OF ALL the crops grown in the United States cotton is the most significant, first because it supports a larger number of farm people than any other crop, and second because it links the United States more definitely with the outside world than any other crop. The producers of many American products are able to fool themselves for long years at a time concerning the real relationship of the United States to the outside world. Not so the cotton farmers. Every year they have it forcibly brought home to them that they are a part of a whole world, with respect both to foreign consumption and foreign competition.

During the five years previous to the World War, the total annual cotton crop of the world was some 20 million bales, of which the United States furnished about 13 million bales. At that time the world outside of the United States ordinarily consumed about 15 million bales a year, about half of which was produced by the United States, and about half by India, Egypt, Russia, China, etc. For forty-five years the trend of production in the United States has been upward, at the rate of about a hundred thousand bales a year; in the cotton growing countries outside the United States the rate of increase has been about a hundred and fifty thousand bales a year.

Again and again during the past century England has done her best to become as independent as possible of American cotton. The movement toward cotton independence for the British Empire has met with great obstacles in the shape of untrained native labor, poorly adapted soils and climates, and lack of transportation facilities. Nevertheless, the steady pressure of England has brought about a fairly constant expansion in cotton acreage in India, Uganda and the Sudan. Other countries, notably Russia, also made strenuous efforts during the twenties to become as independent as possible of American cotton. South America, too, especially Brazil and Argentina, are becoming more and more interested in producing and spinning their own cotton. China, Korea and southern Manchuria, working more or less in coöperation with Japan, will evidently make strenuous efforts to increase their cotton output. Germany and Italy, in their efforts to become as independent as possible of American cotton, have given especial attention to perfecting methods of making substitutes for cotton yarn and cotton cloth out of wood pulp. The methods used seem to be a modification of the rayon process and the resulting product seems to be more expensive than cotton, and from the standpoint of washability, inferior to cotton. Nevertheless, steady progress is being made in this direction, and it must be remembered that rayon consumption, which twenty years ago was only two-tenths of one percent of the cotton consumption in the United States, represented in the year 1934 nearly eight percent. Undoubtedly, the national political pressures of foreign countries, combined with mechanical ingenuity, will more and more tend to force readjustments on the cotton producers of the United States. In particular, the cotton picking machine, when it is fully perfected, will increase the pressure.

The dramatic nature of the rôle played by American cotton in world affairs has been intensified tenfold since the World War as a result of the new creditor position of the United States. Before the World War, when the United States was a debtor nation, our cotton exports, amounting to nearly half a billion dollars annually, played an exceedingly important part in maintaining normal business prosperity. Before the war the United States owed over a hundred million dollars in interest every year to bondholders in England, Germany, France, Belgium, Holland, etc. Our newly-arrived foreigners sent to the old folks across the sea more than two hundred millions of dollars annually. In the old pre-war days, it was exceedingly important that we ship a half a billion dollars' worth of cotton annually to the outside world, because if the crop were short we would have to ship gold and thus would undermine the base of our credit structure and bring about hard times. It is small wonder, therefore, that not only the people of the South but also the bankers of New York City and the manufacturers in other parts of the nation should have a profound interest in cotton as one of the leading barometers of American prosperity.

Today, 17 years after the World War, this picture has changed in many respects, and as a result cotton growers, ginners, shippers, exporters, spinners and financiers are baffled and occasionally irritable. Today we are a creditor nation to a far greater extent than we were a debtor nation before the war. Those within our borders who have relations across the water send them less than half as much as they used to. We are endeavoring to carry an increasing quantity of both imports and exports in American vessels, and thus it is probable that we shall not pay foreign nations as much as before for shipping charges. Our tariffs, in spite of foreign trade agreements, are still higher than they were before the war and are more effective in keeping out foreign goods. We stopped loaning money abroad in 1930. All of these forces added together mean that it has become exceedingly difficult for foreign nations to buy the necessary dollar exchange with which to purchase American cotton. As a matter of fact, the so-called cotton dilemma of late 1934 would have been twice as serious if it had not been for the tremendous imports of gold into the United States. The dilemma will again become more serious than it has been if the imports of gold into the United States cease without compensating factors coming into the picture.

