POSTWAR ECONOMIC STUDIES 

No. 2, October 1945 

AGRICULTURAL ADJUSTMENT 

AND INCOME 

ARTHUR C. BUNCE 

WILLIAM H. FISHER 

EARLE L. RAUBER 

BOARD OF GOVERNORS 

OF THE FEDERAL RESERVE SYSTEM 

WASHINGTON 

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Published October 1945 

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CONTENTS 

PAGE 

PREFACE Inside Front Cover 

OUR AGRICULTURAL POLICIES ARTHUR C. BUNCE 1 

Summary 1 

The Need of Agriculture for Special Policies 2 

Characteristics of Agricultural Production and Prices 2 

Protracted Agricultural Depression after First World War. .. . 4 

Low Incomes of Farm Families 4 

Postwar Problems of Agriculture 5 

Output of Agricultural Products 5 

Prices and Income 6 

Domestic Food Requirements 7 

Agricultural Exports 9 

Objectives of Agricultural Policy 10 

Present Agricultural Policies 11 

Difficulties Inherent in Parity Price Support Programs 13 

Production Adjustments 13 

Agricultural Exports 14 

Methods of Supporting Prices 16 

Rural Poverty and the Objectives of Policy 18 

Postwar Policies for Agriculture 18 

Full Employment 18 

Expansion of World Trade 18 

Soil and Water Conservation 20 

Maintenance of Adequate Diets 21 

Alleviation of Rural Poverty 21 

Crop Insurance 22 

Storage of Nonperishable Products 22 

Other Policies 23 

Policies to Maintain Agricultural Income 24 

Freedom vs. Control 24 

Modified Programs to Support Parity Prices or Income 27 

A System of Forward Price Floors 28 

A Method of Supporting Agricultural Income 29 

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iv CONTENTS 

PAGE 

FARM LAND VALUES AND RECONSTRUCTION 

WILLIAM H. FISHER 32 

Summary 32 

Farm Land Values in the National Economy 33 

Land in the Total Economy 33 

Land and the War Economy 34 

Land Values and Postwar Adjustments 35 

Comparison of World Wars I and II 36 

Basic Differences 36 

Prewar Land Values 37 

Farm Prices and Incomes 37 

The Farm Real Estate Market 38 

Conclusions 40 

Current Forces and Future Development in the Farm Land Market 40 

The Present Situation 40 

The Immediate Postwar Period 42 

The Later Postwar Period 43 

Methods of Preventing a New Land Boom 44 

Education 44 

Control of Demand through Allocation 45 

Restrictions on Purchasing Power 45 

The Control of Liquidity 46 

Methods of Credit Control 46 

Price Ceilings 47 

Capital Gains Taxes 48 

Forced Savings of Receipts from Sales 50 

LOW INCOME GROUPS IN SOUTHERN AGRICULTURE 

EARLE L. RAUBER 51 

Summary 51 

The Geography of Rural Poverty 53 

Some Foundations of Rural Poverty in the South 54 

Population and Land 54 

Cash Cropping 55 

The Tenure System 58 

Programs and Policies 60 

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OUR AGRICULTURAL POLICIES 

by 

ARTHUR C. BUNCE 

Division of Research and Statistics, Board of Governors 

The farm population of the United States was approximately one 

quarter of the total before the war. The total net income from agriculture 

was about 8 per cent of the national income for the 1935 to 1939 period, 

and the average per capita income of persons on farms was less than half 

the average of all other groups. Programs to maintain full employment 

and a high level of purchasing power in the total economy, therefore, 

must include agricultural policies because of their implications to the 

total national income and the welfare of both the farm and nonfarm 

population. This essay presents a brief analysis of the problems that 

agriculture will face at the end of the war, the weaknesses of present 

agricultural programs, and the basic essentials of more constructive 

programs for the future. 

SUMMARY 

During the war agricultural production has been expanded one-third, 

although the number of persons engaged in agriculture has declined. 

This has been made possible by the technological changes which have 

taken place during the last 20 years. Higher prices, Government guarantees, and patriotism have also stimulated farmers to expand production 

rapidly to meet wartime requirements. 

The major determinant of the level of agricultural production and 

income in the postwar period will be the level of domestic purchasing 

power. Even with a high level of employment and consumption in this 

country, however, production will exceed demand at "reasonable" prices 

unless our exports can be expanded above the prewar level. 

At present the prices of agricultural products are guaranteed in terms 

of "parity" relationships that existed 30 years ago. In many cases costs 

of production have changed greatly during this period and will continue 

to change in the future. Parity prices that remain unchanged for long 

periods do not reflect economic changes; the retention of these rigid prices 

in the postwar period will tend to prevent needed production adjustments 

from taking place and they will also tend to limit both domestic and 

foreign consumption. 

1 

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2 AGRICULTURAL ADJUSTMENT AND INCOME 

To solve the postwar problems of agriculture we must (1) maintain 

a high level of consumption in this country, (2) expand our agricultural 

exports on a permanent basis, and (3) assist agriculture to adjust its 

production pattern so that the benefits of low-cost mechanized production can be passed on to consumers while the level of living of our farmers 

is maintained or improved. 

In order to attain these ends we need to maintain a high level of 

employment and income in this country and to develop means of maintaining or improving the food consumption of families whose incomes 

are not sufficient to provide an adequate diet. To expand our exports we 

should initiate and support agreements to reduce tariffs, cooperate in the 

development of flexible international agreements for those problem 

commodities where production adjustments must be made slowly if 

serious economic repercussions are to be avoided, and support policies 

designed to stabilize exchange rates and facilitate international lending 

on a sound basis. 

To assist agriculture to adjust production and maintain a high level 

of income, \ye need greater flexibility of prices than exists under present 

laws. In addition to a system of flexible forward prices and price floors, 

other programs are needed (1) to help farmers on inefficient farm units 

to move into more productive employment, (2) to train remaining farmers 

to develop more diversified production, and (3) to assist farmers to adjust 

crop production from that required for war purposes to that required to 

meet peacetime needs and establish a sound soil conservation system. 

THE NEED OF AGRICULTURE FOR SPECIAL POLICIES 

During the present war agricultural production has expanded rapidly; 

not only have civilians been better fed, except for a very few items, but 

vast quantities of food have been supplied to our armed forces and to 

our Allies. This increased production occurred in spite of a reduction in 

manpower and reflects the cumulative effects of a technological revolution 

in agriculture. In the postwar period production can be expanded still 

further even with a smaller farm population. The problems that agriculture will face after this war are problems that have been intensified 

rather than created by the war and, for the reasons discussed below, the 

farm problem presents special features and requires special programs in 

addition to those applied to the rest of the economy. 

Characteristics of Agricultural Production and Prices. Agricultural 

production expanded about 10 per cent during the First World War and 

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continued to expand a further 10 per cent during the 1920's. This was in 

the face of lower prices and a decline in foreign demand. The index of 

agricultural production for sale and use in the farm home (1910-14 base) 

showed remarkable stability all through the depression; at the depression 

prices of 1932 it was still 117 and the lowest point reached was 111 in 1935, 

in spite of the drought of 1934 and 1936 and all the efforts of the Government to reduce the "surpluses" through production controls. Actually 

production was cut in the two drought years much more than the index 

indicates because the index does not show the reduction in inventories. 

The index tends to obscure annual fluctuations in yields, although it 

presents an accurate picture of longer run trends. In contrast to agriculture, the prices of industrial products fell much less while production 

was cut drastically and serious unemployment resulted. 

This disparity between agricultural and industrial production and price 

behavior is the result of several major influences. Production costs in 

agriculture are almost all fixed costs. Taxes, rent, capital, and family 

labor are all essentially fixed. The farmer cannot gain by "laying off" 

his own labor. The only variable costs are hired labor, power, fertilizer, 

and seed; these, in the aggregate, form a very small percentage of total 

costs. In industry, on the other hand, most labor, raw materials, and 

power are variable costs and form a large part of total costs; when prices 

fall it is possible and often cheaper for the individual firm to cut production rather than maintain it. Another important factor is that the 

total demand for agricultural products is relatively inelastic, compared 

to the demand for most manufactured products, and even large decreases 

in prices do not increase consumption greatly. In addition to these major 

factors, agriculture is extremely competitive; there are millions of farmers 

and each individual raises a crop regardless of the aggregate effect on 

farm prices. Compared to this condition, there is a large degree of monoply 

and monopolistic competition in industry. Furthermore, since some major 

agricultural products are dependent on world markets the tariff is less 

effective in protecting prices in agriculture than it is in industry. Finally, 

production in industry is under human control and largely based upon 

forward orders while agricultural production is indeterminate because of 

the weather and cannot quickly or easily be controlled because of its 

biological nature. 

Because agricultural production is so remarkably stable it is not a 

basic cause of cyclical fluctuations. Booms and depressions arise from 

factors existing in industrial organization; agricultural income reflects 

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4 AGRICULTURAL ADJUSTMENT AND INCOME 

and intensifies these cyclical changes. The maintenance of farm purchasing power in a depression may act as a cushion and modify the downward 

swing somewhat, but it cannot be a major factor in eliminating cycles. 

Agricultural policies, therefore, must be considered only as a supplement 

to general policies affecting the whole economy. Once fluctuations in the 

rest of the economy are controlled, the need for special agricultural policies will be reduced; until this is done, however, special policies are needed 

to prevent cyclical fluctuations from disorganizing and penalizing the 

most stable segment of the economy. 

Protracted Agricultural Depression after First World War. After the 

boom that developed during the First World War, agricultural production did not decline but prices dropped 41 per cent by 1921, while the 

prices paid by farmers, including taxes and interest, dropped only 18 

per cent. Agricultural prices remained low all through the 1920's while 

prices paid, taxes, and interest charges remained relatively high. This 

meant that net farm income remained low and, while industry was experiencing an expansion of almost boom proportions, agriculture was experiencing the pains of deflation that followed the collapse of the land 

boom. In the early thirties came the second blow; prices received by 

farmers fell to an index of 90 in 1931 and to 68 in 1932 while the index of 

prices paid, taxes, and interest declined only to 142 in 1931 and 124 in 

1932. Moreover, the migration from farms to cities, which had absorbed 

some 6 million farm people in the decade of the twenties, was reversed 

because of widespread unemployment in industry. 

Low Incomes of Farm Families. Reflecting the relatively low prices of 

agricultural products that continued after the last war and through the 

depression, the incomes received by many farm families were very low. 

The National Resources Board study of consumer incomes showed that 

in 1935-36, a year between depression and war prosperity, almost onequarter of the 6}4 million farm families received less than $500 a year 

and about 38 per cent received less than $750 a year. This income included the retail value of farm products consumed at home and the rental 

value of the farm home. Only 8 per cent received over $2,500 a year. Of 

those in other occupations only 16 per cent received less than $750 and 

17 per cent received over $2,500 a year. 

In addition to its handicaps from low incomes, the rural population 

lacks many facilities available to urban dwellers. Only 25 per cent of 

farm homes have electricity and only 30 per cent have water piped into 

the house while 95 per cent of urban houses have both^these facilities. 

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Medical and dental care is much less adequate. These disadvantages are, 

of course, partly offset by more fresh air, greater freedom, and lower 

living costs. On the other hand, we need to remember that the rural 

quarter of our population accounts for one-third of all the babies born 

in this country and that the maintenance of the city population depends 

upon migration from rural areas. Poverty, of course, is not confined to 

rural areas and it may be more endurable in a rural setting than in a city; 

but in both cases it should be eliminated by the most appropriate means. 

Rural poverty, however, does not respond quickly to generally improved 

conditions because of lack of mobility, lack of training, and lack of resources; at the same time farmers do not share proportionately in social 

security programs since they are largely designed for industrial workers. 

It is because of their experience after the last war that farmers organized and became a more vocal and powerful force in politics. Farmers 

are now in a position to demand special consideration and, because of 

the implications that agricultural policies have to the well-being of all 

consumers, these policies are the concern of all parts of the economy. 

POSTWAR PROBLEMS OF AGRICULTURE 

There is a widespread fear that agricultural production after this war 

will be so large that prices will again collapse and surpluses pile up. Essentially there are three closely interrelated questions that need to be 

answered: (1) Will our total production be too large in view of our domestic requirements and probable foreign trade? (2) What specific adjustments will be required in the production of various commodities and 

how will they affect the farm organization in various areas? (3) What 

adjustments are required in order to increase the returns to low-income 

families engaged in agriculture? In this paper only the general problems 

of agricultural production and price policies are considered in detail. Adjustments in farm organization with respect to conservation are briefly 

mentioned while methods of raising the level of living of low-income 

farmers are considered in another essay. 

Output of Agricultural Products. Agricultural production has expanded 

much more rapidly during the present war than it did during 1914-18. 

Compared to the prewar average (1935-39) production in 1944 showed 

the following percentage increases: food grains 48, feed grains and hay 

57, oil-bearing crops 173, truck crops 35, vegetables 6, meat animals 55, 

poultry and poultry products 53, and dairy products 16. Sugar production 

decreased by 18 per cent and cotton and cottonseed decreased by 7 per 

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cent. Total production in 1944 was 36 per cent above the 1935-39 average 

and the indications are that production in 1945 will be equally high if 

good weather prevails. 

The rapid increase in production has been due to several factors. Expansion in livestock has been aided by the fact that we entered the war 

period with large stocks of grains that could be rapidly drawn upon. 

Weather conditions have been exceptionally favorable and yields have 

been above normal. Mechanization had advanced to the point where 

acreages of crops could be expanded or maintained even in the face of a 

diminished labor supply and farm families worked longer hours in response to higher prices and appeals to patriotism. If we assume more 

normal weather conditions than those experienced in the war period and 

also assume that farmers and their families will want to work less intensively, it does not follow that total output will fall in the postwar 

period. Improved seed, fertilizers, insect and disease controls, and conservation practices can offset the effect of normal weather, while further 

improvements in machinery and techniques can maintain or expand our 

present output even though fewer hours are worked and fewer people 

are employed. In the past it has not been easy to shrink production once 

it has expanded and the tendency will be for agriculture to continue a 

high level of production or to expand it as more machinery, fertilizers, 

and improved techniques become available after the war. 

Prices and Income. For 1944 the index of prices received by farmers 

showed an increase of 95 per cent over 1940; cash income from farm 

marketings was greater by 137 per cent; and net income from agriculture 

had increased about 160 per cent. In April 1945 the index of prices received was 103 per cent above 1940. 

Notwithstanding the large increase in income resulting from higher 

prices and increased production, the problem of rural poverty has not 

been eliminated. In 1942 the average cash income from farm marketings 

was over $5,000 per farm in seven States and less than $900 per farm in 

three States. Within States the disparities are even greater and range 

from bare subsistence to very high cash returns. This unequal distribution reflects the fact that a large percentage of families living on farms 

produce only small commercial surpluses and, unless they receive other 

labor income, their labor is not effectively utilized. 

A broad approach to the postwar problems of agriculture is through 

attempting to estimate what proportion of an estimated total of national 

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sumptions regarding the size of the national income, total agricultural 

production, domestic consumption, agricultural exports, and the relation 

of prices of farm products to prices of goods purchased by farmers for 

production and consumption. If prices of farm products drop from the 

1944 level of 115 per cent of parity to 90 per cent of parity while over-all 

production and consumption remain at the present level, cash income from 

farm marketings would be about 14.5 billion dollars. This would be 25 

per cent below the 1944 level but over 80 per cent above the 1935-39 

average. This assumes constant 1944 prices for products purchased by 

farmers for production and consumption. To the extent that other prices 

fall or rise, parity prices and income would also vary. This estimate also 

assumes that, if necessary, the Government would purchase the amounts 

required to maintain these prices and does not indicate how large or small 

these purchases might have to be. 

The Bureau of Agricultural Economics has shown that there was a 

close relationship between nonagricultural income payments and cash 

farm income from 1921 to 1943. The average relationship was such that 

a change of 10 billion dollars in nonagricultural income payments was 

associated with a change of 1.6 billion dollars in cash farm receipts. If the 

national income in the postwar period is assumed to be 140 billion and 

nonagricultural income payments to be approximately 124 billion, gross 

cash farm income will probably be about 18 billion dollars if this relationship holds true. This would mean that the index of all farm prices 

would be considerably above 90 per cent of parity if production remained 

at the 1943 level. While agricultural income is unquestionably closely 

related to nonagricultural income, certain dynamic factors make it difficult to use this historical relationship to forecast the future. During the 

war years food exports have been exceptionally high while imports have 

remained low. At the same time the absence of many consumer goods 

from the domestic market may have led people to buy more food than they 

normally would even with a high level of national income, and after the 

war people may prefer to buy other goods rather than spend as much on 

food as they have during the war. It is evident that the approach to agricultural problems by estimating national income, while valuable as an 

indication of national purchasing power, throws no light on the major 

problems of the relationships between the volume of production, domestic 

requirements, and foreign trade. 

