Financial History Issue 132 (Winter 2020) | Page 29

the world wheat market, this transfer is
paid by domestic users only. In this sense,
compared to the Canadian economy, the
US economy could more readily afford to
guarantee its producers a fair price. The
United States and Canada returned to the
private trade, resuming futures trading in
the summer of 1920. By the end of World
War I, however, political motives and
economic means to support grain prices
vis-à-vis price guarantees were apparent
in the United States.
The 1920s began with a short-lived
though severe macroeconomic contrac-
tion. Meanwhile, “agriculture…sunk into
a major depression that was to keep its
buying power low and its workers dissatis-
fied for a number of years.” Post-war crop-
price highs gave way to precipitous declines,
farm incomes and land values consequently
fell, and farm-mortgage delinquencies rose.
Understandably, farmers lobbied for eco-
nomic relief from their unprecedentedly
severe post-war circumstances. The US
government did not offer to support crop
prices; indeed, ostensibly, many farmers
viewed price supports as “a combination
of price fixing and government in busi-
ness that was contrary to their basic prin-
ciples.” For the most part, the government
imposed a series of tariffs on wheat, pro-
moted orderly marketing through producer
cooperation and provided financing.
Nevertheless, between 1924 and 1928,
Congress drafted five so-called two-price
plans known as the McNary-Haugen bills.
The plans intended to raise the price of
agricultural commodities used domesti-
cally above their respective market-clearing
world prices by way of orderly marketing.
According to these plans, a farmer would,
for example, sell wheat to a domestic pro-
cessor, who would pay the market-clearing
world price plus scrip, which the proces-
sor purchased from the government at a
predetermined face value; a government-
sponsored wheat-export company would
sell domestic surpluses abroad. At the end
of the marketing season, the farmer would
redeem his scrip for face value minus
expenses incurred by the wheat-export
company. The plans would operate along-
side tariffs to discourage wheat imports.
The plans were not passed into law, in
part because of political uneasiness with
the obviously intentional transfer of sur-
plus from users to producers, thanks to
the scrip device. Importantly, however,
price-support proponents in the United
States generally favored a tax-and-transfer
scheme, which each plan embodied, for
two reasons. One, the support to farmers
could be economically meaningful, while
domestic users could bear the tax burden,
because the share of grain used domesti-
cally was relatively large. And, two, the tax-
and-transfer scheme could operate along-
side private grain marketing, a feature that
especially appealed to legislators unwilling
to support policies that would effectively
nationalize the agricultural industry. In
effect, the approach integrated private
grain marketing into farm-income support
programs; the futures market became part
of the solution, instead of the problem.
Comprehensive agricultural policy in
the United States began with the New
Deal-inspired Agricultural Adjustment
Act (AAA, 1933), which, in principle, bor-
rowed heavily from the two-price plans
of the 1920s. In the case of wheat, the
AAA imposed tariffs on wheat imports,
taxed domestic processors, supplemented
farm incomes with so-called adjustment
payments (on program-allotted produc-
tion to discourage surpluses) and otherwise
relied on the private trade including, of
course, commodity futures markets. The
act intended the sum of the unfettered mar-
ket price of wheat plus the adjustment pay-
ment to constitute a fair price to producers.
By 1933, the vast majority of US wheat
was used domestically; thus, the burden
per bushel of wheat that the AAA’s adjust-
ment payment imposed on domestic users
was less than at any time since World
War I. In 1935, Joseph S. Davis, writing
on the AAA for the Brookings Institution,
remarked, “Political feasibility, adminis-
trative flexibility and prospects for public
acceptance constituted powerful reasons
for choosing the processing tax device.”
Ultimately, the processing tax device was
ruled unconstitutional; the AAA of 1938
financed adjustment payments with fed-
erally appropriated funds instead, thereby
fundamentally preserving a tax-and-trans-
fer scheme to subsidize farm incomes.
Finally, as for Canada, AAA-styled
adjustment payments funded with a tax-
and-transfer scheme of any kind would
too-greatly burden domestic users. Thus,
“there was no possibility whatever of
the Canadian government undertaking
to keep farm prices at parity levels as
[had] been done in the US.” In September
1943, amid continued disruptions in the
grain market, the Canadian government
declared the Canadian Wheat Board
(CWB) the single selling agency to which
Western Canadian farmers were required
to deliver their non-feed grain in return
for a minimum price. Futures markets
would not market this Canadian grain
again until August 2012, when the CWB
lost its single selling agency authority. 
Joseph M. Santos is a professor of eco-
nomics and Dykhouse Scholar of Money,
Banking and Regulation at South Dakota
State University, where he teaches mac-
roeconomics, monetary economics and
banking. Joe writes on US monetary and
financial policy.
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Benedict, Murray R. Farm Policies of the US,
1790–1950. New York: The Twentieth Cen-
tury Fund. 1953.
Benedict, Murray R. and Oscar C. Stine. The
Agricultural Commodity Programs. New
York: The Twentieth Century Fund. 1956.
Davis, Joseph S. Wheat and the AAA. Wash-
ington, DC: The Brookings Institution. 1935.
Drummond, W. M. “Canadian Agricultural
Price Problems and Policies: A Commen-
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1949.
Grinder, Brian and Dan Cooper. “The Pit: An
Unfinished Trilogy.” Financial History 130:
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Irwin, Robert. “Farmers and ‘Orderly Market-
ing’: The Making of the Canadian Wheat
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Norris, Frank. The Pit: A Story of Chicago. New
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Rothstein, Morton. “The International Market
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Santos, Joseph M. “Grain Traitors: A History
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Santos, Joseph M. “Going Against the Grain:
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