold and
dollar holdings of this group, including Belgium, have fallen
from 5.4 billion dollars at the outbreak of World War II,
to 3.7 billion at V-J Day, and 2.5 billion in March 1947.
The wartime neutrals of Europe, on the other hand, are
better off. The group of four nations, Portugal, Spain,
Sweden, and particularly Switzerland, have a net gain of
approximately a billion dollars since 1939. A proposal for
a “Dollar Pool” in conjunction with the Marshall Plan is
designed to make the dollar resources of Allied countries
*A prospective increase to $50 per ounce has been rumored widely in recent
months; the rumor has been officially and firmly denied.

in the strongest relative positions available to finance im­
ports of neighbors whose needs may be greater but whose
dollar positions are weaker.
DOLLAR SHORTAGES IN SPECIFIC COUNTRIES

The acute British dollar shortage arose following British
action on July 15, 1947, to make sterling freely available for
expenditures on “current transactions” in any currency area.
An unexpected large drain on British dollar resources began
in the latter half of July. Exporters to the United Kingdom
secured payment in dollars or convertible sterling. Other
holders of sterling (not on current account) appear to have
evaded to some extent the limitations of the free converti­
bility provision. The British suspended the dollar converti­
bility of the pound on August 20, following consultation
with American Treasury authorities. If Great Britain con­
tinues to lose dollars in substantial quantities, its 2.4 billion
gold reserve, already reduced by 80 million dollars on
September 17, will have to be tapped further.
France had spent by the end of August all but 30 million
dollars of a 250 million dollar World Bank loan granted in
the spring. The exhaustion of this loan, plus a shortage of
dollars from other sources, caused the French to cut their
planned imports by 250 million dollars, nearly 40 per cent,
for a six-month period beginning in September. Imports
from outside the French colonies are being halted except on
necessities—coal, gasoline, cereals, and fats. In addition, the
French Minister of Economy proposes to shift his country’s
purchases of cotton to Egypt, and of grain to Canada and
Australia, so as to conserve American dollars.
The Latin American dollar shortage presents a different
problem. Most if not all the Central and South American
republics accumulated large dollar holdings from the sale
of raw materials to this country during the war. They hoped
to use these funds primarily to purchase machinery and
other equipment for their own industrialization. With

WHICH INDUSTRY GROUPS ARE BEING HIT BY FOREIGN TRADE DECLINE?
(Amounts in millions of dollars)
EXPORTS
Monthly Average

May - July 1947
Change

1947

Group
1939

Crude Materials ..............................
Crude Foodstuffs..............................
Manufactured Foodstuffs ..............
Semimanufactures ..........................
Finished Manufactures ..................
Total ..................................................

1946

44.0
9.2
16.9
51.3
138.9
260.3

118.0
54.0
127.0
74.7
418.2
791.9

May

143.4
80.0
144.5
171.3
869.2
1,408.4

June

152.8
56.8
137.4
159.4
721.8
1,228.2

July

95.5
62.0
121.5
151.3
708.9
1,139.2

In Dollars

Per Cent

- 47.9
- 18.0
23.0
- 20.0
-160.3
- 269.2

-33.4
-22.5
-15.9
-11.7
-18.4
-19.1

IMPORTS
Monthly Average

May - July 1947
Change

1947

Group
1939

Crude Materials ..............................
Crude Foodstuffs..............................
Manufactured Foodstuffs ..............
Semimanufactures ..........................
Finished Manufactures ..................
Total ..................................................

1946

May

June

July

In Dollars

Per Cent

62.1
24.2
26.1
40.6
36.7
189.7

141.7
67.9
41.9
77.4
70.5
399.4

160.1
61.2
54.0
103.5
76.7
455.5

162.9
55.6
60.3
112.2
81.8
472.8

133.4
55.1
62.9
103.5
89.9
444.8

- 26.7
— 6.1
+ 8.9

-16.7
-10.0
+ 16.5

+ 13.2
- 10.7

+ 17.2
- 2.4

SOURCE: U. S. Bureau of the Census.




Page 3

American metal products remaining in short supply for
two years after V-J Day, however, they found their dollars
being “dissipated” on imports of consumption goods, includ­
ing luxury items. With the avowed purpose of conserving
dollars until American capital goods become available for
export, most Latin American republics have strengthened
their exchange controls against continued imports of Ameri­
can textiles, automobiles, refrigerators, and the like. Argenti­
na embargoed all imports temporarily late in August, follow­
ing the British suspension of sterling-dollar convertibility.
In Mexico, special measures have been taken to prevent
American tourists from selling their automobiles while south
of the border. Cuban and Venezuelan dollar holdings, how­
ever, remain at their peak because of our continued high
imports of sugar and petroleum.
EUROPEAN SELF-HELP

