NATIONAL FARMERS UNION

By ANGUS MCDONALD, DIRECTOR OF RESEARCH

The report of the President and particularly the annual report of the Council of Economic Advisers, suffer from a number of fundamental weaknesses and omissions. The Council is completely blind to the erroneous policies of the Federal Reserve Board. The Board's vagaries, its lack of an agricultural policy, the inconsistencies, the contradictions and the lack of action to do anything about skyrocketing interest rates has made the Federal Reserve Board the laughing stock of the financial and metropolitan news world.

The report of the Council is a self-serving document which apologizes and attempts to sweep under the rug the dismal failure of the past Administration in regard to interest rates and the erroneous monetary policies of the Federal Reserve Board. Over and over again the President's Council attempts to explain away the housing debacle of 1966 and the failure of the Administration to adopt realistic measures as advocated by Members of the House and the Senate.

In regard to agriculture, we have commented annually over a period of years on the failure of the President's Council to take cognizance of the roots and causes of low prices and other situations which have made the farmer, as Senator Proxmire has pointed out, a second class citizen in our so-called prosperous economy. The Council completely ignores the lack of bargaining power and as yet is not even aware that the Food Marketing Commission conducted an exhaustive investigation and came up with a number of contructive recommendations which would correct the maladjustment in the agricultural economy. The Council swallows hook, line and sinker the conclusions of an absurd study of the Department of Agriculture. This study is referred to on page 116 of the document.*

One further observation may be made in regard to USDA statistics. According to the Internal Revenue Service the total net income of farmers for the year 1965 was as follows:

Source: "Statistics of Income, 1965: Business Income Tax Returns," U.S. Treasury Department, Internal Revenue Service.

A critique of this study, "Parity Returns Positions of Farms", which attempts to prove that farmers are better off than nonfarm workers and investors, is attached to this statement. (Attach. “A”.)

According to the U.S. Department of Agriculture, farmers during the past few years have been realizing from $13 to $15 billion in net income. It is seen that there is a wide variance between the reports of the Internal Revenue Service and USDA. Even discounting the fact that a certain allowance is made in USDA statistics for home living and legitimate tax deductions in regard to soil conservation and other items, it appears that the Department of Agriculture is overstating greatly the amount of net income realized by farmers.

Attached to this statement is a sheet giving USDA farm net income statistics for the years 1963-68 and statistics published in Economic Indicators.

The Council neglects completely the dangerous trends of the last few years in regard to mergers, monopolistic domination of the marketplace and the invasion of agriculture by corporations and wealthy individuals. It passes over lightly the conglomerate revolution with the assertion that the taking over of a company which is unrelated to the conglomerate's activities, often infuses new vigor and competition in the industry which is unrelated to the company which makes the acquisition. Furthermore, there is a blatant attempt in the report to sabotage and discredit the Robinson-Patman Act by suggesting that it discourages competition in certain instances by forbidding discriminatory practices.

The President's Council provides no remedies as to interest rates, taxes, or antitrust problems. It apparently is the only agency in Washington which is unaware that something must be done to hold skyrocketing interest rates, the invasion of conglomerates into agriculture and to close up the gigantic loopholes which exist in our tax laws. It is well known that tax dodging activities by wealthy individuals and corporations have become a public scandal. Congressmen in both parties are much exercised over this situation and hardly a day passes that a bill is not introduced or a speech made on the floors of Congress demanding that something be done and be done now.

Inasmuch as a sizable portion of the report of the President's Council is devoted to the past history of the Federal Reserve Board, we feel that a few comments are necessary. It will be recalled that in December 1965 the Federal Reserve Board raised the discount rate and also raised the interest rate which may be charged on time deposits. By this action, protested by President Johnson, it raised interest rates on certificates of deposit from 4 to 52 percent-an increase of 371⁄2 percent.

This, as the eminent chairman of this committee predicted, resulted in catastrophe in the housing and farm sectors of the economy. It set off a rapid increase of interest rates and drained billions of dollars out of the rural areas and into New York banks-dollars which would otherwise have been available for agriculture and housing. The explanation of this flow of funds from the interior of the country into Wall Street is obvious. Why, for example, should an individual or corporation in the Midwest continue to loan money to farmers, small business, and housing authorities at 4 to 5 percent when it could obtain up to 512 percent by merely depositing funds in a New York bank with no risk and no redtape or inconvenience at a higher rate?

The Federal Reserve Board, as well as the administration, refused to act in 1966 (contrary to statements made in this report) until Sep

tember when the housing industry was flat on its back and it was apparent that a tremendous recession had developed which was wiping out small business and causing the liquidation of thousands of farmers. It was at this point that the Federal Reserve and the Administration changed their policies. The President announced that he would no longer pursue the participation sales policy which had been used as a gimmick to reduce on paper appropriation of funds and make the budget look good to those unfamiliar with sophisticated bookkeeping. Having brought the country to the brink of catastrophe, the Federal Reserve Board reversed its policy and injected large amounts of new funds into the money bloodstream. This has been referred to by Barrons magazine, a very conservative publication, as a "zig-zag policy" which we think is a very apt description of the Fed's activities.

At the present time, not only have the policies of the Federal Reserve been questioned in the Halls of Congress, the metropolitan press and by various interested expert individuals, but in the financial world.

Attention is called to an article published in the New York Times on January 3, 1969, titled, "Laughing at the Fed." The writer of this witty article, Edward L. Dale, Jr., says in regard to the Federal Reserve System, "Banks are laughing at it; economists are laughing at it; businessmen-getting loans like crazy-are probably laughing at it. Congressmen are not in the 'in-group.' They are just frustrated and puzzled by it. The easiest laugh around is to say at a party, 'Say, have you heard? The Fed is tightening money...

