Letter to Senator Charles L. McNary on the Export Debenture Plan of Farm Relief.

Note: Senator McNary was Chairman of the Senate Committee on Agriculture. Other Senators referred to in the first paragraph of the President's letter were Arthur Capper, J. Thomas Heflin, Peter Norbeck, and Joseph E. Ransdell.

Analyses of the export debenture plan by the Departments of the Treasury, Agriculture, and Commerce to which the President referred in his letter were also released as follows:

DEPARTMENT OF THE TREASURY

April 19, 1929

My dear Senator McNary

The President has requested me to express to you the opinion of the Treasury Department of the principle underlying the so-called export debenture plan of farm relief.

As outlined in a number of bills which have been introduced in Congress, the general plan provides for the issuance of export debentures by the Secretary of the Treasury to exporters of such agricultural commodities, or products thereof, as are specified in the bills or which may be designated by a proposed Farm Board. The debenture rates are prescribed by the bills, or the Board, with power in the Board to change the rates from time to time. The rates fixed by the recent bills are half the existing tariff rates on the same commodities, except that for tobacco and cotton the rates have been fixed at 2 cents a pound. The debentures will be receivable at par within one year of date of issue in payment of custom duties. In some of the bills the total amount of debentures that may be issued in any one year is limited in some manner relative to the customs receipts. In others, there is no such limitation. Generally speaking, the bills also provide for a reduction of the debenture rate, and even for total suspension in the event of a very great increase in domestic production of the commodity in question.

The issuance of a Treasury debenture is indistinguishable in principle and in its effect on the Treasury from a cash bounty on exports. Nor is it apparent that payment in debentures rather than in cash offers any advantages. Quite the contrary. If the bounty is paid in cash, the farmer, in whose interests the plan is devised, will more nearly get the full benefit, whereas it is inevitable that he will receive considerably less than the face value of the debenture. The debentures must inevitably sell at a discount if for no other reason than that they involve [p.91] a certain inconvenience and will entail a considerable cost in handling and marketing, and since they do not bear interest must inevitably be charged with the cost of carrying them until presentation at a customs house. Ultimately most of them will find their way to New York, where approximately half of our customs receipts are paid, and presumably they will be dealt in there at quotations which may vary widely depending on the amount of debentures issued and the demand therefor, seasonal and otherwise. Machinery will have to be set up for transferring debentures from Galveston, let us say, to New York and for their sale there, which will necessarily involve banking and brokerage charges.

If issued in large amounts, as they may well be, it is likely that the debentures will sell at a very considerable discount which would not only deprive the farmer of a portion of the benefit arising from the debenture rate, but represent a bonus to importers, and would seriously dislocate the tariff schedules fixed by the Congress. It is not apparent, even admitting the desirability of paying an export bounty, why machinery should be set up the effect of which might be to permit the importation of, let us say, butter from Denmark or wool from Australia at rates lower than those established by law. Such a method of reducing tariff rates would unquestionably injure some American farmers in order to benefit other farmers, whereas if a cash bounty were paid the latter would get the full benefit and there would be no dislocation of tariff schedules such as might prove injurious to our present manufacturing prosperity which is an important factor in supporting the farmers' domestic market.

The second major question is whether it is economically desirable to pay a cash bounty on the exports of a commodity which is already produced in excess of domestic requirements. I think not. Exports would be stimulated, and, under the pressure of a consequent decreased domestic supply, domestic prices would rise. This would stimulate increased production. In the meanwhile, increased exports dumped on the world market would depress world prices, thus depriving the producer of the full benefit of the contemplated bounty. There is no doubt, I think, but that the effects of this program would be to depress world prices and to increase domestic prices, and to give to the American producer a price higher than he would otherwise obtain, the increase, however, not being by the full amount of the cash bounty. But as production increased in this country under the stimulus of higher domestic prices, there would be a constant tendency for the bounty benefit to melt away.

It is true that, recognizing this tendency, the various plans proposed provide in the event of sharply increased production for a gradual diminution of the bounty, and even its entire suspension. As framed, however, this action would appear to be too long delayed to be truly effective; and there is a very real danger that a substantial increase will take place in domestic production, leading to the [p.92] automatic suspension of the bounty, and that the farmer will then find himself in a worse situation than he is today.

The truth is that the real justification for a bounty on exports is to encourage domestic production up to a point where the country will be economically self-sufficient. The principle has no application where a country is already producing more than enough to meet its domestic requirements, and under these circumstances an export bounty would seem to be an illogical and unsuitable instrument for effecting a readjustment of domestic prices.

