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DIARY

Book 95

National Academy of Political Science Speech
Delivered November 10, 1937

Part I

Book

Page

Speeches by HMJr

Before National Academy of Political Science, 11/10/37
Conference to talk over plans; present: HMJr, Haas,
and White - 9/13/37

XCV

Conference on Government spending feature; present:

HMJr, Haas, and Seltzer - 9/30/37

Second conference on Government spending feature;
present: HMJr, Gaston, Haas, and Seltzer - 10/14/37

Preliminary draft prepared 10/14/37
a) Conference to consider; present: HMJr, Bell, Upham,
Haas, Wilmerding, Seltzer, and Gaston - 10/20/37

20
26

1) Viner's reaction to draft (page 57)

2) Wilmerding's outline (page 100)
3) Haas-Seltzer draft read (pages 59,78)
Conference; present: HMJr, Magill, Haas, Riefler, Seltzer,
Gaston, Upham, and Wilmerding - 10/22/37

111

a) Magill's reaction

b) Bell's draft

c) Riefler's comments on first draft
Conference; present: HMJr, Bell, Haas, and Bartelt 10/25/37

Conference; present: HMJr, Taylor, Haas, Gaston, and
Seltzer - 10/26/37
Conference; present: HMJr, Haas, Gaston, Seltzer, and

Bartelt - 10/27/37
Agriculture: Bartelt statement showing estimated
expenditures on account of aid to agriculture for
fiscal year ending 6/30/38

129
134
186

237

Public Works Program: Bartelt memorandum giving detailed

statement of plans covering next five years, as submitted

by the several departments
Three parts of speech as decided upon - 10/28/37

250
261

1) Reasons why budget should be balanced
2) How budget can be balanced

3) Considerations involving debt retirement question
Conference; present: HMJr, Viner, Riefler, Haas, Taylor,
Gaston, Seltzer, White, and Bartelt - 10/28/37
a) Receipts from Social Security, taxes, and the states

262

considered

Conference; present: HMJr, Viner, Riefler, Haas, Seltzer,
Gaston, and Bartelt - 10/28/37
a) Riefler opposes giving up a full and complete
balancing of budget including sinking fund
Conference; present: HMJr, Taylor, Riefler, Gaston, Viner,
Haas, Seltzer, White, Bartelt, Upham, and Bell - 10/29/37.
a) Riefler memorandum on Secretary of Treasury's
statement of policy considered

b) Viner's explanation of "balancing of budget"
considered

Draft as considered at Hyde Park - 11/1/37

281

295

322,330
342
346

Book Page

Speech before National Academy of Political Science,
11/10/37 (Continued)
Conference; present: HMJr, Haas, White, and Seltzer 11/2/37

Tax Section: first draft as prepared by Magill

Conference; present: HMJr, Magill, Gaston, Haas,
Seltzer, Upham, and White - 11/3/37
a) Revenue side of picture considered
Conference; present: HMJr, Magill, Upham, and Gaston 11/4/37

Conference; present: HMJr, Taylor, Haas, White, Gaston,
and Seltzer - 11/4/37
Conference; present: HMJr, Magill, Seltzer, Haas, White,
Oliphant, MoReynolds, Taylor, Upham, Bell, and Gaston 11/4/37

a) Entire policy of Treasury discussed

XCV

370
377

383,388

406
421

470

RE PROPOSED SPEECH BEFORE NATIONAL

ACADEMY OF POLITICAL SCIENCE

Present:

H.M.Jr:

September 13, 1937
11:15 a.m.

Mr. Haas

Mr. White

This is what I want your people to start on, Haas,
for me. I have agreed to talk to the National
Academy of Political Science either November 10
or 11, and, to start the thing going, I thought
it would be very interesting to take a look at the
combined figures for the five years previous to
July 1, 133.
He'll give you a copy of this - although you better

make notes, until he gets it all off. Here's lots
of paper.

I'd like to see the combined figures of the five
years previous to July 1, '33, then the five year
period of July 1, '33, to June 30, 1938, see?
Now, when I say the combined figures, I want to break

it down in a way that I don't think it's ever been
broken down before. I'd like to see, for instance,

for the last five years how much we have spent in
regular departments, see, and then under that you'll
have to break it down - let's see - Army, Navy,

Agriculture, so forth.
Then I want to take - under Agriculture, for instance,
I'd like to see how much goes to the regular Agriculture
work, how much goes to good roads.

Then, aside from that, of course, there comes Relief.
Then you've got to include both Hopkins' relief and
the relief that Resettlement has done, you see; and
then separate out what's been done for permanent
construction under Public Works, you see.

In other words, I'd like to sort of get this thing

into how much have we given away; then you may want

to divide into how much have we lent. I want to
try to get out of this damned revolving fund business;
I want a straight cash outgo, you see.
Now, this is what I've got in mind - I want to give

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you the background - you can't tell how this

thing will turn out. That's why I wanted to
pretty well.

get, George, somebody that knows the budget
Haas:

Somebody in Seltzer's place.

H.M.Jr:

Who?

Haas:

Somebody in Seltzer's shop.

H.M.Jr:

I want to settle this thing; this oughtn't to take

more than a couple days to get a look at. Certainly
ought to be interesting to see, what has Roosevelt
done from July 1, 133, to June 30, 1938? It may be
worth while comparing to the previous five years.

For instance, Hoover let the Army and Navy run down
so that we had to spend the extra money. See?
Haas:

Yes.

H.M.Jr:

Then what I'd like to do - how can - this is what
I'm driving at: How can we balance the budget and
plan our program through June 30, '41, which is
three years; where are we going to go the next
three years on spending and on revenue, see, in
order to really balance the budget and pay off some
of the debt? See?
Now let me ask you this. In approaching it from
this way - has this been done by anybody in the
Administration?

White:

No, there are certain novel aspects of it. A
comparison of that kind, if the figures show what
they should

Haas:

Difficult for other people than the Treasury,

because they can't handle revenue, can't know the
expenditures.

White:

Secondly, from the point of view of what you have
loaned, what you have spent in regular expenses, what
you have given away, what you've got to show for it
now in the way of permanent works, and why some of
the expenditures were called forth possibly because
they cut too close previous to that - nobody has done

-3-

that. Now, whether you will come out with some-

H.M.Jr:

White:

thing that will be pretty good, you don't know;
you have to see what the figures look like first.
That's the point. It may be no use to compare it
with the previous five years; it may show something
very interesting.
But in any case that is the significant analysis I mean of expenses. That's the form it should take,
to mean something to the layman and to the

H.M.Jr:

Well, take the five-year period. Has the money

White:

What have we got to show for it?

H.M.Jr:

What do we have to show for our expenditures? See?

been thrown away? What have we got to

And then - whether it's another speech or whether

we can do it in that speech - let's look forward to
the next three years.

White:

How many minutes?

H.M.Jr:

How many minutes?

White:

Yes.

H.M.Jr:

I don't know. I think I'm the principal speaker.

White:

It's a banquet.
Well, that means an hour, and you want to take it.

H.M.Jr:

Oh yes.

Haas:

H.M.Jr:

This next three years complicates it a little bit as to what is done in the new tax bill.
Well, I know, but I could do a little talking about

Haas:

Yes.

H.M.Jr:

I mean I could, for instance, talk in terms - "Well,
I feel that we should continue to raise seven billion

the base.

-4-

dollars. The methods of raising them may be

reshuffled, but while we have prosperity let's
continue to raise seven billions. Don't raise
any more - but we ought to cut our cloth to suit
seven billion dollars. But we may reshuffle it."

Now, that will take care of the new tax bill, you
see. But I don't think we ought to go beyond that.

But if, again, when we get through - you may say,
"Well, we need seven and a half" or "We need six
and a half." Then, I know you'll find out that the
proportion going to good roads, deepening of harbors,
is entirely disproportionate. And I think you will
also find when it comes to housing that we just haven't
spent enough. See?

Well, all I want is that I'd like somebody to get
on that, just to get the figures together. It
just so happens we've got two months to work on
this thing. And what I want to do - I want to be
just as frank as I can about the whole thing, as I
was up at Harvard. And if this thing goes well, I
hope to do three or four of these a year. But - I
mean I think it is very, very important that this
be done. And then the other thing - it's a good
time to do it before Congress is here - let it sink
in.

Haas:

Some parts of this - even if you don't want to put
it in your address, it is something you should have
in your planning anyway.

H.M.Jr:

Of course. I mean if for no other reason, if nothing
else is accomplished, if I could put it together and
let the President take a look at it, it will have a

wholesome effect on him and on me.
White:

For some of these expenditures you may want to go

H.M.Jr:

Well, I think you'll find most of it in the Budget;
most of it is there. The first time it can be kind

to the various departments to break it down.

of roughed out.

Haas:

Are you in a very great rush about this thing? This
fooling around with these figures really takes a little

-5-

Haas:

bit more time than may appear at first blush.
Supposing I give you a week on it.
O.K. You talked about two days; that's what

H.M.Jr:

Supposing you have something a week from today.

Haas:

That'11 be fine.

H.M.Jr:

Let me have something a week from today. How's

Haas:

That's fine.

H.M.Jr:

Does that rush you too much?

Haas:

No, fine.

H.M.Jr:

But I'd like you to put your whole group thinking
on this thing. In the first place, is it worth
while, is it something that I s hould do? What do

H.M.Jr:

bothered me.

that?

you think, George?
Haas:

Very definitely.

H.M.Jr:

Harry?

White:

Oh, I think so.
I think it would be fun, don't you think so?
Particularly if we are able to get out something
good, as I think we will be.
All right, gents.

H.M.Jr:
White:

H.M.Jr:

cc - Mr. Haas
Mr. White

RE SPEECH ON "GOVERNMENT SPENDING"

Present:

H.M.Jr:

Mr. Haas

September 30, 1937
2:00 p.m.

Mr. Seltzer
What I wanted to talk to you gentlemen about is

whether you people had explored the wholly-owned
or partly-owned government corporations and credit
agencies

Seltzer:
H.M.Jr:

No, we hadn't explored that.
as to whether there's any I'd overlooked. Now,
I'd like between now and Tuesday for you to explore

that to see if there's anything we could save, first;
second, whether in any of these cases we might possibly
sell some of their stuff to the public. Now, I don't
know whether that does any good - I don't know. But
I'd like to put a magnifying glass on this thing
from the standpoint not necessarily of winding them
up, although that's always - that's the easiest way
to stop spending, is to put them out of business.
Seltzer:

That's the way you get your money back.

H.M.Jr:

I'm definitely recommending that the Export-Import
Bank be stopped. I've asked the Executive Order to
be drawn up. That's simply - absolutely serves -

just no excuse for it. Now, a lot of other things

in here
Haas:

We went over that stuff, didn't we, Larry, about a

year ago.

Seltzer:

Yes.

H.M.Jr:

Well, I wish you'd go at it again. I don't expect
you to do exhausting - I mean between now and Tuesday
you could take a look at it.

Seltzer:

Something depends on how many feet you want to step

on.

H.M.Jr:

I don't care.

Seltzer:

You see, over at F.C.A. you have this bank for
cooperatives with 50 millions of capital invested

in Governments. That implements our debt, doesn't do

ca- Hoos

-2-

anything for them except to give them an income.
It would be cheaper for the Treasury and Congress

H.M.Jr:

to give them an annual appropriation than to give
them 50 million capital, unless you're looking for
a long-term future.
Well, you put up just as many of those to help as
possible. Some of those are feasible and some of
them aren't. You see what I mean?
Now, we've been working on the Reconstruction
Finance. Commodity Credit - somebody was in here

today, and thought - Oliphant, he's working on that
set-up; he thinks that that should be made a part
of the R.E.C. rather than a separate thing. He's
working on that.
Export-Import Bank - I'm going to recommend it be
dissolved.

Public Works - we've had that.
Haas:

H.M.Jr:
Haas:

H.M.Jr:

Regional Agricultural Credit Corporation.
They're in liquidation. Those were the Hoover
Production Credit.

Those are - well, there's a lot of the same kind
of money all through that system.
All right. Shipping Board - I don't know anything

about that. War Emergency Agencies; Farm Loan Board;
Farm Credit Administration; Inland Waterways; Railroad
Obligations; Tennessee Valley; Subsistence Homesteads now, there's something that should be wound up.

Look into some of those agencies. Some of those
have got a couple million dollars of Government bonds some of these things Hopkins set up - state housing
agencies.

Now - Financed partly from Government and partly from
private funds: Federal Land Banks; Federal Intermediate
Credit Banks; Federal Farm Mortgage Corporation - we
know something about that. Home Loan Banks, Home
Owners Loan. Now, make a special note on that Federal

-3-

Savings and Loan. Why should we continue to
give them capital? See?

I'd just put anything. Don't mind who it is,
see?

Seltzer:
H.M.Jr:

Yes, that's your lookout.
That's my lookout. What I want you two fellows

to do - is it rushing you too much to say I'll

discuss it again Tuesday?
Seltzer:

It is.

H.M.Jr:

It is rushing you too much?

Seltzer:

That is, we've got some other stuff lined up for

H.M.Jr:

What? For me?

Seltzer:

Yes.

H.M.Jr:

What sort of stuff?

Seltzer:

Well, we have this expenditure analysis, this
deficit spending; we have the capital market.
Those are the two main items. I don't say

H.M.Jr:

I don't want you to work Sunday; it's not necessary
to work Sunday. I'd like to have it as soon as
reasonable without having to work Sundays. How's

the next few days.

that?

Seltzer:

The only reason I don't like a commitment on this
is that it involves a lot of detail; we don't know
what we'll run into.

H.M.Jr:

That's all right. When it is reasonably possible,
see?

Now then, the other thing that I want you to do,
George, is to have a sheet like this but have it on
the receipts side, so I can put it right alongside I mean the receipts.
Haas:

Uh-huh.

-4-

H.M.Jr:

You see?

Haas:

The other side of the budget. (Showing chart to
Seltzer) He wants the same thing for receipts.
You want us to go back into these years and give
you the receipts?

Seltzer:
H.M.Jr:

Yes.

Haas:

And we could have a third sheet where we bring

H.M.Jr:

together the totals of the sheets.
Well, that's up to you.

But I wanted to - now, after all - I just want to
give you - if you want to make a few notes as I
talk. This is - part of this is part of my job,

and part of it goes into my speech. See what I
mean? But in preparing for the speech I've got to
do this other job. So the two things work out
beautifully. See what I mean? But I want to let

you know how my thinking is.

Then gradually one of you fellows has got to sit
down and block out something. Now, the way I'm
approaching this thing is this. We have here these
four years before '29, which - I would call them the
boom years. Then we had '30 to '33, which are
depression years. And 134 to 137, recovery. Is
that right?
Seltzer:

Uh-huh.

H.M.Jr:

Now, how much - in the four years of the boom period

we spent a little over 11 billion dollars - 14 billion

dollars. Then in the period of the depression we
spent 18 million. And into recovery we spent 31

billion.

I mean I'm just thinking out loud now. Taking those,
what makes the difference between the 31 and the 18,

which is 11 billion dollars? Well, it's right in
Public Works and Relief.

Seltzer:

That's right.

-5-

H.M.Jr:

It just checks exactly. We spent in those four
years 12 billion dollars for Public works and
Relief. And - I mean I'm just thinking out loud.
Now, if we're going to get back again to an average
period or a normal period, it really - the regular
operating expenses have been more or less running
along 11 or 12 billion for four years; so how much
in the next four years can we reduce Public Works

and Unemployment Relief?

Seltzer:

It isn't quite that, because your revenue receipts
are higher - unless you want to get back to a lower
level of expenditures.
I do. I mean I'm just thinking out loud.
Now, if we spent 12 billion dollars for Public
Works and Relief during the next four years - how
much could we spend, or how much will we have to
spend? And it's a question of tapering off that 12
billion, isn't it? It's a tapering off of that 12
billion. And I think we ought to put down some
figures as to what we think.
Now, the President said on Public Works 500 million
dollars. Well, we are already committed for next year,
if we don't do anything - I think it's six or seven
hundred million dollars, if we don't go another cent.
Didn't you say the other day you also included Soil

H.M.Jr:

Yes. Did you see that statement? I gave you (Haas)

Haas:

Yes.

Seltzer:

I haven't seen it.

H.M.Jr:

Well, you've got it.

Haas:

I've got it.

Seltzer:

That is exclusive, however, of other agricultural
bounties they may pay, like cotton subsidy, other

Seltzer:
H.M.Jr:

Erosion in there?
a copy.

subsidies.

Haas:

on yes.

-6-

H.M.Jr:

Seltzer:
H.M.Jr:

Seltzer:

Well, in my thinking I'm not going to include any.
You spent two billion dollars for Agriculture that
you didn't have before - in this summary before.
Well, I think we ought - I think the main thing to
point out to these babies is this: If you can take
26-129 as an average year - I think we ought to go
back four years behind that too, just to take a look
at that. I mean I think we ought to take a look at
that. In the depression, 18, and here's 31. Now,
how can we get back to - can we get back to 14
billion dollars for four years? Well, I don't know,
but I - I mean that's what I want to look at.
That's a changed picture. You've got Social
Security expenditures.
Well, doesn't the one wash the other? That's why
I want these receipts.
Well, you're talking mainly about the level of
expenditures.

H.M.Jr:

Seltzer:

No, but I mean - Agriculture, two billion one for
four years - Agricultural Adjustment. Now, does
the Social Security 500 million dollars - I mean
whatever it takes one year, does that wash it off?
No, you also have these grants to the states that

grow and grow and grow to where they get to around

H.M.Jr:

900 millions a year.
Well, do you see what I mean? I want to sit down

and tell you people - now, I want - I'm not going
to say it to them, I'll say it to you; I want to
paint absolutely the worst, in other words, give
them everything that there is, so that nobody can
paint it any blacker than I'm going to paint it.
That's the way I want to approach it.

Seltzer:

That's easy.

H.M.Jr:

What?

Seltzer:

That's easy.

12
-7-

H.M.Jr:

Nobody's going to paint this picture any blacker.
When I get through, I'll have Harry Byrd sweating.
I've always done that here and the reaction is "Morgenthau is too blue and things are much better," and the
papers come to my rescue, rather than saying, "He
forgot to say this and to say that." I mean it's
good public psychology, see? At least, it works
since I've been here. Instead of doing what Roper
says, that "everything is lovely." I think you've
got to take the thing - don't know what to compare it
with yet, but I want to show not only - if we use the,
figure 500 million dollars, I want to show that we've

got enough money voted right now, and we don't have

to vote another dollar and still we'll spend more than

that.
Haas:

Have you got a copy of that?
Yes, I have.

H.M.Jr:

Well, you better give him (Seltzer) this stuff.
George has been sitting in.

Haas:

H.M.Jr:
Haas:

H.M.Jr:

He hasn't got in on that.
Well, I want him to get on this thing.
Well, he's been on other stuff.
I know. If we're going to spend 869 million this
year - which leaves unspent but voted for next year
700 million for Public Works. So, in other words, if
we're going to get down to the 500 million, they
oughtn't to vote another dollar; they oughtn't to
vote another dollar for next year. We've got enough
money right now voted. I mean this is cash available
to be spent in '39 - 695 million. So there is no use
attempting to get down to a 500 level in '39; we'd
have to be talking about it in '40. So the die is
already cast for '39; we're going to spend 700
million. And then in '40 we can hope to spend 400
million.

Then, in terms of relief, to give you an idea, the
President has talked about a billion dollars for
relief, and I think in that should go two hundred
million for c.c.c., making a billion two. That's a

hundred million a month, and that should take care

-8-

of all kinds of relief.
Seltzer:

That's for '39.

H.M.Jr:

Pardon me?

Seltzer:

That's for '39?
39. Hundred million a month should take care of

H.M.Jr:

Hopkins and the C.C.C. See?

Seltzer:

And he's already voted his Public Works thing, so I mean I want to give you this idea, so
May I ask this?

H.M.Jr:

Yes.

Seltzer:

Do you want your speech to be something in the nature
of a warning to Congress, or do you want the speech
to be something of a reassurance to the public?

H.M.Jr:

No. I'm glad you asked that question. This is what

I am thinking of. In the first place, I want to do

what certainly for my own satisfaction has never been
done. I want to try, in language so that Joan can
understand it, to show what we are spending - this
Social Security business, what we are taking in, where
the deficit money has gone. What did we do with all
this money? What did we do with this extra 12 billion
dollars?

Seltzer:

Without using too many figures, though.

H.M.Jr:

You can't use too many figures, true. I mean I first
want to take in the whole picture.
Then, what is my objective? My objective is to try
and get a public interest and backing to really
balance this budget in an intelligent manner and,
if you wish, so that the people, when they do write
to their Congressman, will know what they are writing
about; it isn't only Congress, it's the whole country;
and to show them that I, as Secretary of the Treasury,
first, know what I am talking about, and second, that

-9-

Seltzer:
H.M.Jr:

I've got an objective that I'm shooting at.
Now, it isn't to be a reassuring speech.
It is not to be?
Only in its indirect effect that the people will
know - (1) that I know what I'm talking about, and
know where I'm going. Now, if they ask me today,
I don't know - I don't know what the President's
done. He doesn't know, because nobody's ever laid
this out for him; and he's going to see this and I

hope that he'll like it.

But what I am trying to get him to do is to lay out
a program for the next three years that he is in.

Now, it may scare some people to death, but I figure
that knowledge will never scare them. One of the
real reasons that people in this country are so

frightened is that they don't know. They don't know
where we're going. And if somebody says, "Well, what
are you going to do for the next three years on
spending, and I'd have to say, "I don't know," the
fellow says, "My God" - he'd be scared to death. But
if I paint the picture as it is, it may be very black,
but at least the fellow will know the worst. Now,
that - does that answer your question?

Seltzer:

Yes.

H.M.Jr:

Now, I think as a rebound will come confidence -

Seltzer:

Uh-huh.

H.M.Jr:

Seltzer:

as a rebound.

(On phone) Hello. (Has conversation with Gordon

Rentschler)

I've got Rentschler and Parker Gilbert. And those
two - one is the National City, which in world trade
is about as big as any; the other is J. P. Morgan.
The first reaction of both of them is against it,
but I've asked both of them to check that for me don't mention it - and-I'd a damn sight rather take
Their first reaction was against what?

15
-10-

Seltzer:

Against taking the extra 50 million.
You see, this is true, on the other side: that the

H.M.Jr:

Yes

Seltzer:

was in June. That means only once in the whole

H.M.Jr:

last time you raised new money by a financing

year 1937 where you have raised new money, and it
may be that you have raised your last new money

for the whole recovery period last June. That is

a strong argument for avoiding the December financing.
H.M.Jr:

On the other hand

Haas:

But he is raising it in bills if he does this.

Seltzer:

No, the bill thing is a turnover problem.
No. But don't let's get into that; you'll have a

H.M.Jr:

chance at me next week.

Well

Seltzer:

The picture can't be all black. You've done a lot
of things that will save your budget in future years.

H.M.Jr:

All right. Now look, you know how we work on these

things. I don't want to get - the first minute I
get a breathing spell I'm going to fire this thing
at you. And George, now don't - this is all part of
the picture, and early next week I want to have

another session, see?

H.M.Jr:

I think we might start putting something in writing
to help the Secretary.
Now, if we make this one decision about this - what
kind of financing, which would be Wednesday,
wouldn't it? -

Haas:

Uh-huh.

H.M.Jr:

- then after that - then I think you and Seltzer

Haas:

should go some place and lock yourselves up for a
couple days, Thursday and Friday, see, so that you'd
have something for me the following week. How's that?

-11-

Seltzer:

Fine.

H.M.Jr:

See, I'd say next Thursday and Friday you're just
going to devote to this. You can use my room
downstairs if you want to, or - I don't know whether -

where do you go when you want to write?
Haas:

I've got an armored-plate secretary out in front of

my door.

H.M.Jr:

Well, I would say that next Thursday and next
Friday you take whoever you want and just devote

two solid days to this thing. Now, true, I don't
want to say - I'd like to take credit for everything that I could honestly take credit for, see?

And explain why we had to put this money into these
different agencies - Farm Credit, R.F.C., and Public
works, and Hopkins, all those things. And if you want
to, use the argument: Well, ten billion dollars put
here increased our revenue from 40 billion to 70

billion. Now, if a fellow's business was four thousand dollars a year and by borrowing ten thousand

dollars he could increase his business to seven
thousand a year

Seltzer:

It's good business.

H.M.Jr:

It's good business. I mean I'd get it down - it's
good business. Now, the thing is, we're in this
position, we've borrowed this other ten billion,
and we've figured how long it will take us to pay

off that ten billion and still let our national

income keep increasing. Now, isn't that the whole

picture?

Seltzer:

(Nods yes)

Haas:

Un-huh.

H.M.Jr:

What? On the other hand, we recognize human weakness,

and just as long as some of these pump-priming

agencies are there, with the machinery all set up,

there is the temptation for all of us to use it.

Now, for example, we want to close this C.C.C. camp.
The first person we near from is the Chamber of
Commerce in that community - not to do it because on account of the business it brings them. But on

17
-12-

the other hand, the national Chamber of Commerce
wants the budget balanced.

And I used the expression - I said, "We've tried
here to scrape the molasses barrel empty, which

we have. But, for fear that they may fill it full
again, I want to take the barrel apart."

Seltzer:

Break up the barrel.

H.M.Jr:

Sure.

Haas:

I've got that.

H.M.Jr:

Sure, I'm using that. We had to spend money, we

had to lift ourselves up by our bootstraps; we've
done it. But we've done it through public works lot of the things are here. We've put so much stock
into these recovery agencies; that money is still
there, it's still working. We've insured bank
deposits; we've done this, we've done that.
And gentlemen, don't forget that the money we put

into - that we got from our devaluation of gold every dollar of that is accountable. So many
hundred million dollars was used for retiring - I
want to emphasize this strongly - so many hundred
million used for retiring national debt, bank notes,
and the rest of it - every dollar of it is right in
the Treasury today. We never used one dollar of our
gold profit from devaluation, except to either retire
so many hundred million dollars of national debt and the rest of it, the two billion dollars, is
intact in the Treasury today. I want to particularly
get that thing across, see, get that straight.

And the other emergency powers which they gave us

we never used - the Thomas currency, and this thing
and that thing, I don't know how many other things.
We've never used those things. Which shows that
Congress - I mean I'm looking at the other - Congress
can give us emergency power, the President can be
trusted; he had his six-shooter and he never fired
a single shot.
Now, the only thing we did was, we borrowed. Now,

-13-

how much did we borrow in comparison, if you

want it, to other countries, in comparison to
our national wealth, in comparison to our
capital? I mean I'm just throwing this out.
You see, I think we ought to paint a pretty
good picture for what we did; I don't want to
apologize. Put it there and make it just as
simple - I've got 30 minutes - not using too many
figures.
Seltzer:

That's the danger.

H.M.Jr:

And I don't want to spread this around among too
many people. I'm going to rely on you two fellows

to build it up. There'll be plenty of fellows to
criticize and pick it apart. But you can't - I
think if I asked three or four people to write - I'd
rather hang it on you two fellows, if you're willing,
and
don'tthen
likethere'
aboutbeit.enough people to say what they
Seltzer:

Sure.

Haas:

Then too, we won't like it - the first draft perfectly either - but a working basis.

H.M.Jr:

But what I would do is, I would definitely put on
this, see? I'd set that aside.
But
does that give you a little idea how I'm
thinking?
your calendar next Thursday and Friday to work on

Seltzer:

Oh yes, surely. There is no prediction as to the

budget being balanced. in here, but there is a very
strong presentation of the reasons why it should be
balanced in the near future, why you've got to cut
down on expenditures.
H.M.Jr:

Seltzer:
H.M.Jr:

And also some of the hurdles that we've got, some
of the
- why
us
before
wesome
start.of the cards are stacked against
Yes.

People say, "Balance the budget." All right, you

-14-

Seltzer:

say, "Stop public works. " But if Congress doesn't
vote a single dollar, gentlemen, we are obligated
to spend 695 million dollars next year for public
works. Before Congress votes another dollar.
Now, we've got so much public debt - I mean let's
take first what we know is there next year, for
'39. These cards have already been dealt. You
can't change that. Now, how much is left, how
much more have I got to deal? What can I do?
So much is already out on the table, so many
billions of dollars. And when it gets down, it
gets down to a very few things.
And of course, it is worse for '38.

H.M.Jr:

Oh yes.

Then, Magill - I'm going to work with Magill on
the revenue picture, and when I get that, you see and in that - then I'll work with him on that, then
we'll try to put the two things together. But the
speech is called "Government Spending," you see.

Seltzer:

Delivered on....

H.M.Jr:

What?

Seltzer:

When is it?

H.M.Jr:

The 10th of November.

Haas:

H.M.Jr:

But in our draft you don't have any objection to
our taking the receipt side.
No, because you know that picture as well as I do.

Haas:

Yes.

H.M.Jr:

What?

Haas:

O.K.

20
RE SPEECH ON GOVERNMENT SPENDING

Present:

October 14, 1937
11:45 a.m.

Mr. Gaston
Mr. Haas

Mr. Seltzer

H.M.Jr:

Has everybody got a copy so we don't have to read

Haas:

Oh yes, we all have copies.

H.M.Jr:

(After reading short portion) Just put this thing
in here; after the first paragraph, I would say:
"Right at the beginning of my discussion, I wish
to say that I believe that it is imperative that,
without any 'ifs,' 'ands,' or 'buts,' the Federal

out loud? I'd like to read it myself.

budget for the fiscal year 1939 be balanced."

Seltzer:
H.M.Jr:

Seltzer:

That comes on page 1, after the first paragraph.
Why not right there where you are talking about the
three parts of your speech?
But you don't make it strong enough.
Say first your spending program and then why the
budget must be balanced.

H.M.Jr:

Well, let me just throw these things out. I haven't

allowed enough time this morning. Let me read it
through, give you my reaction. Then you fellows take

it, chew over it, and you'll get a chance to come
back at me again. In other words, this is going to
be a little one-sided this morning; next meeting I

promise I'll listen.

(Reads silently)

This doesn't necessarily come in, but I've got an

idea I'd just like to dictate:

"We have been waging a battle during the last four

years to save lives, to rebuild morale, and to put
the country back again on its feet. This kind of a
battle is not very different in many respects from
a battle against the enemy where the objective is to

-2-

kill. In that kind of a battle, we have our

generals. In the battle against the depression,
we have also had our generals to lead this fight,
only this time the generals have been civilians.
And I believe that the fight to save lives is just
as difficult a one to win as the normal battle where

you kill.

"Now, let us see who our generals have been this
time. Our generals who have led the fight have
been Mr. Jesse Jones of R.F.C., Mr. Bill Myers of
Farm Credit, Mr. John Fahey of Home Owners Loan,
Mr. Stewart McDonald of Federal Housing" - all
those people - "and those men deserve the Distinguished
Service Cross for the work that they have done every
bit as much as the generals who directed the troops
during the World War from Washington."

Haas:

Now, it's just an idea, see?
When you were saying that, it occurred to me that
you were going to say that "We spent to save." That's
an alliteration.

H.M.Jr:

I'm just throwing it in. Have to put in a lot of

Haas:

Have to put Wallace in.

Seltzer:

You left out Hopkins.

H.M.Jr:

Oh, just - I left - I'm just throwing it in. I gave

the others.

it to my wife. She said it sounded too much like a
campaign document. But I'm just throwing it into the
hopper, see?

Then that other idea: "If we made a mistake during
the World War, we don't figure it in dollars. The
important thing is: Did we win the war? The same
kind of situation holds true during the last four
years. Of course we made a lot of mistakes, and of
course we wasted some money, but in the end we took
our objective, which was to lick the depression."
I'm on page 7 now.
Haas:

We've got some of that in there.

-3H.M.Jr:

I know.

Look on page 8: "Another amounting to more than

one and a half billion was to provide funds for
governmental corporations and credit agencies that
made loans to farmers, home owners, railroads, banks,
etc. The proprietary interest of the United States
in these agencies now amounts to nearly four billion
dollars."
Now, how could we, on spending one and a half, get

a proprietary interest of four?

Haas:

H.M.Jr:

Seltzer:
H.M.Jr:

Hoover did an awful lot of it. He put up the R.F.C.
Make that clear. A fellow says, "Gee, put in one
and a half and get four." It just doesn't make sense.
We made more of those, but we got repayments.

But a fellow says, "It just doesn't make sense. That's
some pot." See what I mean? It needs an explanation.
(Reads more)

Seltzer:
H.M.Jr:

You get it down to five billion, don't you?
Practically.
Last time we did this speech, we had a profit.

