Increasing Productivity, Expanding Farm Output, Eliminating Poverty
By Stuart Rosenblatt
July 5, 2020–As the nation confronts the expanding COVID-19 crisis and the collateral economic damage caused by the pandemic—the most severe economic crisis since the Great Depression—a consensus is emerging that any recovery effort include a commitment to employ millions of people in rebuilding our crumbling infrastructure and creating great projects for new infrastructure.
Having failed to address our deteriorating roads, bridges, highways, tunnels, dams, levies, etc., for at least the past thirty years, we are now faced with an enormous challenge: If anything good has come out of the COVID pandemic, it’s that it has put a blinding spotlight on the woeful failure of our economy to even supply basic medical equipment to our front-line workers. It became painfully clear that we are totally dependent on other nations, especially China, for even the most basic supplies. We have now ramped up production of ventilators and more sophisticated technology, but only after an unknown number of Americans were sickened and died because of the lack.
Today, there are a number of bills pending in Congress calling for modest-size infrastructure programs, each pointing in the right direction, but none sufficiently ambitious to be capable of reversing the disastrous condition of our nation’s infrastructure. Facing a similar crisis in the 1930s, President Franklin Roosevelt mobilized the Congress and the American people to attack the Depression with large public works programs. Now, nothing less than a brute-force infrastructure-led effort will suffice. Only such an approach can hope to succeed and spark a more general infrastructure/industrial recovery.
The following report focuses on the approach of the Roosevelt administration to the combined farm and rural infrastructure crises, and the consequent deep poverty into which its inhabitants had been plunged. The President and his Cabinet used the federal budget and the off-budget Reconstruction Finance Corporation (RFC) to take seemingly hopeless areas of the country and raise standards of living and productivity by orders of magnitude. We will show that, by concentrating on the crisis in rural communities, especially in the Tennessee River Valley, and highlight some of the crucial governmental interventions that shaped the process.
What the New Deal period, 1933-1939, demonstrated was that nothing less than an upward expansion of the entire real economy would bring a recovery of any particular sector.
The Crisis in Rural America
Rural America had sunk into economic depression long before the Crash of 1929. The post-World War I collapse of farm prices sent the farm sector into a deepening depression starting in the early 1920s and continuing into 1929 and beyond. Annual per capita income for farmers, who comprised 30-40% of the population in 1930, was $273 ($3,387 in 2011 dollars) while for all U.S. citizens, it was $750 ($9,307). Farm income fell 30-40% during the period. Between 1921 and 1929, more than 5,000 banks in rural America went bankrupt. (Unprecedented Power, p. 176)
Farmers were whipsawed among low commodity prices, higher interest rates, and the high cost of farm implements relative to the decreasing market value of their crops. That is, the parity prices were vastly below that of 1912, the measuring-stick year. All farm prices were, on average, 33.7% below 1926 levels. All farm products had fallen 50%, while the cost of agricultural implements fell 14%.
By 1933, cotton was 5.5 cents per pound vs. 12.4 cents in 1914; corn was 63 cents/bushel compared to 83.6 cents in 1914; hogs were $2.94/hog vs. $7.24 per hog. Consumption of electricity in rural America was a fraction of what it was in the cities, with most of rural America literally in the dark. Use of motorized vehicles on farms was far lower; and even road connections between rural Americans and urban dwellers, i.e., their market, was very limited.
The Roosevelt administration attacked these discrepancies from many directions; it was the sum total of the programs, not any particular approach, that succeeded in ameliorating the crisis. However, among these programs, the work of the Reconstruction Finance Corporation, the Roosevelt equivalent of the Hamiltonian national bank, had the greatest success. What follows is a summary of the crucial actions taken by the RFC to attack the farm calamity by providing much of the credit which resulted in the subsequent recovery.
Agricultural Adjustment Act
This large-scale New Deal program underwent many changes, but the basic idea was to match commodity output with perceived markets. Some programs succeeded better than others, and the attempt to achieve parity pricing in farm goods did periodically succeed. But the policy was largely hit and miss.
