CALIFORNIA AGRICULTURAL EXTENSION SERVICE CIRCULAR 126 October, 1942 Farm Finance : Dangers and Opportunities in Wartime MURRAY R. BENEDICT CONTRIBUTION FROM THE GIANNINI FOUNDATION OF AGRICULTURAL ECONOMICS Cooperative Extension work in Agriculture and Home Economics, College of Agriculture, University of California, and United States Department of Agriculture cooperating. Distributed in furtherance of the Acts of Congress of May 8, and June 30, 1914. B. H. Crocheron, Director, California Agricultural Extension Service. THE COLLEGE OF AGRICULTURE UNIVERSITY OF CALIFORNIA BERKELEY, CALIFORNIA A 1916 Prediction: '1 do not know of any class in America who are likely to be more powerfully affected in their business relations by the economic situation of the United States at the close of the European War than the farmers. ''The prices of agricultural products are soaring sky- ward. A period of rising prices almost invariably cre- ates a speculative spirit. This speculative spirit grows by what it feeds on, and sometimes goes beyond the bounds of reason. In that case disaster is certain to come to somebody. The lucky ones who get out from under in time will make money; the others will become bankrupt. * * * ''The best and soundest advice which I could give American farmers, therefore, is to be cautious. If you know exactly how long the war will last you can safely speculate. If you do not, you had better go slow. At all events, whatever you do, don't be in debt when the war closes, for if you are heavily in debt at that time I can predict your bankruptcy with about as much feeling of certainty as I can predict that the sun will continue to shine or the moon to wax and wane." (Source: Thomas Nixon Carver. Professor of Political Economy, Harvard University. In: the University of California Journal of Agri- culture. December, 1916.) FARM FINANCE: DANGERS AND OPPORTUNITIES IN WARTIME MUEEAY E. BENEDICT^ EXPERIENCE AFTER WORLD WAR I Twenty years ago (1922) the farm people of America entered a trying period of readjustment. Prices had fallen almost 50 per cent in two years. Their farms were burdened with far heavier mortgage debts than ever in their history, and there were large amounts of personal and col- lateral loans that could not be met from the reduced incomes then pre- vailing. Because of an unwieldy debt and cost situation, the security of thousands of farm families was gravely threatened. Surprisingly enough, these conditions followed close on the heels of a time when farm incomes had been more than double those of any year before 1916. The problems confronting agriculture at that time were the result of inflationary price increases, followed by deflation ; of unwise speculation in land; and of a lost opportunity in the way of reducing outstanding debts. We are now in the midst of another war. Incomes are again reach- ing high levels. It will be helpful, therefore, to review briefly the main features of farm finance during that period and to appraise the wisdom of farmers' financial policies then. The similarities of current price and income conditions to those of World War I are sufficient to warrant an effort to draw such lessons as we can from this earlier experience. For the four years, 1917 through 1920, cash income from farm pro- duction exceeded by some 27.0 billion dollars what it would have been had annual values been the same as those of 1914.^ Expenditures for farm production rose also but not so much. Data are not available for all farm costs. Estimates have been made, however, for the more iPxipor- tant items, namely, hired labor, feed, fertilizer, farm implements, ma- chine operation, cotton ginning, taxes, and interest on farm mortgages. For the four years mentioned, the increase in these items amounted to about 8.6 billions over what they would have totaled had the 1914 levels of expenditures continued.^ Thus if we ignore certain minor items of cost, there flowed into the hands of farmers during these four years somewhat more than 18 billion dollars in excess of what would have come to them had prices, quantities, and costs remained at 1914 levels. ^ Professor of Agricultural Economics, Agricultural Economist in the Experiment Station, and Agricultural Economist on the Giannini Foundation. 2 See: United States Department of Agriculture. Agricultural Statistics 1941: .554. 1941. ^ Data from : United States Department of Agriculture. Agricultural Statistics 1937:386. 