Remember, Herbert?

Seltzer:
Gaston:

H.M.Jr:

Of course, we never did discover the source of some
of those figures. Of course, we have spent some
more money since that time.

Well, Danny Bell was in on that.

Just a minute. Herbert. Those figures were all right.
That's a good sentence - page 11 -: "We believed it
better and wiser to balance the budget of the American
people when that budget was very grossly out of balance,
than to balance the Federal budget at the expense of the
people." That's a good sentence.
(Reads some more)

-4H.M.Jr:

I'm on page 17.

I like this page.
Haas:

Is that 18?

H.M.Jr:

Uh-huh.

(Finishes reading)

Well, I want to say this. I think it's coming

along very nicely. The main criticism I have and I don't know whether I ought to do that with
you - I don't feel in the first two thirds that the
ideas fall nicely - I mean that they're - they just
come in logical order, that the arguments - I mean
I feel that they're still too scrambled. That's
my principal criticism there. I mean it doesn't give

me
a picture - 1, 2, 3, 4, 5 - you see; it isn't yet
orderly.

But I'd like to - I don't know whether you people
want to take it or whether you'd like to leave it
now until I work with it. What do you think?
Haas:

Herbert could also

H.M.Jr:

How do you like it so far, Herbert?

Gaston:

I think the argument in general is good. I think
it's the right argument and the only one you could
use. I think that there is probably too much of this
review of the reasons for the emergency expenditures,
that it is too nearly in the form in which we have
said it over and over again during the campaign.

Then, I think also that we should try to get that
thing a little more condensed and crisper and enlarge
more on the future picture. And then I think the

emphasis here on the fact that regular expenditures
have not been greater, they have actually been less

than in prior administrations, leads immediately to
the thought that "Well then, the emergency is over,
you can just chop those all off and we'll get back
to a four billion dollar budget"; and it isn't true;
we can't do it, and I think something more must be
said about the difficulty of doing that.

-5-

And I think also that that's a somewhat tricky
statement, because we'r not going to get back to
any four billion dollar budget. We have absorbed
into our regular budget these things which we have
liked to speak of as emergency expenditures, and
they're going to stay there.
Haas:

You
(Seltzer) had that in the other draft, don't
you remember?

H.M.Jr:

Let me just get - I'm tired now. George had me the
other night when my mind was fresh. I'm tired; I
won't be any good the rest of the week. Now, you
three men, just the three of you - I don't want Upham
in on this any more - do you think you could do

anything for me so when I came back it would be whendo
I'dyou
be fresh,
What
think? we could take it up Tuesday morning?

Gaston:

(Nods yes)

H.M.Jr:

What?

Haas:

I think Herbert could do a lot. I think it needs a
fresh mind on it. Larry and I are

H.M.Jr:
Gaston:

H.M.Jr:
Haas:

H.M.Jr:

What do you think, Herbert? I know when my mind is

tired, and right now my mind is very tired.
Yes. Yes, something could certainly be done.
Well, think it over. Is this a copy for me?
It's being retyped.

Have it retyped as it is and I'll take it up to the
farm with me over the weekend, and I'll see what I
thinktired
of it,now.
see? But I know when I'm tired, and I'm
very

But I want to say this. I think it's coming - this
is only the 14th, and I think it's coming. And I
think when it's retyped I'd let Viner and Riefler
read it. Just ask them to read it while they

are here, to see whether they feel that we are
approaching it from the right angle, without getting

-6down to
Haas:

Details.

H.M.Jr:

details; but do they feel that's the way to
approach this thing, and if not I'd like to ask
them to put in writing the way they'd do it. I'll
see them at lunch and I'll tell them.

Seltzer:

Are they going to be around the rest of the week?

H.M.Jr:

Yes. Well, tomorrow anyway.

Haas:

You tell them about it and I'll supply them with a
copy.

H.M.Jr:

I want to see if they think this is the appropriate -

this is the philosophical way to approach this problem.
I also feel much more could be said as to the future.
Gaston:

I'm perhaps - because of the fact that we have had

Seltzer:

I understand.

Gaston:

H.M.Jr:

so much of this stuff, Larry,

maybe I just got kind of tired.
No, George said - he prefaced the thing; he said he
and Larry have gone as far as they can; they've gone
stale on this thing, and they'd like - I think if
we have Viner and Riefler and you (Gaston) take a
look at it and give it some time, so when I come

back Tuesday. But I'm pleased the way it's

coming. And God knows Herbert Gaston can tell you
when I'm not pleased. See?

Now, I'd like a copy. I wouldn't give anybody else
except Viner and Riefler and Gaston and me one; and
then I'll tell'them to read it and tell me whether
they think this is the correct way to approach this
problem, and they should please take it and sit down

and write their comments.
cc - Mr. Gaston
Mr. Haas

Mr. Seltzer

PRELIMINARY DRAFT

10/14/37-- 26

Address of the Secretary of the Treasury,

to be Delivered before the American Academy
of Political Science, Wednesday Evening,
November io, 1937

I am glad to accept the invitation of the American
Academy of Political Science to discuss before its members
assembled here tonight and before the radio audience the

subject of Federal spending and its relation to the balancing
of the Federal budget.

Than

believe
be

imputin
- Imite will
stated
budget
ju parts.
fy 1959
these
My that
discussion
fall into
three
First,
I Labour
shall outline briefly the character of the spending program

of the last four years. Second, I shall outline the reasons
why a prompt balancing of the Federal budget is now desir

able. And, third, I shall tell you why I am confident that,
with the firm support of the public, we shall succeed in
balancing the budget in the coming fiscal year.
During the last four fiscal years, your Government has
deliberately prosecuted a great spending program. The onle.
lines of that program were announced w President Reesevert

Secretary's Speech - 2

th-his very first budget message on January 4, 1934: Its

from the outset.

purpose was clear, It was formulated directly in response

to the chaotic and intolerable conditions that faced the
American people in 1933.

I need not detail these conditions at length. Most of
us retain a keen and bitter memory of them. The national

income, which had totaled eighty-one billion dollars in

1929, had fallen to less than forty billions in 1932. Our
banking system had collapsed. Our foreign trade had shrunk

to small proportions. The drastic deoline in prices had
created unbearable hardships for all who owed debts. Our
farmers were losing their farms, and home owners their homes.

The man who had a job considered himself lucky to hold it,

regardless of wages. The primary necessities of millions of
unemployed Americans and their families had exhausted the

immediately effective resources of State and local governments.

⑈
Secretary's Speech -3

In this situation, the Federal Government was the only
agency in the entire country with the power and the resources
to start our economic machine functioning again.

Some people at that time said: "If only a few big
corporations would get together and agree to build extensions

to their plants, that would start the ball rolling. Or if
only we could induce all the families that need new houses

build

to order then now, that would start the ball rolling."
The fact of the matter was, however, as you are all
aware, that no single corporation or small group of corpora-

tions could afford to or would take the risk of large-scale
plant expansion at a time when the volume of available busi-

ness was not half enough to employ fully their existing
plants.

Likewise, with the families that desired houses. How

could any of them be asked to risk their life's savings as

Secretary's Speech - 4
a down payment on a now house when there was great danger

that the head of the family would lose his job, and that his
savings would shortly be needed for food?

No; so greatly fallen was the morale of business gen-

erally that no private source could be relied upon to start
the ball rolling. Speculative excesses and profound industrial maladjustments had unbalanced our national economy and

laid it low. A paralyzing fear was keeping it unbalanced
and was keeping it low. It could be revived only by a real
increase in the volume of effective purchasing power, and in

the security of jobs, property values, and business profits.
The Federal Government alone had the power and the resources

to bring about such a revival.
Under the courageous leadership of President Roosevelt,
the attack was made on many fronts.

Confidence in the country's banking system was restored

by the use of Federal funds both to strengthen the capital

Secretary's Speech - 5

structure of our banks and to supply the initial capital
resources for a Federal system of insurance of bank deposits.
Federal funds were also provided for loans to farmers, home-

owners, railroads, and others.

The international value of the dollar was brought into

line with the values of other currencies, thereby restoring
world markets to our agricultural and industrial producers.
A great program of public works was inaugurated, which
served the double purpose of giving employment to otherwise

idle labor and of providing the country with valuable and
durable assets in the form of dams, public buildings, publie
roads, electric power developments, river and harbor improvements, and many others.

To resbore the purchasing power of our agricultural
population which had been unbelievably reduced during the

depression, programs of agricultural adjustment and soil conservation were inaugurated.

a
Secretary's Speech - 6

Finally, to mention only one more, but in many respects
the most important, element of the whole program, Nation-wide
provision was made to prevent any American from starving.

Further, to maintain the self-respect of the needy unem-

ployed, the bulk of relief was disbursed in the form of
wages rather than doles, in return for labor services on
thousands of local work relief projects scattered throughout
the country.

The program that we formulated and executed, plus the

special requirements arising out of the great drought and
the prepayment of the soldiers' bonus, cost a great deal of
money. During the four years ended June 30, 1937. our total
expenditures, exclusive of debt retirements, were fourteen

billion dollars in excess of our receipts.
What were the major items accounting for this deficit?

in.
Secretary's Speech - 7

The arithmetic is simple. The largest single item,
nine billions, arose out of unemployment relief, which included the Civilian Conservation camps and the great volume

of useful services performed in connection with thousands

of local projects. Another two billions went to the agricultural adjustment program. Another 2.2 billions went for
the prepayment of the soldiers' bonus. Three and two-tenths

billions went for public works. And one and one-half
billions went for recoverable investments in governmental
agencies making loans to farmers, home owners, railroads,

banks
Insurance companies, and the like. The total of these
iteme is eighteen billion dollars. But increased tax

collections and savings in the ordinary operating expenses
of the Government reduced the net formal deficit to

fourteen billions.

Secretary's Speech - 8

Now the final net cost of our spending program will be
very much less than this figure. We have made a number of

substantial expenditures, aggregating about six and a half

billions, of the kind that will directly reduce the budget
requirements of future years. What were they?
One of them, amounting to more than 2.2 billions, was

for the payment, nine years in advance, of the soldiers'
bonus, which would otherwise have been a regular charge upon

the budget until 1945.

Another, amounting to more than one and a half billions,
was to provide funds for governmental corporations and credit
agencies that made loans to farmers, home owners, railroads,

banks, and so on. The proprietary interest of the United
States in these agencies now amounts to nearly four billion

dollars. The peak in expenditures of this type was passed

two years ago, and the proceeds from these loans

of 34
Secretary's Speech - 8-A

and investments will become largely available for redue-

tions in the public debt.
Finally, our outlays for permanent public works during

the past four years were 1.7 billions in excess of the

and more than four times -chose y the one before that.

outlays for these purposes in the preceding administration,

there increased outlans in part
Athis excess- anticipated future requirements.

If you were to subtract the total of these special
expenditures from the formal deficit of fourteen billions,
you would get a net cost of the recovery program of approxi-

mately seven and a half billions. Even this figure will
eventually be reduced by two billion dollars or more as a

result of the gold profit now lodged in the Stabilization
Fund, every dollar of which is still in our possession, to
be made available in due course for reducing the public debt.

?
Secretary's Speech - 9

But let us waive these real offsets to the cumulated

formal deficit. Let us look at the gross figure itself this fourteen billion dollars. Did we get our money's
worth? I leave that question to your own judgment. I shall
cite no long list of figures to measure the enormous improve
ment in the country's economic condition during those four
years. As I said once before, this enormous improvement is
confirmed by the firsthand experience of every man and
woman in the range of my voice.
Nineteen years ago tomorrow we signed the Armistice

ending the World War. In the two years ended June 30, 1919,

the Federal Government spent thirty-one billion dollars and

created a deficit of twenty-two billion dollars.
During the past four years, we have been engaged in

another war. This time we fought to save farmers from losing their farms, to save home owners from losing their homes,

Secretary's Speech - 10

to give not only bread but jobs to the unemployed, to bring
order out of chaos in our economic system. This war cost

us a good deal less than the war in 1917 and 1918. Is there
anyone within my hearing who doubts that this war has been

at least as worth while, in terms of results achieved, as
that other wart

As in that other war, anyone can point to a dollar here
or a dollar there that was not well spent. In any war we

expect a general to be Judicious in his use of - munitions, but we hold no grudge if he unavoidably wastes a few

bullets. So in this war, it may well be that the detailed
uses of some of our relief funds might have been somewhat

better planned; but such small wastes as may have crept in
were as nothing when compared with both the human and

material values that were at stake.

Secretary's Speech - 11

We knew at the outset that to spend in a great way, as
we have spent, meant a temporary series of unbalanced budgets.

But we also knew that it meant the prospect of a revived and
balanced national economy. We believed it better and wiser
to balance the budget of the American people, when that

budget was very grossly out of balance, than to balance the
Federal budget at the expense of the people.
Let us for the moment ignore the very great human values

that were involved. Let us take a very narrow view of the

issue. We accumulated a formal deficit of fourteen billion
dollars. Suppose a businessman had a chance to raise his
income from forty thousand dollars to seventy thousand del-

lare a year by borrowing fourteen thousand dollars. He would
certainly jump at the chance of borrowing that money. That,

in one sense, is what we did. This fourteen billion dollar
formal deficit has played an important part in raising our

Secretary's Speech - 12

national income from less than forty billion dollars in 1932
to approximately seventy billions in 1937. Your fourteen

billion dollar investment in America is currently yielding
us a return of more than two hundred percent a year.

I turn now to the second part of my discussion -- the
reasons why a prompt balancing of the Federal budget is now
desirable.

As I have indicated at some length, we have deliberately used an unbalanced Federal budget during the past four

years to restore balance in the budgets of the American people.
That policy has succeeded. We have licked the great depres-

sion. We have not, it is true, entirely solved the problem
of unemployment, which was accentuated by that depression;

nor have we completely solved various other problems. But

the domestic problems that we face today are far less

October 20, 1937
10 a. m.
Present:

Mr. Bell
Mr. Upham
Mr. Haas

Mr. Wilmerding

Mr. Seltzer
Mr. Gaston

HM,Jr: Well, this is Viner's reaction to the draft.
I will read it out loud.
"I think that the preliminary draft provides a substantial basis for a satisfactory speech, and if it were
strengthened at the indicated points I would have no
further criticisms to make of it.
"Pp. 6-7. Except for four billion dollars, you
account only for the expenditures in excess of receipts.
But new and heavy taxes were imposed, and these produced
substantial revenues, as you yourself point out later.
The use of these should be accounted for as carefully
as the use of the borrowed funds. If
Well, we have time to work with that.

"P. 8. Again, that part of the recovery expendicounted as a net cost. On this basis, the government's
activities cost nothing in a year in which the balance
tures which was met from current tax revenues is not
is budgeted.

"P. 8. Should not sterilized gold also be included
as a future asset for debt-liquidating purposes?
Pp. 11-12. You must argue as you do that the federal
deficit was a contributing factor to the recovery, but
the claim that all the recovery was attributable to it,
and that all the increase in national income was the result of the deficit and by implication would not have
occurred if the deficit had been smaller or had been
ended sooner, would be difficult to support by reasoned

-2-

"argument, especially before an audience most of whom

are convinced that the continuance year after year of
the deficit has been a hindrance to recovery. I would
certainly eliminate the statement that the 14 billions
of deficit is yielding 28 billions per annum in national
income. On that basis, why not have had a 30 billion
deficit? And what about the devaluation, etc., and
their effects? If all the recovery is claimed for the
deficit, what about the rest of the New Deal program?
"P. 12. I would not boast too much about the present economic situation. It will not sound up-to-date
at a lecture so near to Wall Street. Instead of suggesting that the bulk of the job of bringing lasting and
full recovery has been done, I would advise that you take
the line that what could be done by deficit financing
toward bringing about recovery, relieving distress, and
substituting for temporarily idle private capital, has
been done, and that the remainder of the task, still a
sizeable one, must, in the interest of the security of
the federal finances, be done strictly within the limits
of a balanced budget, and of no increased tax burdens.
The government can still rightly be called upon for help,
but business, labor, and agriculture, in removing unnecessary hindrances, legislative or otherwise, to the profitable investment of private capital, in promoting the
removal of trade barriers, and in maintaining adequate
financial conditions, on liberal terms, for legitimate
industrial, commercial, and agricultural enterprise.
Something of this sort certainly needs to be said after,
or in lieu of, the statement on page 14: 'We believe
that a large part of the remaining unemployment will
disappear when capital funds are actively employed in
productive enterprise. No one disputes this. But
private funds are put to work only when a profit seems
in prospect, and the government now has an unprecedented
degree of responsibility for the conditions which result
in such prospects of profit being either present or absent.
"P. 15. I would point out here that the reductions
of the high surtaxes during the period of prosperity prior
to 1929 reduced the power (and made its exercise more
dangerous) of the Government by deficit financing to
moderate the present depression.

"I hope that these suggestions, etc. etc."
HM,Jr: What I would do is this, 80 we keep it al-

-3-

together, who is going to keep all this stiff together?
Mr. Haas: I will, or Larry (Seltzer).
HM,Jr: This eventually has to go back to Miss

Chauncey.

Mr. Haas: O. K.

HM,Jr: There are some excellent points in Viner's
comment. I don't know why Riefler did not send me his.
I think I will call him on the telephone. (Note: He
could not reach Dr. Riefler during the course of the conference.)

HM,Jr: Now, where are we next?
Mr. Haas: Mr. Wilmerding has gone over and worked

up an outline of the speech draft we had in here the
other day in which I attempted to follow your discussion
of the other evening. It was too long and you made
some suggestion at the beginning that it did not click
80 Larry has taken that and reduced it and made it about
3,000 words and I think Herbert has also taken a shot at

it.

HM,Jr: What's Wilmerding got?

Dr. Haas: This outline.

Mr. Wilmerding: It is a lengthy outline. I am
not myself willing to stand by it.
HM,Jr: How many words have you got? Is it an outline or draft?

Mr. Wilmerding: It's an outline; a sketch.
HM,Jr: What have you, Herbert?

Mr. Gaston: I have re-written about the first half

of what Larry and George produced of the discussion we
had the other evening.

HM,Jr: May I see? Does this follow the other or
is this original?

42
-4-

Mr. Wilmerding: It's original in some respects.
HM,Jr: Let me take a look at it.

Mr. Wilmerding: All right. I will say frankly

it will have to be changed.
HM,Jr: Let me read what he's got and I don't know
whether anybody has got what I have picked up in the
last couple of days in my own mind and when I come to
that I will need a lot of help from your organization,
Dan. I think -- after all, this is November 10th which
is 5 days before Congress meets and it's a marvelous opportunity to lay down certain principles in advance.
Mr. Bell: True.
HM,Jr: And I want to put my neck out. I would
like you to soak this in because I have to rely on you

and your organization for a lot of this stuff.

Mr. Bell: All right.
HM,Jr: Let's see what these boys have got and if

they haven't got what I want I will tell you and we will

get
you, Bell, to dig it out, see? All right, I will
read this.

(Secretary read Mr. Wilmerding's outline, copy of
which is attached.)

HM,Jr: (Having completed the reading) I think there

is a lot of good stuff in there.
Mr. Bell: Yes.

HM,Jr: I think you have gone too much in the direction of not enough figures.

Mr. Wilmerding: I think 80 too.
HM,Jr: But I think there is a happy medium.

Mr. Wilmerding: A little too 'airy'.
HM,Jr: A little bit, but we have got time. But

there is a lot of stuff which I think we can work in.
Let me get -- which is the last one?

(The Secretary then read the Haas-Seltzer draft.)

43
-5-

this.

HM,Jr: (after reading first three pages) I like

Mr. Haas: This is about the way you indicated the
other night.
HM,Jr: Do you like this, Dan?

Mr. Bell: Yes; this is all right.
HM,Jr: (after reading first four lines on page 4) I

like this. This is swell.
(Continued to read.)

"The total of these items is eighteen billion dollars,"
(lines 1 and 2 of page 5.) There is a time element there.

Over what period?

Dr. Haas: Four years.

Mr. Gaston: You are still taking about the four-year

period.

HM,Jr: (Continued to read.) "Finally, our outlays
for permanent public works during the past four years were
1.7 billions in excess of the outlays for these purposes
in the preceding administration, and more than four times
those in the one before that. These increased outlays
in part anticipated future requirements." I question
that paragraph.

(Continuing to read) "If you were to subtract the
total of these special expenditures from the formal deficit of fourteen billions, you would get a net cost of
the recovery program of approximately seven end a half
billions. I question that, too. I think you are going too far.
(Continuing to read). "We believed it better and
wiser to balance the budget of the American people, when
that budget was very grossly out of balance, than to balance the Federal budget at the expense of the people.
What do you mean? You mean unbalance.

Mr. Bell: Balance the budget of the individual.

44
-6-

HM,Jr: "Balance the budget of the American people.'

I think that has to be cleared up. It does not make
sense to me. What you mean is the individual.

Mr. Haas: You can say budgets of the American people.

HM,Jr: That isn't clear. I know what you mean.

You mean when a fellow had nothing it was up to us to

spend, but it isn't clear. I think there is an idea

there, but it has to be re-worded. "Had a chance to
raise his income," has not the President used that?
Mr. Gaston: I think the general idea has been used

and balanced budget of the American people has also been

used.

HM,Jr: (Continuing to read) "200% a year. If (Second

line of page 9.) That's a new one.
Mr. Seltzer: A lot of other things contributed to
this recovery in the national income, but I don't know
that

HM,Jr: Larry, what I am trying to do this morning,
I want to see what you fellows have got and then what I
am going to ask you to do is take Viner's and Riefler's
and anybody's criticism in this group and hash this thing
over plus what I don't think you have got, a new idea I
want to give you. Let me run through this. I think
this is 80 great an improvement over the last one that
am tickled to death. I feel we are coming.
HM,Jr: (Continuing to read) "We have not, it is
true, entirely solved the problem of unemployment...
(Page 9, line 9.) I think you have understated it.
I

"Nor have we completely solved other problems."

(Page 9, lines 11 and 12.) I think we can admit a little
bit more. I think we can say there are still lots of
things to be done and I think we can admit more; we
still have the unemployment problem with us.
(Continuing to read through first paragraph on

page 11) Are you nailing me to the cross! O. K. It's
all true, but it hurts.

-7-

Mr. Seltzer: That's your real basis for asking
for a balanced budget at this time. If you believe
we are going into a tail-spin I would chuck the speech.
I would certainly change it radically.
over.

HM,Jr: All right. I have time to think this

Dr. Haas: There is another angle that coincided
and brought the situation about and that was liquidation by the banks.
Yes.
HM,Jr:
This isstrong stuff.

(Continuing to read) "I need hardly say.." (line 1
second paragraph, page 11). I think instead of "I need
hardly say" I would say "I want to say".
Continuing to read: "I need hardly say that it is
the aim of this Administration to foster and strengthen
the conditions favorable for private business. We want
to see capital go into the productive channels of private
industry. We want business profits to grow. We believe that a large part of the remaining unemployment
will disappear when capital funds are actively employed
in productive enterprise.
"For these reasons we wish to minimize any further
borrowing by the Federal Government; for such borrowing
unlike that which took place during the depression,
would be at the expense of the funds available for industrial expansion.

say.

Mr. Bell: You are going out on the end of the limb.
Mr. Haas: Sure; spend your gold!
Mr. Gaston: You can qualify that all right, I would

".. the great American
HM,Jr: (Continuing to read)
public" (line 11, page 13). It makes me think of "Of
Thee I Sing." Can't you call them something else? P.T.
Barnum and the great American public!

(Continued to read through line 7, page 14.)

-8-

Mr. Bell: Do you want to put something in there
to express appreciation of banks and investors?

HM,Jr: I think that would be very nice. They

have it coming to them.

Mr. Bell: It's a good gesture.
Mr. Haas: I don't think it is necessary.
Mr. Bell: After all, there is a gap between indus-

Government and I would like to see somebody bridge
ittryaand
little.

HM,Jr: After all, you are here to make suggestions,
And I will make some. If these fellows don't like them,

we can put them down and take a look at it.
(Resumed reading) "I say to you with perfect confidence that, given the firm support of the public, and
despite the pessimism of some, we shall definitely accomplish this objective." (Lines 10, 11 and 12, page 14.)
HM,Jr: Balanced budget. That's what I want you

(Bell) in here for.

(Resumed reading). "The number of the needy unem-

ployed has been drastically reduced." (Next to last line,
page 16.)

HM,Jr: Who reduced it?

Dr. Haas: Business recovery.

HM,Jr: Well, say 80. I don't want to give the
impression that we drastically reduced it.
Mr. Gaston: Right.
HM,Jr: Which I am afraid would be pretty hard to
answer because there is some truth to it.

(Resumed reading) and the present fiscal year

may be considered as the year of transition between unbalanced and balanced Federal budgets." (Page 17,line 3.)

HM,Jr: That's what I like! That's Papa!

-9-

HM,Jr: (Resumed reading) "There are some reasons

for optimism on the spending side of our budget picture.

On the receipts side (Page 18, Lines 5 and 6.)

HM,Jr: Now, right here is where I would like to
talk a little. The way I feel today, I would like to
take a very gloomy attitude about the prospects of balanoing the 1938-1939 budget and I would like to say to
these people: While the Administration if most desirous
of doing it, it is going to be an extremely difficult
task to bring this about, and for the following reasons:
Well, we can take the ordinary expenditures of Government,
which run at the rate of 3 billion 2; might bring them
down to 3 billion. Well, we can take the unemployed and
c.c.c., which will run, combined, about 2 billion 2 this
year and cut that next year to 1 billion 2. Anyway, I
got that figure of 5 billion for all Government expenditures plus 1 billion 2 for relief, brings it up to
6 billion 2. Then plus debt retirement, another 600

million, brings it to 6 billion 8. Is that about right?

What I want to do and this is where I want you (Bell)
to come in, I want to take the desire, the wish -- yes;
the accomplishment -- extreme ly difficult. We must get
the help of everybody to bring this about. WhY? First,

Agriculture. I don't say I will put that number one.
Let's take a look at the situation that agriculture is

in today. For next year we have on our books an authorization of $448,000,000 plus, last December, roads authorization of $216,000,000, plus $216,000,000 authorized to be
apportioned this year, of which only $24,000,000 has been
provided, and the difference, roughly, $400,000,000, to be
authorized. That's $440,000,000 plus another $400,000,000
is $840,000,000.

Now I would sketch -- by that time, you know, we are

talking about ever-normal granary. I would say in add1tion to that, Commodity Credit might cost us, due to cotton
and corn loans, another $300 million. So, Agriculture
$400 million plus Road, $440,000,000, equals $840, 000,000,
plus $300 million equals 1 billion 1 plus $100 million,
Customs money under Section 213, equals 1 billion 2.

Mr. Bell: of course that isn't all. You have the

regular operating side.

-10-

HM,Jr: All right. This is where you come in. I

want you to dictate some of this speech. Since I have
been working with Mr. Bell, I want to take the time to
explain, we have got a practically impossible task to I
balance the Budget next year and I want to say 80.
want to say so! I want to say to these people -- I want
to make it just as black as possible, to frighten them.
Say: Why, gentlemen, of course we want to balance the
budget, but what is the problem? After you get through
with 5 billions regular expenditures of the Government,
which are not higher than the previous four years (if that
is true) and after cutting it down this year, plus 1 billion 2 for relief, plus 600 million for debt retirement,
you have a figure of 6 billion 8 and you haven't even included agriculture. Before we take a look at the revenue
side of the picture, we are sunk.
Now, as I told Wallace yesterday, I asked him -- I
have to talk terribly frankly here; we never have any
leaks in the Treasury -- Wallace's attitude was: never
heard of this. I have always gone ahead and spent all
the money I wanted to. No one has told me I could not
spend it. This 18 unheard of. I have to see the President right away.
That's why I want Mr. Bell here. I want him to
say whether I am right or wrong in saying this; whether

this will be helpful to the Administration. In other
words, I am willing to be the goat. I am willing to
stick my neck out five days before Congress meets and

have them say: 'What is this stuff Morgenthau is talking

about? It's the darndest stuff I ever heard of.' See
what I mean?

Mr. Bell: Yes, I see what you mean. I think the
first impression they will get is, Oh, well; the Secre-

tary is beginning to make excuses already about not bal-

ancing the 1939 budget.

Mr. Seltzer: Sounds different from what the Presi-

dent said a few weeks ago.

(Secretary left the room for a few minutes.)
Mr. Gaston: In effect you are saying it is absolutely
essential that the 1939 budget must be balanced, but it
can't be done.

Mr. Bell: That's the argument he's getting into.

-11-

Mr. Gaston: Certainly with that thesis you have
to come half way from both ends. You will have to
translate it: the budget should be balanced, but it
will be a very difficult task. That's what you will
have to arrive at.

Mr. Bell: What I am thinking of: It is going to
be a difficult job to balance this budget in view of
the authorizations hanging over our head and we need

the support of the American people to balance it and the
President is going to make some drastic recommendations
in this Congress for economy and it will take the sup-

port of you people to get that.
Mr. Gaston: 'It is possible to balance the budget.

It will be very difficult. We need your help.
Mr. Bell: That's the line.

Dr. Haas: We started out one other time in making
it black. Remember the first one you (Seltzer) wrote?

That was black.

He has a point about Congress meeting, but I don't
see how we can get it over without completely changing

the front part of the thing.
(At this point the Secretary returned.)
HM,Jr: Dan, the floor is yours. What do you
think about what I said?

Mr. Bell: My first impression is they will say

that you are immediately throwing up an excuse for not

balancing the 1939 budget.

HM,Jr: You want me to answer that?

Mr. Bell: Yes.
HM,Jr: My answer to that is this: I think this
is the biggest thing of the speech and I think I have
to repeat and repeat my pleas for assistance, but I am
willing, as Secretary of the Treasury, to do anything
and everything humanly possible to bring this about,
but I can't do it alone. Why not face the facts?

i. 50
-12-

Mr. Bell: That's what we are leading into, that

the budget must be balanced and it's going to be a
veryvery difficult problem and we need your help. That's

a little different approach.

HM,Jr: I keep saying: You, the American people,
your representatives in Congress, everybody, has to

work together to bring this about and no one individual can do it. This is the biggest fiscal job that
has ever faced anybody and no country in the world has
been able to do it. Nobody has a balanced budget.
We want to do it and in order to do it I am asking,
on behalf of the Administration, I am asking help of
the American people to bring this about.
Mr. Bell: Do you suppose the President would permit you to say that he int ends to make some very drastic
recommendations for economy the first few days of the
session and when he makes those recommendations you want
the public to support them?
HM,Jr: He can look at it. You know, the other
speech I gave him he went over four times.
Mr. Wilmerding: It seems to me you have to leave
them with the impression of not making an excuse, but
that you are absolutely earnest and, as Secretary of
the Treasury, you want to balance the budget and he is
going to move heaven and earth to balance it and tell
what the obstacles are.

HM,Jr: I want to leave the impression that he
has painted the picture even blacker than it is. I
would much rather have that, Dan. I am doing the

President a kindness by putting my neck out, because
and

he does not appreciate how difficult it is.thing
You to
I listened to Wallace yesterday. It's one
go into a corral and say I am going to rope and tie
that, well, to be polite, horse, but we haven't even
tied him. I gave you the figure of 1 billion 2.

Mrs. Klotz is telling me that Wallace called several
times to make sure I was going to be there and that
there was no misunderstanding. I want to take time.
I feel I have gone up on the Hill and I have talked

-13-

about our financing and I have talked about our Gov-

ernment credit and I don't think it is conceited to say
that I have left them with the feeling of sincerity and
honesty of purpose. That's what I want to leave here,
but I don't want to leave a stone unturned to tell them
what the problem is, not that I want to pass the buck
but I want to paint the picture for next year as it is
and taking agriculture, roads and Section 32 money and
all that stuff, and I am just using that because I am
most familiar with it, but you know of other things.
They slide over this thing too easily, that there was
already on the books $700,000,000 for public roads before we get another dollar. We have commitments to

finish these projects until 1941. It's not only 19381939, but commitments we have made to 1941, by years.
We have got projects. We have to finish them. Let's
realistic, gentlemen. Administration wants to do
this, but we need your cooperation and I want to give
the picture just as it is; not a single doubt that I
can think of, but what I am going to tell you: now in
be

order to accomplish this thing, we need your help.

