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____________ Review____________
Vol. 68, No. 9

November 1986

5 The Employment Act o f 1946: Some
History Notes
17 The Farm Sector in the 1980s: Sudden
Collapse or Steady Downturn?

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Federal Reserve Bank of St. Louis
Review

November 1986

In This Issue . . .

About 40 years ago, Congress passed the Employment Act o f 1946. In the first
article o f this Review, “The Employment Act o f 1946: Some History Notes,” G. J.
Santoni shows that the legislation, as initially proposed, stirred up considerable
controversy. Its sponsors believed that earlier failures to deal with unemployment
in the United States and other nations had contributed significantly to the rise o f
National Socialism in Germany, which eventually culminated in W orld W ar II.
Its detractors argued that business cycles arose, in part, from m ajor shifts in the
relative dem and or supply o f various goods and services; government attempts to
maintain em ployment in the face o f such shifts, therefore, w ould be inefficient
and socially counterproductive. Critics felt, moreover, that the application o f the
new theory o f compensatory finance to avoid periodic booms and busts required
forecasting accuracy that was unachievable.
Santoni shows that the legislation that was initially proposed did not fare well
in the debates. The Employment Act o f 1946 approved by Congress differed
markedly from the proposed Full Employment Bill o f 1945. As approved, the act
recognized both high em ployment and price level stability as important econom ic
policy objectives. Furthermore, the requirement to apply the principle o f com
pensatory finance, the centerpiece o f the 1945 proposal, was stripped away.

Recent financial problems in U.S. agriculture are considered by many to be an
aberration; these analysts feel that the relative prosperity that farmers enjoyed in
the 1970s represents a more accurate picture o f what financial returns to farming
should be. In the second article in this Review, “The Farm Sector in the 1980s:
Sudden Collapse or Steady Downturn?,” Michael T. Belongia shows that such an
interpretation is unwarranted. Instead, the elusive gains in asset values during
the 1970s masked a continuation o f the long-standing downw ard trend in the
profitability o f farming. Moreover, the author demonstrates w hy lo w and declin
ing returns to farming are the natural result o f market forces attempting to move
marginal land, labor and other resources to nonfarm employment. Despite
various programs designed to help the “family farm,” the author argues, a
continuing decline in the size o f the U.S. farm sector is likely.

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

The Employment Act of 1946:
Some History Notes
G. J. Santoni

Thus, because o f the planlessness o f the twenties — because o f the lack o f
courageous action immediately follow ing the collapse — the nation lost 105,000,000
man-years o f production in the thirties.
— Full Employment Act o f 1945, Hearings, p. 1104

1 mBOUT 40years ago, in response to the Depression
o f the 1930s, Congress passed the Employment Act of
1946. Its sponsors believed that earlier failures to deal
with massive worldw ide unemployment had contrib
uted significantly to the rise o f National Socialism,
which eventually culminated in W orld W ar II. This
belief urged the act’s sponsors to find a solution to the
problem that had caused “such a great melting away
o f prosperity in such a short period o f time.” 1
The legislation follow ed on the heels o f a revolution
in macroeconom ic theory. This new theory suggested
that periodic booms and busts could be avoided if
government pursued a policy o f "com pensatory
finance.” The new theory prom ised the success of
centrally directed econom ic stabilization policy and
provided the nucleus around w hich the proposed
legislation was built.
The bill that was initially proposed stirred up con
siderable controversy. Some considered it "a great
Magna Carta o f government planning for full em ploy
ment.”2 Others view ed it as “utterly alien to America

G. J. Santoni is a senior economist at the Federal Reserve Bank of St.
Louis. Thomas A. Pollmann provided research assistance.
'Full Employment Act of 1945 (1945), p. 1110.
2Hansen (1956), p. 97.

and her institutions.”3Over the intervening years, dis
cussions o f the Employment Act have becom e less
shrill, but w e continue to regard unem ploym ent as an
important problem. The purpose o f this paper is to
place this policy concern in its historical context as it
initially surfaced in congressional debates o f the Full
Employment Bill o f 1945 and as it re-emerged in de
bates o f the Full Employment and Balanced Growth
Bill o f 1976.

THE IMPETUS FOR THE BILL
Chart 1 plots the unem ploym ent rate from 1900-40.4
Before 1930, the unemployment rate m oved around an
average o f about 4.5 percent. Beginning that year,
however, it rose substantially, reaching 25 percent o f

3Full Employment Act of 1945 (1945), p. 1138.
4The data are from Historical Statistics of the United States Colonial
Times to 1970 (1975), pp. 122-23 and p. 126. Measurement, of
course, is never perfect. These unemployment data are based on
estimates of Lebergott (1957); and Romer (1986) suggests they are
relatively noisy. Furthermore, Darby (1976) argues that these data
tend to overstate unemployment after 1933 because Federal Emer
gency Workers (employees of the Civilian Conservation Corps,
National Youth Administration, Civil Works Administration and the
Works Progress Administration) were counted as unemployed.

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 1

Unemployment Rate

1900

1910

1920

1930

1940

the labor force by 1933, then declined fairly slowly to a
level o f about 15 percent in 1940. During the 11-year
period from 1930—40, it averaged about 18 percent.
Charts 2 and 3 show real gross national product and
the price level (as measured by the im plicit GNP defla
tor) over the same period. Like chart 1, these charts
show a sharp econom ic contraction beginning in
1930. By 1933, real GNP had declined to about $140
billion from its level o f about $200 billion in 1929, while
the price level fell by about 40 percent.

The data presented in charts 1-3 did not exist when
the bill was debated in 1945.'’ As a result, the authors of
the bill used unofficial estimates o f unem ploym ent for
years prior to 1942 to bolster their arguments in favor
o f the bill’s passage.1
’ These estimates w ere inserted
into the hearings from a book by H eniy Wallace that
was w idely referred to in the popular press at that
time.7

The sharpest recorded contraction in econom ic ac
tivity that occurred before this episode follow ed W orld
War I (from 1918-21), and the sponsors o f the Full
Employment Bill w ere motivated by the fear that the
end o f W orld W ar II and the re-entry o f discharged war
veterans into the civilian labor force w ould augur a
return o f the problems o f the 1930s.

5lt was not until August of 1942, when the task of estimating unem
ployment was transferred from the Works Progress Administration
to the Census Bureau, that official definitions of "employed" and
“ unemployed” were developed and consistently applied in periodic
surveys of the labor force. See Bancroft (1957), p. 66 and U.S.
Department of Labor (1982), p. 3.

6Full Employment Act of 1945 (1945), p. 1103.
7See Wallace (1945).

