Roosevelt Creates the Commodity Credit Corporation

Date October 18, 1933

Established as a supplement to the crop reduction program of the Agricultural Adjustment Act of 1933, the Commodity Credit Corporation became the major instrument for implementing government farm price supports.

Locale Washington, D.C.

Key Figures

• Franklin D. Roosevelt (1882-1945), president of the United States, 1933-1945
• Charles W. Macune (1851-1940), leader whose subtreasury plan foreshadowed the Commodity Credit Corporation
• Herbert Hoover (1874-1964), president of the United States, 1929-1933
• Lynn P. Talley (1881-1942), Texas banker, president of the Commodity Credit Corporation from 1933 to 1940
• Henry A. Wallace (1888-1965), U.S. secretary of agriculture, 1933-1940
• Jesse H. Jones (1874-1956), chairman of the Reconstruction Finance Corporation, 1933-1945
• Harry S. Truman (1884-1972), president of the United States, 1945-1953

Summary of Event

The agricultural sector of the U.S. economy began a decline in the early 1920’s, and the general slump in the economy following the stock market crash in the fall of 1929 aggravated the situation. The crux of the farm problem was overproduction. Crops that exceeded domestic demand pushed prices down to the low levels prevailing in world markets. The solution adopted by President Franklin D. Roosevelt and incorporated in the Agricultural Adjustment Act of 1933 was the Voluntary Domestic Allotment Plan. The idea was to reduce production so that prices would rise to parity, a level at which each commodity would have the same purchasing power as it had during the period from 1909 to 1914. The mechanism for achieving that goal was to pay farmers who agreed to limit the number of acres they cultivated. The program covered seven basic commodities: wheat, cotton, corn, hogs, rice, tobacco, and milk. Later additions to the list included rye, flax, barley, grain sorghum, cattle, sheep, peanuts, sugar beets, sugar cane, and potatoes.

Farmers had long complained about short-term fluctuations in prices. Most farmers had to sell their crops at or soon after harvest, when prices were artificially depressed by the influx into the market. At the same time, the Roosevelt administration was under heavy pressure to do something to give an immediate boost to agricultural prices and put cash into farmers’ hands. In response, Roosevelt’s Executive Order 6340 of October 18, 1933, established the Commodity Credit Corporation. The agency had $3 million that could be used to make low-interest loans available to farmers so that they could hold their crops off the market. The loans, however, were to be limited to those who signed the Agricultural Adjustment Administration (AAA) acreage limitation contracts. These were nonrecourse loans, meaning that if the market price rose above the loan level, the grower could repay the loan and sell the crop. If the price fell below the loan level, the grower could have the loan canceled without liability; the Commodity Credit Corporation would take over the crop and thus bear the loss.

The roots of the Commodity Credit Corporation lay in the farm protest movements of the late nineteenth century. Many of the protesters blamed the decline in farm prices, which began in the 1870’s, on an insufficient supply of money. Failure of the money supply to expand to meet the needs of a growing economy was in turn blamed on the gold standard. A popular solution recommended that the money supply—and thus farm prices—be inflated by the issue of paper money. The most ambitious of those proposals was the “subtreasury” plan advanced in the late 1880’s and early 1890’s by Texas farm protest leader Charles W. Macune. Macune proposed that every county in which a minimum of $500,000 worth of agricultural produce was sold a year should have a subtreasury office along with crop storage facilities. Farmers who brought in their crop for storage would be advanced 80 percent of the local price in paper money at an interest charge of 1 percent a year, on the condition that the produce be redeemed or sold at auction within one year. Support for the plan faded even among farmers because of the appeal of William Jennings Bryan’s call for free silver as the solution to the money-supply problem.

The more direct antecedents of the Commodity Credit Corporation lay in the agricultural programs introduced by President Herbert Hoover. The major thrust of Hoover’s solution to the farm problem, incorporated in the Agricultural Marketing Act of 1929 and administered by the Federal Farm Board, was government assistance to promote better-organized and more orderly marketing of agricultural products through larger and stronger cooperative marketing associations. The cooperative marketing associations set up under the new law, such as the Farmers National Grain Corporation and the National Wool Marketing Corporation, included programs in which farmers could receive an advance on delivery of their crop for later resale. A tool meant to iron out short-term fluctuations in price, the legislation provided for the establishment of “stabilization corporations” that would purchase farm products at harvest time and would resell them when prices rose. When prices for cotton, corn, and wheat fell sharply after the stock market crash, the stabilization corporations made large-scale purchases in a futile bid to sustain prices. The resulting losses exhausted most of the $500 million revolving fund allotted to the Federal Farm Board and forced suspension of stabilization corporation purchases.