1937. L 3 J 4 California Agricultural Extension Service [Cir. 126 What became of this 18 billions? Part of it, of course, went in higher expenses for living, such items as clothing and purchased foods. These increases, however, were much smaller for farm families than for city dwellers since, in general, the farms continued to furnish food and shel- ter as in earlier periods. Costs for home-grown foods did not change sig- nificantly, and housing costs did not increase to any such extent as did those of city dwellers. Considerable amounts of the increased income of farmers went, of course, into Liberty Bonds. Unfortunately, much of this investment found its way eventually into speculative ventures of one kind or an- other which yielded little permanent benefit to farm people. Other sub- stantial amounts went into the purchase of farms at seriously inflated values. Most of this amount, as will be shown later, was wiped out in the deflation that followed. The Course of Farm-Mortgage Debt and Land Prices in the United States. — Leaving aside for the present a fuller discussion of the income situation, let us consider what happened to farm debts during these years, for it was this aftermath of heavy indebtedness that caused much of the acute distress in farm areas, and constituted the gravest threat to the security and well-being of farm families. Farm-mortgage debt in the United States in 1914 amounted to ap- proximately 4.7 billion dollars. By 1921 this had more than doubled and stood at over 10.2 billions.* In addition, there had been a marked increase in short-term debt, much of which was destined later to be merged with the mortgage debt shown above. Thus, total mortgage debt did not reach its peak of nearly 10.8 billions until 1923, more than two years after the abrupt decline in farm prices which occurred in 1920. It will be seen that during a four-year period in which the increased value of United States farm production had exceeded cost increases for major items by some 18 billion dollars, farmers were actually in a worse position than when this period started. They did not get out of debt nor even reduce their indebtedness. Instead, the load of mortgage debt bur- dening American farms had been increased by nearly 5 billions (1917 through 1920). While debts had thus been increased markedly, the in- comes out of which they were to be paid had declined sharply. Total cash income for 1919 was estimated at 14.4 billions. By 1921 this had fallen to 8.1 billions. Through most of the twenties, it showed a gradual in- crease, moving up to 11.2 billions in 1929. Costs declined much more slowly than did incomes, and some actually continued to increase. Not only had American farmers burdened themselves with a large ad- * United States Department of Agriculture. Agricultural Statistics 1941:594. 1941. Farm Finance in Wartime 5 ditional private debt ; they also carried a share in the burden of increased public debts, particularly those of states, counties, and school districts. Debts of this kind grew enormously during these years. This is illus- trated in part by the growth of farm taxes, which stood at 393 million dollars in 1919 but did not reach their peak of 567 millions until 1929. They did not again fall below the 1919 level until 1933. (Such tax in- creases were not, of course, due solely to increased public debts. Both the amounts of public service provided and their costs had been in- creased, and did not decline correspondingly when farm incomes fell off.) The full effect of this heavy load of farm debt did not appear until a few years later, as may be seen from the record of farm bankruptcies. Although the number of bankruptcies is not an accurate measure of financial distress among farmers, since bankruptcy is not the usual form of adjustment adopted by farmers,^ changes in numbers of bankruptcies give some indication of the increase in finanical distress. From 1910 to 1914, inclusive, the average annual number of farm bankruptcies was 870. For the next five years (1915 to 1919), the average number was 1,530. By 1924 the number had reached serious proportions : 7,772 cases were reported for that year. The two succeeding years showed similar high levels : 7,872 and 7,769. The number of bankruptcies fell off slow^ly in the succeeding years and has not since reached numbers as high as those of the years just mentioned. In 1926 the number of farms changing hands by involuntary sale, that is, by forced sale, tax delinquency, mortgage foreclosure, and bank- ruptcy, amounted to 21.6 farms per 1,000. This number, except for a slight decline in 1928 and 1929, crept steadily upward until 1933, in which year there were 54.1 such involuntary transfers per 1,000 farms : during that year alone, one farmer out of every twenty throughout the United States suffered the loss of his farm. During the five-j^ear period, 1932 through 1936, nearly one fifth of all farms in the United States changed hands by forced sale of one kind or another.