Domestic Food Requirements. The Department of Agriculture has 

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ferent levels of diet for the population of the United States. These quantities have been converted into acreages of harvested crop land. While 

all such estimates are subject to a wide margin of error they nevertheless 

indicate the approximate amount of crop land required to produce the 

food and fibre required for domestic consumption under different assumptions. With an estimated population of 137.4 million in 1945 and 

no change in the efficiency of production, the approximate acreage required for various levels of diet, plus allowances for nonfood products, 

may be summarized as follows: 

Millions of 

Acres 

Consumption equal to the average for 1920-29 period 280 

Moderate-cost good diet 310 

Expensive good diet 340 

If the decline in work stock continues at the present rate only about 

33 million acres of crop land would be required to feed horses and mules. 

Added to the estimates given above for human consumption this brings 

the total acreage for domestic food and fibre needs for 1945 to about 

313 million acres for the 1920-29 diet, 343 for the moderate-cost good 

diet, and 373 million acres for the expensive good diet. 

A further factor to be considered is the increased productivity that has 

resulted from improved techniques. While agricultural production in 

1944 was 33 per cent above the 1935-39 average, the acreage of crop land 

harvested had increased only 7 per cent. The difference was partly due to 

exceptional weather, but mechanization, improved seed, and better feeding methods and farm practices were also important. During the war we 

have benefited from the cumulative results of the technological revolution 

that increased in momentum after 1910. Estimates by the Bureau of 

Agricultural Economics show that the crop acreage harvested per worker 

increased 34 per cent from 1910 to 1944 and production per worker in 

agriculture almost doubled. Factors associated with these changes were 

a decline of about 17 per cent in the number of people engaged in agriculture, a drop of 50 per cent in the number of horses and mules, and an 

increase from one thousand to almost two million in the number of 

tractors. Each additional tractor, when used with the appropriate machinery, will save about 800 man-hours of labor per year. Estimates indicate that increased efficiency alone may already have raised production 

per acre 10 to 12 per cent above the prewar levels. 

If we assume a minimum increase in productivity of 5 per cent between 

the prewar period and 1945, the corrected number of acres required 

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would approximate 297 million for the 1920-29 average diet, 326 million 

for the moderate-cost good diet, and 354 million for the expensive good 

diet. 

In 1944 the per capita consumption of food was about 7 per cent higher 

than 1920-29 and its nutritive content had improved. It is improbable, 

and certainly not desirable, that we should go back to a lower level of 

diet in the postwar period. At the same time it is extremely doubtful if 

consumption will increase so that the high-cost good diet will become the 

average diet at any early date. Food habits change relatively slowly, and 

low- and middle-income groups may consider other commodities more 

important than a high-cost diet. To be realistic, therefore, we should aim 

at attaining a domestic consumption in terms of the moderate-cost good 

diet that would require about 326 million acres of crops. 

In 1944 about 352 million acres of crops were harvested. The 1945 

goals call for a further expansion of crops and the harvested acreage may 

reach about 356 million acres. If this level is maintained in the postwar 

period we will have about 30 million acres of crops that will not be required for domestic consumption even if the moderate-cost diet prevails. 

If domestic consumption shrinks to the 1920-29 level, there will be 60 

million acres available for exports. 

Agricultural Exports. The decade of the thirties saw large reductions in 

our exports of agricultural products. The index of the quantities of agricultural exports fell from 100 for the 1924-29 period to 60 for the 1935-39 

period. In the early stages of the war, exports fell rapidly to an index of 

40 for 1941. In 1942 and 1943 exports of agricultural products (including 

lend-lease) increased and in 1943 the index rose to 74. Food exports and 

shipments accounted for most of this rise; these increased 376 per cent 

above the 1935-39 average and took over 10 per cent of our total volume 

of production for sale and use in the farm home. 

In the 1924-29 period our exports of 12 major crops (including feed 

turned into pork and lard) used about 57 million acres of crop land (including crop land used for work stock for these products); this was 16 

per cent of the average acreage in crops for this period. The acreage required for our exports in the 1935-39 period averaged about 30 million 

acres because the volume of exports had dropped 40 per cent, efficiency 

had been increased, and fewer horses and mules had to be fed. This represents only 9 per cent of the average acreage in crops for that period. 

During 1946 there will be a large demand for our agricultural products 

for export and relief shipments. This will tend to prevent production 

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from pressing heavily on demand. On the other hand, agricultural imports that have been dammed up during the war will become available, 

domestic purchasing power may drop during the period of readjustment 

of industrial production, and foreign demand may be drastically reduced 

in later years. 

If our agricultural exports return to the level of 1935-39 and only use 

30 million acres of our crop land, and if our domestic consumption attains a level between the 1920-29 diet and the moderate-cost good diet, 

then we will find our agriculture with at least 15 million acres of crop 

land in excess of that for which there are outlets. In the recent study, 

What Peace Can Mean to American Farmers (May 1945), the United 

States Department of Agriculture estimates that in 1950, with a national 

income of 150 billion dollars, our domestic and probable foreign needs 

can be produced on about 327 million acres, assuming improvements 

in technology continue. If all families receiving less than $1,500 a year 

had their consumption supplemented so that they consumed a low-cost 

adequate diet, only an additional 5 million acres would be required. The 

1944 crop acreage of 352 million acres, therefore, is 20 million acres above 

the estimated 332 million required in 1950 even with food supplements 

made available to low-income families. 

These figures all indicate that in the United States agricultural production can continue to expand more rapidly than consumption. To 

solve the postwar problem of agricultural production and income, therefore, we must (1) maintain a high level of consumption in this country, 

(2) expand our exports on a permanent basis, (3) assist agriculture to 

adjust its production pattern so that the benefits of low-cost mehcanized 

production can be passed on to consumers while the level of living of our 

farmers is maintained and improved, and (4) develop policies and programs which will modify the violent fluctuations in farm prices and income that have existed in the past. It is within this framework that the 

objectives of agricultural policy and the means used to attain them must 

be evaluated. 

OBJECTIVES OF AGRICULTURAL POLICY 

In order to appraise alternative policies which may be used to solve 

the problems of agriculture the basic objectives of agricultural policy 

must be stated at the outset. Policies which may be used to achieve one 

objective may prevent the attainment of another; only as various policies 

are analyzed in the light of all the objectives can conflicts be clarified 

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and those policies which supplement rather than negate one another be 

selected. The broad objectives of agricultural policy may be divided into 

those which apply to the economy as a whole and those which are more 

specifically limited to agriculture. The general objectives to which agricultural and all other phases of economic policy must be directed are: 

(1) An economic environment at home and abroad which will develop and maintain 

a high level of production, employment, and purchasing power. 

(2) International trade that will permit specialization and encourage the most efficient use of resources throughout the world, thereby raising the level of living at 

home and abroad and laying the economic foundations for a lasting peace. 

Objectives which apply more specifically to agriculture are as follows: 

(3) Efficient production or such a combination of physical and human resources 

that the largest possible quantities of goods and services are produced at the lowest 

possible cost without exploiting either people or resources. This means balancing the 

people and resources employed in agriculture with those employed in other parts of 

the economy as well as attaining the optimum allocation within agriculture. 

(4) An income from efficient farming which will allow farm families a level of living 

consistent with a progressive economy. 

(5) Elimination of exploitation of our soil and water resources through the widespread adoption of conservation measures. 

(6) A reduction in, and sharing of, those risks which arise from fluctuations in 

weather and prices, which make for short-run fluctuations in the production and income of the individual farmer, and over which he has no control. This includes the 

maintenance of the stocks of nonperishable products needed for consumers' welfare in 

such a way that they will not exert a depressing effect upon farm prices. 

In addition to these purely economic objectives are certain other objectives, some of which are partly social. They include improved marketing facilities for agricultural products, greater security of farm tenure, 

maintenance of family-sized farms, adequate medical care in rural areas, 

and better recreational facilities. The importance and economic implications of these objectives are undeniable, but limitation of space prevents 

any adequate discussion of them in this paper. 

PRESENT AGRICULTURAL POLICIES 

Present agricultural policies are the outgrowth of a long series of attempts to improve the economic condition of farmers after the First 

World War. The McNary-Haugen Bill, passed and vetoed in 1927 and 

again in 1928, sought to protect domestic agricultural prices from being 

depressed by low prices on the world market. This result was to be 

achieved through assuring a market for the domestic crop at the world 

price plus the tariff and selling the export quantity at a loss. The weakDigitized for FRASER 

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nesses of the bill were tfcat by raising prices it tended to encourage production erd tr at it cculd be construed as damping by foreign nations. 

The sutst'tute fsim legislaticn frally enacted was the Agricultural 

Marketing Act of 1929. This Act established the Federal Farm Board to 

assist in developing cooperative and orderly marketing and to purchase 

surpluses that were depressing prices. The Smoot-Hawley Tariff Act of 

1930 raised tariffs to unprecedented levels and undoubtedly made it 

much more difficult for us to export our agricultural products by curtailing the imports which provided people in other countries with the 

funds to buy our exports. The accumulation of ever-rising surpluses and 

the pressure of supply en prices led to the financial collapse of the Board. 

In 1933 the first Agricultural Adjustment Act was passed with provisions for establishing parity prices, adjustment of production, benefit 

payments to cooperating farmers, processing taxes, and marketing agreements. This Act was partly invalidated on January 6, 1936 by the Supreme Court. In February 1936 the Soil Erosion Act of 1935 was amended 

to form the Soil Conservation and Domestic Allotment Act; control over 

acreages was again restored without the processing tax provisions. The 

failure of these Acts to reduce agricultural production is indicated by the 

fact that the index of physical production reached a new high point of 

128 in 1937. Even in the case of cotton, favorable yields made the quantity produced that year (almost 19 million bales) the largest crop ever 

harvested. 

Continuation of these large surpluses led to the Agricultural Adjustment Act of 1938, with provisions for the regulation of interstate and 

foreign ccrrmerce. The new features of this Act were the establishment 

of marketing quotas, storage of crops associated with the idea of an evernormal granary, crop insurance for wheat, and price support loans to be 

made by the Commodity Credit Corporation. 

In an attempt to reverse the world trend toward economic nationalism, 

Congress enacted the Reciprocal Trade Agreements Act in 1934 following 

the devaluation of the dollar between 1933 and 1934. While the devaluation undoubtedly was an important factor in raising the price of cotton, 

progress in lowering tariffs was too slow to offset the decline in world 

trade and make other agricultural policies unnecessary. Actually there 

existed a basic conflict between objectives. On the one hand Government 

policies were directed toward expanding world trade, while on the other 

they were directed toward raising domestic prices above the world level. 

This basic conflict between domestic policy and foreign policy still exists 

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and may be one of the most difficult problems to solve in the postwar 

period. 

Farm Credit agencies were expanded, the Farm Security Administration was developed, and the activities of the Soil Conservation Service 

were intensified. These programs were mainly directed toward improving 

the production facilities of farm families. The Federal Surplus Commodities Corporation bought up quantities of surplus commodities for distribution to relief families and the Government inaugurated the Food Stamp 

Plan and School Lunch Program in order to enlarge the markets for farm 

products as well as to improve diets. 

The development of programs designed to aid agriculture has been exceedingly complex and further complications have been added by the 

measures introduced to encourage an expansion of production during the 

war. The most important legislation has been a series of acts which placed 

new price floors under agricultural products and extended parity price 

guarantees into the postwar period. Prices for cotton are guaranteed at 

92^4 per cent of parity; and prices of tobacco, rice, peanuts, wheat, and 

corn are guaranteed at 90 per cent of parity for two full years after January 1 of the year following the official termination of the war. In addition 

to these so-called basic commodities there is a long list of "proclamation" 

commodities on which price floors have been set to encourage increases 

in production; these commodities, which include almost all major agricultural products, also have their prices guaranteed at 90 per cent of 

parity for two full years after the war, provided funds are made available. 

The Secretary of Agriculture is also authorized to support the prices of 

other farm products if funds are available to do so. One of the major 

problems of the postwar period is to solve the difficulties inherent in any 

program committed to the support of rigid parity prices. 

DIFFICULTIES INHERENT IN PARITY PRICE SUPPORT PROGRAMS 

The disadvantages and difficulties of a system of price guarantees tied 

to the parity base period may be summarized under four points. 

Production Adjustments. Rigid parity prices prevent desirable production adjustments from occurring in response to changes in demand and 

costs of production. Current costs of production vary greatly between 

areas and even between farmers in the same area. For example, a recent 

study by the Agricultural Experiment Station of Texas shows that the 

costs of producing cotton lint vary from less than 4 cents to over 19 cents 

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istics of the land which determine the degree of mechanization possible. 

A reduction in the demand for cotton which is met by percentage reductions of acreages with the price maintained on a parity basis simply 

means that we are keeping high-cost areas in production and at the same 

time cutting production in the lower cost areas. This is a misallocation of 

resources and prevents basic adjustments in production from taking 

place—all at the expense of consumers and often at the expense of depleting our soil resources. 

The parity base period for many products goes back to 1909-14 prices 

and therefore maintains the relationships between the prices of various 

products that existed 30 years ago regardless of changes in the costs of 

production. For example, the man-hours required to produce 100 bushels 

of wheat were 89 in the 1909-13 period and only 41 in the 1934-36 

period. The reduction of 50 per cent in the labor requirements has lowered the costs of production because the savings on labor costs greatly 

exceed the increased machine costs. In the case of corn the introduction 

of hybrid varieties has increased yields about 15 to 20 per cent with only 

a small increase in costs. On the other hand, labor requirements and costs 

of production for vegetables have gone up. The relative position of prices 

as between products, therefore, should be kept flexible in order to reflect 

changes in the relative costs of production. 

If resources are to be used efficiently, production must be flexible between different products within agriculture and also between agriculture 

and the rest of the economy. There is no absolute level of agricultural 

production that is most desirable. The desirable level depends upon 

whether we want an expensive diet or a cheap diet (assuming both are 

equally nutritious) and people should be permitted to choose between 

them; it also depends upon foreign demand and upon available alternative use of resources. At out present stage of technology it appears that 

we have too many people in agriculture in relation to the number in other 

services and productive enterprises. Within agriculture, adjustments between enterprises are also needed; for example, our production of oil 

crops and cotton (in high-cost areas) may need to be reduced while the 

production of milk, fruits, and fresh vegetables should be expanded. In 

order to direct resources to their most efficient use it is essential that 

price relations between different products be kept flexible over time. 

Agricultural Exports. The maintenance of domestic prices on a parity 

basis makes it difficult to export at world prices without appearing to 

dump our surpluses on other nations. When subsidies on exports, as 

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authorized by Congress in 1944, are interpreted as dumping by other 

nations, they usually apply retaliatory measures which offset the benefits 

we expected to attain. At the same time an atmosphere of antagonism is 

created which may endanger other attempts to broaden and expand 

world trade. In the past we have attempted to help agriculture by raising 

domestic prices above world prices; this has made it impossible or dimcult to export and, to the extent that pricing our commodities out of the 

market raised world prices, we encouraged the expansion of production 

in other countries. Attempts to establish a two-price system lead to retaliation and strangulation of trade. In the case of cotton, our unilateral 

action to raise domestic prices through loans and through production 

controls stimulated cotton production abroad and improved the competitive position of synthetics at home. From 1933 to 1940 Agricultural 

Adjustment Administration payments to cotton farmers amounted to 

1.3 billion dollars, which was over 25 per cent of the value of the cotton 

lint produced in this country during the period. If the price had been 

allowed to remain low, high-cost cotton areas would have been forced to 

change to the production of other crops. This adjustment would have 

been slow and painful because of the high comparative advantage of 

cotton in the past; it would have meant larger farms with fewer people 

on the land and a diversified agriculture closely in line with conservation 

needs. To some extent the AAA program helped this adjustment, but if 

we had been willing to spend a billion dollars in adjusting the size of 

farms, training people to handle a more diversified agriculture, and providing them with the capital necessary to do this, we might have moved 

further toward a permanent solution of agriculture in the high-cost 

cotton areas. The AAA has gradually assumed the character of an adjustment and conservation program with acreage allotments related to 

soil conditions rather than to an historical base; this emphasis on physical 

resources should continue and should be expanded in the postwar years. 