Farm foreclosures: As part of the 100 Days of the New Deal, Roosevelt asked for legislation on April 3, 1933 to help farmers refinance their debts. Congress passed the Emergency Farm Mortgage Act, as part of the AAA Act. It authorized Federal Land Banks to issue $2 billion in tax-exempt bonds at 4% for new loans or refinancing of existing mortgages. Between 1933 and 1935, the RFC supported the Farm Mortgage Act by issuing $200 million to assist farmers in redeeming farm property lost through foreclosure, refinancing minor debts, and offering working capital loans. Loans were not to exceed $5,000 at 5% interest. Farmers could repay in ten annual payments, with no principal due for five years. The RFC also loaned $400 million to the Federal Land Banks to assist its refinancing program.
To consolidate all federal farm credit programs, FDR issued an Executive Order in March 1933, creating the Farm Credit Administration (FCA). It created local credit institutions to ease working capital and marketing problems and 12 regional banks for farm cooperatives, and made large loans to national farm cooperatives. It also created Production Credit Associations (PCAs) made up of farmers who could then borrow from the Federal Intermediate Credit banks. The FCA refinanced more than 20% of all farm mortgages, saving millions of farmers from foreclosure and thousands of banks from shuttering.
In 1934, Congress passed the Farm Mortgage Refinancing Act to set up the Farm Mortgage Corporation. The FMC was allowed to issue $2 billion in bonds to refinance farm debts. The RFC supplied the Farm Credit Administration with $1.16 billion to finance the Federal Land Banks, the Federal Intermediate Credit banks, the Federal Farm Mortgage Corporation, the Production Credit Corporations, and other facilities. As an example, the PCC loaned money to the PCAs, who then loaned to the farmers. So, the RFC was instrumental in halting foreclosures and making credit available to production. (Olson, Saving Capitalism, pp. 91-93)
Farm Crop Marketing
One of the major problems in agriculture was the low prices. The AAA attempted to address this with the notorious programs of commodity and livestock reduction in 1933, but that failed. They also began to implement acreage allotment programs, which survive to today, but those initiatives took a lot of adjusting. So, the administration issued an Executive Order in October 1933, creating the Commodity Credit Corporation (CCC, not to be confused with the Civilian Conservation Corps).
The CCC allowed farmers to hold their crops off the market until seasonal gluts disappeared. These gluts occurred around harvest times and inevitably drove down prices. It also issued loan guarantees, hoping to work with local bankers to collaborate on the program. The CCC promised private bankers it would purchase all the marketing loans they had extended, if need be, and when local banks did not step in, the CCC filled the gap.
The RFC provided funding to the CCC with an initial amount of $3 million, but that would rise dramatically at the high point of the program. The first program, at the suggestion of FDR, was to increase the price of cotton from 9 to 10 cents per pound. The farmer went to his bank or warehouse and pledged his cotton as security for a CCC loan. The bank could then take the note to the RFC and be reimbursed, plus 4% interest, or keep the loan. The interest was later lowered to 3% as the offer was quite attractive. In 1934, the price per bale was raised to 12 cents and a much larger amount of cotton flooded into the program. The program attracted significant support; more marketing agencies began to join the effort. The program was extended to many other commodities and grew in size. Congress in turn expanded the Commodity Credit Corporation’s working capital to $100 million from the original $3 million. It became a huge success, was transferred to the Department of Agriculture in 1939, and still exists today.
The CCC has been used by President Trump over the past several years to bail out the farm sector as his tariff policy has ruined many farmers. (Jesse Jones, $50 Billion, pp. 88-104; Fenberg, Unprecedented Power, p. 208)
Other Infrastructure: The New Deal programs produced dramatic transformations in rural infrastructure. One of the most important came via the Works Progress Administration and its predecessors, the Federal Emergency Recovery Act and the Civil Works Administration. Of the many programs of the WPA, road building was front and center. Over its six-year existence, the WPA built 600,000 miles of roads. Of this, 530,000 were built in rural America, connecting farmers with their markets in the city, thus radically transforming the ability of farmers to market their goods, receive equipment, materials, and the like, and even to enjoy daily mail delivery. It also meant that they could purchase and use automobiles and trucks and connect to both market partners and friends and family.
Electric Power and the Internal Combustion Engine
The two most revolutionary developments of the 20th Century which spurred a dramatic increase in production, productivity (Total Factor Productivity), and standard of living were the internal combustion engine and electric power.
