U.S. Farm Subsidies under the 1933 Agricultural Adjustment Act

The U.S. paid farmers to cut production during the Great Depression, reducing supply to raise agricultural prices and farm incomes.

United States1933–1936

American farmers and agricultural land during the Great Depression, representing federal payments to reduce farm output.

Key figures

AAA enacted

12 May 1933

The Agricultural Adjustment Act was enacted as part of the New Deal.

Cotton acreage reduction

10 million acres

The 1933 cotton plow-up campaign aimed to eliminate about 25% of the growing crop, and USDA records state that the target was reached.

Wheat acreage cut

15% in 1934

Participating wheat farmers were required to reduce acreage by 15% in 1934 and 10% in 1935 in return for adjustment payments.

Supreme Court ruling

6 January 1936

In United States v. Butler, the Supreme Court held key parts of the 1933 Agricultural Adjustment Act unconstitutional.

At a glance

The Agricultural Adjustment Act of 1933 paid participating farmers to reduce crop acreage and livestock production.
The policy aimed to reduce agricultural supply, raise depressed farm prices and restore farmers' purchasing power.
For cotton, the first 1933 programme aimed to remove about 10 million acres, or 25% of the growing crop, and USDA records say the objective was reached.
Unlike a standard per-unit subsidy, these payments were conditional on producing less, so the intended effect was a leftward shift of supply.
The policy supported landowners but could harm consumers through higher prices and displaced some tenant farmers and sharecroppers.

Background

During the Great Depression, demand for many U.S. agricultural products fell sharply while farmers continued producing large quantities. Agricultural prices collapsed, reducing farm incomes and purchasing power.

For example, USDA records show that cotton prices fell from 29 cents per pound in 1923 to 6.5 cents in 1932. Large stocks of unsold agricultural goods placed further downward pressure on prices.

The federal government responded through the Agricultural Adjustment Act (AAA) of 1933. Rather than simply paying farmers for every additional unit produced, the programme offered payments to farmers who agreed to reduce production. The aim was to restrict supply and raise market prices.

What happened

The Agricultural Adjustment Act was enacted on 12 May 1933. It created programmes in which participating farmers could receive rental or benefit payments in return for reducing production of designated agricultural commodities.

The payments were financed mainly through taxes on processors of the relevant agricultural commodities. In cotton, farmers were offered payments to plow up part of the crop already planted. USDA records state that the 1933 programme aimed to remove about 10 million acres, or 25% of the growing cotton crop, and that this target was reached.

Similar contracts were used for other products. Wheat farmers who participated received adjustment payments while agreeing to reduce acreage by 15% in 1934 and 10% in 1935. Corn and hog programmes also tied government support to reductions in production.

Economically, the government was trying to shift agricultural supply to the left. With lower output available for sale, market prices could rise, increasing the income received by participating farmers.

In January 1936, however, the U.S. Supreme Court ruled in United States v. Butler that key parts of the programme's taxing and payment system were unconstitutional. Congress subsequently developed different forms of agricultural support and production control.

Timeline

12 May 1933
President Franklin D. Roosevelt signed the Agricultural Adjustment Act into law.
June 1933
The Agricultural Adjustment Administration launched the cotton plow-up programme, paying participating farmers to remove part of their planted acreage.
1934–1935
Production-control contracts continued for commodities including cotton, wheat, corn and hogs.
6 January 1936
The Supreme Court ruled key parts of the Agricultural Adjustment Act unconstitutional in United States v. Butler.

Using this in the exam

Paper 1 Paper 2Part (a) · 10 marksPart (b) · 15 marksData response

Use this case when discussing subsidies, government intervention or policies designed to support producer incomes.

Start by explaining the unusual design of the policy. The government paid participating farmers to produce less. This reduced agricultural supply, shifting the supply curve to the left. With demand unchanged, equilibrium quantity fell and equilibrium price rose, which was intended to increase farm income.

A demand-and-supply diagram is more appropriate for the specific AAA mechanism than the standard per-unit subsidy diagram. A standard subsidy lowers firms' production costs and normally shifts supply to the right. The AAA payments were conditional on reducing production, so applying that standard diagram directly would give the wrong result.

For evaluation, compare the higher incomes received by participating farmers with the higher prices faced by consumers and the uneven effects on different agricultural workers.

Syllabus topics

Supply

Unit 2.2: Supply

Competitive Market Equilibrium

Unit 2.3: Competitive Market Equilibrium

Role of Government in Microeconomics

Unit 2.7: Role of Government in Microeconomics

Diagrams to use

Demand and Supply Supply Curve

Test yourself

Supply, Demand & Market Equilibrium

Price determination, shifts vs movements, and equilibrium adjustments.

Market Failure & Government Intervention

When markets fail and how policy tries to fix them. E.g externalities, public goods, and government tools.

Questions this example can answer

Explain how government payments to producers can affect market supply and equilibrium price.
Using a real-world example, evaluate subsidies as a form of government intervention.
Discuss the consequences of government intervention designed to increase producer incomes.

Evaluation

Arguments in favour

Reducing supply could support collapsing farm prices
By paying participating farmers to reduce acreage or livestock production, the government reduced the quantity supplied. With other factors unchanged, lower supply raises the market equilibrium price and can increase revenue for farmers who continue selling output.
Payments directly supported farm purchasing power
Farmers received government payments while agricultural prices were extremely depressed. This provided income during the Depression and was intended to restore farmers' ability to purchase goods and meet financial obligations.

Arguments against

Higher agricultural prices could hurt consumers
The policy deliberately restricted supply in order to raise prices. Consumers therefore faced the possibility of paying more for agricultural products at a time when unemployment and poverty were already severe.
Benefits were distributed unevenly
National Archives and Library of Congress records show that large landowners often benefited more, while some tenants and sharecroppers lost work or were displaced when land was removed from production. The income support therefore did not benefit all agricultural workers equally.

Context and assumptions

Weather also affected agricultural supply

Severe drought during the 1930s also reduced output for some crops. Changes in prices and farm income therefore cannot be attributed only to the AAA.

This was not a standard output subsidy

The government payment was tied to restricting production rather than increasing it. The case should therefore be used carefully when applying the standard IB subsidy diagram.

Key terms

Subsidy: Financial assistance provided by the government to firms or consumers to influence production or consumption.Taught in Unit 2.7: Role of Government in Microeconomics
Supply: The willingness and ability of producers to offer a good or service for sale at different prices over a given period of time.Taught in Unit 2.2: Supply
Equilibrium price: The price at which the quantity demanded is equal to the quantity supplied.Taught in Unit 2.3: Competitive Market Equilibrium
Government intervention: Government action that changes the allocation of resources or outcomes in a market.Taught in Unit 2.7: Role of Government in Microeconomics
Producer income: Income earned by producers from selling output and, where applicable, receiving government support.