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The South’s Unbalanced Budget

ISSUE:  Spring 1937

The South is losing money. The editor of a leading Southern newspaper makes a rough guess that the South is paying out a billion dollars a year beyond its yearly income. Where does it get the billion dollars? By selling its property to investors in other parts of the country, by borrowing money and going bankrupt, by destroying land and forest to make products for sale.

The South is losing resources, physical and human. Forests are cut and not replanted. Coal and iron ore are mined and the steel is shipped away for others to use. The land is being washed into the sea. The people are being allowed to suffer poor health and poor education, which robs them of part of their productive powers. These unpleasant developments, which so deeply concern the leaders of the South, are involved in the problem of economic unbalance which concerns the leaders of the nation. Not only is the South as a whole spending more than its income, most of its local units are running a local deficit. And any geographic unit that is spending more than its income is in a perilous condition.

The basic geographic unit may be defined for the present discussion as a locality in which a worker can look for employment without having to change his residence. With modern roads men can travel ten or twenty miles to a job. If there is money for hiring workers anywhere within the travel range, the money is in the “locality,” so far as practical effect on the worker is concerned. The locality is healthy if the money spent for outside goods is balanced by income received from goods sold to the outside world, and if the money spent for all purposes is enough to hire everyone who needs a job.

The standard of living of a locality cannot rise above its power to produce, unless it has a subsidy from outside. If the people of the area use more than they produce, they have to sell off their property, and their power to produce will grow less year by year, lowering their standard of living. That is what is happening in hundreds of localities in the South. The problem of geographic balance is not merely to balance income and outgo for the South as a whole, but to balance every locality that has enough natural resources to pay for a decent standard of living—and to vacate the hopeless localities.

The causes of this economic drain can be found, for oratorical purposes, in the evil days of Reconstruction. But in hunting for a remedy, we may as well recognize that the evil of economic drain is found in many parts of the North and West. It has various causes, many of them connected with the difference between agriculture and industry. Any remedy that will help the South will be likely to help the depressed areas in all parts of the country.

During the past half century the Federal Government has, by its handling of tariffs, patent laws, and many other types of legislation, devoted its chief efforts to encouraging manufacturing. The areas where manufacturing got an early start had an advantage over the agricultural areas. Southern agriculture, with its dependence on cash crops, was especially subject to unfavorable influences, because the Southern people had to buy most of what they used and were therefore open to being gouged by high prices.

Once any area begins to lose ground in commerce, it tends to slip faster and faster. Debts lead to foreclosures, or to selling property to outsiders. Interest and rents are added to the unbalance of trade. There is a whole train of secondary effects. George Fort Milton of the Chattanooga News points out half a dozen ways in which a local disadvantage may accumulate. Freight rates are controlled by the stronger party to the bargain. Capital for local industries has to pay high interest rates to outsiders. Management, machinery, insurance, and other necessary factors of production, have to be bought outside. Whenever a technological improvement is made, it appears first at the great industrial centers; the smaller factories trail behind the procession, always suffering a disadvantage in cost of production.

The movement of population caused by economic unbalance tends to make the unbalance worse. Dr. O. E. Baker of the Department of Agriculture gives estimates of the cost to rural areas of the movement of young people into industrial centers. From 1920 to 1929, 6,300,000 youths left the country districts and moved to town. Dr. Baker estimates that the average cost of raising a young person to working age is about $2,250. On this basis, the farming districts in these ten years gave the cities a tribute of 14 billion dollars’ worth of young men and women.

During these same ten years city people received from country people 4 billion dollars in inheritances, 10.5 billions of rent, and 7.5 billions of interest. All together, the cities got a tribute of 36 billion dollars, or $3,600,000,000 a year. In order to balance this annual tribute, city taxpayers would have had to pay subsidies to rural districts considerably higher than they actually paid. Some of the Southern cities were probably on the winning side of this account; but the South as a whole was on the losing side.