A creditor nation which refuses to loan money abroad and to accept increasing quantities of foreign goods and services must prepare for serious trouble in her export trade at the time when gold shipments come to an end. It may be, of course, that the volume of gold shipments into the United States during the next four or five years will be so great that the problem of American cotton exports will not be a serious one. It may also be that there will be such an increase in imports of goods into the United States that foreign purchasing power for our cotton exports will be increased. On the whole, however, it would seem that the situation would periodically become tighter rather than less so.

It is popular in many quarters to say that the Agricultural Adjustment program is destroying the foreign market for American cotton. This is not true. The truth is that a creditor nation with a high tariff inevitably destroys a large part of the foreign market for its surplus the moment it stops loaning money abroad. The United States stopped loaning money abroad in 1930, and at that time the American carryover of cotton stocks began piling up until by August 1, 1932, it was three times the normal.

The American cotton control program has thus far not had nearly as great an effect on American cotton production as the boll weevil had in 1921, 1922 and 1923. In 1921 the American cotton crop, which before the war had been around 13 million bales, was slightly less than 8 million bales. Again in 1922 it was less than 10 million bales, and in 1923 only slightly above 10 million bales. In those years we exported only from 4 to 6 million bales annually as compared with our pre-war normal of some 8 million bales. During the period from 1921 to 1923, the deficiency of United States cotton production below normal totalled about 11 million bales. In 1933 and 1934, the deficiency of American cotton production below normal has totalled only about 31/2 million bales. Moreover, at the present time we have as background a carryover which is more than twice the normal.

It must be kept in mind, of course, that the exceedingly short cotton crops of 1921, 1922 and 1923 were eventually accompanied by high prices which over-stimulated cotton production both in the United States and foreign countries. This resulted, beginning in 1925, in the large cotton acreage which was preliminary to the large accumulation of stocks which played its part in the worldwide collapse among producers of raw materials.

II

There is food for thought for American producers in a consideration of the way in which the high prices resulting from the short American crops in 1921, 1922 and 1923 eventuated in the expansion of foreign production in 1924 and 1925. The effects of this expansion should also be provocative of thought to the foreign producers, because in the final outcome they probably suffered fully as much as the American producers. In this connection, it may be interesting to survey the trend of cotton acreage in the leading cotton producing areas since 1921.

India, which normally produces about half of the non-American cotton which moves in world trade, started out with a little less than 20 million acres in 1921 and rapidly increased to 28 million acres in 1925. Since the start of the depression in 1930, the Indian cotton acreage has been about 23 million acres, or a little less. Indian cotton acreage has not increased thus far in response to the adjustment program in America. It is expected, however, that with ordinary weather conditions in the year 1935, India, as a result of the situation in the United States, may plant an acreage 5 or 10 percent greater than in the year 1934. If cotton prices in the United States had been in the neighborhood of 10 cents a pound, it might have been expected that with ordinary weather conditions the Indian acreage in 1935 would remain about 23 million acres or a little less. With cotton in the United States at 15 cents a pound, the tendency apparently would be for the Indian acreage to expand 10 or 15 percent. For a time in late 1934 and early 1935 Indian cotton moved in world trade at a price which was only about 70 percent as high as that of American cotton. On the average, Indian cotton as a result of its shorter staple, ordinarily sells for only about 80 percent of the American price. The abnormal differential at the end of 1934 was somewhat similar to that during the early part of the twenties. In the spring of 1935, however, the abnormal differential between American and Indian cotton was largely wiped out. Nevertheless, in view of the difficulty encountered by foreign nations in buying dollar exchange, it would seem that abnormal differentials between American and foreign-grown cotton may occur at rather frequent intervals until such time as exchange difficulties disappear.

Egyptian cotton is, next after Indian, the leading competitor with the cotton produced in the United States. Russia and China produce more cotton than Egypt, but as their cotton does not move in international trade it has no great significance for us. Egyptian cotton acreage does not move up and down in response to price in the same way that the American and Indian cotton acreage does. For a number of years the Egyptian cotton planting has averaged about 1,800,000 acres. Governmental control was used in 1932 to cut the acreage almost in half, but during the past two years it has returned to normal. It seems that present prices in the United States are not such as to have any pronounced effect one way or the other on Egyptian cotton acreage. The yields per acre of cotton in Egypt are more than twice as high as in the United States and the grade and staple is of excellent quality. It seems probable that there will be no great expansion in Egyptian cotton acreage unless irrigation storage works at the headwaters of the Nile are constructed on a considerable scale. In any event, it will be a number of years before there is likely to be a material increase in Egyptian cotton acreage.

