A Pair of High IC (or UC) Policy Decisions

by Martin Harris

        For every profession there's a pundit who distills its role down to as few words as possible. In the field artillery, our job was to "move, shoot, and communicate." For agriculture, typically it's "agriculture's strategic role in feeding and fueling a growing world," the "growing" referring to the steadily increasing urban consumer component of the population. Always in history, some of those consumers are the nonfarm urbanites in power who control and structure the economics whereby food moves from field to city. Today in the U.S., it's the Federal Reserve System of currency management within which ag operates, from the actual production of crops to all the beyond-the-farmgate steps that food and fiber take on their way to energy consumers at their dinner tables and, increasingly, their nonfood energy-burning hardware as well.

        Today there's not a reader of this column old enough to remember when commercial farming was a truly free-enterprise, free-market sector of the economy. Most scholars in the relatively new discipline of agricultural cliometrics now define the post-Civil War efforts of the Treasury Department to solve the war debt problem by recalling the war-issue greenbacks as the first major U.S. governmental intervention into farm commodity pricing and thence into urban food prices.

        Since then there have been a lot more; here are two. One has been the multiple historic decisions of the Federal Reserve System, created by law in 1913 as the central bank of the nation, to reject the "commodity dollar" as either a supplement to or replacement for gold as the high-stability backup for an increasingly paper currency; the other is the recent, ongoing and truly remarkable Fed-caused expansion of the money supply in a series of efforts to "stimulate" the overwhelmingly nonfarm economy.

        In 1978, the Carter administration added a role for the Fed: to use monetary policy toward a "full employment" goal, even if that objective calls for potentially inflationary debt creation to "stimulate" the economy in accordance with Keynesian doctrine, but the Fed had already been doing just that. Since 1913, measured against the consumer price index, the purchasing power of the dollar has been diluted by Fed currency-expansion action, so that as of 2010 it took $22.70 to buy what $1 bought then. That's shrinkage of 96 percent, and there's been even more since. In contrast, during the pre-Fed period from 1789 to 1913, when there were two banks of the U.S. and various private banking currency management procedures, the dollar shrank by 12 percent, from $l to $1.12 in equal purchasing power.

        In the last four years alone, the Fed has increased the money supply through three quantitative easings: printing money to buy just-printed U.S. bonds, with almost $3 trillion now in the Fed "portfolio." Total U.S. debt is now well over $16 trillion, all of it Fed-approved and enabled. Debates over international and global "currency wars" via devaluation have been going for years, and new questions about the hundreds of trillions in gold at Fort Knox are now starting.

        The Fed has, with almost unanimous congressional approval, and by its own declaration, abandoned "currency value regulation." The new target is no longer stability of purchasing power, but 2 percent annual inflation. Back in the '30s it accomplished the same purpose by defeating proposals to replace the gold standard with a "basket of commodities" approach whereby the currency supply would be enlarged or reduced as needed to keep commodity values and dollar strength constant, per original Founding Father constitutional intent.

        Since Benjamin Graham and various followers first made such proposals during the Great Depression, all have been successfully dismissed by the Fed. They range from inventor Thomas Edison at the start of the 20th century to banker Lew Lehrman at the start of the 21st. Even former Fed Governor Wayne Angell somehow left the Federal Reserve Board for private banking in 1994, shortly after his declared support for the commodity dollar concept.

        Rejection of the commodity dollar has been a key policy decision enabling, by intent, continued currency devaluation. It has made money supply expansion more feasible by insuring that debt incurred this year can be paid back in some future year with ever-cheaper dollars, similarly by policy intent. Both policies intersect with ag economics in a number of ways, with some intended consequences (IC) and some unintended consequences (UC).

        In the IC category are the two almost inevitable results of extended currency expansion. One is that, in the short term, while the borrower's credit is still highly regarded, interest rates will drop. Indeed, they have, and today they're at historic lows. Investors seeking more normal rates of return, either interest or capital again, will then send more money into less typical investments. Indeed, they have: think the stock market, now approaching all-time highs even though corporate earnings have been stagnant, and farmland. Don't even think about U.S. obligations earning less than 2 percent; that's zero, considering the Fed's annual inflation goal of 2 percent.

        IC #1: To make it as attractive as possible for producers to borrow, grow, and then sell commodities at lower costs. IC #2: To stimulate flight capital into farmland investment, which explains why crop acreage is now well over $2,100 per acre--not bad for land producing commodities that barely cover their production costs when sold by producers into the beyond-the-farmgate agribusiness sequence that ultimately feeds consumers.

        There's a third IC: Farmland appreciation supposedly pleases farmland owners, who are encouraged by long-standing USDA policy to consider asset appreciation just as good as commodity earnings for farmer income purposes and to borrow against the more valuable assets to continue and even enlarge production, and thereby prevent shortages that might cause "undue price increases to consumers." This was a Depression-era policy incorporated into the Ag Adjustment Acts of that decade and restated by President Harry Truman in 1947 as "preventing undue price burdens for our people." You'll find the quotes on farmland values on page 45 of the Agriculture & Food Policy review of 1981.

        A fourth IC: Steep increases in the market value of farmland increase its taxable value as well, encouraging owners to commit to one of various tax-avoidance farmland preservation programs, ultimately aimed at preventing conversion to more profitable development uses and ensuring continued reliable crop flow to urban dinner tables.
Then there are the UCs. One is that such flight capital investment values farmland at far more than its productive worth and thereby creates an obstacle to purchase by farmers, either those already in operation or those considering entry, since it can't pay back the investment in production returns.

        A second UC is that it encourages sale by present farm owners for retirement purposes and, as present patterns have already shown, the most likely buyers are investment, pension and speculative funds, not other farmers. Think Teachers Insurance & Annuity Association and Merrill Lynch Farmland Fund.

        A third UC is that, once established as a constantly enlarging debt asset for continued below-real-cost commodity production, if the farmland price ever stops increasing, the effect on production, "abundance" and "affordability" (Ag Adjustment Act keywords) will be fairly immediate.

        Another UC may be that, aside from the new trillions of fiat money now sloshing through the economy thanks to Fed printing on the orders of administration "stimulus" theorists, much larger quantities of trillions are now passing from older to younger inheritors via intergenerational wealth transfer, and much of that wealth is now causing the "rural gentrification" phenomenon previously mentioned in these columns. We don't yet have the various statistical proofs, but anecdotally at least it seems to be the underlying financial foundation for much of the "new agriculture" of organic production, locavore consumption, farmers' markets, and, quite remarkably, the closest a newly important sector of U.S. agriculture has come to truly free-enterprise, market-driven farming since the post-Civil War ag depression decades and William Jennings Bryan's "Cross of Gold" speech, in which he warned the newly powerful urban electorate and their politicians: "Destroy our farms and the grass will grow in the streets of every city in the country."
        The author is an architect and former farmer.