Economic History Association Institutional Choice and the Development of U.S. Agricultural Policies in the 1920s Author(s): Elizabeth Hoffman and Gary D. Libecap Source: The Journal of Economic History, Vol. 51, No. 2 (Jun., 1991), pp. 397-411 Published by: Cambridge University Press on behalf of the Economic History Association Stable URL: http://www.jstor.org/stable/2122583 Accessed: 14/05/2010 17:00 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=cup. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Economic History Association and Cambridge University Press are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Economic History. http://www.jstor.org Institutional Choice and the Development of U.S. Agricultural Policies in the 1920s ELIZABETH HOFFMAN AND GARY D. LIBECAP We examine U.S. agriculturalpolicy as an institutionalchoice. Price controls in WorldWar I had demonstratedthe government'sinfluencein markets, and with fallingcrop prices in the 1920s,farmersappealedto the federalgovernment.The federal governmentwas large enough by then to intervene in various ways. It could have assisted private cooperatives by providing antitrust exemptions, marketinformation,and enforcementof cooperativerules or interveneddirectly with mandatoryoutputreductionsand targetedprices. The policies adoptedwere influenced by crop-specific characteristicsand broader market conditions affecting the success of private cooperatives. F ollowing a period of generalprosperityfrom 1900throughthe end of World War I, prices for most agriculturalcommodities fell dramatically in both nominal and real terms in 1921. Many farmers who had mortgaged their farms were unable to meet their mortgage payments with currentreceipts, and a wave of bankruptciesand farmforeclosures ensued.' The experience with the Lever Food Control Act of 1917 and the operationof the U.S. Food AdministrationduringWorldWar I had demonstratedthe influencethat governmentcould have on prices. That lesson was not forgotten, and farmersturned increasinglyto legislative action for relief. The natureof the proposed policy and the government response, however, remained to be decided. The eventual choice, shaped by economic and political factors, provided importantlessons for the subsequentadoptionof farmpolicies in the 1930s,many of which remainin effect today. The legislative agenda can be divided into two types of actions, each supported by different farm groups. First, there was a call for the sanctioningand promotionof cooperative marketingassociations. This activity was consistent with the dismantling of wartime programs because it relied upon private cooperative organizationsto address the The Journal of Economic History, Vol. 51, No. 2 (June 1991). ?) The Economic History Association. All rights reserved. ISSN 0022-0507. The authors are Professors of Economics, University of Arizona, Tucson, AZ 85721. We would like to thank Brian Binger, Price Fishback, Shawn Kantor, Paul Rhode, Barbara Sands, and participants at the 1990 NBER/DAE Summer Institute and the University of Arizona Economic History Workshop for helpful comments. Valuable research assistance was provided by Bradley Cloud, Douglas Denney, Chrissy Levering, and Michael Thompson. Funding was provided by NSF Grant SES-8920965. 1 See Lee J. Alston, "Farm Foreclosure Moratoria: A Lesson from the Past," American Economic Review, 74 (June 1984), pp. 445-57; and James H. Shideler, Farm Crisis, 1919-1923 (Berkeley, 1957). 397 398 Hoffman and Libecap WHEAT COTTON 156 r) i 4 r 1.2 1.231 ~~~~~~~~~~~~~~~~~~22 . 3.2 3.13 0 uJ O.~~~~~~~~~~~~~~~~~~~~~~~~~~31 0.2 0.4~~~~~~~~~~~~~~~~~~~~~~~~~~. 033 3-2 3.31 31 YEAR YEAR MILK ORANGES 239 22 2.3 3 ~~~~~~~~~~~~~~~~~~~~~~~2.3 24~~~~~~~~~~~~~~~~~~~~~~~~~~. 2~~~~~~~~~~~~~~~~2 2.2~~~~~~~~~~~~~~~~~~~~~~~~. 9~~~~~~~~~~~~~~~~~~~~~~~~~~. ~~~~~~~~~~~~~~~~~~~~~~~~2 2.2 i 0. 13 Uj 1.6 uLJ 1.3 - 1.4 C- 1.6 1.2 .. 1.4 1.2 1 0.6~~~~~~~~~~~~~~~~~~~~~~~~~. 3.3~~~~~~~~~~~~~~~~~~~~~~~~~~. 0.43. 0.2 3'2 of 3 1343.1313 135-1313 13331314 1-Wq 131-14 '33114 YEAR F mm-11 Iwo-1314 llu-132 12-134 YEAR FIGURE 1 REAL PRICES OF SELECTED AGRICULTURAL PRODUCTS, FIVE-YEAR AVERAGE Notes and Sources: Prices were deflated by the wholesale price index (BLS 1926) from U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, DC, 1975), p. 200. Wheat and cotton prices are from U.S. Department of Agriculture, Statistical Reporting Service, Agricultural Statistics (Washington, DC, 1952), pp. 1-2, 75-76. Orange prices are from Robert S. Manthy, Natural Resource Commodities-A Century of Statistics (Baltimore, 1978), p. 47. Milk prices are from U.S. Dept. of Commerce, Historical Statistics, p. 522. problemof fallingagriculturalprices. The emphasison cooperatives led to the passage of the Capper-VolsteadAct in 1922, the Cooperative MarketingAct of 1926,and the AgriculturalMarketingAct of 1929.The alternative was direct intervention by the federal government to limit supplies on the domestic marketin order to raise prices. Althoughthe 1920swere a time of agriculturaldistress, the severity of the problem varied across commodities. Figure 1 illustrates these differences with five-year