The cotton problem has not been solved. Prices, supported by Commodity Credit Corporation purchases and loans, have risen rapidly since 

1940 and reached 20 cents in 1943. The November 1944 parity price was 

21.20 cents and efforts to raise cotton goods price ceilings so that cotton 

lint will reach parity have been successful. After the war we will face the 

same problem again; our domestic price will be well above the world 

price. Brazilian cotton Type 5 at the Sao Paulo market averaged 0.53 

cents above the American Middling 15-16 at New Orleans from 1923 to 

1939. From December 1941 to July 1945 the American domestic price 

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has exceeded the Brazilian by from 6 to almost 12 cents per pound; a 

number of countries have shifted their purchases from American to 

Brazilian cotton partly because of relative prices and partly because of 

shortages of dollar exchange. While the United States was reducing the 

cotton acreage, Brazil almost tripled her acreage from the 1930-34 

average of 2.4 million acres to 6.7 million in 1940. 

Methods of Supporting Prices. Guarantees of parity prices can only be 

made effective as funds are made available for price supporting purchases 

or through other direct Government actions. If the quantity supplied at 

the guaranteed price is larger than the market will absorb at that price, 

the demand must be increased through subsidized consumption, or losses 

through resale at a lower price must be sustained by a Government purchasing agency, or production must be curtailed through direct Government action. The maintenance of parity prices, therefore, makes essential 

other programs to affect consumption and production; the desirability, 

complexity, and effectiveness of these programs must be considered in 

evaluating any rigid price support policy. 

In the past we have attempted to control supply through imposing 

controls over acreages and through quota allotments. Many claim that 

we will have to follow this same policy in the postwar period. This, however, is not easy to do. Acreage controls in the past were effective in 

shifting the acreages of various crops but not in reducing total production. 

In the case of corn the average acreage from 1931 to 1933 was 108 million 

acres and production averaged 2.6 billion bushels; for the three years, 

1939 to 1941, the acreage under the AAA averaged only 87 million acres 

but production still averaged 2.6 billion bushels. Essentially, therefore, 

acreage controls only prevented an expansion of production between 

these two periods. Production did not decline because hybrid corn and 

improved rotations increased yields: they averaged 25 per cent higher 

for the last five years when compared to the 10-year period 1923-32. 

In the case of cotton the yield increases have been even more dramatic 

and have averaged 50 per cent higher over the last five years compared 

to the decade preceding the AAA. 

Actually to curtail the production of any given crop requires a much 

larger percentage cut in acreage than the desired percentage reduction 

in output because the land taken out of production is the less productive 

land. At the same time the increased use of grasses and legumes to replace 

crops tends to increase both the yields of the controlled crop and the 

output of the products of roughage consuming animals. As a result of 

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their fear of this tendency, for example, the dairy interests were successful in obtaining legislation designed to prevent any increase in the production of milk, which they felt might occur as the acreages of hay and 

pasture increased; this part of the law, however, was never enforced. 

Thus, when only a few basic crops were concerned, the AAA faced serious 

difficulties in trying to curtail the production of individual commodities 

even though there was no attempt to control total production. Also, the 

Commodity Credit Corporation had, in the expectation of war, accumulated the equivalent of a full crop of cotton, half a crop of wheat, and a 

quarter of a crop of corn by the autumn of 1941. Without the war much 

larger reductions of acreages would have been needed to maintain the 

loan rates and avoid the further accumulation of stocks above those 

needed to insure a continuous supply for consumer needs. 

If all the commodities, the prices of which are now guaranteed for two 

years after the war, actually have their prices supported in the face of a 

shrinking domestic and foreign demand, the difficulties of attempting to 

curtail production will probably be much more serious than before the 

war. Almost all agricultural products would be involved and an actual 

reduction in total production would have to occur. Farmers do not like 

to leave resources idle; if they reduce some crops they grow others. To 

place quotas on all crops and livestock products would be extremely 

complex and difficult to enforce because of possible shifts in land use 

and feeding practices. Corn might be replaced by pasture and a quota 

on the numbers of livestock might mean that the stock would then be 

fed more grass and less corn and the pressure on corn prices would not 

be relieved greatly. If quotas were placed on a product such as milk it 

would be almost impossible to prevent shifts in feeding from concentrates 

to roughage. Only by rigid quotas for all crops including pasture and 

control over feeding practices could total production be reduced. 

A further important problem may be the difficulty of maintaining participation in, and compliance with, production control programs. Unless 

the price guaranteed is considerably above the market price, farmers may 

find it more profitable to maintain production, and they may not approve 

marketing quotas, particularly if the production costs fall as a result of 

technological progress. Under these circumstances it would be difficult, 

and certainly not desirable, for the Government to fulfill the present commitments to support prices. This will become a much more important 

problem if the number of commodities brought under control is expanded 

and alternative uses of land and labor become more and more restricted. 

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Rural Poverty and the Objectives of Policy. Supported parity prices 

in conjunction with other programs have not been an effective means of 

increasing the income and efficiency of production of low-income farmers. 

AAA benefit payments flowed largely to the higher income farmers. 

Even in 1942 the 50 per cent of the farmers in the lower income groups 

received only 18 per cent of the total net cash income. These programs, 

therefore, while beneficial to the farmers in proportion to their production in the short run, do not solve the basic problem of rural poverty. 

As shown later, in "Low Income Groups in Southern Agriculture," 

quite different programs are needed to raise the productivity and incomes 

of low-income farmers. However, to the extent that high prices are maintained and production quotas allocated to high-cost areas, the shock of 

rapid economic adjustments is lessened. The danger is that a continuance of these programs may maintain inefficient production for too long 

a time by making it seem less imperative that more constructive policies 

be adopted. 

Concerning the attainment of the basic objectives of agricultural policy 

suggested in the previous section, we may say that parity price support 

programs do not lead to an expansion of world trade nor to a higher level 

of living for the low-income farmers; and they lead only indirectly to conservation and more efficient production in the commercial areas. Parity 

price supports, on the other hand, do remove some risks of price fluctuations, and temporarily maintain farm income and purchasing power. 

Essentially, postwar agricultural policies must aim at achieving more of 

the desirable objectives and eliminating the conflicts which exist between 

the present policies and the attainment of these ends. 

POSTWAR POLICIES FOR AGRICULTURE 

Full Employment. If the objectives of agricultural policy are to be 

attained, the maintenance of a high level of national income and employment is essential. All agricultural groups and interests should support policies directed to this end. Other papers in this series deal with this 

general problem and it is only mentioned here to emphasize its importance to agriculture. Full employment alone, however, will not solve all 

of the problems of agriculture; it will only provide favorable conditions 

for their solution. 

Expansion of World Trade. Agriculture will emerge from the war with 

an expanded over-all output above that required for our domestic needs 

even at an improved level of domestic consumption. Exports of food 

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products have risen from 2.1 per cent of our total food production in 

1940 (including that used in the farm home) to 10.4 per cent in 1943. 

Imports of food, on the other hand, have been below the average for 

1935-39 by 10 or more per cent every year since 1937 except in 1941. 

Net exports have therefore been abnormally high since 1939. Nevertheless, per capita civilian food consumption in this country has remained 

well above the 1935-39 average throughout the war period. After the 

war several factors will make it desirable to expand our exports. Food 

imports will increase, demobilized persons who return to less arduous 

work will probably consume less food, other civilian goods will become 

available, and people may decide to spend less of their income on food 

and more on other goods. Even if we maintain or increase our present 

level of civilian consumption of food, we must find foreign markets for 

agricultural products if we are to have a high level of production and 

avoid the accumulation of surpluses. 

When particular commodities such as cotton, wheat, or lard are considered, the necessity of encouraging an expansion of world trade becomes 

clear. Unilateral action has failed to solve the cotton problem (many 

would argue that it has made it worse) and, since it is a world problem, 

we should attempt to solve it through international cooperation as well 

as national action. This would entail stabilization of the world price 

through a world cotton agreement and positive national measures to develop more diversified agriculture in high-cost cotton areas. 

The alternative to a two-price system is to accept world prices for our 

export commodities and attempt to affect the world price by action along 

the following lines: 

(1) Initiate and support reciprocal reductions of tariffs. 

(2) Cooperate with other nations in adjusting production to a lower tariff structure. 

The adjustment may be particularly serious in the high-cost European grain areas and 

our high-cost cotton areas. 

(3) Develop and continue commodity agreements, in which both producing and 

consuming nations participate, for those problem commodities where production adjustments must be made slowly if serious economic repercussions are to be avoided. 

The most important agricultural commodities to which this action would apply are 

wheat, cotton, coffee, sugar, and rubber. Such commodity agreements should be sufficiently flexible so that both prices and quotas can be varied each year to encourage 

expansion of production in the low-cost areas and discourage it in the higher cost areas. 

(4) In addition to these specific actions directed to expanding world trade, agricultural interests should support international actions to stabilize exchange rates and 

stimulate capital investments. 

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Over the last two decades the value of our agricultural exports has 

declined steadily; this decline has been associated with strong nationalistic policies and high tariffs. Only if we reverse this trend, and abolish 

the fear of military aggression that inspired it, can we hope for a permanent expansion of international trade. Assurances of security are 

essential and, after this, a high level of industrial prosperity at home 

and abroad will be the most important factor in expanding both exports 

and imports. 

Soil and Water Conservation. The need for the adoption of conservation farming will be greater after the war than it was before. Our expansion of intertilled crops has occurred without the needed increase in 

contouring, strip cropping, and terracing. We have drawn heavily on our 

soil fertility during the war and in some areas soil erosion has increased. 

In the past, conservation and production adjustment programs have overlapped; this has created a great deal of confusion and in many cases 

"conservation payments'' have been concentrated in the areas where 

they were least needed from a conservation point of view. Conservation 

can be attained under a large variety of land-use patterns if different 

practices are applied. The crop production pattern, therefore, should 

vary in response to changes in demand and costs, and conservation plans 

suitable to that crop pattern should be applied. A sloping field may safely 

be used to grow a large amount of corn if it is terraced and strip cropped, 

or it may be kept entirely in grass. Both uses conform to conservation 

needs. It is essential, therefore, that conservation be separated from 

other aspects of agricultural planning. This may best be done by expanding the work in conservation districts under the State conservation district 

laws and developing unified regional plans in areas where flood control, 

irrigation, forestry, and conservation are interrelated. At the same time 

the States should develop tenure legislation which will give greater security of occupancy of farms because insecurity of tenure is one of the 

major factors making for exploitive agriculture. 

Some enthusiasts have advocated large expenditures on conservation 

to maintain employment in the event of a business recession. The field 

of such expenditures, however, is limited to projects on which many 

workers can be used efficiently. This eliminates one of the most important parts of conservation—the planning of individual farms. For 

irrigation, drainage, reforestation, and flood-control projects the use of 

unemployed manpower is desirable. In the field of soil conservation on 

farms it may be limited to terracing and building retaining dams for 

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water storage and then only when this forms part of a complete plan for 

each farm. Apart from large public works programs, therefore, expenditures on soil conservation will be relatively small and probably absorb 

only a small quantity of local labor. If the AAA continues to make adjustment and conservation payments, the latter should be made on the 

basis of the physical conservation needs of the land and not on an historical crop basis. 

Maintenance of Adequate Diets. While measures to improve the diets 

of the people of the United States are intended to improve health and 

efficiency, they also have important implications for agriculture. The 

National Food Allotment Plan introduced by Senator Aiken provides a 

method of allocating sufficient food purchasing power to all low-income 

families to enable them to obtain a low-cost adequate diet. The Food 

Stamp Plan and School Lunch programs are of a similar nature. To the 

extent that such programs can expand the total consumption of food 

products they will lessen the danger of agricultural surpluses. Preliminary 

estimates indicate, however, that if all families with incomes below $1,500 

a year (under conditions of full employment) were provided with adequate diets, the products of only about 5 million acres of crop land would 

be required. This would not be sufficient to absorb our increased production even when consumption in other income groups is at a high level. 

If national income and employment decline, programs to maintain food 

consumption will become increasingly important as measures to prevent 

food surpluses from piling up while people are inadequately fed. Ideally 

it would be better to have all people employed at wages sufficient to permit them to purchase an adequate diet; until that goal is reached, however, a national food allotment plan should have an important place in 

agricultural policies. Any such program, however, should be directed at 

improving the diet of low-income families and should not be used as a 

means of disposing of surpluses or raising prices; these should be only 

incidental results. 

Alleviation of Rural Poverty. As was indicated previously, the high 

farm income received during the war has not eliminated the problem of 

low productivity and rural poverty in some agricultural groups and areas. 

More resources and alternative uses for their labor must be made available 

to the low-income groups. This calls for programs which will enlarge the 

size of farms, train the people to operate them efficiently, make the 

necessary capital available, and train those who will have to move out of 

agriculture to be proficient in other occupations. This problem is discussed 

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fully by Mr. Rauber in his paper on low-income groups and is mentioned 

here only because of its fundamental importance. 

Crop Insurance. The development of crop insurance against climatic 

and biological hazards aids agriculture by reducing the risks inherent in 

farming. The program of crop insurance enacted by Congress early in 

1945 lays the basis for experimentation in the coverage of many crops. 

This program might well be expanded in the postwar period to develop 

self-supporting systems for as many crops and regions as possible. This 

will remove one of the most important causes of fluctuations in the incomes of individual farmers. 

Storage of Nonperishable Products. Fluctuations in yields not only 

create uncertainty for the individual farmer through varying the quantity 

for sale, but they also cause fluctuations in prices; a bumper crop tends to 

depress prices greatly and a short crop to raise them unduly. Insurance 

of the individuals' crops removes only one aspect of risk; the risk of low 

prices in a good year still remains. 

This risk may be reduced in the case of nonperishable products through 

a Government program of purchase during periods of low prices with 

large crops and sale during periods of high prices and short crops. This 

would benefit both producers and consumers. Such a program, however, 

can be used to bolster prices and create even a larger carry-over, which 

tends to defeat the purpose of the program. This is particularly true when 

the purchase program is used to support parity price programs. 

In order to avoid this it appears essential that Congress establish regulations regarding storage activities. These might include the following 

points: 

(1) A "normal" carry-over should be established for each product. 

(2) Whenever the amount in storage exceeds the normal by say 10 per cent, it 

should be mandatory for the Government authority to reduce its stocks. 

(3) Whenever there is a short crop the Government should release stocks in order 

to prevent rapid price increases. 

(4) When the amount in storage is below normal the Government should purchase 

stocks unless production is low and prices high. 

Discretion in applying these principles is necessary. For example, the 

United States experienced severe drought conditions in 1934 and again 

in 1936; the amount in storage could not easily have been raised to normal 

in 1935, which was the year in which there was a shortage of feeds. Flexibility in applying these principles over a period of years, therefore, is 

essential. 

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Other Policies, In addition to the measures listed above, there should 

be provisions for more efficient marketing of farm products, for an adequate system of agricultural credit, and for measures to prevent any 

further inflation of land values. Government agencies are already established to improve marketing and provide credit but little has been done 

to control the rapid rise in land values. This latter problem is discussed 

by Mr. Fisher in a separate paper dealing with the implications of an 

inflation of land values to postwar conversion problems. 

None of the programs discussed above would introduce rigidities between the prices of farm products or place a floor under farm income; 

they leave the farmer with no protection against a catastrophic fall in 

prices and income in the event of a business depression. The United States 

Department of Agriculture, in What Peace Can Mean to the American 

Farmery indicates that in 1950 the index of all farm prices would be almost at parity provided that there was a national income of 150 billions 

of dollars, that there was a market for the estimated quantity of exports, 

and that production did not exceed the amount calculated. The study 

also assumed that no Government controls over prices or production 

were in operation. If this nation, therefore, could maintain a high level 

of employment and purchasing power, the problem of maintaining a 

high level of agricultural income would appear to be greatly reduced. 

Long-run adjustments involving larger farms and a smaller farm population would be stimulated because alternative jobs would be available; 

flexibility between the prices of farm products could be maintained and 

prices would direct production in response to changes in demands and 

costs; and, at the same time, total agricultural income would be maintained if the optimistic relationships reported above actually prevailed. 

This essentially would meet the long-run objectives of agricultural 

policy and the programs outlined above would all facilitate this end. It 

is certain that farmers would not wish to relinquish their present parity 

price guarantees unless an acceptable method of supporting income in 

the event of a business recession were offered. The crux of the problem 

of price and income policy, therefore, is to develop a program which will 

restore flexibility between prices and yet provide assurances that farm 

income will not again be allowed to collapse. To attain this end several 

modifications of the present system of parity price supports have been 

suggested; alternative systems which relinquish parity prices altogether 

have also been proposed. These alternatives and some of their implications are discussed in the next section. 

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POLICIES TO MAINTAIN AGRICULTURAL INCOME 

Freedom versus Control. There are many persons who advocate a return to a completely free market price structure; even in a depression 

they would not support the prices of the basic necessities of life. The 

arguments favoring this point of view may be summarized as follows: 

(1) Low-income families, both urban and rural, who do not have a sufficient quantity of these necessities, will be better able to purchase them and thereby raise their 

level of living and improve their diet. 