Prior to the New Deal, rural America had been cut off from both, and this contributed mightily to the poverty and cultural and technological backwardness that characterized the regions. That all changed with the New Deal.
The stupendous accomplishment of WPA and its predecessors in connecting rural and urban areas via transportation brought the many uses of the internal combustion engine to the farm community. Tractors, harvesters, farm trucks, and the like proliferated and spurred the expansion of the agriculture. Without the credit programs cited above, however, the farm sector, and hence the food supply of the nation, would have evaporated. Unthinkable consequences would have followed.
It is into this context that the implementation of large-scale electrification brought the other major technological component into rural United States. Three programs exemplify that development: the Electric Home and Farm Administration, the Rural Electrification Administration, and the Tennessee Valley Authority.
Rural Electrification. At the beginning of the 1930s, over 90% of rural America used kerosene lamps for lighting and had no powered pumping systems to facilitate running water, indoor plumbing, and simple evening activities. At the center of the problem was the domination of private electric companies and holding companies which owned most electric companies. Their motive was profit and control of geographical areas. They did not believe that farmers, especially in poor areas, and that was most of agriculture, could afford to pay for electric power.
The key proponent of public ownership of electric power providers was Morris Cooke, who had been involved in public power projects in Pennsylvania and New York since 1923. He was appointed a trustee of the New York Power Authority under then-Gov, Franklin Roosevelt, who was planning a hydroelectric plant on the St. Lawrence River. Cooke became the leading expert on public power for urban and rural areas. He did a detailed study of the costs per mile of bringing in electric lines to rural areas.
In 1933, the Congress voted to create the Tennessee Valley Authority (TVA), with broad control over the development of the entire Tennessee River Valley. The aim was to bring electric power into the rural South, as well as many accoutrements of modern life. One of the subsidiary success stories of the TVA was the formation of an experimental cooperative to bring electric power to Alcorn County, Mississippi. This project turned out to be a great success, delivering electricity to a severely depressed area, where there were many tenant farmers. The common view was that people were too poor to make the program a success, yet it worked. The cooperative brought power lines from Corinth into the surrounding rural area.
The Electric Home and Farm Authority employed a loan program run by the RFC to assist local farmers in buying modern appliances, such as washing machines and electric irons. Rural Mississippi began consuming more electricity than its urban neighbors, thereby helping to pay for the construction of the power system. The overall increase in the level of development and standard of living of the region allowed virtually all the power loans to be repaid. Defaults were in the 1% range!
Farm organizations from the Grange to the Farm Bureau Federation began beating the drums for rural electrification.
The Rural Electrification Administration
On May 11, 1935, Franklin Roosevelt signed an Executive Order creating the Rural Electrification Administration (REA). Initially the REA reached out to power companies and holding companies to come in and build the transmission lines and other features of the system. Using various subterfuges, the power companies stonewalled the effort. They submitted overly high cost estimates, to pad their bottom lines, and then hemmed and hawed that the rural poor would be unable to pay the bill. Municipal utilities were also approached, but they too rejected the offer. Ultimately, the REA settled on cooperatives, despite much hesitation. Would they have the expertise to build sophisticated electrical programs? Would they be able to pay for the program? Would they be able to administer it on a daily basis?
The answer turned out to be yes, on all counts. The REA bent over backwards to help the co-ops, which were composed of local citizens who had no previous experience, loans to the co-ops at 3% interest, payable at 10- or 20-year time periods. Most importantly, financing for the REA came entirely from the Reconstruction Finance Corporation. The main sponsor of the REA in Congress was Sen. George Norris of Nebraska, who, with Rep. Sam Rayburn of Texas, co-sponsored the legislation. The REA was to be funded at $420 million with 25 years for repayment. Norris and RFC chair Jesse Jones agreed to the terms: $40 million to be loaned at 3% for each year over 10 years. FDR signed the bill on May 11, 1936, and Morris Cooke became the first administrator of the REA.
Implementation of the REA was a total success. The REA launched major innovations in technology, increasing the Total Factor Productivity of the entire rural economy, and increasing the GDP in the process. It sponsored nationwide Demonstration Farm Equipment tours, featuring large tents able to entertain 1,000 people at a time, with exhibits of new electrical household and farm equipment.
