Tuesday, August 7, 2018

Lessons from the Great Depression: Agriculture

Farm policy would serve as an impeccable exhibit of everything wrong with the price-floor policies of both the Herbert Hoover and Franklin Roosevelt administrations.

Click here to read the original Cautious Optimism Facebook post with comments


12 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff continues here with his fascinating and educational series on the lessons of the Great Depression.


Farmers slaughter their own animals before burning them

The corollary to Herbert Hoover’s belief that high wages were the cure for depression was that falling prices were a scourge that dampened wages, and that falling prices must therefore be countered with government action.

Hoover wasn’t completely incorrect: prices in America did fall precipitously during the early 1930’s due to a contracting money supply—abetted by bank failures and financial panics, a curtailment of lending by surviving banks, and after late 1931 an accelerated withdrawal of foreign gold from America’s monetary reserves—the fallout of the Bank of England’s first ever peacetime suspension of gold convertibility in September of the same year.


But Hoover’s solution, an attempt to artificially prop up prices as he did with his corporate “high wage” policy, only served to create unsold surpluses. The more effective method of price stabilization was monetary policy to restore the price level of the entire U.S. economy, but that onus lied with the Federal Reserve and was therefore mostly outside Hoover’s control.

Nonetheless Hoover drudged forward futilely, and his clumsy tool for raising farm prices was the newly formed Federal Farm Board. 


I. HOOVER AND THE FEDERAL FARM BOARD (FFB)


Hoover pressed Congress to pass the Agriculture Marketing Act establishing the FFB in June of 1929—before the October stock market crash. His intent was to offer loan support to farmers who had been left out of the Roaring Twenties as post-World War I demand for their crops tapered off.


Immediately the FFB was authorized to make $500 million ($108 billion in 2018 dollars when calculated as the same percentage of GDP) in low-interest loans to farmers over a 20-year period, and also to create farming cartels to push crop prices higher. The market crash in October quickly led to an acceleration of FFB policy action.

 On November 25, 1929 Hoover organized one of his many White House conferences, this time with major farm organizations and FFB administrators.


The topic of discussion: a proposal to accelerate loan and subsidy support, and to create cooperatives to hold crops off the market and effectively cartelize agriculture to keep farm prices high. Unsurprisingly, the farm organizations agreed wholeheartedly as they had been trying to form cartels for years, and now they had federal money and policy backing to assist them.

The FFB had already announced $150 million in loans (approx. 4.5% of the entire 1929 federal budget) shortly after the market crash to wheat coops to hold wheat off the market. The White House conference formalized federal coordination of the process with the ambitious aim of holding up prices.


At first the FFB’s efforts seemed to work. Prices were stabilized for a few months. But unsurprisingly, they quickly resumed their fall shortly afterwards. The cause? Seeing the initial success of the FFB’s attempts to support prices, farmers simply expanded their acreage, exacerbating the surplus problem. Furthermore, as the globe fell into depression wheat prices fell worldwide.


Seeing higher U.S. wheat prices maintained by the FFB, foreign wheat growers such as Argentina and Russia increased production (even as Joseph Stalin expropriated wheat from Ukrainian farmers in the Holodomor famine of 1932) placing further downward pressure on prices. As coop wheat stockpiles accumulated in warehouses across America, the FFB was forced to lend more and more to American farmers to keep wheat off the market.

Eventually the FFB shirked lending for wheat and began buying it directly to withhold, the official justification being that it would clear a profit when it sold its stocks later at inevitably higher prices.


But spurred on by expanding government purchases, wheat production continued to rise and prices continued to fall even as FFB coop warehouses reached the bursting point. The FFB was learning the first, hard lesson of running any cartel: simply trying to push up prices doesn’t work. The cartel must restrict output if it’s to achieve a sustainable rise in prices.

So the FFB began urging farmers to reduce their acreage voluntarily, with Secretary of Agriculture Arthur M. Hyde lecturing farmers on the evils of “overproduction” (never mind the overproduction was the result of government price-fixing and price floors to begin with). Northwest and Midwest farmers, unhappy with the prospect of reducing their acreage, were bullied by government-sponsored economists to switch from wheat to some other crop. 


Kansas Governor Clyde M. Reed wondered aloud publicly why the federal government on the one hand had encouraged increased farm production with price-floor policies while on the other hand it urged farmers to cut production.