averages of deflatedprices for selected crops U.S. Agricultural Policies in the 1920s 399 from 1900through 1939. The price of wheat, which rose through 1919, fell sharplyafter WorldWarI; there was a slight recovery in 1925-1929, but wheat prices did not regaintheir prewarlevel through 1939. Cotton prices fell in 1920-1924relative to 1915-1919,but they remainedabove prewar levels throughout the 1920s. Milk and orange prices actually rose from 1920 through 1929, with orange prices nearly twice their prewarlevels.2 Thus agriculturaldistress affected some farmers,but not others. In particular,grainfarmers, concentratedin the Midwest, were hardesthit; cotton farmersexperienceda moderaterecession after 1920; and orange and milk producersappear to have been little affected. ECONOMIC THEORY AND COLLECTIVE ACTION IN AGRICULTURE In response to agriculturaldistress, farmers acted collectively to achieve both voluntaryand governmentalsolutions. Collective action to restrict output and raise prices suffers from the "free-riderproblem." Each farmerbenefitsfrom the others' output restrictionsbut maximizes profits by cheating on the joint agreement. Without some means of enforcing an agreement to restrict output, farmers will cheat and the price will drift back toward the competitive equilibrium. Further, without an ability to block new entry, collective action to raise prices is unlikely to be successful. This is the generalstory with attemptsto form cartels.3 While most cartels without governmentenforcement are unsuccessful, some firmor productcharacteristicsraise the likelihood of successful private negotiation of cartel rules and enforcement. First, if few parties are involved and if they are relatively homogeneous in output, size, and cost, it is easier to reach an agreementand to monitorpossible cheating. Second, the existence of established producer organizations will provide a frameworkfor negotiatingrules and monitoringcompliance. Third, public informationon firms' output and shipments lowers enforcement costs. Fourth, ease of entry affects cartel success. Entry has both short-run and long-run dimensions. In the short run, new productionby existing domestic and foreign firms (internationaltrade) can increase supplies and reduce the ability of the cartel to raise the price. The size of this effect depends upon the elasticity of the short-run industrysupply curve. A relatedform of short-runentry is the release of accumulated stocks or inventories. Storage is determined by product 2 Prices of other grainsfollowed those for wheat. Tobacco prices, on the other hand, remained above their prewarlevels throughoutthe 1920s. 3 See Steven N. WigginsandGaryD. Libecap,"FirmHeterogeneitiesand CartelizationEfforts in Domestic Crude Oil," Journal of Law, Economics, and Organization, 3 (Spring 1987), pp. 1-25; and Brian R. Binger, Elizabeth Hoffman, and Gary D. Libecap, "ExperimentalMethods to Advance Historical Investigation:An Examinationof Cartel Complianceby Large and Small Firms," in Joel Mokyr, ed., The Vital One: Essays in Honor of Jonathan R.T. Hughes (Greenwich, CT, 1991). 400 Hoffman and Libecap TABLE 1 FACTORS IN COOPERATIVE SUCCESS Product Number and Heterogeneity of Farmers Homogeneity of Product Wheat Cotton Tobacco Oranges Milk - + + + + + Existing Farm Cooperatives Information on Output and Shipment - - _ - + + + + + + + + + + Ease of Entry Needed Output Reduction perishability and technology. For nonperishable commodities stocks can be held for long periods, providinga continuingthreatto the market, ready for release if prices were to rise. On the other hand, for perishable commodities inventories cannot accumulate in a similar manner in expectation of cartel price increases. Hence, perishabilityof the product may improve the chances for successful cartelization.4Long-run entry involves the establishment of new firms (domestic or foreign), which brings more permanentsources of additionalsupply. Fifth, the size of the cutback needed to raise prices to their target level affects cartel success. The greater the per-firmreduction requiredand hence the smaller its allowed quota relative to its preferredor minimumcost productionlevel, the greater the incentive to cheat. These factors suggest that the characteristics of farmers and their productswill be importantin determiningwhetherthe voluntaryrestriction of output through private cooperatives will be successful. The factors affecting cartel success by agriculturalcommodity are categorized in Table 1. A plus or minus sign is placed in each cell based on whether conditions favor or discourage the feasibility of private cooperatives. In all commodities, the numberof farmersinvolved in bargainingwas large and varied according to size, value of production, and cost, potentiallyraisingthe bargainingcosts in private cooperatives.5On the other hand, all of the products were very homogeneous, facilitating cooperative grading and pooling of output. The distinguishingfactors among the commodities were the existence of established farm cooperatives, the availabilityof public informationon output and shipmentby 4 Perishabilityand storage might also have an alternativeeffect to disciplinecartel members. See EdwardJ. Green and Robert H. Porter, "NoncooperativeCollusionunder ImperfectPrice Information,"Econometrica,52 (Jan. 1984),pp. 87-100. 