I don't want to say this, but I am so sick and
tired of hearing people say, We want a balanced budget,
and they don't know what they are talking about. Maybe
I can say that politely -- so many people calling for
balanced budget. When they want a balanced budget
what are the things -- what is necessary -- to bring
a

that about?

Now, Dan, you can see why I wanted you down here,

but having been through this thing with Wallace twice,
having been through this experience over the week-end
and getting the document signed and the reaction after
the document was signed, I feel I can really render a
great service by knowingly and consciously putting my
neck out as the fellow who is going to bust this bad
news to the country and do it on the eve of Congress
meeting.

Mr. Bell: Good time to do it.
HM,Jr: I don't want you to say to me, unless you
honestly believe it 18 the time to do it and I am the
person to do it. Think it over and tell me.

Mr. Bell: see.
HM,Jr: Because, naturally, the Congressmen are

-14-

going to have someone to jump on and blame and I am

exposing myself to them and I am willing to do it and
I should think the President would jump at it. Now
I am willing to take the responsibility of giving this
news to the public and I think the sooner it is done,

the better, and this is the perfect time to do it.
Mr. Bell: Uh-huh. The way it appears to me it
is the right approach to it.
HM,Jr: Now will you, or could you, yourself, be-

cause you have this thing, take some stenographer and
rough out what I want, the open ended part of the thing?
I have just mentioned agriculture and you know the other
things -- just the way I have talked it, but the real
figures.

Mr. Bell: I think so.
HM,Jr: What would be a reasonable time to get it

from you?

Mr. Bell: I would like to have a day or two. I

am way behind with my Budget. Tomorrow, maybe, sometime.

HM,Jr: Could we have a meeting Friday morning?

Mr. Bell: I think so.
HM,Jr: Is that rushing you too much?

Mr. Bell: I will do it within that time I am sure.I don't

think we want to get too many figures into the speech.
HM,Jr: What would you say about Friday?

Mr. Bell: I expect it had better be sometime in the

morning, because I have to keep afternoons open to do some

revising on the Budget figures.

HM,Jr: How about 10:30 Friday?

Mr. Bell: All right.
HM,Jr: Herbert, what do you think of it?

-15-

Mr. Gaston: I think the way to handle that is
to say that if the budget should be balanced it 18

going to be difficult and I think this is too optimistic.

of course, there is another obtsacle and that is a genuine depression developing in the meantime, which will
be the most difficult thing, and whether you want to make
a decision and announce the decision,in spite of anything
that happens in the me antime, we must try to balance the

budget.

HM,Jr: I won't be here if we have another tailspin and we have to raise another five to ten billions.
Mr. Gaston:, You won't consent to deliberately

unbalancing the Budget with 400,000,000 or 500,000,000
more work relief?

HM,Jr: No. You will have to get another Secretary of the Treasury because I believe what they fellows
say here that there are a lot of other things that are
wrong and they should be corrected, and the reason I am
willing to do this -- the President is not leaning toward
more pump priming, but the thing that bucks me up is he
is leaning to encouragement of private industry and
private capital to get the building thing started, which
the Government has failed at, and he's willing to admit
that. I won't stay and knowingly and consciously have
an unbalanced budget in order to correct the mistakes
made by other people. You will have to get somebody
else to do it. As I say, we are talking terribly confidentially. I believe everything that Haas and Seltzer
said here. We have come to a cross road. The cross
road is when private business needed the money which the
Government has been taking up to this time, and we are

at that cross road now. I don't see why we can't use
those words, the cross road where the Government can
step out of the field of absorbing money and spending
it to stimulate production and it's now up to private
business and they are ready to do it and they should
have the money and the United States Government should
not be in competition with private industry for money.
That's the whole picture. The time has come. And
the only person around here who is not in line is
Wallace and Wallace wants private industry to do it; he
does not want the Government to do it. The President
wants private industry to do it. Let's be honest with
ourselves. And it's not balancing the budget which
18 putting the stock market down. Then why the hell

-16-

should we unbalance the budget to cover up the mistakes

of other people? For four years we have carried the

burden of mistakes made by other Departments. We have
carried much too much.

Mr. Gaston: I still think if the worst happens,
the pressure will be so strong that I doubt it will be

resisted.

HM,Jr: I have yet to see any signs of it. Today,

up to now, I have seen no signs of anybody of responsibility who wants to unbalance the budget in order to
stop this drop in the stock market.

Mr. Haas: Certainly a great many other things would

precede that.

HM,Jr: What I -- I repeat, what I say in this room
must not be repeated -- but I am willing to take the

responsibility. But I will not, in 1938 or 1939, I will
not raise a lot of deficit money. I positively will not

do that.

Mr. Haas: I think you can keep your conviction, but
I don't think you have to burn your bridges behind you.
HM,Jr: We crossed it Sunday night when the President signed this thing. We are all in the clear. I
have made my fight for the last three weeks and I figure
we have won. Don't you feel that way, Bell?

Mr. Bell: Yes, I feel the way you do. I think

you are absolutely right. On the other hand, Herbert's
statement that it's going to be awfully hard to resist
is a big factor in the case. I think you are on sound
ground, that you should not borrow any more money in
the Treasury to correct other people's mistakes.

HM,Jr: Now, listen, Bell. I told the President

he should tell Congress that he would keep them here
until the budget was balanced, so he turns to Doughton
and Vincon and says: This is what Morgenthau says.
Morgenthau is kind of rough about this thing, and he
says you are going to keep Congress here until they

balance the budget. Vinson and Doughton said, Fine.
That's all we want. That's what we want to hear.
And then their reaction is, 'Then the Committee on

Appropriations and the Committee on Ways and Means will

-17-

have to work together.' Now, a statement like that -I go back to my silly example of the 50 communities
who wanted 50 comme morative coins and without any law

I said no to 50 senators and said no more commemorative

coins. As long as I stuck by it, I was all right. If

I had given one, I was sunk. We got away with it. It's
no different from this thing, only this thing is 80 much
bigger, but the principle is the same and somebody has
to strike this note for the Administration and let the
country and Congress know how desperately difficult it
is to do this balance of 1939 budget and you and I know

that the President did not know until I wrote him that

letter. Is that right?

Mr. Bell: That's right.
HM,Jr: He had no idea about it. That's what made
him change -- that letter I wrote to him. But I want
to again emphasize that I want to play down the stuff
that's behind and build up this end of the speech on

the difficulty of what's facing us.

Mr. Haas: Another point which you mentioned before that we had not developed very much, but in view

of this discussion now and that is that the balancing
of the budget means two things: a difficult problem
that you are talking about, and the other is to get
business to take over. There is a little bit here,
but that might be developed a little more and it might
be good thing to hand out.

HM,Jr: All right. Bell, I will only take a couple
of minutes more and then I will stop. I will take this

home tonight.

(Resumed reading) "There are some reasons for op-

timism on the spending side of our budget picture. On

the receipts # (lines 5 and 6, page 18)

This part, beginning with revenue, I wish you would

show it to Magill and get him to do a little bit of work
on that. will you?
Mr. Haas: Yes.
HM,Jr: (Reading) Some people are worried lest we

curtail expenditures too rapidly. What I can tell you

-18-

"in that respect may reassure such people.

"The plain fact of the matter is that the unspent
appropriations already made for public works and similar
projects are 80 great that large expenditures for these
purposes will continue into the fiscal year 1939 even
if Congress does not appropriate a nother dollar for them."
HM,Jr:

even if Congress does not appropriate

another dollar. That does not belong here. This
will go into Bell's part.
1938.
here.

(Resumed reading) "When we entered the fiscal year

HM,Jr: Bell can pick this up. It does not belong

(Continued reading) "It is obvious that even if we
wanted to, we could not suddenly cut off all of our emergency spending."

Mr. Gaston: That ought to reassure some people who

think we are tapering off too fast.
HM,Jr: (Continued reading) "But when I say that
I am confident that we shall balance the budget during
the coming year without violent disruption of existing
programs, I do not mean to say that the job will be an
easy one." (First paragraph, page 21.)
HM,Jr: This part, with the exception of revenue -you don't say enough about revenue. I think that should
be taken up with Magill and let him write something for
me and this part plus the other should be for Mr. Bell,
But I think we are making real progress. George, let
me read what you have done tonight and then we will meet
again on this thing. Do you (Upham) think we are going too far sticking my neck out?
Mr. Upham: No. I am very happy. I should like
to shake your hand. (Mr. Upham and the Secretary shake

hands.)

Mr. Bell: I think this is a big improvement over
the first one.
00o-00o

The University of Chicago
Department of Economics

October 19, 1937

Mr. Henry Morgenthau, Jr.
Secretary of the Treasury
Washington, D.C.
Dear Henry:

I think that the preliminary draft provides a substantial
basis for a satisfactory speech, and if it were strongthened at the
indicated points I would have no further criticisms to make of it.

Pp. 6-7. Except for four billion dollars, you account

only for the expenditures in excess of receipts. But new and heavy

taxes were imposed, and these produced substantial revenues, as you

yourself point out later. The use of those should be accounted for

as carefully as the use of the borrowed funds.

P. 8.
Individual
Again, that part of the recovery expenditures
which was met from current tax revenues is not counted AS a net cost.

On this basis, the government's activities cost nothing in a year in

which the balance is budgeted.

Should not the sterilized gold also be included
as a future asset for debt-liquidating purposes?
P. 8.

Pp. 11-12. You must argue as you do that the federal

deficit was a contributing factor to the recovery, but the claim that
all the recovery WILS attributable to it, and that all the increase in

national income WILS the result of the deficit and by implication would
not have occurred if the deficit had been smaller or had been ended
sooner, would be difficult to support by reasoned argument, especially
before an audience most of whom are convinced that the continuance

year after year of the deficit has been a hindrance to recovery. I
would certainly eliminate the statement that the 14 billions of deficit
is yielding 28 billions per annum in national income. On that basis,
why not have had a 30 billion deficit? And what about the devaluation,

etc., and their effects? If all the recovery is claimed for the

deficit, what about the rest of the New Deal program?
P. 12.

I would not boast too much about the present eco-

nomic situation. It will not sound up-to-date at a lecture so near
to Wall Street. Instead of suggesting that the bulk of the job of

bringing lasting and full recovery has been done, I would rather

Mr. Henry Morgenthau, Jr. - Page 2

October 19, 1937

advise that you take the line that what could be done by deficit financing toward bringing about recovery, relieving distress, and sub-

stituting for temporarily idle private capital, has been done, and
that the remainder of the task, still a sizoable one, must, in the
interest of the security of the federal finances, be done strictly
within the limits of a balanced budget, and of no increased tax burdens. The government can still rightly be called upon for help, but

the help must from now on take the form of friendly cooperation with
business, labor, and agriculture, in removing unnecessary hindrances,

legislative or otherwise, to the profitable investment of private
capital, in promoting the removal of trade barriers, and in maintaining adequate financial conditions, on liberal terms, for legitimate
industrial, commercial, and agricultural enterprise. Something of
this sort certainly needs to be said after, or in lieu of, the state-

ment on page 14: "We believe that a large part of the remaining unemployment will disappear when capital funds are actively employed in

productive enterprise." No one disputes this. But private funds

are put to work only when a profit seems in prospect, and the government now has an unprecedented degree of responsibility for the canditions which result in such prospects of profit being either present or
absent.

P. 15. I would point out here that the reductions of the
high surtaxes during the period of prosperity prior to 1929 reduced

the power (and made its exercise more dangerous) of the government by

deficit financing to moderate the present depression.

I hope that these suggestions will be found helpful. I have
made a for: additional comments on the margins of the manuscript.

Cordially yours,

JV-W

Encl.

Jacob Viner

Other

(Confidentialism 59
Address of the Secretary of the Treasury, to be
Delivered before the Academy of Political Science,

at the Hotel Astor, New York City, Wednesday Evening,
November 10, 1937.

I am glad to accept the invitation of the Academy of
Political Science to discuss before its members assembled

here tonight and before the radio audience the subject of
Federal spending and its relation to the balancing of the
Federal budget.

I shall not keep you in suspense with respect to the
main conclusion of my discussion, namely, I believe that we
should and that we will balance the Federal budget during

the very next fiscal year, which begins July 1, 1938.
Nineteen years ago tomorrow, we signed the Armistice

ending the World War. That war was unbelievably costly in
human values, and it was enormously costly in material

values. In the two years between the middle of 1917 and the

i UL 60
Secretary's Speech - 2

middle of 1919, the Federal Government spent thirty-one

billion dollars and sustained a net defieit of twenty-two

billion dollars.
During the past four years, this country has been
engaged in another war. This time our enemy was a great

economic disaster. In this war we bombed no cities; we
machine-gunned no trenches; we killed no human beings.

In this war, we fought with jobs and with dollars to save
farmers from losing their farms; to save home owners from

losing their homes; to give not only bread but work to the
unemployed; to increase the security of jobs, property

values, and business profits; to bring order out of chaos
in our economic system.

This war, like that other war, required a many-sided
campaign under intelligent and courageous lendership -- a
leadership that was superbly supplied by President Reosevelt.

Secretary's Speech - 3

Finally, this war, like that other war, required a
large spending program. This program, plus the special
needs arising out of the great drought and the propayment

of the soldiers' bonus, required outlays during the four
years ended June 30, 1937, of some fourteen billion dollars

in excess of our receipts. This was a good deal less than

our two-year deficit of 1917 to 1919. But is there anyone
within my hearing who doubts that the results of this
deficit have been at least as such worth while as those of

that other deficit?
As in that other war, anyone can point to a dollar here
or a dollar there that was not well spent. In any WAF we
expect a general to be judicious in his use of munitions,
but we hold no grudge if he unavoidably wastes a few bullets.

So in this war, it may well be that the detailed uses of

Secretary's Speech -4
some of our relief funds might have been somewhat better
planned; but such small wastes as may have erept in were
as nothing then compared with both the human and material

values that were at stake.

Let us look for a moment at the major items that as-

count for our four-year deficit?
The arithmetic is simple. The largest single item,
nearly nine billions, arose out of unemployment relief,
which included the Givilian Conservation Corps camps and

the great volume of useful services performed in connection

with thousands of local work-relief projects. Another two
billions went to the agriculturel adjustment program. Another
2t billions went for the prepayment of the soldiers' bonus.
About 38 billions went for public works. And one and
one-half billions went for recoverable investments in
governmental agencies making loans to farmers, home owners,

Secretary's Speech . 5

railroads, banks, and the like. The total of these items

is eighteen billion dollars. But increased tax collections
and savings in the ordinary operating expenses of the Gov-

ernment reduced the net formal deficit to fourteen billions.
Now the final net cost of our spending program will be
very such less than this figure. We have made a number of
substantial expenditures, aggregating about six and a half

billions, of the kind that will directly reduce the budget
requirements of future years. What were they?

2'4 billion

One of them, amounting to some-than 2.2 billions, was

for the payment, nine years in advance, of the soldiers'
bonus, which would otherwise have been a regular charge upon

the budget until 1945.

Another, amounting to more than one and a half billions,
was to provide funds for governmental corporations and credit
agencies that made loans to farmers, home owners, Failroads,

Secretary's Speech - 6

banks, and so on. These outlars aditas to those or previous

administrations, have increased the proprietary interest of

the United States in these agencies to nearly four billion
dollars. The park in expenditures of this type was passed
two years age, and the proceeds from these loans and invest-

ments will become largely available for reductions in the
public debt.

Finally, our outlays for permanent public works during

the past four years were 1.7 billions in excess of the outlaye for these purposes in the proceding administration, and
more than four times those in the one before that. These
increased outlays in part anticipated future requirements.

If you were to subtract the total of these special
expenditures from the formal deficit of fourteen billions,
you would get A net cost of the recovery program of approxi-

nately seven and a half billions. Even this figure will

Secretary's Speeds - 7

eventually be reduced by two billion dollars OF more as a

result of the gold profit not lodged in the stabilisation
Fund, every dollar of which is still in our percession, to
be made available in due course for reducing the public
debt.

But 1st us waive these real offsets to the sumulated

formal deficit. Let us look at the gross figure itself this fourteen billion dollars. Did we get our money's

worth I leave that question to your own judgment. I shall
eite no long list of figures to measure the enormous improvement in the country's economic condition during those four
years. As I said once before, this enormous improvement is
confirmed by the firsthand experience of every man and
woman in the range of my voice.

we know at the outset that to spend in a great way, as
we have event, meant a temporary series of unbalanced budgets.

in 66
secretary's Speech - s

But we also know that it meant the prospect of a revived
and balanced national economy. We believed 11 better and

wiser to balance the budget of the American people, when that
budget was very grossly out of balance, then to balance the
Federal budget at the expense of the people.
Let us for the moment ignore the very great human values

that were involved. Let us take a very RAFFOR view of the

issue. We accusulated a formal deficit of fourtees billion
dollars. Suppose a businessman had a chance to raise his

a year

income from forty thousand dollars to seventy thousand data
1

by borrowing fourteen thousand dollars. No would
certainly Jump at the change of borrowing that money. That,

in one sense, is what we did. This fourteen billion dollar

net

formal deficit has played an important part in raising our
1

national income from less than forty billion dollars in 1932
to approximately seventy billions in 1937. Your fourteen

Secretary's Speech - 9

billion dollar investment in America is currently yielding
us a return of more than two hundred percent a year.

I turn now to the second part of my discussion - the
reasons why I believe that the Federal budget should now be
balanced.

as I said a moment ago,
1 " have deliberately used an unbalanced Federal budget

during the past four years to reatore balance in the budgets
of the American people. That poliey has succeeded. We have

licked the great depression. We have not, 18 is true, ontirely solved the problem of unemployment, which was seentuated by that depressions nor have we completely solved

various other problems. But the domestic problems that we

face today are for less numerous and far less serious than
the problems that we faced four years ago. And, even more

important, the solution of these remaining problems requires

Secretary's Speech - 10

different detailed techniques from those which were enplayed to attack the gross problems of the depression.
Some of the underlying technical conditions that made

deficit spending the wisest kind of economic policy during
the depression no longer exist. Thus, when we borrowed dur

ing the depression to finance our deficit spending, a large

was
part of the funds were obtained through an expansion of bank

credit. To this extent, our spending did not absorb capi-

tal funds available for private industry, nor did it absorb
taxpayers' funds available for private consumption expendi-

tures. Even to the extent that our bonds and notes were
purchased by non-banking investors, the effect was largely
to make use of capital funds that would otherwise have

remained idle because of the absence of attractive invest-

ment opportunities in private industry.

68-A
Oil

Secretary's Speech - 11

Today the situation is greatly changed in these respects.
Our industrial recovery has created large new demands for

private capital. Our commercial banks are now utilizing their

credit resources again for the financing of private industry.
Any deficit spending that takes place from now on must be

financed in large part by capital funds that would otherwise
be available for business purposes.

I need hardly say that it is the aim of this Administration to foster and strengthen the conditions favorable
for private business. We want to see capital go into the
productive channels of private industry. We want business

profits to grow. We believe that a large part of the remaining unemployment will disappear when capital funds are

actively employed in productive enterprise.
For these reasons we wish to minimize any further
borrowing by the Federal Government; for such borrowing,

83 63-B

Secretary's Speech - 12

unlike that which took place during the depression, would

be at the expense of the funds available for industrial
expansion.

There is a further consideration of great importance

that I should like to emphasise. That is, that the basic
philosophy of our deficit spending of the past few years
requires that a program of substantial debt retirement be
undertaken shortly.
We wish to preserve the power of the Federal Government

to set as a balance wheel in restoring economic order in

the future, if the need again arises. To preserve this
power, we must liquidate during prosperity the debts incurred
during periods of depression.

Despite the substantial increase in the public debt
during the past four years, the credit of the Federal Government has remained absolutely unimpaired. Not once during

68-C
Secretary's Speech - 13

even the darkest days of the depression did the Treasury

experience the slightest difficulty in borrowing all the
funds that were required. The rates of interest on our
borrowings, moreover, have been lower, for comparable secu-

rities, than at any other time in the history of the country.
However, this unimpeachable credit position of the
Federal Government has been maintained because of the con-

viction of investors that the Federal budget was only
temporarily out of balance; that with business recovery
substantially achieved, the President, the Congress, and

the great American public could be trusted to join in a
whole-hearted and successful determination to balance the

budget and to reduce the public debt.
That time has now arrived.

To keep faith with the investors in Government bonds;

to maintain the integrity of the credit and currency of

6. 69
Secretary's Speech - 14

the United States; to avoid draining capital funds from private industry; and to keep open unimpaired the future possi-

bility of the use of deficit spending by the Federal Government as a balance wheel in industrial breakdowns, it is

essential that we now fix our course to bring about a full
balancing of the Federal budget for the fiscal year beginning
next July 1.

Let me turn, finally, to the immediate practical prospeets of budget balancing, beginning this very next fiscal

year. I say to you with perfect confidence that, given the
firm support of the public, and despite the pessimism of
some, we shall definitely accomplish this objective.
Let as give you some reasons for my confidence:

First, the accusulated deficit of the last four years
does not represent any deterioration in the efficiency with

be. 70
Secretary's Speech - 15

which the ordinary operating departments of the Government

are administered. While several new functions may require
somewhat largeroutlaye in the future, we have actually spent

less during the last four years for the operation of the

legislative, judicial, and civil establishmente of the Federal Government, descite their greatly increased responsi-

bilities, than was spent during either of the two previous
edministrations.
We have spent more for purposes of national defense,

but mainly to make un for previous neglect.

Despite the increase in the public debt, our annual
interest charges are less today than they were in 1923.
The aggregate of the regular operating expenditures

of the Federal Government, including all the items that I
have mentioned, plus veterans' pensione and benefit payments,

secretary's Speech - 16

is running today at around 3.2 billion dollars annually, OF
less than in 1932.

It 10 clear, therefore, that a tight reis has been
kept on the ordinary operating expenditures of the Federal
Government.

In the second place, I should like to repeat that
approximately six and a half billions of the expenditures
of the past four years were expenditures of the kind that
will directly reduce the budget requirements for future
years.

In the third place, the fact that outlays for unemploy-

ment relief bulked se large in the deficite of the past four
years is a fast of great promise now. The number of the
needy unemployed has been drastically reduced.

UL 72

Secretary's Speech - 17

As a matter of fact, we have already made important

reductions in expenditures; and the present fiscal year may
be considered as the year of transition between unbalanced
and balanced Federal budgets.

During the current fiscal year, we have been reducing
our outlays for unemployment relief by approximately three-

quarters of a billion dollars below those of the previous
year. If, next year, we reduce these outlays by another
four hundred millions or so, down to the level of twelve

c.c.c.

hundred millions, inclusive of the Civilian Consumerion
Gerps camps, with the prospect of a further tapering off of
these expenditures in the future, the largest single source
of our past deficits will have been reduced to manageable
proportions.

Similarly, if no substantial additions are made to the
already-available appropriations of seven hundred millions

Secretary's Speech - 18

for public works of all kinds for the fiscal year 1939. and
such expenditures in subsequent years are brought down to

the half-billion dollar level, this source of fiscal deficite
will be eliminated.

These are some reasons for optimism on the spending

side of our budget picture. On the receipts side I can
report to you a far greater degree of improvement than many
people have believed possible.

The plain fact of the matter is that the Federal revenue
structure today is stronger as well as more equitable than

ever before in the history of our country.
When this Administration came into office, the total

receipts of the Treasury had fallen to just over two billion
dollars & year. In each year since that time they have
shown marked increases -- the result both of improvements

74
Secretary's Speech - 19

in our tax structure and of the revival in business. For
the present fiscal year, the revised estimates of receipts

total six billion six hundred and fifty millions.
In the tax revisions that Congress is scheduled to make

during the next session, the aim will not be to raise exist.
ing tax rates or to seek out new sources of tax revenue. The

sim, rather, will be to make adjustments in existing taxes
in the direction of achieving greater equity and of reducing
hindrances to legitimate business enterprise.

Some people are worried lest we ourtail expenditures

too rapidly. What I can tell you in this respect may reassure such people.

The plain fact of the matter is that the unspeat
appropriations already made for public works and similar

projects are so great that large expenditures for these

Secretary's Speech - 20

purposes will continue into the fiscal year 1939 even if
Congress does not appropriate another dollar for them.

When we entered the fiscal year 1938 last July 1, the

total appropriations available for public buildings, public
highways, river and harbor in rovements, flood control,
P.W.A. grants, soil erosion, emergency housing, and similar

urposes, stood at more than one and a half billions. Some

eight hundred sixty-nine millions of this will be spent
during the present fiscal year. This will leave approximately
seven hundred millions to be spent in the fiscal year 1939

without a single dollar of additional appropriations.
It is obvious that even if we wanted to, we could not
suddenly out off all of our emergency spending.

It is by no means necessary possibles
to make immediate wholesale eliminations of Federal expendi-

tures. It is necessary, however, that we see precisely
where we are going: and that we see the picture whole.

secretary's Speech - 21

But when I say that I am confident that we shall balance the budget during the coming year without violent dis-

ruption of existing programs, I do not mean to say that the
job will be an easy one, or that it can be accomplished
without stopping on anybody's toes.
The United States Chamber of Converce is on record

as strongly in favor of an immediate balancing of the
budget. But what happens in every local Chamber of Conseree

C.C.C.

when a proposal is made to eliminate a nearby

/ camp or to reduce an allocation for a local
public works project? Letters and telegrams pour in upon
the Congressmen and Signators, complaining of the great harm

to local interests if these Federal expenditures are reduced.
Balancing the budget is your problem -- the problem of

every citizen of the country, no less than the problem of
the legislative and executive branches of the Government.

secretary's Speech - 22

It was the strong support of the American public that
made 18 possible for us to bring this country out of the
depression and to carry through many important reforms.

with this same support, we shall accomplish the simpler task
of balancing the Federal budget.

LHS:em/eta

10/19/37

Address of the Secretary of the Treasury, to be
Delivered before the Academy of Political Science,

at the Hotel Astor, New York City, Wednesday Evening,
November 10, 1937.

I am glad to accept the invitation of the Academy of
Political Science to discuss before its members assembled

here tonight and before the radio audience the subject of

Federal spending and its relation to the balancing of the
Federal budget.

I shall not keep you in suspense with respect to the
main conclusion of my discussion, namely, I believe that we
should and that we will balance the Federal budget during

the very next fiscal year, which begins July 1, 1938.
Nineteen years ago tomorrow, we signed the Armistice

ending the World War. That war was unbelievably costly in
human values, and it was enormously costly in material

values. In the two years between the middle of 1917 and the

Secretary's Speech - 2

middle of 1919, the Federal Government spent thirty-one

billion dollars and sustained a net deficit of twanty-two

billion dollars.
During the past four years, this country has been
engaged in another war. This time our enemy was a great

economic disaster. In this war we bombed no cities; we
machine-gunned no trenches; we killed no human beings.

In this war, we fought with jobs and with dollars to save
farmers from losing their farms; to save home owners from

losing their homes; to give not only bread but work to the
unemployed; to increase the security of jobs, property

values, and business profits; to bring order out of chaos
in our economic system.

This war, like that other war, required a many-sided
campaign under intelligent and courageous leadership -- a
leadership that was superbly supplied by President Roosevelt.

Secretary's Speech - 3

Finally, this war, like that other war, required a
large spending program. This program, plus the special
needs arising out of the great drought and the prepayment

of the soldiers' bonus, required outlays during the four
years ended June 30, 1937, of some fourteen billion dollars

in excess of our receipts. This was a good deal less than
our two-year deficit of 1917 to 1919. But is there anyone
within my hearing who doubts that the results of this
deficit have been at least as much worth while as those of

that other deficit?
As in that other war, anyone can point to a dollar here

or a dollar there that was not well spent. In any war we
expect a general to be judicious in his use of munitions,
but we hold no grudge if he unavoidably wastes a few bullets.

So in this war, it may well be that the detailed uses of

Secretary's Speech - 4

some of our relief funds might have been somewhat better
planned; but such small wastes as may have crept in were
as nothing when compared with both the human and material

values that were at stake.
Let us look for a moment at the major items that ac-

count for our four-year deficit.
The arithmetic is simple. The largest single item,
nearly nine billions, arose out of unemployment relief,
which included the Civilian Conservation Corps camps and

the great volume of useful services performed in connection

with thousands of local work-relief projects. Another two
billions went to the agricultural adjustment program. Another
21 billions went for the prepayment of the soldiers' bonus.
About 32 billions went for public works. And one and
one-half billions went for recoverable investments in
governmental agencies making loans to farmers, home owners,

Secretary's Speech - 5

railroads, banks, and the like. The total of these items
is eighteen billion dollars. But increased tax collections
and savings in the ordinary operating expenses of the Gov-

ernment reduced the net formal deficit to fourteen billions.
Now the final net cost of our spending program will be
very much less than this figure. We have made a number of

substantial expenditures, aggregating about six and a half

billions, of the kind that will directly reduce the budget
requirements of future years. What were they?
21/4

One of them, amounting to more than the billions, was

for the payment, nine years in advance, of the soldiers'
bonus, which would otherwise have been a regular charge upon

the budget until 1945.

Another, amounting to more than one and a half billions,
was to provide funds for governmental corporations and credit
agencies that made loans to farmers, home owners, railroads,

Secretary's Speech - 6

banks, and so on. These outlays, added to those of previous

administrations, have increased the proprietary interest of

the United States in these agencies to nearly four billion
dollars. The peak in expenditures of this type was passed
two years ago, and the proceeds from these loans and invest-

ments will become largely available for reductions in the
public debt.

Finally, our outlays for permanent public works during

the past four years were 1.7 billions in excess of the outlays for these purposes in the preceding administration, and
more than four times those in the one before that. These
increased outlays in part anticipated future requirements.

If you were to subtract the total of these special
expenditures from the formal deficit of fourteen billions,
you would get a net cost of the recovery program of approxi-

mately seven and a half billions. Even this figure will

Secretary's Speech - 7

eventually be reduced by two billion dollars or more as a

result of the gold profit now lodged in the Stabilization
Fund, every dollar of which is still in our possession, to
be made available in due course for reducing the public
debt.

But let us waive these real offsets to the cumulated

formal deficit. Let us look at the gross figure itself -this fourteen billion dollars. Did we get our money's
worth? I leave that question to your own judgment. I shall
cite no long list of figures to measure the enormous improvement in the country's economic condition during those four
years. As I said once before, this enormous improvement is
confirmed by the firsthand experience of every man and
woman in the range of my voice.

We knew at the outset that to spend in a great way, as
we have spent, meant a temporary series of unbalanced budgets.

Secretary's Speech - 00

But we also knew that it meant the prospect of a revived
and balanced national economy. We believed it better and
wiser to balance the budget of the American people, when that

budget was very grossly out of balance, than to balance the
Federal budget at the expense of the people.
Let us for the moment ignore the very great human values

that were involved. Let us take a very narrow view of the

issue. We accumulated a formal deficit of fourteen billion
dollars. Suppose a businessman had a chance to raise his

year

income from forty thousand dollars^to seventy thousand dol-

lare a year by borrowing fourteen thousand dollars. He would
certainly jump at the chance of borrowing that money. That,

in one sense, is what we did. This fourteen billion dollar
net
formal deficit has played an important part in raising our
national income from less than forty billion dollars in 1932
to approximately seventy billions in 1937. Your fourteen

Secretary's Speech - 9

billion dollar investment in America is currently yielding
us a return of more than two hundred percent a year.

I turn now to the second part of my discussion - the
reasons why I believe that the Federal budget should now be
balanced.

as I said a moment ago,
We have deliberately used an unbalanced Federal budget

during the past four years to restore balance in the budgets
of the American people. That policy has succeeded. We have

licked the great depression. We have not, it is true, entirely solved the problem of unemployment, which was accen-

tuated by that depression; nor have we completely solved

various other problems. But the domestic problems that we
face today are far less numerous and far less serious than
the problems that we faced four years ago. And, even more

important, the solution of these remaining problems requires

Secretary's Speech - 10

different detailed techniques from those which were em-

ployed to attack the gross problems of the depression.
Some of the underlying technical conditions that made

deficit spending the wisest kind of economic policy during
the depression no longer exist. Thus, when we borrowed dur-

ing the depression to finance our deficit spending, a large
was

part of the funds were obtained through an expansion of bank

credit. To this extent, our spending did not absorb capi-

tal funds available for private industry, nor did it absorb
taxpayers' funds available for private consumption expenditures. Even to the extent that our bonds and notes were
purchased by non-banking investors, the effect was largely
to make use of capital funds that would otherwise have

remained idle because of the absence of attractive invest-

ment opportunities in private industry.

