January 11, 2021 11:33AM

The New Deal and Recovery, Part 9: The AAA

Having devoted the last two posts in my New Deal series to the NRA, I may have given readers the impression that I had nothing to say about the consequences of the Agricultural Adjustment Act (AAA) passed more than a month before the National Recovery Act. As this series is about the New Deal's contribution to economic recovery, you perhaps assumed that I skipped the AAA because it was a farm relief and reform measure only, and not an important part of FDR's recovery strategy.

If so, you were mistaken, for I realize that FDR saw the AAA and NRA as twin pillars of his recovery plan. The NRA was supposed to boost manufacturers' revenues by ending cutthroat competition, while enhancing their workers' purchasing power by raising their wage rates. The AAA was, in the meantime, supposed to raise farm product prices, and thereby boost farmers' purchasing power, by getting farmers to cut their output. Indeed, if FDR can be said to have considered either program more crucial to recovery than the other, it was to the AAA that he assigned top priority. I took up the NRA first, not because I considered the AAA less important, but because the NRA's tendency to reduce the real gains from gold-based demand growth made it seem natural to turn to it immediately after discussing New Deal gold policies.

Despite its name, the NRA ended up hampering "national recovery" instead of promoting it. In contrast, many experts believe that the less ambitiously-named AAA did promote recovery. In today's installment to my New Deal series, I discuss the AAA's origins, how it was supposed to help end the depression, the extent to which it succeeded, and its long-run repercussions. To anticipate: although the AAA may have aided recovery, its contribution was probably very modest, while its long-run consequences have been so negative that one may well conclude that it ultimately did more harm than good.

U.S. Agriculture in War and Peace

To understand the importance FDR and others assigned to helping farmers during the depression, one must bear in mind the much larger role farmers and farming played in the U.S. economy then compared to today. In 1930 farm families made up a quarter of the total U.S. population, with farm employment accounting for almost as large a share (22 percent) of total employment, and farm output making up about 8 percent of GDP. Those figures are roughly ten times their current counterparts. Apart from their direct importance, farms supported larger rural populations comprising 44 percent of all Americans, as well as a large food processing industry. So it wasn't just farmers who suffered when crop and livestock prices fell.

And those prices fell dramatically at the start of the 1920s, after rising almost as dramatically during and immediately following the First World War. At its peak, in May, 1920, an index of wholesale prices of farm products stood at almost 2.5 times its average between 1910 and the war's outbreak. But between May and December 1920 the same index fell to half that level. As can be seen from the FRED chart below, the rise and consequent decline in crop prices was especially severe. The chart also shows that general prices rose less sharply during the war and immediate postwar period, and stayed well above their prewar levels after the '20-'21 bust. Consequently, although the 1920s may have "roared" for some, farmers found themselves considerably worse off then than they'd been before the war.

Farm and General Prices

During the boom, those farmers, encouraged both by it and by a government-guaranteed wheat price and other wartime government policies deliberately aimed at boosting farm output, invested heavily in new farmland. As Robert Sobel notes in his biography of Coolidge (p. 247), "Wheat acreage rose from forty-eight million acres to more than seventy-five million between 1914 and 1919. Iowa farmland that sold for $82 an acre in 1910 went for $200 in 1920."

Farmers typically paid for new land, and for the resources they needed to cultivate it, by signing mortgages with the sellers or arranging mortgage loans with commercial banks. By 1925, gross U.S. mortgage debt had risen to $9.4 billion, or nearly three times its level in 1910. After farm product prices collapsed, farm foreclosure rates in turn rose to record levels: from an average of just 3.2 foreclosures per 1000 farms for 1913-1920, they climbed to 17.4 by 1926, and ultimately to a 1933 peak of 38.8 foreclosures per thousand farms.