5 There were 1,208,368and 1,986,726wheat and cotton farmers, respectively, in the United States and 19,098citrusfarmersin Californiain 1929.State level datarevealconsiderablevariation amongwheat and cotton farmersby size and value of production.Countylevel datafor California fruit farms indicate, however, more homogeneity in terms of size. See U.S. Departmentof Commerce, Bureau of the Census, Fifteenth Census of the United States (Washington, DC, 1930), "Agriculture,"vol. 4, pp. 108, 111, 641, 732, 736, 853; and "Agriculture,"vol. 3, p. 414. U.S. Agricultural Policies in the 1920s 401 farm, ease of entry, and the size of the reduction needed to raise or maintain prices. These factors suggest that cooperative efforts in the 1920s were much more feasible in milk and oranges than in wheat, cotton, or tobacco. Milk and orange cooperatives developed early and were well established by 1920. Further, as the price data in Figure 1 reveal, they were not faced with a crisis of the magnitudeconfrontingwheat producers.In order to maintainprices, milk and orange cooperatives had to focus on controlling the amount of milk or oranges placed upon the market, denying entry to nonmembers,and negotiatingdistributionand marketing agreements. Members did not have to agree on severe output reductions. Milk cooperatives began in the 1860sin New York state, and by 1900 there were about 1,600 in the United States. They appearto have been relatively successful in bargainingwith milk companies to raise prices received by members and to deny market access to nonmembers. For example, in 1889 the Five States Milk Producers' Union pooled the distributionof dairy products to the New York marketfrom producers in New York, New Jersey, Connecticut, Massachusetts, and Pennsylvania.6 Later, the Chicago Milk Producers Association and the New York Dairymen's League were formed. Between 1915 and 1917 these two cooperatives successfully engaged in milk strikes for higherprices. The National Milk ProducersFederationcoordinatedmarket strategies among the local cooperatives and prevented dealers from breaking strikes in one city by purchasingmilk from farmerselsewhere.7 The first orange cooperative in Californiawas formed in 1885 and covered one-third of the Californiacitrus crop. In 1905 the California Fruit GrowersExchange (CFGE)was formed, and by 1910it controlled 60 percent of the state's crop. The CFGE was a federation of district exchanges, which in turnwere madeup of local associations of growers. The district exchanges elected members to sit on the CFGE Board of Directors. Within this federated structure the number of bargaining parties in each local association was small and the farmers were relatively homogeneous. The local associations did not compete with one anotheras did local graincooperatives. All memberproductionwas pooled, shipped, and marketedunder agreements negotiated centrally by the Board of Directors. The California Fruit Growers Exchange developed the Sunkist label and also provided members with a central source of supplies, such as boxes and fertilizers, through the Fruit Growers Supply. Penalties were assessed for noncompliance, and 6 For discussion, see Joseph G. Knapp, The Rise of American Cooperative Enterprise, 1620-1920(Danville,IL, 1969);andTheodoreSaloutosandJohnD. Hicks, AgriculturalDiscontent in the Middle West, 1900-1939 (Madison, 1951). p. 57. 7 JamesL. Guth, "FarmerMonopolies,Cooperatives,andthe Intentof Congress:Originsof the Capper-VolsteadAct," AgriculturalHistory, 56 (Jan. 1982),pp. 68-69. 402 Hoffman and Libecap farmerscould be expelled and denied access to the shipping,marketing, and purchasingservices providedby the CFGE.8 Similar,althoughless extensive, cooperatives existed in Florida and Texas, the other major citrus regions of the country.9 Cooperativeefforts also were initiatedin grains, cotton, and tobacco. By 1900there were 100cooperativegrainelevators. The early history of grain cooperatives, however, was quite distinct from that of milk or orange cooperatives. Graincooperatives served local groups of farmers but competed among themselves and with railroad-ownedelevators at urbanmarkets. Efforts in the 1880sthroughthe Farmers'Alliance were aimed at broader coordination among grain cooperatives. In 1904 representativesof 17 farmercooperative elevators in Iowa formed the Iowa Grain Dealers' Association. By 1921, 511 elevators belonged. Similarassociations were organizedelsewhere in the Midwest. Despite these state organizations,however, no one grain cooperative was able to control enough of the marketto affect price, and competitionamong cooperatives continued.10Related thoughless severe problemsaffected tobacco and cotton cooperatives. Moreover, it is also clear that grain cooperatives in 1920 faced a very differentproblem than did those of oranges or milk. With real wheat prices down by 24 percent between 1919 and 1920 and with static demand and greater world supplies, American