Secretary's Speech - 11

Today the situation 18 greatly changed in these respects.
Our industrial recovery has created large new demands for

private capital. Our commercial banks are now utilizing their
credit resources again for the financing of private industry.
Any deficit spending that takes place from now on must be

financed in large part by capital funds that would otherwise
be available for business purposes.

I need hardly say that it is the aim of this Administration to foster and strengthen the conditions favorable

for private business. We want to see capital go into the
productive channels of private industry. We want business

profits to grow. We believe that a large part of the remaining unemployment will disappear when capital funds are

actively employed in productive enterprise.
For these reasons we wish to minimize any further
borrowing by the Federal Government; for such borrowing,

Secretary's Speech - 12

unlike that which took place during the depression, would

be at the expense of the funds available for industrial
expansion.

There is a further consideration of great importance

that I should like to emphasize. That is, that the basic
philosophy of our deficit spending of the past few years
requires that a program of substantial debt retirement be
undertaken shortly.
We wish to preserve the power of the Federal Government

to act as a balance wheel in restoring economic order in

the future, if the need again arises. To preserve this
power, we must liquidate during prosperity the debts incurred
during periods of depression.

Despite the substantial increase in the public debt
during the past four years, the credit of the Federal Government has remained absolutely unimpaired. Not once during

Secretary's Speech - 13

even the darkest days of the depression did the Treasury

experience the slightest difficulty in borrowing all the
funds that were required. The rates of interest on our
borrowings, moreover, have been lower, for comparable secu-

rities, than at any other time in the history of the country.
However, this unimpeachable credit position of the
Federal Government has been maintained because of the con-

viction of investors that the Federal budget was only
temporarily out of balance; that with business recovery
substantially achieved, the President, the Congress, and

the great American public could be trusted to join in a
whole-hearted and successful determination to balance the
budget and to reduce the public debt.
That time has now arrived.

To keep faith with the investors in Government bonds;

to maintain the integrity of the credit and currency of

Secretary's Speech - 14

the United States; to avoid draining capital funds from private industry; and to keep open unimpaired the future possi-

bility of the use of deficit spending by the Federal Government as a balance wheel in industrial breakdowns, it is

essential that we now fix our course to bring about a full
balancing of the Federal budget for the fiscal year beginning
next July 1.

Let me turn, finally, to the immediate practical prospects of budget balancing, beginning this very next fiscal

year. I say to you with perfect confidence that, given the
firm support of the public, and despite the pessimism of
some, we shall definitely accomplish this objective.
Let me give you some reasons for my confidence:

First, the accumulated deficit of the last four years
does not represent any deterioration in the efficiency with

Secretary's Speech - 15

which the ordinary operating departments of the Government

are administered. While several new functions may require
somewhat largeroutlays in the future, we have actually spent

less during the last four years for the operation of the

legislative, judicial, and civil establishments of the Federal Government, despite their greatly increased responsi-

bilities, than was spent during either of the two previous
administrations.
We have spent more for purposes of national defense,

but mainly to make up for previous neglect.

Despite the increase in the public debt, our annual
interest charges are less today than they were in 1923.
The aggregate of the regular operating expenditures

of the Federal Government, including all the items that I
have mentioned, plus veterans' pensions and benefit payments,

Secretary's Speech - 16

is running today at around 3.2 billion dollars annually, or
less than in 1932.

It is clear, therefore, that a tight rein has been
kept on the ordinary operating expenditures of the Federal
Government.

In the third place, the fact that outlays for unemploy-

ment relief bulked so large in the deficits of the past four
years is a fact of great promise now. The number of the
needy unemployed has been drastically reduced.

Secretary's Speech - 17

As a matter of fact, we have already made important

reductions in expenditures; and the present fiscal year may
be considered as the year of transition between unbalanced
and balanced Federal budgets.

During the current fiscal year, we have been reducing
our outlays for unemployment relief by approximately three-

quarters of a billion dollars below those of the previous
year. If, next year, we reduce these outlays by another
four hundred millions or so, down to the level of twelve

C.C.C. camps

hundred millions, inclusive of the Civilian Conservation
Compa-comps, with the prospect of a further tapering off of

these expenditures in the future, the largest single source
of our past deficits will have been reduced to manageable
proportions.

Similarly, if no substantial additions are made to the
already-available appropriations of seven hundred millions

you 95
Secretary's Speech - 18

for public works of all kinds for the fiscal year 1939, and
such expenditures in subsequent years are brought down to

the half-billion dollar level, this source of fiscal deficits
will be eliminated.

These are some reasons for optimism on the spending

side of our budget picture. On the receipts side I can
report to you a far greater degree of improvement than many
people have believed possible.

The plain fact of the matter is that the Federal revenue
structure today is stronger as well as more equitable than

ever before in the history of our country.
When this Administration came into office, the total

receipts of the Treasury had fallen to just over two billion
dollars a year. In each year since that time they have
shown marked increases -- the result both of improvements

Secretary's Speech - 19

in our tax structure and of the revival in business. For
the present fiscal year, the revised estimates of receipts

total six billion six hundred and fifty millions.
In the tax revisions that Congress is scheduled to make

during the next session, the aim will not be to raise existing tax rates or to seek out new sources of tax revenue. The
aim, rather, will be to make adjustments in existing taxes

in the direction of achieving greater equity and of reducing
hindrances to legitimate business enterprise.

Some people are worried lest we ourtail expenditures

too rapidly. What I can tell you in this respect may reassure such people.

The plain fact of the matter is that the unspent
appropriations already made for public works and similar

projects are so great that large expenditures for these

P.O

Secretary's Speech - 20

purposes will continue into the fiscal year 1939 even if
Congress does not appropriate another dollar for them.

When we entered the fiscal year 1938 last July 1, the

total appropriations available for public buildings, public
highways, river and harbor improvements, flood control,
P.W.A. grants, soil erosion, emergency housing, and similar

purposes, stood at more than one and a half billions. Some

eight hundred sixty-nine millions of this will be spent
during the present fiscal year. This will leave approximately
seven hundred millions to be spent in the fiscal year 1939

without a single dollar of additional appropriations.
It is obvious that even if we wanted to, we could not
suddenly out off all of our emergency spending.
It is by no means necessary even

possible,

to make immediate wholesale eliminations of Federal expendi-

tures. It is necessary, however, that we see precisely
where we are going; and that we see the picture whole.

Secretary's Speech - 21

But when I say that I am confident that we shall balance the budget during the coming year without violent disruption of existing programs, I do not mean to say that the
job will be an easy one, or that it can be accomplished
without stepping on anybody's toes.
The United States Chamber of Commerce is on record

as strongly in favor of an immediate balancing of the
budget. But what happens in every local Chamber of Commerce

when a proposal is made to eliminate a nearby Civilian Con
C.C.C.
cervation Corps camp or to reduce an allocation for a local

public works project? Letters and telegrams pour in upon
the Congressmen and Senators, complaining of the great harm

to local interests if these Federal expenditures are reduced.
Balancing the budget is your problem -- the problem of

every citizen of the country, no less than the problem of
the legislative and executive branches of the Government.

see

Secretary's Speech - 22

It was the strong support of the American public that

made it possible for us to bring this country out of the
depression and to carry through many important reforms.

With this same support, we shall accomplish the simpler task
of balancing the Federal budget.

1. 100

Welmerding's
Tentative Outline
I.

1. when this Administration took office the country
de

was in a downward spiral of inflation.
2. The general depression was reflected in an unbalanced budget.

3. The choice before us was a hard ones to pursue

what sight be a will-o' the wisp - the balanced budget;
or to throw the balanced budget to the winds and open the
sluice gates of government expenditure and credit in an

effort to bring back into employment the idle resources
of the nation.
4. The former course could only be adopted on the
assumption that we would soon hit the bottom of the
economic depression. But none knew how far below us that

bottom might really be; or whether when we hit it, we

" 101
-2might not plunge through into the abyss of social disintegration.

2. And so we elected the latter course as that
having the greatest antecedent probability of success.

6. Our measures are well knowns relief to
individuals, the saving of homes and farms, the restoration

of bank credit, loans to industry, agricultural aids,
devaluation.

1. The effect of these measures on the budget has
been tremendous with revenues approximating those of
1926-29, we have spent in 1933-37 17 billions more,

exclusive of debt retirement: instead of a four year

operation surplus of billions, we have a deficit of
8. To be sure certain deductions may be sades

recoverable loans, gold profit, prepayment of bonus,

anticipation of public works.

i..

FL. 102

-3 2. But with all allowances, the depression has
cost us a substantial sun.

II.
10. Now the point I want to make is that these
expenditures, recoverable and non-recoverable, were made

intentionally.
11. We regarded the nation as being somewhat in

the position of a family faced with the choice of starving

or living off its capital and naturally we chose not to
starve.

12. Assuming the analogy to be true, no one, I
suppose, will deny that we made the better choice.

13. There are, of course, financial limits to such
a policy; one cannot live off one's capital when one's
capital is gone -- nor off one's fat when one is reduced
to skin and bones.

i. 103
-4- Fortunately the U. S. is a wealthy nation; and
these financial limits have not yet been approached. We
could ifnecessary go on borrowing for some years to come.

15. But there are also moral limits to the continuance
of the policy.
16. While we have a right to use the accumulations

of the past to save ourselves, we have no right to enjoy
them needlessly. Unlike Pope's father we cannot retire to
our garden with a chest of guineas and support ourselves

for the rest of our lives without labor.
17. Having received those accumulations from our
fathers we are bound as trustees, to hand then down,
augmented if possible, to our sons.

16. Consequently, as soon RE it is possible to do
so, it is incumbent upon us to reverse the financial

policy of the past 7 years: first we must balance the
budget, then we must seek a surplus.

124 104

-5 19. This moral principle is reenforced by a
practical one -- namely, that for our own self-preservation
we must seek to restore what I term the national treasure.

For as you know as well as I, the practice of living on
past accumulations is demoralizing and degrading to active

men at all times, but especially when it is not compelled

by circumstance. If after a period of rentier prosperity
we should again be struck by & depression, we might find

ourselves without either the funds or the character to
withstand it.

III.
20. These things I say to you at this time because
it is my belief that the moment to balance the budget is
at hand.

21. The slowing down, stopping, and reversal of

the spiral of deflation are recorded facts. Unemployment

has fallen off, industrial production risen. Farm prices

105

-6 have risen and the farmer is now earning a living. Banks
have resumed their normal functions. The distress due to
the burden of fixed debts has been removed. The spirit

of private enterprise is again abroad in the land -- shaky,

it is true, but still sound.
22. Consistency to our theories demands, therefore,

that we turn our every effort to restoring the financial
position of the government.

-7-

in 106

23. Let us examine the prespects. On paper they

look good. With prosperity revenues are rising and will

continue to rise without stiffening the tax structure)
throughout the depression ve have kept our normal expendi-

tures down to pre-depression limits; the need for relief
is falling off; our loans are beginning to be repaids

private capital is beginning to substitute itself for
public capital; many of our normal expenditures have been
anticipated.

24. In addition, the ability to pay of State and
local governments has revived and they are in a position
to take back various items of expenditure which in normal
times would have been considered exclusively chargeable
to their OWEL budgets.

-8-

25. Against this there are of course, certain
increases in federal expenditure caused by the assumption

of new and necessary functions: e.g. soil conservation,
social security.

26. But the plus is greater than the minus and it
should be possible to balance the budget without injury

and with benefit to the public good -- not this your
but in 1939.

27. Such are the reasons which lead me to believe

that the budget can be balanced -- but possibility is not
performance, and I wish now to outline the difficulties
which confront a real balance.

28. First of all there are public works commenced
which must be finished. That, I suppose, every one will
agree is common sense.

107

-9 -

FL 108

29. Second, a vast program of public works, though
not yet commenced or even covered by appropriation has been

authorized by Congress - public roads are on example.

Unless substantial revisions are made in this works program,

it will be impossible to balance the 1939 budget.

30. The third obstacle is more serious. I refer to
the demoralisation of a certain proportion of rolief clients,
which renders them unwilling to return to the ordinary paths

of livelihood. The existence of this psychological state
exerts a political pressure on the budget which cannot be
discounted.

31. The fourth obstacle is the particularism of
local communities - their tendency to identify their
private welfare with the general good. You all know what
I means compare the attitude of local chambers of commerce

with that of the U. S. Chamber; of street associations with

- 10 -

109

city-wide organizations of taxpayers.

32. or all, this is the greatest obstacle. It
stands in the way of returning to localities their fair
share of the relief cost and the burden of local improvements.

33. Let us not deceive ourselves. The spirit of

particularism exists. If it prevails it will be impossible
to balance the budget for several years.
34. And even when the balance comes the budget

will contain within itself the seeds of rottenness. For
as you well know it is the genius of our constitution that
the national treasure should be devoted solely to the

national interests.

35. I speak with feeling on this subject, for in
the words of Gallatins I cannot consent to act the part
of e mere financier, to become & contriver of taxes, etc.

- 11 -

A 110

36. But neither I, the President, the Congress, nor
the whole government together can do anything in this matter

without the support of the people. For we are not rulers
but instruments and servents of the general will. We can
do nothing by fist -- not even good.
37. The balancing of the budget, the restoration
of the national treasure, depends therefore on our will as
citizens. Let each of us therefore subordinate his private
and local interests to the general good and lend his whole
hearted support to the measures which reason tells him are

in the interests of his country.

111
RE SPEECH ON GOVERNMENT SPENDING

Present:

October 22, 1937
10:50 a.m.

Mr. Magill
Mr. Haas

Mr. Riefler
Mr. Seltzer
Mr. Gaston
Mr. Upham

Mr. Wilmerding

H.M.Jr:

Now let's do Mr. Magill.

Magill:

Well, on page - whatever it is - of this speech I suppose I better get that reference - page 19,
there is a paragraph with respect to tax revision.
I have written a paragraph here, somewhat longer,
with which I am not particularly well satisfied.
I'd like to get everybody's ideas. Let me say that
one reason why it is difficult for me to write this
paragraph - as you know, I've been writing a longer
one, and I've tried to say this in different words.
"In the tax revisions that Congress is scheduled to
make during the next session, the primary aim will
be to make a series of adjustments in existing taxes
in the interests of greater equity, and of reducing any
demonstrated hindrances to legitimate business transactions. It is the surprising fact that these changes,
which, as I think most objective persons will agree,
will g reatly improve the fairness of the distribution

of the Federal tax burden, can be made without increasing the number of existing taxes, and without increasing

the total of revenue to be collected. These statements
assume that expenditures will be kept within existing
budget estimates and commitments, as I believe they can
be and will be. It is my hope that, on the basis of
the large amount of information which the Treasury has
assembled for the use of the Congress, changes can be
made which will strengthen the present tax structure,
and point the way toward establishing it on a sound

H.M.Jr:

and permanent basis."
Excuse me - where are the other men?

(Haas leaves to get other conferees)
(Haas, Seltzer, and Wilmerding come in)

112
-2-

H.M.Jr:

Good morning.

Do you mind reading - wait until Gaston comes to
read that again; take up the whole picture, if you
don't mind.
Magill:
H.M.Jr:

Before he comes, I might add I have written this
this way on the assumption that you didn't want to
state specifically
Not in view of what we had in mind, because this
thing comes afterward.

Did Mrs. Klotz have your time for you? Next Saturday,
10 to 12. A week from tomorrow.
Not Friday?

Magill:

(Nods yes)

H.M.Jr:

Can't do it. Said two hours will be enough.
(Gaston comes in)

Now, do you mind reading this again? And I think

I ought to say, in strictest confidence, the reason
why this thing may not - is as short as it is and

Magill's doing it, is we hope when Congress meets

on November 5 that we will send them up a memorandum

as to just the taxes, and that will be five days

before our speech, you see.
H.M.Jr:

It is when the sub-committee is supposed to meet.
It is when the sub-committee meets, and we're hoping
a memorandum will go up from the President and the
Treasury on that.

Riefler:

You're shoving that up.

H.M.Jr:

Two months.

Riefler:

Uh-huh.

H.M.Jr:

Two months, which should - I mean we've been so rushed

Magill:

this morning on the other matters that we can't - but
we've still got two weeks on my speech, so we've got
plenty of time - not too much time.

113
-3-

Now, read it once more, please.
Magill:

"In the tax revisions that Congress is scheduled to
make during the next session, the primary aim will be
to make a series of adjustments in existing taxes in
the interests of greater equity, and of reducing any
demonstrated hindrances to legitimate business trans-

actions. It is the surprising fact that these changes,
which, as I think most objective persons will agree,
will greatly improve the fairness of the distribution

of the Federal tax burden, can be made without increasing the number of existing taxes, and without increasing

the total of revenue to be collected. These statements
assume that expenditures will be kept within existing
budget estimates and commitments, as I believe they can
be and will be. It is my hope that, on the basis of
the large amount of information which the Treasury
has assembled for the use of the Congress, changes
can be made which will strengthen the present tax
structure, and point the way toward establishing it
on a sound and permanent basis."

Seltzer:

"Strengthen the tax structure" sounds as if you're
going to increase the taxes - tax burden, tax collection.

Gaston:

Yes, I think I'd find another word.

Magill:

Not necessarily, no.

Riefler:

"Improve the stability of the tax structure."
(Upham comes in)

Magill:

Well, let me say this. This surprising fact was
surprising to me, that - you take these items which
we have in the tentative draft of the statement which
we are thinking about sending up; the net result of
what we have in mind is the loss of revenue of 250
millions of dollars, notwithstanding the fact that
we are making a total adjustment in favor of the
taxpayers which aggregates over 600 million. Now,

the point is that the 250 million, in the collective
judgment, ought to be made up from the income tax and
the estate tax, and it is in the income tax that we

are making these adjustments in the interests of

114
-4-

greater equity, etc. The total has not increased;
the total revenues have not increased.

Now, what I mean by strengthening the tax structure,
and what I think the public will think is meant, is
to get your taxes so organized that, whether you are
in a depression or whether you are in better times,
you are assured of a satisfactory flow of revenue.
Gaston:

I think the point that Larry had in mind is that

we have used that particular word about the tax
structure being "strong" enough, and not necessarily

"strengthening" the tax structure, in the connotation
of increasing the over-all yield of taxes, and it is
because it may be associated in that way that the word
might be criticized.
Magill:
Seltzer:
Haas:

H.M.Jr:

Well, I would be perfectly willing to change the
thought if you want to.
That's all that's necessary - some other words there.
Otherwise, the statement is all right.
Except the word "permanent" - I don't like so well.
Well, listen, gentlemen, let's take this thing, put

it in the hopper; I mean I'd like to get - I don't

want to take too much time on one word now, and I'd

like to et what Bell gave us, you see.
I don't know whether you (Magill) want to sit and

listen to this or not.

Magill:

Maybe I'd better not. I've got to go up and see
Vinson this afternoon. He's straining at the leash.

H.M.Jr:

Have we got copies of this?

Magill:

Who do you want to have one?

H.M.Jr:

Give it to Haas, and have you got one for Naster.
(Magill hands copies to Haas and reporter)
I think this can be improved, and hope to do so

Magill:

myself. Got to talk to Vinson about capital gains,

115
-5-

H.M.Jr:

and it's going to be a tough proposition.
(On phone) Ask Mrs. Klotz - I think I told her

what day Jake Viner is going to be down next week.

I think it's Tuesday or Wednesday; I'm not sure.
You (Magill) got this on next week?
Magill:

Yes, I'll speak to her now about getting up there.

H.M.Jr:

Well, don't - that's all entirely - I'll have to

Magill:

All right.

H.M.Jr:

I mean I'11 make the arrangements with you personally.

Magill:
H.M.Jr:

fine. Thank you. (Leaves)
Now let's have what Bell's got.

Seltzer:

I have a carbon of what Bell sent this morning.

H.M.Jr:

(On phone) Hello.

talk to you myself.

He's going to be down here Tuesday and Wednesday.
Haas:

Do you want this carbon?

H.M.Jr:

Well, read it, please.

Haas:

"I am sure you agree with me as to the necessity
year 1939. I have spoken with some confidence of

for balancing the Federal budget in the fiscal

the possibility of doing so. But I want to be
completely frank with you in stating that it will

not be an easy task, and that it can not be done at
all unless we have the complete cooperation of the

American public.

"There are those, both in Washington and throughout

the country, who do not fully appreciate the necessity
of keeping our outgo within our income. There are
some who publicly clamor for a balanced budget, but
lend their support to r equests for Federal expenditures to be made locally."

116
-6-

(Mrs. Klotz comes in)
H.M.Jr:

Just a second. (Confers briefly with Mrs. Klotz,

who then leaves)
Go ahead.

Haas:

"If we are to be successful in our aim of bringing

expenditures within revenue in 1939, the so-called
pressure groups must not continue to ask for a
balanced budget in one breath and in the next for
appropriations in which they have a special interest.
"We must watch the expenditure side of the budget with

the greatest care. Let us look with a realistic eye
at some of the practical difficulties in our way:
"The budget for the current fiscal year shows estimated receipts of $6,600,000,000 and estimated
expenditures (exclusive of debt retirement) of

$7,300,000,000. We not only have to close this
gap of $700,000,000, but must add a further
$600,000,000 for annual statutory debt retirement,
before we can say that the budget is completely in
balance.

"As a practical matter, which of our expenditures
can be reduced in 1939 under 1938? Ordinary operating.
expenditures, which include interest on the public
debt, payments to veterans, national defense, regular
annual public works program, and the expenses of the

legislative, executive, and judicial agencies, will
total $3,400,000,00 in the current year. There is
very little possibility of any reduction here, if,

indeed, the figures can be held down to their present
level. Other programs to which we are committed,
such as that for Soil Conservation, Social Security,
and miscellaneous items, are costing us this year
a billion, seven hundred million dollars. Here, then,
we have a budget for the regular operating departments
and agencies of the Government slightly in excess of

five billion dollars, without taking into account at

all expenditures for account of unemployment relief
and the Civilian Conservation Corps, and without allowing one dollar for debt retirement. I believe that
the $2,200,000,000 which we are spending this year for
unemployment relief and the C.C.C., can be materially

117
-7-

reduced in 1939. Perhaps we can reduce our
expenditures in that one category by as much as

a billion dollars.

"Now let me give you - for I am trying to be as
completely honest and frank as I know how to be one of the situationswith which we are faced that
makes it especially difficult to scale down spending. The figures just cited do not include any
appropriation which may be made by Congress either
in special session or regular session for new
programs. And we can not expect that there will
not be additional appropriations made. Look for a
moment at the public works picture. The Congress
of the United States has already authorized public
works programs, which, if carried out as planned,
would involve expenditures over the next five years
of more than two billion dollars. Past experience
proves that before this five-year period ends,
Congress will have added several hundred millions

of dollars for additional public works to that total.

"Furthermore, we do not know yet what the total 1939
expenditures for assistance to agriculture will be.
Corn and cotton loans through the Commodity Credit
Corporation and benefit payments to farmers in any
new program of crop control. may swell still further
the expenditure side of our budget."
H.M.Jr:

Well, that isn't what I wanted at all. I mean - I'm
sorry Dan isn't here - completely missed it. I mean
that isn t what I asked for. What I want is something
entirely"different, and I told that to Dan walking
down, and I'll go over it once more. I mean this thing
has to be - we've got to keep moving this speech along.
What I want to do is to get up and say to these

people, "Now gentlemen, 11 - I don't want to - that's
public debt and we can't do this." I mean I'd simply
make a sweeping statement and say, "Legitimate general
departments, debt retirement, all of that, five billion
dollars. Now, on top of that, we add this year for
all relief a billion two, which is one billion dollars
less than it was this year."
such a hackneyed thing, about "we can't reduce the

118
-8-

You might say, "The five billion dollars " - when
I mention the five billion, that "that is a decrease
of so much" - I don't know how much it is. But
"five billion dollars for all of those things, which
is a decrease - which we've cut to the bone, which
is a decrease of X hundreds of millions of dollars."

After that - "Add to that relief, one billion two,
which is cutting that item by one billion dollars
from
we two.
are spending this year, which brings it
to sixwhat
billion
"Add to that item debt retirement, which is 600

million
dollars, which brings it up to six billion
eight.
"Now, at that point we have not included in this
program one dollar for agriculture, and let us

take a look at this agricultural program. At pre-

sent we have on our books, included in the budget
for the coming year, 440 million dollars for the
so-called conservation program. We have on our

books 430 odd million dollars for roads, 216 million
of which" - I don't know what the word is
Wilmerding: "Apportioned."
H.M.Jr:

" apportioned to the states - another 216 million

dollars should be apportioned between December 15 and

January first, and of that amount Congress has only
approved - has only supplied us with 24 million dol-

lars. So we're short over 400 million dollars of money
which will not begin to be spent until July 1, 138.

So, totaling it up - 440 - 440 million dollars for
good roads - it's 840 million dollars. Add it to
the six billion eight and it gives us a figure of
what's it add up to? Add it up.
Riefler:

Seven six.

H.M.Jr:

What? How much?

Riefler:

Seven six.

H.M.Jr:

gives us a figure right there of seven billion
six, against a possible revenue of six billion - ah
five?"
"

119
-9-

Seltzer:
H.M.Jr:

Un-huh.

"So we have staring us in the face right now a possible

deficit for the next year of a billion two.

"And I want to tell you gentlemen that this question
of balancing next year's budget is going to be one
of the most difficult tasks that has faced any government since the World War; and it is going to take all
the ingenuity and all the patriotism and all the
determination that all of us combined can put into

this thing in order to accomplish this.

"And I want to say, furthermore, that if we are going
to accomplish this, and we must accomplish this,
Congress will have to sit ready to either cut down
the expenses of the Government or add to our revenue

until the last bill has been signed and we know exactly
where we stand. Otherwise, this is an impossibility.
Now, that's the way. I mean what I want to do is, I
want to show them how difficult this thing is, what
we are facing, and then when various people say, "Let's
balance the budget" - they just don't know what they're
talking about. They've got a slogan: "Let's balance
the budget." But they don't know what it means. And
I want this audience, I want the Congress which is
going to meet five days later, to know what the task

is. Now, every one of these Democratic leaders comes
out and says, "We're going to balance the budget,"
and when they meet five days later I want them to know

what that task is.

"And it's - either we've got to do one of two things.

We've got to change our attitude towards subsidizing
agriculture or on public works, or we've got to increase
the Government's revenue by a billion dollars. Now,

it's one or the other. Now, the choice has to be made
by the American public through their elected representatives. All I can do as Secretary of the Treasury is
to point out what the problem is and how it can be done.'
Now, that's the way I want to say it, and you fellows
have got to take this thing and make it smooth. But
that's the place and that's where I want to say it that this whole crux, this whole balancing the budget
gets down - build this thing up, and the last thing you
talk about is agriculture. And if you'd been through

120
-10-

what I have this week with Wallace - I mean it's
just unbelievable. And the whole thing builds up,

and I think it's more than fair to build this thing
up: five billion dollars; so much for relief; so

much for debt retirement; and then, on top of that
thing, pyramid this subsidy to agriculture.
Now, they completely - if you don't mind - I mean
in this room - completely missed that thing, and
that's a hackneyed way, and I don't want to present
is that way. Completely missed the thing. But I
want to present it the way I say it but make it good
english,
and so forth. But the emphasis and everything
else.

And I - what I - I'm saying this for Riefler - but I

keep talking to these people and when I get through
I want them to say, "Well, no one could be more honest
than Morgenthau, but the situation can't be as bad

as he says it is," rather than have to say, "Well, he
slides over the difficult thing and he won't face the
situation."

Riefler:

Yes.

H.M.Jr:

Now certainly - and I want the Congressmen to say,
"My God, what is this thing we're facing?" and "Can

it be?" Let them send for me and I'11 say, "Yes."
I mean, to show you, for instance, on top of all
this thing we're doing, Bankhead wants us to buy out
of Section 32 money, Customs money, and Wallace
recommended it just to help - he wants us to buy five
million dollars worth of cotton, just for no r eason
other than just to grease their palms. The President
turned it down, and Bankhead's sore.

Now this - Ididn't know that I was going to talk
five days before Congress met, and it's the grandest
opportunity that any finance officer could have, to
lay this thing down, and I'm not going to get up and
say, "This is the way to do it," but I'm simply going
to say, "Here are the facts, and put all the cards
on the table. "And for anybody to say we're not going
to have more taxes until the fellow rings down the
curtain and says (words not understandable) is just
ridiculous, if they want to balance the budget. But
let's stop all these mouthings and talking about

121
-11-

balancing the budget when the people don't know what

they're talking about or what it means or what the

commitments are."

Haas:

H.M.Jr:

Now, that's the way I want to say it, and I want to
say it just as forcefully as that. But you fellows
take my stuff, round it out, and make it sound pretty.
would you be interested in this? In trying to put
roads in Agriculture, you may be criticized, and I
think justifiably so; the case is strong. That may
be a hole they'11 punch in it.
My dear George up to now roads is the only thing
I've been able to save any money on. The President

says, "I will not stand for four hundred million

dollars. All I will stand for is 80."
Haas:

I say keep it but don't say it's agricultural expendi-

tures.
H.M.Jr:

All right, but put it in.

Haas:

that's right.

H.M.Jr:

I want to get over what took me two weeks, the fact
that last December they appropriated money - December,
'36 - to be spent July 1, '38; he spends more money
in December to be spent July 1, '39 - there's 432
million dollars and they've only supplied us with 24.
But that's just an accident that Agriculture happened
to be connected with that. Might have been Ickes.

Haas:

H.M.Jr:

Well, put it onto this - put it at the end, because
the only place I know yet where we can save any

money

(On phone) Hello.

Well, tell them to make
it snappy; I'm going to the White House at a quarter

Haas:

H.M.Jr:

of 12. - - Thank you.
All right, we can rewrite it.

Now look, do you (Riefler) have any objections if
we read your letter at this time?

122
-12-

Riefler:
H.M.Jr:

No, not at all.
I don't know whether you feel any differently in

view of what you have heard me say.

Riefler:

Well, this puts much more punch into the body of it.

Gaston:

AS far as the newspapers are concerned, what you are

talking about now is the entire story of your speech.
Nothing else will receive any attention. This is the
story of your speech.

H.M.Jr:

That's what I told these boys, that this is what I
want to emphasize. After all, the fact that they
are winding up R.F.C. and P.W.A. - I've arrived at
that point due to working on that speech, and if I

had recommended that in the speech that would have
been
news, but that's over the dam, see; that's behind
us. Huh?
Gaston:

Yes.

H.M.Jr:

Now, fortunately, this speech has been a fine thing let Riefler read it himself - for me, because it's
made me take a look at this whole picture, and it's
made the Treasury look at it, and I can present it

to the President and he'11 look at it. That's the
thing about it, and that's why I was willing to accept
the task of this speech. Huh?

Caston:

Yes.

H.M.Jr:

But I want to put the punch in right there. That's
the emphasis. I mean - the boys have done a grand
job since you (Riefler) saw that other draft; the
thing has improved a hundred percent.

"iefler:

Uh-huh.

H.M.Jr:

and - but I said to them that this is the place

where I want to emphasize, this is where I want to
talk to the people as man to man, and say - I'm so
sick and tired of hearing people talk about balancing
the budget as a slogan, like "Eat more Campbell's

soup."

Riefler:

Or "Smoke Luckies."

123
-13-

H.M.Jr:

What?

Riefler:

"Smoke Luckies"

H.M.Jr:

Pardon me?

Riefler:

"Smoke Luckies"

H.M.Jr:

Or "Smoke Luckies Because you're Satisfied." I mean

they've gotten so they think it's a kind of a slogan.
But what do they mean when they say that? Now, let's
just take the can-opener and take a look at the thing.
That's the whole point, Herbert.
Gaston:

H.M.Jr:

That's the whole story of your speech.

All right, now, let's hear - just one second. Do

you (Upham) check?
Upham:

H.M.Jr:

Well, Mr. Bell and Mr. Bartelt don't agree with your
figures. They can't find anything like that billion
and two over the budget. That's this 440 and 430.

Well, that's all right. We can adjust it. If it's

better,
the better. It is the principle that
we
wantso
to much
talk about.
Upham:

There were three drafts of this.

H.M.Jr:

Well

Upham:

First one was just what you said here today.

H.M.Jr:

Well, the figure - the easiest thing - you can
adjust your figures very easily to what I said.
The important thing is, what is my attitude, at
the fiscal office of this Administration, towards
this thing? And this is the first time that I
have ever talked on this thing, and what is my
approach, what is my attitude, what do I want to do?
And when I am talking, I am talking for the Administration. What does the Administration want to do

about balancing the budget, and what is the problem

we are facing, and what is our attitude towards it?
Now, that's the important thing. The figures are

unimportant.

