l i37 AGRICULTURAL LIBRARY UNIVERSITY OF CALIFORNIA DAVIS, CALIF. 95616

University of California College of Agriculture Agricultural Experiment Station Berkeley, California ii. I ! J

INFLATION AND AGRICULTURE

by

J. M.lTinley Associate Professor of , ~tk Associate Agricultural in the Experiment Station '1e and on the Giannini Foundation j'. ' -

A Paper Presented at the Annual Meeting of the Western Farm Economics Association,, Reno" Nevada June 23, 24, and 25, 1937

re AND AGRICULTURE

J. M. Tinley College of Agriculture University of California

What is inflation? The Encyclopaedia of tho Social Sc.iences states that the meaning an economist associates with the terms "inflation" or its opposite, "deflation," is apt to vary in accordance with his views regarding the money--price mechanism. It then proceeds to enumerate a dozen or more definitions or variations of definitions by like Keynes, Cassels, and Laughlin. Still other definitions are given by Kemmerer, Hardy, and Mohr. To be in style I shall be presumptious enough to present my own dofinition or rather understanding of the term.

The layman usually applies the terms inflation and deflation to increases or decreases in the general level of prices, regardless of the causes of such changes. Economists, however, usually apply the terms mainly to rapid price changes originating on the money•credit side of tho equation of exchange -­ changes in the volume of circulating media (including velocity) in relation to the volume of trade. Within recent years some economists (especially some New Deal economists) have given the terms a somewhat new meaning. They visualize some sort of a norm or stubiltzod price level. Whenever prices rise above the norm, wo have inflation; when they decline below tho norm, we have deflation. Movements back from below towards normal are called reflation. This form of reasoning implies that there is something economically sound and desirable in .e a stabilized commodity price level. It is always as well to keep theoretical definitions as closely in line with general usage as possible. I will, therefore, apply the term inflation to all tendencies for prices to rise, but at the same time point out that there are several categories or variations of inflation which are associated with the immediate causes of the increase in prices. I will mention and describo brief­ ly what I believe to bo the five most important vo.riations.

(1) Inflation Arising from Business Recovery,

During economic depressions prices of large numbers of commodities (especially raw materials) 3.nd wages of most laborers decline to extremely low levels -- below any kind of a long-time normal. Prices of other commodities and wages of certain types of labor decline to only a minor extent. When recovery sets in, the prices of commodities which experienced the decline and wages begin to rise -- as~ result the index of prices generally will rise. The influence is largely, if not entiroly, on the side of demand and supply of commodities. What expansion of credit does tako place is in responso to in­ creased demands of trade, but does not proc<:}de it. This may bo called a. form of reflation.

(2) Inflation Arising from Increased Costs and Rostriction.

Sinco 1933 prices of agricultural products havo increased consider­ ably. Although devaluati,on of tho dollo.r, relief expenditures, and tho usual - process of rooovory wore partly responsible, tho moro important influonco wo.s 2.

tho reduction of supply of farm products under tho policies of tho A.A.A. and after tho droughts of 1934 and 1936.· From 1935 onwards., lo.bar hc,s boon striving., - with considernblo success, to obtain higher daily wugos o.nd shortor working hours -- another form of restriction. Whore labor ho.::: been successful, in­ dustries ho.vo used higher wdgos as an excuse to rniso prices. Tho result ho.s been o. very mo.rkod increase in wholesale and retail prices during tho past two years -- an increase still in process. The total volume of circulating media ho.s increased, but a.gain nftor and not boforo tho demunds of tro.do for more money ri.nd credit.

While many economists would not apply the term inflation to this phenom­ enon; the rise in prices still gaining momentum is fraught with serious conse­ quences if not checked. The inflexibility of prices of most industrial products and most forms of public--utili ty rates preceding and during the depression v.ra.s a clear evidence of a considerable degree of monopoly control. In its efforts to stimulate recovery the Administration evidently concluded that to attempt to break down the rigidity of industrial prices would be impossible or too protracted a process. Instead efforts were made to extend to agriculture (under the A.A.A.) and to labor (under the N.R.A. and Wagner Lubor Act) the privilege of also exacting a me~suro of monopoly benefit.

Unfortunately the whole process works in a vicious circle. Universal monopoly is an absurdity. Furthermore., prices tend to be forced inn direction opposite to the one they should move in under conditions of advancing technology. ► In a competitive improvements in the arts in agriculture as well as in industry should result in gradually declining costs and hence grudually declining prices. An upward movement in prices, in the face of technological advances, .e tends to concentrate tho benefits of such improvements in relatively fow hands. We have injected into our economy a greater degree of rigidity and inflexibility, which ~~11 undoubtedly give rise to grovving ni.aladjustmonts. From this stand~ point alone the future is ominous.