grain farmers would have had to absorb significantoutput cuts to raise prices. Cotton and tobacco cooperatives, such as the Burley Tobacco Growers' Association, on the other hand, did not yet face falling prices and the need to reduce production.11 Another distinguishingfactor among the crops is the availability of public informationon productionand shipmentsfor monitoringcompliance with cooperative rules. Orange producers, in particular, were located far from final markets. Shipments could be monitored for compliance with cartel rules, especially through the pooling contracts negotiated by the CFGE. Although milk producers typically were concentrated close to final markets, their shipments too were observable and coordinated through cooperative sales agreements to milk 8 See Knapp, The Rise of American Cooperative Enterprise, pp. 81-89; Albert J. Meyer, "History of the CaliforniaFruit Growers' Exchange, 1893-1920"(Ph.D. diss., Johns Hopkins University, 1950), pp. 55, 62-63, 81-120; 0. B. Jesness, The Cooperative Marketing of Farm Products (Philadelphia,1923);and U.S. Departmentof Agriculture,Summary:Organizationand Development of a Cooperative Fruit Agency, Bulletin No. 1237 (Washington, DC, 1923). 9 In 1925cooperativescontrolled74 percentof outputin California,32 percentin Florida,and 30 percentin Texas. See U.S. Departmentof Agriculture,Yearbookof Agriculture(Washington, DC, 1932),p. 950. 10 See Murray R. Benedict, Farm Policies of the United States, 1790-1950 (New York, 1953), pp. 95, 104; Leighton Geyer, "FarmerBargaining:Legal, Economic, Conceptual,Theoretical,and EmpiricalConsiderations"(Ph.D. diss., Universityof Minnesota,1985);and Saloutosand Hicks, Agricultural Discontent, pp. 56-86. l See WilliamE. Ellis, "RobertWorthBinghamand the Crisisof CooperativeMarketingin the Twenties," AgriculturalHistory, 56 (Jan. 1982),pp. 99-116. U.S. Agricultural Policies in the 1920s 403 companies. By contrast, in wheat, cotton, and tobacco, with thousands of producers scattered across sections of the country, individualfarm productioninformationwas more costly to assemble and shipments to markets difficultto monitor. An importantfactor that contributedboth to public information on shipments and to the ease of entry was perishability. Both oranges and milk were perishable, so that output could not be easily shipped and stored secretly, as was possible for grains and cotton. Frequent shipments were required for perishable commodities, raisingthe likelihood of observation. In terms of entry, perishabilityalso meantthat stores or inventoriesof oranges and milk could not accumulateto be dumpedonto the marketif cooperative arrangementssucceeded in raising prices. Inventories of wheat, cotton, and tobacco, however, were potentialadditionalsupplies to compete with current output. Entry also was easier for the field crops, such as wheat, cotton, and tobacco, because farmers could switch crops or expand production in response to price expectations with the delay of only a growing season. For oranges, however, new orchards requiredthree to six years to reach maturity, and even milk required two to three years before dairy cattle could reach full milk production.12 Since they could not tolerate frosts, oranges also were restricted by climate and region much more severely than any of the other crops. Finally, ease of entry varied by the extent of international trade. There was little or no foreign trade in milk or oranges, meaning that foreign supplies could not provide substitutes for cooperative cutbacks by U.S. producers. Wheat, cotton, and tobacco, on the other hand, were internationallytraded and hence foreign producers were potential entrants.13 This analysis suggests that voluntary collective action in 1920 to maintainor raise prices was more feasible for products such as oranges and milk and much less so for wheat, tobacco, and cotton. For broadly produced commodities, largerorganizations,forced output reductions, and governmentenforcementwould be required.We might refer to this as forced (or involuntary)collective action. Two differentinstitutionalalternativesfor governmentregulationare suggested by the differences between private voluntary and government-enforcedcollective action. Where producershave alreadyformed relatively successful voluntary cooperatives, the government can provide assistance by not prosecutingfor potential antitrustviolations, by licensing producers, and by forcing all potential producersto abide by the cooperative agreements, thus helping to enforce quotas and to 12 Barbara Ellis, ed., Rodale's Illustrated Encyclopedia of Gardening (Emmaus, PA, 1990), p. 271; and Clarence H. Eckles, Dairy Cattle Milk and Production (New York, 1950), pp. 64, 73, 81, 89. 13 U.S. Departmentof Commerce,Statistical Abstract of the United States (Washington,DC, 1930), pp. 557-750. 