The place to be taken by Brazil in future world cotton competition is much more uncertain than that of the United States, India or Egypt. Brazil first expanded her cotton production in a material way during our war between the States, at which time her exports were greater than they have been subsequently until the current year. She again began expanding exports when she lost a considerable part of her rubber business about 25 years ago. The third expansion began rather recently, largely as a result of the decline in profits of the coffee business, and continued partly because of the exceptionally high price for Brazilian cotton in terms of Brazilian milreis (in part as a result of the currency depreciation of the milreis), and partly because of a short crop behind a high tariff wall which forced the Brazilian textile manufacturers to bid up unduly in order to get their cotton.

The Brazilian Government apparently looks on both cotton production and cotton spinning as infant industries. Cotton production is encouraged by a tariff of 17 cents a pound. The textile tariffs are exceedingly high, and several of the Brazilian states have special state tariffs. Last year, for the first time since the Civil War, Brazilian cotton exports began to move in world trade in a really large way, and it seems that in the year 1935 there may be as much as a million bales of Brazilian cotton exported. If American cotton moves in world trade on the basis of 15 cents a pound or more, it would seem that there might be a continuing expansion in Brazilian cotton production, especially in southern Brazil. The outstanding limitations are a shortage of trained labor, a lack of proper financing and inadequate equipment for ginning. Probably much of the enthusiasm of Brazilian farmers for cotton will disappear when they discover that the prices for the 1932 crop were largely artificial and due to causes operating in Brazil and not in the rest of the world. The Brazilian Government seems to be committed to cotton expansion and will undoubtedly push production with great vigor if American cotton prices in the world market are above 12 cents a pound. The government is exercising supervision over the quality of the seed and the method of ginning. While undoubtedly the 1934-35 Brazilian cotton crop was freakishly large, because of certain reasons of weather and past history, nevertheless it would seem to be the part of wisdom for American cotton producers to keep in mind that country's truly great cotton potentialities.

Will it be necessary for us, because of our creditor position and our high tariff, to step out of the production of cotton sufficiently to permit Brazil to place an average of a million bales of cotton on the world market as a substitute for cotton which formerly came from the United States? At 12 cents a pound for American cotton there would seem to be much more likelihood of the expansion of cotton production in Brazil than in Egypt. In the case of India, however, it would seem that while the percentage of expansion might not be so great as a result of 12 cent cotton as in the case of Brazil, nevertheless the increase in terms of bales would perhaps be as great in India as in Brazil.

The cotton acreage of Russia in recent years has been nearly twice as great as Brazil's, but the yield per acre is less and there have been practically no exports. It is a matter of Soviet policy to produce as much cotton at home as possible, and prices for cotton in the United States exercise practically no effect one way or another on Russian cotton acreage. Russian cotton acreage today is somewhat greater than it was just prior to the World War. Nevertheless, from the standpoint of determining cotton policy in the United States the Russian situation has almost no significance.

The situation in China is in many respects like that in Russia. China normally imports more cotton than she exports. During the past ten years she has expanded her cotton acreage about 50 percent, or by more than two million acres. Beginning in 1923, the Chinese Government has increased the tariff on raw cotton on four different occasions, until now it is equivalent to about 2 cents a pound. As is the case in Russia and Brazil, it is a very definite concern of the Chinese Government to bring about an increase in the quantity and quality of Chinese cotton. The Japanese are also interested in the increase of Chinese production.

The demand for cotton since the World War has become more and more a part of general industrial activity. Everyone is familiar with the increasing use of cotton in the manufacture of automobile tires, elsewhere in automobile manufacture, and in many other industrial uses. Charts of industrial production and cotton consumption indicate that the two move together in remarkable uniformity. In view of the exceedingly low level of industrial activity throughout the entire world, beginning in 1930, it is not surprising that the demand for cotton should have fallen so drastically that prices were reduced to 5 cents a pound. If during the next five years industrial production throughout the entire world should return to the 1929 level, there would be an adequate demand not only for the customary 13 million bales from the United States, but also for the customary out-turn from Egypt and India, as well as for the production of recently expanding newcomers such as Brazil. If industrial expansion should continue in Russia and China, it is quite likely that those countries not only would require their maximum possible production but would also make an endeavor to import cotton from outside.