The further accumulation, in Fort Knox or elsewhere, of
an additional 10 or 12 billion dollars in foreign gold would
be of questionable benefit to this country. The forced
liquidation of five or six billion dollars in foreign assets over
the next year or two, if at all possible, would probably be
difficult for the security markets to absorb in any orderly
fashion.
Proposals that Europe and Asia solve their own problems
by lowering living standards and raising output and prod­
uctivity with little or no further American assistance are
common. Their proponents do not as a rule make adequate
allowance for the actual destruction of capital equipment
and the accumulated depreciation and obsolescence of the
war years, or for the effects of poor health and minimal diets
upon the efficiency of labor and, therefore, tend to under­
estimate the degree to which foreign living standards would
fall in the absence of American assistance. The problem is
rendered suddenly more acute by widespread drought which
has cut 1947 crop estimates of grain and potatoes through­
out Western Europe from Great Britain to Scandinavia,
Italy, and Austria.
If Europe and Asia are left to starve or to their own
devices of self-help, their dollar shortages will not be solved,
and the decline in American exports will be assured rather
than averted. Even the limited “mutual aid” provisions of
the Marshall approach will have this effect to some extent
by re-establishing prewar relationships whereby European
countries mutually replenished each others’ deficiencies.
Continuance of a high level of U. S. exports without Gov­
ernment or World Bank assistance is possible only (1) if
private capital undertakes foreign investment on a corre­
spondingly large scale or (2) if foreign revival is concen­
trated in industries exporting to this country. The first
alternative is extremely dubious in view of the skepticism
of U. S. investors toward most foreign securities until politi­
cal and economic risks have been reduced by other meas­
ures. Selling pressure has developed on Wall Street in the
securities of the International Bank itself. The second alter­
native is hampered by a resurgence of American protectionist
sentiment in favor of industries which rose during the war
to reduce our dependence on foreign supplies. American
Page 4



imports of crude rubber, for example, will be held down for
the benefit of the domestic synthetic rubber industry. For­
eign silk is not expected to cut seriously into the American
market now captured by nylon. Even in the service indus­
tries, the United States is seeking a much larger than pre­
war share in world shipping and air transportation revenue,
using subsidies to overcome the handicaps of high wage
rates and construction costs. In the short-run it is probably
physically impossible to step up foreign import totals greatly,
were this country to go so far as to eliminate tariff protec­
tion entirely.
DOMESTIC REPERCUSSIONS

For at least the remainder of this year, falling exports are
expected to serve as an anti-inflationary weapon, a brake
on rising prices, and not as an active deflationary destabilizer.
This is particularly true for the durable goods industries of
the Seventh District. Some individual prices may break,
and there may be a certain amount of “frictional” unem­
ployment, but the net effect on the American consumer will
probably be favorable. Numerous shortages will be relieved
somewhat — railroad equipment, automobiles, agricultural
machinery, etc. There may be some downward pressure on
food and clothing prices, although this is less likely in view
of the pressing nature of foreign demand for the “neces­
sary” items of food and textiles.
The more disruptive effects of falling exports will become
apparent only later, perhaps before mid-1948 if nothing is
done. There may then arise the falling demand, prices, and
employment, which could have been mitigated and perhaps
postponed by the maintenance of our export market close
to its present admittedly abnormal level for a somewhat
longer period.
Perhaps more important and for the still longer-run, when
the volume of American exports must decline substantially
in any case, will be the blighting effect of the present dollar
shortage on the prospect for international trade as a whole,
with special reference to American exports. The Geneva
Conference on an international trade organization was ex­
pected to point the way toward a world wide lowering of
trade barriers. The dollar shortage may well have killed the
conference in embryo, as regards concrete or immediate re­
sults. In a world struggling for dollar balances, prospects for
general tariff reduction appear negligible. A turn toward
state trading, bilateral dealings, and barter agreements is in
the offing, as each country seeks to conserve its supply of
undervalued dollars by cutting its imports or directing them
to areas where dollars are not required in payment. The
trend is, therefore, directed explicitly against this country.
When world demand has fallen to normal and the agri­
culture of Europe and Asia is producing at its prewar rate,
American exporters of both agricultural and industrial prod­
ucts may be handicapped indefinitely in international com­
petition as they face a system of world-wide trade controls
frozen into an anti-American pattern in consequence of the
dollar shortage of 1947. The Bretton Woods agreements are
the principal hope for reversing the trend after they take
full effect in 1951.