124
-14Upham:

Well, I think they're important in this respect,
that they say that there is almost nothing in
Agriculture over and above the present budget, that
those figures are in the present budget, but there's
as much more public highways in this year's budget
as next year's - as much for Agriculture.

H.M.Jr:

O.K. You fellows have got from now until next
Tuesday morning. I want another draft on this,
with my philosophy plus the correct figures.

Upham:

Your figures almost disappear, because

H.M.Jr:

Well - O.K. - George, next Tuesday.

.....

Will you (Riefler) be back next Tuesday?
Riefler:

I don't think I can.

H.M.Jr:

Well, all right. Well, next Tuesday, anyway next
see? Tuesday morning I want again to hit this speech,

Upham:

This ties in originally with just what you said.

H.M.Jr:

What?

Upham:

This
originally
figures
and all. had in it just what you said,

H.M.Jr:

He can leave the figures out.

Just a second. (Looking at ticker clippings)
Gaston:

H.M.Jr:
Gaston:

Couple questions on taxes and budget at the press
conference.
What?

Couple questions at the press conference on taxes

and budget. On the corn loan, all he said was
that Danny Bell would be over there today and that

you
and Secretary Wallace would be over there
tomorrow.
H.M.Jr:

Son of a gun - I keep this thing such a secret.

"President Roosevelt revealed today that the Treasury

125
-15-

will submit to the Senate and House Fiscal

Committees in November a preliminary tax revision

which may include undivided profits surplus and

capital gains tax."

Gaston:

No, the question was by Bob Wharton of ScrippsHoward as to whether consideration had been given

to modification of the capital gains tax and the
undistributed profits tax. He said, "The whole
question is under study by the Treasury. We are
going to submit our recommendations to the Committees
some time in November; but it has nothing to do with
the special session; it is preliminary for a tax

bill in January." That's all he said. to

tax bill in the regular session." That's all he

said.

Riefler:

This is a comment on the first draft.
"Events during the last few days have moved so

rapidly that I feel that a rather new approach to
the whole speech is required. It is something like

the situation on March 4, 1933, when the President
was required to tear up his previous inaugural and
substitute a new one addressed directly to the prob-

lems of the moment. The point of view in the draft
as now written is (1) that we are now in a period
of prosperity; (2) that your audience, far and near,
agrees with this assumption; and (3) that under these
circumstances it is desirable for the Federal Government to balance its budget.
"Actually, your audience is going to be in a very
different frame of mind. They will be filled with
forebodings; some will fear that we are already in
the midst of deep depression; others will be extremely
apprehensive that one is impending. Their concern
about the budget will be diverse, some feeling that
now it will never be balanced and that the Federal
credit is irretrievably doomed, others feeling that
the only way to avert a depression is for a further
expansion of Federal expenditures on armaments, etc.
All will be extremely apprehensive of taxes, fearing
that the total burden will be increased and that kinks
in the present structure may not be eliminated.

126
-16-

"I think it would be advisable to recast the

speech so as to meet the questions in the minds
of the audience squarely, directly and immediately.
Personally, I should start with a paragraph which
enumerated these apprehensions and then stated that
you were prepared to meet them as directly and
honestly as you knew how.

H.M.Jr:

"I should follow this with a very simple statement
of the keynote of your whole talk, phrased something
as follows: 'With full knowledge of the state of the
security markets and of the apprehensions which exist
in some quarters over the immediate business outlook,
we have decided that the most constructive action
which the national government can take in the circumstances is to proceed to an immediate balancing of
the national budget. We expect to balance the budget,
further, without an increase in taxes.'
"Under this approach, the second portion of the
speech would deal with the reasons for making this
decision. It would include most of the material in
last week's draft, recasting somewhat, however, for
the purpose of supporting this statement. It would
state that, whereas the crisis of 1933 was such that
the Administration believed a policy of expenditure
to be essential (because employment, incomes, debts,
etc., were all so low that they would never start up
except under the impetus of vigorous Federal spending),
the present crisis was quite the reverse. It would
then outline the contrasts on somewhat the following
lines: 'We are concluding one of the most active years
in the history of the country. It has not been activity
of the sort, furthermore, which usually culminates a
business boom. There are no outstanding surpluses of
commodities, over-extended credit positions, or surpluses of housing capital equipment, etc.
This is awfully good.

Gaston:

Yes, I think it is too.

Riefler:

" We have not yet reached a stage of full employment.
On the contrary, from all of these standpoints,
business has still some distance to run before

reaching a critical position. It is a situation

127
-17-

basically which needs the driving force and the
initiative of private capital, and its greatest
weakness, to the extent that there has been a
weakness, has lain in the fact that this driving
force has not been forthcoming on the scale
required. Under these circumstances, the policy
of the Administration is to clear the tracks for
the expansion of private business, not supplant
it with increased Federal spending.
"This involves (1) the prompt balancing of the
budget, and (2) the adoption of other policies consistent with this end. You know better than I whether

you will be in a position to outline any of the

details of these policies on which you are working.
"I should follow this with a description of the
actual budgetary position, expenditures and receipts
during the recent years, and prospects for next year,
along lines much the same as those developed in the
preliminary draft of the speech. In this section I
think you should include a paragraph showing that the
Treasury will not have to raise any more new money, if
such is still the case.
"I should close, however, with a new note that again
ties the whole speech to the current situation. You
can not state what tax changes you are going to propose; you can, however, give a picture of the seriousness and sincerity with which you have approached the
tax problem. I believe such a picture would do much
to clear the atmosphere. Recently in personal conversation you told me how you had come to the conclusion
that the problems of the Treasury in the future were
not going to relate so much to the raising of new money
and management of the debt as to taxes; that you had
decided to organize to meet this situation by getting
a tax expert as Under Secretary; that you had cleared
the decks for him to do the best job of which he was
capable, both by relieving him from all extraneous
duties and pressures and by providing such expert
assistance as he desired. It is an impressive story
and I know would carry a great deal of conviction and

H.M. Jr:

weight if you could-give it as simply and sincerely
as you have given it to me."
Excuse me. Bell, not having seen this, asked me to

128
-18-

Riefler:

do just that this morning. Bell asked me to do
exactly the same thing - put that in the speech.
Well, that's all; I just had one more.
"It might serve to meet this terrific demand for
statement on taxes without revealing any
specific news that you have in mind."

H.M.Jr:

Now, what you could do, if you could help - the
thing that would be most helpful to me is if you

fellows here could go down to the conference room

now, and I'd like you to read the speech as it is
now to him and spend the rest of the morning on it
for me. And then after Riefler has the speech as
it was when I last saw it, plus what he heard me say,
plus what he's got there, plus what criticism he's
given to the speech as it is written out - gives you
another fresh outlook - tackle me the first thing

Tuesday morning.

129
October 25, 1937
9:20 a.m.
Present:

Mr. Bell

Mr. Haas

Mr. Bartelt

HM,Jr: If you fellows each have pencil and paper,
I don't know who gives this to me and the reason I

brought Bartelt in it, I thought he might take a little
of the pressure off of Bell and we might let Bartelt
carry part of this. See?
for.

There are certain things which I am still waiting

Mr. Bell: Public Works. I think I should say,

Mr. Secretary, that's been ready and it's my fault because you have been so tied up on other things I did
not bother you.

HM,Jr: All right. When do I get it?
Mr. Bartelt: Right now, if you want it. Here's a
memo and a detailed statement.
HM,Jr: Why not just leave them.

I want a careful listing -- I would like to have
it tonight to study it -- of everything that is in the
budget for agriculture this fiscal year.
Mr. Bell: Uh-huh.
HM,Jr: Including roads, including the statement
that you gave us verbally of how they are going to divert
the money from Section 32.

Mr. Bell: Uh-huh.

HM,Jr: In other words, I would like to have a
statement of every dollar that you think of that Wallace

130

-2-

is going to spend this year plus the amount of money
which has been authorized but not appropriated. I
would like everything that you can think of. Do you
want to do that, Dan?

Mr. Bell: I think we can do it with Lawton. He

will have to show Bartelt everything in the summation.
HM,Jr: To take some of this pressure off of you.

Mr. Bell: It would help.
HM,Jr: Couldn't he work it out?
Mr. Bell: With Lawton and I in the budget.
HM,Jr: If you can, without breaking your neck,

get it out to the gouse so I can study it tonight, I

would like it. It isn't a matter of life and death.
Do you understand, Bartelt?

Mr. Bartelt: I understand.
Mr. Bell: I think most of it has been available.
We have been sort of working on a letter for Agriculture.
I don't know whether it's necessary in view of recent
developments, but we have a draft of letter for the
President.

HM,Jr: I want every single thing; first, money
which has been authorized; money that has been appropriated, and what they are spending it for, and particularly emphasizing this question of land buying which
I have touched several times. Maybe a little history on
the buying of land.

Mr. Bell: Yes.
HM,Jr: But I want to know for once every single
thing that Wallace or A.A.A. have under their control,
and how much. I don't have to enlarge on that, do I?
Mr. Bell: I think we have the picture.
HM,Jr: Then, on previous years, I would like to
know what Section 32 money was used for; actually how
much went out, other than this fiscal year.

131
-3-

Mr. Bell: You mean for the purpose for which the

Act was passed?

HM,Jr: No; how much spent and what for.

Mr. Bell: You see, the difficulty 18 it was passed
for specific purposes. But we have reappropriated some
of Section 32 in order to just get rid of it, for other

purposes.

HM,Jr: Let's have a history on Section 32.
Mr. Bell: Congress picked up some last year, for
instance, refund of taxes. We appropriated $40,000,000
in one year just to get it off the books.
HM,Jr: I want a history of Section 32 of previous
And then, the last year, I want to know what's
years.
happening on, I call it "Share Cropper".

Mr. Bell: "Farm Tenant.' Three titles. That's

rather simple.

HM,Jr: So when the whole thing gets down to it, you

see what I am asking for?

Mr. Bell: Yes.
HM,Jr: And I would like it all tied up because every
time I work on this thing -- the best job I have done this
month was the letter of October 5th because the President
never would have written the letter to Wallace if he had
not gotten that letter. I don't think the President
still knows just the whole agriculture picture.
I am doing it for two reasons: first, to educate myself, and, second, maybe educate the President and, third,
is a by-product I may want to use it in the speech.
Mr. Bartelt: How about Farm Credit in this picture?
HM,Jr: O. K.

Mr. Bell: That's partly agriculture. Crop loans.
HM,Jr: Seed loans.

132
-4-4

Mr. Bartelt: Everything that relates to agriculture.
HM,Jr: How much of this have you already got, George?
ment.

Mr. Haas: We have -- Lawton has made up a long state-

Mr. Bell: It wasn't separated. We had A. A. A.
$475,000 this year. What you ought to do is take
agricultural
aid, straight agricultural aid, and underneath it put roads
HM,Jr: I would handle roads separately. And get

the money
used.

directly allocated and include the money Hopkins

Mr. Bell: I think we have that. Goes back to 1917.
HM,Jr: I think the President will have to write a

message on roads.

Mr. Bell: We are writing it now.
HM,Jr: For the coming session?

Mr. Bell: Uh-huh.
HM,Jr: Good.

Well, anyway, part of this I want for my talk. You
see what I want it for. Don't you think, Eddie -- no

particular pressure on you other than your usual pressure?

Mr. Bartelt: I always have time to do things.
HM,Jr: I mean, Bell is up to his ears. I have

Haas sunk and now I would like to sink you.

Mr. Haas: "Sunk" is the term!
HM,Jr: You understand what I want?

Mr. Bartelt: I understand.

HM,Jr: Because I just haven't got this. The best
thing I ever did was to take on this talk because it
makes me dig into this stuff. So go to it, Eddie. As

133
-5-

far as you are concerned, Bell, on this 9:30 meeting,

if you are busy why not take a minute on Commodity
Credit and then be excused.

Mr. Bell: I would like to.
HM,Jr: You might as well stay, George, and hear
Bell and then be here for the 9:30 meeting.
00o-00o

134

October 26, 1937
10 a.m.

Present:

Mr. Taylor

Mr. Gaston
Mr. Haas

Mr. Seltzer

HM,Jr: I want to read this out loud. I am just
going to read half of the speech. I think I had better

read and rather than be interrupted, I think some of the
answers may be here.

(HM, Jr read the attached

HM,Jr: (To Mr. Taylor after finishing reading the

first half.) What do you think of it?
Mr. Taylor: I think it is excellent.

HM,Jr: I am not going into words, but I would be
more than pleased to have criticism.
Mr. Taylor: I have one, which has to do with the
first part. I don't like the war simile. It has been
done hundreds and hundreds of times, starting with, I
think, Herbie Hoover was the fellow who used it to the
greatest extent, and I think you can bring out the thought
without doing the war thing. In other words, call the
war a disaster, something of that sort, rather than using
the war simile.
HM,Jr: I am not going to argue. I just am going
to listen. What else?
Mr. Taylor: The others are minor, maybe an adjective
here, very minor things. I think the approach is exactly right.
HM,Jr: What I would like to do, when I get through
is to have Haas go in to see you and go over the thing,
word for word, the first half.

135
-2-

Mr. Taylor: I am crazy about the approach.
HM,Jr: You are?

Mr. Taylor: Yes.
HM,Jr: You see what they have done. Remember the

speech 1 We can't do anything until the shoe pinches'? I
want to explain why the situation is different today than
it was then. This answers the boys. This whole question
and the whole emphasis, after explaining why the situation
is different, the whole emphasis is we must do everything
to help. The beautiful thing about this, why they can' t
come back at us, is that one week before this speech goes
out we handle the tax situation, 80 they can't come back
and say, 'Oh, yes, but what about taxes?'.

Mr. Taylor: That's fine. But they will.

The

taxes talk.

HM,Jr: But I want to let you know -- deep, deep,
secret; trying to keep it as secret as we can around
this place -- we are going to handle the tax thing one
week before. I just want to let you know. The rebound
won't be 'That's all very nice, but how about taxes'.
But that thing is going to be handled. I have a week
to get the immediate reaction and I have been telling
the boys we are not going to touch much on taxes in the
speech until we get the reaction on taxes. So the tim-

ing is beautiful. But you like this?
Mr. Taylor: Yes.

Mr. Gaston: What are we going to do on taxes?

HM,Jr: I am sorry. You will just have to take
that. I mean, I am not telling anybody. I am sorry.

I have simply said we are handling it.
Mr. Gaston: You have said a little more than that.
HM,Jr: How much more have I said?

Mr. Gaston: You said something about a statement

to get out up on the Hill.

136
-3-

HM,Jr: Then why do you ask me? Why do you ask
me when I have already told you.

Mr. Gaston: Well, that's half way.
HM,Jr: I told you what I was going to do.
Mr. Gaston: Noo I don't know definitely.
HM,Jr: Yes, you do. I told you.
Mr. Gaston: It has a bearing on the point you raise
about the situation that you would be in.

HM,Jr: What situation? I don't get you.
Mr. Gaston: What is the atmosphere under which this
speech is going to be given.

Mr. Taylor: I think we have to assume that that at-

mosphere is O. K.
you.
ing?

HM,Jr: You know what I am going to do because I told

Now, do you mind just skipping it for the time be-

Mr. Gaston: Yes. Sure.
Mr. Taylor: I am assuming that that background is
fine, and in the other half you can point out the direction, in which the tax message is shown, and I would point
the finger at each one of those things, saying this indicates
that direction. Because otherwise they will
muff

HM,Jr: We have a week to write that part afterwards. There is no use -- as I told George, lay off
on that part pending the reaction to what we do on the
tax business and if they muff it, we can pick up the
part they muff and say, Well now, and emphasize the
part, which gives me another chance to crack the thing
before Congress. But you like this?
Mr. Taylor: Very good.
HM,Jr: Then you like it?

Mr. Taylor: I love it!

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HM,Jr: What the boys have done, they have taken
the first ten pages and reduced it to two.
Mr. Gaston: I like this approach better than what
we had, better because there is less of repetition of
what was said in 36 pages. Much less of that.
HM,Jr: The war thing is my own.
Mr. Seltzer: Armistice is the next day. That makes
a lot of difference.

Mr. Taylor: I think that's fine, Larry, but I think

you can talk about the war in terms of disaster, a human,

financial disaster, rather than bringing
HM,Jr: I have not heard anybody talk about this

thing.

Mr. Taylor: It just happens that I have.
HM,Jr: Well, give me a public speech where somebody
has used it.

Mr. Taylor: If you will take the Republican campaign

speeches of 1932

HM,Jr: Well, put somebody on that, George.

Mr. Gaston: It was used a great deal during the
campaign.

HM,Jr: But since that, they did not forecast what

I was going to do the next four years. It's all right.
I

am asking for suggestions. Let somebody in George's

shop look up campaign speeches of the Democrats and Re-

publicans in 1932 and 1936 and see what they said. Put

somebody on it. But outside of that?
Mr. Taylor: That's the only thing.
HM,Jr: Does it sell you on it?
Mr. Taylor: Yes; just the approach.
HM,Jr: Now, I will excuse you.

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Mr. Taylor: There are a couple of things.
want to read it over with George. I may want to
HM,Jr: I am not going, this morning, to get down
to words, because the next part -- I think we are over
the hump. This is the most difficult thing to make
this speech and justify it and answer these fellows why
we should balance the budget in view of what has happened in the last month and I think, as far as I am
concerned, that that part answers it directly.
George, send a copy in strictest confidence to
Riefler and Viner, air mail.
I

Mr. Taylor: The beautiful part is it sticks; shows

clearly what the direction 18 and what the desires are
of the Administration.

HM,Jr: And it's fresh.
Mr. Taylor: Yes.
HM,Jr: Is it news, Herbert?
Mr. Gaston: No; I would not say it is news.
Mr. Taylor: It is said more positively.
HM,Jr: You wouldn't say it is news?
Mr. Gaston: No, I wouldn't say it is news. I think
the latter part is news.
HM.Jr: Well, Herbert, I am not going to argue with
I think it is news.
you.
Mr. Gaston: There is a marshaling of the reasons
there, the detail why it is desirable to balance now when
it was not desirable three years ago.
HM,Jr: Have you heard anybody set it down in consecutive order and tell why the budget should be balanced?

I have yet to see it.

Mr. Gaston: No.

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HM,Jr: I think it's as fresh as when I went up
I haven't heard anybody -- as a matter of fact, it's
very reassuring to me. A lot of these things I have

to Harvard and gave the monetary stuff, the gold policy.

felt and a lot I have talked about. I read it last

night to Mrs. Morgenthau and she said, I can understand
every word of that, and when I got to the next speech

she said it does not follow.

Mr. Haas: We feel like she does, too.
Mr. Taylor: This is very, very simply stated.
Leaves you with a very positive thing in your mind, which
is the trouble with most speeches; they don't leave you
with anything positive.
HM,Jr: You were the one fellow around here I wanted

to try it on.

Mr. Taylor: I told you I was the "dumb public".
HM,Jr: Well, you know. I don't have to explain.
This was written to convince you as a type. Seriously,
you know the arguments we have had on this thing, which
was the difficulty we were in now, and this is the way

Mr. Taylor: That's why I like it 80. It answers

a lot of questions that fellows have worried about; they
go around like this (stoop-shouldered) and see things
under the bed.

Mr. Seltzer: It has one weakness. This 18 all
fine, predicated on the fact that we are not going to
have a serious business recession. If we do have
serious business recession, private capital is not going
to use the funds that it has and you are up against the
a

same problem you were a while ago.

Mr. Taylor: You forget the other thing there,
Larry, which is that you will have November 5, which
will have preceded this, and I assume you will have
changed the odds a little bit.
Mr. Seltzer: Of course, I am not talking about
the speech part. I am just taking the argument. It's
a sound argument on that assumption. If we got into
a

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tail-spin you would have a perfectly good fround
with the background you have used to reverse your
position.
Mr. Haas: That's right, because we have fixed

it that way.
HM,Jr: As I say, very much in this room, I have
been trying to do -- what I have been trying to do for
the last month, I have been trying to think out a succession of steps which will pull this country out of
deficit spending and put it on a balanced budget and
still keep the country going along. In order to do
that, I have to first spend all of this time to get
this information myself; for example, it took me two
weeks to understand this road money business, but I

got it and I can give it to anybody else. It has

taken me a month on this stuff which is in there, you
know, PWA have committed themselves into 1941 and 1942
and the money is not around to spend it to build these
projects. I do these things and get this thing down
in an orderly fashion. I can say in this room, without being misunderstood, I then explain it to the President because he has not got it. In this most difficult transitional period, we have certain definite
responsibilities and it's up to us to do our own thinking, and then explain it to the President with the hope

that he will take it if it sounds good to him.

Now, this question of balancing the budget. He's
constantly seeing people who are simply inflationary.
I mean, David Stern was here yesterday. See? They
can only think along one channel. Now this is only
the one thing, as far as the tax thing is concerned.
I have got the answer on that to my own satisfaction,
but it has taken six months' work to prepare that, but
I have the answer on that to my own satisfaction and I
can, in turn, give that to the President.
Now, gradually this thing is forming, layer by
layer, and 1f we move fast enough, and I think the
Treasury is moving fast enough without watching the
stock market ticker we can do enough things -- that's
what I have told Mr. Taylor, that I think that we can
keep this country from going into a tail-spin. Now
I realize the enormity of the responsibility I am

141
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taking when I say and do that, but I think we are
going into a tail-spin and, at the same time, keep
this Government solid. That's the problem. If I
simply said, like a lot of people, use the slogan
balanced budget' -- like the Jackass who gave out a
press release and does not give any reasons, this
fellow Gebhardt, just a plain every-day Jackass -National Economy League. If I simply said, yes, I
want to balance the budget, but then did not do anything totake the place of Government spending -- I

moving fast enough that we can keep this country from

boiled it all down yesterday for David Stern. I said
what you want is for the Government to keep spending
in order to keep business going. I said, well you
and I differ. I want business to do the spending in

place of the Government. Now, I said, that's where
our fundamental difference 1s. And when he left here
and I said, I want to stop borrowing in competition
with business; you want the Government to spend; I

want business to spend. So he said, All right, Why
don't you stop borrowing in order to sterilize gold.

He had me there!

Mr.Haas: Well, there is something in that. That's

the problem you ought to take up after the speech.
HM,Jr: But that's the only place he had me.
that.

Mr. Taylor: All right. You have an answer to
It also goes with the other.
HM,Jr: But that's the only place he had me.
Mr. Haas: He hasn't got you there.

Mr. Gaston: What he does not notice is balancing
on the base of 6 billions expenditure where the old

system was 4 billion, more than 50% more Government expenditure.

Mr. Seltzer: You ought to put that in. You

ought to say, In meeting this balanced budget problem
everybody ought to recognize we are not going back to

billions or 4 billions. We have Social Security on
our list; we have some other responsibilities.
HM,Jr: That goes in what I am going to talk about.

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Mr. Seltzer: One thing that bothers me about
this balanced budget 18, in part, a bookkeeping
problem. If you balance the budget and provide
$600,000,000,
debt retirement, you are allowing
1
billion 6.
HM,Jr: How?

Mr. Seltzer: Social Security funds. On an
economic basis that's debt retirement just as much
as your budget. I don't want anybody to get fooled

by bookkeeping.

HM,Jr: You must have been talking to the PresiHe wants three budgets. Go on, ,Larry.
Mr. Seltzer: Suppose you figure you want to
balance the budget this year because you wanted to
get out of the capital markets. That means that
if you just met regular expenditures without a dime
dent.

for debt retirement, you would still provide 1 billion
for debt retirement to the capital market.

HM,Jr: Say it again.
Mr. Seltzer: If you provided merely for balancing your receipts and expenditures ex debt retirement
you would only provide about 1 billion for debt retirement through the Social Security fund. That would
give your capital markets an extra billion dollars.
HM,Jr: Why?

Mr. Seltzer: Because you take your Social Secur-

ity funds, you would go out and buy Governments and

put them on your books, see, but the capital markets
in the meantime would be getting 1 billion dollars.
Now then, if you feel the business situation is a little
shaky and maybe the capital markets won't use 1 billion 6

or might take 1 billion, economically you could justify
merely balancing your budget on the basis of actual receipts and expenditures. It might be too hard a break,
too hard a transition, to do 1 billion 6 debt retirement
in one year.

143
-10-

HM,Jr: of course, 1f you take 1 billion 6 debt
millions
aretirement
differenceplus
of 2700
billion
3. deficit this year, that's

Mr. Gaston: No. You got that billion this year.

You are having it this year.

Mr. Seltzer: It's 1 billion minus the 700 million
deficit.
HM,Jr: So this year we are 300 millions

Mr. Seltzer: If it had not been for the gold.
Mr. Gaston: We would have had a reduction of debt
in the hands of the banks and the public.

HM,Jr: What you are saying is what the President

is groping for. I don't say I am sold on it yet. But

that's the important part of my speech that I want to
do now. This thing here, what you are talking about,
is the next step. What I want to spend the next hour
and a half on, is my transitional year and I am not
satisfied the way you fellows have handled it. I wanted
to do it a new way if I can. Then I want to hit next
year, which would bring in this thing, but before I get
there I want to talk about this year, what I call my
transitional year. I have listened very carefully to
what you have said and if you fellows read Walter Lippman today, he practically says the same thing.
Mr. Gaston: It has been discussed quite a bit by
the financial writers.
Mr. Taylor: The way we keep our books is ridiculously obsolete. Doesn't show the position. No possibility of showing the position.
Mr. Seltzer: We gave this to you about a year ago

in a memorandum on Social Security Act.

Mr. Taylor: Social Security is just another phony,

but the real basic trouble 18 the way we keep our regular books. No business in the world could possibly do
it that way.
HM,Jr: You mean the revolving funds?

144
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Mr. Taylor: The whole business. Suppose we go
and borrow some money. We charge that to operation,
profits and loss for that year, and you show a loss because you make a loan.

HM,Jr: The President said that.

He says if a
man goes out to borrow money to build a house, you

don't show that loan as a loss, but we do.
Mr. Taylor: We do, and it's perfectly ridiculous.
When it's repaid, we show it as a profit.
Mr. Gaston: Of course we gain on the deficit picture-on that.
Mr. Taylor: Yes, but it is phony.
HM,Jr: What would you do about it?
Mr. Taylor: I would set it up just the way business
books. A special account on your books and when you
make an investment in recoverable assets, it shows that
way.

HM,Jr: What assurance have we that we get recovery?
Right now we are using recoverable assets to balance the
budget.

Mr. Taylor: It's a recoverable expenditure in the
first place.
HM,Jr: I am just starting on this now. As far
as my talk goes, I think we have justified why we balance
the budget. The next thing is what we are writing now
and I am not satisfied at all.

Mr. Taylor: It's exactly what we do. It's the

most obsolete method of accounting that's possible to
have. The country does not understand it. No way of
their understanding it.
Mr. Gaston: There are some reasons for it.

Mr,Taylor: There are not any that are good. Remember all during the campaign all this business, what
we went through, what are recoverable assets? and trying
to set up a statement to show the true debt position?
The country wants to know that. They want to know our

145
-12-

actual working receipts.
Mr. Gaston: What about war debts? Would you set

them up the same way?

Mr. Taylor: You are damned right!

Mr. Haas: Only invisible ink!
Mr. Taylor: No, you could show that. They are a

part of your assets and they would be in there, where
they belong.

HM,Jr: Let me take a crack at this thing now. I
of approaching the tax thing. I have taken nothing for
granted. The fact that such a thing has been done for
five years is meaningless to me. I think if we could
take a look at this thing now and simply say this is
the way the situation is, but the fact it has been done
think you have made a contribution and that's my method

for 10 or 15 years does not mean anything.

Mr. Taylor: Doesn't mean anything! The thing
you are having difficulty with is how can we possibly
balance the budget. Commodity Credit Corporation is
answered by this. Of course you can't do it the way
we keep our books, but you can do it if you do it this
way.

HM,Jr: Is that what you (Seltzer) are thinking of?
Mr. Seltzer: Yes, but Social Security is a much
bigger proposition.
Mr. Taylor: But it's part of the thing and the

way we do the thing is phony.

HM,Jr: Fortunately, this Administration did not

set up the books.

Mr. Taylor: Very fortunately.
Mr. Haas: They grew over a period of years.

HM,Jr: Incidentally, you don't say anything about
revolving funds here nor the principle of subsidies.

Mr. Haas: In an earlier draft we put some stuff in.

146
-13-

HM,Jr: Yes, you did and you have taken it all

out, but this whole middle part -- but the most difficult thing was to justify balancing of the budget.
I think you have done that. What I want to know is

where are we going to go from here?

Mr. Seltzer: One of the important questions is
how much do you want to balance the budget. Do you
want to retire 1 billion debt retirement or 1 billion 6?
Mr. Taylor: That's another thing that is phony.

That comes out of earnings, if any.

HM,Jr: You mean, consider tax receipts?

Mr. Taylor: Yes and to set the thing up as part
of the budget and say that statutory debt retirement
is a proper charge against the earnings of a year when
the earnings are not there is perfectly ridiculous.
It's the same damn thing we show each year. Doesn't

make a damn bit of sense.

HM,Jr: I don't know what I have said to Aldrich

but I refuse to read it until I get this out of the

way.

Mr. Taylor: I cut all that out of your letter.
HM,Jr: But the poor man who wrote the letter to

Aldrich is dead. Ogden Mills.
Mr. Taylor: Well, this has been a long speech
for me.

HM,Jr: That's all right.
(Mr. Taylor left the meeting at this point.)
Mr. Gaston: But those Social Security taxes are
the most deflationary thing we have done this last year.
HM,Jr: I again say I consider we are over the

hump, don't you?

Mr. Haas: Yes.

Mr. Seltzer: Except here, the tone of your whole

147
-14-

speech is going to be decided from now on. You have
a good approach now and you are satisfied, all the
intellectual requirements of why there should be a
change of policy, but now, how vigorously you are going to follow that up 18 going to determine your speech.
Mr. Gaston: You dropped the idea of starting
right away with saying that you want a balanced budget

and then saying

HM,Jr: I am satisfied.
Mr. Gaston: I rather like that approach.

HM,Jr: If you don't mind, I think the first part --

I haven't done sentence by sentence, or word by word, I
don't want to do that.

Mr. Gaston: I think it's an excellent statement;
probably will register as well, probably better, with
the ordinary hearer than the other way of doing it.

HM,Jr: I think it's all right, but I would like
to leave it. Nothing is closed. You follow me? What
I want to try to do at this particular time is to take

a look at this fiscal year.
Mr. Haas: Larry has it figured out there.

HM,Jr: You told him what I was going to do?
Mr. Haas: Yes.

HM,Jr: What does that mean -- 1939, 1 and 2?

Mr. Seltzer: That '1' there, you can see what happens. You write your unemployment relief and your CCC
down to 1 billion 2. You assume that no further appro-priations will be made for Public Works.
HM,Jr: I see. But you haven't got 1938, this year;
you haven't got the previous year.
form.

this.

Mr. Seltzer: No. But you have it on the large
You also have it on the short sheet.

HM,Jr: Now I want to approach it something like

I want to say, Well, now, let us take a look at

-15-

the budget -- what do you call it, 'the fiscal picture'

of the year we are in, W we will call 1937-1938, and
first we will compare item by item.

Mr. Seltzer: You are going to run into figures and

everybody is going to sleep on you.

HM,Jr: Let me do it for my ownself. Out of it
you may get some idea of this thing that we are aiming
for, but I want to do this. I would have item by item

for the previous year and compare the same items as they

may look for the next year using the best estimate that
we have at our disposal at this time.
Mr. Seltzer: For 1939?
HM,Jr: Yes.

Mr. Seltzer: There you run into Dannie Bell. He
objects to 1 billion 2.
HM,Jr: Damn Dannie Bell! This is between the

President and myself. To hell with Dannie Bell! I
have
as much right to use the figure 1 billion 2 as anybody else.
Mr. Seltzer: O. K.
HM,Jr: But you say Dannie objected?

Mr. Haas: Said it was against policy.

HM,Jr: All right, that's for the President. Also,

Dan has been frank enough to say that when I made my
speech in 1933, Lew Douglas tore his hair out because
that speech should have been made by the Director of
the Budget.

Is that why you did not use these figures?

