Speech

Z-271 CAN WE CONTROL A WAR BOOM IN AGRICULTURE? Address by Chester C» Davis, Member, Board of Governors, Federal Reserve System, Washington, D. C. Before the Fourth Annual Session of the National Farm Institute, Des Moines, Iowa, Friday evening, February 23, 1940. FOR RELEASE IN MORNING NEWSPAPERS OF SATURDAY, FEBRUARY 2i+, 19/+0. Z-271 CAN WE CONTROL A WAR BOOM IN AGRICULTURE? This subject is ideal for the "if and when, but on the other treatment. The unknowns outnumber the known3 in the ^tion. if a man speaks positively, events a year or two from now contradict everything he says; yet if he doesn't speak with convic- the audience may walk out on him. Tonight's speakers, therefore, are caught between the rock hard place. There is nothing to do but to state our opinions if tney are facts, and hope that time will be good to us. Before we can talk about power to control a boom or to offset °r limit its consequences, it is important to form a judgment on the Pfobahi uj-e effects of the war on American agriculture and American indus- My answer to the basic question "Are we going to have a war boom ^^iculture?" is "no". Perhaps hope is the father of my opinion, be- with all my heart I sincerely hope there will be none. I realize that I may be wrong. Some well-known authorities °^nerwise. Former President Hoover, for example, is quoted by the °°iated Press as advising the nation to get set for a boom in agri- production as a result of the war in Europe. "After the last ' Hoover is quoted as saying, "we exported more food in ten ° ctian we have during the last five or six years. The same proe- ms in action now, and the same situation will some day arise." If he was quoted correctly, I think that he is mistaken. But Wh*th he is right or wrong, it is of highest importance that American -2- Z—271 fa^mers go on about their business as nearly as possible as if they had neve3? even heard of the European war. American farmers haven*t yet completed the adjustments made Pessary by the effects of the last war; if they expand their plant- in anticipation that higher prices and enlarged demand will result f0la ^is one, they will be headed for more trouble than this genera- tion i c. 18 going to be able to mop up. For unless th€>y hold their lines ilin aSainst war influences, every dollar of war business they get will uxlem a good deal more than a dollar in the long run. It is conceivable that a war boom for agriculture might be 11 motion if during the next tivo or three years export orders for Wq . HUantitities of wheat and cotton, meat ana lard, were concentrated ^Q i the same spirit of "get the goods and hang the expense" that ^Ured the old war. It is conceivable also that certain branches of Culture will be indirectly stimulated if huge war orders for manu- goods help to maintain pay rolls and purchasing power of factory 8 a high level during the next year or two. I do not believe either is likely to happen in boom proportions ^sult of this war. It would be a tragic mistake for farmers to ex- it and to act accordingly. Those who predict a powerful war export demand for our farm Nw ^s reason from the experiences of the last World War. It happened » therefore it will happen now. 13ut there is a vast difference be- conditions then and now. I think the differences are more signif- Wi, than the similarities. -3- 2-271 On the supply side, world stocks of essential farm raw mate- rials greater than they were at the outbreak of World War No. 1. are much Wheat stocks on July 1, 1914, were estimated at 3,459,000,000 bu3hel ; they were 5,330,000,000 on July 1, 1939, an increase of nearly S 1,70 Million bushels. Total annual international movement of wheat has topped from between BOO and 900 million bushels to around 500 million ^shels, indicating the extent to which wheat importing countries have ^Ved toward self-sufficiency. But on the other hand, world wheat stock ^SUres t tell a fair story. Since July 1, the wheat prospect in no country has been lowered radically by bad weather in the winter V-Wfc bolt. Apparently a short wheat crop is being harvested in Argen- Total world stocks of .American cotton were 3,300,000 bales on A%ist i, 1914. Tiie y were l/ + ,000,000 bales on August 1, 1939* Meanwhile, ^thotic fibers have vastly decreased dependence on farmers for clothing ^ cellulose. In general, the outbreak of the present war found sup- of farm products abundant in the United States. On the demand side, all belligerents start this war with strict Zoning of domestic consumption and, for the most part, with machinery to and control prices. The Allies start with centralized monopoly They all have rigid exchange control, and absolute government Action of imports and exports. At the outset their trade controls are P03?ienced, and organized with far greater efficiency than they had at- at the close of the old war. Z-271 While military developments are unpredictable, it is at least open question whether the present war ever develops into the mass 3trug ie of millions of men on the battle fields such as marked the pre- g vious