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Farm Policy Over Two Centuries

December 1, 1996


Edward Lotterman Agricultural Economist

Farm Policy Over Two Centuries

The American experience with farm policies from the depths of the Great Depression, when farm families made up a quarter of the population, to the end of the century, when many fewer farmers represent less than 2 percent of all families, is a fascinating social and economic history. But while the Agricultural Adjustment Act of 1933 (AAA) was the first legislation enacted specifically to raise farm incomes, federal policies have affected agriculture in one way or another since before the birth of the nation.

Land policies came first

The earliest agricultural policies in North America dealt with land settlement. Before independence, the British crown had tried to stop European settlement west of the Alleghenies, in part to meet obligations made to Native American peoples in various treaties, but also to maintain the asset values of large landowners such as the Penns, Calverts and De la Wares in coastal colonies. That tension, between owners of existing farms, whose value would appreciate more rapidly if the supply of land were restricted, and a potential farm population swelled by birth and immigration, was to persist until the closing of the frontier in the last decade of the 19th century.

A vision came before policy

The ideal structure of American agriculture was an important issue to some of the framers of the republic. Thomas Jefferson, himself a Virginia plantation owner, argued forcefully that agriculture based on independent small farmers was socially and morally superior to other models, especially the quasi-feudal systems of large landowners and tenants that still prevailed in much of Europe. While Jefferson's ideal of the yeoman farmer was not specified in early legislation, this theme has been pervasive throughout the political life of American agriculture, and contemporary calls to save the family farm hark back to Jefferson.

Moreover, an explicit bias in favor of the independent small landholder was part of the political agenda of succeeding statesmen such as Andrew Jackson and Henry Clay. For the 150 years of the American republic, there was no "farm bill," no explicit federal agricultural policy. But there were policies, particularly those of settlement and transportation infrastructure, that strongly affected farmer households and the structure of agriculture.

Ag policy was often land policy

The legislation of greatest relevance to agriculture was that dealing with disposition of government lands in the West. Such legislation included the Northwest Ordinances of 1785 and 1787, intended to facilitate the settlement of the "Old Northwest" of Ohio, Indiana and Illinois, through the Homestead Act of 1862, to the Reclamation Act of 1902, which collectively transferred to private ownership most of the territory between the Appalachians and the Great Basin.

Cheaper transportation favored frontier farmers

Government support for construction of transportation infrastructure, such as canals, railroads and roads, also had a profound influence on agriculture. Even before the Prussian economist and farm manager J.H. von Thunen formulated his theories relating location, transportation costs and land prices, American farmers knew that proximity to a road, canal or railroad would increase the farm-gate price of their produce and the value of their land. Moving agricultural goods to market more cheaply was a primary objective for many of the canals built, chiefly with state government financing, in the first half of the 1800s.

Later, land grants to railroads as an incentive to build trackage also put millions of acres into the market. Liberal land transfer policies favored rapid settlement and acted as a social safety valve by allowing lower-income people to become landowners, but, as in colonial days, they also tended to keep commodity and land prices lower than they might have been with a more restrictive approach.

Tariffs and taxes also mattered

But beyond land disposal and transportation, the government policies that affected farmers most were the same ones that affected all sectors of society: general fiscal and trade policies. The two were combined in "the tariff," as it was known in political discourse well into this century. Tariffs, or taxes on imported goods, together with income from the sale of land, provided the bulk of federal revenues for over a century. In general, farmers on the frontier and Southern plantation owners favored low tariffs on imports—farmers because such tariffs increased the costs of manufactured goods, Southern plantation owners for the same reason, with the added argument that low tariffs on imports from Great Britain, the United States' largest trade partner, would be reciprocated in low British tariffs on imports of U.S. cotton, and hence higher cotton prices for Southern farmers.