Iowa State Finance III
Influence of State Constitution on Debt Policy
The infrequent resort to deficit financing by the states in
the Middle West is attributable to the prohibitions and
restrictions of their constitutions on the use of credit. The
typical constitution in this area dates back to the middle
nineteenth century. In that pioneer era, the desperate need
for transportation facilities—canals, turnpikes, and railroads
—and for banking institutions to service the capital needs
of a rapidly expanding population had led to widespread
direct and indirect use of state credit. The investment of
the proceeds of state borrowings in banks and self-liquidat­
ing projects promised not only badly needed internal im­
provements but also a continuing investment income, for
these projects were expected to more than pay their way.
Just as the vision of a taxless state government living off its
investments began to assume shape and substance, financial
crisis and economic depression struck. Some states were
unable to avoid serious default. All turned to higher taxation
for interest on loans that were to have been serviced from
enterprise earnings.
The framers of constitutions adopted in the 1840’s and
1850’s were so preoccupied with preventing a recurrence of
over extension of credit that they virtually eliminated bor­
rowing as an instrument of state fiscal policy. Loans to repel
invasion, suppress insurrection, and defend the State in time
of war, and to finance casual deficits in revenue were gen­
erally left within the discretion of the General Assembly.
All other borrowing was prohibited unless specifically au­
thorized by a vote of the people in a manner similar to the
procedure required for amendment of the constitution.1
’Article VII of the Iowa Constitution of 1857 deals with state debt. Its pro­
visions briefly summarized are as follows:
Sec. 1. The credit of the State shall not be given or loaned to any individual
or corporation, nor shall the State assume debts or liabilities of
persons or corporations unless such obligations were incurred in
time of war for the benefit of the State.
Sec. 2. The State may contract debts to supply casual deficits or failures
in revenue or to meet expenses not otherwise provided for, but the
total of such debt shall not exceed $250,000.
Sec. 3. Losses to the permanent school or university fund of the State occa­
sioned by defalcation or mismanagement of the officers controlling
them shall upon proper audit become a permanent debt of the State
upon which an annual interest rate of six per cent shall be paid.
This debt is in addition to that authorized by section 2.
Sec. 4. In addition to the debt authorized in sections 2 and 3, the State may
contract debts to repel invasion, suppress insurrection, and defend
the State in time of war.
Sec. 5. With the foregoing exceptions no other debt shall be contracted
unless:
(a) it is authorized by law for a single work or a distinctly specified
object;
(b) such law imposes a direct annual tax sufficient to pay interest
and principal as it becomes due within 20 years from the time
the debt is contracted; and
(c) such law receives a majority of all votes cast for and against
it at a general election in anticipation of which prescribed notice
to voters shall have been given.
Sec. 6. The legislature may. at any time after the approval of a bond issue
under section 5 and before the debt is actually contracted, repeal the
authorization to borrow. Or if a portion of the debt has already been
incurred, it may forbid the contracting of any further debt under
that authorization.
Sec. 7. Every law which imposes a tax shall distinctly state the tax and the
object to which it is to be applied.
Sec. 8. All motor vehicle registration fees and all licenses and excise taxes
on motor vehicle fuel, less the cost of administration, shall be used
exclusively for the construction, maintenance, and supervision of
public highways or for the retirement of existing or future bonds
for highway construction. (This provision was adopted in 1942.)




The provisions relating to financing casual deficits usually
restricted such borrowing to a fixed dollar amount. The
constitution of Iowa, for example, set this amount at $250,­
000. This was about the level permitted in Wisconsin,
Illinois, and Michigan. No doubt the framers of these pro­
visions were thinking in relative terms. The amounts so
provided were, at the time of adoption, quite liberal. In
Iowa, for example, the sum was the equivalent of a year’s
expenditure. A century of growth in population and eco­
nomic development has, however, reduced this fixed amount
to relative insignificance. The restriction of borrowing for
casual deficits to $250,000 in a state where annual ex­
penditures are at the 150 million dollar level is equivalent
to an outright prohibition against all borrowing for that
purpose.
In consequence Iowa has had to adopt a policy of surplus
financing adequate to cover all possible shrinkage in rev­
enues. Expenditure programs involving substantial capital
outlays must go to the voters for approval or be prosecuted
on a pay-as-you-go basis.
Borrowing by referendum during the past three decades
in the Seventh District states has been limited to three
World War I bonus issues (Iowa, Illinois, and Michigan);
two World War II bonus issues (Michigan and Illinois);
highway issues (Illinois and Michigan); and emergency
relief financing in Illinois. Agency and special fund borrow­
ing by these states has only indirectly employed the state
credit. While these devices are properly an important aspect
of state financial policy during this era, they fall, by judicial
interpretation, outside of constitutional debt limitation.
VETERANS BONUSES

