Charles L. McNary
United States Senate
My dear Mr. Senator:
On April 12th I received a call from yourself and Senators Capper, Heflin, Norbeck and Randsell, acting as a sub-committee of the Senate Committee on Agriculture, requesting my opinion on the “export debenture plan” for agricultural relief, since it is a complete departure from the principles already debated during the campaign. I informed the committee that I would request an analysis of the plan by the Departments of Agriculture, Treasury and Commerce, and would transmit them to the Committee together with my conclusions after investigation. The Departments have given it earnest consideration and I have just received and studied these reports which I transmit to you herewith.
The principle of this plan as set out in the draft bill of your committee which is before me, is to issue a government debenture to merchants exporting agricultural products in amount of one-half of the tariff on such products—such debentures to be redeemed by presentation for payment of import duties. The assumption is that by creating a scarcity through stimulating exports that the domestic price will rise above world prices to the amount of the debenture—that is, if the debenture on wheat exports is 21c. a bushel, the price of wheat will be 21c. higher in the domestic market than in the world market.
I am aware of the arguments put forward in favor of the plan by some of our agricultural organizations; and the arguments of other farm organizations in opposition to it. The proposers advance it in the utmost good faith and earnest desire to assist in solution of a great problem and I regret deeply that I cannot agree that this provision would bring the results expected. On the contrary I am convinced that it would bring disaster to the American farmer.
The weaknesses of the plan as set forth in the Senate Bill may be summarized as follows:
1. The issue of debentures to export merchants and their redemption in payment of import duties amounts to a direct subsidy from the United States Treasury. If the plan proposed be generally applied it would cost in excess of $200,000,000 a year as it would decrease the Treasury receipts by such an amount.
2. The first result of the plan, if put into operation, would be a gigantic gift from the Government and the public to the dealers and manufacturers and speculators in these commodities. For instance, in the principal export commodities the value of the present volume of stocks in possession of these trades would, if the plan worked, rise by from $200,000,000 to $400,000,000 according to different calculations, without a cent return to the farmer or consumer. Every speculator for a rise in our public markets would receive enormous profits. Conversely, if after this elevation of prices the plan were at any time for any reason withdrawn the trades would suffer a like loss and a long line of bankruptcies must ensue. But in the meantime the trades, out of fear of withdrawal or of reduction in the subsidy, would not engage in normal purchase and distribution. Either exorbitant margins would be required or alternatively the farmer would be compelled to himself hold the nation’s stocks until there was a demand for actual consumption.
3. If the increased price did reflect to the farmer, the plan would stimulate overproduction and thereby increase world supply which would in turn depreciate world prices and consequently decrease the price which the farmer would receive, and thereby defeat the plan. Stimulation of production has been the outstanding experience abroad where export subsidy has been applied. Over production will defeat the plan and then, upon its withdrawal, agriculture would be plunged into a catastrophe of deflation from over expanded production. The farmer’s difficulties today are in some part due to this process after the war.
4. The stimulation of production of certain commodities would disturb the whole basis of diversification in American agriculture, particularly in the cotton and wheat sections where great progress is now being made toward a more stable basis of agriculture.
5. Although it is proposed that the plan should only be installed at the discretion of the Farm Board, yet the tendency of all boards is to use the whole of their authority and more certainly in this case in view of the pressure from those who would not understand its possibility of harm, and emphatically from the interested dealers in the commodity.
6. It is not proposed to pay the debentures of subsidies to the farmers, but to the export merchants, and it seems certain that a large part of it would not be reflected back to the farmer. It offers opportunity for manipulation in the export market none of which would be of advantage to the farmer. The conditions of competitive marketing at home and abroad and the increased risks would absorb a considerable part of its effect into the distribution and manufacturing trades. Moreover, the theoretical benefits would be further diminished by the fact that debentures would sell constantly at a discount, for the reason that persons paying duties on imports would not take the trouble to accumulate the debentures and lose interest upon them unless obtainable at a discount.
7. The provision of such an export subsidy would necessitate a revision of the import tariffs. For instance, an export subsidy of two cents a pound on raw cotton would mean the foreign manufacturers would be receiving cotton at two cents a pound less than the American mmanufacturer and the foreigner could ship his manufactured goods back into the American market with this advantage. As the subsidy in many cases is larger than the freight to foreign ports and back, it raises large opportunities of fraud in return shipment activities.
8. Export bounties are recognized by many nations as one form of dumping. I am advised that a similar action by another nation would be construed as a violation of our own laws. Such laws are in force in the principal countries of our export markets and to protect their own agriculture would probably lead to action which would nullify the subsidy given by us.
9. A further serious question arises again (if the plan did have the effect intended) where the foreign producer of animals would be enabled to purchase feed for less than the American farmer producing the same animals. For instance, the swine growers in Ontario would be able to purchase American corn for less than the American farmers across the border and it would tend to transfer the production of pork products for export to Europe from the United States to Canada. It would have the same and probably even more disastrous effect in dairy products.
10. The plan would require a substantial increase in taxes as no such expenditure or depletion of revenues as this plan implies could be paid from marginal income of the Government more particularly in view of the very large increased expenditures imposed by the naval program, flood control and other branches of farm relief.
Altogether, from the above reasons, it is my belief that the theoretical benefits would not be reflected to the American farmer; that it would create profiteering; that it contains elements which would bring American agriculture to disaster.
The introduction of such a plan would also inevitably confuse and minimize the much more far reaching plan of farm relief, upon the fundamental principles of which there has been general agreement.