Full text of Diaries of Henry Morgenthau, Jr. : Volume 95 : Part 2

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237

TREASURY DEPARTMENT
OFFICE OF THE SECRETARY

WASHINGTON
COMMISSIONER OF

COUNTS AND DEPOSITS

October 26, 1937

TO THE SECRETARY:

In compliance with your oral request there is transmitted
herewith e statement showing the estimated expenditures of the Federal

Government for the fiscal year ending June 30, 1938, on account of

aid to Agriculture. Total expenditures for 193, including good
roads, is estimated at $1,590,000,000. This amount is classified by
major organizations ns follows:
Demartment of Agriculture, including
$330 millions for good roads

$1,116,000,000
114,000,000
100,000,000
3,000,000
49,000,000
33,000,000
175,000,000

For Credit Administration

Co-modity Credit Corporation
Reconstruction Finance Corporation
Civilinn Conservation Corps

Rural Electrification Administration
Works Progress Administration

$1,590,000,000

Total

These figures are classified in greater detail ns follows:
(In millions)

Under the Department of Agriculture $1,116,000,000

General expenses of bureaus, (Details in

$101

Exhibit I)
Grents to states (exc. of roads)

24
27

Soil Conservation Service
Farm Tenant Act (To be increased
to 135M in 1939):

Tenancy (Title I)
Submorginal land (Title III)

$ 10
15
5

238

-2Department of Agriculture (continued)

Agricultural Adjustment Administration:
Agricultural Adjustment and related acts
Elimination of diseased cattle
(Section 37, Act August 24, 1935)
Exportation and domestic consumption of

agricultural commodities (Sec. 32, Act

August 24, 1935)

400

Conservation and use of agricultural land
resources (includes $60 M, Sec. 32, Act
Cotton price adjustments (Sec. 32, Act
August 24, 1935)

Administration of Sugar Act, 1937
Highways

Farm Security Administration

478
330
141

1,116

Under the Farm Credit Administration $114,000,000

Federal land banks, paid-in surplus
Federal land banks, reduction in interest rates
Crop and feed loans
Administrative expenses
Federal Farm Mortgage Corporation,

36
32
30
6

reduction in interest rate
Expenses, regional agricultural credit

corporations

114

Under the Commodity Credit Corporation $100,000,000
Commodity loans

100

Under the Reconstruction Finance Corporation $3,000,000

Loans to Joint Stock land banks

Under the Civilian Conservation Corps $49,000,000

Principally in connection with Forest Service,
Soil Conservation and Bureau of Animal

Industry (in addition. about $140 millions
for pay and subsistence, etc., for C.C.C.
enrollees coming from agricultural areas.)

-3239

Under the Rural Electrification Administration $33,000,000

Loans for line construction

$ 32

Administrative expenses

Under Works Progress Administration $175,000,000
Highways and Roads, Bridges and viaducts, Rural
housing, Subsistence homesteads, Fair and rodeo

grounds, Forestation, Erosion and land utilization control, Irrigation and water conservation,
Game, fish, and bird conservation, Plant, crop and
livestock conservation, Rodent and predatory

animal control, Other conservation projects, Distribution of surplus commodities
Total

175

1,590

In considering the amount expended by the Federal Government for

agricultural aid, consideration should be given to the fact that a large
amount of the expenditures of the Department of Agriculture are not,

strictly speaking, for aid to agriculture but more properly would fall
under the heading of general public welfare. For example, the Depart-

ment of Agriculture expends annually over five millions of dollars for
meat inspection. Such inspections are not wholly for the benefit of agriculture, but are made for the general protection of the consuming public.
It spends about a million and a half annually for enforcement of the
food and drugs act. Other expenditures of the Department of Agriculture

which are made more or less for the benefit of the general public, rather
than agriculture, are those made by the Weather Burean. the Forest Ser-

vice, Bureau of Biological Survey, and the Burean of Animal Industry for

the eradication of tuberculosis in cattle. Upon such basis the estimated
expenditures of the Department of Agriculture might be classified as
follows:

-4240
UNDER DEPARTMENT OF AGRICULTURE

1. General expenditures:

a. of benefit to the general publicWeather Bureau

Meat Inspection

Eradication of tuberculosis in cattle
Forest service (Including forest
highways)

Biological survey

Food and Drugs

Sub-total

b. of more direct benefit to agriculture

(Exclusive of grants to states and A.A.A.)
Total, General

4,700,000
5,300,000
1,600,000
36,200,000
2,700,000
2,200,000
52,700,000
246,500,000

299,200,000

2. Agricultural Adjustment
a. Conservation and use of agricultural

land resources:
From annual appropriation
From permanent appropriation of 30% of
customs receipts

340,000,000
60,000,000

b. Exportation and domestic consumption of
Agricultural commodities (Sec. 32, Act of

Aug. 24, 1935) (From nermanent appropriation
of 30% of customs receipts)

C. Elimination of diseased cattle
d. Administration of the Sugar Act of 1937
e. Price adjustment payments to cotton producers
(1937 crop) (From permanent appropriation
of 30% of customs receipts)

f. Agricultural Adjustment and related acts
Total, A. A. A
3. Grants to States:

29,000,000

15,000,000
28,000,000

5,000,000
1,100,000

479,100,000
313,800,000

a. Highway funds

1,100,000

b. Forest Service
C. Agricultural experiment stations, extension
work, etc

Total, Grants to States
Total, Department of
Agriculture

23,700,000
338,600,000

1,115,900,000

-5-

241

An objective classification of the estimated expenditures of
the Department of Agriculture for 1938. is set out below:
General expenses. including physical improvements

a. Department proper

b. Soil Conservation Service
C. Farm Tenant Act

d. Agricultural Adjustment Administration.
e. Farm Security Administration,
Sub-total

$91.6
27.1
3.7

22.4

19.6

164.4

Grants to States
1.1
6.2
17.5
313.8

a. Forest Service
b. Experiment stations
C. Extension Service
d. Highways

Sub-total

338.6

Grants to Individuals

a. Agricultural Adjustment Administration.
b. Farm Security Administration
Sub-total

455.7
67.3

523.0

Loans

a. Form Tenant Act

b. Form Security Administration
Sub-total

9.5
39.0
48.5

Acquisition of lands

a. Forest Service
b. Bureau of Biological Survey
C. Farm Tenant Act

d. Form Security Administration,
Sub-total

Forest ronds and trails

6.6

1.2
1.8
15.5
25.1

16.4

a. Highways
Grand total

1,116,0

-6-

242

AUTHORIZATIONS AND APPROPRIATIONS

The foregoing figures are on the basis of estimated expenditures

(1. e. cash withdrawals from the Treasury) during the fiscal year
ending June 30, 1938. It is thought that you may also be interested
in the picture from the standpoint of authorisations and appropriations.

In considering the Government's budget, there must be kent in

mind the distinction between authorizations, appropriations, and ex-

penditures. Authorizations and appropriations represent limitations
placed by the Congress upon the authority of administrative officers
of the several departments to enter into contracts and to make
commitments which ultimately may involve expenditures from the Federal

Treasury. The diversified manner in which the Congress grants such

authorizations and appropriations requires that the greatest of care
be exercised in presentation in order to avoid confusion and mis-

understanding. One of the principal difficulties arises because of
the fact that the periods in which authorizations, appropriations, and
expenditures, respectively, are made. do not coincide. In addition
to expenditures pertaining to appropriations for the current year,
the expenditures in 1938 include the payment of unliquidated obligations

carried over from 1937. On the other hand, they will not include the

liquidation of certain obligations pertaining to appropriations for
1938, which will be carried over to the fiscal year 1939. The unused
(unexpended) balances of appropriations are written off the books at

the end of the third year for which the appropriations are made. The
amount thus written off on June 30, 1937 was approximately 130

millions of dollars.

243

At the beginning of the present fiscal year the Trensury Department was confronted with the following picture concerning funds made

available for agricultural and related activities, including good
roads:

First, there WAS a liability for outstanding obligations under existing annorprintions
amounting to

$363,000,000

Second, there were unobligated balances of con-

tinuing appropriations available for further

commitments, amounting to

Third, there were new appropriations in the
annual and deficiency appropriation bills for
the fiscal year 1938, amounting to

388,000,000

722,000,000

Fourth, there were reapproprintions of unexpended
balances in the annual and deficiency appro150,000,000
priation acts. amounting to

Fifth, there are permanent and indefinite anpropriations not subject to annual voting by
the Congress, which the Treasury will have
to make available, estimated at

6,000,000

Sixth, there is the sum of $125,000,000 which is
made available under Section 32 of the Agricultural Adjustment Act, as amended by the
Act of August 24, 1935, which permanently appropriates each year. without annual voting by
Congress, 30% of customs receipts for the
125,000,000
preceding calendar year

Seventh, there is a Congressional authorization
for good roads for the fiscal year 1938, funds
for which have not yet been appropriated by
the Congress, amounting to

Eighth, under the sugar Act of Sept. 1, 1937,
unappropriated authorizations for the current
fiscal year amount to over

192,000,000

54,000,000

244

-8-

Ninth, allocations already made this year under
the Emergency Relief Appropriction Act
$ 73,000,000
of 1937, amount to
Tenth, allocations already advanced or set
aside this year by the Reconstruction
Finance Corporation to the Commodity Credit
Corporation and for expenditures of
Regional Agricultural Credit Corporation
(exclusive of undisbursed commitments of
Reconstruction Finance Corporation to
C.C.C. of $227,552,000) amount to

37,000,000

Finally, there are other unappropriated authorizations for the current fiscal year which
are conservatively estimated at

Thus, the total of these potential obligations
facing the Federal Treasury for the agricultural and related activities amount to
the sum of

5,000,000

2,115,000,000

In addition the Congress has already mortgaged the future to
the extent of some $1,753,000,000 through the authorisation of large

appropriations for the Department of Agriculture, as indicated below:
(In millions)
1940

1939

Public highways, Act June 16, 1936

216

(Note: This refers to the service of the
fiscal year indicated. The appropriations

for 1939 will be about $281 . and for 1940
about $125 M. This is accounted for by the

fact that Congress appropriates highway
money upon the basis of estimated cash
expenditures)

Federal aid to wild-life, Act Sept. 2, 1937

Conservation in arid and semi-arid areas, Act
August 28, 1937

Sugar Act of 1937, Sept. 1, 1937

(Exc. of Philippines)

-9-

245

Sugar Act of 1937, Sept. 1, 1937

(Inc. of Philippines)

Conservation and use of agricultural land
resources - Act Feb. 29, 1936

500

Exportation and Domestic Consumption of Agricultural Commodities (30% Customs receipts)

125

Farm Security Administration, Title I, Loans
Act July 22. 1937

Sub-marginal land program, Title III. Farm
Tenant Act, July 22, 1937
Cooperative development of farm forestry. Act
May 18, 1937

Cooperative Agricultural Extension Work, Act
June 29, 1935

b/ 11

Research into basic laws and principles of
agriculture

b 12
5

Total amount

Authorized by Congress and not yet appropriated
a/
b/

971

782

And an equal amount for each year thereafter.
In addition to amounts previously authorized
and appropriated annually.

The foregoing authorications relate only to the Department

of Agriculture, but they serve to illustrate the difficulties which
confront the Treasury in connection with its financing activities.
The practice of commiting the Government several years in

advance is well illustrated in the case of public roads. Sixteen
months ago the Congress authorized a public highways program for

the fiscal years 1938 and 1939, in the aggregate sum of $433,000,000.
To date only $24,000,000 of this amount has been appropriated. The
remainder will have to be appropriated in the 1939 and 1940 annual

supply bills.

- 10 -

246

Another objectionable practice involves the reappropriation
of unexpended balances. For example, in addition to the direct appropriations made to the Department of Agriculture and the Farm Credit

Administration for the current fiscal year, the annual appropriation
act provided reappropriations of $180,916,500 for the Department of
Agriculture and $2,950,000 for the Farm Credit Administration.

A further objectionable practice is the making of so-called
"permanent" appropriations which do not require the annual voting by

the such appropriations of the Department of Agriculture
(exclusive of the appropriation of customs receipts under Section 32

of the Act of August 24, 1935). amount to six millions of dollars.
Closely allied to this is the practice of earmarking receipts for
special purposes. Such practice cannot be too strongly condemned

from the standpoint of sound budgetary procedure. The most flagrant
of such cases is the action taken by the Congress under the amend-

ment to the Agricultural Adjustment Act (Sec. 32), approved August
24, 1935. which appropriated an amount equal to 30% of the gross

receipts from duties collected in each calendar year under the customs
laws. In 1938 the amount thus to be made available is estimated at
$125,000,000, of which about $94,000,000 will be expended. This is

a continuing appropriation and will be available year after year
unless and until the provision is repealed by Congress. The expendi-

ture of such money is estimated for the fiscal year 1938, as follows:

247

- 11 Agricultural Adjustment Administration
Exportation and Domestic Consumption of Agricultural Commodities

Conservation
and use of Agricultural Land resources

$ 29,000,000
60,000,000

Price Adjustment payment to Cotton Producers
(1937 crop)

5,000,000

Total estimated expenditures (The amount

not expended (obligated) during the

fiscal year lapses and is not available
in the succeeding year)

Commissioner of
Accounts and Deposits

Attachments:

Exhibit I, showing detailed classification

of estimated expenditures of the Department of Agriculture, fiscal year 1938,
classified according to organization units

and sub-divided according to general expenses (including physical improvements),

grants to states, grants to individuals,
loans, acquisition of land, and forest

roads and trails.

Exhibit II, showing detailed statement of
authorizations for the Department of Agri-

culture which have not yet been appropriated.

94,000,000

248
COUNT :

LITITATED - DEPARTMENT OF AGRICULTURE FISCAL THAT 1938

(In millions of dollars)

Cleanification of institutes

Estimated

extenditures
1938

General expenses

Greate

Greats

States

Individuals

including ray-

sical improvements

Acculation
Losse

Forest reads
and

treile

lands

effice the Decretary of Acriculture

office of the Solicitor
office of Information

1.3

Little Department of arriculture

1.3

Office Experiment Stations.

Extension Service.

astist Suress.

"ureau of Animal Industry

4.7

10.7

>uresu of Deiry Industry
sureau of Plant Industry

Forest Service.

Turen of Chemistry and Jeile
Pureau of Interelege and Plant quarantine
of Biological Survey
Tureeu of agriculturel Engineering
ureau of Agricultural Economics

5.0

34.0

26.3

1.4

16.0

0.1

4.9

6.6

6.4

Dureau of None Ecosonics
Commentity Exchange Administration

Food and Drug Admin stration.

2.2

National agricultural Research Center

4Justness between checks Issued and each
extenditures
Total, Department Proper

1.1

.1
.1

7.0

100.0

91.4

1.1

7.0

TO STATES FOR ADMICULTURAL EXPENDED

ITATION STANSION
Office of Experiment Station:
Extension Service

Total, Payments to States
on COLVERATION
Regular Punda.
Stergency Funds

Total, Joil Descartation Service

4.0

4.2

17.5

17.0

83.7

23.7

23.1

23.2

3.1

27.1

37.1

our TEAM -

Farm Jecurity Administration
Turees of Agricultural Bemondes
Total. Farm Tesest Ast

10.0

2.0

3.1

15.0

3.7

9.5
1.0

1.0

59.0

10.5

RECULTURAL ADDISTRATION

TAT Agricultural and misted
(A.A.A.

Acts

(a)

Section 37. set of August 24, 1930
(Bureau of Animal Industry

(Pederal Surplus Commodities Corporation)

(D)

Cons. and use of agricultural land reas ress

(Add

(#) Administration of the hear ACC of 1939
Total Agricultural 44 Justmest Adm

0.1

1.9

4.8

18.0

3.0

11.0

21.0

1.0

80.0

8.0

1.8

400.0

15.0

MM.D

26.0

87.0

470.1

M.A

141.4

19.4

600.7

PAID SECURITY ADMINISTRATION

Functions other than those under Fare
Tenent MT.

67.3

ROAD FUNDS

(A) Regular Funds

Bureau of Public Reade)
(Forest Service)

(3) Energency Funds (Suresu of Public Heads
Total, Road Punds
THIS TOTAL

805.8

0.0

193.4

4.4

6.6

180.4

100.4

300.0

313.0

1,116.0

144.4

330.4

14.4

243.9

M.S

m.1

14.4

name ITEM - CF
was - PERCELL TEARS 1999 - 1930, INCLUDE
- - 37 - 1936-INS.
are

Performance

in 1999

contributeral istemates " Harris 2100)

SECURITY II

- Restrict
300,010.00
180,000.00

300,000.00 (1970)

40,300.30 (ases.
steval each year
thereafter)

Items eter level 1977 - 1996)

249

(1999)

- thereafter

officiency 340,000)

issure

store - .

- 4,100

pasts

MAIL

all wellb-life
to --- forfund
fistal

1,000,000.20

Indefisite

so Hist., 02

into No. 1999. ears year

$1,000,000.00

IndePtaile
(2) 3,854,000.00
$ 3,000,000.00

two - . et of

currently fear - firesms, stalls,
error

www.it. 193*

summits is will eat -

Intefinite

(1999)
(1940)

Indefinite
$ 1,000,000.00

L. vited tates)

(1939)

(1) 2,000,000.00

of 1 let.

Sept. 1. 113*

as editistrative of 15 as

se Net.. #15

(1) 14,000,000.00

190,000.00(1930)

(1000)

$4,750,000.00
50,000,000.00

(1999)

(1930 -

each fissal year
Bareafter)
59,000,000.00
1957 Set. 5031

Interistic

" Separate of the Prilippines
-creater
think
- - as eyeal to

($) 6,000,000.00
(8) 0,000,000.00

must . takes milested . expect -

. of and

(1940)

Indefinite
(1939)
(1940)

Title IT, etc.
multillae

and to " of - reserts free

U.S. here.11.

latefinite

THE ec.

Indefielte

427e

Must milestel after states Ires ever e-1.

180,099,814.26

(1999)

159,000,000.00

(1940)

29,000,000.00

(1939)
(1940

First

- Lanna, 9⑆4 1, Pare

July 21,1991

10,000,000.30 (19:01
25,000,000.00 (1930)

- set. 50.

10,000,013.00

50,000,000.00

19,90,000.00 -

-- fissal year

fistal THE tiereafter.

(Pitle ....

(1338)

$2,310,000.00

15,000,300.00

the - fissal Len
after
ay 14, 1999

Tax

1,900,000.00

(1)

fer.

of of finish

termination

80,000,000.00
20,000,000.00

(1999)
(1940)

1,300,000.00

(1999)

1,500,000.00

and

(190 mg

really thereafter)
1,006,300.00

1,300,000.00

P.O. Res. No. Apr.
18. 1937 - $1,000,000
of frate apailable to this
Corporation for purposes
of set Mar. s. 1999.

leases and Territories for Agricultural

Metters leater treating to alesta)

the 1163

Processing

7,500.00(1930)

1957.

10,000.00
12,500.00

(1999)

(1000 and $4,500 edd.

each fissal year will

$37,500 1. reached
1947)

ALL stating System

$14,500,000.00 (1938)

18%

" 14 1019

11,560,000.00 (1999)

Profession $1,500.

Extension un

- to Alesta)

last -

14,500,000.00119381

5,000.00(1950)

ly thereafter.

M.I. 1984

192,000,000.00
214,500,000.00
7,500.00
10,000.00

500,000,000.00

Stat., 1140,
$,000,000.00 (1936)

her 19. 1996

" Net., 458

10,0.0,000.00(1938)

adida

floral year

11,000,000.00
18,000,000.00

will 312,000,000
has 29. 1958

and

" Stat., 450

the presenting 1,00,000.00 (1956)

and

(1999)
(1940

emally thereof er

500,306,000.30

Set.

Interates -

(1938)
(1999)

Net
. the for
fissal year.
(1999)
(1060

fissa) year (benefits)
806,000.00(1939)
1,300,000,00(1936)

4,300,000.00

(1999)

of M. four fier-1 years fellevine.

5,000,000.00 for 1943

only

- eat proper
leases the turgeon . alled

. state fareats,

- 16, 1975

" tet., NO.
See. ,

5,000,300.00

1,000,000.00

(1940 -

fissal year thereafter
5,300,000.00

(1930)

TREASURY DEPARTMENT

250

OFFICE OF THE SECRETARY
COMMISSIONER OF

WASHINGTON

ACCOUNTS AND DEPOSITS

October 20, 1937.

PUBLIC WORKS

MEMORANDUM TO THE SECRETARY:

In compliance with your oral request there is submitted herewith
a detailed statement showing the status of the Public Works Program for the
next five years, as submitted by the several departments.
The statements have been submitted by representatives of the various

departments more or less informally in accordance with a conference held with
them.

At such conference the departmental representatives were furnished

with forms especially prepared for the purpose of submitting the desired information. They were requested to submit separate statements showing - 1. Projects or programs already approved by the Congress.
2. Projects or programs not yet approved by Congress.

251

-The statements show with respect to each project of a million

dollars or more 1 the following information: location and type: date
started; date to be completed; total cost; authorizing act; appropriations
authorized; appropriations provided; additional appropriations required
to complete on basis of present authorizations; additional authorizations
required to complete; undisbursed commitments on June 30, 1937, and the

estimated expenditures for each fiscal year from 1938 to 1942, inclusive.
The following is a summary of the data submitted by the departments (without revision):
5-Year Program (In millions)
Programs already approved

Programs not
yet approved

by Congress

Appropriations already made

Additional appropriations required
Disbursements (estimated):
1938
1939
1940
1941
1942

6,163
3,807

1,387

2,356

1,387

776

7,550
3,807
3,743

777

781

807

479

197

676

289

341
335

630

240

2565

Total cost (estimated)

by Congress Total

575
465

The foregoing is classified by types of projects in the following
table:

Projects for less than a million dollars are grouped.

PUBLIC WORKS PROGRAM

(In millions of dollars)
Total
cost

Appro-

Additional

priated

apprns.

required
Total
Approved program 1
Proposed program 2

6,163
1,387
7,550

3,807

Estimated cash withdrawals
1938

1939

1940

1941

1942

776

781

479

289

240

197

341

335
575

3,807

2,356
1,387
3.743

777

807

676

630

1,723

1,315

408

324

296

125

650
2,373

650

102

216

324

296

227

216

123

Highways

Approved program
Proposed program

1,315

1.058

a M. C.
Approved program
Proposed program

161

135

160
135

296

295

Rivers and Harbors
Approved program

2,323

1,460

863

250

208

164

140

612

559

100

712

559

153

Public Buildings
(Treasury)
Approved program
Proposed program

Penal institutions
(Justice)
Approved program
Proposed program

25
8

252

Total

Appro-

priated

cost

Additional
apprns.

Estimated cash withdrawals

required

1938

1939

1940

1941

1942

Yards and docks (Nevy)
Approved program
Proposed program

125

172

121

15
-

18
5

Foreign Service buildings
(State)
Approved program
Proposed program

996

352

644

285

352

929

Reclamation projects
Approved program
Proposed program

1.281

National parks
Approved program
Proposed program

179

141

Indian Service
Approved program
Pronosed program

115

Miscellaneous (Interior)
15

Approved program
Proposed program

14
5

Approved program means projects or programs already authorized
by Congress.