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 2

Real Gross National Product
Billions of dollars

240

W allace’s data, which span the period 1900-44, are
reproduced in chart 4. The chart presents estimates of
the labor force, the level o f em ploym ent consistent
with “full” employment, and the actual level o f em
ployment." The story told by Wallace’s graph, which
shows a large gap between full and actual em ploy
ment during the 1930s, is consistent with the more
refined data shown in chart l.9

A THEORY OF THE BUSINESS CYCLE:
CIRCA 1945
The sponsors o f the Full Employment Bill w ere

8Wallace estimates full employment by subtracting an estimate of
frictional unemployment from the labor force. See Wallace (1945),
pp. 19-20.
9Wallace (1945), pp. 20-22. Wallace attributed the abnormally high
level of unemployment to "the planlessness of the twenties” and
suggested that the system of free enterprise in the United States
survived only because of the “ bold, courageous action of the
Roosevelt New Deal” and then only by the narrowest of margins.

1930

1940

influenced by the view o f John Maynard Keynes."1He
suggested that unem ploym ent was the result o f insuf
ficient aggregate dem and relative to the full em ploy
ment supply o f output." Keynes argued that swings in
aggregate demand generate business cycles w ith cor
responding fluctuations in em ploym ent and unem
ployment. 'While Keynes suggested a number o f factors that
could induce changes in aggregate demand, the one
10ln the minds of both the sponsors and opponents, the legislation was
considered an application of the theory “ advanced by Lord Keynes,
Stuart Chase, Sir William Beveridge, and Mr. Henry Wallace.”
Stuart Chase was a social scientist and the author of numerous
popular books and articles concerning the Depression. Sir William
Beveridge was best known as the chief architect of Britain's welfare
state legislation that was enacted in the 194GJ
"S ee Keynes (1964), pp. 247-49 and 280-91. “ We have shown that
when effective demand is deficient there is under-employment of
labour in the sense that there are men unemployed who would be
willing to work at less than the existing real wage.” p. 289.
12“ lt is upon the fact that fluctuations tend to wear themselves out
before proceeding to extremes and eventually to reverse themsel
ves, that the theory of business cycles having a regular phase has
been founded.” Ibid., p. 250.

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 3

Price Level
1958=100

he believed contributed most strongly to generating
business cycles was fluctuation in business invest
ment.13 In large part, this fluctuation reflects changes
in “the state o f confidence concerning the prospective
yield ” o f available investment alternatives, which can
change radically overtim e due to "the extreme precariousness o f the basis o f knowledge on which our
estimates o f prospective yield have to be made.” 14
Furthermore, activity on the London and Wall Street
stock exchanges amplified the effect o f the changes in
the state o f confidence on real investment. Keynes
suggested that these stock exchanges transformed the
extremely important social process o f directing capi-

13Some of the other factors Keynes mentions are “the physical
conditions of supply in the capital goods industries,. . . . the psycho
logical attitude to liquidity and the quantity of money . . Ibid., p.
248.
ulbid., pp. 149,153,248,313,316 and 322. According to Keynes, this
tendency for radical change in the state of business confidence is
accentuated by such things as the “ day-to-day fluctuations in profits
. . . (that) tend to have an altogether excessive,. . . , influence on the
market” ; “waves of optimistic and pessimistic sentiment” ; the “ anti
social . . . fetish of liquidity” ; and “the dark forces of time and
ignorance which envelop our future.” Ibid., pp. 153-55.

1958=100

tal investment to its most profitable use “into a by
product o f the activities o f a casino___” 15 W hile the
sponsors o f the Full Employment Bill may not have
accepted eveiy “ jot and tittle” o f Keynes’ analysis, they
clearly believed that labor market conditions were too
important to be left to the vagaries o f a roulette wheel.

THE PRO PO SED REMEDY:
COMPENSATORY SPENDING
The initial draft o f the proposed legislation went
under the title o f the Full Employment Bill o f 1945.
This bill proposed to attack the problem of unem ploy
ment in two ways. Section 2(b) stated that “all A m eri
cans able to work and desiring to work are entitled to
an opportunity for useful, remunerative, regular, and
full-time em ploym ent.” "* In the view o f the sponsors,
'blbid., p. 159.
16Assuring Full Employment in a Free Competitive Economy (1945), p.
81. The proposed legislation used the words “ are entitled to” rather
than the word “ right” but it is clear in the following subsection and in
the debates and hearings that the sponsors intended to establish
the opportunity to full-time employment as a basic right of all
Americans. See, for example, pp. 7 -8 and 71-80.

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Chart

W a lla c e ’s Estimates
M illio n jobs

M i lion jobs

L"
+* /

Labor fore e

It
Full emp loyment

.
45

W\
Employin' nt

1900

the conditions necessary for continuous full em ploy
ment could not be expected from the system o f private
enterprise. Consequently, the bill placed the responsi
bility for the maintenance o f full employment on the
federal government. Section 2(c) requires the federal
government to “provide such volum e o f Federal in
vestment and expenditure as may be needed ... to
assure continuing full em ploym ent.” 17
Section 3 laid out a formula for the federal govern
ment to follow in pursuing this goal. The formula
required the President o f the United States to submit a
national budget to Congress at the beginning o f each
regular session. The budget was to contain a forecast
o f both the level o f output necessary to generate full
employment over the next year and the level of output
that was likely to result if government did not inter
vene. If the projected level o f output was less than the

1950

level necessary for full employment, the President was
required to recom mend legislation that w ould pro
duce a big enough deficit in the federal governm ent’s
budget to raise output to the full em ployment level. If
the relationship between the tw o output forecasts
w ere reversed, the President was required to recom
mend legislation that w ould result in a budget surplus
big enough to reduce output to the full em ployment
level.18At the time, this m ethod o f stabilizing econom ic
activity was called “compensatory finance.” ”’

DEBATES AND HEARINGS
One o f the important features o f the draft legislation
was that it put in place the machinery to apply the

™lbid., p. 82.
nlbid., p. 81.

19Assuring Full Employment in a Free Competitive Economy, Minority
Views (1945), p. 4. See Keynes (1935), pp. 313-32 and 372-84.

FEDERAL RESERVE BANK OF ST. LOUIS

principle o f compensatory finance on a continuous
basis, year in and year out. The sponsors believed that
a continuous application was necessary because they
interpreted Wallace’s data as indicating that high lev
els o f unemployment w ere a natural consequence o f
free enterprise.

