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Increased inflation has the effect of increasing nominal interest rates which in turn cause problems in servicing debts in the form of conventional loans. Price-level-adjusted mortgages (PLAMs) have been recommended as a means of avoiding debt servicing difficulties associated with inflation. Bank overdrafts can act as effective substitutes for PLAMs and have some tax advantages. Leasing also provides an alternative way of avoiding cash flow problems associated with conventional term loans. Experience in the 1970s demonstrated that the provision of external finance to agriculture was maintained during a period of inflation although the balance of borrowing shifted from term loans to overdrafts.

Changing relative prices and conditions of profitability lie behind many demands for new institutions. The emerging nature of environmental disequilibria suggests that allocative effects of alternative institutions can be studied before the difficult question of income distribution. "Externalities" are viewed as joint products, one of which is not priced.

THIS study is not meant to be a defense of or an attack upon the tobacco program. It began as an effort to understand the distributive process. The results conflict sharply with the beliefs of those who argue that labor has benefited from the program. Even though owner-operators supply the majority of the labor, it does not follow that opportunity returns to labor are therefore inseparable from returns to other factors. Nor is there any logical reason for a restriction of production to increase the demand for labor; and certainly nothing has been done under the program to reduce the supply of workers. North Carolina has more farmers than any other state, and many of them grow tobacco. The program clearly has helped the State, and some of its land owners, a great deal.' The main results of the study are summarized in Table 1. Independent estimates were obtained for the annual net revenue and the capitalized value of the right to produce a pound of flue-cured tobacco. Average values of these series, converted to constant dollars, were then calculated for approximately three decades, between 1934 and 1962. Net revenues were relatively constant during this period, increasing from 19.2 cents per * Published with the approval of the Director of Research, Agricultural Experiment Station, as Paper No. 265.3 of the journal series. The author is indebted to Richard C. Manning for the regression analysis of allotment values and for many of the ideas. He also wi-s es to thank Dale M. Hoover, Carnett L. Bradford, and J. S. Chappell for valuable suggestions. ' Agricultural economists have made a number of worthwhile studies of the tobacco program. These fall into roughly four categories: (a) explaining political forces and program alternatives; (b) social costs, including aggregate effects on exports; (C) JAMEs A. SEAGRIAVES is professor of economics at North Carolina State University. 320

I. Introduction, 430. — II. Internal rates of return and the ranking of projects, 434. — III. Calculating the opportunity cost of capital, 440. — IV. Conclusions, 449.