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TIE FARMER'S INTEREST IN OUR NATIONAL ECONOMY Remarks by Chas. N. Shepardson, Member, Board of Governors, Federal Reserve System, before the Farm and Home Woek Assembly, Agricultural Extension, University Station, at Baton Rouge, Louisiana, on August 15, 1956. The topic I have chosen to discuss may be approached from tvo ^gles. We may consider the farmer's interest in our national economy from the standpoint of his share in the total or from the standpoint of his confor the total economy. 1 I propose to look at it from both angles because ^ink both are important to an understanding of our present situation in ^culture and in the economy as a whole. Let us consider the broad picture first. Our national economy is runni ng at the highest level in history. Our gross national product, which deludes public and private consumption expenditures plus private domestic inv eatmQnt, last year reached a level of 391 billion dollars and is now run- nin S at a rate of nearly 410 billion dollars a year. Currently, income at ° Ver 340 billion dollars and total civilian employment at over 65 million also record levels. c °untry a s a w h o l e ig Aiile there are some soft spots in the economy, the operating at near capacity levels. In fact, the spirit of exuberance which pervades most segments of the economy has generated a terrific consumer demand for goods and services. G u ° Pled with the optimistic plans by business for plant and equipment expan- Si n ° > this is putting a mounting pressure on productive capacity and is being ^ e o t e d by a swelling wage price spiral. The effect of demand pressure ^dustrial commodity prices was evident last year, but then it was largely - 2 of fset by a continuing decline in farm prices with the result that the whole- Sals price index showed little change from that of 1953 and 1954. Since the upturn in farm prices from the low of last winter, this offsetting effect has decreased with the result that the general price index has started to nse in recent months, reflecting the inflationary effect of heavy demand Assure on available capacity and encouraging business management to bid ^gressively for scarce labor even at the price of wage increased in excess of increased productivity. Increased productivity is a principal key to our established pat- te]?n as a of economic growth. Our standard of living, either as individuals or nation, depends primarily on the amount of usable goods or services which Procluce per man-hour of human labor. It is also dependent, however, on th e Maintenance of an aggregate purchasing power which is kept in balance Vlth available supply. This is best illustrated by the contrast between ^lopments of the past few years and those of the 30's. During the 30's we were bogged down by a financial collapse which ^ l t o d in an atmosphere of fear and uncertainty. 8 a nd early 30's had shaken our confidence. The debacle of the late Talk was rampant about a ^ U r e economy" and the evils of "technocracy" which had developed an ability t0 ^oduce beyond our apparent capacity to consume. es The situation was one of Pread unemployment, idle plants, and surplus goods. This situation con- in spite of all manner of pump-priming devices until the impact of the Sc °nd World War broke the dam of stagnation in which we had been wallowing ^ ^leased the powerful stream of American initiative and ambition which hag v r°Ught us to our present level. - 3 Let us look for a moment at some comparative figures. In 1939 as the Var in Europe was starting but before we became heavily involved, we had a National income of $72.8 billion compared with $324 billion last year. Part of "this increase was certainly the result of inflation, but part was due to an increased labor force, greatly reduced unemployment, and a rise cf pro- activity averaging, roughly, 3 per cent a year. This increased productivity rel Qased man-power from existing jobs and provided the labor for the produc- ts of the new goods and services that are constantly being developed. At th e same time, it provided increased earning power to support the purchase of +M new production. In 1939, unemployment was high, amounting to about 17 per cent of 4.1 e labor force. Per capita income and consumer buying power were low and Price s generally were depressed. From 1940 through 1951 war, post-war and Ko r ®an demands were pressing capacity to the limit or beyond and the resultPressure inevitably resulted in inflationary price rises. Then came ano ther change. tiv e From early '52 until late 155, we were in a period of rela- e °onomic stability, with unemployment consistently under 5 per cent, disablQ income high, production generally in balance with demand, and a p0s 6a aonably stable level of consumer prices. But in mid-1955 the situation began to change. High level income, uer ant optimism, and easier credit spurred consumer demand. Recently, an y industries demand has been pressing or even exceeding capacity and Plan f o r industrial expansion have been accelerated faster than production itig be expanded. Thus, with a high consumer demand, coupled with a growdemand for materials for plant and equipment, both pressing against a - k - cu rrent capacity, we may be faced with a choice between two courses, neither of which would be universally popular. One leads to another round of price leases, over-expansion, and possibly ultimate