(2) Because the demand for necessities is relatively inelastic, a lower price is not 

fully offset by increased consumption, and purchasing power is set free to buy other 

goods (largely manufactured products); this stimulates employment and investment, 

and creates additional purchasing power. This might lead to an upward swing in the 

business cycle which would more than offset the loss of income resulting from the 

decline in prices. 

(3) Lower prices will cause production to adjust by moving resources into other 

enterprises which will give higher returns. 

(4) Exports will be increased and the benefits of low-cost production will be spread 

to other countries. 

(5) The elimination of Government price controls permits the free play of competitive forces and moves the economy from one of Government control to one of 

free enterprise. 

Opposed to those who advocate a free market are those who wish to 

retain Government support of parity prices and production controls. 

The arguments supporting this opinion may also be briefly summlrized 

in parallel statements: 

(1) Low-income families should have their consumption increased by higher incomes and not through the impoverishment of agriculture. 

(2) Cutting the income of the producers of basic necessities curtails their purchasing power and brings an added downward pressure on the business cycle. Because 

there may be a lag before lower producers' prices are passed on to consumers, the 

initial impact will be to reduce the purchasing power of producers and increase the 

middlemen's margins of profit and probably savings. While it may be desirable to have 

lower prices for food products in a depression, this may be achieved by other means 

than by allowing prices to producers to fall. If the prices of manufactured goods fall 

together with wages, then agricultural prices should fall proportionately. 

(3) Agriculture does not contract its production very greatly even in response to 

catastrophic falls in prices. The maintenance of production is a great social benefit 

and producers should not suffer because of it. In a depression there is no alternative 

use for agricultural resources and the problem should be attacked through increasing 

industrial employment. 

(4) Lower prices might stimulate exports but a sudden fall in prices would disorganize both the domestic and the world market. To avoid this, production and price 

changes should be spread over time through cooperative international action. 

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(5) Competitive forces play an important part in determining agricultural prices 

but industrial prices are more rigid and production fluctuates more in industry than 

in agriculture. The competitive nature of agriculture leaves it at a grave disadvantage 

in an economy where industrial production is subject to rigidities. The alternative to 

maintaining Government controls in agriculture is to introduce flexibility in industrial 

wages, to renovate the patent laws, and to modify our corporation law and our policy 

toward corporations with a view to preventing monopoly practices, and to eliminate 

all tariffs. 

These opposing positions are fundamentally based upon different concepts as to the type of economy we have and should develop. The first 

assumes that we have and can perpetuate a competitive economy. The 

second assumes that we do not have and cannot develop a competitive 

economy that will function effectively in the industrial segment of our 

economy and, therefore, extensive Government action is necessary. The 

challenge to industry and labor to give up all forms of protection is not 

based on any hope or expectation that this will be done; it is used purely 

as a form of justification for the maintenance of rigid controls in agriculture. It is outside the scope of this paper to discuss the validity of 

these two assumptions but the ability of private enterprise, in the absence of extensive Government controls, to maintain employment and a 

high level of productivity in the postwar period will probably determine 

the trend we will follow. 

The validity of many of the claims and arguments on both sides cannot 

be evaluated by objective measurements and any theoretical analysis 

depends upon the assumptions made regarding the framework in which it 

is developed. If we assume that the export and domestic demand is not 

sufficient to maintain farm prices or incomes near parity levels with 

present expanded production, it is quite probable that farmers will demand support of prices and that the necessary measures and funds will 

be provided by Congress. The basic problem of agricultural policy, therefore, is to develop a practical program which will support farm income 

without resulting in curtailed consumption or a misallocation of resources 

such as may occur under the present rigid parity price formula. 

In seeking a practical solution, we cannot ignore the institutional and 

political framework if the analysis is to have more than academic significance. At present it seems very unlikely that all countries will abandon 

national programs designed to protect or assist their farm people. The 

recent agreement in which Great Britain guarantees to purchase all the 

agricultural export products of New Zealand for a four-year period at 

prices determined for two years in advance is indicative of the kind of 

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world in which we will have to operate. This agreement reflects two basic 

factors—the need of New Zealand for an assured export market for her 

products and the shortage of foreign exchange in Great Britain. In the 

case of Russia, international trade will be completely controlled by the 

State and there can be no "free" market as we understand the term. 

When we turn to Western Europe it seems highly improbable that the 

high-cost grain producers will immediately relinquish their protected 

market because it will take considerable time to change old established 

production patterns; no matter how desirable the change may be, it may 

only occur gradually unless drastic changes are made in the early postwar 

period. 

One of the most important political factors in this country is the 

farmer's attitude toward parity prices. To him they have become what 

wage rates are to labor. Farmers have associated with "parity" the concepts of "fair" and "reasonable"; they do not think of support measures 

as a subsidy, no matter what form they take, any more than protected 

producers think of the tariff as a subsidy. On the other hand, subsidies 

or subsidy payments are not welcomed because these have the connotations of relief. At the same time the farmer believes that prices determine 

his income and that supported parity prices have been of benefit in the 

past. 

A second important factor is the rather general antagonism in Congress 

to delegating the authority to make administrative decisions, especially 

when these may affect the incomes of large numbers of their constituents. 

Historically, the representatives of agricultural interests have always 

opposed revisions of the parity price formula which would lower prices; 

and they have supported revisions which would raise them. At the same 

time they have reduced the range of administrative decisions until almost none is left in the determination of support prices. 

These factors appear to rule out the possibility of this country's returning to a free market; it also appears unlikely that a complete delegation of price determining powers to a board, as in New Zealand, will 

be acceptable. On the other hand, an attempt to maintain rigid parity 

prices through Government purchases and production controls may be 

so costly, because of the impossibility or extreme difficulty of reducing 

production, that the program will have to be modified to prevent collapse. 

The cost of any price support program is a function of the prices supported, the control of production that is possible, and the demand situation. If production is maintained at its present high level and a business 

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OUR AGRICULTURAL POLICIES 27 

recession occurs, the spread between market prices and support prices 

may become very wide. The cost of maintaining farm income will then 

become very large and the difficulty of disposing of accumulating stocks 

and supplies will increase. Thus as the need to maintain farm income 

increased, the cost and difficulty of doing it would also increase, and the 

necessity of more flexibility than exists under the present laws would 

become greater. 

Modified Programs to Support Parity Prices or Income. Several programs that effect a compromise between free market prices and rigid 

parity prices have been suggested. These may be briefly summarized as 

follows: 

(1) Guarantee to farmers a "parity income" for agriculture. This means 

retaining the same relationship between the net per capita income of 

persons on farms and persons not on farms that existed during a given 

base period. The fact that farm income is the result of the quantity produced as well as the price is basic to this concept. As production increases, 

prices may fall and parity income can still be maintained. Similarly, a 

reduction in the number of people on farms with constant production 

would also permit lower prices, while an increase in the incomes of persons not on farms would raise the amount of income that should flow to 

agriculture to maintain parity. Since the concept applies to net income, 

the costs of production are deducted and as costs fall, then prices could 

also fall while parity income would be maintained. Since parity income, 

according to this definition, is an aggregate magnitude, the prices between products could be varied freely. The main criticism of this proposal 

is the extreme difficulty of developing a practical program of action to 

implement it. 

(2) Another method of maintaining parity income has been suggested 

which requires that basic quantities of each crop be established and the 

difference between the market price and the parity price be paid to all 

producers on this quantity. Thus all products would sell at free market 

prices and parity payments would be made only on the base quantity. 

This would limit the quantity on which payments would be made without 

restricting production. It would allow prices to reach a competitive level 

and clear the market so that more than the required carry-over would 

not be stored. Several alternative methods of determining the base quantity have been suggested but these are too detailed to be discussed here. 

Like all two-price systems this could be interpreted as dumping by other 

countries and retaliatory measures might be applied. 

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28 AGRICULTURAL ADJUSTMENT AND INCOME 

(3) A third method suggested is to establish a minimum income base 

for each commodity; this would represent the income that would result 

from selling the quantity the market would absorb at parity prices. This 

minimum income would be guaranteed and production controls removed. 

If more of a commodity were produced than could be sold at parity prices, 

market prices would be allowed to fall to the point where the quantity 

produced multiplied by the price would give parity income. The advantages of this system are that it would permit adjustments in both 

prices and production in line with changes in costs and demand. A major 

disadvantage is that the final level of prices cannot be determined until 

production is known; over the years, however, more accurate forecasts 

and fairly stable price relationships could develop. 

Both the second and third approaches limit parity price supports to 

the quantity that would be sold at that price. Thus they escape the 

dilemma of either having to enforce rigid production controls or to purchase the quantities which could not be sold on the market. 

(4) A simpler compromise would be to provide much greater flexibility 

in the law designating the parity loan rate for each commodity; this was 

achieved in the original Agricultural Adjustment Act of 1933 which set 

no limits on loan rates and merely authorized the Secretary of Agriculture 

to support agricultural prices. In the 1938 Act the loan rate on wheat, 

cotton, and corn was specified at between 52 and 75 per cent of parity; 

in 1941 the single rate of 85 per cent was used and a single rate at higher 

levels has been maintained ever since. This completely removes the possibility of making the needed adjustments between commodity prices 

and a return to a range of 60 to 110 per cent of parity for specific commodities would be a great improvement in the present law. 

A System of Forward Price Floors. The suggested alternatives presented in the previous section may all be criticized because they either 

retain elements of rigidity inherent in any support of parity prices or 

they develop exceedingly complex methods of circumventing it. These 

difficulties may be overcome by continuing the system of forward price 

floors initiated during the war with the support prices separated from any 

relationship to parity. 

To do this Congress would have to enact legislation appointing an 

Agricultural Price Board with authority to establish price floors extending over one production period (a year in the case of most products) for 

agricultural commodities. Such price floors would assure the farmer that 

prices would not collapse during a production period and he could plan 

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his production knowing what the relative prices of various products 

would be. This would encourage better production planning and remove 

a major uncertainty. 

The basic objective of the Board would be to establish price floors at 

such a level that supply and demand would balance at that price. In 

order to attain this end and avoid pressure from special interest groups, 

Congress could establish a series of regulations which would limit the 

freedom of action of the Board. The following standards are suggested 

as being essential if the basic objective is to be attained: 

(1) The price floor for export commodities should not exceed the world price expected to prevail over the next year. 

(2) When a storage program for nonperishable commodities is in operation, the 

Board should lower the price floor of any commodity when the carry-over exceeds the 

established "normal" by 10 per cent. When the carry-over is below normal by 10 

per cent the Board should raise the price floor for the following season. 

(3) In the case of perishable commodities it should be mandatory for the Board to 

lower the price floor when the Government had been forced to purchase a commodity 

on the open market and dispose of the product at a loss. 

(4) When the market price of a commodity exceeds the price floor by 10 per cent 

the price floor for the following season should be raised. 

To make such a system of forward price floors effective the Board 

should have the authority to authorize the Commodity Credit Corporation 

to purchase any commodity on the open market and store it or dispose 

of it through resale at a loss. Since such actions would have to be followed by a lower price floor the next year the program could not be used 

to maintain prices and the cost would not become excessive either for 

perishable or nonperishable products. 

Such a system of forward price floors appears preferable to any system 

of modified parity price supports because it allows complete flexibility 

between prices over the long run but removes the fear of a sudden drop 

in prices during a production period. A further advantage of this system 

is that it can be easily modified in such a way as to maintain agricultural 

prices and income in a depression without introducing rigidities which 

might again become entrenched and difficult to remove. 

A Method of Supporting Agricultural Income. Any method of supporting agricultural income during a depression should conform to the 

following general principles: 

(1) It should prevent agriculture from bearing more than its share of the burden 

of the depression. 

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30 AGRICULTUEAL ADJUSTMENT AND INCOME 

(2) It should return the income to the farmers through the prices received for the 

commodities produced. 

(3) It should retain flexibility between the prices of various products and not lay 

the foundations for postwar rigidities. 

(4) It should be simple to operate and automatic in its application so that no declaration as to when it should be applied is required. 

(5) It should permit lower prices to consumers and not restrict production. 

(6) It should be financed in such a way that total purchasing power is increased 

rather than curtailed. 

If a system of forward price floors is in operation these principles can 

all be attained through a Congressional mandate to the Price Board to 

control the rate of decline in prices over a period of years. It is suggested, 

therefore, that the regulations established by Congress direct the Board 

not to permit within one year a decline in the price of any commodity 

greater than 20 per cent of the average price of the preceding three years. 

In the event of a business recession, prices could decline to 80 per cent 

of the pre-depression level during the first year; in the second year they 

could be at 74 per cent, and in the third year they could be 68 per cent. 

It would take five years of depression before prices reached 54 per cent 

of the pre-depression level. It is unlikely that any future business recession will be permitted to last for more than two or three years and, 

if it did, Congress could authorize the Board to prevent further declines 

in the prices of agricultural products. 

Between 1920 and 1921 the index of prices received by farmers fell 

from 211 to 124 or over 40 per cent in one year. From 149 in 1929 the 

index again fell rapidly to 68 in 1932; this was a decline of about 55 per 

cent in three years. If the system of control suggested here had been in 

force the initial postwar decline from 1920 to 1921 would have been only 

20 per cent, and from 1929 to 1932 prices would have fallen only 32 per 

cent. 

To make such a system effective the prices paid to farmers would have 

to be supported through purchases by the Commodity Credit Corporation; the commodities could then be sold on the open market at a loss. 

The annual deficits could be financed by Congress through measures 

which would be part of the national policy to maintain or expand purchasing power; at the same time lower prices for food and raw materials 

would reduce consumer expenditures for these items and permit an expansion of expenditures for nonagricultural products. 

The conflict of opinions regarding agricultural price policies can only 

be resolved by accepting some form of compromise between a^completely 

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free market system and the present system of rigid prices related to parity. 

From the long-run point of view, the prices of farm products must be 

made flexible in relationship to each other, in order that agriculture will 

adjust its production pattern to make full use of modern technology. 

On the other hand the violent short-run fluctuations in farm income must 

be moderated for the welfare of both agriculture and the rest of the 

economy. The fundamental issue is not whether Government programs 

are needed, but whether the programs followed create rigidities which 

prevent long-run adjustments from taking place, or whether they restore 

the necessary flexibility without leaving farm income subject to the 

violent fluctuations of the past. The policies presented here suggest means 

through which these long- and short-run objectives may be harmonized. 

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FARM LAND VALUES AND RECONSTRUCTION 

by 

WILLIAM H. FISHER 

Research Department, Federal Reserve Bank of Richmond 

In the postwar period agriculture needs to adjust the pattern of production if it is to make full use of technological progress. In many areas 

the size of farms needs to be enlarged and inflated land values will act 

as a barrier to this adjustment. The pressures leading to inflation of land 

values and the methods of combating them are, therefore, major factors 

that must be considered in the development of postwar agricultural 

policies. 

* SUMMARY 

All signs at the present (mid-year 1945) point to the rapid rise of farm 

land values for one or two years after the end of the war. Although this 

rise may not reach levels attained in 1920, there is no assurance of this 

fact, and there are many factors in the market which easily could lead to 

a repetition of that earlier boom. So far during World War II the financial 

position of farmers has been far sounder than at comparable periods of 

the last war. Mortgage debt has been reduced to a new low point, the 

formation of new debt has been below the World War I rate, and farmers 

have accumulated record holdings of liquid assets. There has, however, 

been an upswing in the formation of new debt, whether judged by total 

volume or the size of individual mortgages; speculative activities in the 

land markets are increasing; and the delayed demands of servicemen 

(with their easier access to mortgage credit) are beginning to be felt. 

An inflation of land values can have serious repercussions on all phases 

of the economy and, especially if accompanied by a high level of farm 

debt, can seriously penalize the agricultural segment. Not only would 

such an inflation make the task of maintaining stability in the transition 

period much more difficult, but it would also seriously hinder any attempt 

to restore long-run prosperity to agriculture. 

In some parts of the United States, particularly the cash crop regions 

of the South, prices of land have been related to the prices of certain 

high-cash-value crops for which future prospects are not very bright. 

In these regions, the dangers of a land boom are increased by the fact 

that its occurrence can result only in a prolongation of already serious 

maladjustments. 

32 

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The ideal approach to the control of a potential land boom would be 

one which simultaneously reduced the number of prospective buyers, 

eliminated speculatively motivated purchases, and cut down on the supply of disposable liquid funds. In its perfection such a plan would be completely integrated with the controls applying to the rest of the economy, 

so that pressures turned away from one market would not be directed 

into another. At the present stage a perfect control is impossible; time is 

not available for working out all the interrelationships which should be 

observed. 

There are, however, certain controls which if applied would do much 

to prevent further increases in land values. These may be summarized as 

education, taxation, capital gains taxes, credit controls, and permit systems. It is doubtful if any one can be effective under present conditions, 

and a combination of education with some form of a capital gains tax 

and credit control appears to be the minimum required to reduce the 

dangers of a serious inflation of land values. 