Mr. Seltzer: That's why I did not go into great

detail. That' 8 why I lumped them.
HM,Jr: Let me do this myself and see what it looks

like. I don't see how to compare these figures.
Mr. Seltzer: You have receipts instead of expenditures (referring to HM, Jr's list). There is your

regular

148

149
-16-

HM,Jr: But I want to make these things check.

That's $3,264,000,000.

Mr. Seltzer: They changed that upstairs.

HM,Jr: Do they refuse to give you figures in the

Budget?

Mr. Seltzer: No. I did not ask what the 1939

Budget estimates would be, but for 1938 they gave me

a few slight revisions. They changed that $3,264,000,000.

do it HM,Jr:
in ink. Let me see if I can squeeze this in. I will
Mr. Seltzer: You get $3,158,000,000.

HM,Jr: Let's just say, swinging back and forth,

in 1938 it was so much and go forward to 1939.

The regular operating expenses in 1938 were

3 billion 264 million; in 1937 they were 3 billion 158.

In 1939, the estimate at this time

Mr. Seltzer: There we have not any estimates from

the Budget Bureau.

them. Should we?

1939,I have not even asked them for

HM,Jr: Yes.

Mr. Seltzer: Fine. Tickled to.
HM,Jr: Well, we don't know. All I know is I do

know that the President said that they should not be

above 3 billion. I was there when he said that, which

would show a decrease.

Mr. Seltzer: Better than a quarter billion.

$264,000,000.

HM,Jr: Of $264,000,000. In 1938 Social Security

cost the Government

Mr. Haas: Social Security taxes.

- 150
-17-

tive.

Mr. Seltzer: This is both reserve and administraHM,Jr: Expenses of Social Security will be 813

millions. In 1937 they were 452 millions.
Mr. Seltzer: They will be up by 100 million.
HM,Jr: In 1939 they will increase by 100 million.
In 1938, Public Works are 826 million and we already
have on our books obligations for 695 million.
Mr. Haas: But that does not necessarily have to
come out as an expenditure.

Mr. Seltzer: There are actual appropriations available for 1939 expenditures. In addition you have some
Road stuff that has not been appropriated.
HM,Jr: I want to handle Roads separately.
Mr. Seltzer: They are separate. This is only the
stuff that 18 available for 1939; been appropriated.
HM,Jr: Let's go back. In 1938, Public Works,
695 millions; in 1937, 1,065 millions. We are obligated
to spend for 1939, 695 millions.
Mr. Seltzer: You are obligated to spend more than
that, but your actual appropriations
HM,Jr: Our appropriations call for an expenditure
of 695 millions. What do you mean, we may have to
spend more?

Mr. Seltzer: You have made obligations for higher

expenditures.

HM,Jr: Is Roads in here in one separate item?
Mr. Seltzer: Yes. On Public Works there may be
some obligations in here not covered by appropriation;

some Public Works don't get finished and may have made
commitments.

HM,Jr: That's supposed to be in here.

Mr. Seltzer: Just a matter of phrasing.

151
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HM,Jr: Well, just say it my way for the time being.
I think 695 millions is correct, which would be, if not
another dollar was appropriated, would be a saving of
131 millions. Unemployment Relief this year, 1 billion
680. That seems small. I thought it was more than that.
Mr. Seltzer: They changed that to 1 billion 680;
last year, 2 billion 416.

HM,Jr: In 1937 it was 2 billion 416. Next year --

does that include C.C.C.?

Mr. Seltzer: Yes.
HM,Jr: Next year we ought to get by with 1 billion 2
or a saving of 480 million. This year we are going to
spend 475 million for A.A.A.?

Mr. Seltzer: Yes, right there.
HM,Jr: I keep using 440 million.

Mr. Seltzer: This is the breakdown that the Budget

Bureau makes. If you take the budget summation you get

a different figure.
Mr. Haas: I think they put everything that was
agriculture -- roads, etc.

HM,Jr: May I say these figures will have to check

with the budget summation.

Mr. Seltzer: If you stick to the budget summation
you can't do it this way because they spread the thing
around in different accounts. This is the only respectable presentation of the thing.

HM,Jr: All right. We will argue about that after-

wards.

HM,Jr: A.A.A., 1938, $475,000,000. 1937, how much?

Mr. Seltzer: 534 millions.
HM,Jr: Next year?

Mr. Seltzer: Let's just hope!

152
-19-

Mr. Haas: You had a figure -- in other words, 1f
anything new they had to have revenue to carry it.
HM,Jr: Just a second.
Mr. Seltzer: You can't say anything about 1939 there

until Congress meets.

HM,Jr: Yes, you can. For this purpose I am going
to leave that blank.

I am just groping. I don't pretend to be doing anything else. In 1938 these items total 7 billion 058.

You haven't anything in there for roads?
Mr.

Seltzer: Yes. But in this year they are up in

Public Works. We can, of course, take that out and put
it down here.

HM,Jr: I think there was 24 million, if I am not

mistaken.

Mr. Seltzer: I have that on another sheet, not here.
HM,Jr: Well, the money Congress voted in this fiscal

year was 24 millions.

Mr. Haas: It may have been voted the previous year.

It's more than 24 millions. It's 200 odd million, something.
Mr. Seltzer: Amount to maybe 250 million.
HM,Jr: What are the comparable items in here? Anyway,
in 1938 we will spend 7 billion 346 million, which 18 "X"
millions of dollars less than we spent in 1937 -- whatever

that is. I want public highways down here. See?
Mr. Seltzer: Yes.
HM,Jr: Now this is the thing. The best estimate that
we can make at this time for 1939, not allowing anything
for agriculture and not allowing for any appropriation for
roads is -- do you mind if I change these figures here? Now,
as I say, that leaves, we know we have to spend 5 billion
800 million. That we know we have to spend. Now, as to
good roads, Congress has voted 24 millions to be spent be-

ginning with the year July 1, 1938. If we add to this

153
-20-

another 51 millions and we will have 75 million to spend
for good roads for the year beginning July 1, which would
be the same figure that they used to spend prior to the
depression. And, considering the fact that during the
last four years

Mr. Seltzer: Runs higher, you see.
HM,Jr: Well, I am only quoting somebody else. Well,
where the devil did we get that figure there?
Mr. Seltzer: The figures you get from Lawton are
the figures showing Federal grants to States;in addition
to that we spend some money directly. We have, during
this period for example, had emergency funds for roads
in addition to these State allotments and there may be
some such figures in here.

HM,Jr: Well, let's put it this way then. Let's be

reasonable. As I say, Congress has already voted 24
million to be spent for the year begining July 1, 1938.
In view of the fact that during the past four years we
have averaged approximately 250 millions a year for good
roads, exclusive of the money spent by Hopkins, it seems
more than reasonable that we could for the coming fiscal
year drop back to a total expenditure of 100 millions a
year, which would mean that we need an appropriation of
75 millions.
Mr. Haas: You may not need an appropriation.
Mr. Seltzer: Did Lawton think you could get away
with that?

HM,Jr: The President is willing to send a special
message to this Congress to do away with the whole thing,
but this is the one thing the President feels very
strongly on. So that's why I have chosen the people
in this room. I want open minds. I don't want anybody to tell me this is the way we have always done it

or I can't. I very carefully picked who is here today.
I am so sick and tired of -- listen, 1f I listen to
Lawton and the rest of the fellows we will never balance
the budget. We just won't do it. I am trying to do
original thinking. I am trying to do this thing so I

can show the President how this thing can be done. If
we listen to those fellows back there, we will never
do it. Incidentally, put down a memorandum that out

154
-21-

out of this thing should come a letter from the President
on good roads. A special message.
Now, to the 5 billion 808 we add 75 million forThis
good
roads, which brings our total to 5 billion 883.
doesn't look right. I am groping. Is everything in
there except agriculture?
Mr. Haas: Yes, but debt retirement you haven't got
in there.

HM,Jr: All right.
Mr. Seltzer: You probably will get recovery of

100 millions.

HM,Jr: Now, wait a minute. Up to now I am doing
this thing on a straight cash basis.
Mr. Seltzer: This is cash basis.
HM,Jr: We don't have to put anything down

Mr. Haas: He's right. There is something bothering
your figure. A year ago when you compared your figure
you had that in.

HM,Jr: Let's for a minute forget that. Where are
my expenditures?

Mr. Seltzer: Here are the supplemental and it means

you spent that this year. It's supposedly a non-recurring
item, but each year they manage to find a few millions of
that type.

HM,Jr: I don't want to put down 200 millions for
supplemental.

Mr. Seltzer: I don't think you ought to for 1939.
We

HM,Jr: We now have a figure of 5 billion 883.
put down nothing for crop control, which is the big
question. Depending on how much we add to this figure

for agricultural crop control is the final determining
factor of what our total expenditures will be for 1939
exclusive of debt retirement.
Now let's take a look at our revenue side for a

155
-22-

minute for 1939. What does our revenue picture look
like? Where are our revenue figures?
Mr. Haas: Those we make up about November 15th

or thereabouts. We had a preliminary figure of 7 billion 1.
HM,Jr: Our preliminary revenue figures now look

as though we might expect 7 billion, in revenue, of
which how much is Social Security?

Mr. Seltzer: Around 900 millions.
HM,Jr: Of which 900 million is Social Security.
So, exclusive of Social Security our revenues will be
about 6 billion 1. - Then Social Security will almost
wipe itself out.

Mr. Gaston: It will over a year. It has this

year; more than wiped it out.
HM,Jr: Let me stop here for a minute. We take
in about 900 millions worth of Social Security money.
Ag I understand it, with that I issue to them a special
3% certificate.

Mr. Gaston: For about 5 or 600 million of it. The

rest is administrative expenses and grants to States.
Mr. Seltzer: You pay your administrative expenses.

HM,Jr: How much is left? Of this 900 millions

that has come in, how many things

Mr. Seltzer: This 900 million is what you spend.
You might take in about 600 because you have some Social
Security expenditures that are not covered by the tax.
HM,Jr: I take in 600 and spend 900?
Mr. Seltzer: These are expenditure, not receipts,
figures.

HM,Jr: You say I am not going to spend 900. How
much am I going to take in.
Mr. Seltzer: My guess is 600.

Mr. Gaston: Larry, it's 770 for this year.

156
-23Mr.

Seltzer: You take in less than you pay out.

Hth,Jr: How much?

Mr. Seltzer: I don't know.
HM,Jr: How long would it take you to find out?
Mr. Seltzer: About 3 minutes. (He left the meeting.)
HM,Jr: Well, find out.
I am groping very slowly and I don't want to be rushed.
Let's say the figure almost balances itself. What I have
not got clear in my head, if we take in 900 million Social
Security and we issue these 3% certificates, where do we
get the money to go out and buy Government bonds to retire?
That's what isn't clear in my mind.
Mr. Haas: You get it on the tax receipts, but now
when you are operating -- when receipts and expenditures
don't balance you have to do it the other way, of issuing
certificates.
HM,Jr: It doesn't make sense to me because I know

it isn't so. We are going to retire 1 billion or 11 billion
Government bonds, but we are not doing it.

Mr. Gaston: Because of gold sterilization and deficit.
Mr. Haas: That's right.
Mr. Gaston: But gold sterilization does not come in;
it's debt.
HM,Jr: Let's say we had no sterilization.
Mr. Gaston: Then the deficit would be the only thing
that came in.

(Mr. Seltzer returned.)

Mr. Seltzer: Receipts: 757 in 1939; 764 in 1938;
expenditures: 1939, we figured on 900 and some millions.
The difference is accounted for by our grants to states,
primarily.

H",Jr: This is what I want to talk about. Either

I am cock-eyed or somebody else is. Nobody has explained

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it. If we spend 900 and take in 750, we are short
150 million. Where do all these people, like Lippman
this morning, talking about retiring 1 billion public
debt next year in addition to Social Security?
Mr. Seltzer: In addition to this Social Security
you have a trust fund holding funds collected by the
States for unemployment insurance, which this year amounts
to, I believe, 500 million. The States are allowed to
draw on that fund to pay unemployment benefits after
their system has been in operation for two years. Hence
this year Wisconsin, I believe, is the only State entitled
to draw anything out of the fund and all the rest are
putting into the fund. In the me antime you have that
500 million available, like any other cash. Now, next
year you are going to have the same thing. A few more
of the States will be able to draw funds out for unemployment benefits, but more States will be paying into the
fund because this year a lot of States did not have unemployment systems.

HM,Jr: Let's talk about this year. How much money

do we get in? We take in how much money on Social Secu-

ity taxes this year?
Mr. Seltzer: Under the tax you take in 764 million.
HM,Jr: All right. And the money the States deposit with us this year?
Mr. Seltzer: I don't know the figure, somewhere
around 500 million.

HM,Jr: So, roughly, 1 billion 200. That goes into

the Treasury, against which we spend how much?

Mr. Seltzer: Against which your cash expenditures

have been very small. 200 million for administration, a
little bit for grants to States which are not deducts
from these receipts; "come out of your general fund, and
the rest is non-cash expenditure for public debt items
that you put into trust funds.
HM,Jr: But what are we doing for this year.
take in 12 billions and spend?
Mr. Seltzer: Say 200 million.
HM,Jr: Under 1 billion. Does that billion go towards
We

158

-24-

balancing the budget this year?

Mr. Seltzer: No.
Mr. Haas: Explain why.

Mr. Seltzer: It does not go into balancing the
budget because we count as an expenditure these interestbearing instruments that you put into the fund and you
charge that as an expenditure against the budget just as
if you paid out cash for something. Even though you
pay out no cash, you have that cash available to retire
debt.

HM,Jr: What I am leading yp to is this: I am not
a bookkeeper; I am not an accountant. I want to do it
very slowly. I don't see, taking this figure -- the
nest thing is to do it for 1938. If in 1938 our expenses
on this thing here is 7 billion 346, I say less receipts
from Social Security and States is how much?

Mr. Seltzer: Less your tax receipts of 764 million.
HM,Jr: What's this 813?

Mr. Seltzer: Those are expenditure figures, but
they are non-cash in part.
HM,Jr: Let's just take Social Security out of this.
Mr. Seltzer: Yes.
HM,Jr: On both sides of the ledger.
Mr. Seltzer: You can't do that because some of your
Social Security expenditures are chargeable against your
budget, like salaries. We get no taxes to pay those expenditures. Other Social Security expenditures are covered
by specific taxes. You see, your grants to the States
are not covered by taxes.

Mr. Haas: Take out contributing old-age part of the
Social Security.
Mr. Seltzer: Then you would only take out the part
that goes into the reserve.
Mr. Gaston: You could take out excess of back ex-

159

-25-

penditures over receipts anf say Social Security cost
us 30 million in 1938 or thereabouts.

Mr. Haas: Here's the point. What we call in
the budget as entered as expenditure is composed of
two parts; (1) actual cash. You have to pay somebody's salary. The other part of what is entered
as expenditure is an amount which is credited to this
trust fund. There is no cash outlay at all and in
your cash drawer, the cash remains the same. So you
can use that cash as you use it now, to pay deficit,
rather than to go into the market to borrow money on.
Or if you don't have a deficit you go out and retire
bonds.

Mr. Seltzer: If you wanted to deduct anything
you might deduct non-cash expenditures, in which case
you would deduct 1 billion, roughly.
HM,Jr: What I am groping for is this: This
Social Security thing, there are two things which
don't belong in an ordinary business budget. One
is Social Security and the other is revolving fund.
Mr. Haas: Yes.

Mr. Gaston: That's right.
HM,Jr: If we could eliminate those two things
Mr. Haas: We could write that thing up.
Mr. Seltzer: That's a good approach provided
you did not stick to your words. We would have to
include in expenditures those Social Security expenditures not covered by taxes.
HM,Jr: What would you do with those? Leave them

in the budget?

Mr. Gaston: Yes, as the only item of Social Se-

curity expense.

Mr. Seltzer: Yes. That 20 million is covered
by tax. Grants to States is not covered, and we

could take that out yearly.
HM,Jr: What I am trying to get out, and I have

160
-26-

never seen these figures -- after all, the President
ought to get legislative authority to stop all revolving funds so that we could do it the way we are
going to do Commodity Credit. That's an example.
All revolving funds should be treated that way. Take
Commodity Credit. Once a year take inventory, find
out if capital has been impaired and if it has, go to
Congress and ask for 50 million to make this up. Set
up these agencies on a different basis. Farm Credit
is set up that way. They have no revolving fund.
We set up Commodity Credit. Capital belons to them.
PWA is finished and anything they are going to draw
on us in the future we can set that off on the
side
future,
and the same way with RFC. And so, in the

1f any agency -- it will be either of one or two
types, either it will come to the Government through
the Director of the Budget or though the Committee
on Appropriation, get his fund and against that we
will raise taxes or we will set it up like Commodity
Credit and give them their own capital and then

when they want to borrow, all the Government does

is guarantee their obligations.
Mr. Seltzer: In that case they don't need capital.

HM,Jr: I would like to set up all revolving funds
out of the budget. I would like to look at that. That
has nothing to do with Social Security. Then Social
Security, take a look at it, just charging to the Budget
actual expenditures for help, pencils, paper, whatever
goes into an expenditure, and then taking the rest of
it -- if the State of New York gives us 25 millions to
act as trustee and we accept that money, why should that
show up as an expense?

Mr. Gaston: It does not.
HM,Jr: Well, Herbert, please don't upset me. I
am trying to get an entirely new idea. Nobody has put
this thing down here. I am trying to think this thing
through 80 I can explain it to Jones or anyone in this
town -- I don't understand it.
Mr. Haas: The way you are driving for, you have
your budget balance now.

HM,Jr: I think SO.

Mr. Haas: Does that bother you? It did bother

161

-27-

us because we tried to paint a black picture.
HM,Jr: What I am trying to do on this thing -- every
minute here is worth its weight in gold. I don want to
kid anybody. The last person in the world is the President. I don't want to paint it too blue. I don't want
to kid myself, but after these things have been set up the
way they are, if we are going to do the thing entirely new
how would you do if you started right from the beginning.
going
Let me say to you, we have Social Security. We are
to start that again. We have no revolving funds and you
are going to set up a new set of books. If you set up a
new set of books, how would it look?
Mr. Haas: You could handle the bookkeeping, but not
the economics, because no matter what you call it if you
take 800 million from the wage earners you put that to
the use of retiring public debt. You are just takingsame
tax money, using it to retire public debt. At the
time you set up a fictitious debt obligation of a new
kind to the same taxpayers that won't come due until God
knows when. There's the economics and bookkeeping -separate.

HM,Jr: Say it again.
HM,Jr: I say it's easy enough to set up books for
what you want and you can show a straighter budget picture
than you have right now, but when you get through, you
have a clean bookkeeping arrangement; you won't necessarily
have clean economics, because no matter how much you
call Social Security receipts tax receipts, the fact remains
they are just like tax collections and if you don't currently
spend them you are taking out of the public money that 18
not going back to the public.

HM,Jr: And the answer to that is if this picture I

am beginning to see is correct, then out of these tax
receipts we are getting enough and we should not try to -if you said to me, Morgenthau, if you could write the ticket
how much would you like to receive over and above expenditures, if you ran the Government on a receipts and expentures basis, and after you balance the budget and spend
and receive so much out and those two things balanced, how
much over and above do you want your receipts, I would say
1

billion. If I could take in 1 billion more than I spend

I would be the happiest man in the Government as far as
my position goes.

162
-28-

Mr. Haas: That's a very difficult thing.
HM,Jr: I never have understood it. I will be perfectly honest. You know, I never admit a thing as understanding it until I do. If we are taking 800 or 900

millions in taxes from the taxpayers, which we are as I
get it, we are taking that money and we are using it, as
long as we are in the red we are using it for spending
purposes.

Mr. Haas: That's right.
HM,Jr: And faking it by using 3% certificates.
Mr. Haas: Instead of going to the market to borrow
your money for the deficit, you are borrowing it from these
workingmen.

HM,Jr: Now, if we are taking 800 or 900 million from
the factories and the workingmen, but before doing that we
can strike a balance, I would say that's enough for next
year.

Mr. Haas: You have a perfect picture.
Mr. Gaston: We are doing that this year.

Mr. Seltzer: I would like to see Social Security
are
funds take care of our debt retirement. Then you

O.K., because you can balance your budget and you can

collect these taxes without these harmful economic fac-

tors that we are all scared of.

HM,Jr: Let's try to do one. Let's try, George
if you look at anything else today I will be angry. Get

Larry and anybody else. Don't answer telephone calls.
Mr. Haas: I am out.
IM,Jr: Go to your home, or go some place. In the
first place, set this thing up on what would be a delight
to a bookkeeper, a good auditor.

Mr. Haas: Not a Government bookeeper.

HM,Jr: No. Do you need an auditor from outside to
sit in?
Mr. Haas:

No.

We know enough about it.

163

-29-

HM,Jr: Set this thing up. Set this year's books

How
up on what would be Price-Waterhouse's way if they were
given the job of setting up the Government books.
would they set them up. Now, if after setting them up
and I find how we are financing this Government, we are
financing it out of Social
Security receipts and repayThe way I would like to do would be
ments from RFC.
to have enough taxes to pay for all the running expenses
of the Government, and then every dollar we take in from

revolving funds, Social Security, should go for debt retirement.

Mr. Seltzer: You run into the law then.
HM,Jr: Let me give that picture to the President

and I know I can sell it. I will go over it again.

Let me raise enough taxes to pay every dollar of Government expenditures, then every dollar that comes in from
revolving fund plus Social Security should go into debt

retirement. That has nothing to do with gold sterilization. That's an entirely different proposition, because
then you get into the total debt which has nothing to do
with it. After that, if from revolving fund and Social
Security I can write down 1 billion debt and at the same
time I have to borrow another 1 billion for gold sterilization, well we will treat that the very, very last thing.
Mr. Seltzer: In this bookkeeping system we are not
going to say boo about your gold sterilization.

HM,Jr: I have done a lot of talking. Gaston has
been very good. Now you talk.
Mr. Gaston: I think in the economic situation,
probably that's all we could expect to do is just that -have a laymen's balance of the budget and then debt retirement would be confined solely to the Social Security
trust funds and old-age retirement fund plus your recovery
from the agencies. You would then have a true balance
without any of this sinking fund nonsense in expenditures,
which is somewhat different from the proposition that we
originally laid out.
Mr. Haas: This is a real balance.
HM,Jr: You know what I would call this? A business
man's balance. A business man's balance sheet. That's

164
-30-

what I would call it. Listen, if I have a business

and I have got a $15,000 mortagega and the fellow pays

off $1,000 a year, do I take that $1,000 a year and add
don't I?

it to my revenue? No. I write down my capital by that,
Mr. Haas: Yes.

HM,Jr: I reduce my capital by $1,000. If I went
to a bank and showed him that with my receipts -- the
fellow paid back the mortgage -- that I used reduction

of mortgage for expenses, they would think I was crazy.
What I want is not a layman's balance, because the Pres-

ident has put that in disrepute; what I want is a business man's balance sheet.

Mr.Seltzer:Income account.

HM,Jr: No, balance sheet.
Mr. Seltzer: Income and outgo is what you are talking about. Income account.

HM,Jr: Are either of you fellows certified public

accountants?

Mr. Haas: No.
HM,Jr: Have you got one back there?

Mr. Haas: I don't know if any of the boys out there -

we have some good accountants.

Mr. Gaston: There is just this thing to be said about
that, that under the theory of this Social Security thing
in taking in these taxes on Social Security we are undertaking the obligation of making payment and the theory of
setting up reserve accounts as you make investments each

year is a liability that you are not taking into account,
so I think a good many bookkeepers would say if you have
only these Social Security funds to invest in debt retirement that you are short of a true balance in your books
to the amount of the investment in that old age account,
which would be some 600 millions of real liability that
you are not taking into account.

HM,Jr: Well, listen. I can't go any further today.

Have you fellows got what I want?

165

-37-

Mr. Seltzer: This is not for your speech? Do we
put this into your speech or a memorandum that you will
show to the White House?

Mr. Haas: Here's a question I would like to ask.
The
second part of your speech, do you want to go on
from there to show the people -- in other words, you have
indicated you wanted a balanced budget. Do you want the
second part of your speech to show how this is going to
be done? If so, you could use this.
HM,Jr: I want to show how this can and should be
This is the research work which, if it looks good,
done.
we will then popularize it and put it in the speech.
From now on I would like to show in the speech -- I
would like to lay down the policy of what we should do on
Government receipts and expenditures for next year -- what
I, Henry Morgenthau, think. In order to do it I have to
understand it myself and I don't yet, because you have two
things in there which completely distort the picture, one
is Social Security and one is revolving funds.
Mr. Haas: Then I would say the next thing to do is
to get this set up, as you call it, from a research point,
in a memorandum explaining it and then if you like it we

will try to put it in the speech.
HM,Jr: That's right. I don't want to crowd you,

but by this time tomorrow try to have something for me.

Mr. Seltzer: You don't want all these other figures?
HM,Jr: No. The question is, we have laid down the
principle of what it should be balanced; now let's talk
about how we are going to do it.
Mr. Haas: What is a balanced budget and that's what
you are working on now.

Mr. Gaston: I think this task you are setting is not

very hard and maybe it should be harder. From the picture
of receipts and outgo we are having a balanced budget this
year.

HM,Jr: I was willing to go before this group thinking
what I was talking about was impossible. Let's take it a
little from this standpoint. I am saving 10 to 12 for you
tomorrow.

000-000

read first beef 6. 166
at meets

seepOct
this
26.
(nnc
Address of the Secretary of the Treasury, to be

took the
Delivered before the Academy of Political Science,
at the Hotel Astor, New York City, Wednesday Evening, meeting)
November 10, 1937.

I am glad to accept the invitation of the Academy of
Political Science to discuss before its members assembled

here tonight the subject of Federal spending and its relation to the balancing of the Federal budget.
Nineteen years ago tomorrow, we signed the Armistice

ending the World War. That war was unbelievably costly in
human values, and it was enormously costly in material

values. In the two years between the middle of 1917 and the
middle of 1919, the Federal Government spent thirty-one

billion dollars and sustained a net deficit of twenty-two

billion dollars.
During the past four years, this country has been engaged in another war. This time our enemy was a great
economic disaster. In this war we bombed no cities; we

167

-2machine-gunned no trenches; we killed no human beings.

In this war, we fought with jobs and with dollars to save
farmers from losing their farms; to save home owners from

losing their homes; to give not only bread but work to the
unemployed; to increase the security of jobs, property

values, and business profits; to bring order out of chaos
in our economic system.

This war, like that other war, required a many-sided
campaign under intelligent and courageous leadership -- a
leadership that was superbly supplied by President Roosevelt.

Finally, this war, like that other war, required a
large spending program. This program, plus the special
needs arising out of the great drought and the prepayment

of the soldiers' bonus, necessitated outlays during the
four years ended June 30, 1937, of some fourteen billion

dollars in excess of our receipts.

168

-3We deliberately used an unbalanced Federal budget

during the past four years to meet a great emergency.
That policy has succeeded. The emergency that we faced

in 1933 no longer exists.
I am fully aware that many of our problems remain un-

solved. I am aware that there still remains a considerable
volume of unemployment; that the speculative markets have

recently been under severe pressure; and that certain of our
business indexes have recently shown a declining tendency.
I am further aware that some persons contend that another

great spending program is desirable to ward off the risk of
a serious business depression.

I claim no prophetic insight into the future. But,
after giving serious and prolonged consideration to all
these and other factors, I have reached the firm conviction
that the domestic problems which face us today are essen-

tially different from those which faced us four years ago;

-4and that their solution, though requiring other techniques

as well, will best be furthered in the present juncture by
a balanced Federal budget.

Early in 1933, after three years of progressive deterioration, our whole economic mechanism was demoralized.

At that time there was no agency outside of the Federal
Government with the resources and the courage to bring about

a revival.
Today the situation is greatly changed. We are now in
the eleventh month of one of the most active years in the

business history of this country. On the whole, this high
level of activity has been of a healthy character -- not of
the character that usually marks an unhealthy boom and pre-

cedes a serious depression. The present situation is not
characterized by the existence of huge inventories, high

interest rates, over-extended credit positions, or great

169

170

-5surpluses of housing accommodations, capital equipment,

et cetera. We have not reached the stage of full employ-

ment. On the contrary, from all these standpoints, conditions are favorable for a continued increase in the level
of business activity.
This situation stands in sharp contrast to the banking collapse, the bread lines, the bankruptcies, and the

general demoralization of 1933. It also stands in contrast
to the unhealthy excesses of 1929.

The basic need today is to foster the application of

the driving force of private capital to the present favorable circumstances. We want to see capital go into the
productive channels of private industry. We want business

profits to grow. We believe that a large part of the remaining unemployment will disappear when private capital

funds are actively employed in productive enterprise. One

at this juncture

of the most important ways of doing this^ is to balance the
Federal budget.

-6-

171

In this connection, I should like to point out that
the underlying technical conditions that made deficit spending the wisest kind of economic policy during the depression
no longer exist. Thus, when we borrowed during the depression

to finance our deficit spending, a large part of the funds
we.s obtained through an expansion of bank credit. To this

extent, our spending did not absorb capital funds available

for private industry, nor did it absorb taxpayers' funds
available for private consumption expenditures. Even to the
extent that our bonds and notes were purchased by non-banking

investors, the effect was largely to make use of capital
funds that would otherwise have remained idle.

The situation today is greatly changed. Our industrial
recovery has created large new demands for private capital.

Our commercial banks are now utilizing their credit re-

sources again for the financing of private industry. During the first nine months of the present calendar year,

-7the weekly reporting member banks of the Federal Reserve
System reduced their holdings of Government securities by

fourteen hundred forty-five millions in order to meet actual and prospective demands for commercial credit. The

obligations that they sold, plus an amount equal to the
securities newly marketed by the Treasury, were purchased

by investors. Any deficit spending that takes place under
these conditions must be financed in large part by capital
funds that would otherwise be available for business purposes. The sizeable national problems that remain should

be attacked, in my opinion, strictly within the limits of
the balanced budget.

There is a further consideration of great importance

that I should like to emphasize. That is, that the basic
philosophy of our deficit spending of the past few years requires that a program of substantial debt retirement be
undertaken shortly.

172

173

-8We wish to preserve the financial power of the Federal
Government to aid in restoring economic order in the future,
1f the need again arises. To preserve this power, we must

liquidate during prosperity the debts incurred during periods of depression.

Despite the substantial increase in the public debt
during the past four years, the credit of the Federal
Government has remained absolutely unimpaired. Not once

during even the darkest days of the depression did the

Treasury experience the slightest difficulty in borrowing

all the funds that were required. The rates of interest
on our borrowings, moreover, have been lower, for comparable

securities, than at any other time in the history of the
country.

However, this unimpeachable credit position of the
Federal Government has been maintained because of the con-

viction of investors that the Federal budget was only

-9-

174

temporarily out of balance; that with business recovery
substantially achieved, the President, the Congress, and

the American people generally could be trusted to join in
a whole-hearted and successful determination to balance the
budget and to reduce the public debt.
That time has now arrived.

To keep faith with the investors in Government bonds;

to maintain the integrity of the credit and currency of the
United States; to avoid draining capital funds from private
industry; and to keep open unimpaired the future possibility
of the use of deficit spending by the Federal Government as

a stabilizing factor in industrial breakdowns, it is essential that we now fix our course to bring about a full balancing of the Federal budget for the fiscal year beginning
next July 1.

175

- 10 That time has now arrived.

To kee faith with the investors in Government Bonds;

to maintain the integrity of the credit and currency of the
United States; to avoid training capital funds from private
industry; and to keep open un paired the future possibility
of the use of deficit spending by line Federal Government as

a stabilizing factor in industrial break wns, it is essential that we now fix our course to bring about a full balanding of the Federal budget for the fiscal year beginning
next July 1.

Let me turn finally to the immediate practical prospects of budget balancing, beginning this very next fiscal

year. I want to be completely frank with you: The difficulties will be almost insurmountable.

- 11 "Balance the budget" is a kind of slogan that many

people voice without a real understanding of what it involves. Budgets don't get balanced merely by a general

desire to balance them. Specific expenditures must be cut,
which involves painful curtailment of otherwise desirable
activities; or revenues must be increased, which usually
means a reduction in private expenditures. There is no
painless magic way to balance the budget.

First of all, to eliminate this year's net deficit
of seven hundred millions and to provide six hundred millions for debt retirement, we must somehow bring about a net

improvement of thirteen hundred million dollars next year
over this year's budgetary position. That means, unless
receipts should increase, we would have to limit our total
net expenditures to six billion dollars as compared with

seven point three billions this year.