The Iowa bonus issue of 1922 is the only successful at­
tempt to follow the borrowing procedure set forth in Article
VII, Section 5 of the constitution. This section requires the
referral of a proposal to formally use the State’s full faith
and credit for a specific purpose to a vote of the people. The
issue of 22 million dollars was serviced by a special property
tax levy and retired in 1943 at a cost to the State of 9.7
million dollars in interest.
In November 1948 a proposal for an 85 million dollar
bond issue for bonuses to veterans of World War II will
be voted on. The plan contemplates payments of $10 and
$12.50 per month of active domestic and foreign service
respectively with a maximum of $500. Although this latter
issue is, in absolute terms, four times the size of the first
bonus, it is directly comparable to the first bonus if related
to the yield of the State’s tax system then and now. In the
fiscal year 1922 tax revenues were 20 million dollars; in
1923, 23 million dollars. The present tax yield, excluding
payroll taxes, was 86 million dollars in fiscal 1946 and 112
Page 5

million in 1947. In other Seventh District states bonus issues
have been adopted in Michigan and Illinois; proposals will
be submitted to voters in Wisconsin and Indiana. It will be
noted from the table below that in terms of 1947 tax rev­
enues Iowa's contemplated bonus borrowing is less ambitious
than those in other District states.
Tax Revenues
Fiscal 1947
(Excluding Bonus Issues
Payroll
Approved or
Taxes)
Proposed
(^Amounts in millions of dollars)

Illinois ...............318.6
Indiana ............. 135.8
Iowa ..................112.0
Michigan ...........292.7
Wisconsin ......... 148.7

385.0
120.0*
85.0*
270.0
200.0*

Bonus Issues
Related to
1947 Tax
Revenue

1.20
.88
.76
.92
1.35

*Proposed

The Iowa proposal requires an annual property tax levy
of the amount certified by the state treasurer as necessary
to meet principal and interest obligations. Although such
a provision is required by Article Vll, Section 5, it does not
appear to preclude the use of accumulated surpluses or other
sources of revenue to service the bond issue. If other sources
are adequate, the treasurer would merely certify that no
funds were needed from the property tax. In Illinois the
bond issue is being serviced from increased cigarette and
pari-mutual taxes and, if these fail to be sufficient, from
general sources or a state property tax levy; in Michigan
it is serviced from a new tax on cigarettes. If popular refer­
enda are successful in Indiana and Wisconsin, bonuses will
be paid out of additional current revenues—in the latter
from a new sales tax, in the former from a tax preferred by a
majority of voters.
BORROWING FOR HIGHWAYS

In the 1920’s the major problem of Iowa government
was to get the state out of the mud. It was early apparent
that an extensive network of hard roads was essential if
not inevitable in the State’s economic development. Under
the stimulus of Federal aid and the growing yields from
highway vehicle licenses and motor fuel taxes such a pro­
gram was assured a long-run earning capacity ample to
justify an unprecedented program of capital outlay.
The major policy issue of highway development did not
impinge on its desirability or need but on its timing and
on the relative responsibilities of the State and local units
of government. The historic division of the road function
between the State and its subordinate units favored a con­
tinuation of emphasis on local and county responsibility
rather than a transference of the funcion to the state. For
nearly a decade after Federal aid became available and the
Primary Road Fund was created, the activity of the State
was limited to planning and general supervision by the
State Highway Commission. The prime movers toward
greater state responsibility -Federal insistence as a condition
to aid and control of the sources of highway user revenueoperated more slowly in Iowa than elsewhere.
Attempts to utilize the State’s credit by highway bond
Page 6



issues which would have drastically accelerated the trend
toward greater state responsibility were twice thwarted by
court decisions. In 1928 the Iowa legislature proposed a
highway borrowing under Section 5 of Article Vll of the
constitution amounting to 100 million dollars. The proceeds
were for construction and to retire outstanding issues of
county primary road bonds. The bonds were to be issued
serially in the years 1929-34 as needed for construction and
refunding. Principal and interest payments were to be met
from highway user taxes. This issue was approved by a
popular vote of two to one in November 1928. The Iowa
Supreme Court, however, held the plan failed to conform
to constitutional requirements in that (1) the entire issue
would not be retired within 20 years of its authorization
(i.e., the bonds issued in 1934 would not be retired until
1954 instead of 1949), and (2) the General Assembly could
not pledge earmarked indirect taxes beyond a single bien­
nium, and since motor vehicle fees and motor fuel levies
were indirect taxes, they did not satisfy the constitutional
mandate for a direct annual tax (State v. Executive Council
of State 223 N.W. 737, 1929). Some consolation to the proponents of state borrowing was afforded by the Court’s
declaration that Section 1 of Article VII did not preclude
the State from paying interest or principal on county pri­
mary road bonds.
The second attempt to use state credit for highways re­
sorted to the procedure of constitutional amendment. The
amendment proposal was adopted by the 43rd and 44th
General Assemblies and scheduled for reference to the
voters at a special election to be held June 16, 1931. On
May 5 the Supreme Court again nullified the effort to use
state credit by holding that the proposed amendment did
not meet technical requirements in the amending process
specified by the constitution. The major objection was that
the amendment put a double proposition to the electorate
since it both granted to the State power to issue primary
road bonds and denied this power to the counties. (Mathews
v. Turner, 236 N.W. 412, 1931.)
The timing of road development in Iowa thus initially
was a function of the willingness of individual county units
of government to accelerate the program within their re­
spective jurisdictions by the issuance of county bonds. Prior
to 1928 little if any financial incentive to this goal was
provided by the State. The bulk of highway user revenues
was made available for primary road construction and maintenance among the several counties on the basis of area.
The size of these allotments was not altered by county bor­
rowing. Moreover, the county was pledged to pay interest
and any deficiencies in principal out of property tax revenues. In 1928 and thereafter allotments were made wholly
within the discretion of the Highway Commission, and the
county primary road debt service was entirely met from
state highway user funds. Although legally the debt con­
tinued to be an obligation of the county, the State has, since
1928, assumed in fact the responsibility for the management
and payment of county primary road debt.
The first borrowing for primary roads occurred in 1920.
By December 1, 1927, twelve counties issued a total of 27.9
million in bonds. The bulk of borrowing was made during