All the signs seem to point to the conclusion that economic forces acting alone will make the rich grow richer and the poor poorer. “Them as has, gits.” Once the people of any area are placed at a disadvantage, everything conspires to drive them down until they are squeezed into hopeless poverty or forced to move into some more fortunate area. Poverty leads to inefficiency and so to more poverty. Borrowers have to live by running away; lenders have to charge fifty per cent interest, and yet go bankrupt. The bright young men, the natural leaders, escape and join the winning side. Such a condition cannot be cured by the automatic action of economic forces. It is like a ship without ballast: once it starts to fall to one side it will be hove down altogether on that side.

A healthy economy would be one where any tendency to unbalance would generate balancing forces that would help the losers and restore the balance. A self-balancing system cannot be found in economic forces alone; it must be looked for in a combination of economics and governmental policy.


The “new economics” is, as everyone knows, a mixture of economics and government. It requires the use of the National Government in the economic process through the taxing and spending powers, with here and there a measure of direct regulation, and sometimes with direct action such as the T. V. A. If the powers of government can be extended and directed toward balancing the national economy, we may get results. The natural tendency of business to fall to one side may be overcome by the stabilizing efforts of the Government, provided the Government is strong enough. Then the whole system would be like a ship with ballast. The combination would swing to and fro without any danger of upsetting. One of the many ways of describing the “New Deal” is to say that it is a groping attempt to compensate our unstable business system with a ballast that will make the nation into a self-righting mechanism.

It is from some such unemotional point of view that the troubles of our depressed areas, North and South, can perhaps best be approached. This is no question either of justice or of charity, but merely of how to make the nation work smoothly and efficiently for the good of everyone. Whatever may have been the wrongs of the past, national or local, no policy based upon them can be successfully formulated to satisfy the voters of today. A. successful policy will have to be one that promises future benefits to so large a majority of the American people that it will be accepted by a Congress in which Democrats from Rhode Island work side by side with Democrats from Mississippi.

If national subsidies are seen to be necessary, they will be paid out of income taxes collected in New York, in California, in Florida—wherever the men live who are now receiving the tribute from the poorer sections of the country. These subsidies are not a charity to pauper states, but a return of excessive payments, like the “dividends” returned to the members of a co-operative store. Both the taxpayer and the recipient of the subsidy will think more clearly if they keep this basic fact in mind.

What are “excessive” payments? They are payments that throw the nation into distress and so reduce the total national income. The drain of money from the South is not a benefit to the North but a damage. Year by year the North loses a part of the value of its Southern market. Year by year the few powerful economic rulers in the financial centers accumulate this tribute-money and use it to entrench themselves in power. With this money they corrupt legislatures and judges, they buy up their competitors and create monopolies to oppress the people. As their power grows they forget for a while the danger they are piling up for themselves.

But even the financial lords themselves are not benefited by concentrated power. When the day of reckoning comes, as it came in 1929, the system on which their fortunes and their lives depend is shaken. There were days when yachts lay off Newport loaded with gold, ready for escape to some South Sea Island if the Revolution should break loose. There came a time when financial leaders had to beg the Government to save them from the deadly fear that oppressed them. Some of them jumped out of windows. They would have been happier if some way had been found long before, by which the nation could have been made stable and secure.

The fact is that so long as subsidies are necessary to prevent economic unbalance, the cost of subsidy is the cost of stability—and stability is worth the price. If the nation has to pour money into the South and West and into certain depressed areas of the North, that money is not a gift but a part of the cost of prosperity.

In a real sense the problem of balance can be said to be independent of geography. There are some experts who deny that it makes any difference where in the nation wealth is produced, since the nation is one, and the national wealth belongs to the American people. To these students it is entirely a question of the redistribution of income, by which the poor may have more buying power and the products of industry may find a market. This difference in approach should not be allowed to confuse the discussion. Whether a poor man has to be subsidized as a poor man or as a citizen of a depressed area is almost entirely a matter of definition. In one sense, however, the matter is geographic. The sharecropper on a worn-out cotton patch either has to have more money where he is, or else he has to go somewhere else to get it. Even for him it costs something to travel, and if he is ignorant of the world, he may go far and fare worse. The primary problem is undoubtedly the distribution of income among the American people. But since the people live in localities and cannot move about without loss, the problem becomes in a secondary sense the distribution of income among localities. If Southerners could and would all get jobs in New York there would be no trouble about how to get an income in the South—but they can’t and won’t. Hence the geographic problem. Besides, there is a question as to how much of the nation can profitably be abandoned to wilderness. If an area is worth cultivating, some means must be found to make the people comfortable enough to stay there.