404 Hoffman and Libecap prevent entry. Whereproducerscannot successfully restrict output, the government can provide more direct controls throughenforced output restrictions, target prices combined with purchases of surpluses, and tariffprotection to prevent foreign competition. INSTITUTIONAL RESPONSES TO AGRICULTURAL DISTRESS Even before the rapid fall in agriculturalprices in 1920, agricultural cooperatives had received strong political support from Congress. Section 6 of the Clayton Act of 1914 specifically exempted noncapital stock agriculturalcooperativesfrom antitrustprovisions of the Sherman Act. The Capper-VolsteadAct was passed in 1922 to provide even broaderexemptions for agriculturalcooperatives, regardlessof the form of their organization. Between 12,000 and 14,000 active cooperatives were covered by the provisions of the Capper-VolsteadAct. Enforcement of antitrustrestrictions for agriculturalcooperatives was shifted by the law from the Departmentof Justice to the friendlierDepartment of Agriculture. Various aspects of the Capper-Volsteadbill were consideredbetween 1918 and 1922. The law was enacted in January 1922 after intensive lobbyingof various farmand cooperativegroups, includingthe National Grange, National Milk Producers Federation, the American Farm Bureau Federation, the CaliforniaFruit Growers Exchange, and the CaliforniaAssociated Raisin Company.14 Indeed, because cooperatives relied on less direct government intervention in controllingsupplies placed on the market,they blended well with the aims of the Woodrow Wilson, Warren Harding, and Calvin Coolidge administrationsto reduce the role of the government in the economy after World War 1.15 In addition to passing the CapperVolstead Act, Congress enacted the CooperativeMarketingAct of 1926 and the AgriculturalMarketingAct of 1929.The CooperativeMarketing Act created the Division of CooperativeMarketingin the Departmentof Agriculture to assist cooperatives in gathering and sharing data on output, prices, and demand. These data were designed to assist cooperatives in limitingproduction,controllingthe timingat which products were placed on the market, and developing new sources of demand. This law was specifically aimed at promotingthe growth of cooperatives, as many had begun to falter by 1924. The AgriculturalMarketingAct of 1929, enacted duringthe Herbert Hoover administration,represented the final major effort by Congress to address agriculturaldistress through cooperatively determined out'4 See Henry A. Wallace, New Frontiers (New York, 1934), p. 144; Guth, "Farmer Monopolies," pp. 67-82; and Wesley McCune, The Farm Block (Garden City, 1943). 15 See Joan Hoff Wilson, "Hoover's Agricultural Policies, 1921-1928," Agricultural History, 51 (Apr. 1977), pp. 335-61; and Gary H. Koerselman, "Secretary Hoover and National Farm Policy: Problems of Leadership," Agricultural History, 51 (Apr. 1977), pp. 378-95. U.S. Agricultural Policies in the 1920s 405 put and marketingefforts.'6 It was aimed at extending the scope and strengthof producer-ownedand -controlledcooperatives at a time when many were failing. The AgriculturalMarketingAct created the Federal Farm Board and commodity committees to assist cooperatives in the enforcementof productionand marketingrules and to promote coordinated marketingamong cooperatives. Stabilizationcorporations were authorized to assist cooperatives in various commodities, especially cotton, wheat, corn, hogs, and cattle, to act as marketingagencies, and to promoteexports. The FederalFarmBoard, drawingon a fund of $500 million, could make loans to cooperatives. These loans could be used to purchaseand hold productiontemporarilyoff the marketand to develop improved merchandisingand distributionnetworks. Limited price insurance also was provided.17 The reaction of the federalgovernmentto the sharpfall in agricultural prices that had begun in 1920-1921was to assist in the formation and operation of agriculturalcooperatives. The model was the California Fruit Growers Exchange, which in 1921 controlled 73 percent of the fruit shipments from California. The War Finance Corporation, reestablished in 1922, was to provide loans to cooperatives organizedon the CFGE example, based on collateralof stored products held off the market. A California lawyer who worked with the CFGE and other similar cooperatives in California,Aaron Sapiro, traveled around the country to promote the cooperative movement. His aims were to bring together a high percentage of the producers of a particularcrop, to restrictthe amountplaced on the marketat any time to raise prices, and to develop new marketingand distributionmethods to promotedemand. Initially, the reaction to cooperatives was favorable, and they spread across most agriculturalproducts. As Table 2 shows, the bushels of wheat marketed by cooperative pools increased from 11.4 million bushels in 1921-1922to 28 million bushels in 1924-1925.These pools, however, never controlled more than 4.8 percent of the U.S. wheat crop. By 1927-1928 their share had fallen to 1.9 percent. In contrast, throughoutthe 1920s citrus marketingpools controlled 70 percent or more of the Californiacrop and 50 percent or more of the total U.S. crop. Control of 50 to 70 percent of the market is sufficient to affect price; control of less than 5 percent of the marketmay not be.18 Although the cooperative movement had been the federal government's primaryresponse to agriculturaldistress after 1920, by 1923 it was becomingclear that voluntarycooperativescould not reduce output sufficiently to raise prices for grains and other broadly produced 16 Joseph S. Davis, "Some Possibilitiesand Problemsof the FederalFarmBoard,"Journalof Farm Economics, 12 (Jan. 1930),pp. 13-20. 