As I noted in my segment on the banking crisis, the souring of farm mortgages was a major cause of bank failures both during the 20s and during the first years of the depression. According to a recent study by Matt Jaremski and David Wheelock, rising crop prices encouraged not just more borrowing but the formation of many new banks to accommodate it. Because they tended to be especially aggressive lenders, these banks failed in disproportionate numbers when farm prices tumbled. According to economic historian Lee Alston, the overall damage done by farmers' defaults was such that, had it not been for it, "the country at large would have been far less receptive to a New Deal."

Hoover's Farm Problem

Long before the New Deal, while he was still Harding's Secretary of Commerce, Herbert Hoover recognized the farm problem as one of overproduction. "The fundamental need," he told a gathering of dairy farmers, "is the balancing of our home production to our home demand." Although he encouraged voluntary cutbacks, Hoover was opposed to any government scheme that would compel farmers to produce less. The main role he favored for government was its support of the formation of national farm marketing cooperatives, which he hoped might, together with generally rising prosperity, eventually raise farmers' profits enough to end their plight.

But farmers weren't keen on either national cooperatives or voluntarily cutting production. They wanted higher prices for the output they were already generating; and they wanted them not "eventually" but right away. Only direct government support could grant them that wish; and Hoover opposed such support. In particular, both as Secretary of Commerce under Harding and Coolidge and once he became President, Hoover successfully opposed the McNary-Haugen farm relief bill, which would have had a government-funded "export corporation" restore the prices of various farm products to their pre-WWI "parity" levels by purchasing "surplus" output at those parity prices and disposing of it abroad. Farmers responsible for surpluses on which the corporation lost money would be taxed to make up for those losses, while those responsible for crops sold abroad at a profit would receive a corresponding dividend.

Hoover objected to the McNary-Haugen proposal not just because it called for unprecedented "socialistic" government intervention in agriculture, but because he believed that propping-up farm product prices would only result in still larger farm surpluses, and that the export corporation's efforts to dispose of surplus crops abroad would violate the era's anti-dumping laws. Hoover was hardly alone in holding these views, which were shared by many economists, including Chase National Bank's Benjamin ("Mac") Anderson. When the McNary-Haugen bill was first taken up by Congress in 1924, Anderson observed, correctly and somewhat presciently, that it couldn't work unless "Government had power to exercise control over the production of agricultural com­modities and allocate to each individual farmer the permissible acreage of given commodities and to hold the farmers down to the acreage allowed them."

Once elected president Hoover continued to favor voluntary efforts to reduce farm output, which he attempted to assist through the establishment of a Federal Farm Bureau. But as Joan Hoff Wilson notes, Hoover's voluntary scheme struck farmers as both too "complex" and too long term. They therefore continued to press for "an immediate price-lifting solution guaranteed by the government" of the sort "McNary-Haugenism" promised. When the depression began, the Hoover administration took the further step of using loans and grants to enhance both foreign and domestic demand for farm products; but that extra support hardly sufficed to make up for the depression's further toll on crop and livestock prices, let alone achieve a pre-WWI "parity" of relative farm product prices. It fell to FDR to grant farmers the sort of immediate and substantial aid they'd been pining for for a decade.

From Agricultural Reform to National Recovery

With the coming of the depression, farmers' plight went from bad to worse, both in absolute and in relative terms. The average, absolute price of farm products fell below its prewar level, while their price relative to goods and services in general fell to what was then a record low.

Farm and General Prices

While farm legislation had previously been aimed solely at giving farmers their "fair share" of national income, once the depression broke out its proponents began to emphasize its potential contribution to a general recovery. This tack was taken by FDR himself during his presidential campaign, and particularly in his September, 1932, Topeka campaign speech. Yet despite this, as a comprehensive Brookings Institute study of the AAA observes (p. 12), so far as actual policies were concerned neither the Democratic platform nor FDR himself went much beyond the official Republican party position, "if indeed they went that far."

