Speech

Z-98 0 ^ ^ v J) AGRICULTURAL PURCHASING POWER AS A FACTOR IN GENERAL PROSPERITY \ Address of Chester C. Davis, Member, Board of Governors of the Federal Reserve System, ) at annual meeting of the Chamber of Commerce of the United States, Washington, D. C. Tuesday, May 5, 1958. Z-98 AGRICULTURAL PURCHASING POWER A3 A FACTOR IN GENERAL PROSPERITY The title assigned to me is a long one, and you have heard the Object discussed many times - "Agricultural Purchasing Power as a Factor in General Prosperity". There have been occasions in the not-distant past when we would have changed the words a little, to say the same thing in a different for example, "Lack of Agricultural Purchasing Power as a Drag on General Prosperity", or even "As a Factor in General repression". We not be honest with ourselves if we pretended that those times W:ill never recur. My remarks will emphasize how sustained farm buying power keeps tlle wheels of industry turning, and the men of the cities employed. lVlr* Anderson will emphasize how sustained consumer buying power makes a market for the products of the American farm. Our views do not neces- sarily clash5 we simply describe the two sides of the same shield. In considering agricultural purchasing power as a factor in gen- prosperity, one is frequently reminded that cause and effect are always distinguishable. Take the well-known correlation between factory payrolls and farm income. In the years immediately preceding gross income from farm production and the total annual factory Payroll each amounted to 11-12 billion dollars. In 1952, each had s f&Uen to about 5 billion, and each had risen to about 10 billions by And so it is year after year. Clearly agriculture and industry oil each other. o 2-98 — fC*— I'm not going to try to figure out which comes first, the hen or the egg. The point is they do travel together. There are fields in v,kich consumer buying power practically controls the size of farm in- c°mo. And there are clear cases in which farm buying power leads di- r°etly to increased industrial activity. Take, for example, the case of mail order and small-town depart- ^t store sales. From 1929 to 1932, farm cash income fell from 10.5 Millions to 4.3 billions, a decline of 58 percent. Over the same period, mail order and small-town department store sales declined 50 Percent. Efy' 1957, farm income had climbed back up to 8.5 billions, an Urease of 98 percent, while mail order and small-town department store sales increased during the same period by 93 percent. Look at the agricultural implement business. While farm income Was declining 58 percent from 1929 to 1932, employment and payrolls in Element manufacturing fell 75 and 83 percent, respectively. And as income doubled from 1932 to 1957, employment and payrolls in farm ijnPloment industries more than doubled. These figures are pretty dry stuff, but they at least bear out the C°ntention that some of us have been making year after year, namely, if we can stabilize farmer income through a well-balanced farm pro- ^Uction program, we will have moved a long way toward eliminating the fluctuations in industrial production and industrial employment. I believe that wide swings in farm and food prices relative to all °thei> prices to a large extent dominate the general price level, not 0I% in periods of falling prices but in periods of rising prices as ttell, Consider the long downward spiral from the middle of 1929 to March l933» On a 1926 base, while the index of wholesale prices for other Products fell 26 points, food prices fell 48 points, and farm prices fo11 65 points. the recovery upswing in wholesale prices from the low point in 1953 to the turning point last spring, the index for other prices ad- VaUced 20 points, the index for foods advanced 55 points, and the in- for farm products, 51 points* And it is of interest to note that during the current phase of the Session these components of the general price level are running true tn 0 ^ form. During the past year farm prices have fallen 24 points; foods, I4 points; and all others, only 5 points. Nov,', it seems to me that the sheer momentum of the wide swings in ^icultural prices creates a disturbance of the first magnitude - a ^sturbance that affects industry scarcely less than it affects the Airier himself. Business men, to be sure, are able to absorb much of tllG shock through adjustments in production, inventories and payrolls, ^ individuals that is all they can do. But wholesale reduction in °utPUt, inventories and payrolls becomes one of the causes of wide fluctu- *tio*s i f prices. That is bound to be true. On the one n arra and food ^> you do all that you can to keep your prices from sagging, and on th 0 °ther, by reducing costs, you reduce the flow of income into the of those who buy the farmers' produce. 2-93 Traditionally the farmer has had no escape - indeed, no conceded right to escape from the wide swings in the prices of farm products. B°th the deadening lethargy of a recession and the abnormal stimulation of a boom have fallen squarely upon his prices. In recent years, how- 0Ver, considerable progress has been made in setting up democratic ®achinory to shift a portion of the adjustment process from price to SuPply. I suggest -that the successful operation of this machinery is the general interest as well as the farmer's. Both business man and f^mer depend on the same price network, and wide swings in the price Cycle* with gaping disparities among the groups of prices, greatly binder the effective application of other and more generalized economic Co^ectives. Jf we look at the pictoe from another angle, we see that malad- justments in the farm belt, and between the farmer's costs and prices, mightily to the banking collapse that culminated in 1933. during the 12 years from 1921 to 1932 there were 10,808 bank fail- in the United States, with combined deposits of nearly five billion ^Urs. Depositors lost about two billion dollars in these failures. Th Se are appalling figures, and the wonder is that our laissez-faire Ca-Pitali ever survived such a blow. The fact that we did survive, sm ^ have now