The experience of European countries with bounties on sugar may be of interest in connection with this proposal for a bounty on American agricultural products. The original purpose of the foreign bounties was to stimulate production rather than to increase the income of the agricultural population. A cash bounty was paid the producers of sugar and the results desired were obtained. In Germany it was planned to cover the costs of the production bounty on sugar by collections from an internal revenue tax on the domestic consumption of sugar, but production increased so far out of proportion to the domestic consumption that within a comparatively few years the net effect was not to produce revenue. Some time thereafter the sugar bounties so far exceeded the revenue from the sugar tax that the treasury sustained a considerable loss, while sugar was being sold abroad at considerably less than the domestic price, and somewhat less than the actual cost of production. Consequently, the bounties on such sugar production had to be removed. There were no limits to production in the granting of such bounties.

Moreover, it is hardly to be assumed that foreign countries with important agricultural interests to protect will permit their producers to be subjected to a price war subsidized from the United States Treasury without adopting protective measures. It is highly probable, therefore, that they will levy countervailing tariff rates equal in amount to our export bounty, thus entirely nullifying the effect of the latter as an aid to our producers and drawing the amount of the bounty funds into their own treasuries. The United States was one of the first nations to place countervailing duties against the bounty produced sugars of the various European countries.

It is apparently contemplated to apply the plan to products of which we produce a surplus and which are on the free list, notably cotton. This must inevitably give rise to insuperable administrative difficulties in order to avoid wholesale fraud. Again, considerable difficulty is now encountered in the administration of the customs laws in determining the component material of chief value in an ported article. In the light of this experience there would be even greater administrative problems in working out the debenture or bounty rate in the case of articles manufactured from agricultural products.

It seems unnecessary to point out that the program will, of course, entail a [p.93] sharp diminution in customs receipts accompanied by increased expenses of administration and a corresponding need for supplementing the loss by increased taxation along other lines. This in itself is by no means a serious objection if the plan could fairly be said to promise substantial benefit to American agricultural producers.

Very truly yours,

A. W. MELLON,

Secretary of the Treasury

[Hon. Charles L. McNary, United States Senate]

DEPARTMENT OF AGRICULTURE

April 20, 1929

Dear Senator:

At the request of the President I am offering you my comments on the Export Debenture Plan in the Ketcham Bill, H.R. 12892, 70th Congress, 1st Session.

"A bill to foster agriculture and to stabilize the prices obtained for agriculture commodities by providing for the issuance of export debentures upon the exportation of such commodities."

Sections 1 to 4 and 10 to 17 of this bill are in the main similar to other farm relief measures providing for a federal farm board, loans and other encouragement to cooperative marketing associations, price insurance, etc. Sections 5 to 9, to which this analysis will be confined, include the so-called "debenture plan."

The export debenture plan proceeds upon the hypothesis that it should be the policy of the Government to raise the level of domestic prices for farm products and to dispose of the surplus upon the world markets at the Government's expense. The discussion of the plan which follows is based on this hypothesis and logically falls under four heads: (1) Would the debenture plan be an effective and convenient means of accomplishing this purpose? (2) What would be the probable cost of this plan? (3) What would be the probable consequences to agriculture of the operation of this plan? (4) What has been the experience of foreign countries that have tried somewhat similar plans?

Before discussing these questions, it is necessary to outline the principal provisions of the debenture plan in this bill.

Section 6 designates swine, cattle, corn, rice, wheat, cotton, and tobacco as "debenturable commodities." Other farm products produced in quantities beyond domestic requirements and on which a tariff is levied may be added to this list by Presidential proclamation, if it is found that the cost of producing the commodity in the United States "is greater than the cost of producing such commodity in competing foreign countries." No attempt will be made here to analyze the possibility of using differences in cost of production as a standard for extending [p.94] this plan to farm products other than the seven products specified in the bill. It should be noted, however, that since much time would be required in determining cost of production here and abroad, it would not be possible to resort to this feature of the plan in time to meet emergencies due to severe depression in the price of a commodity under the weight of an exceptional surplus.

My comments will be confined to the seven specified commodities. The Secretary of the Treasury is directed to issue to any exporter, under regulations prescribed by the federal farm board, export debentures in the form of negotiable certificates upon the exportation of debenturable farm products. The following rates are specified:

(1) Swine, one-quarter of 1 cent per pound; fresh pork, three-eighths of 1 cent per pound; bacon, hams, shoulders, and other pork, prepared or preserved, 1 cent per pound; lard, one-half of 1 cent per pound.