* It was thus that some of the excessive debt assumed in 1919 and 1920 was liquidated. But this tells only part of the story of what became of the 24 billion •■' It is more usual for farmers to surrender the farm or to let it go through fore- closure than to apply for the formal court process of bankruptcy. Thus the financial distress was far more widespread than would be indicated by the record of bank- ruptcies. « This is on the assumption that the same farm did not go through such sale more than once during this period. Data on which these statements are based are taken from : [United States Bureau of Agricultural Economics.] The farm debt problem. IT. S. 73d Cong. House Doc. 9 :27. 1933. Stauber, B. K., and M. M. Eegan. The farm real-estate situation, 1935-36. U. S. Dept. Agr. Cir. 417:26. 1936. Eegan, M. M. The farm real estate situation, 1936-37, 1937-38, and 1938-39. U. S. Dept. Agr. Cir. 548:1-41. 1939. 6 California Agricultural Extension Service [Cir. 126 dollars^ of agricultural assets which disappeared in the past twenty-five years. Not all farms were bought with borrowed money. Some of the additional income went into competitive bidding for lands, often on a speculative basis. In 1914 the value of farm real estate in the United States was estimated at 39.6 billion dollars. By 1917 this stood at 45.5 billions. In the succeeding three years, United States farm lands were TABLE 1 Farm Real Estate: Index Numbers of Estimated Value per. Acre (1912-1914=100) Year United states California Year United States California 1912 1913 1914 97 100 103 103 108 117 129 140 170 157 139 135 130 127 124 119 93 99 108 111 116 130 136 142 167 168 166 165 164 164 163 162 1928 1929 1930 117 116 115 106 89 73 76 79 82 85 85 84 84 S5 91 161 160 160 1915. 1931 158 1916 1932 1933 1934 1935 1936 1937 133 1917 109 1918 1919 1920 110 115 119 1921 124 1922 1938 123 1923 1939 1940 1941 1942 121 1924 1925 1926 1927 121 122 128 Sources of data: Data for United States to 1939, inclusive, from: United States Departmeiit of Agriculture. Agri- cultural Statistics 1941:583. 1941. Data for California to 1939, inclusive, from: The farm real estate situation, 1936-37, 1937-38, and 1938-39. U. S. Dept. Agr. Cir. 548:5. 1939. All data for 1940, 1941, and 1942 from: United States Bureau of Agricultural Economics. Farm real estate values show general rise during the past year. 3 p. April 13, 1942. (Mimeo.) bid up to 66.3 billions, an increase of 20.8 billions. This is, of course, not all represented in land sales : it is the amount by which the valuations placed on the nation's farm lands were increased, whether they had been sold or had remained in the hands of former owners. This increase in the capitalization of farm lands did not in itself increase the earning power of the lands in any way. It was simply a heavier capitalization carried by farmers on essentially the same lands and in this respect represented an additional financial burden for operating farmers to carry. By 1933 this value had shrunk again, not only to 1914 levels but far below them. The 1933 valuation of 30.7 billions was well below even the 34.8 billions esti- mated value of farm lands in 1910. It is apparent, then, that in this quarter century the farmers of the United States had gained little from their temporary period of pros- ^ That is, 18 billion dollars in additional income plus 6 billions of increased in- debtedness. Farm Finance in Wartime 7 perity, had invested heavily in expected future high incomes from lands, and had suffered capital losses similar to those w^hich befell the holders of common stocks in 1929. 100 , ^^^^ \ United *| California \ % I f 1 1 / / / V^ States \ \ y f \ y W^^ - - 1 1 1 m ■V rf Fig. 1. — Farm real estate : index numbers of estimated values per acre (1912-1914 = 100) ; United States and California, 1912-1942. (Source of data: table 1.) The Course of Land Prices and Mortgage Debt in California. — Thus far we have been considering- the debt situation for the United States. It is appropriate to point out here, however, that the course of events dif- fered in California from that of the nation as a whole, though the gen- eral implications are much the same. Between 1914 and 1919, California land values rose earlier and faster than those for the United States but did not quite reach the peak at- tained for the country as a whole in 1920. After 1920, California valua- tions fell off much more slowly than did those for the United States and have remained higher up to the present time, in terms of relation to 1912-1914 values. This comparison is shown in table 1 and in figure 1. 