.

*>

*

.

,

1928 through 1931, but intermittent borrowing continued
until 1938. In 1939 the General Assembly prohibited fur­
ther issuance of county primary road bonds. Of the 118.2
million bonds issued, 90.9 were retired by June 30, 1946,
at a total interest cost of 47.4 million. A total of 5.1 million
of property tax revenue was spent by counties of which 1.8
million was for principal payment.
In addition to the long-term obligations, counties issued
certificates in the years 1922-26 anticipating allotments of
primary road funds. These were retired as allotments became
payable. When the State ceased to allot funds on an area
basis, the practice of issuing certificates against the primary
road fund was discontinued. A total of 12.2 million dollars
of certificates was issued, but the amount outstanding at the
end of each fiscal year never exceeded 3.6 million.
The growing yield from the user taxes and Federal aid
afforded more and more flexibility in a state-wide construc­
tion program, while the cost of debt service due to refund­
ing operations in the middle 1930’s came well within the
fiscal capacity of the earmarked revenue structure. By 1950
the entire primary road borrowings will have been liqui­
dated, and an additional eight million dollars annually will
DIRECT AND INDIRECT OUTSTANDING
INDEBTEDNESS OF THE STATE OF IOWA
1920-47
(Amounts in millions of dollars)
Direct Debt