2 Proposed program means programs not already authorized by
Congress.

253

4Owing to the fact that the Congress follows a number of different

methods in providing funds for the prosecution of public works, it is virtually impossible to set up a uniform statement which would show in simple

and readily understandable form complete information with respect to all of

the different classes of projects.
PUBLIC HIGHWAYS

In the case of public highways, Congress usually authorizes appropriations covering a two-year program under which the Secretary of Agriculture

is required to make apportionments to the States prior to January 1, for the
ensuing fiscal year. Appropriations in such cases are not made on the basis
of a particular program but are made from time to time on the basis of the
estimated cash disbursements to be made during the year, without regard to the
particular program to which such disbursements relate. The figures submitted
by the representatives of the Bureau of Public Roads show that there are now
standing on the books the sum of $408,500,000 yet to be appropriated on account

of the authorizations of $433,000,000 contained in the Act of June 16, 1936.

It is understood that $2,000,000 of this will be submitted for appropriation
in the next deficiency bill; $281,500,000 for the 1939 Agricultural Appropriation Bill; and $125,000,000 for inclusion in the 1940 annual Appropri-

ation Bill. It is probable that this latter amount will be increased by additional appropriations which will be required to take care of any new program
which may be authorized in the next session of Congress. A summary of the

public highway program as now authorized is attached hereto as Exhibit I.
RIVERS AND HARBORS

With respect to rivers and harbors in general, the Congress author-

izes the construction, repair and preservation of public works on specified

254

-5250
rivers and harbors without fixing a definite limitation on the amount to be
expended on each project. Expenditures on such projects are usually made
from lump sum appropriations. Occasionally, however, Congress fixes the

maximum amount to be expended on a particular river and harbor project. It

is impossible to estimate the total cost of many river and harbor projects.
For example, the dredging of the Boston harbor was authorized by the Act of

March 2, 1825, without limitation as to total cost, and the dredging has been

going on ever since. On this project alone 13 millions of dollars was expended to June 30, 1937, and, according to the figures submitted by the
War Department, there will be expended in the future about a million dollars

annually. There are many projects of similar character involving a recurring
annual charge against the Budget without reference to a limitation of cost.
The statement submitted by the War Department shows that additional appro-

priations of $863,000,000 will be required during the next five years to
take care of expenditures on projects already authorized by Congress.
ARMY HOUSING. ETC.

In many other cases of public works such as, for example, army
housing, the Congress fixes the maximum amount which may be expended on

particular projects.
PUBLIC BUILDINGS

In the case of public buildings outside the District of Columbia
to be used as Post Offices, Court Houses, Marine Hospitals, office buildings,
etc., the Secretary of the Treasury and the Postmaster General, jointly,

submit to Congress a list of eligible projects to be given consideration.
This list shows with respect to each project the proposed limitation of cost.
In appropriating money for such construction programs, however, the Congress

does not specify particular projects in the authorizing act but provides

-6-

256

lump-sum appropriations therefor and authorizes the Secretary of the Treas-

ury and the Postmaster General to select projects from the eligible list to
the extent of the appropriations authorized to be made available.

In the case of public buildings in the District of Columbia constructed under the supervision of the Treasury Department, estimates for such
buildings are submitted to the Bureau of the Budget and each approved project

is specifically authorized under a limitation of cost approved by the Congress.
According to the figures submitted by Mr. Lee Martin of the Public
Works Branch, Procurement Division, the total cost of projects under construction under the present approved program amounts to $612,000,000. The Congress

has appropriated $559,000,000 of this amount leaving only $53,000,000 yet to

be appropriated to cover the completion of projects under existing Congressional
authorizations.

Mr. Martin suggests that consideration might be given during the
fiscal year 1940 to an authorization of $50,000,000 covering a two-year period

for construction outside the District of Columbia, and that an additional
$50,000,000-program might be considered for projects in the District of Columbia

covering a five-year period with the initial appropriation to be made available in either the fiscal year 1939 or the fiscal year 1940. Mr. Martin has
listed the estimated expenditures under the suggested new authorisations as
follows:

Fiscal year
1940
1941
1942
1943
1944
1945
1946

In D. C.
4

12
10

Outside
D. C.
5

Total
9

100

-257
OTHER PUBLIC WORKS

There are still other public works items which are not based upon
prior Congressional authorizations but are simply submitted to the Congress
AS estimates of appropriations in the same manner as estimates are submitted

for any other governmental activities. In this class may be mentioned Reclamation projects (with some exceptions), and physical improvements in
National parks and on Indian reservations.
RECLAMATION PROJECTS:-Under the act of Congress approved June 17, 1902

(32 Stat. 388), there was established in the Treasury a special fund known 1
as the reclamation fund, representing receipts from the sale of public lands

in certain States and Territories to be used for the construction of irrigation works for the reclamation of arid lands. Pursuant to the act of
June 25, 1910 (36 Stat. 835), the Secretary of the Treasury advanced to the
reclamation fund from the General Fund of the Treasury $20,000,000. The act
of June 12, 1917 (40 Stat. 149), provides for the reimbursement of the money
so advanced through the transfer of $1,000,000 annually from the reclamation
fund to the General Fund of the Treasury beginning July 1, 1920, and con-

tinuing until full reimbursement is made. Beginning with the fiscal year
1921 there has been returned to the General Fund $1,000,000 annually, making

a total of $10,000,000 for the 10 years ended with the fiscal year 1930. The
Deficiency Act of February 6, 1931, provided for a suspension of the annual
payments for a period of 2 years; the Act of April 1, 1932, as amended by
the Act of March 3, 1933, and the Act of June 22, 1936, provides for extension

until the fiscal year beginning July 1, 1938.
The Deficiency Act approved March 4, 1931, appropriated an additional
amount of $5,000,000 for advences to the reclamation fund from the General Fund,
all of which was advanced between April 28, 1931, and November 30, 1931.

258

The following statement shows the status of the account as of
June 30, 1937:
Charges:

Advances from the General Funds

Under act of June 25, 1910
Under act of March 4, 1931

Total
Less repayment of advances 1
Unreimbursed balance

$20,000,000
5,000,000
25,000,000
10,000,000
15,000,000

1 Installments for 1931-37 suspended.
Based upon estimates submitted by the Reclamation Service and

included in the annual budget, Congress authorizes the use of monies in

the reclamation fund for specified projects. Generally speaking, Congress

does not fix a limitation of cost for each project but does specify the
amount which may be currently expended on each project.

In the case of the Boulder Canyon project, the Congress fixed
the limitation of cost and authorized advances from the Treasury to meet
the cost, which advances are to be repaid over a period of years from the
earnings on the project.
Under the present authorized program, the Reclamation Service has

reported projects involving an estimated total of $996,000,000 against
which $352,000,000 has been appropriated, leaving $644,000,000 as the

additional appropriations which will be required to complete projects under
the program already authorized by Congress.
NATIONAL PARK SERVICE:--The public works of the National Park Service

consist of roads and trails, physical improvements, and parkways. National
parkway projects are constructed under agreements with States whereby the
Federal Government undertakes the construction and maintenance provided

- 9. -

259

the States furnish the rights of way averaging 100 acres to the mile. Thus,
there exists an obligation on the part of the United States to complete the
construction if the required land is donated to the United States. The
approved projects of the National Park Service amount to $89,000,000. of
which $38,000,000 have been appropriated, leaving $51,000,000 yet to be appro-

priated under existing authorizations,
INDIAN SERVICE:--The Indian Service reports authorized projects in-

volving a total cost of $70,000,000, of which $29,000,000 has been appro-

printed, leaving $41,000,000 yet to be appropriated on the basis of the total

estimated cost. These projects consist of irrigation systems, roads, bridges,
and various kinds of physical improvements.
TERRITORY OF ALASKA:--Conourrent Resolution No. 24 of August 13, 1937,

authorizes the development of resources of the Territory of Alaska. The

Interior Department has not estimated the total cost of this project but
advises that the expenditures will run about a million dollars a year for
a number of years.

ST. ELIZABETH'S HOSPITALI--Several projects at the St. Elizabeth's

Hospital have been authorized without a limitation of cost. The estimated
cost of such projects is $4,700,000, of which $600,000 has been appropriated.
BONNEVILLE PROJECT:-The Bonneville Project in Oregon and Washington

involving the construction of transmission lines was authorised in Public
Act 37 of the 75th Congress. The estimated total cost of such project has
not been submitted but the Interior Department has estimated that it will
spend at the rate of $2,700,000 a year from 1939 to 1942, inclusive. Estimates beyond 1942 were not submitted.

260
EXHIBIT I
PUBLIC HIGHWAYS

Authorizing act of June 16. 1936
Apportioned in December, 1936 (1938 program)
To be apportioned in December, 1937 (1939 program)

$216.5 M
216.5
$433.0 M

Total authorizations on books

Appropriated -

24.5

In Act of June 29, 1937

408.5

Balance not yet appropriated
To be appropriated In next deficiency bill (December 1936 apportionment)

In 1939 appropriation bill

December 1936 apportionments
December 1937 apportionments

$ 2.0
281.5

$190.0
91.5

In 1940 appropriation bill (December 1937 apportionment). a 125.0

408.5

To be expended -

In fiscal year ending June 30. 1938 -

Under Dec. 1935 and prior apportionments
Under Dec. 1936 apportionments

In fiscal year ending June 30. 1939 Under Dec. 1936 apportionments
Under Dec. 1937 apportionments b

157.0
41.5

198.5

175.0
91.5

266.5

In fiscal year ending June 30. 1940 Under Dec. 1937 apportionments b/

a/125.0
590.0

Note. From the foregoing it will be noted that the budgets for 1939 and 1940
are already committed to "expenditures" of $266.5 M and $125.0 M. respectively, under authorisations already enacted by Congress, saking a
total of $391.5. This will be further increased by the amount expended
in 1940 under any new program authorised by Congress.
a/

This will be increased by amount appropriated and expended under any
new program authorised by Congress during the coming session.

b Not yet made.

ACCOUNTS AND DEPOSITS

October 20, 1937

26t
October 28, 1937

You suggested that your speech might consist of
three parts:
(1) Reasons why the budget should be balanced;
(2) How the budget can be balanced;

(3) Considerations involving the debt retirement question.

NOTE:

Today, October 28th, HM, Jr told Haas to include

this in the speech.

262
October 28
10 am
PRESENT:

Dr. Viner

Mr. Rieffler

Mr. Haas

Mr. Taylor

Mr. Gaston

Mr. Seltzer
Mr. Bartelt
Mrs. Klotz

HM,Jr: The net amount we receive from Social

Security, taxes and the States, is 1 billion. De-

ducting expenses would leave us as the net amount we

would receive from those sources of 1 billion, against
which we issue 21% and 3% certificates. However, the
cash, we will spend 700 million more cash this year
than we take in, so we have a cash deficit of 700

millions. If we did not sterilize the gold, we could
retire 300 million dollars worth of public debt. Now,
it has taken me all this time to get it, but to put it
in the language I understand and boil it down, that's
what it is.
Now, looking forward to next year, taking again

Social Security receipts, they will be about 12 billion
and expenses, 250 million, in addition to that. We
now have decided that any amount we get from any revolving funds, net, should be set aside for debt retirement.
That is, an organization like Commodity Credit should
not draw on another revolving fund and we will go to

Congress each year and ask them to make up the amount

of impaired capital in an organization like Commodity
Credit has obtained due to a form of subsidy in the Act
which -- in other words, make Commodity Credit or anything else stand on its own feet; go to Congress and say
we need 50 million or 100 million to make Commodity
Credit good and that would come out of the General Fund.
So looking forward to next year, we would have

this picture again. We would have 1 billion dollars

worth of money coming into the Treasury, to be invested

263
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in these special certificates plus any amount which
would come in net from revolving funds. Again saying
we don't have gold sterilization, again leaving that
out, because it only confuses the picture, if that was
out and we had an exact amount of taxes come in to
exactly pay for our total cash expenditures so that
they balanced, the question I am asking myself and I
want to ask you people, in view of the fact that the
fiscal year 1936-1937 -- the difference between that
and the one we are in now, I have gained about 2 billion,
we are 2 billions better off this fiscal year than we
were last -- again I am asking myself, should we at
this tine in addition to taking this Social Security
money at this time and in addition to taking all net
receipts from revolving funds, should we on top of
that set aside another 600 million to be obtained from
taxes to retire the debt? Now, there's the whole
picture. Now, before I can make a speech, I have

to settle that.
Dr. Viner: This other 600 millions is sinking
fund?

HM,Jr: Yes. Have I put it very clearly? We

have had some terrible fights here, but that's the
Have I stated it about right?
picture.

Mr. Seltzer; Yes. There is this: that what

you retire out of recoverables would be called sinking
fund retirements.

HM,Jr: O. K. A rose by any other name smells as

sweet.

But that's all right.

Mr. Gaston: Yes, that's true.
HM,Jr: After all, my responsibility is to recommend to the President what the top figure should be on
spending and what amount should be for taxes. Now,

how much he gives to the War Department or the Navy,

that's his job and Bell's; not mine. After we arrive
at the top figure, that's my responsibility.
Now, may I say, in helping you to make up your
mind, because, in this room, I am afraid to mention
it to the President because it looks too good, in a
sense -- as far as I am concerned, every ounce of

264

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strength I have got will be continued to be used towards
curtailing unnecessary expenses, because the way the

figures look now we could get along with about 6 billion
650 worth of receipts, isn't that right?
Mr. Seltzer: Yes.
HM,Jr: We could get along with this year's taxes
and I think that that's high. We could get along with
as much revenue as we have this year. We don't need
any more revenue.

Dr. Viner: Allowing how much for sterilization?

HM,Jr: This 18 all ex-sterilization. The steril-

ization thing simply clouds this thing for my thinking,
but the question is should we at this stage go out and
ask for another 600 million from the taxpayers. I am
willing to be cross-examined by you fellows.
Mr. Rieffler: How much does your receipts estimate
allow for a drop in business? Where would you be if the
business picture for 1938 dropped?

Mr. Haas: The President gave you 6 billion 6 as
the necessary figure, but it happens to be the same

figure as our estimate for this fiscal year.

HM,Jr: No. The last estimate Haas gave me for next
year was 7 billion. As a matter of fact, he gave me
7 billion 100 something, and Magill and I working on

his picture has a figure in mind of between 7 billion
and 71.

Dr. White: Shouldn't the determining factor be
the state of business? Could you go on record now as
prophesying the business level a year and a half from
now? Would it not be better for you to so couch your
speech so as to make allowance for a given level; that
you will adapt the situation to that level? You can't
be a prophet. No one here knows what the business level
will be in 1938-1939.
HM,Jr: I think you are getting away from the point.
After all, the 5th of October Haas gave me a figure, an
estimate of 7 billion 172.

265
-4-

Mr. Haas: I want to repeat very strongly that

that was made in August and it was very tentative.

HM,Jr: All right. This is the 5th anyway.
I don't want to get confused, because the business
level -- this is the question, how much did Bell's
figures total yesterday?

Mr. Seltzer: 6 billion 775.
HM,Jr: Call it 6 billion 8.
Mr. Seltzer: He can take a couple of millions off
of that.
Mr. Riefler: Does that include statutory debt re-

tirement?

HM,Jr: No. Does that include expenses for Social

Security?

Mr. Seltzer: Yes.
HM,Jr: The 250 million?
Mr. Seltzer: Yes.
HM,Jr: We will take that off.
Mr. Seltzer: That does not help you because you
also take it off receipts.

HM,Jr: I want to take it off.
Mr. Seltzer: And we haven't got Social Security
expenses broken down the way it would help you for this

purpose.

HM,Jr: How much has he in there for agriculture?

Mr. Seltzer: Agriculture? 600 million for agri-

culture.

HM,Jr: Roads?

Mr. Seltzer: Roads is split up all through here in

266
-5-

public works, but I believe he has 255 million for
public highways. That's the figure he gave me orally.
HM,Jr: But if we set up this thing and set Social
Security to one side, we certainly would have to subtract 250 million if we are talking about how much cash
we raise to put it on a cash basis because we deduct
250 million from cash receipts. What's what I am talking about.

Mr. Seltzer: Well, suppose you figure it this way.
Bell figures 6 billion 775 expenditures including noncash expenditures. Supposing we figure receipts of
6 billion 650. Bell would knock off that 125 million
easy enough so that your receipts and expenditures on a
budgetary basis would exactly cancel out. You would
be exactly balanced without sinking fund. That would
leave you a billion cash for debt retirement.
HM,Jr: I suppose those figures are correct.
Dr. White: There are two different aspects to this
issue. One is monetary and the other is fiscal. The
question as to how much taxes you wish to collect and
spend is fiscal. That you can decide abd take some
chance on envisaging what the situation will be. Any
determination of how much revenue you will get, how much
you will spend -- you will have to modify it 1f conditions
change, but that does not affect the question as to whether
or not you utilize this billion in debt retirement -- how
much to utilize in debt retirement.
Dr. Viner: What else could you do with it?
Dr. White: My point is whether you would use it
as debt retirement or run into a deficit. In other
words, whether you should regard the necessity to increase expenditures rather than -- let me pursue. that
a moment.

HM,Jr: Please don't today. Put it in writing.
George has not kept you posted. Write it. If you
have an entirely different idea, put it in writing.
Dr. White: I will do that because it bears out my

point.

267
-6-

HM,Jr: I want to stick to this thesis today.
Dr. White: Which is?

HM,Jr: I gave it to you.
Dr. White: Well, apparently I did not get it.
HM,Jr: I did it twice -- that the taxes we take

in actually pay for our cash expenditures and that we
raise enough taxes to pay for all our cash expenditures,
then anything we take in from Social Security less running expenses, which would be 1 billion plus anything
we take in from any revolving funds, that those two
sums go toward retiring an equal amount, dollar for

dollar, of debt in the public hands. Now, is that

plain?

Dr. White: It is, but I don't see the issue, because I don't see what you can do with money except
retire debt or spend it.
Mr. Seltzer: Shall we retire 1 billion or 1 billion 6?
HM,Jr: The President is figuring -- the way he told
it to Cabinet when he figured it up -- every time he has
talked, he has always included 600 million additional for
debt retirement. Now what I am talking about, do we
want to tax people in addition to raise that 600 million?
Dr. White: And I maintain that that depends on the
level of business activity and that is some thing I don't
think any of us could foresee. Therefore, your statement
should be couched in such terms as to make possible an
adjustment to the then prevailing situation.
Mr. Seltzer: But it has to be concrete. You have
to lay out a program for next year. Later you may
change your program.

Dr. Viner: The program could be laid out as an
economy budget program with more debt liquidation if
business conditions justify us. There is an alternative.
Dr. White: You can say we are going to balance
the budget in what the President calls a layman's sense,
what I call an economic sense. That's really balancing

268
-7-

budget. It is too bad he terms it a layman's budget.
Dr. Viner: Or you can balance the budget and in
addition carry out the statutory requirements for liquidation. Now I agree with Harry White that it will be
a big achievement if you get the first step done. That
the

ought to be the minimum.

HM,Jr: What is the minimum?

Dr. Viner: The layman's balance.

Mr. Seltzer: Using Social Security to retire debt.
HM,Jr: You people all make this so complicated.

made it simple in my own mind. I am going to stick to
the proposition that I put. I have to make up my mind
am I going to recommend to the President that we have to
raise our tax figures. We have Congress meeting on November 4th, the committee, should we include another 600
million or shouldn't we.
Dr. Viner: Mr. Secretary, your estimates of tax
receipts for the fiscal year 1939 are going to depend
very much on what the level of business is. Therefore,
you ought to estimate a minimum amount on the assumption
that business is not going to be very good in that fiscal
year. That will be a layman's budget. But if business
does recover quicker than some people think, then that
will also give you statutory debt retirement.
HM,Jr: That's all very nice, but I still come back
to you with the question I am asking and no one has answered it. Congress goes ahead and votes so much money

Dr. Viner: Appropriates.
HM,Jr: Through appropriations. They ask us to make
an estimate. The President has to make an estimate in
January, the budget message. Now the way it is always
done, they build, block on block, total expenditures and
Bell gets final figures, which will figure at the present

a total of 6 billion 8. Now, let's not talk lowest

estimate anybody can make on business, which it isn't.

The question is what the country can stand at this time.
After Bell and the President get all through, let's say

269
-8-

the total figure they have, total expenditures, 18
6 billion 8. What I am saying. is of course we should
raise 6 billion 8 in taxes, but should we on top of that
put another 600 million debt retirement?
Dr. Viner: But 1f the estimate of business is based
on very bad business conditions, that's all you can estimate.

HM,Jr: Let's say it is based on the very worst. I
will take the lowest figure that anybody in this room
will give us.

Dr. Viner: Then I will say that 6 billion 8 is suf-

ficient.
HM,Jr: As a matter of fact, since I have been here

we have always figured our estimates -- always taken the
lowest.

Mr. Seltzer: You are saying no more than has always
been the case. Mellon regularly underestimated receipts
and surplus revenue went for debt retirement.

Dr. Viner: Yes, but at the moment there is a little
different situation in that the business situation is so
uncertain that estimates are going to be more conjectural
than usual.

HM,Jr: If the Agricultural Committee votes 1 billion
for agriculture, you have that. If they vote the total
they are going to spend it.
Dr. Viner: Not necessarily.
HM,Jr: But excuse me, they have always spent more

than they have estimated. All right. You fellows --

what I have got to do is stand before this country and
come out and say that I don't believe we should put aside
any money for statutory debt retirement. That's what I
am asking you.
Dr.

White:

At this time. I would say that at this

time the conditions do not look certain so that you feel
warranted in raising taxes for the purpose of debt retirement. It is a deflationary move which is all right when
business activity is reasonably high, but if, as is possible,
1938-1939 may be a bad year, then any such attempt only

270

-9-

accentuates it and you probably will change your mind

sometime between then and now, in which case your promise

will have been of no avail.

HM,Jr: Will you answer me point blank, do you feel
that at this stage of the game -- ten days off from next
Tuesday the President of the United States will send a
message to Congress -- I should recommend to him that we
should not set aside or try to raise any money for debt
retirement?

Dr. White: That's my feeling.
HM,Jr: Now

Dr. White: The way the picture looks now, that's my

feeling.

HM,Jr: What other thing have you in mind?

Dr. White: Just that -- that taxes should not be
raised for debt retirement. I did not know whether you
wanted my opinion. I thought you wanted reasons pro and
con. Therefore I had to put it on the monetary basis
because it relates to the broader picture of business
activity, of contraction of purchasing power, etc., so
I called it the monetary aspect of the budget rather
than purely fiscal aspect. The latter is what you have
outlined for me, cash income and cash outgo. The other
at this time I am not in sympathy. Had this been last
spring I would have said, yes; possibly more. The way
the picture looks now, I think it would be a grave error
to go on. It would be futile psychologically if you
started it.
HM,Jr: This particular audience are going to say I get up and say I am opposed to raising new money for
statutory debt retirement at this time
Mr. Seltzer: You don't put it this way. No. You
say this. You say we have a very strong tax structure.
On any business conditions you get a lot of money for
sinking fund and debt retirement. You don't believe
you should add to that tax structure. You are considering very conservative tax estimates. If business is
better, fine! you will use the surplus for debt retirement, but you are not going to take it out of the hide
of business at this time.

271
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Mr. Taylor: However, you are going to do this:
returns from recoverable assets you are going to utilize
for debt retirement.
Mr. Haas: Yes.
Mr. Taylor: That's a damned good point.

HM,Jr: On the Social Security, you issue, as far
sheet is concerned, you simply issue 1 billion in special
Treasury .certificates. But I have this picture now.
as the statement is concerned, as far as your balance

Nobody can dynamite it out of my head.

Dr. Viner: You from now on hand to distinguish
between public debt and public debt in the hands of the

public.

HM,Jr: It has taken me a week to get that and
Walter Lippmann has not got that.

Mr. Rieffler: I would like to raise one question
of fact.
HM,Jr: (Replying to Viner's statement) But that's
the whole point. They keep talking Social Security.
It's a shift on our books from the hands of the public
to the Treasury books.