Whether the nation should subsidize the States and localities is not a matter of real dispute. From the beginning, the Federal Government has subsidized schools and various “internal improvements.” National subsidies for roads are well established, and many other local activities draw on the Federal treasury. The present argument is entirely concerned with how much subsidy can profitably be paid. There is considerable resistance to the constantly increasing size of the Federal budget. At present the subsidies are too small to restore an economic balance, and they are therefore ineffective in preventing a crisis such as that of 1929. In order to get a system that will work, this resistance has to be overcome. One of the best ways to hasten the course of progress is to press for particular kinds of subsidy that will attract popular approval.

Education is probably the most practical avenue of Federal subsidy to be further developed in the immediate future. For one thing, the custom of subsidizing education is of long standing and high respectability. The voters are not so easily shocked by a program that is merely an extension of a century-old system.

A powerful argument for larger Federal grants can be based on the high birth rate in rural counties and the movement of young people to the cities. When the cities help to pay for country schools, they are helping to educate their own future fellow townsmen. Surely it will be better to have these future city dwellers well trained, intelligent, and efficient Most of the young voters of 1960 are now children on farms. If their parents are poor, that is no reason for endangering the efficiency and strength of the nation a generation hence.

In the South it would be unfortunate if the race question should be allowed to interfere with the benefits of Federal aid to the school budget. It is not the business of the Federal Government either to discriminate between races or on the other hand to interfere with the domestic arrangements of the States. Congress may properly grant an equal subsidy to be expended on each child of school age, and may require the local authorities to match the Federal grant without discrimination. If the States or counties want to supply extra funds for white schools that is nobody’s business but their own.

The point to be kept in mind by people of good will is that the first necessity is to get more Federal money into the South. Theories as to justice or other moral considerations cannot be true if they prevent finding some practical way of helping education—some way that will actually pass the Congress of the United States, and that will be accepted by the States, North and South, where help is needed.

Another well established form of subsidy is highway construction. Some expansion of Federal aid may be hoped for if there is enough popular demand. On the other hand, highways, like all public works, suffer from the fact that the people have qualms about the cost. We could undoubtedly save a good many lives by separating all our main highways into one-way two-lane roads and by other engineering improvements. But the voters are remarkably callous to the automobile death rate, though they would be willing to go to war for a few Americans sunk by foreign submarines. The local people will cheer for a Federal highway in their own neighborhood on one day, and then burst into wrath the next day when they think of Federal extravagance in Washington, far away. Expanding the program is a slow process.

Rural electrification is not, strictly speaking, a form of Federal subsidy, except that the Government may sometimes lower the rate of interest that would otherwise be required. But the Government program can be useful in helping to reduce the unnecessarily high costs of rural line construction, in encouraging farmers’ co-operatives for supplying electricity, and in obtaining favorable rates. Where the people can manage to afford electric service, it will give them a considerable saving in other farm expenses, and may increase their production. Increased production, of course, is a benefit only if the market condition is satisfactory, which is another question. In any case, electricity on the farm will necessarily be limited to those who are well above the lowest income levels, and who can generally make profitable use of it.

The program of the Tennessee Valley Authority, on the other hand, includes a considerable amount of subsidy, because of the construction expenses charged to navigation and military development. The chief function of the Authority, of course, is to develop electricity, though the Constitution requires it to hang its hat on the navigation clause. The effect of the “yardstick” is a peculiar one, like the effect of the Southern Railway’s low-fare policy. The people get service at lower cost; at the same time the volume of business is so increased that the companies generally get better profits. In the case of the power companies, the kitten had to have his nose held in the cream. The other factor in the situation, the general conflict between Government and high finance as represented by power interests, is another story.