To speed up loan applications, the REA hired an expert in automobile assembly lines, implemented standardization and shortcuts in processing. It cut the time between loan application and approval from 36 to 12 weeks, dramatically increased efficiency in construction, brought in high-strength wires, permitting longer spans between poles, cutting the number of poles per mile almost in half. Cross-arms were eliminated from poles and wires were attached one on top of another on each pole; poles, electrical wires, transformers, and other equipment were standardized and mass-produced.
Construction crews adopted automobile assembly-line techniques for bringing in wires. Instead of one crew performing all the tasks, multiple crews began specializing in individual jobs. One crew would follow another on the line, including crews for staking, hole digging, equipment, hardware, pole-guying, wire-stringing, transformer-hanging, etc. REA cut costs per mile from $1,500 to $2,000, and then down to $825 per mile, a savings of 50%.
The co-ops also ran the loan program for wiring buildings, purchasing electrical appliances, installing plumbing systems, etc. They worked to minimize the costs per member, including for the poorest farmers. In the impoverished areas, families were paid less than $2 per month for their co-op membership, electrical service, wiring, along with an iron and a radio. Farmers who were unable to afford even the $2 membership received all the same benefits and were hired by the REA to work on the projects.
From 1936 to 1939, the miles of line under the REA program rose from 400 to 115, 230. The number of customers served increased from 693 to 268,000. The total amount of loans rose from $14 million to $227 million. All of this over a four-year period. And the lights continued to come on over the next decade as the REA moved to electrify the entire country. And yes, the REA was a net money-maker for the RFC. It succeeded because electric power increases overall output of all productive processes.
Tennessee Valley Authority
The Tennessee Valley Authority exemplified the best of the New Deal credit and infrastructure programs. The Tennessee River Valley, which extended over seven states, was one of the poorest in the nation. Per capita income was one of the lowest in the nation; few people had running water or electricity. Only one Mississippi farm out of 100 had electric power; in Georgia it was 1 in 36; in Alabama, 1 in 25. That would change, dramatically.
Poor sanitary conditions resulted in extremely high rates of infant mortality and disease. One of three people had malaria. Illiteracy rates were at the highest end and education quality at the lowest. Due to poor agricultural techniques much of the land had been depleted and many of the mines exhausted. There was widespread poverty throughout. Per capita income was 45% of the national average, and per capita electricity production was 60%. Less than 1 in 10 farm families had electric power.
Additionally, the navigation potential of the Tennessee River remained untapped due to hazardous shoals, while the heavy rainfall and steep slopes in the region subjected many areas to repeated and serious flooding. The people of the Tennessee Valley were trapped in a cycle of poverty. The social problems in the Valley could only be addressed by improving the economy, which depended on a healthy resource base. Development of the region’s land, water, and forests was essential for economic revival.
Three influential men provided the impetus for change: President Roosevelt and his collaborators, notably Nebraska Republican Sen, George Norris and later TVA administrator David Lilienthal. The TVA, from its inception, was conceived as an integrated, multidimensional, coordinated program to develop the entirety of the region.
On April 10, 1933, Roosevelt transmitted a Message to Congress for “A request for legislation to create a Tennessee Valley Authority—a Corporation Clothed with the Power of Government but Possessed of the Flexibility and Initiative of a Private Enterprise.”
The TVA, he said, “transcends mere power development; it enters the wide fields of flood control, soil erosion, afforestation, elimination from agricultural use of marginal lands, and distribution and diversification of industry. In short, this power development of war days leads logically to national planning for a complete river watershed involving many States and the future lives and welfare of millions.”
TVA was charged with responsibilities of national defense, agricultural and industrial development, flood control, and navigation, also for the Mississippi River Basin, and was authorized to produce fertilizers, produce, distribute, and sell electric power, and raise the standard of living in this depressed area.
The bill, passed by Congress, authorized the TVA Board to issue $50 million of bonds, backed by the U.S. government, to launch the project. One of the initial subscribers to the TVA bonds was the Reconstruction Finance Corporation. The TVA would become self-sufficient in power production, and would require congressional appropriations for other areas, such as fertilizer development. It was not authorized to become a large-scale fertilizer producer, but rather an innovator in the field, developing new types and educating farmers in their utilization.