In this capricious, on-again, off-again tragic comedy of contradictory policies the FFB’s Grain Stabilization Corporation cooperative had accumulated 65 million bushels of wheat to hold off the market by mid-1930. As prices continued to fall the GSC bought an astonishing 200 million more bushels by mid-1931. But all to no avail as the forces of worldwide supply-and-demand could not be so easily muted.


Finally, the FFB threw in the towel and dumped most of its wheat stocks overseas, sending wheat prices plunging to levels that Washington, DC had been spending profligately to avoid—likely even lower with such a large surplus unloaded at once. FFB losses totaled $300 million (including similar cotton coops) or 6.4% of the 1931 federal budget—a great deal of the money having been borrowed as Washington ran chronic budget deficits in its efforts to stimulate the economy to recovery. 

If measured as a percentage of the 1931 economy and translated into 2018 dollars, the FFB lost $88 billion on its coop schemes only to fail to prevent crop price declines. It donated 85 million bushels of wheat to the Red Cross.


In the end wheat prices settled where or near where they would have had the market been left alone, only that the federal government had borrowed and lost a small fortune in the process. 


To recoup these and other non-agricultural losses Herbert Hoover signed the Revenue Act of 1932 which raised taxes across the board including a top rate hike from 25% to 63%. The following year was the worst year of economic performance in American history with unemployment skyrocketing to over 25%.

The FFB attempted similar cartel operations to hold other crops off the market—all to no avail. It formed the Cotton Stabilization Corporation (CSC) to hold nearly five million bales in warehouse storage. But for the same reasons cotton prices continued to fall. FFB Chairman James C. Stone then urged the governors of cotton growing states to “immediately mobilize every interest and available agency… to induce immediate plowing under of every third row of cotton now growing.”


The New York Times, itself operating in a past era of journalistic sanity long since gone, condemned the edict calling it “one of the maddest things that ever came from an official body.” 

Nevertheless by July of 1932 the CSC had spent $127 million on cotton of which it lost $94 million (2% of the 1932 federal budget: $78 million donated to the Red Cross plus $16 million in additional losses).

The FFB formed the National Wool Marketing Cooperation (NWMC) with the same intent of holding wool off the market. The result was another failure to hold up prices and the NWMC lost $12.5 million of its $31.5 million in outlays.


The FFB created less ambitious cooperatives that focused more heavily on subsidies and loan assistance—with the “suggestion” that farmers reduce production. These include the National Livestock Marketing Association, multiple dairy and butter cooperatives, a National Bean Marketing Association, a National Pecan Marketing Association, and less organized aid to growers of citrus, figs, grapes and raisins, potatoes, apples, sugarbeets, honey, nuts, maple syrup, tobacco, poultry, eggs, and rice.


In the end the FFB burned through hundreds of millions of dollars, an enormous sum at the time, in a failed attempt to rescind the worldwide laws of supply and demand in what can only be described as a fiasco. By the nadir of the depression an epidemic of farm bankruptcies had spread across the country—the aftermath of the dust bowl drought, contraction of the export market resulting from the Smoot-Hawley initiated international trade war, the heavy debt burden of FFB loans, and the empty promise of higher crop prices to repay those loans. An estimated 25% of depression-era farm bankruptcies were due to inability to pay back FFB loans.


II. ROOSEVELT AND THE AAA


In the frenzy of the Roosevelt Administration’s “First 100 Days” Congress passed the Agricultural Adjustment Act granting new powers to the federal government to prop up crop prices. Now instead of subsidies, loan support, and voluntary exhortations to reduce acreage, the newly formed Agricultural Adjustment Administration (AAA) not only authorized federal dollars to be spent directly to farmers to stop growing food, but according to economic historian Robert Higgs it also “provided for acreage and production controls, restrictive marketing agreements, and regulatory licensing of processors and dealers ‘to eliminate unfair practices and charges.’”


The AAA also “authorized new lending, taxed processors of agricultural commodities, and rewarded farmers who cut back production.” The expenses of the AAA were paid for by the “processing tax” levied on, ironically, agriculture itself (Sennholz, 1969).

Famously, the Roosevelt era has been characterized by stories of farmers plowing under their crops and slaughtering and burning livestock while Americans were going hungry. And as we now know the stories are absolutely true. 


The AAA paid farmers to soak oranges in kerosene to prevent consumption and burn corn as fuel (sound familiar?). In one of the many contradictory policy outcomes, farmers not only slaughtered livestock at the behest of the AAA, but also because feed prices had been deliberately pushed up to levels that generated losses for farmers who paid higher prices to feed pigs and cows.