III

The cotton producers of the United States have always been more definitely underprivileged than any other large section of our population. The gross income from cotton for the average family even in 1929 amounted to only $699 for the year. In the southeastern part of the cotton belt, in 1931 and 1932, hundreds of thousands of families had gross yearly incomes of less than a hundred dollars. The cotton families of the South have always produced about twice as many children as are necessary to maintain the farm population.

During the industrial boom of the late twenties, young people drifted north from the Southern farms by the hundreds of thousands. In like manner they drifted back again in 1930. In many cases Northern cities paid the railroad fare to get them back home and off their hands. But meantime the customary ties between the individual and his home locality had in all too many cases been broken. Thus during the early thirties there grew up an ever larger number of drifters and squatters who had formerly been in the share-tenant class and now were finding it difficult to do anything at all. In the rich delta lands of northeastern Arkansas, especially along the St. Francis river, these drifters and squatters were reinforced by the houseboat people who move up and down the Ohio and Mississippi, and who vary their hunting and trapping with a certain amount of day labor, woodchopping and other casual occupations.

The primary trouble in the South, of course, is that on a per capita basis the Southern farmer's share in the national income has been less than half that of the rest of the population. From the standpoint of social justice it would be a splendid thing to increase the income of the Southern farmers to a point where it would be comparable with that of other citizens. With the utmost possible speed the Roosevelt Administration endeavored to do this during 1933 and 1934. The income from each of the cotton crops of 1933 and 1934 averaged about twice what the income had been in 1932. From the standpoint of abstract justice, we really ought to go farther in benefiting the Southern cotton farmers. But it now becomes apparent, in view of the world situation, that it may be impossible to go farther without dipping definitely and directly into the Federal treasury.

The fundamental object of the American control program has been to reduce the world carryover of American cotton, which was about 13 million bales on August 1, 1932, to 5 million bales by August 1, 1938. On August 1, 1935, it is estimated that the world carryover of American cotton will be somewhere in the neighborhood of 8½ million bales. It is undoubtedly true that the world carryover of American cotton would have been reduced somewhat more rapidly if it had not been for the loans made by the American Government. The 10 cent loan which began in November of 1933 and continued until August of 1934 probably did not interfere much with the exportation of American cotton, because during the period when it was in effect American cotton moved abroad at almost the normal rate. If the 10 cent loan had been continued after August 1934, instead of the 12 cent loan, no one can say whether American exports of cotton would have been materially larger. Germany undoubtedly would still have had many of her same difficulties in buying dollar exchange. The United States would still have been a creditor nation with a high tariff. The 12 cent cotton loan may, perhaps, have been too high from the standpoint of exports, but undoubtedly the primary difficulty was the inability of foreign nations to get dollar exchange. This difficulty might have resulted in small exports of American cotton even though the price had been as low as 5 cents a pound.

A price of 12 cents a pound for American cotton is exceedingly low. In terms of gold, 12 cents a pound in May of 1935 is only slightly above the low point in March of 1933. In terms of the average currency outside the United States, cotton at 12 cents a pound is only about 35 percent higher than it was in early 1933. In terms of American dollars, of course, cotton in May of 1935 was about twice as high as in early 1933. Relative to prices of other products which move in world trade, cotton at 12 cents a pound does not seem unduly out of line.

Our cotton control operations in the United States have not in any sense been foolish in the way that the Stevenson Rubber Control plan was foolish. It will be remembered that in 1921 rubber was selling for about 14 cents a pound, whereas the rubber producers in the East Indies figured that the cost of production was about 25 cents a pound. Partly as a result of the Stevenson Rubber Control, and partly no doubt for other reasons, the price moved up until in November of 1925 it had reached $1.20 a pound. There was then great expansion, and partly as a result of this expansion and partly as a result of the depression, the price fell until in 1932 it was 4 cents a pound. Because of the parity concept of the Agricultural Adjustment Act there is no likelihood, unless the weather for several seasons is particularly disastrous, of American cotton prices reaching abnormally higher levels at any time in the next few years.