regained much of the lost ground, speaks well for the depth of American resources and the character of the American people. And it sPeaks particularly well for the enduring hardihood of the American farm- % Fc>r year after year he fought in the front-line trenches. He had to (» y the trenches came right up to his own doorsteps. to the great farming states on the banks of the Missouri River, f°r Sample. These seven states normally produce one-half of the nation's one-third of its corn and one-third of its pozic. And from i921 to 1952, they produced about 4,000 bank failures - more than one- third of the number and one-fifth of the deposits of all the bank fail- les of the whole country. Add to these the rest of the north central 5ta-tes and the states in the cotton south, and we account for more than four-fif failures and three-fifths of the deposits in- ths of all bank volved in such failures during the 12 years after 1920. Those of us who have been at close grips with the farm problem it hard not to become discouraged at what sometimes appears to be Coinplete lack of understanding on the part of business groups. Even those business leaders who sympathize with the objective, a fair and st*bl income from agricultural production, are often found opposing e feVei7 plan addressed to its achievement. I wonder if it would help to make at least one side of the farm Picture a little clearer if it is considered as an inventory problem, of you have had a headache over that one, in your own business. Most of you men have had some pretty tough experiences during this pa£Jt year. You had on hand large stocks of goods bought during a period 0f Rising prices. You accumulated your inventories when it appeared th&t you would need them to handle an increased volume of business and to Provide against the possibilities of strikes, delayed deliveries, still higher prices. This seemed a prudent course to take, in each dividual case, but since thon the demand for your products has dwin- Many stocks such as textiles, steel, and automobiles, began to appear excessive arid many manufacturers and merchants reduced their Ving. This has contributed materially to the decline in activity -6- Z-98 ough impaired markets for producers of materials and declines in Purchases of finished goods. Now all of us have a first class problem °n our hands. The inventory situation is not the whole story, it is Uo> but it is one important factor. Farmers often find themselves in similar positions, though for cH-pf* c^ent reasons. By and large the demand for farm products is pretty si- v °aqy. The amount of cotton consumed does fluctuate considerably from '0rvUi to month and by a substantial amount from year to year, but not in Oily q, °a°h fashion as demand for capital equipment or for automobiles. The 0ra^stic consumption of wheat runs along at about 650,000,000 bushels a with little variation, and increased demand in any particular year mostly on larger exports. Consumption of dairy products and s is also fairly steady by comparison with demand for most industrial ^Ucts. ^ agriculture the inventory problem arises primarily out of changes °uPply. a good many cf those changes are matters of chance and quite "the immediate control of the farmer. Last year, while planting acres of cotton than in most years, wo had a record cotton crop of ov 18,000,000 bales because the yield per acre was exceedingly large, Of °urso I would not blame all the farmers' inventory problems on the Last year's wheat crop was a big one because a spotted yield a » large acreage followed several years of drought conditions. v v/°ather is one special factor for the farmer to contend with and, b ^ Qc consumption does not vary much, the weather can make a lot of Gr°ace with the inventory situation. -7- Z-98 What can be done with a first-class problem of excessive inventory, with more to come? Industry generally cuts production, and sometimes Cuts prices to help move the goods. Sometimes it does not cut prices. Some industries, like automobiles and steel, have cut production to an extremely low level while maintaining prices at advanced levels; others, like textiles, have reduced prices in an effort to sell the goods and 4. maintain production. Now what do you think the farmer ought to do when his stocks get large _ inventory is excessive? Unless signs fail, that is when the likely to become an important question for you - important, that is, if * you believe the income, the prosperity, the purchasing power of the agricultural population mean anything to you, and the volume and tractor of your business. When we examine the swift break in industrial activity that has taken place during the past nine months, we cannot help wondering how ®Uch worse the decline might have been if agricultural income had not held up fairly well last year. In spite of the usual gyrations in farm food prices, this relatively high farm income has provided a real °Ushion against an even more precipitous decline in business. Farmers & whole enjoyed an income of eight and one-half billions in 1337, ^ farm products on the average had a unit purchasing power, in terms of what farmers buy, more favorable than at any year since 1929. Farm income for 1938 will be considerably below 1937. The Miner's index of exchange value, that is, the ratio of the price the farmer gets for a unit of vjhat he sells to the price he pays for a unit of what he buys, has already dropped from 97 to 75 during the Past year. It really is a shocking commentary on our economic system that this decline .in farmer purchasing power is caused, in part, °ver-generous production. The wheat crop this year may be one of the largest on record, and We have fairly Large stocks to begin the season. The cotton crop last was so large that even with a smaller crop in 1958 and an advance ln cotton consumption from current levels inventories will continue to heavy. The men in positions of responsibility who are striving, with the C°°Peration of the vast majority of the farmers, to hold the ground agri- cUltur has gained in the face of almost insurmountable difficulties, e lighting your fight as well as their own. They are entitled to in- ten ^ •^gent cooperation. I repeat - during the last four years, an advancing farm purchasing Povve1, has been a powerful force in motivating general economic recovery. This nation should fight to keep it so - to prevent failing farm income f3?om adding to the depth of the business down-swing. As human affairs have become more closely knit, more interdependent, the swings of the business cycle have gathered more destructive momentum. 