Dr. Viner: But that's an important shift. That's

not merely a bookkeeping practice.

HM,Jr: We are taking 1 billion from the States and
Federal taxes and putting it into the hands of bondholders,
holders of Government bonds.

Dr. Viner: Economically, it's just like debt liqui-

dation.

Mr. Gaston: May I make a suggestion, something to

shoot at. That is this: that we hold the expenditures,
use every effort to hold expenditures to the level of the
current fiscal year receipts of 6 billion 650. Now if
business in 1938 is no better than in 1937, we should get
approximately that revenue.

272
-11-

Viner:

Oh, no! We ought to get more.
Mr. Gaston: If business in 1938 is not better than
in 1936, I am looking for a drop back to the 1936 level,
then you will have revenues for your fiscal year 1939
exactly equal or approximately equal to the revenues of
1938, of 6 billion 650, and in that situation with expenditures held down to 6 billion 650 you would have
Dr.

available your billion and a billion only for retirement
of debt in the public hands. If you establish such
program, the chances are that the improvement in business
will permit you to retire a larger amount of debt, but I
a

don't think a larger amount of retirement should be done

unless you get an improvement in business above 1936-1937.

Dr. Viner: That's all right, subject to the figures
HM,Jr: We don't have these men very long. Let's
for a second hear these fellows.

Mr. Rieffler: I would like to ask a question.
First, in this estimate of 250 million expenditures on
the Social Security program. Does that take -- what
estimate does that make of unemployment payments, if

we have a bad year? You will have this year withdrawals
from those trust funds for unemployment insurance. Does
that take it into account?

Mr. Seltzer: Yes, as well as it can be. We estimate in 1939 we will get 725 million in unemployment
trust fund receipts. Thus far, payments out of the

unemployment trust fund have been negligible. Now next
year we are allowing,I am doing this because there is no
data available, 221 millions of outgoing payments and
you will still have better than one billion available
and you would add that to old age for debt retirement.

Mr. Rieffler: Next, I agree with this statement
it should be made. I should like to put a footnote
on Harry White's statement about monetary aspects. At
this time, retirement of debt from public hands is not
entirely deflationary. It puts back that money into
the capital markets and if you are trying to raise new
capital, if there is a stringency in the capital market,
this is a machinery. Retirement of debt in the public
hands is not deflationary. It might work another way.
in general and the statement Herbert made is about as

Depends on circumstances. I agree with the program.

273
-12-

HM,Jr: Let's just go ahead and hear what you

have in your mind.

Mr. Rieffler: I would like to say to the public

in your speech that you are estimating receipts on the
basis of business activity, very conservatively, as low
as 1936 or possibly lower. That on that basis you
have a picture in which receipts will cover expenditures
and including the Social Security will provide for some
retirement of debt from the public hands, which means
that

Dr. Viner: 1 billion.
which means that to the extent
Mr. Rieffler:
that the capital market has been put in difficulties
during the past year by the raising of Federal debt
that will be alleviated. At that level you are notdo
providing for statutory debt retirement. That you
not believe that you should raise taxes to provide for
such retirement. That if the level of business activity
is better than this conservative estimate, which it ought
to be, you will have your full amount for statutory debt
retirement.

Mr. Gaston: That implies there will be no change
in the overall tax estimate.
HM,Jr: If I understand you, what you are saying
is that if we figure our tax revenue at a very, very
conservative estimate, or building our tax revenues -that's what we have to do because there will be 80 many
changes, we build our tax structure at the most conservative estimate of business, we will build it on such a
basis that that will produce enough revenue to pay for
the total running expenses of the Government

Dr. Viner: If the business level is what it was

in 1936.

We will just build the
HM,Jr: Wait a minute.
tax program on the basis -- I wouldn't use 1936.
Dr. Viner: You have to use some basis.
HM,Jr: On a very conservative basis. If we have

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underestimated, then anything we get over and above would

go to debt retirement, but we don't feel at this stage we
should add another 600 million to this tax structure at
this time.
Mr. Rieffler: On a conservative estimate of revenues.

HM,Jr: I would make it -- maybe explain a little
how we arrived at it.
Mr. Gaston: I would call it the minimum estimate.
HM,Jr: I would explain, taking Federal Reserve figures
put in four or five items that we would put in.
Dr. White: Except I don't think the Secretary could
prophecy a lower level even though he might feel that way.
That's why I don't think he should name 1936.

HM,Jr: I wouldn't name it.
Mr. Gaston: I would say even if
HM,Jr: Again I keep saying, what I am asking for, if
I stand up and say no statutory debt retirement, you know
what that means to some fellows.

Mr. Rieffler: I would put in the picture that even
public. I would make that very strong, that that still
involves that picture.
HM,Jr: I: :appreciate I am putting it up to you.
Dr. Viner: I have nothing more to say. As far as
I can tell, we are all in agreement.
that does mean retirement of debt from the hands of the

HM,Jr: Now I will give Harry a chance.
Dr. White: I am a minority of one, and I am satisfied.
HM,Jr: Nobody interrupt him.

Dr. White: I further feel that the situation is un-

certain and has possibilities so that you may not even
wish to use a portion of that billion, because though Win

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(Rieffler) is right in saying that it increases the

amount in the capital market and, therefore, may not
be deflationary, that's true only when business conditions are on the downgrade. When they are, you can

pile all the money in the market and it won't help.
So I would merely say I am satisfied with that. I personally would like to go along in that direction, but I
am alone.

HM,Jr: I am asking you what you think.
Dr. White: I would somewhere in the speech, if
that's what you are referring to, or in the statement
have a paragraph which would indicate that you are fully
aware or cognizant of the possibility that if necessary
you may have to reduce the amount of debt retirement

even with respect to that billion.
Dr. Viner: In other words, that you may have to
use part of that billion to meet current expenses of the

Government.

Dr. Haas: Then it would not be balanced.

Mr. Taylor: I think it's a very unfortunate way of

saying it.

Dr. Viner: That's the way they will say it.
Mr. Taylor: I think you have to be particularly
careful you don't say it that way.
HM,Jr: That's an unbalanced budget.

Dr. White: Except I don't like the term unbalanced

budget.

HM,Jr: But you are doing it on a basis. You are.

You are using these receipts, you are spending them just
the way we are this year.

Dr. White: All right. I have spoken.
HM,Jr: What I get from you, you are delighted that
I am going this far.

Dr. White: That's it.

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HM,Jr: But you are fearful if business depression
goes further, I will have to use
Dr. White: You will have to use
But why say it? There is nothing in the law
HM,Jr:
that says I can't. That's a blank check from Congress

for 1 billion dollars. How can I get up in front of
Marvin Jones and pound the desk and say you can't do this
if I point the way to a blank check for a billion dollars?
Why show them the way? I think the position -- I am trying to make up my mind; I haven't and I am not going to
for a couple of days -- should I take the position of
enough takes to pay for cash expenditures of the Govern-

ment

Dr. Viner: I would like to say another word. If

you find yourself forced to invade the Social Security
funds to meet the current expenses, that will be deflationary and not inflationary because again the pledge to
balance the budget has failed and unbalancing of the
budget in 1936 has been deflationary and not inflationary.
Dr. White: There is a point of view that is irreconcilable here.
HM,Jr: I agree with Jake and the thing I am so fearful of, I can say it in the room without being quoted, I
know that the President will grab it because this makes
his task 600,000,000 easier and he's going to take it,
like that! but I am willing to recommend it publicly, and

then if it is good, he can take it. But that's what

am offering.

Mr. Rieffler: One thing more. The Social Security
Board is planning exemptions which will practically wipe
that out.

Mr. Seltzer: But this thing is against that.
Dr. Haas: They are going to get rid of the reserves
problem by spending the reserve. But this checkmates
that.

Mr. Rieffler: But you may have to hold this program
or you are lost.
HM,Jr: Wayne, do you want to say something?

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Mr. Taylor: I check 1000% There is one addi-

tional thing, which is changing the way we keep our

books.

HM,Jr: That's the next thing I have here. This
is Prof. Bartelt's suggestion.
Mr. Seltzer: We haven't heard any explosions from
Bartelt.

HM,Jr: I told Bell we should show it to Himmelblau
tomorrow. Dean Himmelblau is coming and we will show
this to him. If I can think at all, I am good, because
I happen to be very sick. (Referring to table) Where
is Social Security? Does it appear in this?

Mr. Seltzer: It is in there.
HM,Jr: But where is the trust fund?

Mr. Seltzer: That's the turst fund. It does not

get into the Budget, but there is something I want to
mention. I think we ought to have a fourth section
there that shows cash changes in the budget picture where
you take in not only operating expenses and investment
operations, old age reserve account, but take in all
trust funds, so that people could readily see where we
get all the money for retirement of debt in the market.
Dr. Viner: You mean cash accounting.
Mr. Seltzer: And you would also reflect building
up in the cash position too. Increase in the public
debt is merely due to building up cash position. That's
another phase and the budget picture, that ought to be
in there.

Dr. Haas: It's a trusteeship.
HM,Jr: Could you gentlemen do this for me? Could
you go into somebody's room and take a look at that
statement and then as soon as press conference is over

I would like to get on that thing again. And then you
(Viner) are here for two days?
Dr. Viner: As long as necessary.

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HM,Jr: And how about you (Riefler)?

Mr. Rieffler: Just for today.
HM,Jr: But as far as you people in this room are

concerned, if I could get something to show the President

Monday, it would be marvelous.

Mr. Seltzer: We can get something out by Monday.

HM,Jr: And it gets down to clearing the thing. We

have enough talent here. And then on. this thing, maybe
you don't want to see me right afterwards, but I am going
to go home about 11 o'clock. I had a chance to read
this this morning. My thought in talking about economy,
the two illustrations which are the best to use is agriculture and to show you, I would like these gentlemen to
take what Bartelt has prepared, the stuff he has given
us, and where he begins to talk about authorization of
appropriations shows what we are up against. He has done
it very well and I don't know any one better to explain

how difficult it is to do this thing and he builds up
here the picture in agriculture. Well, the Department
of Agriculture for 1939, including good roads, comes to
1 billion 6. This is for next year, the way the picture
looks now, and he has built it up.
Dr. Viner: Is that the Department of Agriculture or
agriculture.
HM,Jr: Agriculture. And taking public works, he
shows how we are committed to pay to 1942 and no money
to finish them. My thought is to use those two illustrations as devices Congress has used to provide money

for agriculture. It is unbelievable. He has it all

down here, has done a beautiful job and I don't know

how better to explain it than use agriculture and public
works. As far as I am concerned, if you fellows could
help me make up my mind -- here's a balance sheet plus
600 millions and everything else around the shop is in
pretty good shape, but you see I am going to see the
President with Bell on Saturday. Before we get down
to talking about individual departments, I would like
to have this picture. I know the President. If
recommend that we get 600 million for debt retirement,
the minute I mention it I will never be able to unsell
him on it and I am the fellow who will sell it to the
I

President.

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Mr. Rieffler: I wouldn't sell it to the President.
HM,Jr: Listen, he's a smart fellow. He did not

know what we were working on. He said we needed three
budgets, kept saying when a fellow borrows money for

improvement, it is ridiculous to charge that to yearly

expenses, and he has been groping for this thing and has
not got the answer and no one has been able to give it

to him. I understand Social Security and once I give
him that I will never, never unsell him. I don't know
how Danny Bell will feel, but I think Danny Bell will be
absolutely opposed. But I am not feeling at all well
today. I have nothing from 9 to 1 tomorrow. But I
terribly would like to get something on paper. Magill
and I are leaving right after lunch to see the President
and Bell and I see him Saturday, and that's my schedule.
Mr. Selzter: What do you want on paper, the speech
or accounting?

HM,Jr: Accounting, and a statement from these gentlemen how the whole thing -- the whole thing boiled down.

It really centers almost on debt retirement. Everything
else, I would say, would center around that. Wouldn't
you, Herbert?

Mr. Gaston: Yes.

HM,Jr: If I come out and say I don't think we ought
to issue another 600, business at this level can't stand
it, I don't see why we don't call a spade a spade, why -this is an intelligent audience -- why should somebody
else read words into it? That's the whole speech, the
part I sent Jake. And did you get one too?
Mr. Rieffler: Yes.
HM,Jr: Tremendously important, that first half.
Then, from then on, how much do we need and then using
agriculture and public works to realize how difficult
the thing is and how we have to untangle all these eight
or ten ways of raising moneys, these devices, these ways
of raising money.

First, the budget balance, and that implies holding

expenses to the level of 1938, and then go ahead and show

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the actual problems we face to do that, which is a
real job. We are not going to hold taxes to business
levels; business levels will decide what the taxes are.

Mr. Rieffler: I think I have a suggestion for presentation. Won t bother you with it now. I think I
can see how to do it. I had better work it out with
the group.

HM,Jr: At 2:30 I have to meet with these people
to get ready for RFC. That will run until four. By
that time if anything 13 left of me -- but between now

and four, I would like you to concentrate. It isn't
the speech. It's setting this policy. I want Harry
to sit in as long as he's the minority. Let him sit in.

281

October 28, 1937
4 p. m.
Present:

Dr. Viner

Dr. Riefler
Dr. Haas

Mr. Seltzer

Mr. Gaston

Mr. Bartelt
Mrs. Klotz

crew.

HM,Jr: Haas, you are in charge of the wrecking
Who comes first.

Mr. Haas: I understand Herbert has a suggestion
which he has put down in writing and Win (Mr. Riefler)
has another one which he did not have time to put in

writing. It's rather simple.
Mr. Riefler: I can give it to you. It's what I

spoke to you about this morning. I suggest you do not
change the first part of your speech or give up a full
and complete balancing of the budget including sinking
fund at all as the objective.

Now, that speech is written in terms -- that first
part -- in terms of the level of business activity during the past year and your revenues on the basis of
that level of business activity would be in the nature
of over 7 billion and would give you the revenue for
administrative expenses and provide for your full Social Security reserves and to provide for your sinking
fund, and I would go right straight through on that
level of presentation. Then, when you are finished,
you could take up the fact that revenues do fluctuate
with business and you can point out that the period
from which these revenues will be collected is a year
or so from now when, even if we had a recession, business would probably be up to 1937 levels, but you can
say that if those revenues are lower because of business fluctuation you can say receipts will still be
enough to cover all cash expenditures and to cover the

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Social Security reserves and, therefore, result in
retirement of debt in the hands of the public even
though they may not be up to 7 billion necessary to
cover the sinking fund. You can follow that by pointing out that if business is higher than last year, revenues will be large enough to provide for sinking fund
and additional debt retirement over that.
said

Mr. Seltzer: Another way of putting what Win just
HM,Jr: It's not very convincing to me.

Mr. Riefler: I think it is what you are saying in

your speech as written today.

HM,Jr: Let me be the audience. What I get out of
this is Morgenthau makes a strong plea to balance the
budget, then he comes along and says that's all fine as
long as business does not get any worse. I am interpolating now, because if business does not get any worse
than it is, then the revenues are set up on a basis where
they will produce about 7 billion, which is ample.
Mr. Riefler: No, you will still have expendi tures.
HM,Jr: Which is ample to take care of the proposed
expenditures, which would be around 6 billion 8, if we

reduce it to that figure. If, however, business gets

worse we are going to keep the tax rate just as it is
now and it may only produce 6 billion.

Mr. Riefler: 61.
HM,Jr: 61, which would not balance the budget and,

therefore, after making this very, very strong plea and
bringing tears to my eyes why it is so necessary to balance the budget, Mr. Morgenthau says that if business
gets worse the budget won't be balanced and we will con-

tinue to have a deficit.
Mr. Seltzer: That's one interpretation.
HM,Jr: Now, wait a minute. I would say, Oh, my

heavens! What a flat tire that fellow is! really

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for a moment thought he meant what he said, but if
busin ess gets worse, and I guess he thinks it is going to get worse, we are just going to have another
cash deficit!

Mr. Viner: Not worse than it is now.
HM,Jr: Just the two of us, Riefler and myself.
Then I will take you on, if I have the strength.
Mr. Riefler: George knows better than I do how
revenue estimates will run, but I would imagine that
when you come to estimate revenues for 1938 you will
forecast a very severe depression or recession, starting
last month, and would still get this level of revenues -for fiscal 1939, I should imagine, because you have got
that's quite a way away -- and you would have time for
the recession to get over and recovery. If you are going to estimate revenues below, then you are forecasting
a pretty severe depression, which I don't think you will
at this time. It seems to me your whole speech is made
on the forecast that the immediate business problem is a
recession and not a depression.

HM,Jr: When I wrote that thing I was writing with
all sincerity and with sufficient fortitude and guts
that I was willing to burn all my bridges and say we
must not only balance the budget, but we musthave 600
million over and above.

Dr. Viner: What's that for?
HM,Jr: Statutory debt retirement.
Dr. Viner: He's including that.
HM,Jr: No. Let me just finish my sentence. I
wrote that balanced budget plus 600 million for statutory
debt retirement. Now, the proposition I put up to you
this morning, in view of what has happened, without going into a long technical explanation, should I adjust
myself to the position which I simply am going to fight,
not in the trenches of debt retirement, but in the
trenches of a cash balance, but then be so forceful and
so determined that no matter what happens that we must
balance it on a cash basis and if business does fall back,
no matter how much it falls off, I will insist that suf-

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ficient revenues be raised to balance it on a cash
basis. Now, my first line trench was cash balance
plus 600 million. Now I go back to what I say in
my opening sentence, should my second line trench be
a cash balance and no 600 million or should I -- I
believe what I am saying, I had better not say anything because if I begin to qualify it I can hear the

catcalls. I go back to my original thing of this
morning: should I retreat from the first line, which
was a cash balance plus 600 million, or to my second
line trench, which is cash balance and no 600 million.

My third line is I will balance it by using Social
Security money. But whatever I do, I ought to be
sure about it, of my facts and if I am sure, just remember this thing: this fellow has made a fine statement which is very true. One of the contributing

factors to this thing is that nobody has made a statement about a balanced budget which has convinced them.
I get up, who only talk once a year or once in fifteen
months, and then qualify it. I would be terribly
scared. I appreciate what your motive is. You are
trying to make it so that if in case the thing goes
worse, HM,J is not made a goat.

Mr. Riefler: No. I am trying to do the same thing

you are. It depends on your estimate of revenues.
HM,Jr: Well, we can have Magill come in on that.
Here we go on the facts. If I make a statement I have
to make a stand.

Mr. Riefler: You have to make a stand and not give
in one bit.

HM,Jr: When I listen to you, what I got this morning,
if business is good, on the basis we set up we will have
enough money for cash balance plus 600 million; if not
so good, we are in the middle, and if it goes worse we
will have to fall back on Social Security.

Dr. Viner: No. I don't think that is correct. You

are saying balanced budget in a different sense -- I
thought we were in agreement, and that is that the minimum position is cash balance; if business is bad -HM,Jr: Let's also call it middle position as between

285
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the two.

Dr. Viner: That's the minimum.

HM,Jr: I did not get that.
Dr. Viner: The middle is balanced budget in the
Bureau of the Budget sense, in a legal sense, in the
congressional sense of including sinking fund.

HM,Jr: It's most important if that 18 the irreduc-

ible sense in your mind.

Dr. Viner: Oh, yes.

HM,Jr: I did not get that. If things got worse

we would drop back and use Social Security money. What
do you want me to say? What is my last trench where

I am going to fight?

Mr. Riefler: You are going to fight for a level

of cash expenditures which may be less than 6,650, but

you are going to fight for a level of cash expenditures
that will give you, even if business is very much worse
than you are forecasting, your revenues will still cover
them and retire debt from the hands of the public through

Social Security.
HM,Jr: To put it my way, we will take in enough cash

to pay for our cash obligations.
Mr. Riefler: And also buy Governments that are out.
Dr. Viner: From Social Security.
HM,Jr: To the full amount.

Dr. Viner: Of Social Security.
Mr. Riefler: That if business is what you are forecasting, it will give you full statutory debt retirement
in addition.
HM,Jr: That's all right.
Mr. Riefler: That if business is better than you
forecast, it will give you more than the statutory debt

286
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retirement.

HM,Jr: You did not have time to put that down in

writing?

Mr. Riefler: No, I did not.
HM,Jr: When do you have to be back in New York?

Mr. Riefler: A 11 depends. I have to be in Newark

tomorrow noon. Two o'clock.

HM,Jr: What time does that plane leave to get to

Newark at 12 o'clock?

Mr. Riefler: I don't know. I imagine 12 o'clock.
HM,Jr: Because I would like to do is to give you a
stenographer and let you go into the room by yourself and

dictate this. I would like to get it direct from the
horse's mouth.

Mr. Seltzer: Another way of putting what Win says
is you are asking them to reduce expenditures by 700

millions in 1939 as compared to this year. That's all
it 1s. You say if they do that, then you are bound to
balance the budget regardless of business conditions and
if business is as good as it has been in 1937 you will
also meet your statutory debt requirements. The essential thing is to reduce expenditures by 700 millions.
Mr. Haas: Where do you get 700 millions?

Mr. Gaston: Present deficit this current year.
HM,Jr: What I am supposed to get up and say is this:
that if we take the worst estimate that we can make from

all the bluest people we can get hold of, we feel that our
estimates would produce enough to make up this 700 million
deficit.
Dr. Viner: If the expenditures are kept down to
some specified level.

HM,Jr: You realize what that level would be? 700
million from 6,650.

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Mr. Seltzer: No. It's from 7 billion 3, this year,
to 6 billion 6. Bell now has a figure of 6 billion 8

and he says he knows he could knock off a couple of million.

HM,Jr: What I would like to do is go through with
it and not have the President hedge. He has been saying
he's going ahead with a full balanced budget and if he
hedges on that, it would be terrible.

Mr. Riefler: This is putting it definitely. This

is saying that Henry Morgenthau for the next year pins

his flag to a reduction of 700 millions in expenditures
and no increase in tax rates on the aggregate and then he
says that will produce the following situation.
Mr. Gaston: That's substantially what I have written
out here.

HM,Jr: The thing I try to do in this room is not to

kid anybody -- much! -- but the statement you made about

the President giving up, then I, as the President's mouthto

piece certainly give up publicly. What I am willing
do from a monetary and economic standpoint, if that's S the
right thing to do I am willing to do it. Then if it goes
wrong, all right. But I am willing to do it if you think
it's in the best interests of the country.
Mr. Riefler: If you say the level of production is
going to be 50, of course you are not going through with
statutory debt retirement. It depends entirely on your
forecast. None of us can advise you to pin your flag
to balanced budget with statutory debt retirement with a
level of 50 or 60. We just could not possibly say that
The whole question is, What is this
business situation? Now, what I am advocating is that,
therefore, you take the thing over into an expenditure
level and a tax burden level, which, of course, will produce results comparable with business and I think you
can state that in such a way
that could be done.

HM,Jr: Are you terribly tired?

Mr. Riefler: I am tired.
HM,Jr: Would you want to do it this morning?

Mr. Riefler: No, I would rather work on it tonight.

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HM,Jr: Before we get the thing done, is there
anybody
who is not in agreement that that's the stand
I should take.
Dr. White: Would you mind repating it once more

to make sure I understand?

Mr. Riefler: Let's see. Well, you can take your

stand on a budget which is balanced in the sense of
covering a full balanced outlay, expenditure outlay,
sinking fund, and Social Security retirement on the
basis of no increase of taxation burdens, taxation
rates, and a level of business approximately that of
the calendar year 1937.