The Sponsors’ Interpretation o f
the Data
As mentioned, a striking feature o f W allace’s data is
the large and persistent gap between full em ployment
and actual em ployment that occurred during the
1930s (see chart 4). The gap averages about 18 percent
o f the labor force, indicating that a very serious eco
nom ic problem existed during this period. Wallace, in
his book, and the sponsors o f the Full Employment
Bill, during the hearings and debates, focused entirely
on this gap.
From the viewpoint o f the bill’s sponsors, these data
indicate that the system o f private enterprise was
prone to sizeable periodic disruptions. The congres
sional debates and hearings are filled with assertions
that “the histoiy o f em ployment and production in
the United States is a record o f boom and bust. It is a
record o f brief periods o f growth and developm ent
culminating in peaks o f prosperity that gave w ay to
disastrous collapse;” or that “private enterprise, left to
its ow n devices, cannot provide full em ployment and
cannot eliminate periodic mass unemployment and
econom ic depressions.”20

The Opponents’ Interpretation o f
the Data
To opponents o f the bill, the data suggest that em
ployment behavior during the 1930s was perverse by
past standards. Indeed, the '30s are noteworthy be
cause the behavior o f unem ploym ent during these
years was so unusual.2'
Chart 4 shows that the level o f actual em ployment
remained very close to the estimate o f full em ploy
ment over the first 30 years o f the sample. There were
sharp increases in 1908, 1914, and 1921, and the gap
was negative during Am erica’s involvement in W orld

x’Full Employment Act of 1945 (1945), p. 1181. In addition, see
Assuring Full Employment in a Free Competitive Economy (1945), pp.
2, 3, 9, 12, 20, 21, 45 and 47.
21Why the ’30s were unusual is still debated and beyond the scope of
this paper. The interested reader is referred to Alchian and Allen
(1977) pp. 467-80, especially page 477, and Friedman and Sch
wartz (1963).

Digitized for10
FRASER

NOVEMBER 1986

War I.22These gaps, however, quickly vanished so that
actual employment was never much different than full
em ployment for any appreciable length o f time.
Opponents o f the bill disputed claims that the con
ditions experienced in the 1930s w ere a natural conse
quence o f free enterprise.-1W hile agreeing that busi
ness cycles are inevitable, they argued that econom ic
forces operate to move the econom y in the direction o f
full employment. The opponents suggested that com
pensatory spending should be applied only in the
event o f an extreme contraction to limit its depth and
duration.24
In addition to this dispute, the debate focused on
three specific points: 1) w hether the requirement to
maintain continuous full em ployment and price level
stability was feasible; 2) w hether the government
could generate the necessary forecasts; and 3)
w hether the right to em ploym ent should be written
into law.

Continuous Full Employment and
Inflation
The opponents thought business cycles w ere inevi
table, and their consequences, in the form o f tem po
rarily reduced employment, could not be legislated
away. They argued that business cycles w ere sym p
toms o f the adjustment process to, say, a m ajor change
in consumer demand in favor o f some goods but
against others, a change that causes production costs
to rise for some goods but fall for others, or a change in
aggregate supply like an unusually good or bad har
vest. Any o f these changes results in a m ovem ent of
resources (including labor) from one job to another.
The adjustment takes time to com plete and, in the
interim, unemployment increases.
The proposed bill required the federal government
to retard these necessary adjustments. While the o p
ponents conceded that “Government spending can
for awhile create full em ployment as it did during the
w ar”23, they objected to the policy because it reduces

^W allace attributes this anomaly (a negative gap) to the war years.
See Wallace (1945), p. 10. Technically, the negative gap occurs
because Wallace does not define the labor force as the sum of
employed and unemployed workers.
“ Some suggested that the New Deal legislation of this period had
discouraged private investment and contributed to the severity and
length of the Depression. Full Employment Act of 1945 (1945), p.
1137.
24Assuring Full Employment in a Free Competitive Economy (1945), p.
21 .
25Assuring Full Employment in a Free Competitive Economy, Minority
Views (1945), p. 5.

FEDERAL RESERVE BANK OF ST. LOUIS

unemployment in the short run by moving it to the
long run and does so at the cost o f higher inflation.2"
The sponsors o f the bill conceded this point but
argued that the resulting inflation w ould be insignifi
cant in comparison to a return to high levels o f unem
ployment and the social unrest that w ould inevitably
follow in its wake.

Impossible Forecasting Accuracy
The bill required the president to estimate the num
ber o f jobs necessary for full employment, the value o f
production consistent with full employment, and the
value o f production that w ould occur in the absence of
any new federal compensatory spending program. In
the opinion o f the opponents, successfully com plet
ing such a task 16 to 18 months in advance o f the
events was virtually impossible. They pointed out that
the estimates w ou ld depend on the prevailing price
level, the kinds o f goods (and hence, jobs) making up
aggregate production, and average wage rates. They
asked Congress to consider “ how w rong any estimate
for 1930 w ould have been, if made in 1929.” 27
The defense mustered against this criticism was
that the bill required forecasts based on "current
trends” in the data. Opponents pointed out that main
taining continuous full em ploym ent required the dis
covery o f deviations from trend as w ell as breaks in the
trend before they occurred. Extrapolating current
trends would not do the job.

The Right to Employment
No provision o f the bill received more attention
during the debates than section 2 (b-c), w hich ex
tended to all able Americans the right to an opportu
nity for full-time employment. Extending this right
meant that the federal government w ould becom e
responsible for assuring that enough jobs w ere avail

26to/d., p. 5. “The adoption of such a policy (compensatory spending),
. . . , would result in continued Federal spending over many years,
causing an inflation of prices and an artificial boom, and then the
very depression and unemployment we are trying to avoid.”
27lbid., p. 3. One of the most forceful criticisms of the forecasting
requirements was presented during the public hearings by Elisha M.
Friedman who suggested that, “ Forecasting economic conditions
16 months ahead is a task for gods, not mortals . . . Look over the
Department of Agriculture forecasts in the spring of the final crop for
the year. Look at the . . . complete failure of the ICC to forecast
economic conditions or earnings, . . . What Government forecasts
have ever been . . . equal to the average of blind chance? How much
Government foresight is revealed in the Pearl Harbor report or in our
prewar policy?” Full Employment Act of 1945 (1945), pp. 1128-29.

NOVEMBER 1986

able.28 Opponents objected to this provision because:
1) the bill made no provision for enforcing the right; 2)
it w ould lead people to expect more than the govern
ment could possibly deliver; and 3) the provision is
socialistic and alien to the basic principles o f the
United States.28
During the debates, supporters conceded that, “ the
statutory enunciation o f the right to an opportunity
for employment does not im ply redress through the
courts.” -” Rather, people w ho believed they were pre
vented from exercising this right could petition the
government to improve its econom ic policy or obtain a
change in government through the regular election
process. Opponents argued that the inclusion o f this
right in the bill, at best, extended an em pty prom ise to
the electorate and led them to expect more than the
government was willing or able to deliver. At worst,
any attempt to enforce the right w ould be incom pati
ble with the fundamental objective o f the bill as w ell as
with democratic institutions.3'