FARM LAND VALUES IN THE NATIONAL ECONOMY 

In order to evaluate the current farm real estate market, it is necessary 

to understand the part played by farm land values in both the wartime 

and the peacetime economy. Generally speaking, both these relationships 

grow out of the importance of farm land as a factor of total national production. Agriculture provides the raw materials for most of the food and 

fibre industries of the nation and for many lesser processes which aggregate to an important proportion of the total economy. Thus, land enters 

into almost every supply process, and the farm population constitutes 

one of the most important segments of the nation's labor force. 

Land in the Total Economy. The fertility and value of farm land together comprise one of the most crucial portions of national capital. 

Land is the basic capital to agriculture, and like any other capital item 

its value influences national wealth and the distribution of national income. While land values reflect prices and net returns over the long run, 

the price of land is an apparent cost to the farmer, since it is reflected in 

payments on mortgage indebtedness and taxes. When a farmer buys land 

on a mortgage at a high value his payments will be high; to him this is a 

fixed cost of production which justifies pressure for high prices. It is these 

interrelationships of land values which make them a crucial problem in 

our economy during both peace and war. 

Where farm land is monopolized and farmers cannot readily move to 

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34 AGRICULTURAL ADJUSTMENT AND INCOME 

other jobs, the returns from agriculture can be diverted largely to the 

landowners, thereby pushing the tenants' incomes down to a low level. 

In the United States this danger is met to some degree by widespread 

individual ownership of land, and in England and some other European 

countries it has been met through legislation controlling rents and giving 

tenants added security of tenure. 

Rents and land values also reflect the social and economic conditions 

of an area. Where there is a dense rural population with few alternative 

employment opportunities, rents and values tend to be high relative to 

the farm level of living; where industrialization offers alternative jobs at 

good wages, farmers demand a higher level of living, and a smaller proportion of net agricultural returns is available to pay rent and to support 

high land values. The opening up of alternative opportunities, therefore, 

may increase the bargaining power of tenants and profoundly affect rents 

and land values, even with no change in prices. 

Finally, land is an important part of the total base for alteration of the 

money supply through credit operations and for the financing of Government services through real property taxes. Thus, when sudden changes 

take place in the value of land, the inflationary or deflationary effects 

may continue to be felt long after the original situation has disappeared. 

In their effects on the tax structure, land values have similarly profound 

and long-delayed consequences. High values established during a land 

boom tend to become the basis for long-term assessments. Although these 

high tax assessments may temporarily benefit the Government, they tend 

to perpetuate improper land uses and, with high mortgage indebtedness, 

may cause the loss of many farms through foreclosure or seizure for taxes. 

Land and the War Economy. In addition to their general economic 

influences, land values have further effects on the nation's wartime 

economy. War is an economic stimulant. High levels of employment, 

higher incomes, and almost insatiable demands for every type of product 

combine to produce inflationary pressures. If not curbed, the economic 

optimism and the cumulative forces of inflation thereby engendered may 

sweep the economy into an inflationary spiral. Land values play an important part in this sequence, and profoundly influence both efforts to 

control the wartime situation and subsequent readjustments to peacetime relationships. With relatively few exceptions it can be said that 

inflationary tendencies anywhere within the economy stimulate inflation 

elsewhere. During a war rapid increases in retail prices cause land values 

and rents to rise after an initial lag; and these in turn result in increasing 

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fixed costs of production which, to the individual producers, justify even 

higher retail prices. This mutual reinforcement can continue indefinitely 

until curbed by Government intervention or the final "bursting of the 

bubble." 

At the same time, the higher values of farm land increase the amounts 

of credit which can be extended upon its security. To the degree to which 

this potential expansion of the money supply materializes, the owners of 

farm land are able to bid up the prices of scarce goods and services even 

further. Thus, farm land values are similar to other capital values in their 

tendency either to reinforce inflationary pressures arising in other parts 

of the economy or to set up inflationary forces and transmit them to the 

rest of the economy. 

Even since the outbreak of the war, the Federal Government has 

attempted to restrain inflation. This program of economic stabilization 

has been an integral part of the war effort, since it had an important 

influence upon both the cost of the war and the ease with which necessary 

materials could be procured. In addition, the more completely inflation 

could be held in check, the easier would be the postwar transition to peace. 

Hitherto, no direct effort has been made to control the values of many 

important capital items. Some forms of producers' capital (particularly 

the costs of new factories and machinery directly involved in war production) have been controlled; but the values of land, standing buildings, 

and share capital, to name some of the most important items, have not. 

Land Values and Postwar Adjustments. During the transition period 

the level of land values can profoundly influence the ease with which 

this country returns to a more normal long-run economy. Generally 

speaking, these influences will be felt most keenly by agriculture, but they 

will have definite indirect effects on the entire economy. 

High land values will be looked upon as a fixed cost, especially by those 

who have purchased land on a mortgage, and this will increase the pressure of farm groups to have postwar prices supported at a high level. If 

prices decline, as seems inevitable, fixed payments on mortgages will take 

a much larger proportion of the smaller net income, and the farm family 

will be forced to lower its level of living or to lose both the farm and its 

accumulated savings. 

During wartime, scarcities of fertilizers and farm equipment usually 

prevent the maintenance or restoration of land fertility and farm capital 

other than land; consequently a considerable part of the abnormal incomes received from the sale of farm products represents the value of 

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36 AGRICULTURAL ADJUSTMENT AND INCOME 

"wear and tear" on productive capital. If this part of farm income is not 

placed in reserve against the future restoration of capital but is spent in 

the acquisition of high-priced land, it implies the permanent depletion of 

the total stock of farm productive capital. After the period of wartime 

flush prices is past, there is seldom opportunity to "plow back" this 

capital out of current income. 

Finally, in those regions, especially in the Southeast, where present 

agricultural production is disproportionately centered on the intensive 

cultivation of cash crops, high land values will hinder the necessary shift 

to more extensive farm enterprises. For example, there are large marginal 

and submarginal areas of the cotton and tobacco South at present characterized by small farm units. The production of these two crops should 

be reduced and more of the land returned to grass or forests; at the same 

time farms should be consolidated into larger units.1 If these lands are 

saddled with high values, such adjustments will be much more difficult 

to attain. 

COMPARISON OF WORLD WARS I AND II 

Basic Differences. One of the most important differences between the 

two wars is duration. World War I lasted four years, with the United 

States involved for only 18 months. In contrast, World War II has gone 

on for five years, and this country has been an active belligerent for 

more than three. Thus, during the latter conflict much stronger inflationary forces have been engendered and have had much longer to make 

themselves felt. If the nation's economy during this war had been as 

uncontrolled as in the former, the forces of inflation probably would have 

already reached unmanageable proportions. 

Again, during the first war this country's contribution took place over 

such a short period that there were few occasions for manpower and 

capital to be greatly restricted, and shortages of farm labor and equipment had little dampening influence upon agricultural optimism. During 

World War II, on the other hand, rather acute shortages in these two 

factors have made it increasingly difficult for farmers to profit fully from 

rising prices; and their land purchases have been moderated by this deterrent. 

The efforts which have been made to control inflation during World 

War II stand out in sharp contrast with those of the first. It is inevitable 

1

 For an example of such a program, see the testimony of former Secretary of Agriculture 

Wickard at the Cotton Conference (Cotton: Hearings before the Subcommittee of the House 

Committee on Agriculture, Dec. 4, 1944, pp. 94-102). 

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that the educational and restrictive activities of agencies (both public 

and private) should make people more aware of the dangers of inflation 

and temper the activity even of uncontrolled markets. Another outstanding difference between the two wars is found in the greater promotional 

effort now given to the sale of Government bonds. This has brought about 

a sizeable flow of purchasing power into assets which may prove somewhat less liquid than others, especially if patriotic holding continues. 

Any reduction in average liquidity tends to reduce proportionately the 

danger of inflation and to retard the rise of all commodity prices. 

During World War II, the psychological aspects of these factors were 

modified profoundly by memories of the boom and collapse following the 

last war. This is particularly true of the older generation, in whose minds 

the effects of the land boom are painfully clear, and of the sections of the 

country (the North Central area, especially) in which the highest rises 

occurred at that time. 

Prewar Land Values. At the time World War I began, land values in 

this country had been advancing for more than a quarter of a century. 

Agricultural prices and incomes were going up; most of our tillable land 

had been settled while the demand for farms still increased; and there 

was no sign of any slow-down in the rate of increase of population or of 

demand for agricultural products. It is likely that by 1914 farm lands 

were already somewhat over-valued in terms of their longer run earning 

capacity. Against such a background the wartime rise of land values was 

looked on as a normal development. The disillusionment which followed 

1920 was all the more severe because of its unexpectedness. 

For the nation as a whole, farm values before the recent war tended to 

be stable at a level below the 1912-14 level. In only 12 States did the 

1935-39 average equal or exceed 1912-14; none of these were interior 

States, and most were situated along the Atlantic seaboard.2 For the rest 

of the country there was a considerable margin through which values 

could rise before reaching previous wartime levels. Furthermore, in 1939 

both the farm population and the Government were well aware of the 

seamy side of high farm land values. 

Farm Prices and Incomes. Prices received by farmers for their produce 

have not risen as high during this war as they did during the last war, 

but they have risen about as rapidly. The major price rise occurred before 1943, as indicated by the chart on page 38, but the movement is 

2

 These States were: Vermont, Massachusetts, Rhode Island, Connecticut, New Jerse>, 

Maryland, Virginia, North Carolina, Florida, Alabama, Louisiana, and California. 

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3 8 AGRICULTURAL ADJUSTMENT AND INCOME 

still upward. When the higher level of Government payments and the 

greater volume of production are considered, it is easy to see why cash 

AGRICULTURAL PRODUCTION, PRICES, AND INCOME, 

UNITED STATES, 1910-44 

INDEX NUMBERS (1910-14*100 ) 

5 0 I I I M 1 I I I I 1 M I 1 1 I I I I 1 I I I I I I I I I 1 I M I 1 

1910 1915 1920 1925 1930 1935 1940 1945 

^EXCLUDING GOVERNMENT PAYMENTS DATA FOR 1944 ARE TENTATIVE ESTIMATES 

NOTE. This chart and the one on p. 39 were provided by the Bureau of Agricultural Economics of the United States Department of Agriculture. 

farm incomes (both gross and net) have exceeded those of any previous 

period. Furthermore, the farm population has been reduced to its lowest 

recent level, making per capita farm incomes also the highest on record. 

The Farm Real Estate Market. Beginning at approximately the same 

relative levels, farm land values rose very slightly during the first two 

years of both wars, as indicated by the chart on page 39. During the 

second two-year period rapid upswings occurred in both instances. The 

fifth year (1919 and 1944 respectively) brought the two relative values 

almost exactly together after a total rise of almost 40 per cent over the 

prewar levels. Although World War I had ended the year before, the rise 

continued into 1919 to reach a peak almost 70 per cent above prewar. In 

World War II, on the other hand, the war was at its greatest intensity 

in 1944. As of March 1, 1945, land values were 52 per cent above prewar. 

But, should the general pattern of the last war be repeated, the greatest 

price rise may still be in the future. By 1944, values in four States had 

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FARM LAND VALUES AND RECONSTRUCTION 39 

reached or passed 1920 levels, the number doubling by 1945.3 During 

World War I, the central wheat area was the region of greatest inflation. 

At present this is one of the sections of the country where land values 

have risen less rapidly. Activity has been centered in other areas, particularly the Southeast. 

The depression of the 1930's with its large volume of foreclosures forced 

a large number of farms into the hands of unwilling institutional owners, 

FARM REAL ESTATE: COMPARISON OF INDICES OF AVERAGE VALUE 

PER ACRE, 1910-34 (1912-14 = 100) AND 1935-45 (1935-39 = 100) 

PER CENT 

160 

140 

120 

100 

80 

60 

-

-

193 

r (1935-: 

h 

f?^ 

I 1 I i 1 

/ 

t 

i j 

i / 

ft 5-45 ^/ / 

39-100) >i / 

/ / 

* / 

\ \ i i 

\ 

f \ \ 

< 

. ! 1. 1 1 

1910-34 

(1912-14--100} 

i i i r 

J 

-| 

-

\ 

V \ % % ~ 

% 

\ 

i i i i 

1935 

1910 

1940 

1915 

1945 

1920 

1950 

1925 

1955 

1930 

a circumstance which has restrained the rise of farm land values during 

World War II. No such restraint existed before the depression. Much of 

the slowness of the rise in land values during the first years of the war 

may be ascribed to the fortunate, but fortuitous, presence of this abnormal supply. By 1943, however, most of these holdings had been liquidated, and their prior existence can have no effect on current or future 

value movements. 

The volume of farm sales during the first war reached its peak in 1919, 

but this level was exceeded in 1943 when over 300,000 farms changed 

hands. The all-time high rate of transfer (about 6 per cent of the entire 

3

 States in which 1944 land values equaled or exceeded 1920 were: Rhode Island, Connecticut, New Jersey, and California. In addition, preliminary 1945 values were above 1920 

in North Carolina, Florida, Alabama, and Oregon. Compare with footnote 2, p. 37. All comparisons are as of March 1. 

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40 AGRICULTURAL ADJUSTMENT AND INCOME 

country's farms) occurred during the year ending March 15, 1944. It is 

noteworthy that the highest rates of transfer during the present conflict 

are not taking place in those sections of the country where the greatest 

inflation previously occurred. 

Between L914 and 1920, farm buyers borrowed heavily to finance their 

purchases, causing agriculture to enter the interwar period burdened with 

the heaviest and most disastrous mortgage debt in our history. Since that 

time, the debt has been reduced greatly, by foreclosure in the early 1930's, 

and since then by repayment. This war has seen nothing like the rate of 

debt formation accompanying the last war: a much larger proportion of 

farms have been bought for cash, and more substantial down payments 

have been made on those for which credit is being extended. This means 

a much stronger financial position for farmers at the end of the war this 

time than was possible before. 

Conclusions. The farm real estate market during World War II has 

not been characterized by a number of conditions which prevailed during 

the last war. Speculators have been less active; the supply of farms was 

relatively greater during the first part of the war; and credit has played 

a lesser part In the financing of farm land purchases. Further, land buyers 

have had the discouraging memories of the last boom to temper their 

optimism. On the other hand, this war has lasted longer than the last 

one; farm incomes have been higher, as have farmer holdings of liquid 

assets; the la ad market has been even more active; land prices have risen 

almost as rapidly; and the postwar spurt in demand and values has yet 

to begin. It would be dangerous then to consider the threat of inflation 

past. Although conditions are different, they are still ominous in many 

respects, as the next section will show. 

CURRENT FORCES AND FUTURE DEVELOPMENTS IN THE 

FARM LAND MARKET 

Present supply-demand relationships are by no means the only forces 

which are being and will be felt in the farm real estate market. In order 

to assess the future prospects of farm land values, it is necessary to consider both present and future developments. 

The Present Situation. During the war, rising prices in general have 

tended to lower the value of money and to raise land values without any 

alteration of the basic supply and demand balance. Since the prices of 

land have not been subject to control, and since land is considered to be 

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lative short-run profits (especially in the vicinity of the larger cities), 

purchase as a hedge against general inflation, and purchase by war 

workers who want something to fall back on when their present high 

incomes are reduced. The first two of these purchase motives will lead to 

heavy selling when prices turn downward, but the third will not. 

The current occupational demand for farm land has been in part increased and in part decreased by the war situation. The drafting of farm 

youths into the armed services and the lure of war jobs have tended to 

defer a sizeable segment of demand until after demobilization is begun. 

But to offset this there has been an actual increase in the demand for 

farms by operators. The rise of farm incomes and the failure of taxation, 

bond purchases, debt reduction, etc., to absorb this increase completely 

have resulted in a rapid rise of farmer holdings of cash and demand 

deposits. Many farmers have expanded their land holdings either as an 

investment in a familiar asset or in preparation for the return of sons 

now in the service. Farmers displaced by Government land purchases 

have often re-entered the market. Many tenants, to whom the war has 

brought the first opportunity for the accumulation of funds, are now 

purchasing farms. There has been a further increase in the demand for 

farms and in the willingness to assume mortgages, because of present 

laws guaranteeing farm commodity prices for the first postwar years. 

Although their influence cannot be measured exactly, low interest and 

service charges on mortgages may be of considerable importance, especially to returning servicemen. 

Finally, the demand for farms is increased by nonfarm persons who 

desire a "place in the country." These buyers fall into two classes: first, 

city people with a yearning for country life and the means of satisfying 

it; and second, nonfarm persons who enjoy country life and desire to 

enhance their incomes through part-time farming. A continued rise of 

urban incomes will probably enhance the first class of demand, while the 

threat of unemployment will add to the second, which may act to support the market in the event farm commodity prices fall. 