deflation. This course means foore inflationary spending at the very time when we need to be encouraging s avinSB to pay for this added capital investment. of The other course is that holding expenditures to a level which will permit a prudent expansion of Production facilities while still meeting the essential needs for current con8 option. has This course should be familiar to any farm group for the farmer always recognized the necessity of holding back a part of this year's crop future replacement or expansion. Just a few years ago we saw the folly of diverting too much of the Cr °P from consumption to expansion. Cat Uem en decided to expand, new men went into the business and both groups buu t or enlarged their herds at the expense of current consumption. tinie ^ In the face of a booming demand for beef, For a this looked like good business. The consumption demand remained strong tho urge to expand to meet that demand fed the shortage and boosted prices hl 2her and higher. Eventually, drought and other factors caused a cessation th3 -s expansionary trend. Then, as the production from these new and enlarged hei>ds began to hit the market, we found we had outrun effective consumptive ^and and cattle prices dropped nearly 50 per cent in three years' time. It is this sort of a situation that must be guarded against in our itiri Atrial economy at the present time. In wartime, this can be done through ^ tio nin g or allocation of materials but such a harness of controls is foreign to (\ concept of free enterprise and we do not accept it in peacetime. - 5The principal tool available and compatible with our concept of free enterprise is that of regulating the cost and availability of credit. is the purpose of the Federal Reserve System — to provide a flexible cr edit and monetary supply that will meet the needs of a growing economy while c °tttributing to a relatively stable value for the dollar; i.e., a minimum Actuation of the price level. It has been with this objective in mind that the System has followed a policy of varying degrees of restraint as inflation- ary Pressuros have manifested themselves over the past year. This restraint is applied to the total available supply of credit and, as such, its effects ar>e felt throughout all segments of the economy. Naturally, its success is e Pendent upon many factors, including the fiscal policy of government and th vi se and prudent allocation of available credit by individual lenders thr °Ughout the country. The farmer is inevitably interested in this general situation. His fw LUre a ^ depends upon a sustainable growth, a high consumer purchasing power balance of production to effective demand. Any over-expansion leads tein Porariiy to inflation and ultimately to deflation. The experience of culture in the past few years is an all too painful example of this sit- ^Uon. And now let us look more specifically at the farmer's share in this noin y. In 1939, a net income of &5.2 billion to persons on farms from farm- ing Counted to approximately 7.4 per cent of the national total while in 1955 net income of $13.4 billion amounted to only 4.5 per cent of the total. At th® S Tne ^ of time, however, farm employment dropped from 9.6 million, or 21 per total civilian employment, in '39 to only 6.7 million or 10.6 per cent - 6 j in 1955 with the result that the per capita share of national income received ky farmers increased over this total period in spite of the drop in the last five years. In looking at the importance of agriculture in the total economy, the question is frequently raised as to the significance of the increased cost of Production in terms of farm purchases of equipment, fuel, agricultural chemetc. While it is true that off-farm production expenditures have more than tr ebled during the past 16 years, they have actually shrunk from about cent of total income in 1939 to 4.2 per cent in 1955. I mention these figures not to belittle the importance of agricul- ture i. . " °ut to point up an element of change that is inevitable in an expanding 01Tl y. Certainly, agriculture, as the principal source of our food and is and for the foreseeable future must continue to be our most basic nd -Ustry. While many of the luxuries of the past have come to be considered ^essities today, we have lived without them and we could again, inconven- ient as a Umn hUfiw « it might be. In fact, a large part of the world is living without them However, important as food is, the amount that we can consume is In fact, as the developments of machine power replace the need for energy, o u r f00(j needs actually decrease. This means that, once we have a satisfactory plane of nutrition, any increased demand for food is a ®nt solely on population increase. Fortunately, most of our people have ^ttl 9 ^ny of i n fact, many of us have too much as witness the widespread °f the bulge" and the doctors' admonitions against overweight. True, °ur people, both rich and poor, need an improved quality of diet but - 7 few ^eed or want any larger quantity of food, Once his stomach is filled, man is n °t interested in more food regardless of the price or the amount of money h3 has. This is not true of most of the other segments of our economy. Man's cies ii,e for other things is limited solely by his imagination and his ability to pa y. Out of his imagination he has conceived and developed everything from the most primitive shelter and tools of the past to the most recent achieve- ^ n t s of science and industry both in terms of tools of production and of goods services for his use and enjoyment. And through increased productive effie e - ttcy Of ^. he has released man-power from existing jobs to produce these new fruits ni s imagination and ingenuity at the same time that he has increased his PUrohufasmg i • power to pay for them. I mentioned earlier this tremendous increase in industrial offiCl enc " y which has averaged approximately 3 per cent a yoar for the past 15 years. 