one. On the west front the fortified lines are so extensive and 31*ong that little room is left for maneuvers in numbers. Whether an- ther front will develop on which millions of men can come to death 83?iP> is a question. I doubt whether any government involved, England Germany or France or Russia, could long survive if this war starts asti g ii t the rate the last war slaughtered its soldiers. n ve3 a These are some of the points of difference between 19M and All wars are similar in some respects. Each side will go to ^ length to win. If food and raw materials from the United States Necessary to carry on 0. nation at war, prices will not stop pur- as long as means of payment exist. But even this prospect is qualified. This time the Allies 11 ^ buy American food and farm raw materials if there is any way to it. They want the dollar exchange which, they have or can buy >/it h 1 gold or investments to pay for airplanes, motor equipment and ^itious of war which they can get here and nowhere else. They will ^ v/heat and meat where they can pay for it with sterling exchange or <*p°n . 8 We are not going to be able to sell oujr crops to blockaded 'ldI1y and her associates. England and France won't buy from us a pound that they can get somewhere else. I can only see one -5- Z—271 Possible development that might send Allied orders our way in large v°lume, and that would be a U-boat blockade so successful as to make slliPments from the Southern Hemisphere too risky and costly to under- take. It isn't necessary to speculate about the effect of Allied ^Port policy on American agriculture; we've already had enough example ur it to realize that the war vail seriously hurt the foreign market many of our crops. England stopped outright all purchases of Amer- tobacco, partly because her stocks were large and she wanted to c°tt3erve dollar exchange, and partly because her government wants to all the trade it can to Turkey. If our government hadn't stepped in ^ in effect bought what England normally takes, the effect on the ^bacco fanners would, have been disastrous. The same thing happened California raisins. Great Britain and France admit Canadian and ^ -American apples. England by one move took over the Australian, Zealand and Indian wool crops at a set price for what she requires according to reports, expects to sell the remainder to the United Stat* at a not inconsiderable profit. This could be extended indefinitely, not in criticism of but as a matter-of-fact recital of how a nation behaves in a totalitarian war. If there is anything in the picture to jus- y the expectation that wo are facing an export demand for farm ^Ucts in volume sufficient to start a boom, I confess I cannot see % The Allied powers are now buying and will continue to buy more -6- Z—271 e^viXy f their own Empire than they did before. The productive rom Power of the Dominions is vastly greater than it was 25 years ago. Balkan states and Turkey will get all the business the Allies can th*°w tlioir way if for no other reason than to prevent their agricul- surpluses from getting to Germany. Nov; let's take a look fit the means of payment available to belligerents who are able to buy our goods and haul them away. Our expanded agricultural exjjorts during and after the last *** V7ere financed by the credit we extended to the buyers. The con- tin u°-tion of our shipments abroad during the 'twenties also was made ^°ssibio by the credit wo gave. In recent years, the excess in dollar VQ],. ue of our exports over our imports has been settled by our purchase Of Sold from abroad- Since 1934, about ten billion dollars worth of v flowed into this country. Most of this represented capital safety or opportunity for investment here. Part of it, - about ''200,000,000 - came in to pay for our exports in excess of our im- The Allies have quite a fund available for expenditure in country and elsewhere for materials necessary to their conduct of Counting dollar balances, and short-term liquid investments in ^is country, and including 15,755,000,000 of central gold reserves, •^ds available to England and France probably amounted to about ,5°0,000,000 at the outbreak of war on September 1. Not all of this will be spent in the United States. Probably "^"fctle of it as possible will be spent for American farm products. -7- Z—271 Will this expenditure in the United States during 1940, 1941 ^ 1942 create a general war boom here, in which agriculture will share? There seems to be agreement that .if the war lasts a long ^ine and is highly destructive, the demands on the industrial plant of this country by belligerents having access to our markets may be V(3ry great on the basis of resources available here without borrowing, ^e United Kingdom, France, Canada, and other British and French coun- ties can keep on selling us goods and new gold currently produced in amount of about $750,000,000 a year and in addition can use their lar8e holdings of gold ($5,750,000,000), their balances at banks in this country ($1,250,000,000), and their holdings of American securi- ties ($1,400,000,000) to