The American cotton control has been financed since August 1, 1933, by a processing tax of 4.2 cents a pound on all cotton manufactured in the United States. This means that since that date the American consumer has in effect paid the American cotton producer an average of from 15 to 16 cents a pound for cotton. The American consumer during this period has paid almost exactly the same percentage of his total cost of living expenditures to the cotton farmer for cotton as he did during the five pre-war years. A price of 16 cents a pound represents a return of about 14 cents an hour to the farmer for his labor, whereas 12 cents a pound means a return of about 10 cents an hour. The cotton farmer can have the satisfaction of knowing that he has not done an injustice to the American cotton consumer. With the cost of other things what it is in the United States today, 16 cents a pound for cotton is not too high. Incidentally, it generally is easier for the mills to pay 11.8 cents a pound cash for the cotton plus the 4.2 cents processing tax than it is to pay 16 cents cash. The processing tax is not paid at the same time the cotton is purchased. Therefore, the processing tax system makes the procedure a little bit like installment buying.

It might also be said in passing that cotton textiles imported into the United States not only pay the regular tariff but also in addition a special tariff equivalent to the processing tax. The following table gives, in cents, the amount of the processing tax and the tariff on several different types of cotton goods:

Processing tax Tariff in
in cents, per lb. cents, per lb.
Men's cotton shirts 3.1 43   
Hose and half hose 0.7 4   
Tire fabric 4.8 10.5
Cotton towels (not figured) 1.1 3.5

While the foregoing items are not imported in significant volume, the ratio of the processing tax to the tariff on cotton cloth that does come in indicates that the tax is considerably smaller than the tariff which is collected.

Farmers of the United States are coming more and more to look on the processing tax as their tariff. They realize that if the United States were not a creditor nation with a high tariff there would be no necessity to have a processing tax. They would be glad to give up their processing tax if the industries of the United States would give up their tariff; but in view of the fact that the tariff has been the most substantial single item in destroying the foreign market for the product of some 50 million acres of farm land, farmers naturally wish to utilize the processing tax to enable them to adjust their production to meet the changed world situation.

IV

It is exceedingly difficult for the people of the United States to realize that they are no longer a pioneer debtor nation. A high tariff does a pioneer debtor nation very little harm. As a matter of fact such a nation may require a high tariff in order to make sure that there will be a sufficient excess of exports over imports to pay the interest on the money which is owed abroad. As a pioneer debtor nation, the United States was well warranted in placing heavy emphasis on cotton, which was its biggest single export. But since the World War the United States has been a mature creditor nation, though it has kept to the habits of a pioneer debtor nation.

The conflict between habits and the facts has been soul-wrenching for the American people. Those who profess to be 100 percent American in their attitude insist that there shall be no increase in the imports into the United States and that all goods should be carried as nearly as possible in American bottoms and that American tourists should stay at home as much as possible. The pioneer prejudices of the American people would if carried to their most complete expression completely destroy foreign purchasing power, and hence the foreign market for American cotton. Strangely enough, the same pioneer prejudice which tends to destroy the foreign market for American cotton is also strenuously against the use of the centralizing power of government to enable the farmers of the United States to adjust their cotton acreage to the resulting loss in exports. Typical so-called 100 percent Americanism, therefore, tends to insist that American farmers shall produce to the limit for a market that doesn't exist. Such a procedure, of course, would mean a return to 5 cent cotton, 40 cent wheat, 10 cent corn and $2 hogs. American farmers will not stand for this.

For the greater part of the period since the World War the American people have been willing to lose billions of dollars in foreign loans badly placed rather than wake up to the fundamental realities. The United States has continually postponed a showdown in the international poker game by the simple procedure of buying more chips and fattening the pot. In 1934 the showdown was again postponed because the United States imported $1,300,000,000 in gold. But today the Germans find it exceedingly difficult to buy American dollars because the United States buys only about a third as much from Germany as it did in 1929. Therefore, the Germans have bought only about a fourth as much of the American cotton crop this year as they customarily do. There is still plenty of American cotton available, considerably more, in fact, than during the twenties. The problem is not one of American cotton but of American dollars in the hands of those foreign nations which want cotton.