8 California Agricultural Extension Service [Cir. 126 The reasons for this difference are to be found both in the character of the crops grown and in the stage of development through which Cali- fornia agriculture was passing at that time. Through most of the twen- ties, industrial activity in the United States was at a relatively high level and much of the urban population was prosperous. The nation's food habits were changing in the direction of more use of fruits and vegetables and less use of wheat and other starchy foods. Both factors were favor- able to many of the specialty crops grown in California. Furthermore, California's own population was growing at an unprecedented rate.^ Large amounts of capital were flowing into the state from other parts of the United States. It was a period of relative optimism as far as new investments in agriculture were concerned. Between 1919 and 1929 the grape acreage of the state increased by 94 per cent. Lemons and oranges, which had experienced a large acreage increase in the previous decade, showed a substantial further increase of 25 to 30 per cent. Subtropical fruits and nuts gained 82 per cent. Vegetables and temperate-zone fruits likewise were expanded greatly, the former increasing by 91 per cent, the latter by 63 per cent. The optimism which would lead to these large plantings would natur- ally have a stimulating effect upon land prices. Most of these investments were not expected to yield returns until several years later. Hence, in most lines the effects of these heavy increases in production were not yet apparent in the market. Troublesome surpluses were to appear in the thirties, however. As a result of the influences mentioned above, California land values did not, during the twenties, follow closely the downward trend of those of the United States. As late as 1930 they were only 8 points below the peak figure of 168 (1912-1914=100), which was reached in 1921. There was a sharp drop in the early thirties, though the level still remained significantly higher than that for the nation as a whole. Great care is needed in making any assumption that California land prices will continue to show this distinctive behavior. They will no doubt continue to reflect price conditions for the products characteristic of the state rather than those for crops more common in other parts of the country. These may, however, be either lower or higher relatively than the general average for the United States. The period of most rapid intensive development of California farm lands is probably past. The change in food habits will probably continue, possibly at a faster, pos- sibly at a slower rate. The local population is continuing to increase at a rapid rate, and this should lend strength to the local markets for specialty crops. On the other hand, the plantings of the twenties have *• In terms of total numbers. Farm Finance in Wartime 9 now come into much fuller production, export markets for some products have been seriously curtailed, and in some cases, important competitive areas are increasing their production. Taking all factors into account, it seems likely that Land prices in Cali- fornia will follow a somewhat different pattern from those of the United States and one which will vary considerably from area to area within the 2oe »00 United Statas /^ ' ^^•t»^ 90 / "'^^^ / ^ W^l y ^ ^^^^""^ y o "^ I 1 r 6 California ^♦••••' '■•>«, , ,^"0^--' .^' y 1 / ^111111 1 .1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Fig. 2. — Relative changes in farm-mortgage debt by years, California and the United States, 1910-1940. (Source of data: table 2.) state according to the price conditions for the various crops. It seems unlikely, however, that they will have the support of such a prolonged period of optimism and rapid development as that which marked the period from 1910 to 1930. From 1910, the earliest date for which estimates are available, the California farm-mortgage debt grew, for the most part in modest incre- ments, until 1920. In that year it increased by 60 million dollars and in the following year by 85 millions. After a brief and slight recession, the upward trend was resumed in 1924, and did not reach its maximum until 1932. Thus the expansion of mortgage debt in California continued for 10 California Agricultural Extension Service [Cir. 126 nearly ten years after the peak had been reached for the United States as a whole. These changes and relations are shown in table 2 and figure 2. As of January 1, 1935, it is estimated that 67,444 California farms were mortgaged.