The TVA became a total success, despite intense opposition from power companies and congressional power blocs. Over 15 years, the TVA built 9 major dams on the Tennessee River and 12 subsidiary dams, generating immense amounts of hydropower, ending the persistent flooding, sharply reducing disease levels, increasing employment, massively increasing literacy, dramatically improving farm production and yields, and transforming the region.
In its first ten years, TVA electricity production went from 60% of the per capita level of the nation to 50% greater than the national average! The TVA became the second-largest producer of power in the United States in its first 10 years! The amount of electricity produced, per person, increased 500%, twice as fast as in the U.S. as a whole. In 1933, annual power produced per person in the Tennessee River Valley was 400 kilowatt hours; in 1944, this had increased to 2,600 kilowatt hours, or roughly 75% greater than the kilowatt hours for the rest of the nation. Because, by law, the TVA was allowed to buy out nearby competitors and become a public power company, it was able to price its electricity at a low rate. By 1941, TVA became the largest producer of electrical power in the nation. Its retail rates were based on expectation of future consumption, for both home and industrial purposes.
In his book, Democracy on the March, David Lilienthal, who led the TVA from 1941 to 1946, and was a member of the three-person board from 1933 onward, said, “The answer [to widespread availability] is to be found largely in a new way of thinking about electricity, best reflected in the principle of a low rate—resulting in a wide use of power. That principle of ‘more not less’ was established in the very policies of the TVA Act, creating the TVA. Congress directed the TVA to see to it that this vast store of electric power should be widely used; the moral purpose behind the whole TVA Act, to benefit the greatest number of people, was thus written into an express mandate of law.” (Democracy on the March, p. 25)
One innovation which also started with the TVA was the creation of electric cooperatives. Farmers in Alcorn County, in rural Mississippi, could not afford to bring in electricity from the county power company. They wanted public, not private power. TVA set up principles to form rural cooperatives: private, independent, non-profit electric utility businesses; owned by the customers they serve; incorporated under the laws of their state; to provide electricity at cost; and to elect board of governors from the community served.
On June 1, 1934, the TVA purchased the Mississippi Power distribution system and resold it to the Alcorn County Electric Power Association. Electric power was delivered at cost. The co-op was also authorized to buy and sell electrical supplies, wire houses, and equipment at cost. Membership was cheap, and electric bills varied from 75 cents to one dollar! The program was an instant success and became the model for electric co-ops throughout the entire REA system.
As the facts above prove, this method of pricing power for maximum development was in stark contrast to the accepted economic policy—and it worked. Financially, the TVA was a success, and the key to its success was the development of electric power. This latter point proves the principle of increasing Total Factor Productivity, which massive application of electric power ensures. Electric power transforms all levels of production, increasing output, cutting costs, and increasing the standard of living. As stated above, the key innovations which drove the early decades of the 20th Century were the utilization of internal combustion engines and generation of electric power
Lilienthal summed up the concept of increased productivity this way: “In late 1944 the system was producing at the rate of almost a billion kilowatt hours of electric energy every month, nearly half as much electricity as the utilities in the entire country produced when we entered World War I.
“These figures have deep human importance, for this must be remembered: The quantity of electrical energy in the hands of the people is a modern measure of the people’s command over their resources and the best single measure of their productiveness, their opportunities for industrialization, their potentialities for the future. A kilowatt hour of electricity is a modern slave, working tirelessly for men. Each kilowatt hour is estimated to be the equivalent of ten hours of human energy; the valley’s twelve billion kilowatt hours can be thought of as 120 billion man hours applied to the resources of a single region! This is the way by which, in the Age of Electricity, human energies are multiplied.” (Democracy on the March, p. 19)
Complementing the development of Total Factor Productivity, was the broad-based nature of the TVA. It was “bundling” at its most developed level. Rather than build the region piecemeal, TVA overhauled and drastically upgraded the entire seven-state region. Lilienthal’s book covers all of the accomplishments of the transformation, among the most important of which is how families in the Tennessee Valley benefited from bringing electric power to the region. Initially, the people were too poor to afford electric power, and had no idea how modern equipment could revolutionize farm production and farm life. So, the TVA, and later, the RFC, created the Electric Home and Farm Authority.