(2) Cattle weighing less than one thousand and fifty pounds, three-fourths of 1 cent per pound; cattle weighing one thousand and fifty pounds or more, 1 cent per pound; fresh beef and veal, 1½ cents per pound.

(3) Corn and maize, including cracked corn, 7½ cents per bushel of fifty-six pounds; corn grits, meal, and flour, and similar products, 15 cents per one hundred pounds.

(4) Paddy or rough rice, one-half of 1 cent per pound; brown rice (hulls removed) five-eighths of 1 cent per pound; milled rice (bran removed), 1 cent per pound; broken rice, and rice meal, flour polish, and bran, one quarter of 1 cent per pound.

(5) Wheat, 21 cents per bushel of sixty pounds; wheat flour, semolina, crushed or cracked wheat, and similar wheat products not specially provided for, 52 cents per one hundred pounds.

(6) Cotton, 2 cents per pound.

(7) Tobacco, 2 cents per pound.

The debenture certificate would be negotiable and redeemable at part by the bearer in the payment of import duties within one year from the date of issuance. Except insofar as exporters of debenturable commodities are also importers, the certificates necessarily would be sold sufficiently below par to induce importers to use them in preference to cash in the payment of import duties. Foreign experience shows that import or export certificates usually sell at some discount from par value. To the extent, at least, of such discount, the farmer would lose the full effect of the subsidy in the price he received of the amount of such debenture certificates.

Revenues from import duties would be reduced by the total face value of the debentures issued. The extent of this loss to the Treasury would equal the debenture rate times the quantity exported of each of the debenturable commodities. [p.95] It the plan had been in operation in the three fiscal years 1926 to 1928 on the basis of the volume of exports in those years, the annual average loss to the Treasury on account of the seven commodities specified in the bill would have been $153,000,000 or 26.2 per cent of the average of all customs receipts for these years.

In practice, however, the loss to the Treasury would have been greater than indicated in this table because of increased exports. An increase in the price of these products by the amount of the export debenture (less the figure at which the certificates would have sold below par) probably would have stimulated production and would have tended to decrease domestic consumption. The degree to which production might be stimulated, however, would depend upon the level of prices resulting from the use of the debentures and the prospects for increased incomes through the expansion of farm operations.

The administration of the proposed plan would not be difficult. On a strictly theoretical basis it should increase the domestic price of each debenturable farm commodity by the amount of the export debenture, less the discount on the certificate and provided competition between exporters in bidding up the domestic price were sufficiently effective to hold the price of the commodity up to the full amount of the world price, plus the debenture, less the discount on the certificate.

Applying the debenture rates to the average estimated sales by farmers of debenturable commodities for the three fiscal years 1926 to 1928 gives an annual average increase of $515,000,000 in the gross value of the seven debenturable products marketed by farmers. As a matter of fact, this sum could hardly be realized, because, as already indicated, it is not reasonable to assume that the debenture rate could be translated in full into higher prices to producers, since the debentures would exchange only at some discount. Furthermore, it is possible that exporters may not bid prices up to the full extent of the debenture less the normal exchange discount on the certificate. It is therefore possible that exporters might be in a position to derive an extra profit by not reflecting in prices paid to farmers the real value of the debentures. In order to dispose of the surplus the exporter would have to make some price concessions to meet the competition from other countries and this would tend to depress world prices.

As a consequence of an increase in domestic prices of debenturable commodities, production would be stimulated. Production of debenturable commodities has materially increased following the adoption of debenture plans in foreign countries. In an effort to prevent over stimulation in this country H.R. 12892 (Section 8b) provides for a so-called "flexible rate" of debentures. If the board should find that the average annual production of any debenturable livestock commodity or the average acreage of any other debenturable agricultural commodity "for the last two preceding years has exceeded the average annual production or acreage of [p.96] such commodity from the seventh to the third preceding year, the board may invoke the flexible debenture." If this increase should be more than 5 per cent, but less than 10 per cent, the debenture rate would be reduced 25 per cent. Should the increase be 10 per cent, but less than 15 per cent, the reduction would be 50 per cent, and should the increase be 15 per cent or more, the "issuance of debentures shall be suspended for a period of one year."