^ This number included 55,234 owner-operated farms and 12,210 operated by tenants and hired managers. Individual mort- gages were much larger on the manager and tenant farms : here they averaged $16,388, while on owner-operated farms the average size of TABLE 2 Estimated Farm-Mortgage Debt by Years, California and the United States, 1910-1940 Year California United states Year California United States 1910 1911 million dollars 107 122 152 191 220 239 256 300 338 345 404 489 489 441 462 493 million dollars 3,208 3,522 3,930 4,348 4,707 4,991 5,256 5,826 6,537 7,137 8,449 10,221 10,702 10.786 10,665 9,913 1926 1927 1928 million dollars 520 551 546 557 615 637 638 623 580 533 525 533 539 543 542 million dollars 9,713 9,658 1912 9,757 1913. 1929 9 757 1914 1930 1931 9,631 1915 9,458 1916 1932 9,214 1917 1918 1933 1934 8,638 7,887 1919 . 1935 7,786 1920 1921 1936 1937 7,639 7.390 1922 1938 7,214 1923 1939 7,071 1924 1940 6,910 1925 Source of data: Horton, Donald C, Harald C. Larsen, and Norman J. Wall. Farm-mortgage credit facilities in the United States. U. S. Dept. Agr. Misc. Pub. 478:219, 220, 221. 1942. mortgage was $5,378. Approximately half (49.8 per cent) of all owner- operated farms in the state were mortgaged and nearly 31 per cent of the manager- and tenant-operated farms. In addition to the mortgage debt shown above, the farmers of Cali- fornia owe substantial but fluctuating amounts on personal and col- lateral loans. As of January 1, 1941, these amounted to 95.2 million dollars. Of this, 79.3 millions was in the form of commercial bank loans. The production-credit associations held 9.7 millions, Farm Security 5.7 millions, and the Emergency Crop and Feed Loans Office 0.5 million."^" ^ Data from : United States Bureau of the Census and United States Bureau of Agricultural Economics. Farm mortgage indebtedness in the United States (detailed summary). 12 p. Cooperative Survey. August 26, 1937. (Lithoprinted.) (Some of the data secured in the 1940 Census have been published but as yet these have not been fully analyzed.) ^° United States Bureau of Agricultural Economics. Agricultural loans in Califor- nia, p. 12, 17. Washington, D. C. April, 1942. (Mimeo.) Farm Finance in Wartime 11 TABLE 3 Cash Income from Farm Marketings Year United States Cash income from sales of crops, live- stock, and livestock products Government payments California Cash income from sales of crops, live- stock, and livestock products Government payments 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 million dollars 5,785 5,581 5,966 6,251 6,015 6,391 7,755 10,648 13,464 14,436 12,553 8,107 8,518 9,524 10,150 10,927 10,529 10,699 11,024 11,221 8,883 6,283 4,682 5,278 6,273 6,969 8,212 8,788 7,649 7,852 8,331* 11,185* million dollars 131 447 573 287 367 482 807 766^ million dollars 508 560 577 606 633 690 568 447 360 407 466 515 613 692 563 592 641 849 million dollars * Preliminary. Sources of data: United States figures, 1910-1937, from: United States Department of Agriculture. Agricultural Statistics 1941:554. 1941. Other figures from: United States Bureau of Agricultural Economics. Farm value, gross income, and cash income from farm production. [Title varies.] Annual issues, August, 1930-February 26, 1942. (Mimeo.) FARM INCOMES, CALIFORNIA AND THE UNITED STATES Brief reference has been made to the fluctuations in United States farm income during and after World War I. For the convenience of the reader, these data are presented more fully in table 3 and figure 3. While estimates are available back to 1910 for the United States as a whole, 12 California Agricultural Extension Service [Cir. 126 those for California go back only to 1924. Hence it is not possible to show the course of California farm income during and immediately after the last war. United States farm incomes for 1942 will undoubtedly be much higher than those of recent years. Prices of farm products for the first quarter of 1942 averaged more than a third higher than for the first quarter of 1941, and the volume of marketings for a number of the livestock prod- 14 12 10 8 6 4 2 c c - A 1 / A^ / - / 1/ ^ \ A - / - / \/ ^/^"^"^^ V - 1 1 1 1 1 1 1 1 1 t 1 1 1 1 1 1 1 1 1 1 f 1 1 1 1 1 1 1 Fig. 3. — United States cash income from farm marketings, 1910-1941. (Source of data: table 3, col. 1.) nets was larger than a year ago. The latest estimate of 1941 cash farm income is 11.8 billion dollars as compared to 9.1 billions in 1940. Current and prospective economic conditions suggest that 1942 income will be close to 14 billions. The largest income on record was that of 14.6 billions in 1919. Income per farm and per capita will probably set a new high record this year.'' The income of California farms may well pass the billion-dollar mark. The index of prices received by farmers stood at 93 in 1939 (1909- 1914=100). In April, 1942, it stood at 150. This is an increase of more than 60 per cent in less than three years and far exceeds the rate of increase in prices of all commodities or in the costs of things farmers " George, Frank. Income: increase. Agricultural Situation 26(3) :6. 