COUNTRY GENTLEMAN

December, 1944

THE KEY TO PROSPERITY

New research findings show that high farm production and income are the guaranty of full factory employment and national prosperity.

by E. H. Taylor

The American people can have a national income of $140-billion dollars, necessary for full employment, after the war. But it depends on one definite requirement. This is an annual total farm income of around $20-billion.

Whatever our afterwar national income may be, it will inevitably be very close to seven times the total farm income. Whether we enjoy the prosperity that is possible or suffer a needless depression, this ratio will hold true.

All the major interests in our economy are geared to the same controlling factor. The value of manufacturers, labor payrolls and employment, retail sales, transportation income, and volume of construction work are limited by farm income. They follow its course, for better or worse, at an interval of roughly three to six months.

Our national balance sheet in any peacetime period, for all practical purposes, is regulated by the amount of farm production and the price levels at which it sells.

These significant findings are the result of a study made under the sponsorship of the National Association of Commissioners, Secretaries, and Directors of Agriculture of the 48 states. Two years ago this bi-partisan organization set up an educational and research committee to make a basic study of the American economy. One of the purposes was to determine just what conditions would "create the income which would make full employment and the distribution of our factory goods possible." The results are being made fully public for the first time in this article.

It has been known for some time that total farm income and factory payrolls averaged practically the same amount over a long peacetime period. Also, that the volume of factory output was governed by the balance maintained between the prices of finished goods and farm products. Farm income was clearly a barometer of purchasing power. These facts were published by Country Gentleman in 1940.

Several men had been carrying on studies, which convinced them that the relationship of raw materials and farm income to the rest of our economic machine went much farther and deeper. Among them were Carl H. Wilken, of the Raw Materials National Council at Sioux City, IA; Charles B. Ray, engineer and business counselor of Chicago, and Dr. John Lee Coulter, former president of North Dakota Agricultural College and one-time member of the U.S. Tariff Commission. These men were made members of the research staff and did the work that led to these important new findings.

Summed up, they show that raw-material income, most potently that of agriculture, is the prime mover in our national economy. They also demonstrate, for the first time, that there is a natural law -- the law of exchange -- which controls the whole complex system by which we live.

Raw materials income is the start of the cycle of exchange. It is the new wealth annually created by production. All other money, involved in the processes of manufacture and delivery to consumers, is money temporarily borrowed from the store of capital already in existence and is returned to it when the finished goods are sold.

This much was fairly well known before. What the research men found is that there is a rate of turnover to this raw-material income as it passes through the various stages of economic use. This is the key to the whole matter. For the national income is then simply the amount of raw-material income times the rate of turnover. The nation's wage fund, the manufacturing output possible, and the amount of public purchasing power are fixed by this turn of raw-materials dollars.

Going back into the records for nearly a century, the researchmen found this rule constantly at work, setting the bounds of the nation's income. The rule did not vary, but the rate of turn has accelerated, due to the increased efficiency in both raw-material production and manufacturing. In 1850, one-half of our labor force was required in the production of raw materials, and the turnover was only twice.

By 1925-29, our national efficiency had risen so that a much smaller part of our population was required to produce the raw materials and the turn for the five-year period was 2.9. It is now up to a fivefold turn, with only one-fifth of our working population engaged in raw material production. The other four-fifths of our population are now enabled to earn their living by taking the raw materials to the factories, processing them, distributing the finished goods, and performing other services called for by our standard of living.

But the amount of raw-material production and the prices it brings determine the amount of national income that can be distributed among these other groups. The new income this provides is the starter for the whole machinery of exchange. If large, the machine runs at full speed. If small, the machine slows down and we have bad times. For the rate of turnover operates as an economic constant.

Agriculture supplies 65 percent of our raw materials and its income is the most sensitive and powerful part of this combination. Its products are mostly the kind that are quickly used up, either in processing or direct consumption. Iron, copper, coal, and oil can be held, and the income from them enters more slowly into the process of exchange. But farm products quickly become buying power. Also farm income is distributed among a much greater number of individuals and affects the buying power of vastly more communities over the nation.

So the dollar of agricultural income has a large influence and a higher rate of turnover. For the period from 1921 to 1940, the national income averaged 7 dollars for each dollar of total farm income. This general average held during the good times of the 1920s, the Depression, and the unsuccessful efforts to restore prosperity in the 1930s. In each case, the rise or fall of farm income preceded the same course of the rest of the economy.