9 W e a s e in agricultural productivity has been even greater, averaging ap- ^imately 6 per cent a year over the same period. Unfortunately for agri°U:itUre, i ts i n c r e a s ed productivity has outrun our domestic capacity to conSl%6 s and this condition has not been adequately offset either by increased outthrough foreign markets or new uses. During the 30's agriculture was depressed largely because of the Messed condition of the rest of the economy. The deflation, which followed thQ ec °nomic collapse of the late 20's, resulted in unemployment and loss of W power that crippled the market for agricultural products. Urban un°ymervt retarded and in some cases reversed the normal flow of excess farm to industry, thus increasing the employment problem on the farm. At the - 8SaiIlQ time, the loss of urban buying power resulted in the accumulation of farm SUr Pluses, the further depression of farm prices, and a reduction of farm buypower for industrial commodities. It was a vicious circle in which it was °ften difficult to say which was cause and which was effect. This, coupled with the lower flexibility of industrial prices corne d with farm prices, led to a wide disparity of farm purchasing power. The of the parity price concept and measures to implement it grew out 0f this situation but little progress was made in correcting price relation- shi Ps until after the outbreak of World War II. anci War demands stimulated prices created man-power shortages, which were felt most acutely on the farm, ^ s no longer a question of what to do with surplus farm labor and surplus but rather one of how to produce what we and the world needed with the labor and facilities available. As a result, agriculture advanced technologically during the past Is years at a rate about double that of the rest of the economy. Unfortunately, th Q c °ntinuation of production incentives, after war and postwar needs had retarded prompt adjustment to a peacetime basis, and since the Korean 6pi sode agricultural income has declined as farm surpluses mounted. There is a marked difference, however, in the present situation 0m that in the 30's. Then vje had loss of confidence, business and indus- tn a l ^agnation, burdensome unemployment, and lack of consumer buying power. ^od ^ ve have the reverse. Practically all phases of business and industry e Qt s record or near record levels. Employment is high and consumer purchas- Power is at record level. Sse In some areas there is an actual shortage of *vtial industrial commodities. - 9 - Here, then, is our dilemma. On the one hand, business and industry are booming, wages and prices are increasing, and inflation continues to man- ifes t itself. On the other hand, agriculture is still caught in the throes of O ver-production and deflation although the change in trend in recent months aeQ tos to indicate a definite improvement in that situation. For the economy as a whole, a cautious restraint of inflationary te *c}encies would seem to be in order. Certainly, inflation would be of no to the farmer. Since his price problem is definitely one of surplus su Pply rather than lack of consumer buying power, inflation would be of little heI P to him in terras of increased selling price, especially for commodities are in surplus, and it would definitely be a detriment in terms of in- Crea sed prices on the things he has to buy both for production and for his °Wn Use. Neither would inflation help the large and growing group of our Elation who are dependent on fixed incomes, whether salaries, pensions and on insurance protection for their families. To ride that fin ne line of restraint needed to avoid inflation without bringing the growth Of 4. the economy to a halt is like riding a skittish horse. It calls for a aUt a nd steady rein that can check any bolt, at the same time avoiding any . J6l?ka that might bring him to a sudden halt and catapult the rider into the <Utch. Difficult as this job is, the farm problem is more complicated ^ can be remedied only over a period of time. There are several facets the Xo problem and, while most of them are familiar to all of you, I would call your special attention to a few of them. ~ 10 - First, we must give greater attention to the wise conservation and Use of our land and water resources. We have thousands of acres in cultivathat are so low in fertility, so subject to water or wind erosion, and So subject to drought as to be unsuited for cultivation except under abnor- mall y favorable conditions of weather and price. Much of this land would be productive and a better conservator of our dwindling water supply if it V6r o restored to its natural cover of grass and trees. If this.land were taken out of cultivation, it would do much to enable the operators of our proActive crop lands to utilize their lands to the best advantage without the han ^icap or necessity of acreage allotments. 