pay for whatever they must have. Should all of these resources be expended in a period of a year or two under con- ditions demanding promptness of delivery, the effect on volume of in- dustrial output and on prices of industrial products in this country Would undoubtedly be important. But many observers do not expect in the near future war de- Velopments of a type that would force Great Britain and her allies to ^e any such large purchases here. They point out that these countries restricting civilian consumption, that they have stores of military SuPplies of many typos, and that the war may continue to be of a block- type. In that case war demands during 1940 at least will be only ^ extension of the rearmament program that has been going on for Z-271 Several years already. These observers, then, hold the view that there be an increase in shipments abroad but that it will not become a controlling factor in the domestic business situation. They attribute the rise last fall in part to inventory buying. They are convinced ^t export volume in the near future will not be sufficient to stim- a business boom, particularly as industrial output is now de- fining and, as in most industries, there is considerable unused Opacity available. There you have the two views. Any estimate and forecast seems reasonable now may be altered quickly by events no man can ariticipate. Most of the men I have talked with do not expect an in- ^s trial boom to result from war orders placed with our factories. They expect exports of industrial products, while the war anci the resources last, will continue well above pre-1940 levels. They 6*Pect the displacement of our agricultural exports by industrial ex- **te to continue at an accelerated trend. They recognize that events si*ice l t September indicate clearly how developments abroad may af- as £ domestic markets and business volume even though actually export ^ers contribute only a small part of the total of national activity. I - • In short, they expect the war business to be a support to ^iness activity and employment while it lasts, but they do not expect it + t0 create another 1918 or 1919. On the basis of the whole analysis it looks to me as though ^ orders will stimulate certain lines of factory production directly -g- 2-271 decisively; that the stimulation to agriculture will be more in- ject arid sympathetic than direct; and that nothing like the effects ^e old war had on farming in this country is in the cards. It isn't necessary to tell this audience what the last war ^ to American agriculture. We planted 27 million additional acres our ten major crops, principally in wheat with 21,500,000 new acres, method of financing the war here and elsewhere was highly infla- tionary. In the one fiscal year 1918-1919 national expenditures ex- uded national receipts by 13 billions of dollars in the United States, 8 Millions in England and 6 billions in France. Prices went to levels ^at could not be sustained. Farm land prices sky-rocketed to the great disadvantage of the farmers. Everybody and his brother speculated in ahd. Here in Iowa, according to Department of Agriculture figures, land prices rose from an average of $96 per acre in 1910 to $227 an acre in 1920. They had dropped back to $124 in 1950. Farm mortgage ^t rose accordingly and did not drop. I've used up most of my time telling why I think we are not to have that kind of a war boom in agriculture this time, and yet ^ question is, can we control one if it starts? We certainly can if we have the courage and the good sense ^ °ught to have. The trouble is that when a boom gets under way no- likes to do the things that are necessary to keep it from getting hand. Before listing some of the unpleasant medicines for boom let me state two general courses of action which I am assuming ^ United States will follow: -10- Z—271 1. We will not commit the incredible folly of engaging in this war either on the Atlantic or the Pacific scenes of action. 2. We will not finance their war for them by grants of credit. When the time comes we ought to be willing to lend or even give for peace, but not for war. If the United States will hold the line against war credit, the expenditures in this country that will be paid for out of the liquid Assets of the belligerents will probably not be sufficient to cause any runaway expansion. War orders that are placed here will have some effect on our ec°nomy. if they provide enough stimulus to reduce factory unemployment Substantially, then Federal relief expenditures and deficit financing sWld be correspondingly reduced. If the patient's temperature begins to rise with symptoms i>6sembling those of the business fever that accompanied the old war, Sti£f and courageous taxation would be an effective antidote and would the same time offer the opportunity to balance the budget and re- the Federal debt. In the course of the war, much more of the world's monetary will probably come into the possession of the United States. If lVe follow present policies, that gold will add dollar for dollar to our reserves and to our money supply, i.e., bank deposits and currency in 1 circulation. If we wish to prevent its infusion into the money SuPply, it is only necessary to borrow the money that pays for the -li- z -m gold — sterilize the gold purchases is the short term for it. Since that involves adding f35 to the public debt for every ounce of gold that Is bought, the practice lacks political sex appeal. Without getting too far afield in technical discussion, it sh°u.ld be mentioned that the banking system already has over five bil- lions of dollars in excess reserves, and if the United States buys Mother five billions of monetary gold during the course of this war, an3 other factors remain about the same, we will find ourselves with exc<?