Thus, farm income appears to be the key factor in our system of making a living. It becomes of tremendous importance to all our afterwar plans for the full use of our machines and tools and the employment of an increased labor force. These plans cannot work unless an adequate farm income is provided. For this research shows that the total fund to be distributed among all working groups and to finance the Government's obligations will approximate only seven times the total farm income.

In fact, as Carl H. Wilken, one of the men engaged in the research remarked, "all other groups should insist on proper farm prices if they wish to have a job at an American price level."

Parity farm prices consequently becomes a national necessity. The United States has never had a depression when farm prices were at parity. Our troubles always came when farm prices fell out of line with others. And, as the charts accompanying this article graphically show, disaster soon overtook the other major elements in our economy.

With a reduced farm income, every industrial and trade group lost its proportionate share of the turnover that might have been had. The loss of national income or purchasing power, through the failure to maintain proper farm prices over the 1930-41 period, is put by this research study at the gigantic figure of $473,000,000,000 -- about the cost of the War.

When All Lost

If anyone doubts the results of reduced farm income and the sequence of its results, two years stand as grim evidence. In 1928 and 1932, the farms of America produced substantially the same volume of all grains and livestock. But the market value or income from these products in 1932 was less than one-half of what it was in 1928. The national income also dropped to less than one-half, maintaining an approximate seven-to-one ratio. Factory payrolls took a similar drop of more than one-half. Automobile production fell from more than 4,000,000 to 1,186,000 cars. Value of construction fell even more sharply, showing the more durable types of goods are the hardest hit by the loss of purchasing power generated by farm income.

Farm income reached its low in 1932 and started to move up again in 1933. But the other elements in our economy followed the natural lag behind it. Salaries and wages, value added by manufacture, construction and transportation all reached their low in 1933 and did not start their recovery until the turnover of increased farm dollars began to take effect. This was true through the whole outlay of consumer expenditures -- for clothing, housing, insurance, auto registration fees, amusements, and education. All had to wait until the turnover of new income reached them.

Another instance is what happened in the two years 1937-38. Farm income rose nearly $1-billion in 1937. National income went up approximately $7-billion and we seemed to be pulling out of difficulty. But, with a larger farm production in 1938, prices weakened and farm income fell almost exactly $7-billion, with the loss spread all along the line. Manufacturing, employment, wages and salaries, construction and transportation all suffered their proportional cut. All started to rise again with the upturn in farm income in 1939.

When Consumers Gain

The Administration explained the 1938 recession by saying that Government spending has been reduced too soon. But Government spending merely represented money borrowed from the store of capital already in existence. The actual reason was the failure to maintain the flow of new income. It had slackened at its source -- on the farms -- and consumer purchasing power had fallen accordingly.

Consumers, this research shows, do not gain from low farm prices, but always lose. At the bottom of the depression, although farm prices were disastrously low, the share of the consumers' total income required for food was the highest in a decade. This was because their total income was proportionately low. In 1938, when farm prices dropped, consumers did not benefit from lower food prices. The share of their income spent for food remained the same because their total income had declined in ratio with farm income. On the other hand, in 1943-45, although farm prices were at or above parity, the share of consumers' total income required for food has been the lowest in history. Their income has been at the highest level in history.

Under normal peacetime conditions, the large balance left after food needs were satisfied would be spread over the whole outlay of employment-making wants -- clothing, automobiles, housing and conveniences, radios, amusements, and many other items.

At the close of the war, we shall require something like the present national income and balance of consumer purchasing power. These will be necessary to permit our factories to operate at full rate and new industries to start up, to provide jobs for an increased working force and to finance the enormous Government debt. There is much debate about how we shall achieve all this.

The revelation of the effects of raw material production and income on the whole national economy therefore has an especial timeliness. It shows the factor that is indispensable to a prosperous afterwar condition. The record it discloses has too relentless a consistency to be merely a matter of coincidence.

Our farm production after the war will have to be higher than in the peacetime past if the growth in population and the food needs of a fully-employed population are to be met. At parity prices, it is estimated, such a production would provide sufficient income to employ our full work force. The two requirements go together.

At parity -- or equal exchange -- price level for farm products, it thus becomes obvious, it is not simply a matter of fairness to the people engaged in agriculture. It is a matter of direct self-interest to those in every other group in America. What they make, sell and earn is equally at stake.

(Note: Thanks to the Raw Materials National Council's influence on national economic policy in the mid-1940s, the United States maintained parity farm commodity prices after World War II and, [just as the organization predicted] the U.S. made the transformation from a war to peacetime economy with nary a sociological ripple.)