The situation will get worse rather than better unless the American people are willing to start loaning money again to foreign nations, or unless the foreign nations are willing and able to continue to send us large quantities of gold, or unless the United States is willing to accept greatly increased quantities of imports. There is no other way out. The showdown is coming, and cotton will typify the situation better than any other commodity because it is our greatest single export.

During the past six months in the United States a tremendous amount of effort has been put into working out some scheme to increase exports of cotton without increasing imports of foreign goods. The American people are strong believers in the sacredness of exports and the hellishness of imports. This is a type of scarcity economics which has always seemed completely respectable to that type of American who is completely horrified at the thought of plowing under cotton. Exporters, shippers, traders, railroad men and the whole group of people who profit by volume and are not hurt by low farm prices clamor insistently for increased cotton production. Many of them have come out in favor of what is known as the "two-price system," or in other words, export dumping. Under this scheme, cotton might be sold in world trade for perhaps 8 cents a pound, and in domestic trade for 15 or 20 cents a pound. There would be no control of production and the ginners and all the rest of the people interested in volume would be completely happy. Incidentally, many of the foreign users of cotton would also be happy. They would again be able to buy American cotton at bargain prices. Some foreigners during the early part of this year have been arguing in a quiet way for an American program of this sort. It has been said that the break in cotton prices which took place in March was to some extent a result of the agitation for export dumping, which caused foreigners to think that they would be able to buy American cotton much more cheaply later on.

The strongest argument for export dumping is to prevent the undue expansion of cotton acreage in India and Brazil. Certain American financial interests are reported to have been active in furnishing capital to promote the expansion of the cotton business in several parts of the world during the past year. These gentlemen might discover that there are political laws of action and reaction which must be taken into account, as well as economic laws. But before the United States engages in an extensive program of subsidized exports of cotton, it is worth while to remember that a program of this sort might cost close to 300 million dollars a year. And there is a real question as to whether the benefit to the exporters, shippers, railroad men and new cotton producers is sufficient to warrant the increased expenditures. The cost of a controlled production program is only one-third to one-half as great. Moreover, we must keep in mind the probability that strongly subsidized exports would result in the gravest damage to India and Brazil, with inevitable repercussions on the United States. Strong retaliatory action would probably be taken by both India and Brazil, as well as by Great Britain.

In 1921, 1922 and 1923 the United States relinquished a considerable part of its hold on the world cotton trade as a result of the boll weevil depredations. Nevertheless it was able to come back in a most vigorous manner in the years from 1925 to 1929. Uncertain or mistaken policy in the next year or two need not therefore be altogether fatal to the future of the American world cotton trade. If we really believe it is a fundamental part of American policy to export, one year after another, our customary 8 million bales of cotton, it would seem to be wise to adopt a policy which will enable us to sell cotton at a price as low as 10 cents a pound on the world market if necessary. Some people think we do not need to go that low. Many people believe, however, that a price above 10 cents a pound will tend to bring about a substitution of considerable quantities of Brazilian and Indian cotton for American cotton. Other observers believe that no matter how low the American cotton is priced, the shift will take place to Indian and Brazilian cotton simply because the United States is a creditor nation with a high tariff, and that therefore there is practically nothing which the United States can do, short of giving her cotton away, which will restore the customary foreign demand for 8 million bales annually.

The fundamental aim of the United States Government with regard to cotton has been first of all to cut the carryover to normal proportions. It is hoped that the plans now in prospect will result in a carryover of American cotton on August 1, 1936, of about 7½ million bales, or 5 million bales less than that of August 1, 1932. The second objective is to hold the price at a point which, with benefit payments added in, will result in a fair return to the domestic producer while not unduly interfering with the movement of cotton into world trade. The program thus far has worked unusually well, but the difficult time is now approaching, not because of any particular shortcomings in the cotton program itself, but because of the fact that the United States is a creditor nation with a high tariff psychology and a belief that it can hold on to a large volume of exports in spite of high tariffs and its creditor position. This psychological factor, which is utterly at variance with reality, has provoked a profound national neurosis and, following the neurosis, internal physical disorders which reduce the nation's ordinary immunity to the shallow political quackery and demagoguery of men who presumably know better. Looking toward the future, the United States must make an effort to understand the necessity of a continuing adjustment between the needs of its export industries and the development of increased imports.

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