SOME IMPORTANT CHANGES
The debates resulted in significant changes be
tween the bill as it was initially reported and the
legislation that was finally ena.cted by Congress (see
shaded insert on the next page). For example, amend
ments succeeded in eliminating the declaration o f the
right to an employment opportunity, the federal gov
ernment’s responsibility to assure continuing full em
ployment, and the requirement to submit a budget
based on the principle o f compensatory finance. In
particular, section 2 o f the final version states that it is
the intention “o f the Federal Government ... to pro
mote maximum employment, production, and pur
chasing power.” Thus, the actual legislation is a state-

Z8Of course, scarcity assures everyone of a job at a sufficiently low
wage. The rub came because the wage considered to be “ remuner
ative” was $2,000 per year which was the average annual income of
private nonagricultural workers at that time.
79As the Kiplinger Washington Letter once noted, “Jobs for everyone
able and willing to work leaves out a lot of people.”
30Assuring Full Employment in a Free Competitive Economy (1945), p.
27.
31Assuring Full Employment in a Free Competitive Economy, Minority
Views (1945), pp. 4-5, 27. This criticism was discounted by Sen.
Thomas of Utah, a spokesman for the bill. He reminded detractors
“that the basic difference between the American constitutional con
cept (and totalitarian regim es). . . is that in America we have all the
time the welfare of the individual person in mind.” The senator’s
argument calls to mind Daniel Webster’s observation that “There
are men in all ages who mean to govern well, but they mean to
govern. They promise to be good masters, but they mean to be
masters.”

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

Important Differences Between the Bill and the Act
The following summarizes some o f the more im
portant differences between the Full Employment
Bill as reported by the Banking and Currency Com-

mittee and the Employment Act o f 1946 that was
approved on February 20,1946. Italics are added to
emphasize deletions or changes in wording.

The 1945 Bill

The 1946 Act

Section 1
"This Act may be cited as the Full Employment
Act o f 1945.”

Section 1
“This Act may be cited as the Employment Act of
1946."

Section 2
b) “All Americans ... are entitled to an opportu
nity for useful, remunerative, regular, and fu ll
time employment.
c) In order to assure the free exercise o f the right
to an opportunity for em ployment ..., the
Federal Government has the responsibility to
assure continuing fu ll employment, that is, the
existence at all times o f sufficient em ployment
opportunities for all Americans ..
d) To that end the Federal Government shall,. . . ,
provide such volume o f Federal investment
and expenditure as may be needed, .. ., to
assure continuing fu ll employment.

Section 2
“The Congress hereby declares that it is the con
tinuing policy and responsibility o f the Federal
Government ... to p ro m o te m axim um em ploy
ment, production, and purchasing power.”

Section 3
“The President shall transmit to Congress ... a
general program, pursuant to section 2,f o r assur
ing continuing fu ll em p loy m en t. . . "

Section 3
“The President shall transmit to the Congress... a
program for carrying out the policy declared in
section 2 . .."

ment o f intention rather than a requirement to act.
Furthermore, it indicates that the government is con
cerned about more than just the level o f employment;
on occasion, the government may wish to pursue an
econom ic policy that results in less than full em ploy
ment but greater price stability, for example. M ore
over, the final version does not contain the require
ment to “ provide such volume o f Federal investment
and expenditure as may be needed [to maintain con
tinuing full em ployment].” This provision had been
the “heart and soul” o f the bill as initially reported.

ployment Act (see chart 5). The unem ploym ent rate
averaged 4.6 percent from 1950-70:“ This average was
just about the same as the average for 1900-29 which
was about 4.5 percent. Business cycles, o f course,
occurred in both periods and account for fluctuation
in the unemployment rate around its average. After
1970, however, the unem ploym ent rate began to rise.
By 1975, it had reached a level o f more than 8 percent.
An unem ploym ent rate this high had not been experi
enced since the 1930s and it rekindled many o f the
fears that had motivated the 1946 legislation.

UNEMPLOYMENT AFTER THE
EMPLOYMENT ACT
Unemployment in the United States remained at
fairly low levels for about 20 years following the EmDigitized for12
FRASER

“ Whether this relatively low average rate was simply fortuitous or the
result of the legislation is beyond the scope of this paper.

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

Chart 5

U n e m p lo y m e n t R a te
Percent

THE FULL EMPLOYMENT AND
BALANCED GROWTH
BILL OF 1976
Thirty years after passage o f the Employment Act o f
1946, Sen. Hubert H. Humphrey and Rep. Augustus F.
Hawkins introduced the Full Employment and Bal
anced Growth Bill o f 1976. I’he core o f this bill was a
carbon copy o f the initially proposed Full Em ploy
ment Bill o f 1945.
The 1976 bill resurrected "the right o f all adult
Americans able, willing, and seeking work to opportu
nities for useful paid em ployment at fair rates o f com
pensation." It required the president to establish “an
nual numerical goals for employment, production,
and purchasing p ow er” and to submit a budget con
taining a “level and com position o f Federal expendi
tures, measured against estimated capabilities at full
em ployment and production, necessary to support
the annual econom ic goals proposed in section 3 and
to support the Full Em ploym ent and Balanced
Growth Plan ..
In addition to this core, the bill

31Full Employment and Balanced Growth Act of 1976, pp. 7-10, and
15.

Percent

contained provisions regarding the coordination o f
m onetaiy and fiscal policies, econom y in government,
anti-inflation policy, regional em ploym ent policy,
youth em ployment policy and incom e maintenance; it
also established an Advisory Committee on Full Em
ploym ent and Econom ic Growth.34
The legislative process was less kind to the 1976 bill
than it was to its 1945 forerunner. One critic o f the bill
remarked that the seedling o f the unem ploym ent goal
had grown into an “unmanageable Christmas tree," an
“ unworkable monster" that deserved to be chopped
down. The bill was debated for more than two years
and, like its forerunner, was stripped o f its substantive
provisions when President Carter signed it on October
27,1978 (see the shaded insert on the next page for the
main provisions o f the Full Employment and Balanced
Growth Act o f 1978).

MA comment of Raymond Moley’s regarding the proliferation of
conflicting goals in some New Deal legislation seems pertinent at
this point. Moley wrote that “to look upon these policies as the result
of a unified plan was to believe that the accumulation of stuffed
snakes, baseball pictures, school flags, old tennis shoes, geometry
books, and chemistry sets in a boy’s bedroom could have been put
there by an interior decorator.” Moley (1939).

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

The Full Employment and Balanced Growth Act of 1978
The following is a condensed list o f the main
provisions o f the Humphrey/Hawkins Act.
Title I — National G oals and Priorities
1) Declares a national policy o f prom oting full
employment, increased real income, balanced
growth, a balanced federal budget, growth in
productivity, an im proved balance o f trade,
and price stability.
2) Declares a policy o f primary reliance on the
private sector for accomplishing the above ec
onom ic goals.