The supply of farms for sale is relatively inelastic, especially since the 

same factors calling forth increased demand act to increase the reluctance 

of owner-operators to sell. Thus the supply of farms will probably continue to be provided by the death or retirement of operators plus offerings in the expectation of higher prices. But it must be remembered that 

many owners have heirs, and that many older owners are deferring retirement because of a sense of public duty, the desire to hold the farm 

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for an absent son, or the lure of high incomes. There is, therefore, small 

likelihood that the immediate postwar supply of farms can be greatly 

enlarged to meet the high level of demand. 

But it is less a matter of possible expansion of supply, than the lesson 

of the last boom and the educational efforts of various interested agencies which has restrained farm real estate activity. One of the most 

effective instruments has been the National Agricultural Credit Committee, organized in 1941 through the leadership of the Farm Credit 

Administration. The membership of this committee was drawn from 

various representative farm organizations, banking groups, insurance 

companies, the Federal Reserve System, the Department of Agriculture, 

and other Federal agencies interested in farm credit problems. The 

Committee has done much to promote sounder agricultural credit conditions, to encourage the use of surplus farm funds for debt reduction, 

and to secure widespread publicity concerning the dangers of farm real 

estate inflation and means of combating it. The Committee has been 

aided by the research and publicity efforts of the Department of Agriculture, the land-grant colleges, and other State and Federal agencies. 

The Immediate Postwar Period. For the year or two immediately following the war it is easy to see what the future holds for an uncontrolled 

land market. There is no evidence that the total demand for agricultural 

products will fall off during this period. Any reductions in military demand should be largely offset by increased civilian demands and the 

shipment of foods to devastated areas. Therefore, farm incomes should 

be maintained at a high level. At the same time there will be some lessening of the restraints which heretofore have prevented farmers from taking 

full advantage of high prices: quickening industrial reconversion will be 

accompanied by increased supplies of farm machinery, labor, etc. Returning servicemen desirous of becoming farmers will have easy access 

to credit. Finally, there will be an inevitable relaxation of psychological 

(and perhaps legal) restraints on the impulse to buy. Unless this is accompanied by a very rapid rise in the flow of civilian goods, it will greatly 

increase inflationary pressures throughout the economy. 

All of this indicates the probability of a sharp rise in the occupational 

demand for farms, both by present farmers of all tenure classes and by 

persons returning from service or war industry. Since general prices and 

farm incomes will be high, purchases of farms for purposes of hedging 

and investment should continue at present levels or increase. Speculative 

activities probably will rise, also. 

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On the supply side of the market there is little likelihood of great 

change. Most farms held by institutional lenders have been sold. Farms 

absorbed into military or industrial sites will not be returned to agriculture until well after the close of hostilities, if at all. Retirement of 

operators is not likely to be greatly accelerated. Few investors will have 

decided to sell their holdings. Finally, there is little chance that farm 

subdivision and reclamations can ever add noticeably to the supply of 

farms. In fact, in the Southeast, it will become necessary to reduce the 

number of farms through consolidations in order to solve basic social and 

economic problems. 

All in all, the most likely prospect for the farm land market appears 

to be a continued upward movement of prices and activity for some time 

after the war. If the general price level continues to rise, it will strengthen 

inflationary tendencies in the land market. Should the proportion of returning servicemen who desire farms be greater than now estimated, the 

increase in* demand may take the form of an abrupt spurt accompanied 

by a dangerously rapid price rise. It is during this immediate postwar 

period that the gravest danger of a complete breakdown of market restraints is to be feared. Not only this, but there is reason to expect that 

farm purchases during this period will be accompanied by the formation 

of excessive new mortgage debts. 

The Later Postwar Period. The evaluation of later developments in 

the market for farms is much more difficult, j In the first place, if controls 

are soon placed on the market, early developments may be less inflationary than those outlined above. In the second! place, much depends on the 

degree of success with which the rest of the economy makes a safe transition from war to peace. However, it must, be remembered here that a 

high degree of interdependence exists between the future course of land 

values, on the one hand, and the general economic behavior of the nation, 

on the other. If the rest of the economy is ^ble to maintain reasonably 

full employment and a high level of incomes, it will be much easier for 

the agricultural segment to make the transition, especially if rapid inflation of farm land values is avoided. However, if this inflation occurs, 

it will make the general economic transition much more difficult. Economic maladjustments cannot be confined behind bulkheads—they always spread beyond the area in which they tyegin. 

During the transition period there may bejsome falling off in demands 

for and prices of farm products. A slight change may take place in the 

nature of farm sellers: investors, hedgers, |and speculators will begin 

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gradually to sell their holdings and retire from the market. But it will 

not be until after the transition period that the forces of deflation will 

really become apparent. Then the time will come when demand (at existent high prices) suddenly will be saturated, and farm land values will 

turn sharply downward. Falling farm commodity prices and falling farm 

land values will reinforce each other. It is quite possible that both will 

drop well below the long-run normal; but, after the initial sharp decline, 

land prices are likely to lag increasingly behind falling farm prices and 

incomes. Eventually, if the rest of the economy is healthy and able to 

take up the slack, all three should return to stability at levels more in 

keeping with long-term prospects. On the other hand, if the rest of the 

economy is unable to absorb the shock of violent deflation, a situation 

similar to that of the 1930's may again develop. 

METHODS OF PREVENTING A NEW LAND BOOM 

It has been estimated that more than 2 million involuntary transfers 

of farms and tracts have occurred since 1920. This means that the equivalent of one-fourth to one-third of all land in farms has gone through 

forced sale in the last 25 years. Tragic and costly as this loss has been, it 

is by no means the only effect of a boom in farm lands. The whole agricultural fabric is penalized through the interruption of technological progress and by the stabilization of improper farm practices. In addition to 

all the suffering which it brings to the agricultural population, the collapse of a land boom saddles the nonfarm segments of the economy with 

the increased costs (through taxes and higher prices) which accompany 

a sick agriculture. It is still possible to apply curbs which would do much 

to restrain the development of a runaway boom; and the major methods 

of control are, therefore, discussed below. 

Education. Machinery already exists to carry out an intensified campaign of public information. The potentialities of press and radio, of 

neighborhood discussion groups, etc., have yet to be exhausted. Among 

agencies which directly reach farmers, the State extension services, 

county agents, and land-grant colleges have done much, but still have 

not tapped all their resources. Likewise, it should also be possible to enlist more intensive efforts on the part of farm cooperatives, production 

credit associations, and similar rural organizations. In the areas where 

the greatest harm would result from a land boom, particularly in cashcrop regions, a last ditch attempt to create added awareness of the effects 

of high farm land prices might be implemented by the joint efforts of 

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these agencies plus schools, churches, and the like. The need is certainly 

great enough to justify the broadest approach. It is probable, however, 

that these methods, by themselves, cannot curb inflationary tendencies 

as strong as those now operating. 

Since the greatest single factor in the present rise of land prices is the 

willingness of buyers to pay increasing amounts for their land, an effective curb on inflation would be a more skeptical attitude toward the 

value of specific properties. It is not enough to tell people that land is 

over-valued—they must be shown that the specific property they desire is 

over-valued. This can be accomplished through appraisal clinics to which 

potential buyers of farms could bring their problems and receive assistance in planning land purchases, in appraising the long-term value of 

specific properties, in budgeting their credit needs in terms of future 

income prospects, and in determining the alternative uses to which land 

could be put if bought at a given price per acre. This approach has not 

been utilized as fully as its potentialities merit. Such clinics also could 

act as central clearing points for the most authoritative information on 

prospective changes in prices, alternative opportunities, and competitive 

position, with respect to the specific farm enterprises of importance in 

the community. Finally, when the acquisition of more land is necessary 

for the achievement of a proper farm balance, the alternative local possibilities of leasing and buying could be explored. 

Control of Demand through Allocation. In Australia, the farm land 

market (as well as that for urban real estate) has been controlled quite 

effectively through a permit system which operates upon prospective purchasers. The basic law has proved sound and land prices have been held 

to moderate increases. In this country, such an approach might be taken 

along the following lines. In order to purchase land, the individual would 

be required to prove need, ability to use it properly, and reasonableness 

of price. The priority of different classes of buyers could be so defined 

that it would not work undue hardship on legitimate purchasers (tenants 

desirous of buying farms, small owners who need to expand, etc.), while 

keeping speculators and other nonoperating buyers from the market. 

This would curtail or altogether eliminate some of the most inflationary 

present demands and tend to bring demand in line with the supply of 

farms without a rise of price. 

Restrictions on Purchasing Power. Since excess purchasing power in 

the face of limited supply is a major cause of inflation, means of reducing 

or absorbing the free funds of potential buyers are an indirect curb on 

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inflation. This approach has two phases: (1) the elimination of excess' 

liquidity in the hands of possible farm buyers, and (2) the control of 

credit extensions on farm mortgages. 

The Control of Liquidity. In general the control of individual liquidity 

during World War II was left to voluntary methods. That these methods 

have at least partly failed is evidenced by the large volume of demand 

deposits now outstanding and the record amounts of currency in circulation; but partial success is demonstrated by sizeable individual holdings 

of Government securities and by the phenomenal reduction in outstanding debts of all sorts. So far as the farm land market is concerned, any 

further reduction of individual liquidity through voluntary methods will 

be worth while; but these methods can hardly prove sufficient to absorb 

all the cash and demand deposits which have accumulated. 

There are two methods by which the several levels of government can 

restrain the future expansion of liquid funds. The first consists of simultaneously raising income taxes and reducing evasion and avoidance. The 

lack of farm business records and the difficulty of determining the taxable income of any farm enterprise is responsible for the failure of farmers 

to report all taxable income. Tighter collection of farm income taxes 

probably would take effect too slowly to affect present farm land prices. 

Still, it might restrain the farm land market—and it should be done in 

the interest of fair play in all events. 

A different approach would be through local land taxes. In order to 

obtain maximum impact on farm land prices, it might be worth while to 

institute automatic reassessment of farm lands for tax purposes whenever 

resold, with the new price furnishing the assessment. In this manner, farm 

owners who held their land would pay prewar taxes, but buyers would 

know that higher bids would mean higher assessments. This might help 

to discourage speculation in addition to draining off purchasing power 

from those willing to bid up the price of land. Provision for a peacetime 

reassessment should be made. 

Methods of Credit Control. Emergency powers possessed by the executive 

branch of the Government would permit the institution of credit controls 

for the period of transition. It would be a mistake, however, to think that 

curbing farm land credit can remove the threat of inflation: farm incomes 

are at record levels and there is too much liquid purchasing power in the 

hands of potential farm buyers. There would be no serious difficulty in 

raising barriers against easy institutional credit. 

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servative policy in appraising land and in extending credit; but individual 

lenders have accounted for almost half of the recently recorded farm 

mortgages. Thus, to be effective, credit controls must cover at least a 

major part of the individual lenders. This can be done under existing 

law, which permits individual lenders to be classified as "banking institutions.' ' It appears, however, that any individual who makes just a 

single loan, and engages in no other lending transaction, could not be 

regulated under existing statutes. This limitation probably would not be 

serious, since "lending institutions'' could be prohibited from participating in any transaction or taking over any loan in which an individual 

lends an excessive amount. Such a provision would make excessive loans 

less attractive to both individual lenders and borrowers. 

The primary credit controls should act through appraisal and through 

the proportion of appraised value which could be encumbered. A further 

effective curb might be the raising of interest rates, service charges, etc., 

on all land-secured loans. 

Credit control cannot be completely effective in halting the land price 

rise as long as potential buyers have large cash holdings. However, the 

controls outlined above could curb part of the rise and hold farm mortgage debts to a reasonable proportion of long-run value and income. This 

last is particularly pertinent, for one of the greatest dangers in the immediate future is an increasing mortgage debt on many farms. 

An argument often advanced against credit controls is that they would 

be subject to wide evasion. Any law may be so criticized. In the final 

analysis, it is popular acceptance rather than power of enforcement which 

makes a law effective. A regulation of this sort, well publicized, would 

have a strong deterrent effect even if strict enforcement were impossible, 

especially if the regulations were so framed as to place no undue burden 

on legitimate extensions of credit. 

Price Ceilings. Price ceilings have been placed on many goods (both 

consumption and capital) and services during the war. Some were imposed early in the conflict and have proved very effective in slowing down 

the rise of commodity prices. Others were delayed until after price rises 

were well under way and still have been effective. 

There are several possibilities as to how land price ceilings could be 

determined (assuming the new legislation necessary to authorize them): 

(1) All farm land, whether or not for sale, could be appraised and therewith placed 

under ceiling. This would be extremely costly and time consuming, and can be ignored as a feasible possibility. 

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(2) No farm could be sold (other than, say, to heirs in settling an estate, or in 

some similar sale formality) without an official appraisal and the setting of a ceiling. 

Once set, this ceiling would apply to all resales during the period of control. The large 

proportion of credit-financed sales would make this method of determining ceilings a 

logical corollary to credit control, since one appraisal could serve both purposes. 

(3) The price set in the first sale after a given date would be recognized as the 

ceiling. If different time intervals elapsed between the reference date and the first 

sales of similar pieces of property, this method would allow inequitable price differentials to develop. 

The major effect of ceilings would be to discourage speculation and 

hedging by removing the possibility of pronounced price rises. Although 

the ceilings might still be so high as to penalize persons buying for occupational use, this would have resulted from the price rise, in any case. 

If this control were applied in conjunction with a permit system of land 

sales, the greatest single opportunity for evasion would be eliminated, 

although administrative effort would be greater than under a system of 

allowing sellers to decide which of several ceiling bids to accept. 

Though the use of ceilings is one of the most effective methods of curbing future land price inflation, there is, unfortunately, little likelihood of 

its being politically acceptable. Too many influential groups are of the 

opinion that current increases in the price of farms are justified by prospects of high future farm product prices. 

Capital Gains Taxes. A less direct method of removing the speculative 

motive from the farm land market would be to tax away the profits from 

all early resales. There have been three suggestions as to how this could 

be done: the use of a special capital gains tax, the extension of the holding 

period required before this capital gain could be taxable at less than 

ordinary income tax rates, and an increased transfer tax. 

As outlined by its advocates and incorporated in bills already introduced into Congress, the resale gains tax would be administered under 

regular income tax procedures. Like the extended holding period, legislation would be required to instrumentalize it. This tax would be based 

on two variables: (1) the profit, excess of resale over purchase price, on 

any capital sale transaction, and (2) the period intervening between purchase and sale. As embodied in a Senate bill (S.1584, 78 Cong., 1 Sess.) 

introduced in December 1943, the capital gains tax was to apply only to 

the sale of farm real estate and took the form of an amendment to the 

Internal Revenue Code. The base of the tax was defined as the net gain 

from resale (allowing deduction of costs of improvements and other costs 

covered by the Code) of farm properties acquired after November 1, 

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1943, or within three to four years following the end of hostilities, by 

means other than "inheritance or devise or by gift," but excepting executor or administrator sales and sales through condemnation "or the 

threat or imminence thereof." The tax rate varied downward from 90 

per cent on gains from sales taking place within two years of purchase, 

to 30 per cent on gains from sales taking place five but less than six years 

after purchase. These taxes would be, in effect, in lieu of regular income 

tax on such gains. On property held six years or longer, the tax did not 

apply, but the regular income tax re-entered the picture. 

It is obvious that such a tax would go far toward eliminating either 

speculation or hedging in farm land, since it would prevent the realization 

of major profits through appreciation. Handled as a part of regular income 

tax procedures, it would involve no great administrative difficulty. Even 

the usual non-coverage of agricultural incomes, mentioned above, would 

affect it little, for most short-run speculating and hedging activities are 

carried on by nonfarm persons. The tax would cover a period long enough 

to reach well past the transition period, affecting all lands purchased 

within three or four years and sold within nine or ten years following the 

war's end, with few exceptions. Finally, since it would not affect longterm holdings of farm land, it could not interfere with the legitimate 

profits of owner-operators or true investors. 

In the administration of a capital gains tax, it would be important that 

allowances be made to cover certain sales by farmers. For example, if a 

farmer found that he could improve his income and opportunities by 

selling his present farm and buying another, perhaps at a higher price, 

it would be unfortunate if he were prevented from shifting by reason of 

being forced to pay the tax if he sold his old farm. Similar situations can 

be visualized which might necessitate some degree of flexibility in the tax. 

A comparatively mild deterrent would be merely to extend from six 

months to a longer period (usually placed at three years) the holding 

period necessary to define a gain on farm resale as a "capital" gain, taxable as such, rather than as ordinary income. Since income tax rates are 

the higher, it is thought that this redefinition of gain would be sufficient 

to restrain land speculation. Unfortunately, the income tax rates which 

would apply are relatively low in comparison to the rates applicable 

under the proposed resale gains tax and would provide far less restraint. 