1942. Farm Finance in Wartime 13 buy. The index for wholesale prices of all commodities rose in the same period from 113 to 144 (approximately 27 per cent) . Prices for products used by farmers for living rose from 120 to 150 (to March, 1942) ; those for commodities used in production from 122 to 149 (to March, 1942). Farm wage rates increased from 123 to 167 in the same period. They have, of course, risen more than this in some areas and for some tasks. During World War I, prices of farm products rose between 1914 and 1917, a comparable period, from an index of 101 to 175. Thus it will be seen that the rise was more rapid in that period. Yet the rate of increase over the past two years is certainly enough to cause grave concern. In considering inflationary effects, the most important problem is the rate of increase rather than the justice or injustice of the level from which the advance started, or that of the level it has reached. It is evident that a price increase for a major group of products so rapid as to gain more than 50 per cent in less than two and a half years is bound to be seriously disturbing to the whole economy if not checked. A continued rise in food costs and other living expenses is certain to set in motion far-reaching changes which will eventually react to the disadvantage of farm people. Powerful demands for wage increases will result; salaries of public employees will have to be adjusted; costs of supplies will increase. These are the very items that do not fall so rap- idly as do the prices of farm products when the spree is over. Thus farm- ers may find themselves saddled not only with larger debts (if the higher prices lead to land speculation) but with higher taxes, increased wage rates, and many other items which will make for slow and painful re- adjustment a few years hence. Farm taxes, for example, rose during and following World War I from an index of 118 in 1914 to 281, but this peak figure did not come until 1929, almost ten years after the drop in farm prices. In California the increase was still more marked (from 124 in 1914 to 332 in 1928) . Wages in the United States stood at 105 in 1914, but by 1920 they had reached 240. In 1932, twelve years after the fall in farm prices, they still stood at 189." It seems evident that regardless of views about parity and other goals, farmers are likely to find their longer-term interests damaged by price increases that are so large and so rapid as to set up an inflationary spirit. There can be little doubt that in World War II, as in World War I, farm prices led off the procession. This is not, of course, to say that other advances would not have occurred had farm prices remained stable. It does emphasize, however, the stake farmers have in policies which will keep all prices relatively stable. ^Warren, G. F., and F. A. Pearson. Prices, p. 206. John Wiley and Sons, Inc., New York, N. Y. 1933. 14 California Agricultural Extension Service [Cir. 126 FARM COSTS IN RELATION TO INCOME The farmer's financial situation is reflected only in part by the record of income changes. Costs also have an important bearing on amounts available for debt repayment or capital increase. They react more slovv^ly tlian do prices of things the farmer sells. Prices of farm products are more flexible than those for most commodities and services. With sharply increased demand or curtailed supply, they tend to rise quickly, and under opposite circumstances to decline with equal or greater abrupt- ness. As previously indicated, both in "World War I and World War II, agricultural prices have been near the head of the procession in the up- swing, and the changes have been both rapid and large. In the earlier period, farm prices jumped from 98 in 1915 to 175 in 1917. Two years later they had reached 213. In this war they have moved up from 98 in 1940 to 150 in April, 1942. Tliey had reached 143 as early as December, 1941. The all-commodities index moved up nearly as much between 1915 and 1917 (from 102 to 172). This, however, included a number of com- modities which had spectacular rises because of wartime conditions but did not bulk large in the farmer's purchases. Chemicals, for example, had already risen to 138 by 1915 and stood at 203 in 1917. Textiles like- wise had risen from 96 to 175. On the other hand, household furnishings and "miscellaneous items" had moved up only from 103 to 136 and from 79 to 111, respectively."" On the down side we have seen that farm prices are likely to show much quicker adjustments than those of many other types of commodi- ties. They dropped from 213 in 1919 to 125 in 1921, and again in the early thirties they fell from 126 