176

- 12 -

Now see how difficult it will be to do this, despite
all the good will and determination in the world:
The ordinary operating expenses of the Federal
Government, including national defense and interest on the

public debt, are running about the same as in 1932; and I

do not believe that significant savings can be looked for
here. Indeed, because of added responsibilities, these expenditures might even be expected to increase.

If we assume, however, that they will run no higher

next year than this year, and 1f we add provision for social
security and for actual appropriations already voted and

available for next year's public works, we reach a subtotal

of about five billion dollars. This would mean that to

keep within the limit of six billions of total net expenditures, we would have to cut our aggregate outlays for unemployment relief, the C.C.C. camps, and the agricultural

177

178

- 13 -

adjustment program to a total of one billion dollars, or
about half the amount allowed for these purposes during

the current year -- unless, of course, receipts increase
or other expenditures are curtailed.

I have already indicated how difficult it would be to
curtail other types of expenditures. Let me now point out
that, on the contrary, certain other types of expenditures,

at least, are likely to increase.

Let us look first at the effects of the statutory provisions which govern Federal grants to the States for public
highways. Last December the Secretary of Agriculture under

these statutes apportioned two hundred sixteen million dollars of Federal money to the States for highway projects

for the current fiscal year; and he is scheduled to make
a further apportionment of a like amount this coming December

179

- 14 -

for the fiscal year 1939. Against these apportionments,
Congress has thus far actually appropriated only twenty-

four millions. The States, meanwhile, are making their
plans and commitments for highway projects under these appor-

tionments. As the Secretary of Agriculture approves these
projects, more than four hundred million dollars of addi- -

tional appropriations, though not all of it in 1939, will be
necessary to meet the program already provided for by existing statutes.

Finally, as you are all aware, discussion is now taking
place in Congressional committees with respect to an en-

larged program of soil conservation and agricultural adjust-

ment. The figures that I have cited would appear to indicate very definitely that the Federal Government cannot

significantly increase its aid to agriculture within the
limits of a balanced budget unless tax revenues are increased
to meet any new requirements.

180

- 15 -

I have cited these very real difficulties in the path
of budget balancing because I want no one to be under any

illusions. The budget will not be balanced without very real
sacrifices and the very vigorous cooperation of all sections
of the public.
On the other hand, I do not want to leave you under
the impression that the picture is a hopeless one. We have
already made considerable progress this year toward this
second phase of our fiscal program -- a balanced budget and
adequate debt reduction; and with the wholehearted coopera- -

tion of the public the present fiscal year should prove to
be the year of transition between unbalanced and balanced
Federal budgets.

The business recovery of the past year has enabled us

to make reductions that will total some three-quarters of a

billion dollars in our outlays for unemployment relief this
year below those of the previous year. If another substantial

- 16 reduction can be made next year, with the prospect of a

continuing tapering off in the future, the largest single
source of our past deficits will have been reduced to
manageable proportions.

Similarly, if no substantial additions are made to the
already-available appropriations of seven hundred millions

for public works of all kinds for the fiscal year 1939, and
if suitable alterations in our highway program can be made

at an early date, these sources of fiscal deficits will be
eliminated.

Further, in his Summation of the 1938 Budget, the
President announced that no further new commitments would

be made by the Reconstruction Finance Corporation or the

Public Works Administration, thereby eliminating other

sources of our past deficits.

181

182

- 17 These are some reasons for encouragement on the spend-

ing side of our budget picture. On the receipts side, I
can report to you a far greater degree of improvement than
many people have believed possible.

The plain fact of the matter is that the Federal revenue

structure is stronger today than ever before in the history
of our country.

When this Administration came into office, the total

receipts of the Treasury had fallen to just over two billion
dollars a year. In each year since that time, they have
shown marked increases -- the result both of improvements

in our tax structure and of the revival in business. For
the present fiscal year, the revised estimates of receipts

total six billion six hundred and fifty millions.
In the tax revisions that Congress is scheduled to make

during the next regular session, the primary aim will not be

183

- 18 to increase the total amount of revenue to be collected.

It is my hope that, on the basis of the large amount of information which the Treasury has assembled for the use of
the Congress, adjustments in existing taxes will be made

in the interest of greater equity and of reducing any
demonstrated hindrances to legit date business transactions.

Unless appropriations are voted in excess of anticipated

receipts, the revenue yielding power of the present tax structure will be great enough both to supply current requirements
and to permit adequate provision for debt retirement.

In closing, let me remind you that it was the strong
support of the American public that made it possible for us

to bring this country out of the depression. We shall need
this same vigorous support to provide for a prompt and full
balancing of the Federal budget.

substitute for

- 12 -

public debt, are running about the same as in 1932; and I

do not believe that significant savings can be looked for
here. Indeed, because of added responsibilities, these
expenditures might even be expected to increase.

If we assume, however, that they will run no higher

next year than this year, and if we add provision for social
security and for actual appropriations already voted and

available for next year's public works, we reach a subtotal

of about five billion dollars.
If, now, we assume that relief expenditures and the
C.C.C. camps combined can be out to twelve hundred millions,

our expenditures would total six point two billions, exclusive of the agricultural adjustment program. And if this

184

185

- 13 program were limited to the present year's outlay of four
hundred seventy-five millions, our aggregate expenditures

would reach just under six point seven billions.
In other words, in the absence of an increase in receipts, and if no other expenditures were made, we would

just about balance our budget, exclusive of any provision
for debt retirement.
Now, let me point out that I have ignored some expen-

ditures that are almost certain to be made.

Let us look first at the effects of the statutory provisions which govern Federal grants to the States for public
highways. Last December the Secretary of Agriculture under

these statutes apportioned two hundred sixteen million dollars of Federal money to the States for highway projects

for the current fiscal year; and he is scheduled to make a
further apportionment of a like amount this coming December

186

October 27, 1937
10:15 am

PRESENT:

Mr. Haas

Mr. Gaston

Mr. Seltzer

Mr. Bartelt (for part of the meeting)
HM,Jr: (Reading attached draft.)
That thing about war material, that's new. I think
that's a good illustration.
Mr. Gaston: Yes. Yes.

Mr. Seltzer; Yes. Their surpluses are always ex-

aggerated in post war years.

Mr. Haas: And gives the base for cutting taxes when
they should have left them up.

HM,Jr: That's new to me, that point.
Mr. Seltzer: There is some more on the typewriter
on the Social Security aspect of it.
HM,Jr: Yes, but do you want to talk it to me?

Mr. Seltzer: Yes. I suggest that you look at what

Mr. Gaston wrote.

HM,Jr: I did. I have it right here.
Mr. Seltzer: That thing is something like this. We
had real taxes for the old-age part of the Social Security
thing. They come into the General Fund and are taxes
like any other taxes, but the expenditures that we make
will not, for the most part, be cash expenditures for a

great many years to come, 80 that for every year we get
a large amount of cash for which we make only a bookkeeping appropriation, 80 we have a lot of money available

for debt retirement. It's the only thing we can use
that money for. Now, when we include that Social Security
account with its real cash receipts and it's non-cash expenditures in the regularbudget we distort the budget

187
-2-

picture. It ought to be treated separately.
HM,Jr: Bell wants to see you 80 he can give you

some figures.

(Mr. Seltzer leaves the room.)

HM,Jr: While we are waiting, I talked to Jake Viner
about this and I said what we were thinking of doing and
it was so important I would like other people than Viner
and Rieffler to look at it and whom did he suggest. The
first suggestion he made was Dean Himmelblau. He said
he's dean of Northwestern and a certified public accountant.
Mr. Haas: Accounting is his field.
HM,Jr: And Jake said, What you want to know is how

this will react on the business man. He's an accountant.
Mr. Haas: He was quite helpful the last time he was

down.

HM,Jr: I asked what about Hague, of Columbia.
Mr. Haas: He would not know this. He would know

something about it, but that is not where he is outstanding.
HM,Jr: I read his thing in the Yale Review on balancing the budget and it was this old hackneyed stuff.
But I think Himmelblau, besides everything else, he has
a private practice, 250 small businesses that he advises
on accounting and taxes. But the only person Jake could
think of was Himmelblau.

Mr. Haas: You might have somebody who is just a

business man in whom you have confidence.

HM,Jr: The best business man in town and the most

successful, according to Bell, 18 Biggers. He's head of
Libby, Owens and they have a 25 million cash reserve.
Dan thinks he's topnotch. Everything that Dan says 18
that Biggers is the tops and is very keen to meet me.
Mr. Haas: And then I have another thing. Herbert
1s a better judge than I. Some of these good press men,
if you could trust one of them, to get the reaction because they will be writing it up.

188
-3-

HM,Jr: I wouldn't bother so much on that.
Mr. Gaston: No.

HM,Jr: No; you can't trust them.
Mr. Gaston: There are some people you could trust,
but you would be spreading it a little too wide.
HM,Jr: But you could bring in fellows like Biggers
and show it to him.
Mr. Haas: I would do that.
Mr. Gaston: A newspaperman who is going to cover

the story dislikes to be taken in confidence in advance;
interferes with his dispassionate review of the speech.
HM,Jr: Just let me clear up one thing in my mind,
one thing I haven't got clear. We started using Herbert

Gaston's figures.

Mr. Gaston: I took in only Social Security funds.
I did not take in any other trust funds.
Mr. Haas: Do you want to see a table on this thing?
(Mr. Seltzer returned.)
HM,Jr: This afternoon we are going to have Gaston,
Haas and Oliphant. We are going to have a preview on

what Magill prepared. He's going to read it to you this
afternoon. I wanted you to be a little patient.
Mr. Gaston: That will satisfy a great personal curiosity.

HM,Jr: I consider it one of the most important docu-

ments if the President will put his O.K. to it.

Seltzer, come around and explain this table.
Mr. Seltzer: Here's your operating budget receipts

and expenditures.

HM,Jr: That's for this year?

189
-4-

Mr. Seltzer: 1937-1938. These are operating re1936-1937. In other words, this is the year we are in
now.
ceipts, incoming taxes, miscellaneous, etc., down to

HM Jr: This is the way it is set up now?
Mr. Haas: No. That period, the one you are looking
at, is but that 18 supposed to be 8 representation of a
businessman's budget.

come

HM,Jr:
All right. This is operating receipts, inand profit taxes.
What is that figure?

Mr. Seltzer: There is a difference between collec-

tions and daily Treasury statements.

HM,Jr: Need I bother with that?
Mr. Seltzer: No.

Mr. Seltzer: Total internal revenue.
HM,Jr: You are bringing this figure down, plus

customs plus miscellaneous get that much?

Mr. Seltzer: That's right. Those are your total

operating expenses.

HM,Jr: I thought we would say 6 billion 650. Oh!

You have taken our Social Security.

Mr. Seltzer: Sure. We have also taken our that
R.F.C. stuff too.
HM,Jr: Operating expenses, legislative, national
defense, veterans, unemployment relief, total operating

expenditures, 7 billions; deficit, 2 billion 8. This

is just what I was going to do. You are one ahead of
me. That's 692, which checks with --- it shouldn't check.
Mr. Seltzer: That checks. All you have other than
that
HM,Jr: Why should this check if -- have you got

Social Security in here?

190
-5-

Mr. Seltzer: No. When you come down
Mr. Haas: On the expenditures side they check because most of those would be attributed to operating.
HM,Jr: We received that much in '37 and we are pay-

ing out that much in '38. Why do you put it minus?
Mr. Seltzer: It's a negative expenditure. We re-

ceived that much more than we paid out.

HM,Jr: Why won't it be plus?

Mr. Seltzer: It's a negative expenditure. If you

want to say receipt, it would be under receipt.

HM,Jr: That's such a funny one under expenditure.

How much have we spent, net?

Mr. Seltzer: In this year we spent, net, a negative
250 million. We got in 250 more than we paid out, but
in this current year we are paying out 850 million net.
HM,Jr: I will come back in a minute. It seems to

me like a double negative. Would the sentence change
your figures if I changed words?

Mr. Seltzer: No use in

HM,Jr: Expenses for recoverable assets, net recovery.
Mr. Seltzer: You see, in some years there are going

be net receipts. In other years they will be net ex-

penditures.

HM,Jr: Would net investments -- would you mind that?

Mr. Seltzer: I prefer that.
HM,Jr: All right. Net investments for recoverable
assets. I mean the net amount we paid in. We not only
put it in but we took back 250 million. Well, for my purposes, I am going to make that plus. And this year I am
going to put that minus.
Mr. Seltzer: O. K. As long as you know what you

are doing.

191
-6-

HM,Jr: Our net investment. We gained 250 million
this year.
year.

Mr. Seltzer: We reduce our investment by 250 this
We increase it by 108.
HM,Jr: Old age benefit program?

Mr. Seltzer: Here, let me give it to you the way I

would like to set it up. I put at the top, total receipts

minus administrative expenses. Then I would say minus appropriation for old age reserve account, balance should be

zero, 80 that thing 18 a self-cancelling proposition.

HM,Jr: But it isn't.
Mr. Seltzer: Well, it isn't because we had not gotten

the figures for administrative expenses.

HM,Jr: All right. Now on this side.
Mr. Seltzer: That's another year.
HM,Jr: And you get a total last year of 2 billion 8.
This year 896.
Mr. Seltzer: I crossed this out because you had
sinking
including deficit and I did not want to include it fund
in there.
HM,Jr: What's what I have been groping for. Now
when the President said over the 'phone, the other day,
that he wanted three budgets, he did not mean that, but

he's been groping just for this. The thing that frightens
me about this -- I want to talk quietly -- I don't want
this thing to look 80 good that the drive for economy will
stop.
what Mr.
BellSeltzer:
tells me.It does not look very good, not from
Mr. Haas: For 1939.

HM,Jr: Well, what I was going to say is I want the

three years. L936-1937, 1937-1938, and now I want 1938-1939.

192
-7-

Mr. Seltzer: There you run into this. He has

had two hearings.

He doesn't know the total figures.
He gave me his rough guesses to go on this sheet. They

total up, including 600 million fod ebt retirement, to
billion 375; without debt retirement, 6 billion 775.
Now, he says, I can take some money out of that. Now,
he said that these are very rough figures. I just
dashed them off on my cuff and I have them down the
line for these items.

HM,Jr: Yes. But have you got in that -- have

you picked out Social Security?
here.

Mr. Seltzer: No. No. This is just on this basis

Well, now, supposing Social Security doesn't
enterHM,Jr:
into that

Mr. Haas: Yes, it does.

Mr. Seltzer: Social Security enters into it.
HM,Jr: But suppose you put in net expenditures for
Social Security, like here?

Mr. Seltzer: If you took out your tax receipts

also you wouldn't be ahead.
HM,Jr: You wouldn't?

Mr. Seltzer: No.
HM,Jr. Oh, you wouldn't?

Mr. Seltzer: No.
HM,Jr: Well, those figures,I did not have them yesterday. You see, when I had my figures you said I was

away off.

Mr. Seltzer: Well, I am not so sure about these
figures, nor is Danny. He says, For example, up here
I ought to be able to knock off 50 millions, and here,
I ought to be able to knock off 60 millions.

193
-8-

HM,Jr: Let me do this again, as of yesterday. Have
you got your sheet, expenditures for next year?

Under that first thing there: estimate for 1938, we
get a figure of 3 billion 263 for that first bracket.
Mr. 310.
Seltzer: Now, for that he gives me a figure of
3 billion
HM,Jr: Well, you see, the President says 3 billion.
All right,
3 billion 310.
Mr. Seltzer: Then, for the next group, 705 millions,
Public Works. Then, for Unemployment Relief, lbillion 330.

HM,Jr: All right. I had better keep to his figures,

hadn' t I, ,

Seltzer:

Yes. They are gross figures. You can
them. Then he did not total Agricultural Adjustment,
Social
miscellaneous, but the total amounts to
1 billionSecurity,
580.
Mr.

cut

HM,Jr: (Asked the operator to tell Bartelt to come

down right away.)

Mr. Seltzer: These three items here are 1 billion 580.
HM,Jr: No use my totaling. How much does he allow
for agriculture?

Mr. Seltzer: 600 million. This is what happens.
His regular expenditures run up to 6 billion 925. Then
he figures he will recover 150 millions from loans. That
will bring it down to 6 billion 775. Then if you add
600 million for debt retirement you get 7 billion 375.
HM,Jr: Well, we will use his figures, 6 billion 775.
Here's where' we keep going around in circles. If we just

bodily lift all Social Security out on both sides, it

doesn't make any difference?

Mr. Haas: No; except your debt retirement.

Mr. Seltzer: It doesn't on your bookkeeping. But
if you decided that all the debt you wanted to retire was

194
-9-

1 billion and if you could retire that out of Social
Security, you take out 600 million for debt retirement.
HM,Jr: If you take it out on both sides, doesn't
it reduce this figure? I mean, how can you retire that
figure of 1 billion debt retirement?
Mr. Seltzer: For this reason
(Mr. Bartelt arrived.)
HM,Jr: Bartelt, I have been sitting around 3 days
waiting for the figures on agriculture. It shouldn't
be so difficult to get one department.
You know what's involved.
Mr. Bartelt:
wait.

HM,Jr: It seems incredible. I just sit and wait and

Mr. Bartelt. I will bring(Bartelt
them right
down. I will
left.)

show you what a job it is.

Mr. Seltzer: These figures total 6 billion 775. They

include non-cash expenditures.
HM,Jr: Such as?

Mr. Seltzer: Such as for the old-age reserve account.

HM,Jr: But, as I say, let's leave that out bodily.

We put it down at the bottom.

Mr. Haas: I think I can explain it, Mr. Secretary.
HM,Jr: I mean, 1f you are going to spend your receipts

it goes round and round.

Mr. Seltzer: What you will spend for Social Security
you will spend mainly for retiring the public debt.
HM,Jr: May I correct you there? Now, you are not
doing that. Somebody is fooling somebody along the line.
(Bartelt returned.) Just sit,
If using round figures
(Bartelt) and wait until I get through with this thing.
If we take in 12 billions from the States and Social Security,

195
-10-

I am approximately right, am I not?

Mr. Seltzer: Right.
HM,Jr: And we use about 250 million for expenses.

Just let me say that my figures are right for a minute.
Talking about next year. Then we take that billion
and issue 3% certificates or 21% certificates and put
that into the Treasury, and then we turn around and
spend that money -- use that money -- spend it for other

Departments.

Mr. Seltzer: No. If your budget is otherwise balanced, use that to retire debt.
HM,Jr: But if it isn't balanced?
Mr. Seltzer: To the extent it isn't balanced.
HM,Jr: Let's make it, if Danny's figures are right,
6 billion 775. Let's just say, using that figure, 6
billion 775, regular expenditures and receipts were exactly equal. But in that, on the receipt side, come
Social Security.

Mr. Seltzer: Right.
HM,Jr: Now, the two things just don't mix. If
expenditures for Social Security and receipts for Social
Security and still the budget only balances, you can't
balance the budget and also retire 1 billion public debt.
You can only retire 1 billion public debt if you spend it.
Mr. Haas: There is a catch there.
HM,Jr: Wait a minute. The fact that these fellows
are saying because we have a billion dollars' worth of
Social Security money and issue 3% certificates that means
we don't need to borrow an additional billion, that's one
thing. That's what we are doing this year.
Mr. Seltzer: In part.
HM,Jr: Yes, in part. We don't increase our public
debt by the exact amount we have surplus in Social Security. What I am trying to get at, if next year our

196
-11-

budget 18 balanced out of receipts exclusive of that, then
we would have 1 billion dollars and then we could reduce
our public debt by every dollar over and above that we have

from Social Security. But we can't do that. But what I

can't get through my head is that the way the picture stands,
unless you leave the whole Social Security out, we won't have

any extra money next year.

Mr. Seltzer: That's where I differ.
Mr. Gaston: We are taking in, in all these Social
Security funds, 1 billion 182. That's both unemployment
and trust funds and the taxes. 1 billion 182. Of that
we are spending 182 millions for Social Security expenditures. That leaves a clean billion. Now then, we have
an operating deficit of 695 millions, so that 695 millions

of that billion we are spending for operating expenses.
We will expect to have left, if the budget summation proves
out, we should expect to have, June 30th, 306 millions
which will be used either (a) to retire that amount of
debt or (b) to increase the General Fund in that amount.
HM,Jr: That makes sense.

Mr. Haas: That's right.
Mr. Seltzer: Take your figures, 6 billion 775. Suppose our total receipts were written down to 6 billion 775.
You will balance your receipts and expenditures, but since
your expenditures will include 1 billion of non-cash expenditures you will have a billion to retire debt.
HM,Jr: This next year? Just on your figures? Say
it again.

Mr. Seltzer: Suppose that our expenditures are no less
than Danny figures, 6 billion 775. Suppose our receipts
are also 6 billion 775. We will be in balance, but some
of the expenditures included in the 6 billion 775 are noncash expenditures.

HM,Jr: Such as?

Mr. Seltzer: Such as special certificates that you
give to your old-age reserve account. We will have all

197
-12-

that cash, representing these non-cash expenditures, of

a billion or so to reduce the debt.
Mr. Haas: Here's the catch: that over a year you
have this list of expenditures that goes up to 6 billion
775, but the way you spend the billion of the Social Security is to keep the cash in your till and issue some
certificates. Now, you have your till cash built up
or you can reduce it down to normal balance and use that
balance to buy debt in the market.

HM,Jr: Which all goes back -- the only way I can
understand this thing is let's take this year and set up
this thing this year -- never mind next year -- removing
all expenditures and receipts of Social Security and put
them down in section 2. It would be very easy to take
Herbert Gaston's figures and put them down at the bottom.
Before we did that we would have a cash deficit of

Mr. Gaston: A cash surplus of 300 million this year.
Mr. Haas: Yes, you would have to show that and under
that would come receipts from Social Security, old-age
and unemployment, 1 billion 1.

HM,Jr: How much of that 1 billion 1 do we actually
spend for unemployment. How much do we spend of that?
You don't show that.

Mr. Gaston: If you are doing it on the old basis

you have 1 billion 182.
HM,Jr: This is the way the budget today would look:
at the bottom here would be surplus 300 million. Then
you would draw a couple of lines, then say Social Security

receipts 1 billion 182. Expenditures happens to be 182
millions, leaving 1 billion. Now what do we do with that
thing in the budget?
Mr. Selzer: Used 695 million to finance the deficit,
your operating deficit.
HM,Jr: And then the billion we have, issue how many
certificates against that?
Mr. Haas: The full amount.

198
-13-

HM,Jr: Now we will get right down to the guts of
this thing. Bartelt ought to know something about this.

Mr. Bartelt: I do.
HM,Jr: 1 billion 182. We spend 182 millions, leaving
roughly
1 billion. Then we issue 1 billion in certificates
on that?
Mr. Haas: Yes, but we still have the cash.

HM,Jr: But we issue 1 billion in certificates. Now
do
debt?those billion in certificates show up in the public
Mr. Seltzer: Yes.
Mr. Gaston: Yes.

HM,Jr: They do show up in the public debt? Well,
that's
point
number 2. When they show up, what's all
this talk
about?
Mr. Gaston: We create a new special debt.

HM,Jr: What's the difference?

Mr. Seltzer: It's quite a lot different.
HM,Jr: All right. Well, I still say we have a net

this year of a billion. Then the way for a bookkeeper to
show that is that with that billion of surplus from Social
Security we used 700 million to finance the Government and
then we had 300 million left.
Mr. Gaston: Yes. And we used that, not to reduce
the
gross
of the debt.debt; we only used it to reduce the character

HM,Jr: All these writers haven't got that right.
Mr. Bartelt: That's shown up in the Treasury state-

ment on page 3, the new form.

HM,Jr: Yes, but how many people read that?

Mr. Bartelt: There is quite a bit of comment about it.

199
-14-

Mr. Seltzer: From a economic standpoint, this bookkeeping presentation 1a not the right one.
HM,Jr: Now, then, second

Mr. Seltzer: The only reason that shows up in the
public debt is because that's the way the law is written.

HM,Jr: This is the first time I have done it. That's
why I am so slow at it. I have never done it. Itstill
have to read it in print. The net position of our public

debt statement doesn't change a bit? We issue a certificate
that is in our hands instead of in the other fellow's hand?

Mr. Seltzer: That's right.
HM,Jr: Now, looking at next year's, suppose we did
this on the same basis for next year.
Seltzer: You would not have any change in the
publicMr.
dent.
HM,Jr: But supposing we pull this thing down, how
much
are States?
we going12
to billions?
take in next year for Social Security
from the
Mr. Haas: From both sources.

HM,Jr: All right. Then we have that down there below.
Then say, roughly, our expenditures for next year will be
250 millions. Again we would have a balance of 1 billion.
Q.E.D. If the general cash expenditures of the Government
are balanced by receipts, then that billion could be used to
reduce the public debt by the net amount of 1 billion?
Mr. Haas: In the hands of the public.
Mr.
Gaston: No. Just change the character. Transfer
it from
one classification
to another.
If you are figuring
on
a bookkeeping
deficit of 250
millions there
HM,Jr: spend
But wouldn't
we be 1 billion dollars better off?
We wouldn't
it.
Seltzer: You would in practice, but you wouldn't
on theMr.
books.

200
-15-

HM,Jr: We wouldn't spend it.

Mr. Haas: Let me explain it.
HM,Jr: But we wouldn't spend it next year.
Mr. Haas: I agree with you. Really we would not.
Really we would be reducing the public debt, but on the

books you would show no change on the books in the public
debt.

HM,Jr: To hell with the books! I have it straight.

This year, keeping this Government on a strictly cash
basis and taking the Social Security into account, everything

else, we will end the year, 14 the figures are correct,
300 millions to the good. Looking forward to next year,
if we keep our tax receipts up to 6 billion 775, if we took
in that much money, using this set of figures we then would
balance our books on a cash basis and would have 1 billion
left over which we wouldn't use. Now, what would we do
with that billion dollars?

Mr. Gaston: It doesn't belong to us. It belongs to

Social Security funds.

HM,Jr: All right. We are using it this year.
Mr. Gaston: Yes, by increasing our debt, our theoretical debt including Social Security obligations.
HM,Jr: This year what will we do with the 300 million
this year extra?

Mr. Seltzer: This year you had your gold steriliza-

tion program.

HM,Jr: Yea, but just say we didn't have that.
Mr. Seltzer: You reduce your outstanding debt by
300 million in the hands of the public, but you don't reduce your gross debt, but it is increased because you have
transferred 1 billion Social Security trust funds and reduced the other debt, the outstanding debt, by 300 millions
so you have a net increase in the gross debt of approximately 700 millions.

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HM,Jr: Which gets back to the same thing.

Mr. Seltzer: There is a real distinction between

your bookkeeping and what you are doing.

Mr. Bartelt: I don't agree with that. I think you

have a liability which is growing here and it's just a
question of whether you are going to put it on the books
or simply issue a public debt obligation. Now, if I may,

I would like to review this situation just a little bit.

When the Civil Service Retirement Act was enacted, we
deducted 23% from the salaries of all employees and the
Secretary of the Treasury was directed to invest those
moneys in Government obligations and the Secretary did

that. He went into the market, bought Liberty bonds and
other bonds and put them in that Trust Fund. Later it

was decided, after some consideration in the Treasury,
that the Treasury could save commissions and that it would

be an easier financing operation if the Secretary of the
Treasury should issue to that fund a special 4% obligation.
Now, this old-age reserve fund is patterned along that
identical line. Instead of going out in the market and
investing these moneys in your regular obligations, you
find an easier way of doing that. You issue a special
obligation to this fund and in lieu of that you go in the
market if you have the available excess cash and retire
debt in a formal manner. Now that is about the situation.
You could, you know, they blame a lot of things on
bookkeeping, but you could, it is true, simply set it up
as a bookkeeping proposition on the books, but it would
always be, in my opinion, a big danger to you. I think
the best
can
see it.thing to do is put it in the public debt 80 people
HM,Jr: Nobody is arguing

Mr. Bartelt: What he wants to do is put it on the
books and keep it out of the public debt.
HM,Jr: You take this personally.
Mr. Bartelt: Noo I don't, but I think you blame too

many things
on bookkeeping when they don't understand
what's
involved.

HM,Jr: I will tell you what is wrong with this thing.

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-17-

You give me the answer. Let me put this up to you,
from a bookkeeping standard. Let's say that the
next fiscal year that our cash expenditures were met,
to the dollar, by our receipts from taxes, customs.

We took in as much cash as we spent.

Mr. Bartelt: You include Social Security taxes

in that?

HM,Jr: No. And I do not include in that any net

amount that we will get from PWA or R.F.C. What I am
talking about is taxes, customs receipts, what we take
in through internal revenue.

Mr. Bartelt: But exclusive of Social Security.
HM,Jr: Exclusive of Social Security, exclusive of

PWA, exclusive of any receipts from revolving funds. Now,

you have got my premises?

Mr. Bartelt: I have.
HM,Jr: Now, the amount we spend is exactly equal
to the amount we take in from internal revenue.
don't change our procedure of issuing to these different
funds a special Treasury obligation. See?
We

Mr. Bartelt: Yes.
HM,Jr: We don't change that. In the case of
States we issue a 28% obligation and in case of Social
Security taxes we issue a 3% and for Government Retirement it's 4% and we show that up right in our public
debt. What I am asking you -- oh, yes! and the expenditures for Social Security would not be shown in this
either, what Social Security costs us next year. Now,
how would you show this up? I mean, what would you do?
The figures they give me, roughly, next year from oldage and from the States we will take in about 12 billion
and it will cost us about 1/4 billion. My figures I think
are approximately right. So from those two sources we
take in 12 billion from the States which wish to deposit
the money with us and from Social Security and it costs
us 250 million to run it. We have 1 billion left. What
are you going to do with that?

Mr. Bartelt: That billion ordinarly would be used
to retire obligations, debt in the hands of the public.

That would reduce your public debt in the hands of the

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public by 1 billion dollars. But from the standpoint

of the deficit you would have this what might be called
an accruing liability that Congress appropriates each
year and that would go into the special obligations.
In other words, your debt in the hands of the public
would come down 1 billion dollars, but your debt in
special obligations, representing this accruing liability, would go up.
HM,Jr: So far we are together. In the hands of
the public generally.
Mr. Bartelt: Yes.
HM,Jr: In the hands of the Treasury for an equal
amount that they issue. Now, but we have 1 billion notwithstanding that. The net result is have we got a billion dollars' worth of debt retirement?

Mr. Bartelt: I understand the assumption was you
used that billion excess cash and went out in the market
and bought a billion dollars worth of your obligations
and, therefore, you don't have your cash. It has been
paid out in debt retirement.

HM,Jr: All right, but let's say, in round figures
our debt is 37 billion. We go out and retire debt in
the hands of the public of 1 billion dollars. We use

our cash for that purpose, but on our books -- which
would take us down to 36 billions -- we would have to

use another billion, special certificates, so we are
back to 37, where we were, but we spend a billion with
the public to retire the public debt.
Mr. Bartelt: That's assuming, all along the line,
that your budget is balanced.
HM,Jr: Yes. Now, Mr. Bookkeeper, having spent a

billion dollars' worth of Social Security money to go
into the open market and buy the debt, should I -- and
this is the crux of the question -- add another 600 million taxes to retire another 600 million? There's the
whole thing. On top of that, should I go out and tax
the American public another 600 million on, say, gasoline

204
-19-

or liquor in order to go out and retire another 600
millions 80 instead of having 37 billion debt my figures would be 36 billion 400?

Mr. Bartelt: You should if in your premise the

sinking fund was not in your figure when you said your
receipts and expenditures were balanced.

HM,Jr: No, it wasn't.
Mr. Bartelt: If you want to get an orderly retirement of your debt including sinking fund, you must

go out and get more money.

HM,Jr: For the first time, I understand it and
it's the whole thing.
Mr. Gaston: We are all together.
HM,Jr: Let me give it fresh once more. At least
it is clear in my own brain. We are going to use more
or less approximate figures to make the picture look
pretty. What I am saying to you is that removing all

Social Security receipts and expenses to one side on
our cash balance next year, the budget is balanced. We

take in as much as we spend. I got,net, left out of
12 billions from the States one billion and it costs me

250 millions to run it. I take that billion cash, go
out and buy 1 billion of Government bonds, spend the

money and then, in turn, I set up -- they give me a billion, they have to have a receipt, I give them a receipt.
So when that operation is finished, what have I done with
that billion? I have spent every dollar of it, not for
Government expense, the way I did this year, but I have
spent it to retire the public debt. When I have done
that, have I done all I should or should I go out and
spend another 600, the tax money?