While import duties were the largest component of federal taxes, specific excise taxes could rouse agrarian tempers. One early internal challenge to the new republic, the Whiskey Rebellion of 1792, was motivated by farmers angry with a new tax on distilled spirits, an important value-added agricultural product in the days before railroads or refrigeration. The tax was imposed to help repay war bonds, largely owned by established commercial families in coastal cities, during a time of generally falling commodity prices as the Treasury shrank the effective money supply by such debt payment. Postwar economic conditions also had led to Shays' Rebellion in 1786, a protest against land taxes. This phenomenon, rural discontent fueled by fiscal and monetary policies unfavorable to the rural sector, was to be repeated in the next two centuries.

Morrill links land and education

Following initiatives by state governments in Pennsylvania and Wisconsin, in 1862 Congress passed an act authored by Rep. Justin Morrill of Vermont, setting aside public lands to be used by the states to fund colleges to teach "such branches of learning as are related to agriculture and the mechanic arts." While it took many years to come to fruition, the Morrill Act laid the basis for a teaching, research and extension system that would foster rapid technological change in the following century.

This funding of public education and research at the college level complemented provisions in the Homestead Act that required a portion of land in each township to be set aside as a site and funding source for public grade schools.

The constraints of hard money

A return to the gold standard after the Civil War resulted in a similar period of postwar deflation that gave rise to the National Grange and other farm organizations. This period of farm discontent also led to regulation of monopolistic activity at the state level through Railroad and Warehouse commissions and by the Interstate Commerce Commission at the federal level. The Interstate Commerce Act gave the federal government power to regulate interstate freight rates and, some would argue, set up a model of economic intervention that would reach a high point in the AAA and other New Deal agencies.

Golden age of farming turns to lead

The short period from the dawn of the 20th century to, or through, World War I is often described as the golden age of U.S. agriculture. Technology had reduced the drudgery of farming, and the closing of the frontier had slowed the increase in output to less than the growth of the consuming public, so farm prices rose. Indeed, farm prices were so favorable relative to those of other goods that even today, when farm leaders call for measures to restore farm prices to "parity" with nonfarm prices, the reference period they seek to match is that from 1910 to 1914. Farm incomes relative to those of nonfarm households were also higher than in any preceding and most succeeding periods.

World War I, like most major wars, cut agricultural output in the combatant nations and increased world farm commodity prices. The United States and Argentina, as major exporters, were best positioned to benefit, and farm prices and incomes remained high through 1918. Indeed, when the United States entered the war in 1917, loose wartime fiscal and monetary policies helped raise nominal farm prices even higher.

But the armistice, postwar recessions in Germany and France, and a return to "sound finance" in the United States resulted in drastic drops in farm prices and incomes. By 1921 farmers, like their urban counterparts, were in a sharp recession. Unlike the urban sectors, farming did not recover as the decade went on, and for farmers, the Depression effectively began in 1921.

McNary-Haugen, the first farm bill

As the '20s began to roar everywhere but in the countryside, Sen. Charles McNary of Oregon and Rep. Gilbert Haugen of Iowa responded to the plight of their farm constituents. With the assistance of Coolidge's Secretary of Agriculture Henry C. Wallace, uncle of Henry A. Wallace, agriculture secretary and vice president under Franklin Roosevelt, they introduced a bill to raise farm incomes by dumping surplus commodities abroad at lower prices than would prevail within the United States. Farm producers would receive payments equal to their proportional share of domestic and foreign sales.

The McNary-Haugen Bill, in various incarnations, caused intense congressional debate for over four years, and was passed twice. However President Coolidge also vetoed it twice, even though his own secretary and Department of Agriculture had been instrumental in its drafting. His successor, Herbert Hoover, was similarly opposed to such government intervention. Hoover did approve a Farm Marketing Board that would, with the help of federal subsidies, buy farm products during times of "surplus" for later disposal during times of "shortage." This board, established with limited finances, collapsed under the effort of battling a 50 percent decline in farm commodity prices in the last half of 1929. Following its demise, little was done in the way of federal agricultural legislation until Franklin Roosevelt was inaugurated in 1933. But while McNary-Haugen never was implemented, elements of it turned up again and again in succeeding decades. For example, the Export Enhancement Program, which survives in a curtailed form in the 1995 farm bill—in spite of the rhetoric of getting the government out of agriculture—is virtually a direct copy of McNary-Haugen's surplus dumping provisions.