in 1930 to 65 in 1932. Even with the far- flung and costly efforts at price support applied during the late thirties, farm prices fell from 121 in 1937 to 93 in 1939. In contrast, commodities used in farm production declined only from 192 in 1919 to 141 in 1921. Commodities used in family living did not reach their peak until 1920, when they stood at 222. Their downward adjustment from 1919 to 1921 was from 210 to 161." Farm taxes continued their upward trend until 1929, when they stood at 281 as compared to 200 in 1919 and 259 in 1921. Even if the index of the prices of things bought by farmers moved up at the same rate as that of products sold by farmers, the higher incomes now being received by farmers would still leave larger balances avail- able for debt retirement, for savings, or for consumption. Only part of "United States Department of Agriculture. Agricultural Statistics 1941:559. 1941. "United States Department of Agriculture. Agricultural Statistics 1941:555. 1941. Farm Finance in Wartime 15 the cost of farm operation is in the form of cash outlays. If most of the labor is hired, this is a cash cost and offsets a considerable part of the in- crease in farm income. If the labor is largely or wholly supplied by the farm family, a rising level of wages is reflected in more money for the farm family to spend. Supplies, taxes, and costs for groceries and cloth- ing are cash costs, but the several other items such as food and shelter furnished by the farm, interest on owned investment, and depreciation, unless equipment is actually replaced, are not cash items and may be costing little if any more than in periods of lower prices. Interest charges also, unless debt is increased, will remain relatively constant. Thus despite increases in many of the cost items, net farm income is likely to increase during a period of rapidly rising prices, unless practically everything, including labor, is bought for cash. In these circumstances an atmosphere of false prosperity is created. Eventually, however, costs catch up and after farm incomes decline tend to remain higher than before the rise and fall in farm incomes. Hence, if obligations have been taken on on the basis of this temporary enlarge- ment of spendable income, hardship is bound to result. LONG-TERM TRENDS IN LAND VALUES Until around 1900, land prices were established in relation to an undeveloped frontier on which lands were still available for homestead- ing. Farmers and prospective farmers had the alternative of buying lands in the older farming areas or of undertaking the hardships, un- certainties, and delay of developing a farm from the raw lands still available in the West. Such lands were by no means "free" as compared to those in the East and Middle West, but the form of payment was dif- ferent. In these new areas, roads, schools, buildings, towns, and other items of capital had still to be provided. Kainfall was more uncertain and markets were distant. The savings which created the private and public structures on these lands had to be provided through the priva- tions of the settlers, except for such amounts as were borrowed. Records of land prices during this time are meager and scattered. We may con- clude, however, that an important if not a major factor in their deter- mination was the cost in terms of hardship, time, and money, of develop- ing available homestead lands in the West. The relation of land value to farm incomes and to the business situation was apparently less direct than in later years. By 1900, or before, good lands available for homesteading had become very scarce and the tide of pioneer settlement, which had lasted for nearly three centuries, had about run its course. From the late nineties until 1914, there was a significant and fairly 16 California Agricultural Extension Service [Cir. 126 rapid rise in farm prices. This, coupled with the growing scarcity of land for homesteading, brought about a continuing increase in the prices of farm lands such that farmers came to look upon these increases as nor- mal and a significant noncash item in their incomes. They were generally willing to bid up the price of land beyond the level of a direct capitaliza- tion of its current cash earning power. That is, if land was earning $6 per acre per year net and the customary rate of interest was 6 per cent, it would yield a customary rate of interest on $100. Actually such land was likely to sell at $150 per acre or even more, which put it on a basis of 4 per cent or less in current earnings. The farmer, however, expected it to rise 1 or 2 per cent a year in value so that he would get his normal return on investment, even though it remained a noncash item retriev- able only at some later