Dr. Viner: I would not necessarily support those
figures, although I would support them. It seems to
be the most reasonable one. But there is no other way
a Finance Minister can forecast a balanced budget unless
he says he is going to keep the tax levying authorities
in session all the time and the minute revenues slump
below the estimate he is going to slap on some taxes that
produce results immediately. Nobody can estimate on
that basis. You can'tgive them a: tight guarantee that
your estimates will work you. The worst thing you
would fall from is the level which in a sense balances
the budget, and if business is better than as estimated
it will do more than statutory balancing and I would say
that's a big promise. I would say your obligation after

you make that statement, assuming it be confirmed by the
President, that if bus1 ness does slump worse than we ex-

pect that you will scrutinize expenditures, put the brakes
revenue if that is feasible, but then notice that failure
to achieve your end is failure in the sense that your program was unreasonable when you made it or that you failed
in reasonable efforts to attain it. You can't both give
them a good program and give them a guarantee that regardless of what happens it can be carried out and only
unreasonable persons would expect that of you. All they
can expect is a good program and honest efforts to obtain
it in the light of circums tances existing.
HM,Jr: As I see the thing that I want to do in
this approach, I want to make the statement just as
frank, open and clear as possible, so there can't be
on them more drastically than contemplated and increase

289
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anybody that can read into it a hedge. And I think,

from my standpoint, it seems to me in view of what has
happened, that what we are talking about here, I have
about made up my mind that that is the position we will
take. Once having made up my mind, it's easier to put
it -- certainly enough people can use the English language to put it into words, but that does not prevent us
from painting the picture -- for instance, using agriculture as a whole and public works, the mess we are in

in those things; how difficult it is to cut it, and

how important it is to watch every dollar and bring all
those things into the open. That picture ought to be

painted.

Mr. Riefler: Yes.
Mr. Seltzer: You won't have room to do it except
in broad outlines.

HM,Jr: That's all right, but it must be done in
the speech. The first section, why the budget should
be balanced and, second, then how are we going to do it
and what are the difficulties in doing it and then somewhere in that would be, third, a talk about debt retirement.

Mr. Seltzer: But to get all those things covered
you have to give up a lot of detail.
HM,Jr: I am more than willing, because here's the
point: if I lay down a principle and the President will
accept, I am trying to think through with the help of you

gentlemen, what should be the policy of the United States,
fiscal and monetary beginning July 17 That's what we

are talking about. If I can think it through and be
satisfied and sell it to him -- we have 3,000 words. There
are plenty of people we can turn this material over to.
There are a dozen speeches in it. Plenty of stuff that
can be handed out to congressmen and senators and leaders

of the party, university people, who can use this material
once we have it or we could put in appendices. I take it
this society up there would be more than pleased to have
appendices attached to this speech and give it to the

members, and so forth.

Dr. Viner: Oh, yes. They publish the proceedings
and no limitation

290
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H Jr: So they will be more than pleased to have
Bartelt's report on agriculture showing where we got
these figures and all that stuff. But to get back to
the principle.
Dr. Viner: I would stress one idea on the expenditures side, that that 1s the phase of it that is strictly
under control. That's the only place you can be sure
and truly make estimates and if you are determined to
carry through your aims you can be sure because revenues
depend on uncertainties.

HM,Jr: As to the mechanics, you all like pretty
much the first part, don't you?
Dr. Viner: I handed my verbal crticisms to George.
Mr. Rieffler: Jake and mine are together.
HM,Jr: Did anybody look up the part Taylor objected
to, the reference to the war?
Mr. Haas: I had Miss Diamond look that up and she
did not find any place where the analogy of war was used.
In several cases the President and others used fight,

which is a different thing, and on the Republican side
the word fight was used, but the war analogy was not
used.

Dr. Viner: It seems to me when the legal question

of what is an emergency came up, the analogy was used.

Dr. White: It was used once.
Mr. Rieffler: Al Smith used it when he advocated
a 5 billions work program.
Dr. Haas: She went back to the campaigns of 1931
and 1936.

Dr. Viner: What if it was used before?
When I talk I
HM,Jr: Maybe we can crib from Al.
have the greatest difficulty in not using the same method
of accenting as he does.

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Mr. Seltzer: If you were able to postpone your
meeting with us until after luncheon you might get some
drafts.
HM,Jr: Here's my program. We are due at Hyde Park

tomorrow at five. I have nothing on for tomorrow forenoon, but I don't want to work with people who are not
ready. I had hoped to show the President something on
Monday, but I think he would see me Tuesday morning.
I would much rather, if you are not going to be ready,
to stay here and work out as much as you can and some
of you come up to the Farm and give this thing to me
Monday and I will take it to the President Tuesday morning.
Think that over. I don't imagine we can do much drafting.
Isn't this thing taking pretty good form as to what our
objectives are?

Mr. Haas: Yes, and I think it will clear up a good
deal if you had a draft.

HM,Jr: All right. Let's say this, Riefler is going

to do this one particular thing, which is his Boy Scout
deed for the day. What are you going to do, Jake?
Dr. Viner: I would like to see the second part,
even raw material. If you like, I will also try my hand
on handling these three levels of business.
HM,Jr: When and where do you want to do that?

Dr. Viner: I will do it tonight. I haven't anything

else to do.

HM,Jr: Then the thing gets down to this: why not
let's meet in the office tomorrow morning at 9:30 at which
time

Dr. Viner: Could we make it at ten so we can get it

typed?

HM,Jr: Not necessary. Let somebody stop at the

hotel in the morning, pick it up and bring it in to type.
You fellows are pretty well tuckered out. I am not going
to press you. Bring this in and we can go over this
thing tomorrow morning and see where we are at. What
do you think, Herbert, as to the may we are handling it?

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Mr. Gaston: I think that's all right. I want

say, George mentioned that I wrote my idea of this thing
which is substantially the general scheme. Will you
read it now?

Dr. Viner: I had planned to use that if I were

drafting one.

Mr. Gaston: It will take about five minutes. This

is not a finished draft. I wrote it hurriedly after
leaving the meeting this morning.
(Read draft.)

You see, what I am saying is hold expenditures down

to 6 billion 650 and use all of the surplus above that

which we expect for debt retirement.

The one thing -- I don't want to argue -- I don't
like, that phrase that we are not spending Social Security
taxes. I don't agree with that, but I think when we go
out and buy a billion dollars of Government bonds, if that
is not spending, what is it? May not be spending for
public works, but it's spending.
Mr. Gaston: I do say it goes into the capital markets.
HM,Jr: But I wouldn't, as Secretary of the Treasury,
say we are not spending it. We are. We are buying a
billion dollars of Governments. I am perfectly willing
to say where it goes. We are taking it out of the payrolls
and putting it in the hands of the bondholders, but the fact
remains it is going out of our pocket. That's the only
argument. Then the thought that I am taking a billion
dollars away from factories and workers and locking it up
is not so. We are turning around and spending it. The
bondholders who get one billion dollars worth of cash are
going to do something with that cash.
Mr. Gaston: I say you are taking it from taxpayers

and giving it to investors.
HM,Jr: That's all right.
Mr. Haas: There is an important point that the press
has taken up, the inference that the people who are beneficiaries under the pension plan would be better off if
we locked up the cash, the dollar bills, than they are on

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the present basis. What you are doing, instead of
keeping the cash, which would be a foolish thing to
do, you transfer this cash into Government obligations
and guarantee them 3% earnings on that, which is

Dr. White: Instead of using the word 'spending'
use 'investing'.

H,Jr: That's all right, but I also don't want

to get the thought over that we are not using it, not
putting it to use.
Dr. Viner: We are not impounding the funds.

HM,Jr: That's a good start. Who wants that to-

night?

Mr. Seltzer: Viner wants it.
Dr. Viner: Yes, I certainly do!
HM,Jr: We will meet tomorrow at 9:30 and we will

see what the professors have.

Now, the only other thing -- I don't think the de10th -- what we are going to do with the Treasury daily
balance sheet. I think that's some thing that can go
over until after the 10th because I could not take you (Bartelt)
or Bell on. I am just too weak.
Dr. Viner: We tried to wear him (Bartelt) down for
cision has to be made today, or between now and November

you this morning.

HM,Jr: Well, I will give you another two weeks, but

I don' think it's part of the speech. I got that idea
during the noon hour.

Mr. Bartelt: I don't think we ought to go into it
hastily. I want to give you a pretty good picture.
HM,Jr: In studying it, it has brought out what I

wanted. It served as an educational document for me.
If I had to make up my mind, I would change it, but I am

willing -- Bell is tired, and I wouldn't want to do anything like that without he's being more than satisfied,
so I won't rush anybody to a decision.

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Mr. Seltzer: It would also be well to get some good

outside accountants.

HM,Jr: One coming tomorrow. What are we going to

do with him? He can sit in here and listen. If I say
it is confidential, he will keep it, won't he?
Dr. Viner: Absolutely.

295

October 29, 1937
9:30 am

Present:

Mr. Taylor

Mr. Gaston

Mr. Rieffler
Dr. Viner
Dr. Haas

Mr. Seltzer
Dr. White

Mr. Bartelt
Mr. Upham
Mr. Bell
HM,Jr: (To Mr. Kieley) I am expecting Dean
Himmelblau of Northwestern University. If he comes,
will you let me know.
Does Riefler come before Viner? Match him, Jake,
to see who goes first.

Dr. Viner: I lose.
HM,Jr: Well, I will do it this way. Which do you
want?

wins.

Heads or tails?

Dr. Viner: Heads I win, tails he loses. So Riefler

Dr. Rieffler: I tried to do something on the
speech, the first part which gives reasons for balancing
the budget in the fiscal year 1939.
HM,Jr: I will want a confidential copy of that to
go to Mr. Bell, Haas, and I want one.

Mr. Rieffler: (Reading) "Now exactly what(Full
does
this statement of public policy imply?"
text is attached hereto.)
HM,Jr: I think when you consider the time, I think
that's an admirable paper. I think it is going to be
most helpful and I am very appreciative. It's a summation of what we were talking about and it's a beautiful
job.

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HM,Jr: I wish Himmelblau were here.

Mr. Bell: With a few minor corrections, Win
Rieffler's S statement is swell and I think Viner has
some language that might well be incorporated.

Mr. Taylor: They fit together.
HM,Jr: Why not give Bell a copy?

Mr. Bell: The corrections I have in mind are minor.
I don't think you can speak of 6 billion 8 as tax revenue;
you can call it revenue, but not tax revenue.
Dr. Viner: Say revenue receipts.

Mr. Bell: That's right, or just receipts.
Mr. Rieffler: This is just a series of guesses.
Bell: I think it's a swell approach.
HM,Jr: Let me take it. Let me read it. Those

things that you (Bell) are talking about are technical

language?

Mr. Bell: Yes, that's right. I think it's a swell

approach to take this problem, as I understand it, to do
it on the debt rather than the budget, which is exactly
where it belongs.

HM,Jr: It does not take me ten minutes to do this
thing and if you (Rieffler) leave this room at 10:35,
you can do it, allowing ten minutes extra. You people
listen and then you have the whole thing.
(Read pages 12, 13, 14, 15, 16, 17 and through
second paragraph on page 18, of the draft attached.)

Bell: Very good. I have a few questions.
Can't go back over them. I think you say two or three
places where the situation is changed. I wouldn't say
it so many times. Another place, I think you make
rather positive statements that you might want to qualify.
Mr.

HM,Jr: I just wanted you to get the philosophy which
am willing to say is my philosophy as to why we should

-2-

Dr. Viner: He worked all night.

Dr. Rieffler: Until three o'clock.
HM,Jr: What would you people like to do? Discuss
this or hear Viner's and discuss both?
Dr. White: Hear Viner's.

Dr. Viner: I did not stay up until three o'clock

so mine is short.

(Dr. Viner read his memorandum, copy attached.)
too.

HM,Jr: I think you have covered it extremely well,

Dr. Viner: I haven't touched the question of expenditures at all.
HM,Jr: You mean the part about agriculture and

public works?

Dr. Viner: Yes, and I did not say anything at all
about Social Security; let the other fellows do it.

But I would like somewhere in there a discussion of the
public debt in the hands of the public as compared to
public debt as it stands.

HM,Jr; I walked down with Bell. We started a
discussion and then Bell said that he had not been in
on this thing long enough to fet the feel of it and he
still has not read the thing that preceded it, but it's
entirely up to him. I don't want to crowd Bell this
morning because it's up to him whether he wants to get
in on the discussion this morning, and not having read
the ten pages that preceded this on why I think it is
necessary to balance the budget

Mr. Bell: I take it that it is necessary. You

don't go into figures?
HM,Jr: No figures, just as to the principle.
Mr. Rieffler: It is a very eloquent statement as
to principle.
HM,Jr: Purely as to principles, but I don't think
I could make it any stronger.

297

298
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do it. Now you have that and you have the benefit of
this discussion as crystallized in Reffler and Viner.
Now, having this, which lays down the 'why' of this thing,

how do you feel?

Mr. Bell: I feel it is getting a nice form.
HM,Jr: You do?

Mr. Bell: Yes, sir.
HM,Jr: Anything in there which as a 25-year employee

of the Treasury -- I am being serious- and forget whether
it is this Administration or any other, just stra ight
thinking, anything in there which grates or rubs you the

wrong way?

Bell:
No. I don't think so, if I got everything,
and IMr.
think
I did.
HM,Jr: You think this is the right approach?

Mr. Bell: I think it is a very good approach. I
in Mr. Rieffler's draft I think you want to make it clear

question whether you want to get out too far on 1939 and

that you are basing your revenues in 1939 on 1938 estimates.

I don't think there ought to be any doubt about that.
Dr. Viner: On 1937 estimates.

Mr. Bell: No, you are assuming that revenue in 1939
will be the same as 1938 and that expenditures ought to
come down to those figures.

Dr. Viner: 1938 revenues are being estimated in 1937.

Mr. Bell: On 1937 calendar year, that's right. After

all, you are making the speech two months before estimates

go to Congress and they might be entirely different from
what you are indicating and there is no use of your going

out on a limb without qualifying yourself, as I see it.
HM,Jr: Well, one of the reasons you might give as
to why I am doing this on November 10th -- the main reason
I am doing it, I can't say it so baldly, is that I want to
serve notice on the Congress which is going to meet and

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take up the agricultural program, I want them to know

what the situation is. Why not just say so -- in reference to the Congress which meets which is going to
consider this agricultural program, let's just take a
look into 1939?

Mr. Bell: I think that's very good.
HM,Jr: I think, George, that's the thing to say.

Here they are meeting. Normally, the Secretary of the
Treasury wouldn't be making a statement like this on
November 10th because we have a special session of
Congress which is called to consider among other things
an agricultural program which, this year, cust us 1 billion
600. Before they sit down and vote anything, they ought -the country ought to know what is the situation and this
is what the situation is and this is why we have to watch
every penny that we are going to vote of new money because
the situation is 30. That's why I'm doing it on Nóvember 10th instead of waiting until the President does it
on January 5.

Mr. Bell: I see.
HM,Jr: If somebody -- it's very nice for the Presi-

dent of the United States -- if I were Marvin Jones, it
would be nice for the President to write a letter, have
an agricultural program, but not do anything to unbalance
the budget. Well, what is the budget picture? Why
shouldn't we go ahead and spend 1 billion 6? How do

I know what the program is?

The President in talking to me last night said, Have
you talked to Marvin Jones and I said, No; I am working
on this year's corn crop; why should I talk to Marvin
Jones about next year's thing when I am still wrestling

with this? The President said, That's all right.
Mr. Bell: I wonder 1f you want to leave this statement in here about RFC in view of yesterday's conference.
It is open-ended now.

Mr. Haas: Here is a question. With regard to your
taxes, the question of levying the same aggregate burden
if the agricultural bill attaches taxes, in my opinion
that is increasing your tax burden.

Dr. Viner: It certainly is.

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HM,Jr: The President said last night, and knowing
that I was going to spend this evening with Magill and
him the Gods being with us, I was willing to take a
chance on that. He said, What have you done to provide taxes to pay for this Commodity Credit? I said,
Nothing for this year, but, I said, please won't younow
let me wait until I see you tonight? Now, between
and Wednesday when I want to hit this thing, this tax
thing will have jelled, at least I hope it will. Magill
and I will lay the whole thing before the President tonight. We hope out of that will come some kind of
public statement and it's just my good fortune. I hope
that there will be something publicly so that I can use

that in this. You see?

Mr. Riefler: It would be much more precise.
HM,Jr: But I am saying, I am hinting pretty broadly
here, and everybody would give their eye tooth to know,
but if there is a public statement and that's behind us,
it makes my job that much easier.
Mr. Seltzer: Too bad if it jells the wrong way,
because some of your material is against a jelling in
one direction.
HM,Jr: Well, Magill has seen this and I have worked
every morning, from 8:30 on until I see you fellows, 80
Magill and I are together. Everything in there is the
result of days and nights Magill and I worked, so my
right hand happens to know what my left hand is doing.

Don't worry. It's all right. And George has seen
it.
It's all right, isn't it?

Dr. Haas: Very good.
HM,Jr: So there are no cross-purposes, but I am

being a little cautious in what I am saying, that's all.
This is all new to you (Upham). What do you think of
it?

Mr. Upham: Oh, I think you are going to have a
good speech.

HM,Jr: What don' tuyou like about it?

301

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Mr. Upham: Nothing important. A few little

things.

HM,Jr: But as to approach?

Mr. Upham: That's what I was speaking of. I think
it's very good.

HM,Jr: You think it is all right?
Mr. Upham: Yes.

HM,Jr: Where could you attack it if you were an
editorial writer for the opposition? Where are the
weak points? Where will they attack?
Mr. Upham: Well, a very minor note. I would like
to keep it completely free of politics. I should not
like to make any reference to this Administration or the
previous Administration or the great leader, Mr. Roosevelt,
as appears on the first page.
HM,Jr: I want to just rub their noses once into
Mr. Roosevelt.

Mr. Upham: I prefer to see that taken out.
HM,Jr: I just want to take them like that (makes
gesture of sticking his nose into the speech.)
Mr. Upham: It isn't a political occasion.

HM,Jr: I know, but it's good for them. I want to
rub their noses into the New Deal once. I am glad you
say it, but just once -- I had more than that.
Mr. Taylor: You ought to put it in the last sentence.

Mr. Bell: End it with a snap!
Dr. Viner: They would snap, too.
HM,Jr: What did you say?

Dr. Viner: I said put it in the last sentence.

Then you would guarantee there would be no applause.

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302

Mr.disagree.
Upham: I am just telling you what I think,
but you

HM,Jr: I think once I want to do it.
I am a little surprised to find so much optimism

about this not being a down-swing of some permanence.
have

Dr. Viner: There must be some bottom or you can't
a balanced budget. You can't have it both ways.

Mr. Bell: I think your opposition will pick up
this kind of a story. The Secretary of the Treasury
is the first one to come out with a sort of inferred

alibi that there will not be a balanced budget in 1939.
Dr. Hass: That depends on the latter part.
Mr. Bell: It may be the thing you most have to face.
HM,Jr: And I kind of got Rieffler excited on the
question 80 he was willing to burn the midnight oil.

Dr. Rieffler: I think the figures have to be

looked through now and I would like to see your estimates.
It does seem you can look for quite a business depression
and unless you are forecasting a renewal, your averages

will show something like this. That's got to be done
very carefully tosee that this checks up.
Mr. Upham: I heard some people, Louis Bean and
and a half dozen or eight Government economists paint
a very dark picture. Lee Pressman said unemployment

is going down so fast that his group is going to have

twice as much relief this winter as last.
HM,Jr: He's with Lewis?

Mr. Upham: Yes. C.I.O. And these other people
just had a completely different tone; they think things
are in for a very bad situation in the next couple of
weeks. By the time you reach November 10th, 1f they
are right, you will see a precipitate decline in business
employment, etc. They may be wrong.

HM,Jr: Is that the meeting Goldenweiser sat in?

303
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Mr. Haas: No, they have been meeting

Mr. Upham: I am writing you all about this, a

summary of the whole thing.

HM,Jr: This is another group?
Mr. Upham: Yes. This is the Committee on Economic Security and I more or less got sucked in on it.

Mr. Haas: Steel is a sore spot and that constitutes a large part of the FBI. The index calculated
roughly for October might be 105. I haven't talked
to Goldenweiser.

HM,Jr: From 112?

Mr. Haas: Yes, and it's largely accounted for

by steel.

HM,Jr: What I want to say is this: I am in this
thing and I have got a date which is a good date. Five
days before Congress meets. Now, all I said to Bell
this morning is this: As Secretary of the Treasury, I
think it's my duty to think out certain things for the

President and the Treasury -- what I should recommend to
him and to the country what our objectives should be.
If between now and the first of November, the thing

goes much worse, I will ditch it.
Mr. Bell: You will have to change the speech.
HM,Jr: That's all right. I may have to change
it the last day. I changed the last one; I changed
it, as Mrs. Klotz knows, and almost passed out, at six
o'clock. The President read one part and asked me to
leave it out.

Dr. White: Why not have one prepared ahead of
Why not prepare one and not look at it unless
you need it.
time?

Mr. Gaston: It ought to be done.
Dr. White: You may never see it.

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HM,Jr: I will ask for it Wednesday morning.

Dr. White: All right. I will do what I can.
Mr. Upham: But don't look at it.
HM,Jr: Have it -- I have a nervous system; what's
left of it -- I would like to see it Wednesday morning.

You go and give me one Wednesday morning.

Dr. White: All right.
HM,Jr: I don't want to kid myself, but I can't

get down to the depths that these people get and I don't
see it.

Dr. White: Just to have an ace in the hole.
Dr. Viner: Must not have too many aces in the hole.
HM,Jr: We can go through any draft you life; take
out any positive statements, so you are not saying any-

thing at all.
Dr. Haas: I have those alternatives.
Dr. Viner: Either take a chance or not. If you
don't take a chance, you won't say a damn thing.

HM,Jr: What I want is a "White" ace in the hole.
Dr. Viner: Is that the kind you keep up your sleeve?
here.

Dr. White: There are a couple of logical difficulties
Shall we raise them at this discussion?

For example, implicitly and explicitly, any deficit

spending that takes place under these conditions must be
financed in large part by capital funds. The implication
there and elsewhere is that if you go cut and borrow, you

are drying up the sources that would otherwise go into investment. You are also saying so somewhere else that if
you put a billion in, it would be a good thing. It seems
to me a critic would say if that is so, why are you hesitating using 1 billion 500 million active gold. You have
now 700 million in silver certificates that you could issue
now. If these things are good, as you admit they are, and

305
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doing the opposite is bad, as you say, why have you refrained from doing something which is good. That's one

logical difficulty.

HM,Jr: Bell, I wanted you to hear this. You have
lots of other things. Don't you want to go?
Mr. Bell: One thing I am working on is a revenue
estimate of 7 billion 2. If there is going to be any
new estimates coming to 6 billion 8, as this indicates,
I think I ought to know about it.
HM,Jr: You will after tonight.
Dr. Haas: I tried to get you on the 'phone.
Mr. Bell: My job is stiff enough to get in with

7 billion 2, and 6 billion 8 is terrific.

Dr. Haas: Danny asked me for very rough, tentative
figure and we gave him a figure of 7 billion 775.
I

frankly think that is high -- the figure is too high.
Mr. Bell: You think it is too high?
Dr. Haas: I do. If you want to be conservative
You
I would figure on what you are getting this year.
will probably get some more. I would take 6 billion 650
like you have this year; probably get a little more than
that.

Mr. Seltzer: All through this speech, the Secretary
is calling for reductions.
Mr. Bell: That's another place he's putting himself
out on a limb, because there can't be a reduction of
700 millions in expenditures. There will be more than
700, probably, in some group, but another group goes in
to take the place.
Mr. Seltzer: Would you repeat that?
Mr. Bell: I do not think there could be a reduction
of 700 millions in expenditures. I think we probably can
reduce relief 700 millions, maybe 800 millions, but your
Social Security goes up 100 millions and you have other
things that will take up some of that 700, -- housing,
farm tenancy, etc.