Title I I — Structural Econom ic Policies
1) Permitted the President to establish “reser
voirs o f public em ploym ent,” if he found that
other policies w ere failing to achieve full em
ploym ent goals.
2) Required that any reservoir jobs be useful and
in the low er ranges o f skill and pay, be targeted
on individuals and areas w ith the worst unem
ploym ent problems and be set up so as not to
draw workers from the private sector.
Title I I I — C ongressional Review

3) Encourages the adoption o f fiscal policy that
w ould reduce federal spending as a percent
age o f GNP.

1) Establishes procedures for Congressional re
view o f Federal Reserve Board goals and
policies.

4) Requires the President to set budgetary goals
so as to achieve an unemployment rate o f not
more than 3 percent among persons aged 20
and over, and 4 percent for persons 16 and
over by 1983.

2) Gives Congress the option o f determining
when the full em ploym ent goal could be
reached should the President declare that the
goal could not be met by 1983.

5) Requires the President to set a budgetary goal
o f reducing the rate o f inflation to 3 percent by
1983. Furthermore, once the goal set in 4 above
is achieved, the President is required to set a
goal directed at reducing inflation to 0 percent
by 1988.
6) Allows the President to m odify the timetables
for achieving the goals set forth in 4 and 5
above.

Title I V — G eneral Provisions
1) Prohibits discrimination on account o f sex,
race, age, religion or national origin in any
program under the bill.
2) Provides that workers in reservoir jobs be
given equal pay for equal work, but not less
than the federal minimum wage.

7) Requires the Federal Reserve Board to report
to the Congress twice a year on its monetary
policies and their relationship to the goals o f
the act.

SUMMARY
The legislative proposal advanced in the Full Em
ploym ent Bill o f 1945 was motivated by the severe
Depression o f the 1930s and the fear that this condi
tion w ould return with the dem obilization following
W orld War II. Many advocates o f the legislation w ere
convinced that the system o f private enterprise was
prone to sizeable periodic disruptions caused by the
erratic behavior o f business investment. As initially
Digitized for14
FRASER

proposed, the legislation required the federal govern
ment to intervene to smooth out the business cycle.
The legislation was based on the principle o f com pen
satory finance which argued, for example, that a pro
jected slump in econom ic activity could be offset by
running a sufficiently large deficit in the federal
budget.
The initial proposal did not fare w ell in the debates.
Various people argued that business cycles reflected
the process o f redirecting resources (including labor)

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

brought about bv major shifts in the relative dem and
or supply of various goods and services. In their opin
ion, the governm ent’s responsibility should be lim ited
to the relief o f destitution w hich frequently could be
accomplished more adequately and cheaply in ways
other than maintaining em ployment in jobs o f lesser
value.35Others argued that the application o f com pen
satory finance required forecasting accuracy that
could not possibly be achieved. They pointed out that
the business slump that began in 1930 was not fore
cast in 1929 and that existing government agencies
responsible for forecasting econom ic conditions pro
duced results that were indistinguishable from ran
dom chance.

ions w orthy o f consideration as there are competent
economists.”3®

The Employment Act o f 1946 that was approved by
Congress differed markedly from the Full Em ploy
ment Bill o f 1945. As approved, the act recognized both
high em ployment and price level stability as important
econom ic objectives. Furthermore, the requirement to
apply the principle o f compensatory finance, the cen
terpiece o f the 1945 proposal, was stripped away.

Bancroft, Gertrude. “ Current Unemployment Statistics of the Cen
sus Bureau and Some Alternatives,” in The Measurement and
Behavior of Unemployment (Princeton University Press, 1957),
pp. 63-119.

The Humphrey/Hawkins Bill o f 1976 attempted to
revive the main provisions o f the 1945 bill. Congress,
however, had becom e no more sympathetic in the
intervening 30 years. As in 1946, they extracted the
legislation's teeth before approving it and created an
"unworkable monster” by loading the bill with an
agglomeration o f conflicting policy statements. In the
end, the bill was hailed as a legislative monument to
Hubert Humphrey, w ho had died in January 1978.
Apart from this, and the expression o f congressional
sentiment regarding a vast array o f econom ic prob
lems, the legislation was not expected to produce
much o f substance.
Debates over the econom ic consequences o f the
1946 em ployment act continue to this day. However,
many w ould agree with the assessment given by Alvin
Hansen in a collection o f papers celebrating the tenth
anniversary o f the 1946 act. In his opinion, public
exposure to policy debates stimulated by the Eco
nomic Report o f the President and the Hearings before
the Joint Committee, both o f which are required by the
legislation, have had the effect o f raising the level o f
econom ic literacy in the United States. As for the real
econom ic consequences o f em ployment legislation,
he suggests that “ there are as many econom ic opin

35Assuring Full Employment in a Free Competitive Economy (1945), p.
25.

REFERENCES
Alchian, Armen, and William R. Allen. Exchange and Production:
Competition, Coordination, and Control, 2nd ed. (Wadsworth,
1977) pp. 467-80.
Assuring Full Employment in a Free Competitive Economy. Report
from the Committee on Banking and Currency, 79 Cong., 1 Sess.
(Government Printing Office, September 1945).
Assuring Full Employment in a Free Competitive Economy, Minority
Views. Report from the Committee on Banking and Currency,
79 Cong., 1 Sess. (Government Printing Office, September
1945).

Darby, Michael R. “ Three-and-a-Half Million U.S. Employees
Have Been Mislaid: Or, an Explanation of Unemployment, 19341 9 4 1 Journal of Political Economy (February 1976) pp. 1-16.
Employment Act of 1946,
304.

79 Cong., 2 Sess. (S. 380), Public Law

Fellner, William J. “The Balancing of Objectives Under the Em
ployment Act of 1946," in The Employment Act Past and Future
(National Planning Association, 1956) pp. 87-91.
Friedman, Milton, and Anna Jacobson Schwartz. A Monetary His
tory of the United States 1867-1960 (Princeton University Press,
1963) pp. 299-545.
Full Employment and Balanced Growth Act of 1976, Committee on
Labor and Public Welfare, S. 50, 94 Cong., 2 Sess. (Government
Printing Office, 1976).
Full Employment and Balanced Growth Act of 1978,
95-523 (H.R. 50), October 27,1978.

Public Law

Full Employment Act of 1945, Hearings Before a Subcommittee of
the Committee on Banking and Currency, United States Senate,
79 Cong., 1 Sess. (Government Printing Office, September
1945).
Hansen, Alvin H. “ The Reports Prepared Under the Employment
Act,” in The Employment Act Past and Future (National Planning
Association, 1956) pp. 92-97.
Harris, Ralph. “ Where Does Unemployment Come From?” in Job
Creation1— or Destruction? (Institute of Economic Affairs, 1979)
pp. 5-9.
Historical Statistics of the United States Colonial Times to 1970,
U.S. Department of Commerce, Bureau of the Census (U.S.
Government Printing Office, 1975), pp. 121-22 and p. 126.
Keynes, John Maynard. The General Theory of Employment, Inter
est and Money (Harcourt, Brace and Company, 1935).
Lebergott, Stanley. “Annual Estimates of Unemployment in the
United States, 1900-1954,” in National Bureau of Economic
Research The Measurement and Behavior of Unemployment
(Princeton University Press, 1957) pp. 213-38.