In the field of agricultural and industrial planning the T. V. A. will probably not fill as large a place as some people expect. A Federal authority cannot wage a vigorous campaign to attract industry to the Valley, or to build up local business at the expense of other parts of the country, lest it be cut off by a Congress which is not mainly drawn from the Tennessee area. The attempt to build up local industry is a local job. On the other hand, as an incident to protection of the reservoirs against soil erosion, and to the use of electricity by its customers, the T. V. A. is developing various new methods and inventions that will be of value to farmers everywhere.

The soil conservation program of the Federal Government is a valuable form of subsidy that can be expanded for ten years or so, until soil erosion is brought under control, after which it will probably be of less importance as a means of distributing Federal funds. Every effort, of course, ought to be made to enlarge the Soil Conservation Service, as fast as the expert personnel can be trained to carry on the work. The sooner we stop the erosion, the less it will cost.

One limitation on soil conservation has been pointed out by the authorities. There are areas where the soil is so poor that no practical plan for reclaiming it is worth the cost. Of course, if there are valuable reservoirs below, it may pay the Government to spend money to keep worthless soil from washing into the streams. In some places, too, soil conservation may pay as a means of flood control. The recent behavior of the Ohio is an indication that all possible methods of stopping runoff will still be none too much. But this is a big country, and we may as well recognize that some parts of it, in the South as well as in the West, are going to become deserts to serve as a lesson to our grandchildren. The soil conservation money will have to be put where it will pay to put it. If we need to find an erosion service merely as a means of distributing money, there is plenty of human erosion to be attended to.

Human erosion, in fact, can probably absorb a larger sum than soil erosion, with profit to the nation. The American people can spend about two dollars per year per capita on public health services that will repay the cost in direct money savings. That would be $250,000,000, which, if it were to come from Federal appropriations, would be a help in redistribution. A good deal more could be spent on special campaigns to eliminate malaria, syphilis, and tuberculosis. Sometimes the cost of a campaign can be shown to be overbalanced by the direct savings; in other cases the savings are indirect but nevertheless real. The field for public investment in health services is large, especially in areas where private incomes are low. Development along these lines may be encouraged by the fact that incidentally it will spread money in parts of the country where money is badly needed.

The prevention of human erosion is a larger matter than public health. Since 1933 the people have begun to notice the disturbing loss of skill and morale among workers who have been too long subjected to idleness and despair. From viewing this new development, many observers have gone on to recognize other evils of long standing, such as the low level of skill and energy among the sharecroppers and other permanently submerged classes.

Men and women who have been ground down by extreme poverty for many years are apt to become a national liability rather than an asset. Like slum property, they cost the taxpayers more money than they contribute to the general wealth. To raise their level of life to a point where they will be able to carry their own weight will be a costly job; but in the long run it is cheaper than keeping them as they are. Racially, many of the submerged people, white or colored, are of vigorous stock, capable of developing energy and usefulness if properly fed and encouraged. They have been reduced by hunger, hopelessness, and lack of education to a point where they cannot help themselves. In many cases the way of salvation may be to pamper a worthless family for a whole generation, merely in order that the children may be strong and healthy so that the next generation can run on its own steam.

Here again, moral theories are sometimes misleading. If we are going to be squeamish about helping the “unworthy,” we ought in fairness to go back several generations and find out just whose fault it was that these people were allowed to become “unworthy.” That, however, is impossible. Justice is not for mortal man to understand. A more practical attitude is to regard the final result, a generation or two hence. Good, stout, efficient—and patriotic—workers can be produced by good food, good schools, economic security, and generous treatment. The fact that their parents may not have “deserved” such advantages will be forgotten in thirty years or so. What we want is a strong nation made up of strong States, each capable of holding its place in a fast-moving world.

These same considerations apply to the delicate problem of old-age pensions. The present Social Security Act is only a beginning, serving the useful purpose of getting things going and educating the public. Later, the policy will develop toward a general Federal old-age pension. The complications of trying to keep track of twenty-five million workers, thousands of whom are named Smith or Brown, will provide a growing pressure to drop all the tangled records and give them all an average annuity as soon as they are past a certain age. On the charity end of the system, the problem of trying to enforce the vow of poverty as a condition of old-age relief payments will lead to inquisitorial snooping that is bound to be unpopular.