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HM,Jr: I expect to save it. I think you are

estimating too high on agriculture and roads. I think
after you and I get through Monday morning with the
President, I think you will find the President of the
United States, he will tell you that he will only ask
for 50 million new money for roads for the year beginning July 1. I think you will have to ask for 75, giving
us 1 billion cash expenditures, which is 300 less than we
figure.

Mr. Bell: You can't do it.
HM,Jr: All right. That's what he said. He said,

Cock-eyed (the road program), they have enough.

Mr. Bell: I admit that.
HM,Jr: They voted 24 million this year and it calls
for 400 million more. He said he would only ask for 50.
I think they will have to ask for 75. There is a saving
right there of 300 million. And then you have a saving
of 600 million or 700 million in CCC and relief, below this
year.

Mr. Bell: About; yes, sir.
HM. Jr: There' S 1 billion right there, and in agriculture I think that the President -- there is a chance
that we can unsell him on the processing tax. I think
there is a chance of keeping the agricultural program down.
I am going to talk 300 millions and I think we ought to
keep it down to 400 millions. How much less is that than
this year? They voted 400 millions cash for agriculture.
Mr. Bell: It' 8 500 millions cash for domestic allotment, but we have only put in 440 millions expenditures.
I think there is 60 millions in reserve.
HM,Jr: Let's say no saving there, but roads and
relief, and how about public works?

Mr. Bell: I don't remember what the figure is now,
but exclusive of roads I think it will be 250 millions or
300 millions more.

HM,Jr: He can't have anything more. He
has 700 millions.

already

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Mr. Bell: I am talking about money already appropriated and to be spent.
HM,Jr: Oh, yes, but nothing new.

Mr. Bell: Yes, but you have 700 millions of public
works without appropriating another dollar.
HM,Jr: That's what I say, so you can't ask for
another dollar

Dr. Viner: Is it possible to repeal or reduce a

passed appropriation?

HM,Jr: That's how much of public works this year
exclusive of roads, 800 millions?

Mr. Bell: About that.
HM,Jr: It gets down to roads and agriculture and

relief. Out of that it gets down to roads and relief,
I say 1 billion, and we will split the difference and call
it 700 millions. That's what he has in his mind.
Mr. Bell: Yes, but he can't mean what he has in
his mind. It's all right to say I am going to appropriate
100 millions in 1939, but there is already on the books
which they will spend and which they olbigate and the obligations will have to be liquidated.
HM,Jr: Which is all the more reason why I am willing
to go up and be a human sacrifice on November 10th and tell

this story to the public.

Mr. Bell: I am not willing for you to. I don't --

Unless we are pretty sure, I don't think you will get any
place by being a human sacrifice.

HM,Jr: All I want to do is paint the picture as it
is and all this talk about balancing the budget and 600
million debt retirement, as I see the picture today is

eye-wash, and I can honestly say as long as I have been
here I have never made a statement, publicly or private,

that I did not believe and I think that's one of the
reasons why I have all the confidence of some of the people
in the financial district. Why go on and keep talking

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about baling the budget if we can't do it? It's eye
wash. And I would much rather be safe. I don't want

to be personal, but Mr. Kennedy, coming out after seeing
the President, says 'Very good chance of balancing the

budget'. What's the use of saying that?

Mr. Bell: I agree with that.
Mr. Bartelt: May I raise a question about the
public debt before Mr. Rieffler goes? I think he suggested distinction should be made between debt held in
the hands of the public and trust funds. I was wondering whether further distinction should be made between
the special issues in the trust funds and those which
are represented by Treasury bonds that were purchased
in the market. In other words, are you putting all
those together or are you going to make further distinetion?

Mr. Rieffler: I was putting them all together

because I want to go back to the beginning of the speech
where the Secretary placed so much emphasis on opening

the capital market by retiring debt from the market to
show that there was larger debt retirement in that sense
in prospect than would be implied by statutory debt retirement alone. If you want to go on and explain the

trust fund, that's all right, but my feeling is that the
total is the principal thing.
(Mr. Bell was excused at this point.)
HM,Jr: Taylor, do you want to say anything to

Rieffler before he goes?

Mr. Taylor: No, nothing in particular.
HM,Jr: Now, George, when is it humanly possible
for you and whoever you want to have work with you --

the President has shifted me. I asked him to see me
on Election Day. He said, Never heard of such a thing,

but will see me Monday morning before Bell comes.

Mr. Bell: We will work over the week-end and see
what we get -- Larry and the boys he uses.

Mr. Seltzer: I can get a draft out today.
Dr. Haas: The work starts after you get the words.

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HM,Jr: Could you people come to the farm on Sunday

with something?

Dr. Haas: Certainly can, with something.
HM,Jr: I don't want to ask the impossible.

Dr. Haas: Your time is so short, I think.
Mr. Seltzer: There is no way of making progress

unless you have a specific draft. We will knock out
draft; maybe no good; we will change it.
HM,Jr: You will have today and tomorrow. You
could come up to New York tomorrow night, take whatever
that train is. Some train leaves New York around 8 or
a

9 o' clock in the morning. Come to Beacon and be met on

Sunday.

(Mr. Rieffler left the meeting.)
Mr. Seltzer: There is one point that still bothers
me, and that is I think we are still weasling on this
balanced budget business. I don't know whether you have
decided that. All you are going to ask for is a layman's
balance without the statutory sinking fund. Whether you
are reconciled to saying, Well, that' my line; if we do
any better, Thank God!, we will retire some debt, but I
don't honestly believe we are going to be able to do any
better without good luck.
HM,Jr: I am glad you asked that question and that's
the question I asked the group yesterday. That's where
we started.

Mr. Seltzer: But in these drafts the thing is just

a weasel.

HM,Jr: The way we do this thing is this: each
person take a piece of paper. The question is this:
Question 1 is, should I ask for enough revenue for a cash
balance, or (2) should I ask for an extra 600 million?
We will keep to the theory we are going to cut expenditures to 700 millions.
Mr. Seltzer: That was the trouble with both drafts
this morning.

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HM,Jr: Should we ask for additional tax burden
in order to get that 600 millions or shouldn't we?
Dr. Viner: Should we ask for additional tax under

any circumstances.

HM,Jr: Go back the way I asked the question:
should I recommend that the budget be balanced on a

strictly cash basis, figuring that the present taxes

will produce enough revenue to give us a cash balance
or should I recommend with increased taxes 600 million

in order to get 600 millions more taxes for the statutory debt?

Mr. Seltzer: I would phrase it a little bit dif-

ferent.

Mr. Bartelt: You have a tax law now that will
take care of the Government's budget normally and in
which I include accruing liabilities as well as cash
commitments. Then I would not oppose new taxes.

Mr. Haas: You have to reduce it 700 million exclusive of sinking fund and Herbert's idea is you would
have to reduce it another 600 or a total of 1300 millions.
Mr. Gaston: No.

Mr. Bartelt: If you can reduce expenditures 700
millions and this present tax structure will take care

of expenditures, I would say not to impose new taxes.

Dr. Viner: I think 700 millions could be cut with
a gain in political decency.
Dr. White: I have 100 million that could be cut.
HM,Jr: How?

Dr. White: From 80 millions to 100 millions could
be saved by spending the sterile gold and 700 millions
in silver certificates and buying 2 billions in bonds from
the Stabilization Fund.
Mr. Bartelt: That doesn't balance the budget.

Dr. White: I said you will save 80 millions to

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100 millions in interest payments.

Mr. Bartelt: It's all right to save interest.
That's perfectly all right. I don't object to that.
Dr. White: Everybody benefits; nobody suffers.

Mr. Bartelt: As long as you have that tied up in
inactive gold, it's costing you money.
Mr. Seltzer: It's not a budgetary item. I would
be willing to do that independently. But that's a small

part of your 700.

Mr. Gaston: I vote for it.
Mr. Bartelt: I vote for that.
Mr. Seltzer: Isn't this your problem? Say you
could add in your speech and say the thing we can reasonably strive for, taking a conservative view of the situation, is cash balance; if things are better than that,
so much to the good, but it's ridiculous to think you
can do the other thing, that you can strive right now
with any assurance that you get the other thing.
HM,Jr: I am glad you are pressing it because you

are back where I was at 9 o' 'clock and you want a cleancut answer.

Mr. Seltzer: Yes.
Dr. White: Mr. Secretary, he is asking the absolutely impossible. They are asking you to take the
position which no one can take, to expect a person to
come out with a definite statement which implies a certain
state of affairs which he cannot
Mr. Seltzer: I said strive, not underwrite.
Dr. White: It depends on how it is worded.
think you can take the position that -- if it is properly
I

worded -- you would not be guilty of weasly phrases and
at the same time you would not be expected to do the 1m-

possible, which is to say that you don't care whether
business goes to the dogs or not, you are going to balance

the budget willy-nilly. If that happens again, it is not

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going to be balanced. Let's recognize that. But you
can take a position with regard to expenditures and with
that as your objective that you can, but I don't think
you will be subject to the criticism that you are weasleworded. You can't take the strong position that no
matter what happens you are going to balance the budget.
They would like to hear you say that.

HM,Jr: I agree with that.
Dr. Haas: I think what you have to do in your pre-

sentation, having accepted a certain level of expenses,
convince the audience that there is a reasonable expec-

tation, a very good expectation, that the budget will be
balanced exclusive of sinking fund. That's what I had
in mind.

Dr. Viner: You think that's all you should aim at,

with reasonable estimates?

Dr. Haas: Yes, it looks quite good. It can be

done that way.

Dr. Viner: As far as I am concerned, I think that
the technical meaning of balanced budget is cock-eyed one;
has no sense, but I think the public has generally accepted
it.
Dr. Haas: No. I think the adverse press has accepted it.

HM,Jr: I think that this should be done by steps
and I think that the first step that I should decide is
should I give up the idea, which I have had up to two or
three days ago, that I am going to insist on enough revenue
to raise 600 million for debt retirement.
Dr. Viner: Enough revenue or sufficient reduction
in expenditures?

HM,Jr: Either way, but that's an objective. I
think that S the first step.
Dr. Viner: I think there is a lot at stake as to
the method of describing it. Increasing taxes is the

easy way. Reducing expenditures is the way to clean up
our financial mess.

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HM,Jr: I will make the flat statement here that
I will do everything I can, as Secretary of the Treasury,
to see that expenses go down; I won't leave a stone unturned to cut expenditures.
What you fellows want to get is my philosphy. Let

me give it my way.

After listening to all this thing, I feel that the

best thing that I can do for my country, as Secretary of
the Secretary, at this time, is this: go all through
that first part about why we want a balanced budget.
There is no reason why I should change that. Two, look
the situation in the face as it is now, and that is the
thing that we should try to do -- explain intelligently
what things we can out. Now, I don't want to cut Relief
below 1 billion2; I don't want to cut C.C.C. below
200 millions. am very much unsold on what they are
doing over in Agriculture. I believe that this expenditure of 1 billion 6 is a most outrageous thing and that
the place we can really cut without doing any injury is
to cut on the agricultural program and roads. Public
Works is set at 700 millions; we are committed.
Now I want to make it plain to this audience that
at this transitional period which we are in, from where

we have been bringing back recovery through deficit spend-

ing, that that transitional period -- that it is just as

dangerous to move too fast as it is not to move at all,
and that while I don't want to leave a stone unturned to
cut every single dollar which can be done without being
'penny wise and pound foolish'. On the other hand, in
order to achieve this balanced budget, I am not at this
time willing to recommend a broader tax base; that whatever this base is, it will have to produce whatever the
business profits based on this kind of a tax structure
will produce. See? Now, in order to achieve a balanced budget at this time, I believe it would be wrong,
deflationary, and everything else, to increase taxes and
in that I feel, and I guess it will be more and more clear
as we go along, the best we can hope for is to have a cash
balance. That's the best we can hope for and that any

such thought -- in order to retire 600 millions -- of

raising 600 millions more taxes, as far as I am concerned
is out the window.

But for once I want to get in this man's (Seltzer's)

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head
-- does
that leave any question in your mind as
to where
I stand?

Mr. Seltzer: No. It is the position I wished

you to take. It' S the only honest one you can take.
HM,Jr: Any hedging in that?
Mr. Seltzer: No.

HM,Jr: Does it suit you so that you can sit down

today and tomorrow and give me something?

Mr. Seltzer: I think so.
Mr. Bartelt: You say cash balance. I don't like

that. I was just wondering whether you meant that.
Does that care take of accruing liabilities for Old Age?
The only reason I raise it is because it is a cash item.
Mr. Haas: If the Secretary worded it 'exclusive
of sinking fund'.

Mr. Seltzer: All the expenditures.

Mr. Bartelt: That's right. It includes that.
H,Mr: Now, Mr. Minority. You become the majority.
The way I put it, you feel that what I am saying is what
is
necessary to say at this time or, rather, what should be
said?
Dr. White: I am much happier at your last statement

than heretofore. I think if it is properly worded -- I
think it's all a question of wording -- as far as I personally am concerned, the point of view: I like it much
better. It's a very clear statement. I don't think it
is weasly.

Dr. Viner: Would you like it better if it was aiming
at a billion
deficit?
Dr. White: On advice of counsel, I refuse to answer.
Dr. Viner: I would like to know his answer.

Dr. White: I don't think it is pertinent. You tell

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me what the state of business conditions will be.
don't know. I like just the way the statement has been
issued. It's satisfactory. How far beyond that I would
go, I don't know.
I

Dr. Viner: I think there is a fundamental issue

about to come out as to what sort of advice you get.

Dr. White: If you want that issue settled right

now, I will be

Dr. Viner: What is the underlying philosophy underneath the advice you get? I am asking White a question.
He says he likes your present statement better than the
previous.

HM,Jr: Let's forget we three ladies (HM,Jr, Mrs.

Klotz and Miss Chauncey) are present! Go ahead!

Dr. Viner: There is nothing personal involved here.

I think one of the e fandamental issues facing the country
in its history is the issue involved now, so I don't want
you to think

HM,Jr: Am I doing this in a light way? Could any-

body be more serious?

Dr. Viner: I am explaining myself.
HM,Jr: You are explaining this question of White.
Dr. Viner: I say in order that you may appraise
the advice you are getting, you want to know what the
men are wanting. He refused to answer.
HM,Jr: You (White) take time to answer. What do
you think the fiscal and monetary objectives of this Government should be?

Dr. White: I feel that they should definitely go

in the direction of a balanced budget, to be achieved just
as soon as business conditions permit; that the business
conditions of the last year permitted some rapid progress
toward it; that had they continued this year I would like
to have seen a balanced budget in a cash sense and a balanced budget in an accounting sense, but surplus for further

debt reduction -- I feel, I hope that if this is the case,
I hope that is what will take place.

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-22-

(At this point Mr. Kieley came in and said that
Professor Himmelblau had arrived. The Secretary said
to have him wait.)
HM,Jr: Start again.
Dr. White: I am in favor of a balanced budget as
soon as business conditions warrant it. I think that
business conditions of this last year warranted a great
stride towards a balanced budget to be accomplished by
two ways: reduction in expenditure and increase in tax
revenue. Both agreed. Had next year given promise of
at least as good, I would favor and strongly would like
to have a completely balanced budget, both in the cash
sense and in the accounting sense, and if that should
happen that is what I am strongly in favor of and a sharp
curtailment of expenditures in the very direction you
indicated as first to hit agriculture. Now then, if,
however, business begins to continue to turn down at the
rate the last couple of months seemed to give indication that
it is possible, then I would definitely say that an attempt
to balance the budget at the expense of (a) either increased
taxes (b) reduced expenditures in any substantial degree
at a time when business depression is declining, I would
definitely oppose, because fundamentally I do not believe
that the thing that stands in the way of recovery at a
time of declining business, and I must emphasize that 'declining business is a balanced budget. Things went down
in 1934-1935 and the same people who were opposing a balanced budget then are endorsing it now and the first time
that business turns down they say, 'Only if the budget had
been balanced, I would have gone out and spent money.' The
fact that prices are dropping -- after all, inventories
are holding up, capital equipment too large, won't stop
me as long as you balance the budget, I will save money.
They have always said that and is their statement now, and

that is, that what stands in the way is not the real cause
of the downturn in business. That does not mean that
am not strongly in favor of balancing the budget but when
conditions are, I won't say 'right', for it, because that's
I

too weak, but when conditions are such that a balanced
budget does not speed up a downward trend which is already

in evidence and therefore I say that the position to take
is the one you did take and if business continues to go
down, I don't know; I guessed wrong about this fall, I
hope I am wrong about next spring -- I hope business is
better, but if it continues to go down, then I hold that

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an attempt to balance the budget under these conditions,
and let us clearly remember that you have decreasing
revenue and increasing unemployment -- let's remember
1933-1934; the same conditions will prevail -- and under
those conditions to cut expenditures on C.C.C. and on
Public Works, to cut on unemployment, I think is counter

to the whole philosophy that I understand. To cut unnecessary expenses to the bone, absolutely! at all times, but
HM,Jr: Do you include agriculture?

Dr. White: No, I say agriculture is one of the
first things I would hit. I would save 100 millions
on interest. I would put more in capital equipment, but

any downturn -- I want to emphasize that only when business is going down do I object to commitments to balance
the budget either through severe curtailment of expendi-

tures -- and that's where it will have to come.
HM,Jr: I would say you could not ask for a more

clean-cut statement.

Dr. Viner: No, but I could disagree with him.
Dr. White: As Jake feels, it's a very important
matter. I think there are great things at stake. On
that philosophy, fortunately this year we have both been
in agreement. Let's hope next year we only become in
disagreement if things go down and go down rapidly.

Dr. Viner: There are circumstances in which I accept every word he said. I won't accept them as general
as he outs them and I am talking in the history of the
last five years when I say this is not the moment to deliberately move or persist in a movement of an unbalanced
budget. I would say if we had in the past four years,
say, had two years of big budgetary deficits and then
two years of substantial liquidation, I would say not
only would I favor your proposal, I would say through a
billion to drown out an incipient depression that seemed
to be starting, but we haven't a record of a balanced
budget. All we have 18 a record of deficits and a record
of promises and I was going to say that no one believes

the Administration now. It is very nearly that. And

one year more, I don't see why it should not be.
HM,Jr: How could you laugh off the fact that we

are cutting the deficit this year by 2 billion 6 this

318
-24-

year,
2 billion less than the year before. That's
tremendous.
Dr. Viner: Yes, I think that is a substantial
Everybody says: I don't believe this Government
1s willing to take any political risk in the interest
of balancing the budget. And what I am trying to do
is use my little influence to get them converted. If
step.

the Government is willing to cut Government expenditures
then the Secretary could make a strong pledge. The expenditures will be kept to thismaximum. On conservative
estimates revenues will produce so much. That's what
we are aiming at. We are not guaranteeing revenues to

produce that. But if the Government is not willing to
cut expenditures, then I say I don't believe anything
they say about a balanced budget.

HM,Jr: You and I are together and I think Harry
and I are together to this extent: as far as I am concerned, unless the President agrees to do what he has
really said to me that he will: really put his mind to
cutting expenses, if I don't get anything else -- forget
about taxes and business -- he has agreed with me that
he personally will sit as Director of the Budget as the

head of this Government and hold budget hearings in
November and he said, I will take my blue pencil and do

it like in Albany, and believe me! he will do it! If

he will do that three afternoons a week and really do
that and then if after having done that and cut this thing

to the bone -- and after all, it's my job here -- my God!
it took me two weeks so I could understand it. It has
taken this man (Bartelt) three weeks to dig out this

public works for no one ever had it to go through 1941-42.
Some of this the President has and some of it he has not,

but I have yet, when I have given it to him, that he has
not taken it and acted on it and absorbed it. After
that R.F.C., I don't know what reasons he had, but he
moved without consulting Jones. He made a mistake. He
should have consulted Jones. I could not. The President should have. Sonwe have to retract a little bit
and give Jones time to liquidate some of the things he
has in the works, which is only fair. Jones did not
have a chance to present his case. But every time I
present something to the President, he is reasonable.
On saving money there has been no argument. So he is
ready. What he wants is for us to feed this stuff to

him. When I show him this memorandum that agriculture

319
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spent 1 billion 590 millions this year, he is going to

be just as mad about that as roads, and when he

Dr. Viner: Does that include roads?
HM,Jr: Yes.

Dr. Viner: Include reclamation, Department of the
Interior's expenditures?

Mr. Bartelt: Includes expenditures of all agencies;

WPA, about 175 million for that.

HM,Jr: It's all bracketed. A very intelligent

memorandum. Now when I gave him my roads memorandum,

what was his reaction? 'It's crazy! I would not give
them 400 millions. If they have 75 millions, it's

enough.' Which would mean they would only get 50 millions more.

Dr. Viner: On these matters, nobody can be certain.
I think the more informed public, including also the hostile public, are more interested in the trend of expenditures than balancing the budget, because what they want
to know is are you going to balance the budget but also
are you going to get it by getting more taxes out of
certain groups, and the downward trend in expenditures
is the thing they are going to look for and that's the
thing you can forecast more definitely, in which case you
don't go out on a limb.
HM,Jr: What are we going to do with Himmelblau?

Dr. Viner: Get him to work on that thing we had
That's where his judgment is valuable.
yesterday.
HM,Jr: Who's working on that? I would be very

glad to, but this thing will take a week or ten days.

Dr. Viner: Just get his ideas. I think he can

render real service.

Dr. Haas: One thing, I think it's very important,
hind it, I think that when you have a patient that is sick
in connection with this spending and the philosophy be-

you have to diagnose the situation in each instance to find

320
-26-

out what the ailment is and not apply a dose of patent
medicine, the same dose, under all circumstances. For
instance, the present situation. Nobody can tell whether
one analysis is correct and another is wrong, but you have

certain probabilities. We know, in this situation, you
have had recovery to date and capital expansion has not
gone one. There is one big field where there is large

unemployment and that is construction. If you can do
long-term commitments, if they are worried about it, that
you can take that move, but if you are wrong you still can
come back into this spending proposition if that's the last
recourse that you can take. Another thing, 1f your diagnosis shows a certain situation -- capital markets are in
a bad situation -- there are other things that you can do
something about balancing the budget, people who make

that costs the Government nothing and Harry was mentioning
one. The interest thing would save some money.

HM,Jr: You mean stop sterilizing gold?

Dr. Haas: And also put 1 billions you have and
silver certificates.
Dr. Viner: And raise the price of gold.
HM,Jr: But Harry and I are psychiatrists, but in
this particular case we differ as to the type of insanity

which is indicated.