Fiscal
Year
Ending:
June 30

Total

1920
1921
1922
1923
1924

1.7
4.4
8.3
23.4
37.1

.2
.1
*
11.2
20.9

11.2
20.9

1925
1926
1927
1928
1929

36.7
37.5
45.4
63.5
79.2

19.8
18.7
17.6
16.5
15.3

19.8
18.7
17.6
16.5
15.3

1930
1931
1932
1933
1934

102.6
113.6
112.6
109.4
103.5

14.2
13.2
12.1
11.0
10.3

14.2
13.2
12.1
11.0
10.3

1935
1936
1937
1938
1939

99.6
95.5
91.7
87.4
81.7

9.2
7.7
6.6
5.5
4.4

1940
1941
1942
1943
1944

74.6
66.5
59.0
50.9
43.5

1945
1946
19477

36.2
28.3
20.8

Total

Long­
term1

Short­
term2
.2
.1
*

Total

Indirect Debt
Long-term
High­ Univer­ Short­
term5
sity4
way3

1.5
4.3
8.3
12.2
16.2

1.5
4.3
7.1
8.6
13.0

_
__
—

_
1.2
3.6
3.2

—

16.9
18.8
27.8
47.0
63.9

14.9
16.9
24.1
43.1
60.7

.1
.2
.2
1.4

2.0
1.8
3.5
3.7
1.8

—
—
__«
__ 0

88.4
100.4
100.5
98.4
93.2

86.1
96.8
96.3
95.0
90.7

1.3
1.2
1.2
1.2
1.2

1.0
2.4
3.0
2.2
1.8

9.2
7.7
6.6
5.5
4.4

—
—
—
—

90.4
87.8
85.1
81.9
77.3

86.6
86.4
83.4
79.8
74.7

1.2
1.2
1.7
2.1
2.6

2.6
.2
*
*
—

3.3
2.2
i.i
.1
*

3.3
2.2
i.i
.1
*

__
—
—
—
—

71.3
64.3
57.9
50.8
43.5

68.8
62.2
55.7
48.7
41.7

2.6
2.1
2.2
2.1
1.8

__
__

*
*
•

*
*
*

36.2
28.3
20.8

34.6
27.2
19.8

1.6
1.1
1.0

_
—
—

—

—

__

—
—
—

,

_
—

_
—
_
—
—
Consists of indebtedness for World War I bonus payments,
includes warrants outstanding issued in anticipation of revenues for
capitol grounds extension (1920-22).
3These are county issues for construction of state primary roads.
4Consists of loans made for dormitories at the state colleges and univer­
sity, for the stadium at Iowa State University, and the Memorial Union
Building at the Iowa State College (Ames).
6Issued by counties in anticipation of revenues of the State Primary Road
Fund, and warrants issued in anticipation of revenues to the State Sink­
ing Fund for Public Deposits. County road warrants outstanding are as
of November 30.
®During fiscal years 1933 and 1934 due to large amounts of funds in closed
banks, the treasurer issued approximately 14 million dollars in stamped
warrants. Amounts outstanding at the end of these fiscal years are not
available.
7Subject to revision.
♦Less than $50,000.




be available for other programs.
THE STATE SINKING FUND FOR PUBLIC DEPOSITS

The State’s credit has been indirectly employed to insure
bank deposits of the State and local governments. Deposi­
tories for public funds in Iowa are designated by local
governing bodies. In the years when the State levied a
property tax substantial amounts of deposits of state funds
were customarily left in the hands of county treasurers.
Thus both state and local funds were widely distributed in
Iowa banks. Depressed agricultural conditions and declin­
ing farm land values in the early and middle 1920’s led to
many bank failures. To cope with the ensuing shock to the
finances of the State itself and the local units of government
and to safeguard operating balances from loss and temporary
embarrassment, the Iowa General Assembly of 1925 cre­
ated the State Sinking Fund for Public Deposits. From this
fund the state treasurer was directed upon certification of
the State Banking Commission to make timely restoration
to local governments of amounts frozen in closed banks.
The funds to meet these claims were derived from liqui­
dation dividends and from the diversion of all interest pay­
ments on public deposits to the Sinking Fund. As it was
expected that liabilities would accumulate more rapidly
than these sources of revenue could liquidate them, pro­
vision was made for the issuance of state anticipation war­
rants. The statute authorizing their issuance required that
the warrants should be labeled an “obligation of the State
Sinking Fund for Public Deposits only.” A ceiling for the
total of warrants outstanding was set at 3Vi million dollars,
but this limit could be extended by executive action. In
1934 the revenues of the Sinking Fund were further aug­
mented by earmarking the yield from a newly enacted malt
beverage tax. The prohibition of the payment of interest
on demand deposits contained in the Banking Act of 1934,
and first effective on public deposits August 24, 1937, de­
nied this source of revenue to the Fund. A system of semi­
annual assessments against public balances was adopted as
a substitute measure. These assessments continued through
the fiscal year 1940. This was also the last year that revenue
from the beer tax was allocated to the Fund.
During its entire history from 1926 to date the Sinking
Fund for Public Deposits received from interest payments
13.7 million dollars, in assessments on public deposits 2.3
million dollars, in liquidation dividends 16.6 million dollars,
and in beer revenues 7.8 million dollars. Together with
earnings on investments in Government securities in recent
years total receipts of the fund have been 40.4 million dol­
lars. In the same period the Fund has paid claims for de­
posits by the State and local governments in closed banks
aggregating 35.7 million, incurred interest costs on the an­
ticipation warrants of one million dollars, and transferred
two million dollars to the General Fund.
The Sinking Fund still exists to fulfill the function for
which it was originally created, although the coverage of
the Federal Deposit Insurance Corporation lessens to a
marked degree potential liabilities. The Fund has been vir­
tually dormant since 1940 when its major revenues were
Page 7

cut off. No claims have been paid since 1942, and liquida­
tion dividends have declined from a $500,000 level in 1941­
43 to $77,000 in 1947. A balance of 1.75 million dollars
nearly all of which is invested in securities of the Federal
Government is available for future operations.
The total of borrowings through the issuance of antici­
pation warrants from 1927-35 was 22 million dollars, but
the amount outstanding at any one time was seldom in
excess of 3.5 million dollars. All warrants were retired by
1939. In 1933 an effort was made by the General Assembly
to authorize the borrowing of 20 million dollars from the
Reconstruction Finance Corporation to be used to replenish
the depleted cash resources of the Sinking Fund. The Iowa
Supreme Court held such borrowing to be contrary to the
constitution unless approved by a vote of the people as
required by Article VII, Section 5.2
INSTITUTIONAL DEBT