FDR did, however, express his support for aspects of the so-called "domestic allotment" plan, albeit without naming it, having been encouraged to do so by both Raymond Moley and Rex Tugwell. By 1932 that plan, first proposed by agricultural economist W.J. Spillman, and then taken up and popularized by another agricultural economist, Harvard's John D. Black, was generally seen as the most promising alternative to McNary-Haugenism. The basic thinking behind it was that, while tariffs on farm products alone had proven ineffective in raising farmers' earnings, they could become effective if farmers limited their output to levels consistent with domestic needs. The plan's "essential principle," Black told the House Agriculture Committee in 1929,

is paying a free-trade price plus the tariff duty for the part of [farmers'] crop which is consumed in the United States and this price without the tariff duty for the part of it that is exported, this to be arranged through a system of allotments to individual producers of rights to sell the domestic part of the crop in the domestic market.

A version of Black's plan, which had many progressive Republican supporters, including future Agriculture Secretary Henry Wallace, was taken up by Congress twice during 1932. But the "Jones Bill," named after Congressman Marvin Jones (D-Texas), who became chair of the House Agriculture Committee when the Democrats gained control of Congress that year, was rejected by the Senate both times, and would certainly have been vetoed by Hoover had it not been.

Once in office, FDR, who had encouraged Jones's efforts,[1] asked him to assist Wallace in revising a draft bill also based on the domestic allotment idea. The revised measure differed from Jones's earlier efforts mainly by replacing transferable allotment rights with direct payments made to farmers in return for their agreeing to limit output to allotted amounts, to be financed by taxes on food processors. The resulting Agricultural Adjustment Act, promising to "relieve the existing national economic emergency by increasing agricultural purchasing power," flew through the House on March 22, 1933, gained the Senate's approval five weeks later, and was signed by FDR on May 12th.

The Theory

By creating a government agency—the Agricultural Adjustment Administration—expressly charged with restoring farmers' purchasing power to levels last seen in the years just before World War I, the new law broke new and untested ground. Whether its combination of direct benefit payments and reduced farm output would suffice to achieve its immediate goal was doubtful enough. But even if it succeeded, just how were farmers' higher earnings supposed to translate into improved all-around prosperity? Direct benefits to farmers were funded by taxes on food processors, which ultimately tended to be passed on to consumers. Crop reduction programs likewise benefited farmers only by making food less abundant and more costly for everyone. Surely Robbing Peter to pay Paul couldn't possibly make both Peter and Paul better off. Or could it?

Actually, it could—in theory at least. For it to do so, it sufficed for farmers taken as a whole to have a higher "marginal propensity to consume" than those, apart from farmers themselves, who bore the brunt of higher food prices. That, at least, is how economists might put it today. During the first years of the depression, before the General Theory had taken the economics profession by storm, the same idea was stated more prosaically, if also more awkwardly. According to the Brookings study, by initially shifting "purchasing power" to farmers from others, the AAA intended to "exert a significant influence toward accelerating the release of [that] purchasing power into the general market."

FDR understood that, taken as a means for improving overall prosperity, the AAA was a gamble. In his message transmitting the bill to Congress, he admitted that it took the government down "a new and untrod path." But he considered the gamble worth taking, while promising that if it failed to "produce the hoped-for results, I shall be the first to acknowledge it and advise you."

Qui Buono?

Did the AAA actually "produce the hoped-for results"? FDR, for his part, never suggested otherwise; and all experts agree that the AAA boosted overall farm earnings. Brookings' painstaking report concludes that, taken as a whole, its programs enhanced gross farm earnings by as much as $2 billion, about a quarter of which took the form of direct Treasury payments. Allowing that farm families themselves bore some burden from increased food prices still left them with net gains of between $1.5 and $1.9 billion, which, at a time when total U.S. GNP was around $58 billion, was no small sum. Although AAA officials themselves claimed much bigger gains, they tended to credit the AAA both for its genuine contributions to farm earnings and for concurrent improvements in those earnings for which other factors were responsible.