Dr. White: Jake knows, or at least you know, you

once asked me who I thought was the best economist around

and I said Jake Viner and I still think he is the best.
But unfortunately on some things, on the broader philosophies I don't agree, but he is without peer as far as his
analytical ability.
HM,Jr: Fortunately, I think, for the Treasury and
for the President, he has to meet this problem. I have
come through, since Labor Day, less flustered than anyone
else he has close to me, he has told me. But with me here,
working as I have never worked in my life -- this speech
is only incidental -- it's fortunate we have the date,
November 10th. Now out of all this I hope will come a
statement that I can make committing the Government on
fiscal policy as far as we can see it reasonably; no
further; calling a spade a spade; not trying to hedge;
not trying to cover up something in innuendo or any way

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else; in other words, take the public in our confidence
as far as we know our own mind and as far as we see the
situation as it exists ten days before the speech; go
as far as that and take them in our confidence and state
the thing. I can't do any more than to be completely
honest and frank. That's why I moved heaven and earth
to get the President to give the public the budget summation; information we had no right to withhold from
the public. That's all we are attempting to do. We
are not going to attempt to try to solve the gold sterilization problem nor the silver problem. Some members of
the Treasury came and said, If you want to make good your
silver program and show the world you made good, now is

the time to issue silver certificates against sterilized
silver. I listened to everybody. I tried to make up
my mind. I think everything is very good. I am perfectly conscious of the devices which are there. I don't

think it is conceited to say I am more responsible than
anybody in the Administration and the only device we used
was to make a bargain for silver. The President has all
these other things and he is not using them. Certainly
I am not going to fall back on narcotics for stimulants

unless the thing is a great deal different than what it
is today, and I say it is different. That's the whole
opening thing. Everybody has said his piece. I see the
picture. If you people don't know now how I feel -- but
I think you do; you are smart enough.
I wish, George, you would take your gang and I

think the thing to do is to plan to come up there Sunday.
I will talk to you about it. I would like to have a
talk with Viner and Taylor and you on this thing that
I
of him.
brought Himmelblau down for. I have to make use
And you other people can be excused.
00o-o0o

at 2 9
322

Now exactly what does this statement of policy imply?

How can it be effectuated. What sacrifices does it entail?
Detailed answers to these questions do not exist at the
present time. The regular budget hearings are still going
on, and the final budget will not be prepared until after
they are concluded. I can, however, indicate the nature
of the problem.

First of all, I wish to state that it will not be
easy to secure a full balance of the budget. It requires
more than determination on the part of the Administration
and Congress. Loyal support on the part of the people is
also essential. It is not possible, furthermore, to make
a categorical statement that any given line of policy will
produce a precise balance. Expenditures to be made during
the fiscal year 1939 will be appropriated during the coming

regular session of Congress. Taxes will also be levied
during that session, although both of these elements in
the picture are directly responsive to policies adapted by
the Government they are not wholly under the Government's

control, since a major portion of our expenditures are required to provide for essential public services or to meet
commitments already in existence. The limit of revenue
yields, on the other hand, will depend largely upon the
average of business activity over the coming eighteen

months. This it is impossible to determine. It is not

323
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within our control. The best we can do is to make as
careful a forecast as we can of the probable average of
business activity over the period and to adopt policies
that will meet the essence of our objectives even in the
event that these forecasts should prove to be fairly
wide of the mark. No reasonable man can ask more.

What then are these policies. First of all I
want to take up taxation. From the point of view of
yield, our present taxation structure is strong. It
produced

1936 and

in the fiscal year ending June 30,

in the fiscal year ending last June.

During the current fiscal year we estimate that it will
This is a revision of earlier estiproduce
mates mode to take full account of any drop in revenues

that may result from the present lag in business. At a
level of business activity averaging as high as that
which has prevailed during the past twelve months they
. These
would yield in the neighborhood of :
amounts represent a very high level of revenue. I have
not believed that we should seek to balance the budget

by means of a further increase in the average level of
rates upon which these yields are based. The present
uncertainty in industry confirms me in this view. In
accordance with this policy the tax revisions which the

-3-

* 324

Treasury is now preparing for submission to Congress con-

template basic revisions in the structure of our taxes
designed to remove inequities, but no increase in their
aggregate burden. There is just one qualification that I
would like to make to this statement. It assumes that
expenditures appropriated during the coming year will be
held down to the levels recommended in the budget message.

Should expenditures exceed those levels, the Administration

will be forced to request an increase in tax rates.
Let us turn now to the expenditures. These aggrein the fiscal year ending June 30,
gated
in the fiscal year ending last June, and
1936,
in the current
it is estimated will amount to #
fiscal year. If we are to balance the budget next year they
must be further reduced, by an amount in the neighborhood
This represents a reduction of 10
of

per cent in total. Since the bulk of these expenditures
are fixed, however, the proportional reduction in flexible
items will have to be very much larger than 10 per cent.
The regular expenses of the government including the civil
departments, defense, veterans, etc. amount at present to
per year. This compares with $
about
per year on the average during the preceding administration
when adequate appropriations for defense were not as urgent

as they are today. Clearly, no great savings can be made

325

-4-

in these elements of expenditures. Interest on the
This cannot be
public debt will require $
reduced. All revenues under the Social Security Act
amounting to $

not absorbed by current grents,

expenses, etc. should be invested in the old age trust

fund to meet accruing liabilities in coming years. They
must not be diverted to other purposes. These three
items which are relatively fixed amount in the aggregate
to 8

Reductions in expenditures must be

concentrated, consequently, on the three remaining
classifications in the budget namely, public works, unem-

ployment relief and payments to agriculture. It is just

that this is so, for it is these classifications that are
primarily responsible for the debt at the present time.
of these three, public works already authorized by Congress
This is somein preceding years amount to $
.

what less than in the current fiscal year. It cannot be
increased by appropriations for new projects 1f we are to
balance the budget. Payments for unemployment, including
during the current
the CCC will amount to $

fiscal year. They are being reduced rapidly each month,
however. We ought to be able to hold them down to an aggreduring the coming fiscal year.
gate of 8
If we do this and at the same time reduce payments to agri-

326
-5-

culture from $

to 8

, total

expenditures, exclusive of debt retirement through the
during the
sinking fund will amount to $
from
coming fiscal year, a reduction of 8
this year.
The question before us then, - Will revenues be
sufficient in the coming fiscal year to produce a balanced

budget including a retirement of public debt through the
sinking fund on the basis of a reduction in expenditures
to these amounts. This will depend upon two factors, the
level of business activity during the next eighteen months,
and the amount of recoveries we obtain from recoverable
assets now held in the RFC, PWA etc. That revenue from these

two sources will be sufficient appears to me to be a
reasonable expectation. The President recently stopped
all new allocations of funds by the RFC and the PWA. That

means that practically the full amount of recoveries by
these agencies in the coming fiscal year will be available

for debt retirement. During the last fiscal year, total
recoveries amounted to $

and during the

current fiscal year we estimate they will amount to $
Should they amount to $

during the coming

fiscal year, the aggregate revenue from taxation required
to produce a full and complete balance of the budget in-

-6-

327

cluding $600,000,000 of debt retirement through the sinking
Our present tax situation
fund will be $
is capable of producing this amount on an average level of
business activity.appreciably lower then that which has

prevailed during the past twelve months. Personally I do
not believe that the present readjustment will involve an

average decline below that level. I believe that I are
supported in this view by the great majority of accredited
analyists of business activity.
I want to be completely candid with you, however,
These calculations are of necessity based on forecasts

which no one is in a position to guarantee. Let us suppose

that they are considerably in error. Should they prove
too conservative, as I fervently hope may be the case,
revenues available for debt retirement will be in excess
of $600,000,000. I want to assure you that any and all
excess revenues will be earmarked for debt retirement and
not for increased expenditure. On the other hand, should

the event prove that they are not sufficiently conservative,
I must admit frankly that we would not have achieved the
complete balance of the budget for which we are driving.
I would like to add, however, that these forecests would

have to be very seriously in error to reduce revenues to
the point where they could not provide for some debt retirement through the sinking fund.

328
-7-

Before I conclude I would like to make a brief
comment on the growing importance of trust fund investments

in the location of the public debt. The Treasury has long
been responsible for the mangement of a variety of trust
funds, such as the Civil Service Retirement Fund, the
Veterans' Life Insurance Fund, etc. It has the responsibility of investing the resources of these funds in
Treasury obligations. Now these obligations remain a true
part of the public debt - they represent a real accrual
of future liabilities on the part of the Treasury. For the
present, however, such obligations are not held by the
public, - they do not represent expenditures which the
Treasury has met by selling obligations in the market.
During recent years, the number and importance of these funds
has increased considerably, especially since the passage

of the Social Security Act which established two new ultimately very large trust funds in the Treasury, one to
build up a reserve against liabilities for Old Age Pensions,
the other to safeguard unemployment insurance reserves of

the States. At the present time, the aggregate volume of
Treasury obligations held in all these various funds amounts
to $

, and this sum should be sub-

tracted from the gross Federal debt to arrive at a figure
which represents truly the amount of Treasury obligations
which are available in the market for purchase by banks,

329
-8-

corporations, insurance companies, and other investors.

By June 30, 1938, the end of the current fiscal year they
will amount to $
and by the end of the
,

coming fiscal year, June 30, 1939 which we have been dis-

cussing tonight they will amount to $
This means that the total amount of public debt retired
from the market will exceed sinking fund retirements by
during the fiscal year 1939. I
mention this merely to show that the capital market will
be stimulated by a retirement of public debt on a much
larger scale than is provided for by sinking fund retire$

ments alone.

atv
330
/

Now exactly what does this stational of
complete ? How can it be effectivated What
secrifice does l entail ? Detached answers to

the question do address al th preval team.
are now still going

they and he provide until ape
B
concludes
day
and
to
Congres
ih can house indicat the nature
of this
elproblem
of all, Imist to state
easy Green a full Chalam of the budget require

won than determination the pound the administration

and Congress 9/20 the prant walso
essential I is re possible furthermone to

mak a catigoreal statement thank any grain
him of policy will produce a precise balama &
the budged Expenditure to la made Juning the

liscal year 1939 will the during the

coming regular session of Congress Tom th of there well

also he lemind during that session.

lements in the picture are directly exesponsion b polices

331

adapted by the government, they are not

whally under the control houses

since a major of off our are

required to promide for
services or to cheet committeen already in

indutation existem. the bud guilds,
on praping the other ahand, will olyan upon th

Miami activity one covery eighthen

months. determine scontral The
heal
the can do is to mak as careful photography
problem

possible and to
lb probable anyay of the period essem and

adopt malian that (will mail the issum

low Mu obycitine even in the event that then someone

alim should prom to be farily unde M the mark

the man can ask man

What then an there police Feisl of all I want
to

tab up taxation. From the paint of view
an present taxation structure is strong. I product
in the fiscal year endingfur 30,1938 and

the fiscal you Jun. Persingle current fiscal

at a and at humins activity annoying as high as

has during the post tureline months 332

they would yuild in the neighborhood -

year the estimate that it willproduce - this

isa unision of earlin estimates und to take

full account of any drops in revenues that youry

It from
the printa lag
business
mounts
represent
veryinhigh
fund ofPlan
uning

It have oral behindthal the should such to balance

the hunged lights of a further increas in

Q onerge bhat afrate upon which these guild are
and the present ungertainly in industry confirms
me

in this view In accordance with this

wher the tax revisions which th
trading is now preparing for subrassion
angrees contemplate have unicions in the
twitter of am taxes designed to remove their aggreate

requites
inimary
in
the
hurden Then is firel one qualificating that I

fould lik to mah to this statement. Elassumes
expenditure appropriate during the coming year

ill he held down to the levels recommended in

expenditures exceed thous levels,

administration will the found to request ansiered in

333

tax rates.
helus turn now to the expenditure. them

aggregated - in the fiscal year ending
him 30,1936 - in the fiscal year ending
last from, and it is estimated well amount to:

balann the must
in the current fiscal year are to

bu further upland, by an in the

me rahlerhood of this represents reduction
of
w

10 per gel in total. Lim they of this expenditure

fixed, hozeme, the in flixible

Line will ham to lu very wind layu than
per and the regular exem of the government includes them

state the civil department, define, veturns etc. amount

present to about on the this company
with you year china appropriating the preading

administration when /adephist health define were not as

upend as they are today. Clearly, no
an he made in then elements of expenditions, Intered

the
public
Jhh
will
uguin
.
this
carrol
security
tasts one
udunds

334

amounting to

h reduced all renim unch the
Social Security ad amounting over you to

not abounted by

exa etc should be invested in the loved

this to &

wonderful accuring habible is coming years. They
must by dinnety an to other purpose Weke
th
Productions in expenditure will consigned

M the this california is

hundred which as namely paulki words, unemployment

which and payment "to agriculture I is
air that this is no for it is there classification
that am primarily representing offer the defrid

the of there
this
publi
for by Coughts in preveiring

years

this is halber

than in the current fiscal year. I cannot lu
pressand by any new author appropriation for

new project if ne are to belawn the herded.

Payments for including the CCC will ameunt

335

during the current fiscal year

They are being each month house,
though to he able to hold them down to an
during the coming fiscal

agreed If in al s do this and al lls same term
udue performate to agriculture

total expenditure

return reduced bf for the

was will exclusion of debt reliance
through
the
sinking
bund
coming
will
amound
GB
during to final year 1939
a

reduction of from this year.
the question before y then - Will tax

revenues to sufferent in the coning from

year to a balance hudge including a
retraimed of to public reduction debit in on through to

exinding hand on the have operatitive

these amounts. which I am prepared to recommend this

ill depend upon two factory th bund al husins
atemily duying the need eighteen months, and

the amount of reconsium the obtain from recoverable

336

a the

univers

the uggi

assets now held in the R that
rom there two factors sawn will the suffirial appear

I hands by Thatthen
means
allowance
he evaluate,
in the coming final gui) Deeing
the lad fingel year, ated ceremis the amounted eathmed to -

and during the curvey fined year lthry will

manul to / should thing around to S_ -

lung the comma . fiscal year the aggress

asalin unemu from turation required to
produce a full and complete balancy at

the $100,000 are of debt
Our

throughtta sinking fund will he
resear tax strutus is capable of producing this
mound on an annage level of business actimity

uppreciately lover than that which has prevacted
using the pay twelve month Personally tdo

l helien that the present

minor an anlrage declim below that lend. I helio

337

calculation an of necessity hand on

They feviant which no oni is in a
position to guarantee.

that I am supported in this min by the
and majority of accredited analysts of

theremon activity

I want to be completely candid with
you, howeving tel us A upper that formation
are consination consign able in error should they prope

WB t as I pervently hope way he the
case, revenues available for
will h in excess of 600 000 oro.unimer
Draw
assum you the any and all excess will

a for ablet extrement and

los or increased excendifier. an the other
hand, should the prom even prom bland
by are not sufficially consination Aust adrid
andle that the would not ham achieved the

complete halam of the budget for which the

during. I would lik to add, house,

hal there foreants would home to he very
evailly in error to reduce university to the

cacil when they would no promide for
one dihl utilim through the sinking hand.

338

Refer I conclusive I would like to
unkia lini community on the growing
importance of trust fund investments

is the location of the public died Uu
masery has long hun responsible for

the
management
at
a
variety
of
Just
Resuls archas the Cimil Lemin Retrumed

Fund the Veleram Life Insurance
Punder 9s theath responsibility of
existing the resources of these
obligation
lands in Leasury
a nou there

while they understand of the

ubli debt- they representive account of futun

liabilities on the pow of the forth
round whomes, such abligation are vol hold

I they do not expenditure

wasery has you

lling obligation in the monthl Whithy beard
fals the and of there funds has mirrand
priduably , especially uni the passage of the julfinate
in Security alwhich established live new

339

very large truel funds in the Zuarum,

one to build upa resem against babilities for
old off Pensions the other to safeguard
unestyphysical ensurem usems 2 the states

at the present term, the aggress volum of
wasely obligation held is all them moving

funds amounts to and this seem should
delt of should lu substracted from the
Frahual dibit to anim al would a from

and is represents truly the the Training
obligation which are available compensations, is the

monthlal for purchase by bank consinum

companies and other investive By not
who 30/938, the end of the current fiscal
and

year they will amount to &

by par the end of the coving fiscal year, from 30,

939 which the have him disuraging tonight

will amount to of this means

had the mound of public delet return f you

marchal will excerd th smoking fund retrieurate
during the fisia year 1939. menhan

//
menly

340

a of

thirst show that the capital work
public dehton a must larger scal
than
is
promiser
for
by
sintaining
fund
retirements alone.

Rufler # 416

THE HAY-ADAMS - HOUSE
ALL BED ROOMS AIR CONDITIONED

WASHINGTON, D.C.

Robert Me Hough

Irons

341

342

Dr given 10/29/37
To safeguard against any misunderstanding let me

explain precisely what I mean by "balancing the budget."
There are two senses in which the term is commonly used with

reference to federal finances: First, in the accountant's
or non-technical snse, in which it means meeting from current
revenues all current expenditures, so that, with an unchanged
cash balance, he total debt outstanding remains unchanged;

second, in the special technical sense, in which it means
meeting from current revenues all current expenditures plus

expenditures on account of the statutory sinking fund, so that,
again with an unchanged cash balance, the total debt outstanding
is reduced by the amount of Treasury purchases of government

obligations on statutory sinking fund account. It is in this
second, or more rigorous, sense that I wish my declaration of
the intention of the government to balance the budget during the
fiscal year 1939 to be understood.
The President will not present to the Congress until
next January his budgetary program for the fiscal year, 1939,

and I cannot of course anticipate at this time the specific terms
of his announcement. I venture, however, to forecast the major
principles to which his budgetary program will conform. It is
my belief that the President will find such possibilities of
economy in expenditures as, without serious interference with
the proper execution of the government's policies, will make
feasible a reduction of expenditures exclusive of sinking fund

-2-

343

to a total not exceeding $6,650,000,000 as compared to total
expenditures exclusive of sinking fund as estimated for the

fiscal year 1938 of $7,346,000,000. To meet the statutory
expenditures on sinking fund account, amounting for 1939
, he will probably rely upon an
to

increase in the revenue productivity of the existing tax
structure in the fiscal year, 1939 over the fiscal year 1938,
resulting from the material improvement of business conditions

for the calendar year 1937 over the calendar year 1936. In
other words, I expect that in the fiscal year 1939 the present
tax system will yield in the neighborhood of

or sufficient to met anticipated expenditures in that year
exclusive of sinking fund amounting to

and in addition to provide for debt reduction to the extent
on statutory sinking fund account.
of
,

I am of course not unaware hat if perchance the
reverse of the moment in the hitherto $eady upward trend of

business should prove to be protracted or severe, these expectations

as to increased productivity in the fiscal year 1939, of the
existing federal tax structure will turn out to be somewhat

overoptimistic. After careful consideration, however, of the
many uncertain factors upon which ventures in forecasting so far
ahead the revenue productivity of the tax system must rest, I am

confident that on the least favorable turn of events which on
present data an reasonably be anticipated, the yield in the

344

-3- -

fiscal year 1939 of the present tax system will fall short of
meeting the anticipated expenditures of that year by substantially
less than the statutory sinking fund requirements, so that some
reduction in the amount of the outstanding federal debt 11 still

result from t he fiscal operations of that year. Should, on be
other hand, the present reversal in the upward trend of business
prove as moderate and as short-lived as there is substantial
ground for expecting, then the revenues of the fiscal year, without
increase in tax rates, should suffice not only to meet the anticipated
expenditures of that year, inclusive of statutory sinking fund
requirements, but should provide a modest surplus available for

debt liquidation.
The President and Congress together have complete

power over the level of expenditures. The level of revenues,
however, reflects to an important degree the course of business
activity, and can be determined in advance subject only to a

substantial margin of probable error. The presentation of any
budgetary program for the future inevitably involves, therefore,
the assumption of the hazard of revenue estimates which may be

falsified by later events. The American public may rest assured,
however, that the budgetary program for 1939 will be designed

to give every reasonable assurance of the attainment of a strict
budgetary balance in that year based upon conscientious economy

in expenditures and conservative estimating of prospective revenues.

345

-4-

The Administration has promised to present for consideration by the next regular Congress a comprehensive program

of revision of the f ederal tax structure with a view to achieving
a greater measure of equity for the taxpayer and a more economical

and efficient administration of the tax-collecting machinery.
It does not propose to recommend any increase in the tax burdens

on the taxpayers as a whole, and it is determined to attain a
strict balancing of the budget without resort to increase in
tax rates.

348

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

at the Notel Aster, 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 accembled

here tonight the subject of Federal spending and its relation to the balancing of the Federal budget.
Nineteen years age 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 ongaged in another war. This time our enemy was a great

economic disaster. In this war we bombed no cities; we

347

-2 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 eyeten.

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

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 is excess of our receipts.

aewasem
-3-

200,348

We deliberately used an umbalanced Federal budget etc
during the past four years to meet a greas emergency.
That policy has succeeded. The emergency that we faced

in 1933 no longer exists.
I as fully aware that many of our probleme remain un-

solved. I as avare that there still remaine a considerable
voluse 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 16 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 ages

many in their measures solution are . one required of ower)

these measures in
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343

and that their solution, though requiring other measures

as well, will best be furthered in the present Juneture by
balanced Federal budget.

Early in 1933, after three years of progressive deterioration, our whole oconomic meehanisa was deneralised.

AS 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

bustness 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 been and pre-

cedes a serious depression. The present situation is not
characterised by the existence of huge inventories, high

interest rates, ever-extended credit positions, or great

350

5
surpluses of housing accommodations, capital equipment,

et eeters. We have not reached the stage of full employmeat of our productive resources. on the centrary, 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

demoralisation of 1933. It also stands in contrast to the
unhealthy excesses of 1929.

The basic need today is to fester the application of

the driving force of private capital to the present favorable circumstances. We want to see capital go into the

reasonable

productive channels of private industry. We want nbusiness

profits to grow. We believe that the bulk of the remaining
unemployment will disappear when private capital funds are

actively employed in productive enterprise. We believe that
one of the most important ways of achieving these ends at

this time is to balance the Federal budget.

351

-6In this connection, I should like to point out that
the underlying technical conditions that made defieit spending the wisest kind of economic policy during the depression
ao longer exist. Thus, when we borrowed during the depression

to finance our deficit spending, a large part of the funds
was obtained through an expansion of bank credit. To this
extent, our spending did not abserb 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 purchase& by non-banking

investors, the effect was largely to put to work capital
funds that would otherwise have remained idle.

The situation today is greatly changed. Our industrial
recovery has created large new dessads for private capital.

Our commercial banks are now utilising their credit re-

sources again for the financing of private industry. During the first nine months of the present calendar year,

352

-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 astual 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 siseable national problems that remain should

be attacked, in my opinion, strictly within the limite of
the balanced budget.

There is a further consideration of great importance

that I should like to emphasise. That 10, that the basic
philosophy of our defieit spending of the past few years requires that a program of substantial debt retirement be
undertaken shortly.

353

-8Despite 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. Moreover, the rates of
interest on our borrowings have been lower, for comparable securities,

than at any other time in the history of the country.
We wish to preserve the financial power of the Federal

Government to aid 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.

I turn, then, to the immediate practical aspects of budget
balancing for the coming fiscal year. What are the controlling
figures?

Our total receipts for this year are estimated at six

billion, six hundred and fifty million dollars, and our total
expenditures at seven billion 343 millions, leaving a deficit of
roughly seven hundred millions.

-9-

354

To seek a businessman's balance of the budget next year,
we must therefore accomplish a net improvement of seven hundred

million dollars in our budgetary position. In estimating revenues,
it is far worse to overestimate than to underestimate. We must
not count on an increase in revenues next year from the existing
tax structure. We must plan to achieve this seven hundred million
dollar improvement by a reduction in expenditures unless to are
prepared to face new or increased taxes.

we
ought
not
to
am strongly opposed to increas the total

tax burden at this time. I believe that an increase in

taxes would be most unfortunate in its effects upon business
recovery and upon the public.

and then of the favrecepts

youd expectations the excess
could
yo
of
course
to
reduction
national debt

355

- 10 -

(Tax discussion to be supplied)

356

- 11 -

When I say that we look to a curtailment of expenditure
so that we may achieve a business mans balance of the Federal budget,

I do not mean to imply that our revenues next year may not be greater

than those of this year. with active business, our revenues should
increase by several hundred million dollars. If our revenues of
next year should, as I hope, exceed those of this year, every dollar

of additional revenue should be used to retire debt. In addition,
every dollar that the Treasury realizes from the liquidation of
revolving funds, and from other repayments of loans and capital

advances, should be set aside for debt retirement. In no event, in
my opinion, should we contemplate total net expenditures in excess of

the level of this years estimated receipts. That means that our
expenditures must not exceed six billion 650 million dollars for the
coming year.