The complexities and inconveniences of the present system of old-age security are likely to increase as time goes on. At last it will probably appear more practical to give up the attempt to define exactly what each old person has earned, and admit frankly that every old man or old woman has surely worked and suffered enough in a long life to be entitled to a modest dividend in the last years. What we shall lose in abstract justice we can gain in ridding ourselves of bureaucratic complexities and regimentation. This line of development seems inevitable, but it leads to certain problems of adjustment in the low-income areas, both South and North.

A practical old-age pension will have to be uniform all over the United States, which means that it will be somewhat generous in low-cost areas and scanty in high-cost areas, Southerners are tempted to view with alarm a generous pension for aged Negroes, or even for poor whites. They have mental pictures of whole families living riotously on the grandparents and refusing to work at any price. This apprehension is not surprising, when one remembers the large support that was given to Dr. Townsend’s proposal of a pension of two hundred dollars a month. On the other hand, let us recognize the facts to which we shall probably have to adjust ourselves.

Some kind of old-age security is necessary. All civilized nations provide it in some form. In the United States, because of our great size and our habit of moving around, a simple old-age pension is the only practical kind. Moreover, if the Federal Government is to give larger pensions to aged Northerners than to aged Southerners, it will get into a hopeless tangle. Therefore in the long run we are bound to have some kind of universal flat pension. The question is how to handle it so as not to dislocate industry and do more harm than good.

First, the pension will not be two hundred dollars a month, for obvious political reasons—Congress would not dare try to find that much money. Thirty dollars a month is a more likely figure. The high-cost areas would have to provide local pensions for their own citizens to piece out the flat payment from Washington.

Thirty dollars a month, with less than double for married couples, may seem unduly generous for Negroes in some parts of the South. But there are certain extenuating circumstances. Thirty dollars a month is not going to be thrown suddenly into the situation without warning. More probably, it will come as the result of a slow growth, giving the old people more than ample time to get used to it. The standard of living has a tendency to rise with an increase of income. The long-time adjustment is likely to be that the old folks will find plenty to do with their modest pension, and that they will not support many of their relatives permanently.

It is true that a general old-age pension of even thirty dollars would tend to make labor more independent and wages higher. That, too, may seem shocking to employers who have a hard time now meeting their payrolls. But consider this tendency to higher wages. It would come as the result of higher local incomes and more prosperity. If you are an employer, you do not really like low wages, low profits, and low prosperity. With more business and higher standards all around, both wages and profits would be larger, as they are in the high-cost areas of the nation. The general old-age pension will be a means of bringing the South closer to the same level of prosperity as the North, which means higher costs as well as higher incomes. Such a result would not be disaster; it would be success.

One reason for advocating a general old-age pension is that no other means of equalization seems to be strong enough to get results. Subsidies for education, public works, health, and other social services are all helpful. But public opinion is slow to authorize large sums for these purposes. A few hundred millions here, fifty millions there, are not enough. The share of these appropriations going to the South will not balance the yearly drain of perhaps a billion dollars or more. All these activities are forms of public spending— that is, the money is used to hire people for useful work, which renders them unavailable for any other work. Although the results are good, and in depression the employment is a benefit, yet the people are afraid to spend too much, for fear of not getting their money’s worth. That is why the steady growth of public expenditure is not fast enough to balance the economic system.

Old-age pensions, on the other hand, are not public spending. No one is hired, except those who do the bookkeeping. This is merely a redistribution; the money is taken in through taxes, and paid out without being spent. The money is only moved around. When this fact becomes clear, we can move a larger body of money through old-age payments than we can through public spending. Thirty dollars a month for ten million old people would distribute 3.6 billion dollars a year. The South’s share, over and above the taxes to pay for it, might well be enough to wipe out the general economic deficit. For this reason, Southern leaders ought to make a real effort to overcome whatever prejudices may stand in the way of obtaining so valuable a benefit.


