Editor’s note: This column ran in the Jan. 11 edition of The Pulse, a weekly BankBeat email sends to subscribers. The Pulse also includes a comprehensive list of the top weekly stories on BankBeat.biz.
Recent conversations with my father over the 1980s farm crisis have led me to ponder the domino effect inflation can have on rural communities.
My father, who in the early 1980s was beginning his career as a reporter covering the agriculture industry in southeastern Minnesota and northern Iowa, often recalls the impact the crisis had on both the agriculture industry and small towns, including one especially notable protest attended by more than 10,000 people in Iowa. Protestors demanded the government halt foreclosure actions via a moratorium. Thousands of white crosses were pounded into the lawn in front of the building hosting the meeting. A 24/7 hotline had been set up to support farmers who were threatening suicide at the time.
The era was also especially challenging for community bankers who often had no choice but to foreclose on farmers who were their friends or neighbors. The 1986 book “Final Harvest: An American Tragedy” covered the 1983 murders of two bankers in Ruthton, Minn., by a farmer and his son who had been evicted from their land.
The farm crisis was caused by a number of factors. Former Fed Chair Arthur Burns has been widely criticized for his failure to bring inflation under control during his tenure from 1970-78. The Federal Reserve had raised interest rates repeatedly after Paul Volcker was named chair in 1979, with rates reaching a modern record high of 18.63 percent in October 1981. While the Federal Reserve eventually reduced inflation, land values also fell amid soaring interest rates, including by 50 percent in Iowa over just 18 months.
The bank prime rate averaged nearly 20 percent in 1981 as the 10-year Treasury bond yield averaged 14 percent, which was a major blow to farmers who had assumed more debt the previous decade to finance farmland acquisitions and other expenses. By the end of the 1980s, an estimated 300,000 U.S. farmers defaulted on their loans. More banks failed in 1985 than in any year since the 1930s. The number of farms in Minnesota fell to 85,079 in 1987 from 98,671 in 1978. Despite the farm economy improving in the late 1980s, the number of Minnesota farms hasn’t recovered, falling to 74,542 in 2012 from 85,079 in 1987.
As inflation today remains stubbornly above the Fed’s 2 percent long-term target — the CPI rose 3.4 percent in December, according to a Jan. 11 report — history shows that inflation and high interest can get much worse and harm community bankers and the rural communities they serve.