Our problem is clear. Our expenditures must be cut 700

million dollars.
But where can cuts totaling this amount be made? After
studying the whole problem day and night for several months I have

357

- 12 -

come to the following conclusions: First, little or no money can
be saved in the regular operating expenses of the federal government,

including the national defense and interest on the public debt.
The increased volume of services now demanded of the government

make it almost impossible to achieve significant reductions here.

On the other hand, by focusing attention on the four or five
classes of expenses that have been mainly responsible for our past
deficits, I am convinced that the necessary savings can be made.
I have before me a table in which I have set down my
rough estimates of the reductions that should be possible next
year in several classes of expenditures.

358

ESTIMATED POSSIBLE SAVINGS FOR FISCAL YEAR 1938-39
1.

Public Works expenditures this year,
including emergency funds, but
exclusive
of highway
expenditures,
are
estimated
at
Next year they should be cut to

Savings

573
500

This would save

2. Highway expenditures this year,

including emergency funds, are
estimated at
Next year they should be cut to

253
100

This would save

153

3. Unemployment Relief and the CCC

camps this year are estimated to cost
Next year they should be cut to

1,680
1,200

This would save

480

4. Agricultural Adjustment Program

this year is costing

Next year the cost should be normore, or
The saving being

475
475
0

5. Miscellaneous and Supplemental Items
This year are costing
Next year they should be cut to
353

359
$180
50

This would save

$130

Total savings on above items

836

Less increase in Social Security expenditures

117

Net savings

$719

it viny - 13 - between Ri

360

First I have set down the item of public works, whether
financed by emergency or regular appropriations, but exclusive of

highway expenditures. This item during the current year will
account for 573 millions of expenditures. Next year, despite the
fact that available unspent appropriations for this purpose already
approximate 700 millions, I believe that the expenditures should be
limited to 500 millions which would produce a saving of 73 million

dollars. I believe further that we should reconsider the public
works program already formulated for the future by the various
government departments, programs which would involve an average annual

expenditure of about 700 million dollars for the next four years.
Second, I have before me the item of highway expenditures,

estimated at 253 millions this year; an amount that may well be

cut to 100 million next year to produce a saving of 153 million.

In this connection, also, I believe it would be wise to alter the
existing programs for the future, which would call for new appropriations totaling more than 400 million dollars during the next two
years.

Thus returning to the average

federal highway expen diture

- 14 -

361

Third, I should like to see our outlays for unemployment
relief and the CCC camps, which, exclusive of other recovery and

relief expenditures, are running at 1680 million dollars this year,
reduced to 1200 millions, which would produce a saving of 480
millions.

Next believe that 130 million dollars or more can be
saved next year by reduced outlays for miscellaneous and supplemental

items, which this year amounted to 180 millions.

The total savings that I have listed amount to 836 millions.
We must deduct from this figure a probable increase of 117 millions

in Social Security expenses, leaving a net possible saving, exclusive
am
of agriculture, of 719 millions, or more than enough to achieve an
ordinary balancing of the budget.
Both because of the real problems involved in the present

level of our agricultural expenditures, and because it may not be

possible to achieve all of the savings that I have listed, I strongly
recommend that the present level and character of our agricultural
expenditures be given very serious reconsideration.

stud know ban
- 15 -

362

not

I ask you to consider what I have to say on this point in
the light of the fact that I have been for more than twenty years
deeply concerned with the problems of agriculture, especially farm
management and farm finance, and most keenly interested in doing all
that can be done to remove the economic disadvantages that the

farmers have suffered. That very Interest impels me to believe and

to state with all the force at my command that agriculture car not
rely on merely temporary expedients. We must have a long-range
program to maintain the independence and the purchasing power of the

farmer. That program must take into consideration his opportunities
both in the domestic and the foreign markets and we must keep always

in mind its effect on our whole National economy. To endure and to
be of permanent help to the farmer the program must be thus soundly

based. It will be of no service to the individual farmer or to the
Nation's agriculture as a whole to offer what we shall later be

compelled to withdraw. The farmer himself
The plight of agriculture in the depression called for

does not want subsides
- - 81 -

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363

- 16 -

special aid not only in the farmer's interest but in the interest
of all of us. Much that was done was on an emergency basis.
Emergency devices must be resurveyed. We must see just what we

are doing to determine how far we can go in the future. No more than
any other branch of our economic life can agriculture prosper on
permanently unbalanced Federal budgets.

Besides the 116 millions included in this year's budget
for the general work of the Department of Agriculture, there is
an estimated expenditure of 475 millions for the soil conservation

program, 33 millions for rural electrification, 55 millions to the
Federal Land Banks to provide lower interest rates, 100 million for
commodity loans and 125 millions for resettlement. These items

total 903 millions for this fiscal year.
I am aware also that discussion is now taking place in
Congressional committees of additional measures in aid of agriculture
that may involve large expenditures. The magnitude of the sum we
are already expending for agricultural purposes demands that the

- 17 -

364

whole program be re-examined on the basis of a determination of

how much we are willing to spend and can afford to spend in this

one direction. The farmer's lasting welfare also demands that
this be done.

There may be some persons who would counsel a more

drastic reduction of expenditures or a program of far heavier

taxation in order to make certain a substantial reduction in

the public debt in this fiscal year. There are serious objections
to such a course.

We are definitely in a transition period between unbalanced
and balanced Federal budgets. We are making great progress toward

a balanced budget. Relatively few persons realize that the net
improvement this year in the budgetary position of the Federal

Government, will amount to more than two billion dollars. In

other words, the net deficit this year is estimated at less than
seven hundred millions as compared with more than twenty-seven

regr 3
hundred

willed

- 18

365

well

millions last year. That in financement of runey
I am enthusiastic about the direction in which we are

alve

going; but I firmly believe that there is just as much danger to
our economy as a whole in moving too rapidly in this direction as

there would be in not moving at all.
The minimum goal that I propose will by no means be easy

to achieve. But it is a goal that we can safely, honestly, and
reasonably, hope to reach.

More than two-thirds of this year's budgetary improvement
comes from increased revenue, rather than from reductions in expen-

ditures. I should welcome a further increase in revenue next year
but only if it comes from expansion in business activity rather

which would buing
in than were from PARIS than the increased taxes. present tax structure
There are equally compelling considerations on the expen-

diture side. I strongly favor a vigorous program for the progressive
reduction of Federal expenditures to the minimum demanded by the

Government's increased responsibilities. But it would be clearly

then cae 2 bellion $ er- in a year
towards budget following bethaud

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366

- 19 -

unwise, and disruptive to many sections of private industry, if we
were suddenly to slash Government expenditures by more than the amount

I have indicated.
There is a new and important aspect of our budget that
must be considered when the economic effects of our expenditures and

receipts are being analyzed. The Social Security Act has introduced
new items into our budget. A major one of these, the appropriation
for the Old Age Reserve Account, involves an expenditure for reducing

the amount of the public debt held in the market.

Next year, as a result of this Act and of the related
State laws, it is estimated that the Federal Treasury will receive
more than one billion dollars net for investment in Government
obligations for the Old-Age Account and the Unemployment Trust Fund.

In exchange for its obligations issued for these purposes,

the Treasury will receive more than one billion dollars in cash.

This billion dollars will be used to retire public debt now in
=TITTOUR Jeaf

the hands of private investors. In other words, the Treasury next
- IB -

had

- 20

wer
-

367

year would be adding one billion dollars to the supply of funds
in the capital market.

It is true that this very substantial retirement of
public debt now held by private investors will not reduce the

total public debt. It is a transfer of the public debt from the
hands of private investors to the Old-Age Reserve Account and the
Unemployment Trust Fund. Nevertheless, the effect on business,

and on the capital market, is exactly the same as though the

billion dollars were used to reduce the total public debt. One

billion dollars will be paid over to private investors.
Even during the decade of the Twenties, when the Treasury

was receiving large payments of interest and principal on war debts,
and from the sale of surplus war materials, the maximum reduction

made in any single year in the public debt held by private investors
was one billion three hundred millions.
My object this evening has been to present, as clearly

and as frankly as I

I know how, a comprehensive picture of Federal

It is very clear

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- 21 -

w
36th

expenditures and the budgetary outlook. I have tried to make plain
the underlying economic reasons, as well as the humanitarian ones,

for the past deficits; and I have tried to bring out clearly the
underlying economic considerations that now demand a balanced

Federal budget. I have shown why, in my opinion, this balance
should be sought by a reduction of seven hundred million dollars

in expenditures, and why a large surplus for debt retirement

would be undesirable at this time if it must be achieved by
eliminating essential Federal services or by increasing the
existing tax burden.

The principal objects of our budgetary policy have
been, and I hope will continue to be, to promote a large volume
and healthy character of business activity, a maximum volume of

employment at good wages in private industry fair treatment for
our agricultural population, adequate revenues to meet the increased
services now demanded of the Federa 1 Government, and the preservation

of the credit and currency of the United States, on which depends

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370
November 3, 1937
11:30 am

Present:
Dr. Haas

Dr. White

Mr. Seltzer
HM,Jr: Now, where do we go. (Draft of speech #10)

Mr. Seltzer: Right there.
HM,Jr: Are you going to tell me what is different?
Mr. Seltzer: All that we did, mainly, was to incorporate the President's suggestions and the first place is

page 23.

HM,Jr: What's different?
Mr. Seltzer: The most important change relates

to Social Security. You might go over that first.

HM,Jr: Where is that? What page?
Mr. Seltzer: Begins at the bottom of page 22,

last paragraph.

HM,Jr: I don't think what the President dictated

was so hot.

Dr. White: Some of it was good. That paragraph,
I think, was good.
HM,Jr: (Reading) "The funds paid into both of
these accounts operate just like payments made by an individual to a private insurance company. Such a company invests
your premiums in Government obligations, in farm and urban
mortgages, in railroad, industrial, and public utility bonds,
and in other forms of investment approved by one or more of

the forty-eight different State laws. All that the insur-

ance company has when it has invested your premiums in this
manner, are bundles of pieces of papers representing all kinds
of promises to repay your money with interest to the insurance
company. If

371

-2-

HM,Jr: That's exactly what he said.
Mr. Haas: Yes.

HM,Jr: Did you fellows think that's all right?
Mr. Seltzer: Yes.
Mr. Haas: Yes.

Mr. Seltzer: If he wants you to take the occasion
at this time to refute these contentions in the newspapers
about Social Security funds, this is a good way to do it.

HM,Jr: He does. He does. He has been so terribly decent about this speech that I think -- very few sug-

gestions made, I think we ought to take it.
Mr. Haas: You did not check this one about "reasonable profits". Larry changed "We want reasonable business
profits to grow" to read "We want to see private business expand."

Dr. White: Leave profits out of the picture. Either

say we want to see national income
Mr. Seltzer (to Mr. Haas) We have not discussed any

of the other changes except Social Security.

HM,Jr: Somebody take this and read to me what the
changes are.

Mr. Haas: O. K.
On the bottom of page 3 and top of page 4. Here's
the President has suggested

of these
are the change required in solution.
their saying:One
measures
"Many measures at the

present Juncture is a balanced budget." # We just took that.

HM,Jr: That's all right. That's a very important
change.

Mr. Haas: Yes, that's an important one.
HM,Jr: Let's run through and show me where the
changes are.

Mr. Seltzer: "We want to see private business ex-

372

-3-

pand" and the President wanted "We want reasonable business

profits to grow," and that takes all the force out of saying
we want private profits to expand, so we changed it to read
"We want to see private business expand."

HM,Jr: That's all right.
taxes.

Mr. Seltzer: The next was in connection with
HM,Jr: That's the one he stumbled so on.

Mr. Seltzer: Mr. Seltzer: Right up here in the
old draft where we say we must plan to achieve this by reducing expenditures, and "And then, if the tax receipts
rise above those of last year, the excess should be used
to reduce the national debt." Then this is to be filled
in by Magill.
HN,Jr: I have just spent an hour with him and
he and Gastor are now trying to write it. I did not accept
what Magill wrote at all and I dictated my own. He gave
me six pages which I could not use.
Dr. White: Too detailed?

HM,Jr: No. Getting down again into the question
of specifying particular changes and this is a speech on
Government spending.

Mr. Haas: About "thus returning to the average

annual Federal highway expenditure.

Mr. Seltzer: Page 15. "In this connection, also,

I believe it would be wise to alter the existing programs
for the future, which would call for new appropriations
totaling more than four hundred million dollars during the
next two years, and return to the average annual level of
expenditures prior to the depression -- under one hundred
millions.
HM,Jr: Under? Why put 'under'?
Mr. Seltzer: Because the average was under. As
a matter of fact, it did not go above.

373
-4-

HM,Jr: All right. That's all right.
Mr. Haas: The next thing: the farmer himself does
want subsidies. Page 15.
HM,Jr: That, I thought, was very good.

Mr. Seltzer: You say you are in favor of a long-

range program.

HM,Jr: Is that any change?

Mr. Seltzer: No. Right here (page 18) "The

farmer himself does not want subsidies, but rather such fair
prices and such balanced production of crops as will make
subsidies unnecessary for his decent ecnomic status."
HM,Jr: That's the President.

Mr. Seltzer: Yes.
Mr. Haas: Those are his words.
Mr. Seltzer: The President wanted this emphasized:
Relatively few persons realize that the net improvement this
year in the budgetary position of the Federal Government will

amount to more than two billions dollars. "This net improvement of more than two billion dollars that is taking place in
a single year provides the best answer to those who have
publicly despaired, etc.
HM,Jr: Is that new?
Dr. White: The last sentence Larry is paraphrasing.
We say this: "This net improvement of more than two billion
dollars that is taking place in a single year provides the
best answer to those who have publicly despaired of our willingness or our ability to balance the Federal budget."
Mr. Haas: He asked to have that put in the headlines.

Now this, which would bring in taxes. (Page 18 of

the draft.)

Mr. Seltzer: It wasn't very clear. There is a
question mark here.

374
-5-

HM,Jr: The question mark is out. That 'only
if itscomes from expansion in business activity rather than
from increased taxes which would bring in more than the present tax structure. That 18 his own language.
Mr. Hass: Larry, show the Secretary what you did.

Mr. Seltzer: of course, it wouldn't fit just as
it is there. What we put down is this: "More than two-

thirds of this year' 8 budgetary improvement comes from increased revenue, rather than from reductions in expenditures.
This clearly indicates that further increases in taxation
are unnecessary, for a continued expansion in business activity would produce adequate additional revenues on the basis

of the present total tax structure.
HM,Jr: That's all right.
Mr. Seltzer: Then we come to Social Security.
what else?

HM,Jr: I read that. That's all right. Now,
Mr. Seltzer: That's about all.

to Larry.

Mr. Haas: Then the gold thing, which you mentioned

The gold thing, it took too much
als O have to curtail to bring
space and did not fit. WeWe
had tried including gold at this
you in a half hour.
Mr. Seltzer:

length.

HM,Jr: Let's put it this way. The way I plan
to do this is Magill is supposed to come back at 2:30 and
tomorrow he goes on the Hill. I want to clear that up -this missing part -- and I had promised Bell, because I
don't know what Bell is going to say about these figures.

Mr. Seltzer: Right.
HM,Jr: But I figured that I had better be present
when you go over those things.

Mr. Haas: Oh, yes. Uh-huh.
HM,Jr: Now, can I have this copy at this stage

375
-6-

or do you people need it.

Mr. Seltzer: No.
HM,Jr: Well, Bell is coming in at five minutes
to one. Let me just talk with him. What I am trying
to say 18 the chances are that you will have the rest of
this afternoon. The President will not be back here tomorrow.
Chances are I will not see him on this question until Saturday.
(HM,Jr: Mr. Morgenthau spoke to Bell on the 'phone
and Bell will work with the Secretary tomorrow at 3.)

HM,Jr: I have to get Magill's first. It gives

you fellows the rest of today and sometime tonight give it to
Bell. That giveshim a chance to read it and check it up 80
when he sees me tomorrow he does not get it cold.

Mr. Seltzer: Will we get Magill's stuff this

afternoon or tomorrow?

HM,Jr: I don't know. You will get it sometime

between now and midnight, because I am going to work with
him the way I did you fellows on Sunday, so between now and

midnight it has to be finished.
Mr. Seltzer: Do youknow whether it is going to be
very long?

HM,Jr: It will not be more than two pages.
think?

Mr. Seltzer: It will run about two pages, you
HM,Jr: Yes.

Mr. Haas: Only one item we have not got your views
on and that S gold.
HM,Jr: Yes, go ahead.
Mr. Haas: (To Mr. Seltzer) Tell them what you had
in mind.

Mr. Seltzer: I was somewhat dubious about mention-

ing it at all because in 80 far as you go back to the past

we don't want to give any more space to the past than we have,

376

-7-

which 18 7 pages.

Your speech is devoted to the present

and future. Secondly, if you at all boast about the present
gold position of the country, you flag everybody on our gold
sterilization program. For example, you bring up what is
going to happen to the Stabilization Fund, etc., and you won't
have time to get into that. That, it seems to me, is better
suited to another speech.

HM,Jr: It's unimportant, as far as I am concerned.

If you think it's a mistake, out the window!
Mr. Seltzer: We also have this other factor: that
we are very much pressed for space.

HM,Jr: Are you? How many words have you got?

Mr. Seltzer: You have got 27 pages without Magill.
Twenty-eight pages including two pages of Magill's. We ought
to cut this down to twenty-three.
Dr. White: You are not limited to time.

HM,Jr: Yes; on the radio 30 minutes, and I don't
think it ought to be more than 3,000 words.
Dr. Haas: No.

Mr. Seltzer: No. That would be about 23 pages. If

we can get gold in
HM,Jr: I am not crazy about it. Somebody suggested

it.

000-000

FIRST DRAFT OF TAX SECTION
PREPARED BY MAGILL FOR SECRETARY'S
NOVEMBER 10th SPEECH. DISCARDED
11/3 AS TOO LONG AND DETAILED FOR

377

HIS PURPOSES.

If expenditures can be held within the limits I
have outlined, it will be possible for the Congress to
make a number of changes in the tax system in the in-

terests of greater fairness. Since the revenues must

be maintained at their present level, in order to
balance the budget and to provide adequately for debt

retirement, reductions in particular taxes must be
balanced by increases in others. Nevertheless, I be-

lieve that the tax structure as a whole can be put on
a sounder and more permanent basis, if it is thoroughly
overhauled in the light of accepted standards of tax
justice.
One of the basic standards is that the burden of
taxation should conform to capacity to pay; and that
capaci ty can fairly be measured by income. At the
time, the Federal Government is receiving

Orig
present and 4 carbons made (3 carbons bestroyed)
RM/mrl
11-2-1937 (a. )
First Draft

FILE COPY

378

-2approximately the same amount through the miscellaneous

internal revenue taxes, mainly levied on different kinds

of sales, that it is receiving through the income tax.
Some of the Federal sales taxes are essentially nuisance

taxes, since their individual yield is small, since ad-

ministration 1s difficult, or since they fall upon
articles of general use. The tax structure as a whole
would be improved therefore if the direct and plainly
known liability of the income tax were gradually substi-

tuted for a part of the indirect and hidden tax liability
now imposed by these quisance taxes. I do not advocate
a broadening of the income tax base, unless the consumer

with a small income is relieved of some of his present
indirect tax burden. Moreover, earned incomes, in my

opinion, deserve a slight extension of the preferential
treatment which they now receive. The tax revision as a

whole should be framed in the light of the available

FILE COPY

379

-3data on the actual burden of taxation, direct and indirect, upon the different income classes.
The Revenue Act of 1936 made important changes in

the method of taxing corporations. The general purpose
was to insure that corporate incomes, whether retained

for use in the business, or distributed as dividends,

would bear like taxes. Since there are legal difficulties in the way of taxing undistributed corporate incomes directly to the shareholders, the end had to be
achieved by means of an undistributed earnings tax on
corporations. We have assembled and analyzed the infor-

nation shown on the latest corporation income tax returns,

in order to determine the effective rates and burden of

all Federal taxes upon corporations of different sizes
in the various industries, as well as the operation of
the taxes in special cases. The accumulated data shows

FILE COPY

380

-4that while the effective rates, on the average, are
reasonable, the small and the medium-sized corporati on

might properly be given somewhat more liberal treatment, through exemptions declining as income increases,

and through credits for past operating losses.
The tax on capital gains has received widespread

discussion in the press. For reasons which need not be

detailed here, it is difficult to devise a method of
taxing such gains, which 18 at once fair, and simple

enough to use on a tax return. I do not believe, how-

ever, that these considerations justify the repeal of

the tax entirely. On the score of capacity to pay, it
is hard to see any justification for eliminating the tax
on the profits from investments or speculations, while

retaining it on the income of the merchant or the salaried
man. Enough experience has now been accumulated to en-

able a considerable improvement in the rates and in the

FILE COPY

381

-5method of taxation itself. In particular, provision
should be made for carrying over the net capital losses

of one year tc be applied against the capital gains of
the subsequent year.

I shall mention only a few more major topics on
which information will be presented to the Congress.

Whether or not the income tax is to produce relatively

a greater share of the Federal revenues, it is excential
that incomes of like size be subjected to like treatment.
Consequently, the exemptions accorded to the interest on

state and municipal obligations, and to the salaries of
state and municipal officials should be ended for the
future. The deductions allowable for income tax purposes
should in general comprise those expenses, losses, and

reserves which are directly occasioned by the activities
which produce the income subjected to the tax. Some of

FILE COPY

382

-6the deductions, such as that for percentage depletion
enjoyed by oil and mining companies, are excessive;

and others are not quite adequate. The gift tax and
the estate tax should be further coordinated, preferably

with a single set of rates and exemptions. Finally,
some definite move in the direction of reducing the
present serious overlapping of Federal and State taxes
might well be undertaken.
Let me say again that whatever changes are made in

the tax structure, the total yield must be maintained
at the present level, to meet estimated expenditures and
to retire the debt. Changes can be made at this time,
however, which will improve and strengthen our revenue

system as a whole, through a fairer distribution of the
total tax burden among the various income classes.

FILE COPY

383

November 3, 1937
10:30 am

Present:

Mr. Magill

Mr. Gaston

HM,Jr: Let me do it in my own crude way.

don't know that I can do it. May I just take a look at
the speech before this first, to get the feel of the thing.
Mr. Magill: You had it or someone had it inserted
about page 10.

HM,Jr: I just want to see what goes ahead.

don't care where it goes. I am going to talk now.
'Let us stop at this point and consider the revenue
2:356
side of the picture, always keeping in mind that the total
revenue for next year must produce at least as much as it
did this year. The Federal tax system affects every wage
earner in the country and we in the Treasury are constantly

studying the tax problem so that (I am not going to use wage
earner, but business man does not answer that -- the man who

pays the taxes; that is what I want to get over.) we can collect these taxes in a manner -- as painlessly as possible.
(That can be explained.) Let me just use that word for the
moment, because that's what I mean.

'There is no question in my mind that the present

Federal tax laws are, first, entirely too complicated, that
in many cases the cost of collection exceeds the revenue, and
that the taxpayer finds it difficult and burdensome not only
to make out his tax returns, but in the administration of his
business.

'We in the Treasury take the position that if we

find that any particular tax is a hardship on the individual
or the business man, we are more than willing that this particular tax should be modified or withdrawn in favor of some
other form of taxes which are fairer and will produce the
same amount of money.