If the Federal Reserve Board was not so powerful and did not affect the lives of so many millions of citizens, we could laugh too, but we assure you that farmers are not laughing at the present time at skyrocketing interest rates which have reached disastrous proportions. Farmers are struggling now under a total debt of $55 billion. They are having to pay not only the 8 percent rate which is charged those who obtain funds from the Housing Authority, but as much as 10, 12, and 15 percent on short-term loans. Federal agencies particularly the Farmers Home Administration, are out of money and farmers are dying on the vine by thousands. Fortunately, within the last few days the new administration has made $25 million of new money available under the emergency FHA program.

Some comment is called for, we feel, in regard to the threats made by Federal Reserve Board Chairman William McChesney Martin. In 1968, having injected too much new money into the money bloodstream, Chairman Martin began threatening the Congress and the American people with a recession if Congress did not do his bidding in relation to a balanced budget and a new tax law. He said, according to a statement inserted by Congressman Holifield in the Congressional Record of April 24, 1968, "We are in the midst of the worst financial crisis since 1931." Martin said the Nation faces either "uncontrollable inflation" or an "uncontrollable recession" because of an "intolerable balance-ofpayments deficit side by side with a budget deficit."

In this hysterical statement Chairman Martin ignored the fact that the national debt and the deficit were not high-in fact, extremely low-as compared to the debt as a percentage of the gross national product during the years 1941-47. The following figures succinctly prove this point:

The following table also proves that Chairman Martin didn't know what he was talking about in regard to deficits. During 1941 through 1947, total deficits amounted to $210.4 billion, while during the period 1961-67, total deficits amounted to only $40.3 billion.

At the present time the Fed is pursing its stupid policy of tightening money across the board, ignoring the needs of agriculture and the housing industry. Furthermore, Martin is continuing his threats. I call attention to an article in the December 15, 1968, Washington Evening Star by Lee M. Cohn. The writer asserts in this article that the Federal Reserve will squeeze credit harder and push interest rates higher unless President-elect Richard M. Nixon soon indicates clearly that he will operate a tight budget. By a tight budget, informed sources said, according to the writer, the Fed means strict curbs on Government spending and extension of the income tax surtax beyond its scheduled expiration next June 30.

There is no doubt in our minds that efforts will be made along this line, ably assisted by the Federal Reserve Board. Already it has been announced that the 414-percent interest rate ceiling on long-term bonds will be done away with. Farmers Union has obtained a copy of a secret report, probably motivated in part by the Federal Reserve Board, which recommends that the rural electrification program and the Farmers Home Administration be done away with. We have no idea whether President Nixon will act on these recommendations or not.

The committee is well aware of skyrocketing interest rates and the fact that New York bankers have announced that the prime interest rate has now been raised to 7 percent. This means that farmers and other borrowers will pay much more than that. The prime customers of the New York banks are required to pay an effective 8.4-percent

rate because they must keep 20 percent of their loan on deposit at the bank. Details of this situation are set forth in an article in the Wall Street Journal of February 8, 1969.

The Federal Government is one of the first to feel the pinch of this raid by bankers. The Wall Street Journal of January 30, 1969, reports that the Nixon administration in its first big Treasury financing plan is faced with the highest interest rate on an issue in more than 100 years. In an exchange of $14.47 billion of securities maturing on February 15, the Treasury offered holders their choices of a 15-month note with a 6%-percent coupon, or a 7-year note with a 64-percent coupon. This 15-month note slightly discounted will pay investors 6.42 percent-the richest return on Federal securities since 1865. There was an issue in that year on a $600 million 3-year note which carried a 7.3-percent interest rate.

Banks and institutional investors constitute the groups which are able to take advantage of the high interest rates. Farmers at this time do not have extra funds to invest in Government securities. Banks are keeping on deposit, because of the generosity of the Federal, State, and local governments, $40 billion on which they pay no interest. They use this money to make loans to those who are outside the banking fraternity. The Federal Government subsidizes the commercial banks by keeping on hand some $5 to $6 billion of deposits on which no interest is paid. These funds are called "Tax and Loan Accounts." The greed of bankers can never be satisfied-they are not satisfied even with the highest interest rate in 100 years.

John A. Maver, chairman of Mellon National Bank & Trust Co.. was quoted in the Wall Street Journal of February 26, 1969, as saying, "Another increase in bank prime rates is a possibility that shouldn't be ignored." Mayer said he expects Federal Reserve Board authorities to continue to keep the money supply tight for a while. With a continuation of this policy and continued strong loan demand by bank customers, he said, "to put it mildly, interest rates aren't going to go down-and they could go up some more."

The disastrous results of the monetary policies of the Federal Reserve Board and the failure of the Johnson administration to do anything about it, are set forth in an article in the U.S. News & World Report of February 17, 1969. This conservative publication apparently is alarmed at the effect that skyrocketing interest rates are having on the housing industry. It published a chart which graphically shows the interest which those purchasing automobiles and other consumer items are paying. In 1960 a total of $14.7 billion was paid in interest charges by such groups. By 1968 the interest load for these consumers had increased to $31 billion.

U.S. News reports that mortgage loan rates have reached 9 percent for some homebuyers on the west coast. Many lenders, squeezed for loanable funds, are weeding out many of their customers. Even if a family has the necessary credit standing and security to secure a loan, it is subjected to an intolerable interest burden.

According to the article, "If a family buys a $40,000 house with a $30,000 mortgage at 8 percent for 30 years, total interest payments come to over $49,000. A 7-percent mortgage on the same house means $7,300 less in interest payments over the term of the mortgage: at 6 percent the homebuyer pays $14,500 less in interest than he would on an 8-percent loan."