Wednesday, June 9, 2010

The American Adjustment Act (AAA)

In thew 1930s there was a problem in the agriculture industry. There was too much produced. With supply greater than demand, this resulted in lower prices. And the result of that was that farmers were unable to afford to stay in business, let alone feed their families, and were forced to close shop and move out of town.

This resulted in FDR pushing through Congress his Agricultural Adjustment Act (AAA). On May 12, 1933, was signed by the President, and became law. The Act ultimately restricted agricultural production during the New Deal era by the Federal government paying farmers NOT to farm a certain portion of their farm, and failure to comply meant the government could punish by fine or imprisonment.

It actually created the Agricultural Adjustment Administration to oversee the distribution of the subsidies, and was the first U.S. farm bill.

In 1790 farming represented the method 80% of Americans made their living. In 1930 this rate was down to 20%. Thus, 20% of the population could actually produce more food than the population in 1930 could eat.

Yet, while farmers were closing shop, overproduction still occurred. Yet considering the Great Depression, there were no jobs available for these ex-farmers. Plus, due to the Smoot Hawly Tariff Act, few Europeans were purchasing American products. Traditionally when overproduction occurred products were exported. In the 1930s, this outlet was unavailable.

This created greater unemployment. To solve this "naturally" occurring problem -- to help farmers, FDR pushed through Congress the AAA.

The AAA was basically a socialist program that did the following:
  1. Set up secretary of Agriculture where an expert decided where to set processing, taxes, prices, and tell farmers how much land to not farm.
  2. Farmers were paid not to produce on part of that land.
  3. Farm prices would be pegged to purchasing power of farm prices in 1910 instead of 1930, which meant higher prices. Due to higher prices, farmers made more for products sold. However, this made products more expensive for consumers.
  4. Millers and processors would pay for much of the cost of the program.

The program was unconstitutional because the constitution did not grant the Government right to regulate agriculture, and the 10th amendment notes that anything not mentioned in the Constitution is left to the states or people to decide. Yet FDR did not care. He wanted control of the markets.

Hoover attempted a similar program and called it the Farm Board. It set prices for wheat and cotton and set price floors so competition couldn't cause prices to fall and the farmer would make more money.

This sounded like a noble idea, but it didn't work, especially since prices of wheat and cotton were guaranteed, wheat and cotton farmers increased acreage and overproduced. Farmers of other crops shifted to wheat and corn. There was so much cotton and wheat Hoover had to pay farmers over $500 million just to store the extra food.

The program was ultimately stopped, and the government had to sell all teh overproduced wheat and cotton at a loss.

By all means, the Farm Board should have been a sign of what happens when the government tinkers with supply and demand.

Lacking competitive prices, the farm board resulted in overproduction. Lacking competitive prices, the cost of farmer products were not allowed to fall due to FDRs AAA. Because there was no competition, there was no need to invest in new methods of farming. Innovations that would have made farming more productive, improved quality of farming, and decreased prices never occurred during the Great Depression due to the AAA.

The same thing occurred as a result of FDRs National Recovery Act.

"For example," Burton Folsom notes in New Deal or Raw Deal, "with no competition and no price controls, GM invented ignition starters, adjustable front seats, automatic engine, temperature controls and hydraulic shock absorbers which helped them sell more cars than Henry Ford."

Since they didn't receive fixed prices, and a fixed market share, there was an incentive to do research and improve their product. They ultimately sold more, demand increased, production increased (supply increased) and more profits were made. This is what the free market does.

While farmers made more money, consumers had to pay more for food, which results in them having less money for purchasing other goods and services, which meant that other people weren't able to make a profit off of them. The cycle continued. Everybody got hurt.

Burton writes that "fewer shirts, steaks and loaves of bread were being sold, that meant textile companies, meat packers and millers had to lay off workers -- which lead to more unemployment."

Actually, fewer shirts sold meant less cotton sold also, and this led to even more unemployment.

Since no one was purchasing these goods, in 1937 there was cotton to supply the nation even if no one grew any. So FDR ordered cotton crops to be cut. With the U.S. not selling cotton and other agricultural crops, this led to an increase in sales of foreign crops, and the U.S. share of cotton industry went from 60%. This was greatly diminished thanks to the unintended consequences of government meddling.

An unintended consequence of the AAA is represented by food imports into the U.S. increasing as follows:

  1. Beef and Veal increased from 138, 283 pounds in 1934 to 7,684,637 in 1935
  2. Ham and bacon increased from 626,148 pounds in 1934 to 2,846, 005 in 1935
  3. Butter increased from 535,144 pounds in 1934 to 212,048,458 in 1935
  4. Corn increased from 816,000 pounds in 1934 to 34,809,120 in 1935
  5. Wheat increased from 3,330,188 pounds in 1934 to 13,446,009 in 1935
  6. Raw cotton increased from 7,328,084 in 1934 to 36,353,324 in 1935

Unemployment soared. Many people went hungry even though there was a food surplus because of FDRs New Deal.

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