The rapid increase in farm prices since 1933 Wl:\S largely due to the fact that agriculture got a head start on other branches of industry. Wagos of labor (agricultural as well as industrial) and prices of industrial com.~odities ure now gaining an upward momentun1. On the other hand, supplies of several im­ portant farm products ( e.g. wheo.t, corn, and hor~s) h:we been reduced to such low levels that an increase in the output of such products is in the no.tional interest. This will tend to check a further rise in farm prices. It is thus not unlikely thnt the next yec.r or two may find reo.l buying power of form products little greater tho.n in 1932 o.nd 1933.

(3) Po.per Money Inflation.

A third form of inflation tnk0s plo.ce when the printing press is set to work turning out paper money, the value of which is cut entirely froo of the gold bo.se • Most of us are familio.r with the infln tion in Gorrmmy after tho World War. This type of inflnt:Lon need not be given serious consideration here. There is o.lwo.ys. of course, the possibility that we mo.y indulge in this form of economic "ha.ra-kiri, 11 but it is improbo.ble., at le[\st in th0 neo.r future. If it comes about, it will probo.bly indico.to tho complete bronkdown of our economic - systom and proso.ge sor.10 form of oconoraic c.nd socio.l revolution. (4) Secular Trends of Prices. Another type of inflntion is that ref'er1·od to in economic writings us o.n upwo.rd socula.r trend of pricos -• a gruduo.l upward movomont covoring o. - long period of' time. Since 1730 thoro have boon throo auch movomonts:. o.nd we may be in a fourth now. These movements all culminated in a rapid war-time inflation, rapid post-war deflation, and then a gradual downward secular move­ ment covering twenty years or more followed again by a gradual upward mo~ement, Economists like Warren, Fisher, Cassel, and others claim that these secular movements arise out of the relation between the growth of world stocks of monetary gold and the volume of world tro.de. Other economists, hovv-over, while o.groeing to the importance of tho gold-tro.do ratios, ospecially prior to 1900·, maintain that this explanation alone is insufficient. Thoy maintain thnt normal business psychology is inflationary, thut unless intorruptod, prices over a long poriod of timo will tend upwo.rds. During tho past 150 yours tho threo upward movements were ondod by wo.rs. During vro.rs tho normo.l debtor­ croditor rolo.tions within and botwoen oountrios a.re rodica.lly upsot and pro• duction forced into non•peaoetime cho.nnels. They claim tho.t the post-wo.r downwo.rd trends aro duo to tho f'nct that norrr.o.l economic foroos aro opera.ting to iron out the wo.r mo.lo.djustmonts. As soon ns this process is complotod, prices again start upwn.rd in response to our optimistic inflationary psychology. Such seoulo.r inf'lutiormry or doflo.tiono.ry trends nro important in that they a.ro so gro.dua.l thut people genoro.lly do not know what is happening and because it is difficult to tako uppropria.to corroctivo moasuros. Tho post-war difficulties of' farmers (ospeoia.lly those connectod with fa.rm indobtodnoss) could in la.rge moo.sure bo truced to tho incronso in lund w.luos during tho . e upwo.rd secular movement starting in 1897 • (5) Credit Inflation on a Gold Base. The fifth category of inflation is that which takes place where deposit currency is expanded# although the country remains on the and the expansion is within the usual legal gold reserves, This type of' in­ flation is often advanced by economists such as Hawtrey as an explanation of the business cycles. Since the World War the possibility of this typo of inflation has incroasod and the probable results have become more serious. In pre-War days international trade barriers were low in oompo.rison with thoso at the present timo. Gold moved frooly f:ro~ one country to another and was in active circulation as coin within :mo.ny countries. The tondoncy tovmrd inflation or deflation within individual countries was usually rapidly and offoctivoly checked by tho in- and outflow of gold. International curroncios wore by this moans kopt in fair balance with oaoh other. Sinco tho War, howovor, o. very largo pa.rt of tho world's monetary supplios of' gold huvo boon concentrated in tho Unitod States; gold coin has boen withdro..wn .from circulo.ticn,; nat:i.ono.l, contro.l, and rosorvc hnvo developed now moohanisms for extending credit to other countries without the po.ssngo of' gold; national trade barriers hAvo \, distorted and curtailed tho no.rmo.l flow of world trado. Evon before the depression tho monetary gold supplies of tho Unitod Sto.tos hnd i:ncrc-o.sod to such o.n extent us to perm.it a oonsidoro.blo oxpo.nsion of cir­ culo.ting media, ovon though a siza.blo proportion of tho gold stocks wci.s moro or less sterilized -- not used as a bo.so of tho pyramid of ciroulnting modio.. The devaluation of the dollar in 1933,. e.nd the large inflow of {;old during the past few years had vastly increased the gold base for potential expansicn of - money and credit., It is thus possible tha.t the United States may have con­ siderable inflation en a strictly gold base and within the usual legal gold reserves. 4.