Significance

The Commodity Credit Corporation was a continuation of the Federal Farm Board’s stabilization corporations, but with more generous funding. Its $3 million in start-up capital was supplied by the secretary of agriculture and governor of the Farm Credit Administration from funds provided by the National Industrial Recovery Act (1933). During its early years, however, most funding came as loans from the Reconstruction Finance Corporation (RFC). Although technically a corporation organized under the laws of Delaware, the Commodity Credit Corporation was largely administered as an RFC subsidiary. Lynn P. Talley, a Texas banker who was a longtime friend of Jesse H. Jones, chairman of the RFC, was made president of the new agency and retained that position until health problems forced his retirement in early 1940. Under Roosevelt’s 1939 reorganization of the executive branch, the Commodity Credit Corporation became a part of the Department of Agriculture and was wholly responsible to the secretary of agriculture. Although Congress placed the Commodity Credit Corporation on a statutory basis in January, 1935, the agency continued to depend on periodic renewals of its authorization until June, 1948, when Congress gave it permanent status.

Although the Commodity Credit Corporation had authority to make loans directly to farmers, few were made in that fashion. The agency’s managers preferred to encourage private banks to extend loans by guaranteeing that the Commodity Credit Corporation would, on demand, buy all such loans. Even this guarantee failed to overcome private bankers’ nervousness about the soundness of farm loans, however, and as a result, most of the loans were made by the Commodity Credit Corporation itself, with private lending agencies acting only as brokers. Thanks to the strength of the farm bloc in Congress, the agency had even larger amounts of money to lend, and its capital was raised to $100 million in 1938. More important, lawmakers repeatedly increased its authority to borrow on the credit of the United States: Farmers could borow $900 million in 1939, $1.4 billion in 1940, $2.65 billion in 1941, and $10 billion by 1954. The Agricultural Adjustment Act of 1938 shifted the major thrust of the Commodity Credit Corporation from ironing out short-term fluctuations in supplies and prices to a new goal of maintaining farm prices above their free-market levels. The agency’s mission thus became one of subsidization rather than stabilization.

The Commodity Credit Corporation’s first major loan undertaking, the corn program of 1933-1934, proved successful because of a drought that caused a sharp reduction in the size of the 1934 corn crop and therefore increased the price per bushel. Most of the loans were repaid, and the Commodity Credit Corporation even made a profit on the operation. This success inspired Secretary of Agriculture Henry A. Wallace to urge a permanent commodity-loan program for maintaining an ever-normal granary—that is, stabilization of supplies and prices through loans that allowed farmers to withhold part of their crops from the market in years of high output and release them in years of short production.

The ever-normal granary idea was a handy rationale for permanent establishment of the Commodity Credit Corporation. The decisive factor in its transformation into the major instrument for long-term farm price maintenance was the failure of the production-limitation program of the Agricultural Adjustment Act of 1933 and its successor, the Soil Conservation and Domestic Allotment Act of 1936. This failure was partly the result of the lack of voluntary cooperation from farmers and partly the result of contract violations by cooperating farmers. The major difficulty faced by the corporation was that advances in technology were rapidly increasing output per acre.

When the Agricultural Adjustment Act of 1938 was written, Farm Belt lobbyists managed to include directing the Commodity Credit Corporation to make mandatory nonrecourse loans on a number of crops whenever their prices fell too low or their production rose too high. Such loans were available only to those who cooperated with the legislation’s acreage limitation program, in which the major crops were cotton, corn, and wheat. As of 1940, however, the Commodity Credit Corporation was making loans on butter, dates, figs, hops, mohair, peanuts, pecans, prunes, raisins, rye, tobacco, turpentine and rosin, and wool. Congress also repeatedly raised the loan rate and offered higher guaranteed prices.

Given the continued failure of meaningful production limitations, the net effect was to give farmers a virtually blank check from the treasury, and the Commodity Credit Corporation accumulated increasingly large collections of stocks and commodities as more and more farmers defaulted on their loans. The carryover of cotton, for example, reached an all-time high of 13.3 million bales in 1939, more than a full year’s supply for both domestic use and export. The carryover of corn rose to a record level of 687 million bushels in 1940, more than double the carryover of the early 1930’s. Only World War II prevented what appeared to be the impending collapse of the farm-price support system.

As the price of allowing the imposition of wartime price ceilings on farm products, the farm bloc in Congress wrote into the Stabilization Act (or Anti-inflation Act) of October, 1942, a provision requiring the Commodity Credit Corporation to provide loans at 90 percent of parity for two years after the official end of hostilities for a broad range of crops, including cotton, corn, wheat, rice, tobacco, peanuts, hogs, chicken, eggs, milk, butterfat, and potatoes. This provision did not raise major difficulties because the exceptional need for foodstuffs abroad absorbed nearly all available production during 1946 and 1947. The Agricultural Act of 1948 continued the loan program of the Commodity Credit Corporation at 90 percent of parity until June 30, 1950, when a flexible system was supposed to support prices at a level ranging between 60 and 90 percent of parity, depending on production totals. The move to avoid the rigidities of the parity formula, however, was undone by the surprise victory of Democratic Party presidential nominee Harry S. Truman in the 1948 election, a victory that owed much to farmer discontent over falling prices.