Although far better than nothing, the extension of the holding period 

cannot be effective in a strongly speculative market unless supplemented 

by other measures. This tax has the advantage that, like the resale gains 

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tax, it could be administered through existing machinery acting under 

the Internal Revenue Code. 

The suggestion has also been made that the present real estate transfer 

tax be greatly increased. The rates usually recommended have been in 

the neighborhood of 20 per cent ad valorem on property sold. There is no 

doubt that this tax could be administered, probably as well as is the 

present low tax, but its fairness and feasibility are quite another matter. 

The biggest objection is that it would affect all transfers regardless of the 

degree to which they were inflationary. Distress sellers would be taxed to 

the same degree as speculators. In order to absorb a large part of speculative profits without hurting legitimate sellers, this tax would have to 

be rendered impotent by many exemptions and qualifications. 

Forced Savings of Receipts from Sales. The idea of making all sellers 

of farm land accept some proportion of their sales price in the form of 

nontransferable Government bonds, redeemable at some future date, has 

received some discussion. Advocates of this control contend that it would 

be less punitive and more flexible than other controls, and could be administered more simply. Although this approach would have considerable 

virtue at the beginning of a land boom, its slow cumulative effect is hardly 

adapted to the control of later stages of inflation. Further, there are legal 

complications to requiring the acceptance of any special form of tender. 

Finally, the singling out of a particular group of sellers and the application to them of a forced saving plan would hardly be acceptable. 

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LOW INCOME GROUPS IN SOUTHERN AGRICULTURE 

by 

EARLE L. RAUBER 

Research Department, Federal Reserve Bank of Atlanta 

Problems concerning the distribution of wealth and income are not 

only among the most intricate in economic theory, but they are among 

the most thorny in the field of economic policy. Problems of production, 

since they are largely concerned with means instead of ends, can ordinarily be viewed with a fair degree of objectivity, somewhat in the way 

an engineer can view dispassionately the technical problems with which 

he is concerned. The distribution of wealth and income, on the other 

hand, involves the ends of economic activity and hence gives rise to questions of a non-economic order—questions that touch the status of men in 

their society and thus involve their personal lives and destinies. It is difficult to consider with scientific objectivity any question so heavily 

fraught with social and personal implications. In the real world, such 

questions tend to become the focal points of group tensions and political 

activity. 

The tendency for problems of distribution to become political issues 

probably goes far to explain the long history of special aids to agriculture 

on the part of Federal and State governments. The socio-political expediency that has been thought to justify special consideration for agriculture as a whole is also invoked to win consideration for low-income 

groups within agriculture, for agriculture is far from being a homogeneous 

sector of the national economy. On the contrary, agriculture is extremely 

heterogeneous and contains groups that follow diverse patterns of production and have very different standards of living. 

It is the groups at the lower end of the present income scale that will 

be discussed here, together with the conditions that create and perpetuate 

them, as well as policies that look toward the elimination of such groups 

or the amelioration of their position. 

SUMMARY 

Although rural poverty can be found in almost every section of the 

country, the degree to which it is concentrated in the South makes this 

region a national problem. 

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Three interdependent and overlapping causes are chiefly responsible 

for the prevalence of rural poverty in the South. These are (1) an unusually high ratio of population to land resources, (2) the overshadowing 

importance of cotton as a cash crop, and (3) a tenure system characterized 

by a high rate of tenancy. The first of the three is the most fundamental 

because it tends to perpetuate the other two, although it is also reinforced 

to some extent by them. 

Possessing only 17 per cent of the total land in farms, the South has 

40 per cent of the nation's farm population. Such a situation results in 

an average size of farm that is incapable of supporting a farm family on 

any decent level of living under prevailing agricultural practices on land 

that is inherently low in fertility. Whereas, in 1940, the average size of 

farm in the United States was 174.0 acres, in the South Atlantic States 

it was only 90.8 acres, and in the East South Central States it was 75.3 

acres. Farms of 15 or 20 acres of cropland per farm family are very 

numerous throughout the region. 

The high man-land ratio is an historical result of the cash cropping 

of tobacco and cotton under conditions of slavery. When land holdings 

shrank as a result of the breakup of the slave system, the necessity for 

the farmer of a few acres to find the cash for his fixed expenses led to a 

perpetuation of cotton cropping. Cotton still possessed, as it had before, 

the greatest comparative advantage as a source of cash. 

The tenure system that followed the breakup of the slave system was 

characterized by a large proportion of tenants, both cash tenants and 

sharecroppers. Because of their need for cash and the small size of their 

farms, the tenants who pay rent in the form of cash or in a fixed amount 

of lint continue the soil-depleting cropping of cotton. Since sharecroppers 

who pay rent in the form of a share of the crop have little initiative in 

determining what they shall raise and since the landlord's interest lies in 

getting an easily marketable crop, they too continue to raise cotton. 

As long as these three factors remain important, widely advocated 

programs for agricultural rehabilitation that stress soil conservation, 

diversification of crops, and farm ownership, desirable though they are, 

have little chance of success. Such programs presuppose more extensive 

forms of agriculture and hence larger farms; before they can be put into 

practice there must be a reduction in the ratio of population to land. 

The solution of the problem of low farm income in the South therefore 

lies in large part in the realm of the general economy. A level of industrial 

activity that will attract large numbers of marginal and submarginal 

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farmers and farm laborers from the land is essential. Industrial development within the South is an important part of this national goal. The 

achievement of such a situation will require the intelligent cooperation 

of Government, banks, and private business. 

When larger farms have become possible, training, guidance, and suitable financing may then be used to effect a gradual shift to more extensive and socially desirable types of agriculture. Failure to bring about 

the necessary reduction in population pressure on the land would result, 

in all probability, in the perpetuation of rural poverty in the South. 

THE GEOGRAPHY OF RURAL POVERTY 

The geographical distribution of rural poverty is brought out clearly 

in a 1943 study of rural levels of living by Margaret Jarman Hagood of 

the Bureau of Agricultural Economics. 

With 1940 figures, an index of rural farm living is constructed, based 

upon such components as the percentage of occupied dwelling units with 

fewer than 1.51 persons per room; the percentage of dwelling units with 

radios; the percentage of farms with gross income of more than $600 per 

year; the percentage of farms reporting automobiles of 1936 or later 

models; and the median grade of school completed by persons 25 years 

of age and over. From these series, each of which is indicative of a much 

wider range of data, an index is computed for each county. The county 

index is then related by percentages to a similar index for a nation-wide 

sample of counties. The county indexes thus express the level of living 

of the farm population of counties relative to the level of living of the 

farm population for the nation as a whole. 

In terms of this index of rural farm living, it was found that most of 

the counties falling below the national average were confined to 12 

Southeastern States. The only other areas having an index below that of 

the nation were some counties in northern New Mexico and Arizona, and 

a small cut-over area in the Great Lakes States. To an overwhelming 

extent, therefore, the problem of rural poverty is a problem of the southeastern part of the country. Since the greatest concentration of rural 

poverty is found there, this paper will confine itself to that geographical 

area. 

Within the 12 Southeastern States, as might be expected, rural levels 

of living vary considerably, the index ranging from a high of 86 per cent 

of the national average in Virginia to a low of 64 in Alabama and Louisiana. In 4 out of the 12 States the index was below 70, and in 7 States 

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—Alabama, Louisiana, Mississippi, South Carolina, Georgia, Arkansas, 

and Tennessee—it was below 80. 

If the farm population of the country suffers from a standard of living 

lower than that of the urbanized industrial population, then the farm population of the Southeast as a whole and particularly of the 7 States named 

is at a still greater disadvantage. What such a position means in terms of 

inadequate diet, housing, health, education, and the infrequency of all 

those facilities ordinarily associated with our ideas of a desirable standard 

of living is sufficiently well known to require no elaboration here. In the 

South, these inadequacies were so marked that in 1938 the National 

Emergency Council in its "Report to the President" gave to this region 

its now famous appellation—"the Nation's No. 1 economic problem." 

SOME FOUNDATIONS OF RURAL POVERTY IN THE SOUTH 

The fundamental elements of the South's problem of rural poverty are 

simple and obvious and have long been recognized by all observers. They 

are (1) a high ratio of population to land resources, (2) the overshadowing 

importance of cotton and tobacco as the region's leading cash crops, and 

(3) a land-tenure system that represents a more or less incomplete adjustment of the antebellum system of slave labor to the condition of 

legal freedom brought to the South's labor system as a result of the Civil 

War. These fundamentals, of course, are not independent of one another. 

On the contrary, each conditions and reinforces the others. 

The apparent simplicity of the problem, however, does not make the 

solution any easier. Indeed, it is because these fundamentals are mostly 

historical products, because they involve elements of social lag, and because, in addition, they are colored by prevailing racial attitudes that 

the problem becomes extremely obdurate. 

Population and Land. The relative overpopulation of rural areas is not 

a condition confined to the South. That 50 per cent of the nation's farmers 

produce 90 per cent of all farm products sent to market is sufficient evidence of a large surplus farm population in the nation as a whole. More 

people are evidently trying to get a livelihood from the land than can be 

supported by it on any reasonably satisfactory level of living. 

In the South, however, overpopulation is especially acute and contributes heavily to the general agricultural problem for the nation. With 

the exception of a few scattered States, the Southeastern States comprise 

the only major geographical region in which the reproduction rate of the 

population exceeds unity, that is, where the number of children being 

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reared exceeds the figure necessary to maintain a stationary population. 

With one quarter of the nation's population, the South before the war 

was furnishing one-half the nation's natural increase in population. Inasmuch as the urban reproduction rate is no higher in the South than it is 

in other regions, the conclusion is clear that Southern farms have become 

the major source of the nation's population. 

Two-thirds of the natural increase in farm population for the nation 

during the period 1930-34 occurred in the South where only one-half of 

the farm families were living. Migration out of the region and from farms 

to cities within the region has served to relieve the pressure of population 

on land resources to some extent but not enough to remedy the serious 

maladjustment implicit in the situation. With approximately 40 per cent 

of the nation's farm population, the South has only 17 per cent of the 

total land in farms. Under such circumstances, unless the soil be exceptionally fertile and unless it be tilled with exceptional skill, the result 

could only be a lower-than-average level of living for its cultivators. 

The high man-land ratio implied in the foregoing figures is naturally 

reflected in the small average size of farm in the South. Whereas, in 1940, 

the average size for the United States was 174.0 acres, in the South 

Atlantic States it was only 90.8 acres, and in the East South Central 

States it was 75.3 acres. Within the 12 Southeastern States, the average 

size of farm varied from a high point of 127 acres in Florida to a low 

point of 66 acres in Mississippi and Louisiana. 

Actually the situation is worse than these figures indicate. Within the 

South Atlantic States in 1940 almost half of all farms had less than 50 

acres each and in the East South Central States more than half of the 

farms were of less than 50 acres. Moreover, not all farm land is available 

for providing a current living, some of it being wood lots, some wasteland, and some lying fallow. The result is that farms of 15 or 20 acres of 

cropland per farm family are very numerous throughout the region, and 

this amount of land is commonly considered insufficient to provide a 

decent living for a family under present cropping practices and where 

soils are low in fertility. 

Cash Cropping. Another fundamental cause of the low farm incomes 

of the Southeast is the predominance of cash cropping—chiefly of cotton 

and, though to a lesser extent, of tobacco. 

Nothing in commercial farming or in specialization in one or more 

crops is inherently uneconomic. On the contrary, many economies are 

possible where there is such specialization. 

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The evils of cash cropping in the South grow out of the relation of such 

a system to the man-land ratio. In one sense cash cropping is the cause 

of the man-land ratio, and in another sense it is an effect of that ratio. 

The two things are parts of a single whole that has its roots in the failure 

of an historic situation to adjust to technological and social changes. 

Historically, the South was the nation's first great commercial farming 

area. The cultivation first of tobacco and later of cotton on a commercial 

basis to satisfy the demands of a world market dates from Colonial times. 

These two crops had one characteristic in common; namely, they were 

both large consumers of labor time at certain peak seasons. 

In a new country, where land is abundant and cheap and where labor 

is in short supply, it would be natural to expect that a large amount of 

land would be used per unit of labor and that farming would become extensive rather than intensive. These expectations did not materialize in 

the South as they did in other areas because the character of the labor 

supply under conditions of slavery made supervision a necessity and 

prevented the dispersal of labor over very large areas of land. Labor 

thus came to be concentrated in the form of plantation gangs. A combination of land and labor that, in view of their respective supplies and 

costs, would have been uneconomic in a system of free labor could be 

made to pay the landowner financially only if the cost of the inherent 

wastefulness of the system could be shifted to labor and land—to labor 

in the form of a subsistence standard of living and to land in the form of 

the exhaustion of soil fertility. The exhaustion of the soil, however, did 

not represent any real cost so long as new land was available to replace 

that which had been worn out. The entrepreneur planter could shift the 

labor supply to its most profitable place of use. This geographic mobility 

of labor, plus the fact that the remuneration of labor was arbitrarily fixed 

at a subsistence level and represented no equilibration of supply and 

demand, made the concentration on cotton and tobacco financially profitable to the entrepreneur planters. 

With the legal freeing of the slaves, the planters lost their power to 

shift the labor supply in accordance with their own interests. Indeed, 

since slaves had been capital, their emancipation left the planters with 

almost no capital except land. When entrepreneurs who possessed nothing but land confronted a labor supply destitute of land and capital, a 

modus vivendi was established in the form of a tenure system characterized by small tenant holdings. If anything, this system was more uneconomic than slavery, for the former geographic mobility of labor was 

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lost and the high man-land ratio became more or less permanently established as an institution. 

Having lost geographic mobility, the labor supply was compelled, by 

its small holdings as well as by the terms under which access to land was 

secured, to continue the production of cash crops. These crops were still 

the traditional staples of the South. Cotton remained the crop that had the 

greatest comparative advantage, for any other crop or combination of 

crops would have implied a more extensive type of agriculture and, consequently, a lower money yield per acre. The immediate economic interest 

of any individual operator lies in securing the highest value product per 

acre. Whether he thus gets enough to maintain a desirable level of living, 

however, depends upon how many acres he has at his disposal. 

The gross value of farm products per acre, for example, is higher in 

the Old Cotton South than it is in the newer cotton-producing areas in 

the Southwest. In Alabama in 1940, this figure was $6.25 per acre—the 

lowest in the Southeast. In Texas, the value of farm products per acre 

was $3.70; in New Mexico, it was $1.23; and in Arizona, it was $1.64. 

Nevertheless, the value of farm products per farm amounted to only 

$522 in Alabama in 1940, compared with $1,246 in Texas, $1,455 in New 

Mexico, and $2,370 in Arizona. The higher money yield per acre in the 

Old South was more than offset in its influence on the level of living by 

the small average size of farm. The size of farm, in turn, was the result 

of the disproportion of population to land resources. 

Cotton and tobacco, as well as the corn that is generally raised for 

stock feed and farm consumption, have in common another characteristic that works to the disadvantage of the Southern farmer; namely, 

their tendency to impoverish the soil. These are all intertilled crops and 

so facilitate a rapid runoff of water in rainy seasons. The top soil, which 

has never been very thick in the South, is thus subject to a heavy annual 

loss from erosion. The "Report to the President" of the National Emergency Council called attention to the fact that 61 per cent of the nation's 

badly eroded soil is found in the Southern States. At least 22 million acres 

of once-fertile soil, it was said, had been ruined beyond repair. In order 

to make other abused and badly depleted lands produce, it is necessary 

to make heavy applications of fertilizer. In 1942, the South Atlantic 

States and the South Central States purchased nearly 6 million tons of 

commercial fertilizers—three-fourths of the nation's total. Meanwhile, 

it is estimated, 27.5 million tons of nitrogen and phosphorus compounds 

are leached out of Southern soil annually. 

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Exhaustion of the soil and the necessity for heavy fertilization implies 

higher costs of production, and rising costs place the Old South at a disadvantage in competition with newer producing regions where land is 

fresh and fertilization less necessary. In South Carolina, for example, in 

1941 the yield of cotton was 166 pounds per acre, compared with the 

1934-41 average of 290 pounds, and the cost of production was 16.6 cents 

per pound of lint, having risen from 8.7 cents per pound in 1934. In 

Arkansas, by way of contrast, the 1941 yield was 342 pounds of cotton 

per acre, compared with the 1934-41 average of 297 pounds, and the cost 

of production per pound of lint had fallen from 9.9 cents in 1934 to 7.9 

cents in 1941. 