1 betimes think that it would be a great comfort to know that these *bep*ations , ffairs - these everlasting gyrations we call the in men s a busines cycle - are caused by sun spots, the weather, or even by old s J°Ve himself. Then, at least, we could lie down at night and sleep in -9- Z-98 Peace, and know that it is no fault of ours that some eleven million People are unemployed. But I am afraid that most of our troubles are of our own making, the product of mass confusion and man's ineptitude guiding and controlling the machine he has created. I am well aware, of course, that there are those who place re- sP°nsibility for our present woes squarely on the governmental agen- ts that control the country's money supply. One only has to read daily press and listen to the radio occasionally to learn that Soine people see no baffling, deep-seated obstacles to be overcome in thieving economic stability. For them it is as easy as rolling & log; devalue the dollar, or issue more currency, or buy more s-dver, or abolish the Federal Reserve System, or go back to the simple ^-sufficing economy of a generation or so ago. Now, there may be some merit in various of these suggestions. j > for one, wish the problem were as simple as that. Then we could beHev those i j_ t that if the volume of money is expanded, e who ns s x tlle Price level will rise, and that if the price level is raised bus- lnGss will boom. But in the main I suspect that the ailments of our ^onorqy are far too complex to yiold to such simple, symptomatic ^tment. No matter what volume of money exists, the only money that °es any work is that which is used; and that quantity is determined ^ needs of business. The remainder lies idle in the banks. And ^ith the volume of money nor of banking reserves means much -4.0- 2-98 UnleSK people put it to work. In other words, you can make a string as long as you like, but you still cannot push it where you want it to go. at the other end of the line has to pull. Nor is the price level as simple a thing as many people believe. ^ange in the so-called general price level do not reveal the nature of s th le Changes of the component groups. If we separate a general price index lnto several constituent groups of commodity prices we discover that there ig -thing one price level, but many price levels. Some no £Uch aB Primarily determined at the moment by temporary shifts in supply out- l0olc> others by shifts in demand; some may be particularly influenced at ^^s by the international value of the dollar, while others are not; and Very important set of prices may be moving up and another equally im- ^tant set moving dom. On top of all this the securities and capital may present still another set of problems peculiarly their own. Proper credit policy is, of course, indispensible to the smooth func- ioriitlg of priee and credit economy. But that alone is not enough. For a y ^eir very nature monetary devices are general in character, and for ^ reason they cannot be employed to give specialized aid to particular ^'srits of prices that from time to time tend to obstruct the smooth func- 0ni»£ of the price machinery as a whole. Too often in recent years, this machinery has been clogged by the Prices the farmer gets for the things he sells, and the relatively ^r prices he must pay for all things he buys. This disparity between Prices and other prices has frequently been the dominant force in down business activity. I suggest, therefore, that the mercantile ~u atl(i Other commercial groups represented by the United States Chamber of Commerce have a direct and vital concern in the wide swings in the far- ^ergt fortunes. Stabilized farm prices and farm income will go far toward aMlizi g general business. n Most of all, we need balance between the major producer groups whose ^oducts are poured into, milled around in, and finally distributed through Gn enormously complex price mechanism. Achieving this balance is a job v fci< all of us, We are confronted now with the prospects of a 15-million b" i "* world carry-over of American cotton - a carry-over equal to the 1952 filiur , ~ Q one-half times the average carry-over from 1925 to e n tw0 bnd And it is estimated that the world carry-over of world cotton will ^ 5 million bales above the 1952 level. In wheat, on the basis of present prospects, we will have a carry- °Vei? this year of around 200 million bushels, compared with a 1925-29 aver- of 152 million bushels. And so it is with other important crops. On ton p of this, our foreign outlets for many farm staples are shrinking, and ^ob&bly will continue to shrink in spite of all we can do. On the business side of the ledger, the Reserve Board's index of ^Ustrial production has fallen from 118 to 79 since last spring --and ?Ven last spring, with the index at 118, we had a serious unemployment AU of us - business men, the farmers, and the Government - are up ''8uinst responsibilities and problems of the first magnitude. We cannot u°lve them by calling each other names, by making faces and pulling hair. -12- Z-98 ^ these problems must be recognized and solved. They can be solved if are willing, individually, to foster cooperation rather than animosity; for the individual selfishness that aads up to mass confusion, we, all of* Us> are willing to substitute a personal concern in the general welfare.

Chester C. Davis (1938, May 2). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19380503_davis

@misc{wtfs_speech_19380503_davis,
  author = {Chester C. Davis},
  title = {Speech},
  year = {1938},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19380503_davis},
  note = {Retrieved via When the Fed Speaks corpus}
}