*Hansen (1956), p. 97.

FEDERAL RESERVE BANK OF ST. LOUIS
Moley, Raymond.

After Seven Years (Harper, 1939) pp. 369-70.

Romer, Christina. "Spurious Volatility in Historical Unemployment
Data,” Journal of Political Economy (February 1986), pp. 1-37.
Summary of Federal Agency Reports on Full Employment Bill,
Report to the Committee on Banking and Currency, 79 Cong., 1
Sess. (Government Printing Office, July 1945).

Digitized for16
FRASER

NOVEMBER 1986
Tobin, James. “ The Interdependence Between an Effective Stabi
lization Policy and the Attitudes of Labor, ’’ in The Employment Act
Past and Future (National Planning Association, 1956, pp. 11418.
U.S. Department of Labor, Bureau of Labor Statistics, BLS Hand
book on Methods (December 1982), pp. 3-11.
Wallace, Henry A.
pp. 8-22.

Sixty Million Jobs (Simon and Schuster, 1945)

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

The Farm Sector in the 1980s:
Sudden Collapse or Steady
Downturn?
Michael T. Belongia

I t has becom e popular to discuss the recent history
o f farm incom e and debt in the context o f a 1973—80
boom period and a post-1980 collapse in the farm
sector’s performance. This view suggests that the per
formance o f the farm sector since 1980 represents a
sharp break with historical experience.
This article reviews the evidence used by some
analysts to argue that the farm sector’s downturn is a
recent phenom enon. It then analyzes alternative indi
cators more representative o f the farm sector’s eco
nomic health and concludes that the 1980s are little
more than the continuation o f a long-established
downward trend.

THE “BO O M ” OF THE 1970s, THE
“BUST” OF THE 1980s
The performance o f U.S. agriculture in the 1970s
generally is characterized as a boom period on the
basis o f two indicators: export volume and asset val
ues. As the indexes plotted in chart 1 show, exports
and asset values rose rapidly through 1980: both se
ries, however, have fallen precipitously since then.
The 35 percent increase in U.S. farm export volume
between 1973 and 1980 was the com bined result o f
many coincident changes: production shortfalls in
other grain-producing countries, the fall in the

Michael T. Belongia is a senior economist at the Federal Reserve Bank
of St. Louis. Paul Crosby provided research assistance.

dollar's real exchange value (following the switch to
floating exchange rates), rapid growth in real foreign
incomes and strong incentives from domestic com
m odity programs for U.S. farmers to expand output.
Over the same period, a rising U.S. inflation rate, tax
advantages associated with ownership o f farmland
and the incentives o f com m odity programs to expand
production increased the dem and for farm assets,
primarily land. The result was a 46 percent increase in
the real value o f farm assets. Thus, the sharp increases
in these two indicators presumably signalled that the
markets for U.S. farm products w ere growing and that
owners o f assets em ployed in farm production w ere
becom ing wealthier.
Interpreting these indicators broadly as measures of
econom ic well-being supports the current notion that
the farm sector’s collapse began in 1981. Moreover,
their parallel declines since then have been viewed as
more than coincidence. With real farm exports falling
46 percent and real asset values falling 35 percent
between 1980 and 1985, a causal chain seems clear: the
loss o f export markets abroad causes a decline in farm
incomes, which, in turn, causes declines in asset val
ues and defaults on farm debt. Given this view o f when
and w hy the farm sector’s problems originated, the
apparent solution to the problem is to stimulate ex
ports. This intent is expressed clearly in the 1985 Farm
Bill and the discretionary implementation o f its provi
sions by the Secretary o f Agriculture. With greater
foreign sales, presumably, farm income, prices and
asset values all will rise.

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

Chart 1

Real Farm Assets and Real Farm Exports
1970=100
300

1970=100
300

250

200

1
1

/
/
/
/
/
1
/
/
/
/
/
/
1 __ ____

150

Exports y

250

\
\

200

\
150

Assets

100

50
1970

A LONGER-RUN PERSPECTIVE ON
FARM SECTOR PERFORMANCE
There are at least two pitfalls to using export volume
and asset values as primary indicators o f the farm
sector’s econom ic health. First, selling larger quanti
ties o f output to foreign buyers says nothing about the
profitability o f farming. Export volum e is solely a mea
sure o f quantity; it may bear little predictable relation
ship to the net returns earned by the labor and capital
em ployed in farming. The export measure provides no
information about the costs o f producing farm prod
ucts relative to prices received by farmers.
Second, the appreciation o f farmland prices during
the 1970s masked the incipient severe financial prob
lem now facing farmers. Farmers w ere earning a rela
tively lo w return from farming itself; their ch ief gains
accrued from the capital appreciation o f farmland
Digitized for 18
FRASER

1
74

1
82

1986

resulting from under-anticipated inflation. Farmers
w ho borrow ed against their higher-valued land w ere
borrowing against gains in wealth that w ere not re
lated to the incom e associated with farming. This
financial strategy could be pursued only so long as
asset values continued to rise fast enough to support
the higher debt load they acquired.

A Longer-Run View o f Returns to
Farming
A considerably different picture o f the farm sector’s
performance can be discerned from examining pat
terns in the relevant price, productivity and incom e
data.
This alternative longer-run history o f the fann sec
tor begins w ith the relationships shown in figure 1 and
chart 2. Figure 1 depicts total product (Panel (a)) and
marginal product (Panel (b)) curves and illustrates a
fundamental law o f economics, the law o f diminishing

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

F igu re 1

Relationships Between Quantity of Output Produced and Quantity of an Input Employed

returns. Total product is the total amount o f output
that can be produced from any particular quantity of
inputs (land, labor, capital and other resources) used
in production. Marginal product represents the
change in total product that results from a change in
the quantity o f one input, holding the quantities o f
other inputs constant. The law o f diminishing returns
says that, at some point, the additional output gained
from an extra unit o f one input (marginal product) will
begin to decline. Moreover, beyond some point, add
ing more units o f an input reduces total product; the
marginal product o f this input is now negative. These
relationships are discussed extensively in many m i
croeconom ics textbooks; thus, it is sufficient for cur
rent purposes sim ply to assert that, when more o f any
one input is added, w hile holding the quantities o f
other inputs constant, total output rises first at an
increasing rate (between points A and B), then rises at
a decreasing rate (between points B and C) and, finally,
declines (to the right o f point C).1

'See, for example, Stigler (1947), pp. 117-24; Hirshleifer (1976), pp.
344-45.