period in life when the farm was sold, or in the form of higher rents expected to be attainable after a few years of in- creasing land values. These increasing valuations on farm lands also enlarged the borrow- ing power of farmers and contributed to a rising volume of mortgage debt. Mortgages could be allowed to run indefinitely or even could be added to without much pressure for repayment on the part of lenders, since the security back of the mortgage was increasing in value. After 1913 this tendency was accelerated. By 1917, when we entered the war, the index number for farm-land prices in the United States had advanced from 100 in 1913 to 108 in 1916, an increase of 2% per cent a year. It was in the next four years, however, that the large and, as it later proved, disastrous increases occurred. Land prices went to 117 in 1917, to 129 in 1918, to 140 in 1919, and to 170 in 1920.'" The greatest increase of all occurred after the close of the war. It resulted from the speculative impulses already set in motion and from the continuation through 1919 of high prices for farm products. Many farmers had come to believe that prices were on a permanently higher level. The fact that prices did not decline significantly immediately after the Armistice tended to clinch this belief. After 1920 began the long and painful readjustment which resulted from a reversal of this upward trend that had lasted for more than twenty years. By 1933 the index of United States farm-land values had dropped to 73, 27 points below what it had been in 1913. During these thirteen years (1921-1933) the prices of farm lands showed an average decline of more than 7.4 per cent a year. The large decreases, which make up a good part of this average, occurred in 1921 and 1922 and in 1932 and 1933. It is evident that no farm owner who was not in a strong finan- ^ United States Department of Agriculture. Agricultural Statistics 1941:583, 1941. Farm Finance in Wartime 17 cial position could stand declines of such magnitude without finding" himself in difficulty. The extremely low prices of 1933 were in part a result of the great number of distress sales occurring at that time and did not represent farmers' real estimates of future earning power of the lands. Great num- bers of mortgages were falling due. Many creditor agencies, under neces- sity of making their assets more liquid, were unable or unwilling to re- new mortgages. New sources of funds were in the main unavailable until 1933, when the United States Government reorganized the federal-farm- credit agencies and broadened their capacity to make loans. Since these agencies afforded almost the only significant source of new loans at that time, transfers to them reached unprecedented volumes. In 1933 the fed- eral land banks had outstanding loans of 1.1 billion dollars. By 1937 these had reached 2.1 billions, and land bank commissioner loans which had been initiated in 1934 stood at 836 millions.'^ During 1934 the vol- ume of land bank and land bank commissioner loans made reached the staggering figure of 107 millions a month." This mammoth program of refinancing, together with the washing up of a good part of the most desperate cases, brought a check to the downward trend of land prices. With gradually improving conditions, prices began to improve and by 1941 had reached an index of 86, which was still 14 points below the 1913 level. A release by the United States Department of Agriculture under date of April 13, 1942, states that farm-real-estate prices have risen about 7 per cent in the 12 months March 1, 1941, to March 1, 1942. This is much the most spectacular rise of recent years and comes within 3 points of the increase of 1916 to 1917. It has led to some fears that the unfortunate episode of 1917 to 1920 is about to be repeated. LIKELIHOOD OF A SLUMP AFTER THE PRESENT WAR Predicting for the future in a world so torn by struggles and forces of unprecedented magnitude is indeed a hazardous undertaking. Many new types of economic and monetary control have come into use since 1920. Most of them are too recent for safe appraisal of their effectiveness and long-term results. In the United States we have tried easy-credit and low-interest policies, gold buying, dollar devaluation, deficit spending, crop control, and farm subsidies; in fact, nearly the whole gamut of plans for raising the prices of farm products and industrial goods. Some ^^ United States Department of Agriculture. Agricultural Statistics 1941:594. 1941. " United States Bureau of Agricultural Economics. Federal land bank and land bank commissioner loan activity decreases. Agricultural Finance Eeview 1(2) :60. 1938. (Lithoprinted.) 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