Not only does the Old Cotton South face a future of increasing difficulty 

in competition with newer low-cost areas in the United States, but it faces, 

in common with all cotton producers, increasing competition in the world 

market from foreign countries. The prospect of the complete mechanization of cotton culture from planting to harvesting with the near approach 

of the mechanical picker and stripper may make it possible for the Southwestern areas to raise cotton in competition with foreign countries, for 

mechanical equipment is particularly adapted to level land and is most 

economical when used on large farms. Such equipment is less adaptable for 

use on the rolling terrain of the piedmont region and parts of the upper 

coastal plain in the Old South. It is therefore doubtful that this region can 

take full advantage of the cost-reducing possibilities of mechanization. 

The Tenure System. If population pressure on the land and the system 

of cash cropping are two aspects of the strait jacket in which the Southern 

rural economy finds itself, the land-tenure system is a third aspect growing out of the others, but at the same time reinforcing them. 

The predominant characteristic of this tenure system is the high proportion of tenancy. Tenancy, as has often been pointed out, is not necessarily bad in itself. It may represent a stage in a farmer's climb up the 

ladder to full ownership of his farm. On the other hand, it may represent 

a step downward from full ownership to a lower status. 

Of all the farm tenants in the United States in 1935, 41.4 per cent were 

to be found in the Cotton Belt and 8.9 per cent in the Tobacco Belt. Tenants in these areas are of two kinds—cash tenants who pay a fixed cash 

rent or a fixed amount of cotton lint and croppers who pay rent in the 

form of a share of the crop, the size of the share varying widely from one 

case to another and depending upon the amounts of feed, fertilizer, and 

equipment that are furnished by the landowner. 

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The distribution of these classes of tenants differs markedly between 

white and colored farmers. Forty-four per cent of the white Cotton-Belt 

farmers in 1935 were owners or part owners, whereas 15 per cent were 

croppers and the remainder mostly cash tenants. Of the Negro farmers 

in the Cotton Belt, however, only 16 per cent were owners or part owners, 

while 51 per cent were croppers and the remainder cash tenants. 

Theoretically, cash tenants partake of the nature of entrepreneurs, as 

do owner-operators, in virtue of their power to control the disposition of 

their labor and land among various alternative uses. Practically, however, 

this freedom of action is limited by the small average size of tenant holdings. The necessity of earning the cash to pay rent, taxes, and other fixed 

charges, as well as to provide items in the family living that are not produced on the farm, causes the small tenant farmer to squeeze his few acres 

for their maximum cash yield. Since cotton still possesses the greatest 

comparative advantage for the small farmer, the cash cropping of cotton 

is perpetuated. Where acres are few, none can be spared for crops that 

involve more extensive forms of agriculture. 

Economically speaking, the sharecropper partakes more of the nature 

of a wage laborer—a laborer, however, who, while assured of a year's 

employment, is assured of no definite wage for his year's work. His 

wage—his share of the crop—is sharply affected by the yield of the crop 

and the price at which it is sold, as well as by the rate of interest charged 

by merchant and landlord on any advances that have been made to him. 

Moreover, since the landlord usually wants his return in the form of an 

easily marketed commodity, and no other commodity so readily lends 

itself to a division between owner and tenant as cotton does, the cropper 

must perforce plant his land to cotton. Thus, without an entrepreneur's 

freedom of choice, the cropper is really a wage worker who must in addition accept entrepreneurial risks. 

Since leasing arrangements are typically made for a year at a time 

and are often merely oral agreements, there comes about a restless milling 

about from farm to farm by the tenants at this lower end of the scale. 

Tenants move more frequently than do owners, and croppers move more 

frequently than do cash tenants. Of the croppers in the 12 Southern 

States in 1940, 22 per cent had moved to their present farms within the 

three months preceding April 1 and 41 per cent had been on their farms 

less than 15 months. 

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tain the tenant house or other farm buildings in good repair. He has 

little incentive to care for the land beyond his own short-run needs. He 

has no incentive to plant and cultivate a year-round garden that might 

serve to improve the quality of the family diet. The decade of 1930-40 

witnessed some spectacular changes in the institutional pattern of farm 

tenure in the South. In the first place, farm ownership increased. This 

increase, however, was entirely within the ranks of white owners; the 

number of Negro owners on the contrary declined. There was also a 

sharp decline in the number of tenants of all classes, both white and 

colored. Since the decline in tenancy greatly overbalanced the increase 

in farm ownership, it did not represent any improvement in the position 

of Southern farmers. Indeed, the net effect of these changes was for the 

worse. It meant that tenants and share croppers were being forced out 

of even the tenuous connection with the land which they did possess. In 

part these displaced tenants migrated to the cities, especially to Southern 

cities, where the urban growth between 1930 and 1940 was nearly three 

times as great as the national urban increase. In part, too, these dislodged tenants and croppers sank down into the class of farm labor 

where they were more "marginal" than they had been in their former 

status. In either case, casual and seasonal employment and Government 

relief became their chief means of support. 

In large part, the cause of these changes lay in the Government's 

agricultural policy of the 1930's: cotton acreage was retired in an effort 

to reduce the cotton surplus and to raise prices, and benefit payments 

were made to encourage certain soil-conserving practices. This policy, 

working within the traditional tenure system, gave landlords a direct 

economic incentive to reduce the number of their tenants even though, 

under the policy, they were supposed not to do so. In this way, the social 

cost of the policy tended to be shifted to the weakest tenure groups who 

were reduced to a still more precarious income status. 

PROGRAMS AND POLICIES 

The fundamental causes of low farm income in the South have been 

recognized for a long time. For a long time, also, a program has been 

advocated to deal with some of the more unfavorable aspects of Southern 

agriculture—a program that has become almost a tradition of the "New 

South." Three major items in this program are (1) soil conservation, 

(2) diversification of farm operations, and (3) farm ownership. 

The ravages of erosion are so evident throughout much of the South 

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that little argument is needed to justify all practicable measures for soil 

conservation. Less obvious but equally deleterious is the exhaustion of 

the soil when planted year after year to the same soil-depleting crops. 

The plowing of rolling country to follow the contours of the hills instead 

of running furrows up and down the hillsides where every furrow becomes a gully to carry off the rainfall is, of course, only rational. Similarly, the terracing of hillsides to check the runoff of water is also essential. The planting of winter cover crops and legumes is necessary to 

check erosion and to restore plant food to the soil. Soil is the foundation 

of agriculture, and unless it is conserved there will be no profitable agriculture in the future. 

The diversification of enterprises on the individual farm has been advocated for a number of reasons. By diversification a farmer can make 

himself more nearly self-sufficient; a larger part of the living requirements of himself and his family can be produced on the farm. By engaging in a variety of enterprises, a farmer spreads the risk of failure of any 

one of them over the whole group. By a combination of pasture for the 

grazing of livestock with crops properly rotated, much can be done to 

check soil exhaustion as well as erosion. Diversification also makes possible a fuller use of available labor time. In raising cotton, for example, 

the peak demand for labor comes in the spring and the autumn. For at 

least four months in the year, labor is idle except for chores. Crops, 

therefore, that have somewhat different peak demands for labor can be 

raised at practically no cost, since they would be produced by labor that 

would otherwise be idle. 

As the third part of this program, farm ownership and the family-size 

farm have been insisted upon. These are conditions for carrying out the 

conservation and diversification parts of the program. Only a farmer who 

has the security of tenure that comes with ownership and who possesses a 

sufficiently large farm can be expected to engage in these better practices. 

Not only has this general program been advocated for years, but the 

technical knowledge for putting it into effect has been carried to the farm 

leadership of the Southern States by county agents of the Extension 

Service of the United States Department of Agriculture with a great deal 

of missionary zeal and with the support of Federal and State agricultural 

authorities. It was expected that the improved farm practices would be 

adopted by the leading farmers and by imitation would finally reach the 

lower rungs of the agricultural ladder. 

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cated in this program, and it cannot be said that its advocates have been 

entirely without success in winning a response. Nevertheless, the results 

have been far from commensurate with the time and effort and talent 

that have gone into the propagation of the plan. 

The cause of this disappointing outcome is fairly clear. The program 

cannot be carried into effect in the face of the existing disproportion of 

population to land resources that keeps the average size of the farm 

small. It is idle to preach the desirability of soil-conservation practices 

and diversification to a sharecropper who has little or no control over 

the use to which his land is put. It is almost equally futile to do so to a 

cash tenant or an owner-operator with but few acres at his disposal. 

Moreover, such practices require capital that must be invested for 

some time before it begins to bear fruit in increased income. The small 

owner-operator or tenant, with little collateral to pledge for a loan, experiences difficulty in securing such capital in the first place. In the 

second place, he cannot afford to wait for the fruition of an investment 

several years hence. The pressure to get a living in the immediate present 

is too insistent. 

A study made in 1942 by the Agricultural Experiment Station of 

Alabama Polytechnic Institute in cooperation with the Bureau of Agricultural Economics of the United States Department of Agriculture 

brings out the limitations of such a program as that advocated. This 

study was concerned with ways and means of increasing incomes and 

conserving resources on cotton-corn farms in Marion County, Alabama. 

A typical one-mule farm in this county with a total area of 85 acres, of 

which 22.5 acres were cropland, was the subject of one set of calculations. 

As it was then being worked, this farm was yielding at 1935-39 average 

prices a net cash income of $101.40. An alternative system was outlined. 

This included clearing some woodland in order to increase the amount 

of cropland and pasture. It included larger applications of fertilizer to 

increase yields of cotton and feed crops—the additional feed would make 

possible an increase in livestock. Fall oats, cowpeas, kudzu, and vetch 

were added. Idle cropland was reduced. Farm garden patches were increased. 

These were the kinds of adjustments usually recommended. They 

would have involved an investment of about $350 and an increase in 

total cash expenses amounting to $140 a year. Net cash income, however, 

would have been raised to $186.25—an increase of 82 per cent. If depreciation and interest on the investment are subtracted from these 

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figures and nonfarm income and the value of farm living produced on 

the farm are added, the family labor earnings, which were $339 before 

the adjustments were made, would have been $449 afterward. That the 

owner of this farm would not have been lifted to the class of the wellto-do by any such means is evident. 

Similar calculations were made in this study for typical two-mule and 

three-mule farms. For a three-mule, cotton-corn farm of 141.5 acres, 

family labor earnings under the current system were $327. After the recommended adjustments they would have been $643. Even on a farm of 

this size—much larger than the average in any of the Southeastern 

States—the results are not sufficient to provide much in the way of a 

good living standard for the farm family. The farmer and his family 

would still be in the low-income group. 

In a capitalistic society, income tends to bear a direct relationship to 

productivity, and high productivity presupposes the use of resources in 

their most economical combination. If rational behavior on the part of 

all concerned is assumed, labor is expected to move from a low-income 

area, where its productivity is low, to a high-income, high-productivity 

area. Or labor is expected to move from occupations yielding low incomes 

to occupations yielding high incomes. The objective conditions for such 

a migration of labor from the South to other regions, or from farms in 

the South to industrial occupations, are obviously present. 

Such a migration has in fact occurred, but not in sufficient volume to 

relieve the pressure on the land. In the decade 1930-40, the South experienced 44 per cent of the nation's increase in population. While the 

States west of the Mississippi River, except Louisiana, experienced a 

decrease in farm population, the South Atlantic States had a 2 per cent 

increase and the East South Central States, approximately a 4 per cent 

increase. 

But what did not happen even under the stress of the economic depression of the 1930's has been brought about to an unprecedented extent by the war. Farm labor has been drained off to the armed forces, to 

wartime construction work, to war industries, and into shipyards, and 

the population pressure has thus been relieved to some extent. The labor 

shortage has caused a great outburst of enthusiasm for cattle raising in 

the Southern States. Many an old cotton county in the Black Belt of 

Alabama and Mississippi is now green with pasture. War crops such as 

peanuts and soybeans have expanded, and other food crops as well. 

Diversification has been given a great impetus. The demand for most 

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crops is good and prices are high. Incomes are higher than they have 

been for a generation. Even the Negroes—the lowest income group of 

all—are enjoying a degree of prosperity they have never known before. 

The postwar outlook, however, is not so bright. After one, or at most 

two, crop years the foreign demand for American foodstuffs will decline 

sharply. Cotton faces a gloomy future because of the loss of foreign 

markets to other countries, where production has been stimulated by the 

United States policy of maintaining prices above the world level, and 

because of the growing competition of rayon and other substitute fibres. 

Only 20 million acres were planted to cotton in 1944, the lowest acreage 

since 1895. Conditions that seem most likely to prevail in the postwar 

period all point to a further decrease in cotton acreage. 

On the other hand, the end of the war will see the return of many 

thousands of men from the armed services and from war industries. On 

their return, these men will find a radically altered pattern of land use 

—one in which the need for labor is much less than it was when they 

went away. There literally will be no place for them on Southern farms. 

In a country that was once a good cotton country but which has been 

converted almost entirely to cattle raising, a banker described the situation by saying, "When these people come back, they will have to march 

right on down the road. There will be no place for them here." 

Under such conditions, the economic problem of low-income farm 

groups may be converted into a social problem of quite another order, 

especially since it will be darkened by the racial issue. The basic difficulty of the South—the high man-land ratio—will then stand out, 

starkly demanding a solution. 

Some elements in the solution are clear: 

(1) There must be such a demand for labor in the nation's industries at such wages 

that the excess population of the rural South will be drained off. Although the inauguration of desirable agricultural programs is not necessarily contingent upon industrialization, to put such programs into effect in the absence of industrial opportunities for the displaced rural population would result merely in trading one social 

problem for another of equal gravity. 

(2) Better still would be an industrial expansion in the South itself sufficient to 

absorb the surplus rural population. If labor were perfectly mobile, of course, it would 

not matter where industrial expansion occurred. Labor would be expected to gravitate to the jobs. Practically, however, labor is far from being perfectly mobile. The 

result is that an industry presenting a given number of job opportunities in Illinois 

has far less capacity to absorb Southern labor than would the same industry located 

in the South. 

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(3) To this end, businessmen should be on the alert to discover and develop all 

possible opportunities for industrial growth and banks should be prepared to finance 

such activities to the limit of their ability, despite a certain element of risk that would 

necessarily be involved. Banks might well be encouraged in making such loans by 

some form of guarantee. 

(4) Vocational and technical training should be provided in order to fit rural labor 

to the requirements of modern industry. Access to such training as well as to industrial employment, both skilled and unskilled, should be given without regard to race; 

for the Negro, being on the lowest rung of the agricultural ladder, is likely to bulk 

large in the surplus population that must be drawn off from the land. 

(5) Thorough and systematic efforts should be made by Federal, State, and local 

governments to place men in jobs for which they are fitted and, if necessary, to assist 

them financially to move to such jobs. 

If the farm population of the South could be reduced by these means 

to the point where a large increase in the average size of farm could be 

effected, then the extensive forms of agriculture that have long been 

advocated would have a better chance of success. Soil conservation practices could be more widely adopted. If this condition could be brought 

about, then: 

(1) The system of tenure should be reformed so that tenants would be placed on a 

ca3h basis and under long-term leases, with provision for the recovery at the time 

the lease terminates of the unexhausted value of any improvements they may have 

made. 

(2) Widespread training should be provided in the techniques incidental to new 

and unfamiliar farm projects. Ways and means of increasing yields of familiar crops 

should also be widely taught. 

(3) Banks should stand ready to finance by long-term loans and at reasonable rates 

the radical shift from intensive to extensive agriculture as well as the adoption of soil 

conservation practices, mechanization, and any other development that would have 

the effect of reducing costs. Here, too, bank loans for such purposes might well be 

guaranteed by Federal Reserve Banks or other appropriate agencies. 

(4) Farmers should be encouraged to carry their product one or more processing 

stages beyond the harvest where this is physically possible. This might in some cases 

be accomplished on the farm; in other cases it might be done in small local plants, 

cooperatively or privately owned. 

The key to the solution of low agricultural income seems to lie not in 

the field of agriculture itself but rather in that of the national economy 

as a whole. If industry fails, nationally or regionally, to provide employment for the people who are no longer needed on farms, because of the 

increased physical productivity in agriculture and the inelastic character 

of the demand for agricultural products, then the South faces a bleak 

future indeed. This is the South's dilemma: Either a large fraction of its 

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Federal Reserve Bank of St. Louis
6 6 AGRICULTURAL ADJUSTMENT AND INCOME 

farm population must shift to nonfarm employment within or outside 

the region, or the South must resign itself to being the most depressed 

rural area in the United States in the future as it has been in the past. 

In the latter event the rural South will probably have to be supported 

to a considerable extent by Federal subsidies of one kind or another or 

by the channeling of increasing expenditures for Government public 

works into the region. 

Digitized for FRASER 

http://fraser.stlouisfed.org/ 

Federal Reserve Bank of St. Louis