It is common practice among states to differentiate the
method used to finance capital expenditures for regular
educational facilities from that used for such subsidiary
enterprises as dormitories, recreational facilities, and athletic
plants. While both types of expenditures are ordinarily
regarded as proper functions and responsibilities of the state
and can be financed directly, because earnings from sub­
sidiary enterprises can be readily segregated, the states gen­
erally prefer to finance them as independent undertakings
and without state appropriation.
In Iowa the 1925 General Assembly authorized the State
Board of Education to borrow funds for the construction
of dormitories at the institutions under its jurisdiction by
pledging the improved real estate as security. Ensuing prin­
cipal and interest obligations were to be retired solely from
earnings of the property, from profits of similar property at
the same institution, or from private bequests. Separate cor­
porations have been organized to construct the memorial
unions at the State College (Ames) and the State Univer­
sity and the stadium at the State University. These bor­
rowed money, made the necessary improvements, and leased
the property to the university which meets the equivalent
of principal and interest requirements out of operating earn­
ings. When the debt is retired, title to property reverts to
the State. In some states the earnings of subsidiary enter­
prises are supplemented by state appropriations. Flowever,
this is not the practice in Iowa.
In the last ten years the greater portion of the outstanding
indebtedness resulting from agency borrowing has been for
dormitories. While the current outstanding obligations are
nominal, it is anticipated that as a result of record enroll­
ment in state universities and colleges additional loans of
this type will be made in the near future.
Agency borrowing in Iowa up to the present time has been
confined to state educational institutions. The recently ad­
journed General Assembly authorized the State Armory
Board to borrow money for the construction of armories,
and thus made possible an extension of this general tech­
nique to another agency. There is an important distinction,
*HubbeU v. Herring 249 N.W. 430 (July 18, 1933).

Page 8



however, in that the earnings of the Armory Board are
derived from rentals paid out of state appropriations. This
method of finance has come into common use to provide
facilities for national guard units without recourse to appro­
priations or direct borrowing for construction.
It has been pointed out in other articles in this series that
many state courts recognize a distinction between borrowing
by the State and its agencies even though they may be its
creatures. Thus, state appropriations may be used for the
service of debt without making the debt a legal obligation
of the State. The creditor’s security is limited by statute to
the physical assets acquired with the proceeds of the loan
and the future earnings of the improved property. In the case
of loans for local armories the physical assets while for a
specialized use are of such character that they are suitable
for community centers. Where the property pledged is a
stadium or a dormitory, no doubt the moral prestige and
standing of the borrower is an added assurance to the legal
safeguard.
SHORT-TERM BORROWING

In 1913 the General Assembly adopted a 10-year pro­
gram of enlarging the site on which the capitol and other
structures housing the state government were located. The
expansion was to be financed by an annual property tax
levy yielding between 1.5 to two million dollars during the
period. The Executive Council was authorized to purchase
land whenever it became available with funds from the
annual tax levies, or if these were not sufficient, the Council
could issue warrants in anticipation of future levies. Such
borrowing, when reviewed by the court was held not to
constitute a debt under Section 5 of the constitution, pro­
vided warrants issued were limited to the anticipation of
revenue for a biennial period.3 The theory advanced was
that one legislature could not bind its successors and, hence,
could not guarantee continuity of policy beyond a biennial
period. This required that anticipation notes be limited to a
similar period. A total of 1.5 million dollars was issued in
warrants, but, except for June 30, 1914, when the amount
outstanding was $675,000, the warrants outstanding were
usually less than $200,000.
In the years prior to World War I the state treasurer was
compelled to mark warrants presented for payment at times
when cash balances were inadequate to meet obligations
as “unpaid for lack of funds.” These warrants were then
sold, and interest, not exceeding five per cent, was paid on
them. During 1916-18 an average of one million dollars was
outstanding at the end of each of the fiscal years. With
increased revenues during the 1920's this practice was not
used again until the 1930’s. In fiscal years 1933 and 1934
the treasurer, stamped approximately eight million dollars
of warrants against the General Revenue Fund and six
million dollars of warrants against the Primary Road Fund.
This was primarily due to the fact that State balances were
frozen in closed banks. By November 1933 almost all of
these warrants were redeemed from current collections and
from liquidations of assets in closed banks.
3Rowley v. Clark. 144 N.W. 908 (1913).

