Today's farm crisis: an echo of the 1920s
JOURNALISTS, entertainers, and political spokesmen often compare the present crisis in America's farm belt with conditions farmers and rural bankers experienced in the depressed 1930s. But it is to the 1920s that the present financial hardship of rural Americans should be likened. Then, as now, most Americans enjoyed considerable prosperity, while farmers and rural bankers faced appalling debt and unprecedented numbers of farm foreclosures. To compare the '20s with the '80s offers insight into the causes, and implications, of the present crisis in the farm belt.
In the present, as in the 1920s, farmers suffer particularly from their inability to repay mortgage debt. Consequently, uncommonly high rates of farm foreclosures and rural bank failures are now occurring, as they did in the '20s. But for neither period do politicians and news analysts assign these foreclosures and bank failures to farm debt itself. Instead, most insist that the farmer's inability to repay legitimate mortgage loans is not his fault.
It is ironic that the experience of the past 50 years has not diminished the widespread conviction that financial hardship -- resulting in falling farm real estate values, farm bankruptcies, farm foreclosures, and bank failures -- is caused by circumstances beyond farmers' control. In the 1920s, depressed farm income was widely blamed for rural debt problems. Supporters pointed out that since 1910, when official price statistics were first collected, the prices farmers received for their production had steadily declined in relation to their costs.
It was argued that farmers had to sell their products at marginal-cost prices in competitive markets, over which they had no control. They purchased their materials, however, at prices set by large companies in monopolistic markets. This view led to the belief that farmers would earn fair incomes if they had the power to influence prices by controlling the quantity of the products they sold. That belief, conceived during the farm crisis of the 1920s, led in turn to price-support proposals in which the f ederal government would help farmers to control agricultural ``surpluses'' through acreage limitation. Such control has been the cornerstone of federal farm legislation since the Agricultural Adjustment Act of 1933.
Clearly federal solutions to the financial distress that occurred in the 1920s have not prevented rural financial distress from recurring in the 1980s. The inability of these measures to prevent the type of rural hardship that is occurring today -- the same type of hardship that prompted their enactment more than 50 years ago -- suggests that they are treating the wrong problem. Indeed, today's recurrence of rural problems suggests that the architects of New Deal agricultural policy were wrong to blame
depressed farm income for those financial difficulties. Net farm income rose sharply during the '20s and, unlike the falling incomes in the '30s, could not in itself have contributed to the post-1920 rural financial crisis; similarly, depressed farm net income is not an underlying cause of today's rural financial distress.
In the present, as in the 1920s, the popular view is wrong. The underlying cause of most rural financial distress in both the 1920s and the 1980s lies within farmers' control. Farmers create their own economic anguish by borrowing excessively against farm real estate values in times of severe inflation. Immediately preceding each of these decades was a 20-year era of prolonged inflation that culminated in a final year or so of sharply escalating prices, followed by a pronounced deflation. Farm real esta te values and mortgage debt followed the path of inflation from the early 1900s to 1920 and then again from the early 1960s to about 1980. Observers sometimes used the word ``speculation'' to characterize highly leveraged purchases of farm real estate during the peak inflations of 1919-20 and 1979-80. When the inflation bubbles burst in both 1920 and 1981, declining farm real estate values left those farm mortgage borrowers, and their bankers, in a precarious position, regardless of how much net income the farmers earned from their basic agricultural pursuits.
In the 1920s, rural bankers sought a rise in agricultural commodity prices that could restore farmland values to pre-1920 levels. This was an understandable position, since they held a great many loans backed by sharply depreciated farm real estate. Bankers believed, not unreasonably, that Congress would support legislation to aid the nation's farmers before it would back measures to aid failing banks. Thus rural bankers pressed hard for federal agricultural commodity price supports.
All efforts to enact price-support legislation in the 1920s failed, perhaps because the major legislative proposals all advocated export dumping, a means of supporting domestic prices which did not find favor in the Coolidge and Hoover administrations. The first administration of Franklin Roosevelt, however, quickly passed into law a method for propping up domestic agricultural prices by limiting the acreage farmers could plant.
In the 1980s we see that price-support legislation does not prevent farm foreclosures and bank failures such as rural Americans faced in the '20s, and which beset today's farmers. Is there a lesson to learn from this experience? Perhaps one lesson is that long-term mortgage debt and the operation of a farm are not compatible. Theoretically the two might be compatible if farmers' loan repayments were always predicated on expected operating cash flows, and never on expected increases in land values. But
that condition would hold only if farmers never succumbed to the temptation to speculate in real estate, hardly a reasonable expectation.
As long as there are American farmers who view their farmland as an asset that they should own, and not rent, there will be farmers who will combine gambling with farming. These farmers will never lack funds as long as bankers are willing to base loans on property values rather than cash flows. But when these farmers and their bankers periodically indulge the temptation to beat an inflationary farm real estate market, as they did just after World War I and again in the 1970s, the rest of the public and their elected representatives should not attribute the inevitable aftermath of farm foreclosures and bank failures to depressed farm incomes. Instead, they should point to the true cause -- gambling.
H. Thomas Johnson, visiting professor at the University of Washington, is the author of ``Agricultural Depression in the 1920s: Economic Fact or Statistical Artifact?''