Looking at Panel (b) o f the figure, it is clear that w e
can observe greater productivity in the production of
some com m odity as a result o f two very different
causes. On the one hand, it is possible to move from
point (1) to point (2) on curve MP,: a reduction in the
quantity o f a specific input em ployed is associated
with a movement back along the MP curve. The mar
ginal product o f the specific input remaining in the
industry w ill be higher than before, although total
product is lower. A second alternative is that some
technological improvement shifts the entire MP curve
to something like MP,; thus, the marginal product for
any quantity o f input is greater under the new tech
nology (MPj) than under the old (MP,).
There is, o f course, a substantial difference between
the two eases. The first case results from certain in
puts leaving the industry; the second case results in
additional inputs entering the industry.’ The data for

2The MP curve, multiplied by the price of the final good produced by
this and other inputs, is the demand curve for the input. An outward
shift in the MP (or VMP) curve, therefore, reflects an increase in the
demand for that input.

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 2

Indexes of Farm Labor and Farm Labor Productivity
1950=100
800

1950=100
800

700

/
/
/

600

700

60 0

/
500

500

Produ ctivity
400

400

s '

300

200

100

Labor

I I I
1950

I I I
54

I I I

I I I
58

I I I
66

the farm sector, shown in chart 2, indicate that agri
culture’s productivity gains have been associated with
reduced numbers o f farmers. Starting from comm on
index bases of 100 in 1950, the chart shows that output
per farm worker has increased over 600 percent while
the number o f farm workers has declined about 70
percent. The data appear to be consistent with an
upward movement along a curve such as MP, rather
than an outward shift in factor productivity such as
MP,. The coincident observation o f both greater pro
ductivity and few er farmers suggests that agriculture
is now a declining industry and, moreover, has been
so for several decades.
All things equal, more output per unit o f input helps
farmers as it w ould allow them to sell more product
from the same amount o f effort devoted to farming.
But, all things are not equal. A change in prices of farm
products also affects the well-being o f fanners. Total
revenue (TR) received by farmers is defined as price (P)
Digitized for 20
FRASER

T
70

...

1986

times quantity sold (Q). W e already have seen that
productivity and total output have increased signifi
cantly in farming. The dashed green line plotted in
chart 3 shows, however, that greater productivity (in
conjunction with other factors, such as slow growth in
food demand) has resulted in low er prices o f farm
products relative to prices o f nonfarm products. With
output rising and prices falling, what w ill happen to
the well-being o f farmers?
The result has to do with the elasticity o f demand
for farm products. For- purposes o f calculating the
effect o f changing prices on farm revenues, most stud
ies estimate the price elasticity o f food dem and to be
near —0.2.3If w e assume, for ease o f graphical illustra-

3See, for example, King (1979), for a review of food demand studies.
The income elasticity typically is estimated to be near 0.2, which
suggests that food demand will increase slowly, relative to general
economic growth, and instead will depend more on the growth of
population than other factors.

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

Chart 3

Real Net Farm Income a n d R e la tiv e Farm Prices
1950=100
140

1950=100
140

Income
120

120

100 /

100

n
80

Vc --------, V . -----------

Prices
'■— --------

- ---—

v
60

\
60

------I V s

___

.1 I 1

1950

1 1 1 ..,.1,1
62

1 1 1

1
66

i
70

i i

1 1 1

1 1 1
74

1986

tion (figure 2), that the demand curve for farm prod
ucts is linear, it can be demonstrated that the marginal
revenue curve for sales o f farm products also will be
linear and intercept the horizontal axis at exactly onehalf the distance between the origin and the point
where the demand curve touches the horizontal axis.4
It also is well known that a price elasticity o f demand
equal to —0.2 is on the low er portion o f the demand
curve and is associated with negative marginal reve
nue. That is, a given percentage change in output w ill
cause a larger percentage change in price in the o p p o
site direction; consequently, total revenue (P X Q) will
fall with greater farm productivity. Unless the costs o f
farm production are falling faster than the prices o f
farm products (and the relative price line in chart 3
suggests the opposite), the end result w ill be low er
real farm income.

And, in fact, the solid black line in chart 3 shows that
real faim incom e has been on a steady downward
trend for many years. Real net farm incom e in 1985
was less than one-half o f its value in 1950. Over the last
10 years, real net farm incom e has averaged $29.3
billion (in 1982 dollars), about 40 percent less than its
$47.6 billion average value in the 1950s. Given the prior
history o f farm income, the “b oom ” o f the 1970s ap
pears to be best described as unusual.

“For proofs of this proposition, see Stigler, pp. 55-57 or King, pp.
840-41.

5There are a number of problems with farm population series that lead
to questions about what per capita measures of farm income mean.

Some might argue that the plot in chart 3 is mislead
ing because incom e is not measured on a per capita
basis. Because numbers o f farmers and farms have
been declining so rapidly, per capita incom e actually
has risen in recent years.5 Clearly, it is not sensible to
interpret the rising per capita farm incom e measure as

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

im plying improvements in the welfare o f farmers vis-avis the rest o f the economy. If so, w e ought to observe
increases in the number o f farmers rather than what
w e actually see. Again, the point goes back to the
marginal product curves in figure 1. The fact that farm
productivity is rising while resources are leaving the
industry suggests an upward movement along the MP,
curve in contrast to, say, the com puter industry,
w hich is making great gains in productivity and at
tracting new resources to the industry. In fact, the
returns to farming still must be below the returns to
other occupations — farmers are continuing to leave
farming for nonfarm activities.1
’

F ig ur e 2

R ela tionship s between Price Elasticities of Demand and
M a rg in a l Revenue

Returns to Farming: A Look at
the Components
In light of the foregoing analysis o f long-term declin
ing returns to farming, w hy w ere the 1970s a boom
period? Chart 4 shows that the boom period was one
o f exceptional capital gains, not exceptional earnings
from farm production. By dividing total returns to
farming into incom e and capital gains components,
the chart verifies the earlier discussion o f incom e
being generally low and trending downward. During
agriculture's boom o f the 1970s, however, capital gains
were positive and, with the exception o f 1974, at levels
substantially above the percentage return represented
by income. For example, in 1972, when farm incom e
produced only a 2.9 percent return on equity, capital
gains generated a 10.6 percent return on equity. By the
late 1970s, the share o f total returns produced by
capital gains became even larger. Income's share of
the return on equity was 1.5 percent or less in each
year between 1976-79, w hile capital gains, over the
same four years, showed an average return o f about 9.5
percent. Chart 5 reinforces the point by noting that,
with the exception o f 1972-74, capital gains have rep
resented nearly all o f the returns to equity in farming.
The problem with using changes in farm asset val
ues as a benchmark o f farm sector performance be
comes clearer w hen comparing the appreciation of
farm assets with changes in other asset values. During

the 1973-80 "boom ,” w hile the value o f farm assets
rose 152 percent, the median price o f a single-family
home rose 115 percent, the price o f gold increased 526
percent and the value o f stockholders’ equity in all
manufacturing corporations rose 79 percent. Thus,
while farm asset values increased during the 1970s,
both absolutely and relative to the prices o f some
assets, they declined relative to prices o f other assets.