FARM INCOME CONTINUES HIGH
(Continued from Inside Front Cover)

dollars. This rate may he compared with total domestic ex­
ports valued at two to four billion dollars during most of
the inter-war years. The world dollar shortage and declin­
ing exports are treated in the accompanying article in this
issue entitled “World Dollar Shortage Hits U. S. Exports.”
The expected further decline in exports may have an impact
on farm prices and farm income in two ways.
Traditionally, at least during the inter-war years, agri­
cultural exports accounted for 20 to 40 per cent of total ex­
ports. But during the peak period of exports in recent
months agricultural exports have totaled only about oneeighth of the value of all exports. In other words, in spite
of high levels of total dollar values of agricultural exports,
the levels of industrial and other non-agricultural exports
have reached even greater relative magnitudes. If exports of
such conlmodities are to continue to decline sharply, the
indirect effect on farm prices and income could be a curtail­
ment of civilian domestic demand. It is estimated that up­
wards of 3.5 million of the 60 million employed in this
country are producing directly or indirectly for export. If the
gap of curtailed exports is not filled by backlogs of domestic
demand for the amounts of reduction, some unemployment
and slackening production can be expected. The effect of
this would be to lessen somewhat the domestic demand for
farm products. Such a change would be most likely to be
felt in the so-called luxury items, such as fruits and vege­
tables, top quality cuts of meats, and some dairy products.
The second way farm incomes and prices will he affected
by declining exports is, of course, the direct slackening in
demand for agricultural commodities as such. Reductions
will not only affect prices proportionally but may be ex­
pected, in view of the high levels of farm exports, to have
multiplied effects on the level of farm prices. Studies indi­
cate that even in the inter-war years when agricultural
exports were only a fraction of recent levels a change of one
billion dollars in exports was associated with a change of
more than 1.5 billion dollars in cash farm income. It seems
reasonable, therefore, to assume that in the light of recent
and current rates of agricultural exports and the generally
tight domestic supply situation any given percentage decline
in these exports may carry with it a decline possibly twice
as great in prices.
Naturally, such magnified effects on prices would not be
expected to occur for each exported commodity. The de­
clines might be more or less, depending upon whether a
particular commodity experiences a declining export volume,
upon the relative importance of the volume of exports in
the total moving into consumption channels, and on the
relative supply and demand situation within this country.
Turning now to estimates on the relative importance of
exports of various commodities to total supplies or produc­
tion, it may be seen that some commodities are much more
“exposed” to price changes from export changes than are
others. Based largely- on rates of export for the first quarter
of 1947 and partly on estimates for the total to be exported
for the year, such calculations indicate that for the grains
and grain preparations 1947 exports will be at the following




rates or proportion of total supplies moving into consump­
tion channels: wheat, more than one-third; rice, more than
half; corn, nearly one-third (note that this is corn moving
into consumption channels, not production); oats, about
one-fourth; and barley, more than 10 per cent. For cotton
and tobacco the rates are about 38 per cent and 30 per cent
of production, respectively. At somewhat smaller rates are
the following commodities: food fats and oils (excluding
butter), 10 per cent; fruits, seven per cent; meats, three per
cent; dairy products, three per cent; eggs, four per cent; and
poultry, 0.5 per cent. In the case of dairy products the esti­
mates show that about 0.5 per cent of the butter and 15
per cent of the cheese supplies moving into consumption
channels will have been exported during the year. It is
further estimated that well over 10 per cent of the dried
milk and condensed milk production will be exported during
1947.
It may thus be seen that sharp reductions in export de­
mand for cotton, tobacco, wheat, rice, and to some extent
other grains, fats and oils, cheese, and condensed and dried
milk might be expected to have price-lowering effects con­
siderably out of proportion to the amount of reductions. To
what extent and in what order of priority these food exports
may be hit by reductions remain in part unknown, but there
is already evidence, particularly with regard to Great Britain,
that cotton, tobacco, meat products, eggs, cheese and dried
milk, as well as fruits and their preparations are most likely
to feel first and most the probable reductions. The world
food situation continues apparently to be such that the
highest priorities will continue to be placed on grains and
grain preparations. When it is remembered that Great
Britain in the first quarter of this year took from one-fourth
to one-half or more of our exports of such commodities as
cotton, tobacco, meat products, dairy products, fruits, and
nearly all of the eggs exported, it is obvious why the dollar
“crisis” should be of concern to farmers and other agricul­
tural interests. For some of these commodities the propor­
tions of supplies exported, as shown earlier, are relatively
small, and therefore, the price reducing effects may be minor
and possibly delayed at least temporarily in the face of the
domestic demand situation.
But the British crisis is generally regarded as only the
beginning, to be followed later by further aggravation from
developments in France, Italy, and probably other countries.
It seems probable now that the greatest impact of declining
exports on American agriculture will come via the indirect
effect of declining non-agricultural exports on domestic
economic activity. It should not he inferred from these
points discussed here and elsewhere in this issue that there
is any notion that exports will vanish within a few months
or the immediately foreseeable future. But even a modest
fractional reduction, a strong probability, could set off some
substantial economic declines in this country. Whether this
happens depends upon steps taken by this country to meet
the situation, and if it does happen on a substantial scale,
the short-run outcome will depend upon the magnitude of
domestic needs to take up the slack and the speed with
which adjustments can be made internally to take up such
slack.




SEVENTH FEDERAL

RESERVE DISTRICT

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