17 David E. Hamilton, From New Day to New Deal: American Agriculture in the Hoover Years, 1928-1933 (Ann Arbor, 1985), p. 87. 18 See Bingeret al., "ExperimentalMethods." 406 Hoffman and Libecap TABLE 2 OUTPUT CONTROLLED BY COOPERATIVE MARKETING POOLS Citrus Pools Percent of Market Wheat Pools 1920-1921 1921-1922 1922-1923 1923-1924 1924-1925 1925-1926 1926-1927 1927-1928 1928-1929 1929-1930 Bushels (000,000) Percent of Market California U.S. 11.4 20.3 24.4 28.0 16.8 17.5 12.3 14.9 17.6 2.2 3.5 4.8 4.4 3.5 3.0 1.9 2.2 3.1 82 75 83 69 74 72 69 73 67 73 63 53 60 51 54 56 54 56 53 57 Source: U.S. Department of Agriculture, Yearbook of Agriculture (Washington, DC, 1932), p. 950. commodities. As shown in Figure 1, real wheat prices never regained prewar levels duringthe 1920s. After a slight rise in mid-decade, they fell once again, ending any temporaryoptimism about the success of grain cooperatives. For agriculturalproducts such as oranges or milk, on the other hand, prices were stable or rose slightly through the decade. For these products voluntary cooperatives with government assistance in funding, information,and antitrustexemptions seemed to be sufficientfor maintainingprices. Farm groups associated with milk and oranges continued to support the cooperative movementand the effortsof the Harding,Coolidge, and Hoover administrationsto work through cooperatives to implement agriculturalpolicies. Table 3 shows the percentage of farms reporting cooperative sales by region in the 1920s. In the Pacific region, where crops such as fruits and vegetables dominated, cooperatives were successful in marketingand controlling the flow of production to the market. This contributed to the observed stability of prices, and the cooperative share of farms increased from 15 percent in 1919 to 23.5 TABLE 3 PERCENTAGE OF FARMS REPORTING COOPERATIVE SALES Region Pacific Mountain West South Central East South Central South Atlantic West North Central East North Central 1919 15.0% 5.2 1.6 1.2 0.8 22.2 13.3 1924 1929 19.3% 10.5 6.7 9.1 8.2 27.3 19.5 23.5% 11.7 3.8 1.9 2.7 26.1 17.7 Source: U.S. Department of Commerce, Bureau of the Census, Fifteenth Census of the United States, "Agriculture," vol. 4 (Washington, DC, 1930), p. 526. U.S. Agricultural Policies in the 1920s 407 percent in 1929. On the other hand, in the north and south central regions, where wheat, cotton, and corn were the primary crops, the percent of farms involved in cooperatives dropped after 1924. In the grain belt, less than 10 percent of farms reportedcooperative sales. With downward pressure on prices, cooperatives in grain, tobacco, and cotton could not control a sufficientamount of the commodity to reverse the trend and raise prices. Enforcementof productionlimits or other marketingcontrols became increasinglydifficult,in part because producers were isolated from one another so that monitoring was difficult. "The man who increases his cotton or corn acreage in a time of great over productionwhen an acreagecampaignis on, is a 'scab'just as much as the man who takes the job of a striker. Farmers, however, do not come in close enough contact with each other to make a manfear loss of standingamonghis neighborsif he is a 'scab.'a'9 "Night riders" were used unsuccessfully in cotton and tobacco cooperatives to enforce agreementsto keep productsoff the marketuntil prices rose.20Cheating was common, and many agricultural cooperatives involving major commodities, especially wheat, began to fail. By 1924 dissatisfaction with private cooperatives and the relatively conservative approach of the Coolidge administrationin addressing fallingfarmprices led farmgroupsin the grainstates to organizeto push for more direct governmentinterventionin the market.The U.S. Wheat Growers Association and the Oklahoma Wheat Growers Association claimed that cooperatives could not raise prices and that only action by the federal government could guarantee a price that would cover productioncosts and provide for a "reasonable profit.''21 At that time there was no sustained effort to have the government force output reductionsby individualfarmersthroughquotas; rather,the goal was to establish greatercontrol over the supply placed in the domestic market. There were two prongs to this intervention. One was a tariff to separate domestic and foreign markets and to raise prices.22 Increasingly in the 1920s,with the adoptionof the EmergencyTariffof 1921,the Fordney-McCumberTariff of 1922, and the Smoot-Hawley Tariff of 1929-1930,tariffsbecame an instrumentfor subsidizinglocal producers. 19 Henry A. Wallace, "Controlling Agricultural Output," Journal of Farm Economics, 5 (Jan. 1923),p. 17. 20 See Gilbert C. Fite, George N. Peek and the Fight for Farm Parity (Norman, 1954), pp. 19, 113. 21 Theodore Saloutos, TheAmericanFarmerand the New Deal (Ames, 1982),pp. 17-21; and Fite, George N. Peek, pp. 46, 66, 90. 