Mr. Seltzer: That's precisely the problem.

HM,Jr: It's clear with me for the first time.
Mr. Bartelt: Let's assume you have a billion in

cash over and above your expenditures. You went into
the market and bought a billion of your obligations.
Let's assume, just for simplicity, that you at the same
time increase your special debt 400 million because of
this Social Security.

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-20-

HM,Jr: Start over again.

Mr. Bartelt: Let's assume that you had 1 billion
excess cash that you used to retire debt in the hands
of the public. Let's say that that was offset to the
extent of 400 million in special securities in your own
possession for this special reserve. Your debt has
gone down 600 million. Is that right?
HM,Jr: Why?

Mr. Bartelt: Your gross debt. Because you have
went up 400. Now, if your sinking fund is 600 million
for that year, your budget is balanced and there is no
need for taxes.

reduced debt in the hands of the public and your old-age

HM,Jr: I can't do that unless my receipts are 600
million.

Mr. Bartelt: I assumed in the illustration that you

gave that your receipts were.

HM,Jr: Six hundred more than my expenditures?

Mr. Bartelt: Oh! I assumed that your budget was
balanced except sinking fund. Well, then, my remark
that I made before stands.

HM,Jr: I should have known a year ago.

Mr. Gaston: I would like to say this: that it will

be a continued source of embarrassment to us if we continue to absorb net repayments from these revolving funds

for current expenses, 80 it would be a desirable picture
if you were able to have your budget balanced without the
net repayments for the sinking fund, and actually to reduce
your debt in the hands of the public to the amount of any
net recovery that you might have from sinking fund, but I.
would say the whole question is one of the position of the
national economy. In spite of the fact that these expenditures appear in the budget, we are taking this year more
than 1 billion from the. We are taking this year 306
million more from the public than we are paying out for

Government expenses and in order to get that we are taking

206
-21-

1
billion 182
in payroll taxes, which is a serious deflationary
thing.
HM,Jr: Now I will tell you where you are wrong,
always going to the assumption of the gold. Take this
year.
If we
did not have the gold, what would I do
with that
300?

Mr. Seltzer: Retire debt.
HM,Jr:

Sure. Does not that money go into the hands
of the public? That's the answer to this whole argument.
Gaston:
You are taking over a billion from the
lowerMr.
level
of taxation.

HM,Jr: Now I have the answer. I will stick to my

billion figure. Let's just forget the 300 million for
this year. Let's stick to the billion. Sure I have
got -- if I did not retire the debt in the hands of the

public -- supposing I did not go out and supposing I kept
that billion, then we would be one billion ahead, but this
talk that I am taking it out of the mouths of the working
man, what am I doing? The billion goes right back into
the hands of the public because I am paying cash for those
bonds.
Mr. Seltzer: Are the people who get that money going to use it? That's important in determining how much
you want to retire in any given year.

HM,Jr: But the fog is dispelling at last. I am

pounding myself until I get it. Supposing we went along
five years this way, each year be just balancing the budget; each year having 1 billion dollarsworth of this
money left, and each year we retire one billion of the
debt in the public hands and set up another one. When
do we begin to have to pay this out?
Mr. Seltzer: We would have an approximate debt of

36 billions on that basis.

Mr. Haas: I wouldn't do that indefinitely.
Mr. Gaston: But the question is, is it enough to
go this far next year? Isn't it enough just to say that

207
-22-

all Social Security funds do go to retire debt in the
hands of the public? I say if we retire any more, I
would say it's because we do a little bit better than

we expect.

HM,Jr: Let me try out this thing. We are living
for our future. We could go on this way indefinitely.
Let me think out loud, because we are taking Social
Security money, taking debt out of the public but building it up in the Treasury, and at the end of the year
this public has 1 billion less of Treasury debt but we
owe this to the workingman, so we issue

Mr. Seltzer: That's what you are supposed to do
under the Social Security Act.
HM,Jr: Yes, but some day -- suppose we went on..

Mr. Seltzer: You are never supposed to pay off
that debt in the Social Security fund. You are supposed to earn interest and meet these benefit payments
in the future.

HM,Jr: Yes, but look! Using your figures, if
at the end of this year, exclusive of gold, we are
300 millions to the good, that means that we had a
deficit of 695 million and we ate into this billion
to the extent of 700 million. In other words,
we

fall short of a balanced budget this year by 700 million,
not by 300 million but by 700. And we had to take 700
million of Social Security money to spend.
Mr. Haas: You borrowed it.
HM,Jr: We borrowed it for spending purposes. Now,

I would say that if next year we simply balanced it on
a cash basis, we would not even be attempting to pay
back 700 million that we borrowed.

Mr. Gaston: That's right.
HM,Jr: Now, we are 700 million in the hole and if
we were 700 million to the good, on the plus side, if
we took in 700 million more than we took in the differ-

ence between this year and next year would be 1 billion 4

208
-23-

Now,
the difference between last year and this year
is 2 billion.

We are 2 billion better off this year
than last year. We would go ahead next year -- 1 billion 3 better than this year. 1937-1938 is 2 billion
better than 1936-1937. If we had 300 million debt,
statutory stuff, we would be 1 billion better off.
Mr. Gaston: That's true. The whole question is

whether business can stand it.

HM,Jr: It's something much more important to me.

I am afraid if we do this -- the other school of thought.
Mr. Haas: No. It's a question -- you are borrowing

money from two places, from the market and the public.
You have two markets, the public market and Social Security

receipts. The question is, next year do you want to
bring it in balance so you are not increasing your debt?
You just have a balance and no net retirements. Debts
of two characters, Social Security and debt in the hands

of the public. Is that enough for next year? Next year

you might do better.

HM,Jr: This whole argument boils down: should we

have, what do you call it, debt retirement?
fund.

Mr. Bartelt: Statutory debt retirement. Sinking
HM,Jr: Sinking fund. Should we have that and how

you set it up is really unimportant.
Mr. Haas: I think it is some important because the

difficulty is with people understanding it. It would
be much more understanding if broken down in parts.

HM,Jr: Yes, broken down. We get it down on one
piece of paper and let Bartelt take a look at it. But
on the next line I want 1938-1939 on this.

Mr. Seltzer: This is something I should like to
mention. Under the Social Security Act you are going
to have a debt of 47 billion. You have to meet the
present law. You have to build up securities in that
fund, which will amount to 47 billion. I don't think

209
-24-

that's such a terrible thing. That's a piece of bookkeeping. That comes out of Mr. Bell's shop, for this

reason. When you get right down to the Social Security
Act, in order that the future may not have the complete

burden of making these payments and the problem of paying

interest on public debt, let's retire the present public
debt out of Social Security so in the future you will
not have that debt to bother with. For the present, it
seems to me, we are doing what we are supposed to do.

take HM,Jr:
interest.Do they draw on us for cash or do they just

Mr. Haas: According to estimates it will run up to
47 billions.

Mr. Bartelt: Mr. Secretary, I thought possibly a
little later on you might want to give consideration to

a chance of policy whereupon this would be treated on a
cash basis -- a pay-as-you-go basis.

Mr. Seltzer: If you kept your taxes you would be
rolling in surpluses right now. Under the present law
you are going to build up a debt of 47 billions under the

Social Security Act anyhow.

Mr. Haas: Can't get around it.
Mr. Seltzer: Unless the law is changed, you have

to go into debt 47 billions. That's a very special
kind of debt because it is a bookkeeping arrangement
to provide for retirement of the existing debt and to
provide interest on that 47 billion to maintain benefit
payments. You never pay off the principal. That being
800 you fulfill all requirements of the Social Security

Act if you use that money to retire public debt and you
don't need to use any other money than your recoverables
to retire public debt because 1 billion retirement of
debt is as healthy as can take place in any year.
HM,Jr: Now you say we have to build this up to
47 billions?

Mr. Seltzer: I say as far as reducing your total

public debt, that's out of the question anyhow because

210
-25-

under the statute you have to build up 47 billions debt
reserve for old-age account besides what you build up
for the unemployment trust fund and it is not contemplated
that you will ever pay off the principal of the old-age.
You build that up so the interest will take care of interest payments and the whole idea back of the thing was to
prevent future generations from having double burden of
the present public debt and those benefit payments. So
if we use these old-age taxes to retire public debt, we
are relieving the future of that public debt. Now, the
practical question becomes this: should we in addition
to that also take the regular sinking fund and reduce the
public debt further?

HM,Jr: I can say this here, it is all my fault that

I have never understood this, but we have never gotten it
down as simply as this. I can understand this now.Maybe

Iunderstand
had to goit.through this rocky road to get this. But I
Mr. Haas: I think the proposition comes down to

this, Mr. Secretary. You have had a situation this
year and do you want to retire, make such a rapid change
that you would retire, in the next fiscal year -- you are
talking about more than one billion of debt from the market,
not for budgetary reasons, but for its effect on capital
markets, etc. From the budgetary point of view, you
are taking care of the situation, as Larry pointed out.
You might add to that, that all these recoverables that
come in -- that you don't make a mistake and add that to
the billion 80 it will be somewhat more than a billion.
HM,Jr: Now you are coming along. I won't commit
myself, but today if I could set this picture up so that
every dollar of recoverables would go to debt retirement
plus every net dollar of Social Security for debt retirement and we raise enough taxes to pay the cash expenditures
of the Government, I might be willing to decide on
that.
Mr. Seltzer: For next year.
HM,Jr: Yes. How much would we get from recoverables?

Mr. Seltzer: Only about 100 million.

211
-26-

HM,Jr: Wouldn't it be more than that? We are shut-

ting off PWA.

Mr. ifBartelt:
doubtful
we getRFC
that.is down for 150 million, but it's
HM,Jr: Of course, George, I am not committing myself.
Mr. Haas: I am not asking.

HM,Jr: Of course, George, from the capital market
standpoint, the more money that we put into the hands of
the bankers by paying them cash for their Governments,
the more money they have to find employment for.

Mr. Haas: It's just a question of rapidity.
HM,Jr: What I would like you to do is continue that

sheet there. Show it this afternoon to Eddie Bartelt,

setting it up just the way you set up 1936-1937 and 1937-1938
and 1938-1939, just the way you started, and show it to him
and we will meet again tomorrow morning about 9:30.
Mr. Seltzer: How about the speech part?

HM,Jr: This is what I have been waiting for from
Bartelt.
Do I have to read all of this? (Two reports.)

Mr. Bartelt: That depends. If you want a complete
picture of the agricultural proposition you would have to
read it all. I tried to give you a comprehensive picture.
Of course, you can stop here if you wish, but you said
you wanted the total list. I have listed about 1 billion
590 million that will go into agriculture this year and I
have indicated what major agencies and I have tried to give
you
a little detail and the total

HM,Jr: I did not realize it was a big a job as this.

I had no idea!

Mr. Bartelt: If you will read this, you will see what
I tried to do for you.
HM,Jr: (Reading) Department of Agriculture, including
$330 millions for good roads, 1 billion 116 million; Farm
Credit, 114 million; Commodity Credit, 100 million; RFC,

212
-27-

3 million; CCC, 49 million; Rural Electrification,
33 million, WPA 175 million, total 1 billion 590 millin!

This is worth waiting for.

Mr. Bartelt: I want to tell you that that involved
a lot of work. I was down here to midnight last night,
but
I do think I have a good an,lysis of the agricultural
situation.
HM,Jr: You had to work until midnight last night?

Mr. Bartelt: Until midnight, in order that you might
have it today. It's not a matter of figures; it's a matter of analysis. I am now having the figures checked because I don't want to give you anything that is not right.
HM,Jr: (Continuing to read) That's 2 billion for this

year!

Mr. Bartelt: That's 2 billion, but I go on to explain.
It
does not mean that they are going to spend all of the 2
billion.
HM,Jr: You have done me a great job and I appreciate it.
Now you ask me about my speech. I want Eddie to go

somewhere with you and do this now. Let's just forget
everything else we have been talking about. When I boil
it all down, PWA is under control. RFC is under control.
Relief, under control. I can devote any amount of time
in talking about the balance of next year's budget, except

Agriculture. I want Eddie to sit down with you. There
are two things -- because no matter what we do about the

public debt -- let's say I go along and say we should not
have any of this statutory debt retirement and just take
recoverables. Then it is all the more important that I
should stress economy. Now, the two things which the public has not got and which this fellow (Bartelt) has given

me: commitments of PWA up to

Mr. Bartelt: 1942. All public works.
HM,Jr: All public works to 1942. It shows the thing
we are facing, the commitments there, and then this darn
agricultural picture. And until we get those two things
within control, any talk of a balanced budget on a cash

213
-28-

basis
is out of the question. Have you (Bartelt) got an
hour?
Mr. Bartelt: Yes.

HM,Jr: And don't work tonight. I did not realize
what a job it was. You look played out.

Bartelt:
perfectly all right. I was just
tryingMr.
to do
a goodThat's
job.
HM,Jr: Where are we going to get the money to finish
public works which run into 1942, and talk about it. What

about agricultural expenditures, 1 billion 6, and show it.
There's nobody in the world knows what agriculture is costing
us and I have a chance of talking it just on the eve of
Congress meeting. Here's Marvin Jones' farm program, just
came over the ticker. Will you fellows do that?
If I am going to do this other thing-- let's say I am
going to decide not to ask for any taxes to retire the debt.
Mr. Haas: Don't make up your mind on that.

HM,Jr: I am not. Then I am talking about a balanced
budget next year. All the more important to explain how

difficult it is and what's been going to agriculture and

public works and even though we have 695 millions to spend
next year the commitments which run through 1941 and 1942
and how careful we have to be not to make any more commitments until we have liquidated what we have and what this

agricultural program is. The agricultural writers have
done one of the cleverest jobs they have ever done. They
take one-sixth of all the money and get away with it.
Mr. Bartelt: That's a staggering sum of money!

HM,Jr: That's
thing.
And you (Bartelt) go home
this afternoon.
Youthe
look
tired.
Mr. Bartelt: No, I don't want to do that.
HM,Jr: You are not going to work tonight?
Mr. Bartelt: That depends on what develops today.

214
-29-

HM,Jr: I want these boys to absorb this thing.
had no idea what I was asking you. I have been groping
and groping to see what this agricultural picture is. And
public works. How long did it take you to do this?
Mr. Bartelt: That was quite a job, but it was enI

tirely different from the agricultural.

HM,Jr: There's the whole business and I have not had

a chance to study up carefully and if you could go in there -I think those are the two things. Isn't that enough to
bite on, public works plus agriculture, future commitments,
1939?
Mr. Seltzer: When do we finish the draft?
HM,Jr: I had figured on seeing the President on this
on Monday morning, but I may not. We will do the best we
can.
Mr. Seltzer: One question about taxes. Do you want
to be against raising taxes?

HM,Jr: In Magill's statement -- this is extra, extra

confidential -- the tax schedule must be between 7 and 73
billions for next year. We must raise between 7 and 7t.
Which all fits into what we are doing here.
Mr. Seltzer: We will come out with revenue estimates
considerably under that.

HM,Jr: I told Magill this morning what we are doing.
It's much easier to cut down. If Magill came out and

said he only wanted 6 billion and I showed a picture a week

later where we needed 71

Mr. Bartelt: I want to say these are figures based
on estimates of agriculture and the Bureau of the Budget
has trimmed some.

HM,Jr: But this is the whole picture. You have got

enough to do.

Mr. Haas: We can sit down with Eddie

HM,Jr: If I can't get it Monday, I can't. What

215

-30-

this speech is doing is serving the purpose of crystalizing what I had in my head as budget policy of next
year and when I make up my mind, with the assistance
of you people, I want to try to sell it to the President.
When I am through with this my job wi th the budget is
finished because the policy of the budget is not my job,
but I do think it is my job to lay down limits. What
you fellows are helping me to do is decide what the
budget policy should be next year, but how much Agriculture, or War Departments get out of it, I don't care.
00o-00o

216

I as glad to avail syself of the opportunity presented by the
invitation of the American Academy of Political Science to discuss the

subject of government spending in its relation to the balancing of the
Federal budget.

Right at the beginning I wish to say that I believe it is imperative that the budget for 1938-1939 - the next Government fiscal year,
beginning July 1, 1938 - should be in balance. This means that anticipated
revenues should equal or exceed the total of planned expenditures, including
sinking fund provision of some 500 to 600 million dollars.
Now, don't misunderstand me. I as not saying that the Federal
budget should have been balanced in 1932, or 1935, or 1985, or even in

1958, the current fiscal year. What I am saying is that for next year the fiscal year which begins next July -- it should be and must be in
balance.

I am not among those who make a fetish of a balanced budget, who

say that every year anticipated revenues should equal phanned expenditures.

-2-

$U.217

I know that there are apparently sincere people who take that view,
whose cries for a balanced budget as the remedy for economic ills were heard
all through the depression and were redoubled as we began to come out of it.

I think if we had taken their advice we would have found it, in the first place,
administratively impossible to realize, and, in the accond place, economically

ruinous. Those are but mild words for the disaster which I believe would have

befallen us. I think their advice was just as bad in 1935 as it was in 1953.
Recovery is not an easy plant to rear; it must be nurtured carefully. To
change the metaphor, at any time in the last few years, it would have required
only the application of what some short-sighted people call "sound business

principale" - such as sharply cutting off work relief, for instance, or
withdrawing all aid to agriculture - to send us into another economic tailspin.
Deficits are not novel in the history of Government finance. I look
over the records of the Treasury Department and I find that in 147 years of our
government we have had yearly deficits 55 times. Most of those deficits might
be called accidental. We always got them in time of war and we always got them

in depression. Whether we will it so or not, we're always going to have

218

-3deficite in either of those two situations. That is morally certain - if
history teaches us anything. I will go further and say that we should have
them.

Out deficits of the last few years have been different from some

of our other deficits in that we planned to have them. I think we would have

been criminally stupid if we had not. But in that respect they are not diffarent from our war-time deficits. We planned those too.
Nineteen years ago tomorrow we signed the armistice that ended the

World War. In the two years ended June 30, 1919, we spent thirty-one billions

of dollars and created a deficit of twenty-two billions. with the Nation in
peril, we did not hesitate to run up a bill of tremendous proportions. It is

a bill that we are still paying. It ran right along during the late depression,
adding to government deficits every year. What we call the cost of fighting
the depression is in part the cost of fighting that war two decades ago - and
hot an inconsiderable part.
What makes our recent depression deficits unique among our planned

deficits is that the enery was of a different sorty but 10 was an enemy no

2.219
4

less menacing. Instead of striking at one home in thirty or one home in one

hundred, it struck at practically every home in the land with the sort of

terrors neither you nor I want to recall, the terrors of physical lack and
suffering and the terrors of mental torture.
If there was anything that could be done by governmental action to
seet and vanquish that enemy, not only common humanity but common sense

dictated that it should be done. It dictated, moreover, that we should do
something, even if some that we did or such that we did turned out to be
wasteful or even wrong. We had before us a greater problem and a greater
necessity than a mere annual balance of the Federal budget. What was

attempted was to balance the whole budget of the American people -- to give
then revenue to meet their urgent needs. of course mistakes would be made;
they are made in any human enterprise - even in war.

I as not going into detail of the situation that President Roosevelt

faced in 1953. It is too painfully familiar to all of you. I shall give some
attention to the character of the expenditures that were made and the amount

of them. During the four years ended June 30, 1937, our total expenditures,

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-5exclusive of debt retirements, were fourteen billions of dollars in excess

of our receipts. That is the unpaid bill for the war on the depression,
in the four years up to last June.

It is a great sum. It is just over $100 per capita for our whole
population. But it is not as great by eight billions as the two-year war
bill that remained unliquidated in June, 1919. And it is not as great as
the unliquidated cost of the World Bar that we had hanging over our heads

when the depression and recovery deficits started. Our whole National debt
today is about evenly divided between war and depression costs. We had heavy

depression deficits for two years before the Roosevelt recovery program was
inaugurated.

What were the major items accounting for this four year fourteen-

billion-dollar deficit?
The arithmetic is simple. The largest single item, nine billions,
aross out of unemployment relief, which included the Civilian Conservation
Camps and the great volume of useful services performed in connection with

221

6thousands of local projects. Another two billions went to the Agricultural
Adjustment program. Another two and two-tenths billions went for the prepayment of the soldiers' bonus, an obligation previously incurred but due in
1945. Three and two-tenths billions went for public works. And one and one-half
billions went for recoverable investments in governmental agencies making loans

to farmers, home owners, railroads, banks and others. The total of these items

is eighteen billions) but increased tax collections and savings in the
ordinary operating expenses of the Government reduced the net deficit to

fourteen billions.

The final net cost of our four-year spending program will be much
less than this figure. We have made a number of substantial expenditures,

aggregating about six and a half billions, of the kind that will directly
reduce the budget requirements off future years.
One of them, amounting to more than two and two-tenths billions,
was for the payment, nine years in advance, of the soldiers' bonus, which
would otherwise have been a regular charge upon the budget until 1945.

222

-7Another, amounting to more than one and a half billions, was to
provide funds for governmental corporations and credit agencies that made
loans to farmers, home owners, railroads, banks and so on, Loans to a very
considerable amount, notably to banks and to railroads, were made under the

prior administration, so that although the expenditures on this account in
the four-year period of which I an speaking were but one and a half billions,
the proprietary interest of the United States in these agencies now amounts

to about three and three-quarters billions. The peak in expenditures of this
type was passed two years ago and repayments in the future will be available

for reductions in the public debt.
Finally, our outlays for permanent public works during the past

four years were 1.7 billions in excess of the outlays for these purposes in
the preceding administration and more than four times those of the one before

that. These increased outlays in part anticipated future requirements.

I shall not attempt any bookkeeper's listing of these or other
assets of the Government as an offset against the fourteen-billions, because

it is immaterial to my discussion. The substance of the matter is that in

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-8four years we have incurred deficits to a total of fourteen billions; that
we incurred them in a deliberately planned effort at National recovery.

Did that effort meet with any success? I won't argue that point,
either, because I think the country has spoken on it. I merely make mention

of the fact that we had a National income under forty billions in 1932 and
that the National income for 1937 will be in the neighborhood of seventy

billions.
I as fully aware that there are some who challenge the right of
government to attempt to control or direct or modify the national economy -

to interfere with normal business and private initiative, as it is sometimes
expressed. Theoutories against government interference were not so loud,
however, when banks were failing right and left, when factory chimneys were
black, when fear choked all the normal avenues of credit and when private

initiative was in hiding. The need then was support for tottering financial
structures and money spending from are source to feed the hungry and get the
wheels of production going. The spending came from the one reservoir of

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-9sound credit from which it could come, the borrowing power of the Federal
Government. That power coaxed capital from its hiding when nothing else

could coax it out, and trod a path for private financing, at the same time
it gave bread to the hungry and shelter to the homeless.

It is very easy to reduce this argument against government interference to an absurdity. Every act of government at any time affects our
industrial economy, and to say that that government is best which does least

for its people is to say that we would be better off without public roads
and streets, without water systems, without parks, without police, without
protection against fire, without any restraint over extortion and monopoly.
The truth is that all of us recognise many things that we can do most
our

effectively through governmental action - things that affect/own welfare
and our ability to earn a living. Where we differ is in the things we want most
of government.

This has a bearing both on our planned expenditures to fight this
most recent depression and the steps we take to prevent and to conquer future

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- 10 depressions - in other words, on our future Federal government budgets.
The Federal government never has been confined to the mere role of a

policeman. It has always had withan its sphere of action the control over
natural resources, the promotion of agriculture and industry, science and
invention and the immensely important function of providing a monetary supply

and safeguarding its use. It can not be expected to abdicate any of those

fields. What the people will demand of it is rather that it shall be more
efficient in its operations within them.
Realistic financial planning must have all these facts in its view.

But to be realistic it must never lose sight of the fact that financial
strength and complete solveney is a basis essential that must be met & the
government is to be an enduring instrument of service to the people.
Energencies call for deficit financing and if the emergency be
great as in a major war or a major depression expenditures can not be on a

niggardly scale. Action must be bold and prompt, But it is self-evident
that for the Government to be able to act on this pattern in an esergency
it must in other years reduce its debt through a surplus of revenues. We

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- 11 can't have cycles that turn only downward, they must make the up-grade too.

What this means is that if there are heavy deficits in a depression
and recovery period there must be rather large surpluses in periods of great

business activity. It also means that in the transition from one condition
to the other a median stage will be reached when the deficit must vanish even

if the surplus is not great. It is my considered opinion, based on a great
many factors, that we have arrived at that stage now.

The rise in National income, the increase in industrial production,
the expansion of payrolls, the increase in Federal revenues all argue that we
have reached a position where expenditures should no longer exceed receipts

in the budget of the Federal government. This means, viewed from one side,
that at whatever level we fix the need for expenditure, we must have revenues

to match it. Viewed from the other side, it seans that we must cut our
expenditures to fit the cloth of the revenues we can attain without hardship
on our people or interference with recovery.

I do not believe we shall find it fessible to make any substantial
additions to the revenue we can attain on our present level of National

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- 12 prosperity. (in other words, I think OUR tax structure is strong enough,
that increase in revenues should come only from increase in the earnings

of our people. It seens to me that any changes we make in our tax structure

in the near future should be in the direction of better distribution of the

tax loads not of increasing it.
There are other circumstances than the increase in National wellbeing and the consequent increase in the Federal revenues that indicate that
not

we have arrived when a balance of the Federal budget should merely be sought,

but should be attained. They have to do with the position of the National
debt and the capital markets.

Some of the underlying technical conditions that made deficit
spending the wieest kind of economic policy during the depression no longer

exist. Thus, when we borrowed during the depression to finance our deficit
spending, a large part of the funds were obtained through an expansion of
bank credit.

To this extent, our spending did not absorb capital funds available

for private industry, nor did it absorb taxpayers' funds available for private

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- 18 consumption expenditures. Even to the extent that our bonds and notes were
purchased by non-banking investors, the effect was largely to make use of
capital funds that would otherwise have remained idle because of the absence

of attractive investment opportunities in private industry.
Today the situation is greatly changed in these respects. Our
industrial recovery has created large new demands for private capital. Our
commercial banks are now utilising their credit resources again for the

financing of private industry. Any deficit spending that takes place from
now on must be financed in large part by capital funds that would otherwise
be available for business purposes.

I need hardly say that it is the aim of this Administration to
foster and strengthen the conditions favorable for private business. We want

to see capital go into the productive channels of private industry. We want
business profits to grow. We believe that a large part of the remaining
unemployment will disappear when capital funds are actively employed in
producing enterprise.

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- 14 For these reasons we wish to minimize any further borrowing by
the Federal Government; for such borrowing, unlike that which took place
-

during the depression, would be at the expense of the funds available for
industrial expansion.

Despite the substantial increase in the public debt during the
past four years, the credit of the Federal Government has remained absolutely

unispaired. Not once during even the darkest days of the depression did the

Treasury experience the slightest difficulty in borrowing all the funds that
were required. The rates of interest on our borrowings, moreover, have been

lower, for comparable securities, than at any other time in the history of
the country.

This unimpeachable credit position of the Federal Government,

however, has been maintained because of the conviction of investors that

the Federal budget was only temporarily out of balance; that with business
recovery substantially achieved, the President, the Congress and the great
American public could be trusted to join in a whole-hearted and successful
determination to balance the budget and to reduce the public debt.

230

- 15 The President has given full consideration to all the factors I
have mentioned and he has determined and has announced the definite plan to

bring the budget into balance for the fiscal year 1938-39. I am very confident that with the cooperation of Congress and the American people he will
succeed.

Now let us give some consideration to the working aspects of the
problem. I have given you my opinion that it would have been unwise to have

slashed expenditures too radically at any time in the last few years. The
shock to the National economy would have been too great. What was required

was a tapering off and a gradual approach to a balance. That in fact is

precisely what is occuring. While we are anticipating a net deficit of
695 millions for this fiscal year, that is a sharp reduction from the net
deficit of two billions seven hundred millions for the fiscal year 1957.
Some of the favorable aspects of our present problem are these:

The accumulated deficit of the last four years does not represent
any deterioration in the efficiency with which the ordinary operating departnehts of the Government are administered. We have actually spent less during

231

- 16 the last four years for the operation of the legislative, judicial, and
the ordinary civil establishments of the Federal Government, despite their
greatly increased responsibilities, than was spent during either of the two
previous administrations.

We have spent more for purposes of national defense, but mainly to
sake up for previous neglect.

Despite the increase in the public debt, our annual interest charges
are less today than they were in 1923.
The aggregate of the regular operating expenditures of the Federal
Government, including all the items that I have mentioned, plus veterans'

pensions and benefit payments, is running today at around 3.2 billion dollars
annually, or less than in 1932.

It is clear, therefore, that a tight rein has been and is being kept
on the ordinary operating expenditures of the Federal Government.

The fact that outlays for unemployment relief bulked so large in the

deficits of the past four years is a fact of great promise now. The number of
the needy unemployed has been drastically reduced.

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- 17 As a matter of fact, we have already made important reductions in

expenditures; and the present fiscal year may be considered as the year of
transition between unbalanced and balanced Federal budgets.

During the current fiscal year, we have been reducing our outlays

for unemployment relief by approximately three-quarters of a billion dollars
below those of the previous year. If, next year, we reduce these outlays by
another four hundred millions or so, down to the level of twelve hundred
millions, inclusive of the Civilian Conservation Corps camps, with the

prospect of a further tapering off of these expenditures in the future, the
largest single source of our past deficits will have been reduced to manageable
proportions.

Similas if no substantial additions are made to the alreadyavailable appropriations of seven hundred millions for public works of all
kinds for the fiscal year 1939, and such expenditures in subsequent years are

brought down to the half-billion dollar level, this source of fiscal deficits
will be eliminated.

233

- 18 These are some reasons for optimism on the spending side of our

budget picture. On the receipts side I can report to you a far greater
degree of improvement than many people have believed possible.

The plain fact of the matter is that the Federal revenue structure
today is stronger as well as more equitable than ever before in the history
of our country.

When this Administration came into office, the total receipts of the

Treasury had fallen to just over two billion dollars a year. In each year
since that time they have shown marked increases -- the result both of improve-

ments in our tax structure and of the revival in business.

In the fiscal year ended last June, our total receipts rose to five
billion three hundred millions. Even this figure does not adequately reflect
the strength of our present tax structure nor the great improvement in the
national income that has occurred, because of the usual lag in tax collections.
This means that there will be another very substantial increase in our tax
revenues during the present fiscal year.

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- 19 Some people are worried lest we curtail expenditures too rapidly.

That I can tell you in this respect may reassure such people.
The plain fact of the matter is that the unspent appropriations
already made for public works and similar projects are so great that large
expenditures for these purposes will continue into the fiscal year 1939
even if Congress does not appropriate another dollar for them.

When we entered the fiscal year 1938 last July1, the total appro-

priations available for public buildings, public highways, river and harbor
improvements, flood control, P. W. A. grants, soil erosion, emergency housing,

and similar purposes, stood at more than one and a half billions. Some eight

hundred sixty-nine millions of this will be spent during the present fiscal
year. This will leave approximately seven hundred millions to be spent in

the fiscal year 1959 without a single dollar of additional appropriations.
It is obvious that even if we wanted to, we could not suddenly cut
off all of our emergency spending.

It is by no means necessary, even if it were possible, to make

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- 20 immediate wholesale eliminations of Federal expenditures. It is necessary,
however, that we see precisely where we are going; and that we see the picture
whole.

But when I say that I am confident that we shall balance the budget
during the coming year without violent disruption of existing programs, I do
not mean to say that the job will be an easy one, or that it can be accomplished
without stepping on anybody's toes.
The United States Chamber of Commerce is on record as strongly in

favor of an immediate balancing of the budget. But what happens in every
local Chamber of Connerce when a proposal is made to eliminate a nearby

Civilian Conservation Corps camp or to reduce an allocation for a local
public works project? Letters and telegrams pour in upon the Congressman

and Senators, complaining of the great harm to local interests if these
Federal expenditures are reduced.

Balancing the budget is your problem -- the problem of every citisen
of the country, no less than the problem of the legislative and executive

236

- 21 branches of the Government.

It was the strong support of the American public that made it

possible for us to bring this country out of the depression and to carry
through many important reforms. with this same support, we shall accomplish
the simpler task of balancing the Federal budget and keeping the Federal

finances in an unassailably strong position to meet the stresses of the
future.

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