The Agricultural Act of 1949 was largely a victory for those who favored high price supports. Commodity Credit Corporation loans remained the major instrument for implementing the price-support program, and its loan rate became farmers’ minimum-price guarantee.

High price supports, coupled with rapid growth in agricultural productivity because of the continuing revolution in technology, brought larger and more burdensome surpluses that were only temporarily alleviated by the Korean War (1950-1953). The Agricultural Act of 1954 represented a victory for more flexible and market-oriented price supports, but it did not change the system’s basic structure. As output continued to grow, so did the stock of farm commodities in government hands. Farmers’ resistance blocked a bid by the administrations of John F. Kennedy and Lyndon B. Johnson to impose mandatory production controls. By the 1960’s, however, even farm bloc lobbyists recognized that high price supports were having a damaging influence on U.S. farm exports. The Food and Agricultural Act of 1965 introduced a new gimmick that became a standard part of the farm program: the “two-price” plan. To make American products competitive in the international market, domestic price supports were reduced to the world-market level through Commodity Credit Corporation loans. Producers were then paid a deficiency payment that amounted to the difference between the loan rate and the official target (or ought-to-be) price.

Most agricultural economists agreed that this approach had major flaws. It saddled the federal government with a multibillion-dollar commitment whose costs were unpredictable and encouraged chronic overproduction. Because of the alarmingly high levels to which Commodity Credit Corporation inventories and loans had risen by 1983, Ronald Reagan’s presidential administration introduced the payment-in-kind (or PIK) program, whereby farmers were paid to take land out of production in return for a payment of government-owned stocks rather than cash. The 1983 PIK program temporarily relieved the carryover problem, but falling export demand in the years that followed produced a major crisis, and farm subsidy costs skyrocketed to an estimated $26 billion in 1986 alone. Because farming interests remained sources of political power, the demand for subsidies remained high, and Congress usually responded to pressures from the farming industry. Subsidies distorted the marketplace, and this put pressure on the federal budget. These problems persisted into the early 2000’s, as Congress made historic increases in farm subsidy levels that largely benefited the wealthiest farmers and agribusinesses.

Bibliography

Benedict, Murray. Can We Solve the Farm Problem? An Analysis of Federal Aid to Agriculture. New York: Twentieth Century Fund, 1955. Analytic and evaluative. Chapter 10 has an excellent summary of Commodity Credit Corporation activities from 1933 up to the early 1950’s.

‗‗‗‗‗‗‗. Farm Policies of the United States, 1790-1950: A Study of Their Origins and Development. New York: Twentieth Century Fund, 1953. An indispensable, comprehensive, and detailed history both of the demands of farmers and farm organizations and of government policies regarding agriculture.

Cochrane, Willard W., and C. Ford Runge. Reforming Farm Policy: Toward a National Agenda. Ames: Iowa State University Press, 1992. An illuminating critical analysis of the shortcomings of contemporary U.S. government farm programs by two leading agricultural economists. Offers recommendations for reform.

Cochrane, Willard W., and Mary E. Ryan. American Farm Policy, 1948-1978. Minneapolis: University of Minnesota Press, 1976. A history of the U.S. government’s farm policies.

Gup, Benton E., ed. Too Big to Fail: Policies and Practices in Government Bailouts. Westport, Conn.: Praeger, 2004. Collection of essays includes discussion of the farming industries.

Hamilton, David E. From New Day to New Deal: American Farm Policy from Hoover to Roosevelt, 1928-1933. Chapel Hill: University of North Carolina Press, 1991. An important revisionist account that emphasizes, in contrast with most treatments of the New Deal, the large degree of continuity between the farm programs of the Herbert Hoover and Franklin D. Roosevelt administrations.

Hansen, John M. Gaining Access: Congress and the Farm Lobby, 1919-1981. Chicago: University of Chicago Press, 1991. An illuminating analysis of the politics of congressional farm policy making that documents the farm lobby’s continuing success in gaining lavish subsidies for farmers despite their dwindling numbers.

Himmelberg, Robert F. The Great Depression and the New Deal. Westport, Conn.: Greenwood Press, 2000. Discusses the causes of the Depression and the actions taken in the United States to alleviate its effects. Features chronology, glossary, and index.

Olson, James S. Saving Capitalism: The Reconstruction Finance Corporation in the New Deal, 1933-1940. Princeton, N.J.: Princeton University Press, 1988. A thorough examination of the role of the Reconstruction Finance Corporation in the New Deal that includes coverage of the activities of the Commodity Credit Corporation during the years when it was virtually an RFC subsidiary.

Saloutos, Theodore. The American Farmer and the New Deal. Ames: Iowa State University Press, 1982. The most comprehensive treatment of New Deal agricultural programs.