To call the AAA's contributions gains to "farmers" is nevertheless misleading, because they mostly ended up going to landlords, rather than to their tenants or to actual farm workers. When AAA benefits went to cash-paying tenants, they tended to be fully offset by higher rents. When, instead, they were meant to be divided between sharecroppers and their landlords, as in the cotton-growing South, the landlords often prevented sharecroppers from being paid directly, while dispensing with those they no longer needed. As a result, hundreds of thousands of tenant farmers and their family members found themselves homeless, with no means of survival save those offered by other New Deal relief programs. A Cornell agricultural economist estimated that, all told, the AAA added roughly 2 million former farm tenants and workers to the ranks of the unemployed.[2]

But so far as we're concerned, the relevant question is whether the AAA helped to lift the U.S. economy as a whole from the depths of the Great Depression. Did it serve in practice to boost aggregate demand, as it was supposed to do in theory?

According to two of Brookings' three experts, it did, both because farmers were more inclined to spend extra resources that came their way than the groups from which those resources were diverted, and because AAA programs often "advanced" purchasing power to farmers before they deprived food processors of it by taxing them. "On the whole," they write, "we believe that the AAA was a quickening rather than a retarding factor in industrial activity":

With confidence renewed that he was to be enabled to keep his farm and continue supplying the market under more favorable commercial conditions, the farmer expanded his purchases of consumption goods and farm supplies up to the limit made possible by enhanced prices, better credit, and direct benefit payments. This expansion of orders…improved the financial position and the business confidence of certain classes of manufacturers and in turn enlarged their purchases of raw materials and equipment. This reacted favorably on employment, payrolls, and urban buying. Ultimately…there was a larger flow of national income from which to divert the larger share that went to the farmer.

The same experts concluded that there was no reason to doubt the AAA's claim that increased rural demand accounted for two-fifths of the rise in factory employment between the spring of 1933 and the fall of 1935, although AAA programs themselves only accounted for part of this, the rest having been due to "relief, public works, the Farm Credit Administration, and the drought."

Where Credit is Due

For some, even Brookings' tempered conclusion gave the AAA too much credit. These included Joseph S. Davis, the third author of its in-depth study. That conclusion, he observes in a footnote to that study, "conveys a materially exaggerated impression of the extent of the AAA's recovery contribution." In Davis's opinion, that contribution, if it was positive at all, was minor. "[I]n this important sense," he says, "the 'recovery argument' of its [the AAA's] advocates was unsound."

Although Davis's footnote doesn't supply his reasons for doubting that the AAA promoted recovery, he offered some of them two years earlier, when the AAA had been in business for 19 months, in an article for the Journal of Farm Economics. "On the basis of reasoning and experience to date," Davis wrote then, the AAA's contribution to recovery "has been minor, not major." While Davis didn't deny that AAA programs added to the money earnings of certain groups of farmers, he believed that most of the observed increase in both farmers' earnings and their demand for non-farm goods and services was "due to other factors than the AAA." Those other factors included the Great Plains drought, "[h]uge outpourings of public funds other than through the AAA," and the dollar's depreciation. Although Davis was unable to determine just "what influence the AAA might have had" in the absence of these other factors, his best guess was "that as a force in general recovery…it quite failed to fulfill" its advocates' promises, "and may even have retarded aggregate business recovery."

A recent AER paper lends support to Davis's perspective, by showing that devaluation was a major source of both farmers' increased earnings and the revival of rural demand for non-agricultural goods and services. In "Recovery from the Great Depression: The Farm Channel in Spring 1933," Joshua Hausman, Paul Rhode, and Johannes Wieland argue that, thanks to farmers' relatively high marginal propensity to consume, a redistribution of income favoring farmers did indeed contribute substantially to recovery during the spring of 1933. However, on the basis of a careful assessment of the evidence, in which they do their best to "control for the possible confounding effects of the drought and the AAA," Hausman et al. assign most of the credit for that redistribution, not to AAA programs, but to the devaluation of the dollar, which caused farm product prices, and traded crop prices especially, to rise both absolutely and relative to the CPI. Contemporary press accounts, they note, also attributed the spring, 1933 rise in farm commodity prices to the FDR's April 19th decision to suspend gold exports and allow the dollar to depreciate. And no wonder: within three months of that decision, the dollar had lost between 30 and 36 percent against gold and gold-backed currencies!