It is very doubtful that the flexible rate provision of the bill would have any material influence in checking the expansion in production. The average annual acreage of wheat harvested in the past five years has been, in round figures, 55,500,000 acres. Under the proposed plan, the producers would be free to increase their average acreage in the first two years of this debenture plan by 5 per cent before being obliged to accept a reduction of 25 per cent in the export debenture. In other words, the farmers could increase the acreage from 55,500,000 to more than 58,000,000 acres before the export debenture of 21 cents would be reduced to 15 3/4 cents. It is hardly reasonable to suppose that the farmers who harvested an annual average of about 55,500,000 acres of wheat in the past five years for an average price of about $1.20 per bushel would be induced not to expand production by the fear of having to accept an increase of only 15 3/4 cents over this price instead of an increase of 21 cents, the full amount of the debenture.

It appears from our study of the effect of export debentures in other countries that it has operated to increase production. In Germany from 1890-93 to 1909-13, under the operation of the plan, the acreage of wheat remains substantially the same, but that the average production increased from 104,000,000 to 152,118,000 bushels, an increase of 46%. In the same country the acreage in rye increased from 14,203,000 to 15,387,000 whereas the average production increased from 245,449,000 bushels to 445,222,000 bushels, an increase of 81%. Substantially the same results were realized with respect to oats and barley. The experience with it in Sweden has been for a relatively short time, but it appears that the wheat area of that country has expanded from 363,000 acres in 1925 to 574,000 acres in 1927, and that the average production has increased from 13,359,000 bushels to 16,151,000 bushels. This increase in yields no doubt was due partly to the increased use of fertilizers and better cultural methods in Germany as in other countries.

As a consequence of the operation of the debenture plan, there would be a tendency in farming to shift from many lines of production toward the production of debenturable commodities, especially those with a short production cycle-grain and cotton, for example--the acreage of which could be increased greatly from one year to the next in the expectation of realizing quickly the benefits of the debenture. This would at least temporarily disturb established production programs. Furthermore, should the support of prices provided through this plan be removed, the debenturable commodities would be left in an overstimulated [p.97] condition and agriculture would stand to suffer accordingly. An inquiry might well be made into the probable effect of the debenture plan upon existing farming. In some sections, notably the South where leaders of agricultural thought are putting their efforts behind programs of diversified farming, it might result disastrously by putting a premium upon the one crop system. The same inquiry might well be made with reference to those states which have made considerable advancement in developing the dairy industry.

It should be noted also that an increase in our exports of a commodity would tend to depress world prices. This would tend to reduce the effectiveness of the debentures and necessitate further increases in debenture rates in order to maintain prices.

While the debenture bill provides for flexible debenture rates with respect to an increase in production, it does not provide a means for making debenture rates responsive to changes in world prices. If, for instance, world conditions of competition and demand affecting a debenturable commodity should be such as to raise the world price to a satisfactory level, there is no provision in this bill for reducing debentures. Should the world price level of a commodity rise materially, there would still be an enhancement of the domestic price above the world level by the amount of the effective debenture. This would tend to give an abnormal stimulus to production.

In considering this or any similar plan, it is important to give careful consideration to both sides of the proposal lest the alluring prospects of an immediate increase in prices of the debenturable commodities should obscure the dangers that go with such a plan.

Sincerely yours,

ARTHUR M. HYDE

Secretary

Enclosures.

[Hon. Charles L. McNary, United States Senate]

DEPARTMENT OF COMMERCE

[Memorandum]

ANALYSIS OF THE EXPORT DEBENTURE SCHEME AS CONTAINED IN THE KETCHAM BILL H.R. 12892

John D. Black* makes the following statement as to the principles involved in the export debenture plan:

"The essential principle of the export debenture plan is the paying of a bounty [p.98] on farm products in the form of negotiable instruments called debentures which can be used by importers in paying import duties. The price of domestic farm products would be raised to the extent of the bounty; likewise prices to consumers. The revenues of the Government would be reduced by the amount of the export debentures issued. The maximum height of the export bounty is the import duty; otherwise a return-flow of the product would set in."

*"The Annals", Volume CXLII, March, 1929, Page 381.

In the Jones-Ketcham Bill the rates which are designated are equivalent to one-half of the present import duties on the commodities named, while in the case of cotton and tobacco a rate of two cents a pound is specified. To make the debenture plan effective it would be necessary to put a tariff on cotton to prevent a back-flow of the commodity.