-ss reserves of close to ten billions of dollars. These reserves are high-powered. That is, if they are fully used by the banking system as a whole, a multiple expansion of credit many times the volume of the e*cess reserves would result. A dangerous credit expansion from that quarter could be headed off if Congress would grant the Federal Reserve Authorities power to fix bank reserve requirements at whatever point necessary for monetary safety. None of these boom antidotes would be popular when the time C?lRle to apply them. When business booms and tax revenues are rising, there i always a clamor for reducing tax rates, not raising them — G ^hess the 'twenties. Banks and investors want higher interest rates, they like the present swollen condition of reserves, too, ana the ^Ught of increased reserve requirements is very distasteful to them. These considerations have strayed away from the strictly agri- Cuitural problem assigned to me. If war orders in volume strike the Arnei<ican farmer — which I consider unlikely — the danger to be guarded -12- Z—271 against is that farmers will again expand and rearrange their plant on ^e war-time basis. This, I think, would be a terribly stupid thing for Us to do, but it has been done before and might happen again. Fortunately the machinery exists now that did not exist in the war which the farmers can use if they will to keep their course stm ht in spite of the war winds. They now have a functioning machine g which extends not only into each county but into each agricultural town- SlliP by means of which economic information can be brought home to every farmcr. They do not have to depend on emotionalism or speculative for their outlook on agricultural prospects. I believe the farmers of the United States should resist every Urge to alter their course to accommodate a doubtful European war demand, 1 believe the machinery of the Agricultural Adjustment Administration sk°uld be improved and strengthened and used to hold the line where it ^ Certainly there is no present need to plant or breed for another p0und of grain or fiber or meat because of any war orders in sight. Th _ ler>e will be plenty of time for expansion later if it appears necessary step up production to prevent prices from reaching levels that are ^air ^0 the American consumers. I doubt if the present law and mechanism could put the brakes Oh w^r-time expansion if the unexpected happened and a flood of war hit us. The power of an adjustment program to induce cooperation ^ taking it economically worth while to cooperate grows less as prices Se and the temptation to expand acreage pulls harder at the individual £ ii ^nier. This presents a problem that should have the immediate study _15_ Z-271 of the agricultural leaders inside and outside of government. I have puzzled quite a bit over how to close my talk here to- night. I have the queer feeling that the things we've been speaking *bout are not really the things we are thinking about at all in our innermost layers of consciousness. We are all of us in reality caught in the grip of a great amazement et a world gone utterly mad. We ask °urselves what is in store for the world, and for us in it, and we Cahnot answer. But there are one or two things on which we can fix minds. First and foremost, the counsel of sanity teaches us that v'e cannot help the world or ourselves by getting into this war, but ^at v/e may be able to help the world greatly and ourselves with it in c°hstructing a fair and enduring peace when the collapse of one side or the sheer exhaustion of both forces a truce. In the meantime plenty of sized problems here at home are challenging us. Let me close by ^tioning one to which we must find thu answer in spite of the fact that it hasn't been answered yet. It would be a healthy demonstration the United States could show the world that here is one mature nfiti that doesn't have to go to war to lick its unemployment problem, 0n we feel we've got to fight, let's get together and fight that one.

Chester C. Davis (1940, February 22). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19400223_davis

@misc{wtfs_speech_19400223_davis,
  author = {Chester C. Davis},
  title = {Speech},
  year = {1940},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19400223_davis},
  note = {Retrieved via When the Fed Speaks corpus}
}