6ate(i In this connection, I was inter- to hear a State Forester of a Southern State say recently that his orders seedlings for reforestation this year were double the capacity of the State Series to supply. Second, we must give more attention to the development of increased ° u U Qt g f o r Q u r f a m product ion. thr u This may mean increased foreign outlets ° Sh improved trade relations and more realistic pricing. It may mean the ^lopment of new uses or better quality for existing uses. Here again we Shou ^ not lose sight of the tremendous increase in the present and potential USe wood products as a need for reforestation of many of our less produc- tlVe crop lands. It may also mean curtailment in production of some of the Bt **ohy foods and increased production of meat, milk and poultry products, Vhioh 5t are so essential to improvement in the quality of the diet for our con- ^tl y growing population. Here we should remember two things: (1) increased *** °apita consumption of these products offers a tremendous potential outlet f0l> ^creased production; (2) production of animal products requires about - 11 times as much land per unit of human food produced as do our surplus hence, the diversion of less productive crop land to pasture would Ser Ve both to conserve the land and to reduce our crop surpluses. Third, we must continue to advance in productive efficiency. The acJ Vancement of our whole economy is based on that philosophy. There is no In re ° fo]? future for the inefficient or inadequately equipped farm than there is the inefficient merchant or manufacturer. qUatQ The modern farm must be ade- ly equipped and operated by the best known methods. We can no more e *Pect to keep up in the race of farming today with the tools and methods of yQ 3terday than we could in procession on the highway with a Model-T or a team Of niul es. By this, I don't mean that we should resort to the rules of some of modern turnpikes where they fine you or rule you off the road as an ^ifcent to traffic if you go too slowly. Rather, we should exert every Sffo hig n i n assisting the man on an inefficient unit to increase and modernize derations to an efficient level or, if that can't be done, we should ass ist him in finding other opportunity for the more profitable employment °f nis h' tnal time and ability. This includes providing more opportunity for indusemployment and more training for him and his children for such employ- ^ ^ Of t It also calls for a broader understanding of the importance of mobility ^abor and alternative opportunity in this ever-changing and expanding e ° 0 n o % of ours. In this connection, it is most encouraging to see the industrial Vei °pment in many sections of the South. This increased opportunity for Ua1 *ial employment has resulted in two changes in the farm picture. In Ca ses it has resulted in reorganization of the farm operations so as to - 12 Permit part-time, off-farm employment, thus raising the family income while ffiai ntaining a farm home. In others, it has resulted in a family moving into fu U-tinie, off-farm employment, thus permitting two or more inadequate farm ^ t s to be combined into efficient family-size farms. Fourth, we must realize that farming is a way of making a living as w ell as a way of life, Unless it provides an adequate living, it will be a very attractive way of life. In other words, it is a business and be run as such. The size of the average family farm has increased 4-0 Per in cent and the average capital investment is four times the amount required 1940. This means that the farmer is increasingly dependent on larger and lai, ger amounts of credit. To bo able to justify and secure this needed credit e A toUsthave a plan of operation and a prospect of income that will provide the orderly retirement of this debt over a reasonable period of time. Ad equacy 0 f collateral is not sufficient justification for the extension of °le(Ht. Unless the operation gives promise of being profitable to both borJ? Wer ° and lender, it is of doubtful value to either party or to the community. there are leases where too much credit has been extended on S u ° nd operations that only resulted in the gradual attrition of the bor- ^ r ' g assets and his ultimate failure. So that farmers may be better acqUaij ited with the increasing importance of sound business planning, your Service has inaugurated the Farm and Home Development Program. In thi 3 Program farmers are assisted in analyzing their farm operations and doping a farm plan that will support and justify their requests for nec- PSjvj credit. And lenders will normally accommodate such requests even in °as of credit restraint when credit for less promising or more speculat e ^quests may be denied. On this basis we can do much to strengthen our agricultural economy at the same time that we exercise a prudent restraint on credit expansion ln the interest of a sound, sustainable growth for the entire economy. I Voul 3 not close, however, without warning you that neither the Federal Reserve Astern nor any combination of governmental agencies can assure that we will hav ® a straight line growth in our economy. SeX f It is in the nature of life it- " that we have periods of accelerated activity followed by breathing spells or Periods of decelerated activity, and the best we can hope to do is to mode3?at e the magnitude of these fluctuations in the light of our best information and judgment at the time.
@FedFRASER