On January 6, 1936 the Supreme Court ruled the AAA unconstitutional due primarily to its coerced cartelization and monopolization policies, but FDR continued with it anyway under the guise of a “soil conservation” program, paying farmers officially to “conserve soil” when in fact they were still being paid to plow under crops and slaughter livestock (DiLorenzo, 1998).


In the end, crop prices did rise and farm income with it, but this was due more to the reinflation of the money supply as a whole—the product of Federal Reserve policy, the enactment of the FDIC, and abandonment of the gold standard. U.S. prices rose nationwide by over 25% from 1932 to 1936 due to reinflation efforts alone, providing many farmers relief from debt payments denominated in more expensive dollars based on pre-1932 price levels.


And to FDR’s credit, his efforts to tear down Smoot-Hawley imposed trade barriers reopened overseas markets to U.S. agriculture, the policy instrument being the Reciprocal Trade Agreements Act of 1934 that empowered the White House to negotiate country-by-country bipartisan reductions or eliminations of tariffs.

Although the process of reestablishing unimpeded commerce with America’s important trading partners took nearly seven years (to the outbreak of WWII) the process slowly but steadily relieved pressure on farmers whose overseas markets had been choked off by early 1930’s protectionism.

III. ARTISTS AND PLAYWRIGHTS: NEVER RIGHT BUT ALWAYS SELF-ASSURED


During the early years of the Roosevelt Administration, the tragedy of deliberate food/crop destruction in the midst of widespread hunger didn’t go unnoticed.


Author John Steinbeck famously wrote of the plight of hungry and unemployed Americans watching hopelessly as crops were burned in “The Grapes of Wrath.” Steinbeck, while not a card-carrying member of the Communist Party, was a member of the communist League of American Writers, famously visited the Soviet Union, joined in solidarity with labor movements and striking workers, and was surveilled by the J. Edgar Hoover FBI.

Although he drifted towards the political center three decades later, his socialist-populist leanings were on full display during the Great Depression as he protested the plight of the poor against the dehumanizing marketplace (as if anything resembling the free market actually remained during the 1930's) in his Pulitzer Prize winning novel:
“The purple prunes soften and sweeten. My God, we can't pick them and dry and sulphur them. We can't pay wages, no matter what wages. And the purple prunes carpet the ground. And first the skins wrinkle a little and swarms of flies come to feast, and the valley is filled with the odor of sweet decay. The meat turns dark and the crop shrivels on the ground.
“And the pears grow yellow and soft. Five dollars a ton. Five dollars for forty fifty pound boxes; trees pruned and sprayed, orchards cultivated—pick the fruit, put it in boxes, load the trucks, deliver the fruit to the cannery—forty boxes for five dollars. We can't do it. And the yellow fruit falls heavily to the ground and splashes on the ground. The yellowjackets dig into the soft meat, and there is a smell of ferment and rot…”
 “...There is a crime here that goes beyond denunciation. There is a sorrow here that weeping cannot symbolize. There is a failure here that topples all our success. The fertile earth, the straight tree rows, the sturdy trunks, and the ripe fruit. And children dying of pellagra must die because a profit cannot be taken from an orange. And coroners must fill in the certificate—died of malnutrition—because the food must rot, must be forced to rot.”
 “The people come with nets to fish for potatoes in the river, and the guards hold them back; they come in rattling cars to get the dumped oranges, but the kerosene is sprayed. And they stand still and watch the potatoes float by, listen to the screaming pigs being killed in a ditch and covered with quick-lime, watch the mountains of oranges slop down to a putrefying ooze; and in the eyes of the people there is the failure; and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage.”
                 -The Grapes of Wrath

If only Steinbeck had taken a Microeconomics 101 course in his youth and learned the fundamentals of price floors and price ceilings. Maybe he would have better understood the true causes of hunger and human suffering during the depression (Herbert Hoover’s FFB and Franklin Roosevelt’s AAA policies), but then he wouldn't have a Pulitzer Prize for eloquently getting it so wrong.


Note: The Cautious Optimism Economics Correspondent drew heavily from Murray N. Rothbard’s classic book “America’s Great Depression” and recommends it highly—particularly “Part III: The Great Depression: 1929-1933.” The PDF version is available free online at the Ludwig von Mises Institute’s website mises.org.

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