The other economists who shared Davis's pessimistic view of the AAA's contribution to recovery included T. W. Schultz, the future Nobel Memorial Prize winner, who in commenting on Davis's assessment said not only that he found it reasonable, but that he doubted "if anyone would claim that the AAA has been a mighty or even a significant force in improving economic activity generally." Schultz, who on the whole favored the AAA, regretted that Davis chose to harp on its failure to promote recovery, rather than on its contribution to agricultural reform. But since Davis's concern, like ours, was the "AAA as a Force in Recovery," Schultz's complaint is mostly beside the point.

The AAA is Dead; Long Live the AAA

"Mostly." Except that any full account of the AAA's merits as a recovery measure must consider both its immediate and its longer-run costs and benefits.

The AAA was sold to the public as an emergency measure, which, if proven successful, would end once "the national economic emergency in relation to agriculture has been ended." But as we've seen, its roots lay in proposals that pre-dated the depression. Moreover, the agency was expected not just to re-establish but "to maintain" agricultural commodity prices at their (relatively high) pre-WWI levels—something it could hardly do once it ceased to exist.

So it isn't surprising that many of those who took part in creating and overseeing it, including FDR himself, looked forward all along to making agricultural "adjustments" a permanent feature of U.S. agricultural policy.

It was never the idea of men who framed the act," FDR said in an October, 1935 statement, "that the Agricultural Adjustment Administration should be either a mere emergency operation or a static agency. It was their intention—as it is mine—to pass from the purely emergency phases necessitated by a grave national crisis to a long-time more permanent plan for American agriculture.

And that is indeed what the AAA became. Despite the Supreme Court's ruling of January 6, 1936, striking down the original act as unconstitutional on the grounds that by using taxes levied on food processors to benefit farmers the federal government had encroached upon states' rights, the AAA would survive, in name, until 1953; and after that, as Bill Ganzel observes, "the basic policy of the federal government has remained to keep prices up by keeping production down. And this is a very real way in which the Great Depression continues to affect those of us growing up and living today."

As the aforementioned Brookings study notes (p. 2), instead of being "swept from the boards by this Supreme Court decision, as the NRA had been some seven months before," the AAA was merely "diverted into new channels under modified procedures." Less than two months after the court's decision, the AAA's crop-reduction component was reconstituted as part of the Soil Conservation and Domestic Allotment Act. Under that arrangement farmers, instead of being paid simply for refraining from growing certain crops, were paid for "conserving" former cropland, either by growing grass or nitrogen-fixing legumes on it instead, or by otherwise modifying it to limit soil erosion.

Two years later, a brand new Agricultural Adjustment Act, guaranteeing minimum prices for cotton, corn, and wheat. and otherwise supporting various other farm products, rose, phoenix-like, from its predecessor's ashes. To steer clear of the Supreme Court's 1936 ruling, instead of being funded by a tax on food processors, the new AAA relied upon appropriations from the Treasury's general fund. In 1940 the new AAA, which like its predecessor was originally to expire after two years, was made permanent; and in 1942, in Wickard v. Filburn, the Supreme Court declared it constitutional.

Because FDR and other proponents of the original AAA had always had a permanent arrangement in mind, it seems only reasonable to take both the original and the revived AAA's consequences into account in assessing the original plans' overall net benefits. Addressing those consequences a half-century after the original law's passage, agricultural economist Don Paarlberg concludes that the program's tendency to benefit a minority of relatively large farmers, present from the start, only grew worse over time. While producers of certain "basic" crops, which by 1983 accounted for only 20 percent of agricultural output, received 75 percent of the program's benefits, farmers of hundreds of other crops got no help from it at all; and 21 percent of the benefits paid went to just 1 percent of all participating farmers, who were generally far better off than the consumers and taxpayers who paid the bill for this largesse.[3]