6This observation is not new. T. W. Schultz suggested in the 1950s
that government help expedite the flow of farmers to nonfarm work
with a “ reverse-homesteading" plan. Recognizing already that in
creasing farm productivity would make farming unprofitable for many
current farmers, but that their transition to nonfarm work might be
impeded by lack of skills, the notion was to give farmers a lump-sum
payment that would allow them to establish an urban homestead and
enter nonfarm employment. See D. G. Johnson (1958), p. 131.

The point is simply that, in an environment o f high
actual inflation and accelerating inflationary expecta
tions, individuals w ill make changes in their portfolio
holdings to hedge against the capital losses associated
with unexpected changes in inflation and interest
rates. Increases in farm asset values, as w ell as the
values o f a w hole variety o f comparable assets with
varying sets o f characteristics (liquidity, use in con
sumption or production, etc.), reflected these portfo
lio adjustments. The data on prices o f farm products

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

Chart 4

Return to Equity from Income a n d R e al C a p ita l G a in s

1950

or farm income, however, suggest that the rising farm
asset values w ere not the result o f higher profits from
farming per se.

WILL THE FARM SECTOR REBOUND?
In contrast to the persistent negative trends d e
picted in the previous section, some analysts have
argued that a low er value for the dollar’s exchange rate
w ould stimulate farm exports, raise farm incom e and
reverse the decline in farm asset values. As mentioned
earlier, this view is em bodied in the philosophy o f the
1985 Farm Bill and is espoused by some farm econo
mists. Although few believe that exports w ill rebound
to levels o f 1980, many argue that there are significant
opportunities to recoup a large share of the $18 billion
in export sales lost in the last five years.
At least two pieces o f evidence disagree with the
prospect o f significantly larger export sales. The first is
the sharp gain in farm production in foreign nations in

1986

recent years. As table 1 shows, increases in U.S. pro
duction o f wheat and cotton account for less than 10
percent o f the increase in w orld production between
1980 and 1985; increases in U.S. soybean production
are about one-fifth o f the total gain. Only in corn
production has the rest o f the w orld lagged behind the
United States.
These data support the general conclusion that, for
a variety o f reasons, foreign producers have expanded
farm output considerably during the 1980s.7With rela
tively slow growth in w orld food dem and and rapid
increases in the productive capacity o f nations that
formerly im ported U.S. food commodities, it is difficult
to see where there is potential to expand U.S. farm
exports.

7Reasons often given are the high world price floor set by U.S.
commodity programs during the late 1970s, the view that the U.S.
was an 'unreliable” supplier after the 1980 embargo on grain sales
to the Soviet Union and domestic policy decisions in foreign coun
tries regarding food self-sufficiency.

FEDERAL RESERVE BANK OF ST. LOUIS

NOVEMBER 1986

Chart 5

Return to Equity and Share Represented by Real Capital G ain s
Percent

Percent

1950

Table 1
Changes in Total and U.S. Production of Major Crops, 1980-85

Crop
Wheat
Soybeans
Cotton
Corn

Increases in
U.S. production
(million tons)
6.0
1.9
0.4
25.7

Rate
of change
9.3%
3.8
16.7
15.2

Increases in
world production
(million tons)
71.6
9.5
4.3
43.0

SOURCE: Agricultural Statistics, 1985, USDA/GPO (1986) and 1983, USDA/GPO (1983).

Rate
of change
16.2%
11.7
30.0
10.6

1986

NOVEMBER 1986

FEDERAL RESERVE BANK OF ST. LOUIS

C h a rt 6

Tw o M easures of Excess C ap acity in Farming
Million seres
SO

Percent
r
Acreage e q u h alen t

^SC A LE

(Seven-year m o vin g averages)

Percent of output

Percent of output
20

16
Maj or cro j s / -

/,/

/ y

Total agric u lu re
t

— /./

10
/

Pe rce n t of har vestec

acres ge
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S o u r c e : A g r i c u l t u r a l O u t l o o k , O c t o b e r 1 9 8 6 , p.3 2

A second reason to doubt any reversal in the longrun decline in the size o f the farm sector is the persist
ence o f excess farm capacity in the United States, even
during the export boom years. Chart 6, which depicts
the excess capacity o f the U.S. farm sector as a percent
of total farm output, shows that long-run excess ca
pacity now is near the post-1940 high o f six percent
that prevailed during most o f the 1960s.“ Excess capac
ity for major crops, now at 13 percent, has risen to
levels that existed prior to the export expansion o f the
1970s. With another significant export expansion un
likely, however, it is difficult to see h ow this excess
capacity w ill be reduced except by a reduction in the
resources engaged in farming.

A longer-run view o f the relevant data o f the 1970s
indicates that farming fundamentals — primarily rela
tive prices and real incom e — have been declining for
many years. In contrast, asset values have fluctuated
erratically in response to accelerating inflation, tax
incentives and other factors largely unrelated to the
returns from producing and selling farm output.
While it is true that farmland price appreciation made
many farmers wealthy prior to 1981, this wealth in
crease occurred despite the decline in the profitability
o f farming itself.

SUMMARY
A short and selective view o f history suggests that
the farm econom y was reasonably healthy prior to the
collapse that began in 1981. This assessment is based
on the substantial gains in export volume and asset
values that w ere realized during the 1970s. Neither of
these measures, however, has much to say about the
inherent past or future profitability o f farming.

8Excess capacity is defined as the difference between potential
supply and commercial demand at prevailing prices. Potential supply
is actual production plus possible production from diverted acres.
See Dvoskin, p. 31.

REFERENCES
Dvoskin, Dan. “ Excess Capacity and Resource Allocation in Agri
culture, 1940-1985,” Agricultural Outlook, USDA — Economic
Research Service (October 1986), pp. 31-33.
Hirshleifer, Jack. Price Theory and Applications. Englewood Cliffs,
N.J.: Prentice-Hall, Inc. (1976).
Johnson, D. Gale. “ Government and Agriculture: Is Agriculture a
Special Case?” Journal of Law and Economics (October 1958), pp.
122-36.
King, Richard A. “ Choices and Consequences,” American Journal
of Agricultural Economics (December 1979), pp. 839-48.
Stigler, George J. The Theory of Price. New York: The Macmillan
Company (1947).