22 Jacob Viner, "The Tariffin Relationto Agriculture,"Journal of Farm Economics, 7 (Jan. 1925), pp. 115-23. Other tariffs of the time were the EmergencyTariffof 1921, the FordneyMcCumberTariffof 1922,andthe Smoot-HawleyTariffof 1929.See BennettD. BaackandEdward J. Ray, "The PoliticalEconomyof TariffPolicy:A Case Studyof the UnitedStates," Explorations in Economic History, 20 (Jan. 1983), pp. 73-93. 408 Hoffman and Libecap The second was to reduce supplies availablefor domestic consumption to meet a targeted price. The McNary-Haugenbill was introducedinto the first session of the 68th Congress on January 16, 1924, by Senator Charles McNary of Oregon and Representative Gilbert Haugen of Iowa. Ultimately, four McNary-Haugenbills were considered by Congress from 1924through 1928. The major proponent of those bills was George Peek, who had served on the War IndustriesBoard duringWorldWarI. That board, in conjunction with the Food Administrationand other agencies, had controlled prices during the war, demonstratingto farmers that the official prices of wheat and other commodities could be fixed through major government intervention. Under the McNary-Haugenbills, the domestic and internationalmarketsfor majoragriculturalcommodities were to be separatedby a flexible tariff.In the domestic market, supply would be held to a level that would meet demand at a real price comparable to the commodity's price during the period 1905 to 1914. These prices were to be computed monthly by the Bureau of Labor. Production beyond that needed for domestic markets was to be purchased, at the target price, by an agriculturalexport corporation, composed of the Secretary of Agricultureand four presidentialappointees. The corporationwas to have a fund of $200 million to purchase "excess" supplies and sell them on the world market. The difference between the domestic price and the world price was to be paid for by an equalizationtax on farmers. The McNary-Haugen approach appealed to many farmers for two importantreasons. First, it involved direct federal interventionto raise prices, with taxpayersprovidingfunds to control surpluses. Second, the legislation did not require them to reduce output. The first McNaryHaugen bill covered wheat, flour, corn, wool, cotton, cattle, sheep, and hogs. In 1924,with cotton and tobacco prices relativelyhigh, the Cotton Growers Exchange and the Tobacco Growers CooperativeAssociation opposed the McNary-Haugenbill. Majorcooperativegroups (for example, the National Council of Farmers Cooperatives and the National Milk Producers Federation), grain exporters and domestic millers, and the American Farm Bureau Federationalso lobbied for its defeat. The bill failed twice in the House, on June 3, 1924, and on May 21, 1926. Two other versions passed Congress in February 1927 and May 1928. Both were vetoed by President Coolidge. The growth in supportfor McNary-Haugenreflectedboth the continued deteriorationin prices for some commodities and changes in the coverage of the legislation. For example, between 1924 and 1926 real cotton prices fell by 47 percent, and cotton farmers became more interested in the McNary-Haugen approach. Cattle and butter were dropped from the bill, and rice and tobacco were added. The final version was broadenedto include all commodities. To gain the backing U.S. Agricultural Policies in the 1920s TABLE 409 4 SUPPORT FOR MCNARY-HAUGEN BY COMMODITY (Affirmative Vote's Share of Total) State 6-3-1924 5-21-1926 2-17-1927 5-3-1928 Dairy States Fruit States Grain States Tobacco States Cotton States Total 23% 21 72 29 15 41 27% 17 75 41 35 44 32% 31 77 75 67 55 45% 33 83 81 73 63 Source: U.S. Department of Agriculture, Farm Credit Administration, Statistics of Farmers Cooperatives, Misc. Report No. 108 (Washington, DC, 1947), p. 11; Congressional Record, 68th Congress, 1st sess., p. 10341; 69th Congress, 1st sess., pp. 9862-63; 69th Congress, 2nd sess., p. 4099; 70th Congress, 1st sess., pp. 7771-72. of supportersof cooperatives, the thirdversion called for the creationof a Federal Farm Board to work with cooperatives in disposing of surpluses. The fourth version added a $400 million fund to help cooperatives control the amounts placed on the marketand to expand marketing efforts. Endorsements were obtained from the Grange, Farmers Union, and the American Wheat Growers Association. The Coolidge administration countered with competing legislation that would have established funds to be used to induce cooperatives to hold more productionoff the market and to better stabilize prices. Table 4 summarizessupportin the House of Representativesfor the four versions of the McNary-Haugen bill. The congressional votes reveal a general increase in supportfor majorinterventioninto agricultural marketsby the federal government. Nevertheless, there are clear differencesin votes for the legislationacross regions definedby agricultural commodities. Representatives of dairy and fruit and vegetable states (Maine, Vermont, Massachusetts, Rhode Island, Connecticut, New York, Pennsylvania,Michigan,Wisconsin, Minnesota, Maryland, Idaho, Washington, California,Virginia, New