The general problem, then, from the national point of view, is to establish means of redistribution that will stop the present drain of money out of depressed areas in all sections of the country. If the means adopted are too weak, the drain will go on and conditions will grow worse, though not as fast as if nothing were done. No improvement can be expected unless the means of redistribution become stronger than the forces of unbalance. Therefore the first and most vital duty of public leadership is to help the expansion of Federal taxation and spending. There is no prospect, however, that the Federal budget can overcome the unbalancing forces of business unless each area of the country takes action to reduce the unbalance. This is a terribly big country. This country has about 130 million people, and a national income at full production that may well go beyond 100 billion dollars a year. We can properly expect the Government to exert great powers to keep us balanced, but we cannot go blindly along building up economic troubles and expect that Washington will save us from all our mistakes. Success will depend on an effective effort by the National Government matched by equally powerful efforts of the States and localities to help themselves.

In the South, the general problem is how to buy less from outside, sell more to the outside, and at the same time raise the standard of living. How to economize and yet spend more—it seems at first sight impossible. The answer, of course, is to produce more at home. Then more of what is spent will be spent in the home territory, and more of what is produced can be shipped out to pay for imports.

Local manufacturing is known to be needed, but it is not necessarily true that a Northern factory is worth all it costs. Some of the Northern manufacturers who have been moving to the South have paid less than they took away, and have only served as agents for collecting tribute. There would be advantages in saving the bounties that are offered to flyby-night concerns from outside, and using the money to invest in home-owned industries. The way to escape from servitude to outside capital is to economize and save up home capital. The place to economize is in the purchase of luxuries from outside.

I am an advocate of spending as a way to prosperity. For the United States, suffering from too many factories and too few customers, less saving and more spending would make better business and more jobs. But the excessive saving is not taking place in the South. It is in the North that the great masses of capital pile up, with which the resources of the agricultural areas are bought in and controlled. The South is still in the scarcity condition that was universal in earlier days all over the country. Therefore it is proper to preach spending in the North, and in Washington, and to preach thrift in the South.

An important factor in raising the economic level is a proper sense of values, which might well be the central feature in college courses in economics. An area such as the South, where economy and capital saving are needed, can be greatly helped by true economies or wrecked by false economies. Private and public spending should be criticized not blindly but with due regard for the result. As one Tennessee farmer put it: Ford ruined us. If the farmer had saved what his Ford cost him and had put the money into soil conservation or health or education, he would have been better off. Road taxes may be an investment or an extravagance, and the distinction is worth careful study. In one county where the annual money deficit of the people was estimated at $100,000 a year, nearly half the deficit was accounted for by the cost of candy imported from outside the county. That money might better have been spent on schools. The efforts of the Memphis Commercial Appeal to encourage farmers to grow and put up their own food are an excellent example both of the line of progress and the way to get into action.

The credit system of the South is both a result and a cause of economic deficit. Incomes are so low that borrowers often run away or take a bath of bankruptcy. Interest rates therefore have to be high to compensate for the risk. High interest rates help to bankrupt the borrowers, and the circle is complete. Subsidy from outside will be necessary to raise incomes to a level where debts can ordinarily be paid. But Southern leaders will need to work strenuously to change the evil custom of high interest and easy bankruptcy. Both the force of public opinion and the force of state law will be needed over many years, before a healthy relation between lender and borrower can be built up.

The economic deficit of the South is one part of the great national maladjustment that comes from a wrong distribution of income. Until the national income in general can be redistributed by government action, no local remedy will cure what ails the South. First of all, then, must come a national policy of income taxation and subsidy that will work powerfully against the unbalancing forces of a commercial system that is controlled by high finance. But a successful national policy is not enough. A successful national policy will mean opportunity, at last, after all these years of a situation without remedy. But opportunity carries no man on a stretcher to the peaks of success. He must storm the breach on his own legs and at his own risk.

If we Americans can break the deadening power of high finance in our country, as Americans we shall breach the power that has held the South confined. Then if Southerners have not lost their vitality, they can get up and capture their own land of plenty. It is no easy job for the American people or the Southern people. But it is worth the price.


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