Electric Home and Farm Authority
One of the most important and successful ancillary finance programs of the New Deal intervention into the farm sector was the Electric Home and Farm Authority. One problem confronting policy makers in 1933 in the agricultural sector, especially in the poverty-stricken areas all around the country, was how to help families take advantage of available electric power to radically improve potential in both farm and home. They simply could not afford, initially, to buy the products which could utilize the new power, everything from automatic washers to electric equipment on the farm.
On Dec. 19, 1933, Roosevelt issued an Executive Order creating the Electric Home and Farm Authority under TVA. It would soon be transferred to the RFC. The EHFA would assume the credit obligations of the purchasers of the new equipment. It would take the purchase agreements and sell the notes to local banks, which then paid the manufacturers. The bank could at any time sell the paper to the RFC.
The RFC initially allocated $10 million to the program, but that would be raised over time. The EHFA would make available upwards of $50 million during its existence. The U.S. Treasury allocated $850,000 as its initial capital.
EHFA negotiated lower prices from manufacturers and lower rates from utilities outside of TVA, as the program expanded.
In 1934, EHFA financed the sale of 70,000 refrigerators in Tennessee, Alabama, and Georgia alone. They then worked with farmers throughout the region to purchase all types of new equipment: electric ranges and ovens, farm motors, water heaters, water pumps, milk coolers, electric irons, milking machines, radios, space heaters, and heavy load-bearing machinery. The program rapidly expanded.
By the end of 1934, EHFA got cooperation of 41 electric utilities in 10 states, 70 appliance manufacturers, and 409 retail dealers. Utilities agreed to keep rates below 3 cents per kilowatt hour in urban areas and 4 cents/hour in rural areas. As energy consumed grew, rates were lowered. Consumers of electric products generally put down 5% of the cost and 5% interest, or some variable thereof. The EHFA either paid the dealer or a finance company which assumed payment of the contract. The dealers did all the selling and the utilities did all the collecting, simply adding the repayment and finance charges to the monthly bill. Therefore, the RFC, which backed the entire program, required little manpower to operate the effort. At its height, the EHFA had no more than 150 RFC employees deployed.
The key provision, which was encouraged by the RFC and Jesse Jones, was to include payment of the interest and part of the principal in the monthly electric bill. It was small enough to not overly tax the borrower and steady enough to satisfy the creditor. The EHFA was a great success. It served 10 states in 1935, and 37 in 1941; participating utilities rose from 41 in 1935, to 657 in 1941; appliance manufacturers increased from 70 to 428. Ultimately, the Authority purchased 255,000 contracts and helped sell over a million products.
With backing of the RFC, the EHFA sold bonds on the open market at 1% yield, and raised over $50 million, used to purchase the contracts of the farmers. It moved far afield from the TVA, and by the time of its shutdown during World War II, its biggest borrowers were California, Tennessee, Illinois, and Georgia.
At the end of its existence in 1942, the EHFA repaid the Treasury its capital stock of $850,000 and an additional $175,000 net profit. The credit losses came to less than one-fourth of 1%!
The overall electrification and industrial development of the agricultural sector was a success. TVA power production and water-control systems were so powerful that it became a mainstay of the World War II war production effort. Alcoa and other aluminum companies built airplane and other parts in the Tennessee Valley, and munitions were produced adjacent to the dams. Ultimately, the combination of cheap and abundant power, new transportation infrastructure, and an upgraded standard of living played the decisive role in the Roosevelt administration locating the top-secret atomic bomb project at Oak Ridge, Tennessee, in the Tennessee Valley Authority.
 The main books consulted for this report are referenced in the text. They are Unprecedented Power: Jesse Jones, Capitalism, and the Common Good by Steven Fenberg; $50 Billion: My 13 Years with the RFC, 1932-45 by Jesse Jones; and Saving Capitalism, The Reconstruction Finance Corporation and the New Deal, 1933-40 by James Stuart Olson.
Tags: agriculture, Commodity Credit Corporation, electrification, farm income, infrastructure, New Deal, poverty, Reconstruction Finance Corporation, rural America, Stuart Rosenblatt, Total Factor Productivity, TVA