Most people think of inflation in terms of a rise in commodity prices. Yet inflation may be apparent in other forms~ A money-credit inflation may take the form of a rise in prices of land (land speculation) or a rise in the - prices of stocks (stock speculation) accompanied usually by an overexpansion of production goods. We had this form of inflation from 1925 to 1929# during which commodity pr'ices remained relatively stable. The stability of' the general price level obscured the fact that we were embarked on an important inflationary spree. In analyzing the trend of prices it is thus necessary to focus attontion on the trend of land valuos and stock quotations, as well as on the trend of commodity prices• Dangerous as has been tho upswing of prices since 1932 in response to production restriction and higher costs, there is even greater danger that this upswing may merge into and be acceleriited by money-credit inf la tj.<;m. Nor can we be sure that, once started, we can curb and control either forms ·or inflation. It hasn't always been possible in the past; and although we have developed new· banking mechanisms, we can't be sure, until they are tried, that they will be effective in halting inflation or that if applied they might not precipitate a deflati~m• There is little likelihood of the government consoiously courting money-or~dit inflation. Tho danger is that government policies and the trend . of economic events may indirectly stimulate o.n inflation which cannot be stopped. Tho Federal Reserve Boo.rd rocently doubled the required deposit rosorvos and a considerable part of our gold stocks has been impounded and sterilized. Certain members of Congress ho.vo oven advanced tho previously undroo.mod of suggestion that wo place an embargo on furthor importations of gold. In spite ' of theso prooautions, howovor, wo may find it difficult to prevent ;f'uturo .e inflation -- even with the full sanction of highor rcdiscount rates, open transactions, and othor moans. The purpose of this po.per is to show that inflation nw.y be due to both monetary and nomnonetary causes. Both types are dangerous o.nd, while a non­ monetary inflation has been in motion since 1933 1 it might quite readily pave the wo.y for credit inflo.tion. But why is money inflation economically and socially undosirable? A period of inflation is cha.ra.cterized by higher profits, o.nd greater ease in meeting interest and taxes o.nd po.yments on principle. Wages, taxes, and costs generally lug behind prices; business activity is stimulated • .. Proponents of inflation, however, do not realize tho.t the totul volume of production increases relatively less l"r.pidly tho.n prices and tho.t the improve­ ment in national income is, therefore, more o.pparont than ronl. More important still is the fact that an rirtificio.l stimulus cannot go on forover. Inflation tends to genera.to ma.lo.djustmonts within our ; mnludjustments that bocome so burdonsomo that a. roo.ction eventually sots in. During tho deflationary poriod taxos, wn.ges, o.nd othor costs ln.g bohihd ;tho decline in pricos. Widespread loss of oquity and bankruptcy is tho ordor of tho do.y. We arc nll frunilio.r with tho cho.ro.otoristics of de£lo.tiou. Two o.spects of both inflo.tion and doflo.ticm, however, nood stressing bocnuso of thoir peculiar relation to ng~iculturoe During infla.tionarj7 poriods a large po.rt of the increased current and o.ntic'ipo.ted not oo.rnings f'rom agri• culture tond to bo capitalized into highor land values. To tho extent thnt land changes ha.nd.\ roo.1 incomo of persons o.ctually on,gngod in farming is pre­ vented from rising as rapidly as tho inoroo.so in prioos. Thora is some dispute - as to whether prices of farm products •inoroaso as ro.pidly o.s prices of nonfo.rm 5.

products during o. long gro.duo.l period of inflation. Thero mo.y be o. yoo.rly lo.g beoo.usc most fa.rm products are mc.rkotod during only a £ow months 00.ch year. However; in o. dcflo.tionnry period, fa.rm pricos noo.rly nlwo.ys doclino rooro - ro.pidly than nonfarm prioes. Those of us who are.closely associated with o.grioulture are prone to overlook the fact that:during a deflationary period the hardships suffered by labor, dependent upon industry, are likely to be us great o.s those suffered by farmers, if not greater. Wo.ges decline and unemployment is greatly in• creased. Even during booms lnbor is nt o. diso.dvo.ntage because prices rise more rapidly than wages. During booms there is nn increase of employment, but a decline in real wages. During depressions the real wage of those employed in• creases, but fewer people are employed. Labor as a whole thus loses both coming o.nd going. It is necessary tho.t we boar this cleo.rly in mind, for there is danger that we my lose our perspective as to true co.use and effect. During the po.st few yea.rs we hnve to.lked much o.bout the unbalo.nce between agriculturo o.nd · in-­ dustry. Farmers have overlooked the fa.ct thnt during prioe declinos, labor is at least in as difficult a. position ns thoso engo.ged in agriculture. The 1.m­ bo.lanc~ is between farmers a.nd labor on the one side a.nd employers and capital on the other. Farmers o.nd labor a.ro mutually interested in a.voiding inflntion o.nd its sequonoo. deflation. Moro important still, fa.rmors o.nd labor should develop o. new perspoctivo in regard to prices. Rising prices in a cnpito.listic economy, whether ,due to moneto.ry or nonmc:noto.ry co.usos, o.ro do.ngorous. Ro.thor t than emphasis on o. stabilized or rising price lovol, wo should o.im o.t insuring o. graduo.lly doclining price lovol •• o. doclino in lino with docronsod ·unit .e costs of production accompanying incrouso in tochnclogica.l officionoy. This will not o.ffoct tho earnings of capital udvorsoly. ----Quo vo.dis?

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