Jersey, Delaware, Florida, Oregon, and West Virginia), where cooperatives were more successful and where agricultural prices generally remained relatively higher, provided the least support for McNary-Haugen. Representatives of grain states (Ohio, Indiana, Illinois, Iowa, Missouri, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma,Montana, Wyoming, Colorado, and Nevada) were the most supportiveof the legislation. Representativesof the tobacco and cotton states (North Carolina, Kentucky, South Carolina,Georgia, Tennessee, Alabama, Mississippi, Arkansas, Louisiana, Texas, New Mexico, and Arizona) supportedthe legislation by 1927, by which time their prices had fallen and they were incorporatedinto the bill. The provisions of McNary-Haugenwere not enacted duringthe 1920s, but supportfor them grew. When agricultural prices dropped again in the 1930s, the approach of McNary-Haugen 410 Hoffman and Libecap became the forerunnerfor the FranklinRoosevelt administration'seven more drastic approachto farm policy. CONCLUDINGREMARKS Agriculturaldistress in the 1920sled to collective action by farmersto create institutionsfor controllingthe outputplaced on domestic markets in order to fix prices. The institutionalresponses favored by farmers varied between voluntary cooperatives assisted by the federal government and direct government intervention to restrict the output marketed. The type of action favored varied among farming groups, depending upon their ability to form successful private cooperatives. The government assisted the cooperative movement by providing antitrust exemptions, information, and funds to purchase output to smooth the amount placed on the market. Cooperatives, even when assisted by the federal government, were unable to reverse the price decline in wheat or prevent prices from falling in cotton and tobacco. Cooperatives in those crops began to fail by 1924 and more direct government intervention was demanded. Farmers who grew those commodities appealedfor the McNary-Haugenbills, but they were not able in the 1920s to have them implementedinto policy. More drastic governmentinterventioninto agriculturalmarketsawaitedthe sharpfall in prices in 1930and the enactmentof the AgriculturalAdjustmentAct of 1933. With the general deterioration in agriculturalprices in the 1930s, all farmersappealedfor greatergovernmentassistance, although the division between those who favored cooperatives and those who wanted more direct controls remained. Agriculturaldistress was not a new experience in the 1920s. In wheat, for example, there were long, cyclical price patterns through the nineteenth and early twentieth centuries. Although previous periods of agriculturaldistress had generated farm protest and contributedto the enactment of the Interstate Commerce Act in 1887, they did not bring the type or magnitude of direct federal intervention into agricultural markets that began in the 1920s. Three factors appearto separatethe 1920sfrom these earlierperiods to help explain why more extensive federalinterventionoccurredat that time and not earlier. First, by the early twentieth century, the integration of the national economy had proceeded to such a degree that the federal government, rather than state and local governments, had become the object of interest group pressures for intervention into markets to redirect income on their behalf. Second, by the 1920s the federal governmentwas both large enough and had sufficientresources to affect agriculturaland other markets. The size of the federal labor force more than doubled between 1901 and 1925, and because of the power of the state, federal employees in regulatoryand administra- U.S. Agricultural Policies in the 1920s 411 tive agencies exerted influence in the economy well beyond their numbers.23Moreover, the income tax, adoptedin 1913,providedmajor new sources of revenue for government activities. Third, the recent experience of WorldWarI had demonstratedthe influencegovernment could have on productionand prices. The Lever Food Control Act of 1917allowed for the fixingof minimumprices for wheat and other crops, showing farmers that the federal governmentcould have an impact on supply and demandand fix officialprices.24George Peek, who served on the War Industries Board, and others involved in federal regulation during the war were active in lobbying for renewed government interventionin the 1920s and 1930s. The 1930sbroughtan expansionof federalinvolvementin agriculture. As prices fell, producers of major commodities successfully achieved forced reductions in output and the implementationof parity prices. Producers of products like milk and oranges also obtained more direct federal enforcement of productionquotas and shipments among cooperative members through marketingorders. The groundworkfor the modern farm program, which began in the 1920s, was extended to become a seemingly permanentfeature of federal regulatorypolicy. 23 24 U.S. Departmentof Commerce,HistoricalStatistics, p. 1102. Tom G. Hall, "Wilsonand the Food Crisis:AgriculturalPriceControlDuringWorldWarI," Agricultural History, 47 (Jan. 1973), pp. 25-46.