And that largesse has grown considerably since the 1930s, both absolutely and as a share of total farm earnings. Here is a chart (from a webinar bearing the happy title, "Straining the Alphabet Soup," by University of Illinois agricultural economists Joe Janzen and Nick Paulson) showing how direct government payments to farmers have evolved since 1933:

Direct Farm Payments

And here is another, from the folks at Agricultural Economic Insights, showing the change in the government-provided shares of total net farm income. It shows how, when Paarlberg wrote, that share had risen to almost 70 percent!

Direct Farm Payments

Nor have matters improved since Paarlberg wrote. Although direct farm payments declined as a share to total farm for most of the period after the mid-1980s, they were still substantial—and still overwhelmingly aimed at large-scale farmers who were better off than most of their fellow citizens. "If the intent of commodity support programs is to assist low-income households," the President's Economic Report for 2005 observed, "then these programs are failing in this task today because the bulk of payments go to farm households with incomes above the U.S. nonfarm average."

At last, in 2014, Congress did away with direct farm subsidies by passing a new Farm Act. But while that measure did reduce the flow of direct aid to farmers, it did so by substituting almost equally generous crop insurance subsidies along with other offsetting benefits. Consequently, although insurance companies now received a bigger slice of the subsidy pie, large-scale farmers suffered little if at all.[4]

And thanks to the first Coronavirus Food Assistance Program (CFAP), and despite the 2014 reform, those farmers raked-in more direct government aid in 2020 than ever before. Here again, as has been the case generally, the largest 1 percent of farms received one-fifth of all direct CFAP payments to farmers, amounting to almost $1.1 billion. While many people found themselves in desperate economic straights in 2020, thanks to the CFAP large-scale farmers earned more than they had in any year since 2013. Because the second COVID-19 relief package includes a similar amount of direct aid to farmers, mostly aimed at the usual set of favored farm commodities, 2021 is likely to turn out to be another banner year for them.

Nor has the harm done by post-New Deal farm policies been limited to regressive income redistribution. By encouraging for intensive farming methods, including heavy applications of chemical fertilizers and pesticides, those policies have also had substantial, adverse environmental consequences. "To the extent then that agricultural assistance stimulates crop and livestock production," Jan Lewandrowski, James Tobey, and Zena Cook observed in the August, 1997 issue of Land Economics, "and to the extent that such increases in output impose unintended and unaccounted for environmental costs on society, those environmental costs can be seen as a form of government 'policy failure'."

***

Just how should one weigh the AAA's supposedly positive, if modest, contribution to economic recovery in the 1930s against its regressive and environmentally damaging long-run legacy? There may be no generally-acceptable way of doing so scientifically. But I daresay that few plausible social welfare functions would suggest a net balance in the program's favor, let alone a substantial one. On the contrary: I believe most would suggest that, as a means for promoting general prosperity, the farm support gambit was a game not worth the candle.

Continue Reading The New Deal and Recovery:

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[1] According to Eric Rauchway (Winter War, p. 78), Roosevelt had also "indicated to Hoover the importance of a farm bill, telling the president at their White House meeting on November 22 that if a law incorporating his [and progressing Republicans'] ideas about farm relief could be passed in the lame-duck sitting, then he might be able to avoid calling Congress into a special session on March 4, because the nation's most pressing economic need would already have been addressed." This was, of course, long before anyone had any inkling of the banking crisis that would erupt in the weeks leading to Roosevelt's inauguration.

[2] James E. Boyle, "The AAA: An Epitaph." The Atlantic Monthly 157 (February, 1936). (Unavailable online.)

[3] For more on the skewed distribution of farm program benefits up to 1983 see Johnson and Short (1983).

[4] For a detailed, critical account of the various farm subsidies in effect as of 2018, see this Downsizing Government entry by my colleague, Chris Edwards.

[Cross-posted from Alt-M.org]