Statistical Analysis Showing How the Plan Would Work:

The following statistical analysis is a rough estimate of the increase to producers and cost to public, based on estimates by the United States Department of Agriculture, of the quantity sold of each commodity:

THEORETICAL INCREASED COST OF PRODUCTS TO PUBLIC OF SPECIFIED COMMODITIES

Item Quantity solda Debenture Increased

rate value

Unit Amount (Cents) (Million

(Millions) dollars)

Hogs Pounds 12, 500 1/4 31

Cattle Pounds b13, 500 7/8 118

Corn Bushels 500 7 1/2 37

Wheat Bushels 660 21 139

Rice Pounds 1, 109 1 11.0

Cotton Pounds 7, 800 2 156

Tobacco Pounds 1, 300 2 26

Total 518

a Average total quantity sold by farmers in the production years, 1925-26, 1926-27, 1927-28.

b Average of the rates for cattle weighing less than 1,050 pounds and cattle weighing 1,050 pounds or more.

THEORETICAL VALUE OF DEBENTURES BASED ON 3 YEARS EXPORTS OF SPECIFIED ARTICLES

Products Average exports Debenture rate Value of

1925-26-27 (Cents) debentures

Pork (1000 lb.) 1,100,000 3/8 $4, 070, 000

Wheat (1000 bu.) 184,724 21 38,792,040

Corn (1000 bu.) 18,087 7 1/2 1,356,525

Rice (1000 lbs.) 164,730 1 1,647,300

Cotton (1000 lb.) 4,657,601 2 93,152,020

Tobacco (1000 lb.) 492,137 2 9,842,740

Cattle (negligible)

$148,860,625

If the above estimate on cost to the public were calculated on the total crop produced, instead of the portion going to market, the figures would be approximately 20% higher, due mainly to the fact that only 15% of the corn crop is marketed.

In making this calculation it is assumed that the export bonus would be fully effective in raising the price. The total cost to the public would be approximately $518,000,000, of which $369,000,000 would be increased cost on domestic consumption and $149,000,000 public revenues spent on paying bonus.

The above calculation, of course, is only an estimate and does not represent actually what would happen. If there was an increase in production, and assuming that all the increase would be put on the export market, it would no doubt result in some depression of world price levels and the theoretical gain would not be realized by the producers nor would the theoretical cost be the same to the consumers.

The bill provides that when increased acreage or production reaches fifteen per cent, the debenture plan then becomes inoperative and shall be withdrawn. The effect of this would be to leave the industry with an increased production and no protection. Evidently it is the thought of those who have prepared the Bill that some means would be found of both raising the prices and controlling production.

It might be observed also that it would be much simpler to pay a straight export bounty. It would have the same effect and would cost the public exactly the same amount and be simpler in operation.

POSSIBILITY OF RETALIATION BY FOREIGN COUNTRIES UNDER ANTI-DUMPING LAWS

It should be pointed out that practically all countries, with two or three exceptions, have anti-dumping laws. It is possible the debenture plan would be interpreted as an export bounty and export dumping, since products would be sold in foreign countries at lower prices than in this country.

USE OF EXPORT CERTIFICATES IN FOREIGN COUNTRIES

Foreign countries have used export certificates, especially Germany, Czechoslovakia and Sweden. In none of these cases is the situation comparable to the proposed debenture plan. In the first place, the export certificates are given on grain but are only usable for the reimportation of grain.

In both Sweden and Czechoslovakia the scheme apparently is to facilitate the export of certain grades and varieties of grain and imports of other varieties or grades without paying duty.

When the plan was first adopted in Germany the country as a whole was on an import basis when all grains were considered. However, Northeast Germany had a surplus, especially of rye, but in shipping this to Southwest Germany the railway freight and other charges made the prices in Northeast Germany considerably lower than in Western Germany. Originally the idea was to give Northeast Germany world price plus the tariff without raising prices in Western Germany, and in this way practically equalizing the price over the whole country. The export certificates issued in Northeast Germany were used to pay import duties on Grain into West Germany. However, when production was stimulated in Northeast Germany and the number of certificates exceeded the imports, they provided for a time for using the certificate for paying on both coffee and petroleum. There was a protest against this, however, as it amounted to using potential public funds for paying a bounty. The new law enacted in 1925 limits the certificates to the payment of duty on grain.

There is also in effect in both Norway and France an export certificate scheme applying to wheat, due to the fact that both countries must import certain amounts of hard wheat for blending. They use an export certificate on the exportation of soft wheat which can be used in turn to pay tariff on the importation of hard wheat.

April 20, 1929.