Lessons about government from wheat supports
December 30, 2008
by Morton Sosland
Ever since the Bush administration led in promoting legislation that is resulting in the partial nationalization of major banks, the temptation has been great to note how grain-based foods faced a remarkably similar intrusion by government beginning in the 1930s. When attention is called to the four-day banking holiday and later steps taken by President Franklin D. Roosevelt right after assuming office as a model for what is now occurring to stabilize credit markets and to prevent the economic downturn from worsening, anyone familiar with what happened in food and agriculture must wonder if the experience the industry had 70 years ago doesn’t merit examination. Like the modern-day bankers who are openly wondering if their children have a future in the business because of the likelihood of a heavy-handed bureaucracy asserting an unfamiliar role, more than a few people in grain-based foods seriously worried about their futures in light of programs enacted to help farmers avoid the worst of the Great Depression.
Current actions involve large-scale financial assistance for banks in need of capital. This has been achieved through a "new economic model," involving unprecedented government purchases of preferred stock. Described as a fundamental change from recent years when less governmental participation was the norm, the new programs not only use taxpayer funds to provide capital, but promise greatly increased regulation. Indeed, it is the absence of regulatory supervision that is mainly blamed for the economic crisis, along with unrestrained issuance of mortgages and collapse of the housing market.
Of course, providing billions to a select group of banks may appear different from the price supports for grains that came with the Roosevelt administration in the 1930s. Yet, a similarity does exist, and it is this resemblance that deserves attention. Under the Agricultural Adjustment Act, farmers were offered loans against their crops at levels well above the then depressed market price. Prices for many of these crops had fallen to record lows and it was difficult to find any market, much like the situation recently facing financial derivatives whose collapse wiped out much bank capital. These crop loans were non-recourse, meaning that the borrower could deliver collateral to the Commodity Credit Corp. and would owe nothing additional if the market price was below the loan.
Not only did the government place itself in position to make unlimited loans that were likely to produce losses, it became the owner of defaulted collateral. Suddenly, the C.C.C. loomed as main owner of grain inventories, which meant its decisions on when and how to release impacted markets. As the C.C.C. inventories rose to hundreds of millions of bushels, ways had to be found to curtail what was obviously excess production. Here the response was acreage allotments, a complex way of restricting the number of acres a farmer could harvest to be eligible for loans, and then marketing quotas limiting the quantities of wheat and other grains that could be sold in a given year. It was a bureaucratic nightmare, with each complexity building on something meant to make price supports less a burden for government, but rarely considering the impact on the market.
From these initial moves to seek to stabilize the price of wheat and other grains, much like what is now being attempted for banks, emerged efforts to establish global price agreements and steps to use export subsidies and food relief to move America’s burdensome surpluses into foreign markets. Perhaps the ultimate intrusion in this long list of support programs was the domestic wheat certificate plan, which was a hated tax imposed on each bushel of wheat milled domestically into flour. Ended in one of the periods when wheat prices were climbing, the tax on bread consumers imposed by this program is a good symbol of the inherent negatives of government participation in markets, whether to support wheat or to boost the capital of bankers making bad decisions.