'We realize fully that the Federal Government is
financed largely through taxes, and if we are to continue

384

-2-

to collect the vast sums in the future that we have in the
past the tax laws must be so written and so administered
that the taxpayer can continue to make a reasonable profit
with a minimum of interference from his own Federal Government. We further realize that when only two and one-half
million people in the United States pay Federal taxes' -- is
that right? You said 5,000,000 tax returns.
Mr. Magill: That's about right on income taxes.
them
All of them pay Federal taxes. You had better limit
to income tax.

HM,Jr: 'When only two and one-half million people

in the United States pay income tax, it is entirely too few
for the country as a whole to take a real interest in the
Federal tax problem and, therefore, we feel that it is most
important that the number of taxpayers be increased through -lowering the exemptions. (I haven't said anything anywhere
I am just going to keep it general.)
To sum up the attitude of the Treasury towards

the collection of revenue, I wish to say that, first, our
fiscal policy for the next year, as stated tonight, 18 based
on our receiving at least as much revenue next year as we
do this year. In other to accomplish this we are more than
willing to sit down with any individual or group and go over
their tax problems and if we find that any particular tax is
making it difficult for them to conduct their business or to
make a reasonable profit, we stand ready to make public the
results of our findings.
Mr. Magill: Well, I think the general tone is good.
There are a lot of catches in it because of the fact that
anyone listening to it or reading it will want to see what

specific things you have in mind.
I think the main point you want to make is one which
underlies what you have said; that is, what we ought to be
doing is shifting away from the great number of taxes that
we now have that take no account of ability to pay -- that is
the great batch of sales taxes -- over towards income taxes.
(Miss Chauncey went out to type up the Secretary's
remarks.)

385

-3-

"Let us stop

HM,Jr: Let me do this again.
at this point and consider the revenue side of the picture,
always keeping in mind that the total revenue for next year
must produce at least as much as it did this year.'

Mr. Magill: The first paragraph, the idea is
good.

HM,Jr: That's the way to open it, isn't it?
Mr. Magill: Yes.
HM,Jr: 'During the past eight months the most
exhaustive studies have been going on in the Treasury
and many conferences have taken place between individuals
and groups with Treasury off cials. We have taken the
position during these conferences that if any particular
tax bears down too severely on the individual or corporation, we are more than willing that this particular tax
should be modified or withdrawn in favor of some other
form of taxes which are fairer and will produce the same
amount of money.'

Mr. Magill: I have written this: 'A number of
adjustments ought to be made in the income tax, both on
individuals and corporations, and a number of nuisance

taxes might well be repealed. We further believe that
there ought to be a gradual shift from the nuisance taxes
to the income tax as a means for providing a greater pro-

portion of the revenues required by the Federal Government.

it.

HM,Jr. All right, we will get together again on

386

(Draft) Nov. 3
Let us stop at this point and consider the revenue

side of the picture, always keeping in mind that the
total revenue for next year must produce at least as
much as it did this year.
The Federal tax system affects every wage-earner

in the country and we in the Treasury are constantly
a
studying the tax problem so that we can collect these
taxes in as painless a manner as possible
There is no question in my mind that the present

Federal tax laws are, first, entirely too complicated;
that in many cases the cost of collection exceeds the
revenue, and that the taxpayer finds it difficult and
burdensome not nonly to make out his tax returns, but

in the administration of his business.
We in the Treasury take the position that if we
find that any particular tax is a hardship on the
individual or the business man, we are more than willing
that this particular tax should be modified or withdrawn
in favor of some other form of taxes which are fairer
and will produce the same amount of money.

We realize fully that the Federal Government is

financed largely through taxes and if we are to continue

387

-2-

to collect the vast sums in the future that we have
in the past the tax laws must be so written and so
administered that the taxpayer can continue to make

a reasonable profit with a minimum of interference
fromwhen
his own Federal Government. We further realize

that/only two and one-half million people in the United
States pay income taxes, it is entirely too few for
the country as a whole to take a real interest in the
Federal tax problem and, therefore, we faunt feel that
it is most important that the number of taxpayers be
increased through lowering the exemptions.
To sum up the attitude of the Treasury towards

the collection of revenue, I wish to say that, first,
our fiscal policy for next year, as stated tonight,
is based on our receiving at least as much revenue

next year as we did this year. In order to accomplish
this we are more than willing to sit down with any
individual or group and go over their tax problems
and if we find that any particular tax is making it
difficult for them to conduct their business or to
make a reasonable profit, we stand ready to make

public the results of our findings.

388

November 3, 1938
2:30 pm

Present (First part of meeti ng)
Mr. Magill
Mr. Gaston

Mrs. Klotz

Also present (second part of meeting)
Mr. Haas

Mr. Seltzer
Mr. Upham

Dr. White

HM,Jr: (Reading) "Let us stop at this point to
consider briefly the revenue side of the picture, always
keeping in mind that the tax system must produce at least
as much total revenue for next year as it is producing this
year.

"The Federal tax system affects every wage earner
and every business man in the country." #
Make a note to change wage earner so it will be

all inclusive.
Mr. Gaston: Yes. I had in there'every wage earner
in the country who works for a living'.
HM,Jr: I will go through it.
Mr. Gaston: The tax system does affect them.

HM,Jr: (Finished reading the draft.)
refined.

I think this is pretty good, but I think it can be
Let's do it right now. What do you say?

Mr. Gaston: Yes.

HM,Jr: (Reading from the beginning.) "Let us stop

389

-2-

at this point to consider briefly the revenue side of the
picture, always keeping in mind that the tax system must
produce at least as much total revenue for next year as it
is producing this year. #

That's right, isn't it?
Mr. Gaston: Yes.

HM,Jr: (Continued reading) "The Federal tax

system affects every wage earner and every business man in

the country." Why couldn't you simply say 'affects every
wage earner, every farmer, every business man'. Simply say
it affects everybody in the country.
Mr. Magill: I think that would be better.
Mr. Gaston. Yes. Uh-huh.
Mr. Magill: 'affects everyone'.
HM,Jr: 'The Federal tax system affects every one
in the nation.

Mr. Magill: I like 'country' better. It also

affects, we hope, a lot of people who are not in the country.

HM,Jr: This is like a telegram. Why not say 'The

Federal tax system affects everyone. Period.

Mr. Magill: I would leave it this way: every one

in the country.
HM,Jr: (Continued reading) "We in the Treasury
are constantly studying the tax problem with two objectives
always before us." Would you say 'One.' That's the way
I would say it.
Mr. Magill: First, and second.

HM,Jr: "First that the tax burden shall be distributed as fairly as possible. That's all right.
don't like the next part about the collection.
Mr. Gaston: Make it "So that the collection of
taxes shall be as little burdensome to the taxpayer as possible."
I

390
-3-

Mr. Magill: We were thinking of administration,
but I think collection is good.
HM,Jr: I would leave out collection. "First,
that the tax burden shall be distributed as fairly as possible, and, second," -- how did you put it, Herbert?
Mr. Gaston: 'That the collection of taxes shall
be as little burdensome to the taxpayer as possible'.
HM,Jr: Is that a correct statement?
Mr. Gaston: Yes.
HM,Jr: Magill?

Mr. Magill: Yes.
that?

HM,Jr: You have two 'possibles'. Do you want

Mr. Gaston: I think so.
Mrs. Klotz: I think you emphasize it a little.
HM,Jr: (Continued reading) "It is with these
aims that, by direction of the President, we have been
reviewing the whole tax structure in the last few months
and are just now presenting -- why not say 'and are just now
in process of presenting'?
"The study has not been directed toward raising
new revenue, but to determining whether there are inequalities and injustices in the distribution of the tax burden,
whether there are some taxes whose cost of collection and
whose burdensome effect outweigh the revenue gain, and whether
we may simplify collection and make the taxpayer's record
keeping less difficult by changes in the administrative
provisions of the law. #

HM,Jr: I think that's all right.
Mrs. Klotz: Very long sentence.
HM,Jr: Can you divide that sentence up?

Mr. Magill: Yes, we can do that. You can make

it into three.

391

-4-

a questionHM,Jr:
on it. Well, look at it afterwards. Just put
welcomed

(Continued
If reading)
"In making this survey we have
'Welcomed'
or 'invited'?

Mr. Magill: Well, we have invited.
Mr. Gaston: True.
survey.

I don't like
HM,Jr: "In making this survey"
Study, isn't that a better word?
Mr. Gaston: Study is a better word.
HM,Jr:

we have invited the assistarce and ad-

vice of groups of taxpayers and individuals. If Why not simply
say we have asked the advice of taxpayers. That covers all.

Mr. Magill: Well, I like the groups; has a little

different significance; like the U. S. Chamber of Commerce,
American
Institute
of invited.
Accountants, American Bar Association,
all of whom
we have

HM,Jr: All right.
(Continued reading) "We want to hear about the

taxpayer's difficulties. Make it 'We want to hear the
taxpayer' side of the story. "We want all the facts we
can get, and we have been at pains to seek both facts and
opinion." I don't like the word pains.
Mr. Magill: Carefully?
Mr. Gaston: We have sought.

HM,Jr: 'We have sought.' I admit it has been painful, but why say so. 'We have sought both facts and

Mrs. Klotz: It is not a strong sentence.
HM,Jr: Can you strengthen it a little bit?
Mrs. Klotz: 'At pains' gives you the feel of ex-

haustively.
Mr. Gaston: What it means, we have been at some
trouble.

392
-5-

HM,Jr: 'Have taken great care'. I just don't

like the word pains.

Mrs. Klotz: 'We have sought facts and opinions.
Isn't that what we really did?

Mr. Magill: Well, I like 'sought' all right.
HM,Jr: Herbert, can you strengthen it?

Mr. Gaston: I can't think of a word just now.
HM,Jr: (Continued reading) "Our tax revenues
come largely from individual earnings and business profits."

Mr. Magill: On that previous, I don't know that

you need to make it any stronger, because it is an actual
fact, as you know, you get the information without seeking

for it. It's facts that are hard to get. People are al-

ways glad to give you information on what you have done, but

you have to be at pains to get the facts. I think 'sought'
is O.K.

HM,Jr: (Continued reading) "Of course, tax policy
cannot be determined from one individual case alone. We
must look at the whole picture."

Mr. Magill: Why not say we have tried to look at

the whole picture?

HM,Jr: We have.

Mr. Gaston: That's claiming too much infallibility.
This is speaking in general; how our tax picture is framed.
HM,Jr: All right. (Continued reading( "We must
take testimoney and we must examine tax returns. Continu-

ously'? I guess that's all right.
Mr. Magill: I think that's all right for the pur-

pose.

HM,Jr: (Continued reading) "We realize that our

tax laws are too complicated. We realize that there are
inequities; we want to eliminate as many of them as we can.
Taxation is not just a Treasury problem, but it is a problem
before all taxpayers. All are entitled to submit their experience and their opinions and it is our purpose to meet

393
-6-

'them more than half way." If

Mr. Magill: That's rather superfulous. I suggest we might cut that last out. We don't need to argue

that point. It's conceded.

HM,Jr: We said that at the beginning.
(Continued reading) "The amount of our income

tax revenue is only about half our total internal revenue
and less than three million people out of 130 million pay
income taxes. Both proportions are probably too small.
"Both proportions are too small." I don't get
that.

Mr. Gaston: Strictly speaking, it should be ratios.
The ratio of income tax payers to the whole number of inhabitants is too small.
HM,Jr: Do you have to say that?
sentence.

Mr. Magill: You can cut it out. It's in the next
HM,Jr: I wonder if you could not make it better.

I guess it's all right.

(Continued reading) "We would be applying the

principle of capacity to pay more justly if we were to re-

duce the number of nuisance taxes, and at the same time to
extend the income tax. Taxpayers who are squarely confronted with their own tax burdens are bound to take a more

active interest in the way the money is being spent by the
Government on their behalf."

Mr. Gaston: In place of that 'and at the same time

extend the income tax' and at the same time increase the
number of income tax payers. I

HM,Jr: That's much better. Do you want to make

it two sentences?

nected.

Mr. Magill: I think it would be stronger.
Mr. Gaston: I think they are very directly conIt does not make any difference. It's part of the

same thought, however.

394

-7-

HM,Jr: "Less than three million people out of
130 million pay income taxes." Make that a new sentence.
(Continued reading) "To sum up the attitude of
the Treasury toward the collection of revenue: Our fiscal
policy for next year is based on receiving as much revenue
as we are receiving in this fiscal year. We want to adjust
inequalities and remedy defects in the tax laws. In doing
this we seek the help of the taxpayer, promising him a sympathetic
hearing."
have the
others? Why not put that in the past, the way we
Mr. Gaston: "In doing this we have sought."
Mr. Magill: 'and have given him'.

HM,Jr: (Continued reading) "If we find that the
operation of any particular tax is unfairly burdensome
.

I don't like unfairly.

Mr. Gaston: of course, the thought is any tax 18
burdensome. It's a question of whether he's being unfairly
treated compared to other tax payers.

HM,Jr: Is it 'operation' or 'application' of any

particular tax?

Mr. Magill: I think either.
Mr. Gaston: Of course you don't need 'operation' --

just 'if we find that any particular tax is unfair.'
Mr. Magill: I like operation or application, for

this reason: any tax is burdensome; on the other hand, the

way it is applied or the way it operates in any particular
business

HM,Jr: Let's use operation.
Mr. Gaston: I think we might just drop out the

whole sentence.

HM,Jr: What, the last?
Mr. Gaston: Yes.

HM,Jr: Couldn't you say something like this: We

always stand ready to make recommendations to change the tax

395

-8-

law if we find that its application has proved unnecessarily
burdensome? Have you said that before?

Mr. Magill: Not quite. You could say something
like this: In the next few months we expect to point out

to the congressional committees instances in which it appears
that taxes are unduly burdensome.

HM,Jr; What I like about the last -- whether it's
operation or application -- if we find the application of any
particular tax is unfair, we stand ready to make public the
results of our findings. What I am trying to get over there
is -- what I am trying to say is if we find we are wrong, we
are man enough to say so.

In doing this we have sought the help of the taxpayer and have given him a sympathetic hearing. If we find
any of these tax laws are unfair, we stand ready to say 80
publicly. If we are wrong, we are man enough to come out

and say so. That's the note I would like to leave, because
that's what I would like to do.
Mr. Magill: That would make it even stronger. I
like putting this stuff in the past because I think it ought
to be. Would you be prepared to say this: we have found
the operation of some taxes are unfair and we stand ready to
make public the results of our investigation?
HM,Jr: 'We have found the operation of some taxes
to be unfair and we are now presenting to the Committee of
Congress the information that we have collected.
Mr. Magill: What we have learned in this way has
influenced the recommendations that we expect to make.

HM,Jr: Let's make it: "If we find that the operation of any particular tax is unfair, we stand ready to say
so publicly.
The following came in and joined the meeting:
Mr. Seltzer
Mr. Haas
Mr. Upham

Dr. White

396
-9-

HM,Jr: (Read the corrected draft to the group.)

Now I am ready for comments. Just for curiosity,

I would like to ask Cy Upham.

Mr. Upham: I would think it is splendid. There
1s
repetition at the end. You repeat that you consulted
the taxpayers.
HM,Jr: I said 'to sum up'.
Mr. Upham: I like it very much. Of course, it
may mean more to me.
ing you.

HM,Jr: What does it mean? That's why I am ask-

Mr. Upham: I don't know what you are going to do,
but I should think that would mean some substantial change

in the undistributed earnings tax.
Mr. Seltzer: You do know you are going to have a
lower level of income tax. You are going to have more inclusive group.

Mr. Upham: Yes, but that does not mean stimulating
business in drying up the source of revenue and removing in-

equities in taxation.
HM,Jr: The reason I am asking you is, if you don't

mind my saying 80 -- what you have told me you want to see us
make as many changes as possible. The reason I am asking you

before the others talk, I wanted to know if this at all satisfied you or, let's say, you think it would in any way satisfy
the New York Times?

Mr. Upham: Yes, I should think so if you mean all
these things; if you want to make taxes as little burdensome
to the taxpayer as possible, and if you are going through and

accomplish that, I think that will satisfy everybody.

HM,Jr: You know me long enough now that I mean
what I say.

Mr. Upham: My only question is does it mean a

little more to me when you say it. There 1s a question of

degree.

397
-10-

number

HM,Jr: Let me put it this way: We tried it a

of ways. We went up with definite recommendations,

which the President was not ready to accept in its entirety.
Then Mr. Magill brought in six pages to boil it down and as
Gaston said, We either did not go far enough or we went too

far. So this thing is just what is the tax philosophy of

the Secretary of the Treasury. Every word I say here, I

mean.

Mr. Upham: That's fine.
HM,Jr: The President of the United States has to

read this first, but everything I say here, I mean.

Now, without making -- I could devote 6,000 words

to talking about taxes, but all I am attempting to do here is
say what I mean. I am more than willing, if we are wrong,
to

say so publicly. That's what I want to get over. If I
am wrong -- speaking of those who are responsible out of the
Secretary's office or the Under-secretary's office -- if we
are wrong, I am sure I can talk for Magill on this, we are
ready to say so. In other words, neither Magill nor I are

so interested in any particular form of taxes that we have
to save our faces. Face saving doesn't mean anything to us.
But what I want to get over to you, do you think that this
is enough. Does it mean anything to you in view of the

present system of barrage that we are under?

Mr. Upham: Yes. I think it would probably inspire

a good deal of hope in the New York Times and me. I think
you will find people looking with a good deal of skepticism
on Treasury talk, whether you are the Secretary of the Treasury or anybody, about making taxpayers' recording keeping

easier. People don't think you can do it.
HM,Jr: Magill has just got out a new tax form,

with how many less words than before?

Mr. Magill: Good deal less simple.

Mr. Upham: I think it is splendid. There may

be some quarrel with this: where you say less than 3,000,000
people pay income taxes. A good many people regard Social
Security as income tax.

HM,Jr: It's not 80 defined. We can go over the
verbiage on this. Either go in your room, Magill, or go

398
-11-

home,
and
take each word and give it to me the first thing
tomorrow
morning.
than that. Mr. Upham: I don't see how anybody could ask more
HM,Jr: You don't think anybody could ask more than

that in a talk on spending?
Mr. Upham: No.

HM,Jr: Now, Mr. Haas.

Mr. Haas: What occurred to me as you read it --

the first one I jotted down, I think repeated twice in the
statement, that we must have a tax system, or whatever it

1s called, which will produce as much revenue as was produced

this year. The thought in the other part of the speech is

better expressed 1f we say that the tax system must produce
the same amount as the present system would produce. You
see, what if you get a sharp decline on business. On the
basis of that it would mean you would have to increase taxes

in order to keep it up to the level of this year, which

would make that conform to what you have said in the other
part of your speech.

HM,Jr: Wait a minute! Wait a minute! Don't we
want a tax system that will produce $6 billions?
Mr. Haas: Yes. If it was in operation in 1938
then it would be identically the same strength as the present system. In other words, under the same conditions.
But in 1939 if business continued down, you might have to
have a much stronger system to produce $6 billion 650.

HM,Jr: I don't get it.
Mr. Haas: Put it this way: that this year, 1938,
the present tax structure will produce $6 billion 650. If

business conditions are the same in 1939, it also will produce $6 billion 650, but this statement says here that we
must have a tax structure in 1939 which will produce $6 billion
650 and I take it to mean that regardless of what business
conditions are, 1f business conditions go down the present
structure would not do that.
HM,Jr:

No.

What do we say in the rest of

399
-12-

of the speech?

Mr. Haas: In the rest of the speech we say that
the tax structure -- you don't bring up this particular

point because you did not discuss taxes. What we had in
mind was that the tax structure would have the same strength
as the present tax structure; in other words, if after you
get through Congress is closed, you have a new tax bill,
if you repeat 1938 over again you would get the same revenue
as from the present system.

Mr. Magill: The same statement appears here.

HM,Jr: I am going to let Magill off. He does not

mind struggling with it until it is finished tonight. He
can give it to me tomorrow.
Dr.Seltzer: You are either saying nothing other
than repeating the text book things or saying a good deal.

What I mean is, here you are voting in favor of fair or unfair taxes. Well, everybody does. You say that the law
should be SO written and administered that the taxpayer can
continue to make a reasonable profit. I don't know whether
anybody would disagree with you there. I don' tthink it's
worth saying unless you believe and want to say that the existing laws, in your opinion, should be changed because they

unduly hinder this thing. As it is, you kind of have a
homily that might be said by anybody.

HM,Jr: Well, you fellows are just traveling this
road. We went out -- extra, extra confidential -- Mr. Magill
and I, with specific recommendations, every 't' crossed,
every comma, every period. Well, we didn't get it across.
Mr. Magill spent yesterday trying to reduce it to 6 pages and
being specific again. After going over it this morning we
are attempting to say less now. I had hoped when I gave
the speech, next week, that Magill's statement would be out
today, but it isn't, so we have a vacuum. So I get up and
talk about spending and don't say anything about taxes. I
will be just as direct as you. I can't talk about specific
taxes because I don't know where I stand. Now, is it better

to say nothing, or the things in there -- to its full implication. I mean, we should not have so many taxes that
are heavy. I don't think it's right or fair to have a
man -- Federal plus State pay 89% income tax. I think we

are drying up the source and we have that on the books and
when a fellow wins he has to pay 89% and when he loses, 100%,

400
-13-

and we are drawing those funds from useful purposes. A

lot of other cases like that and I don't believe that that
sort of thing -- I think we ought to encourage people to
use their money and when they die we will get it. I told
that to the President. I have to be very frank here and
the President if he will approve it and pass it -- and everything in there I think I can say we mean to its full limit.
We have gone around the other way on certain definite things
and I think that only two people can say it, the President
or myself, and the President is not ready to talk and I am
and I think the taxpayer 1s entitled to know do I think the
man should be entitled to make a reasonable profit.
Ibusiness
do.

Dr. White: You are saying it all right; if you
mean to say it, that's fine.
HM,Jr: I mean to say it. Magill took a month or
two months to write the other thing. We could not get it
across. Now I think somebody for the Administration -- do
we mean that we are going to run this Government through

tax on wealth or are we going to do it through income tax?
I think the situation is bad enough that the Secretary of
the Treasury or the President should say it and I don't think
anybody is going to laugh at it when I get up and say it.
I think they definitely want to know are we going towards
State socialism or continue capitalistic? Revenue is based

on a capitalistic system and I believe in it. I think the
situati on 1s bad. But Larry is talking that it is unnecessary.

Dr. White: No, in justice to him, he means you
are either saying something or not.
Mr. Seltzer: What I am batting about is you are
saying something. Either you are a consummate politician
and want to say something that nobody could tag you for
afterward -- I mean 'that law should be so re-written and
so administered'
HM,Jr: Larry, for Heavens sake, who has said
last

Who has said anything like that. During the
six weeks this country has just been going down so rapidly
and these fellows want to know what does the President and
the Secretary of the Treasury think as far as the business
man's profits go. Are we going to have capital levy or are
that.

401

-14-

Are we going to
we going to let them stay in business.
do it the way they do in Italy, take 10% of all the capital?
mean, I don't know where you have been living, but people
just want to know and I don't know that the President will
I

let me say that, but if he will, I would be tickled to death
a week from tonight to get up and say it. There is nothing
mealy-mouthed about that. I can't get down to specific
things, that I would abolish this and modify that and replace
it with another.
Mr. Seltzer: I don't think the alternative is that.
I think the alternative 18 saying I believe that certtain of
our laws, without citing them, have this effect.
HM,Jr: I think we have gone as far as we can. I
think Magill ought to go in his room, take it and do what he
can with it.
00o-o0o

402 nov 3.

220 pm

Lot us stop at this point to consider briefly the revenue side
of the picture, always keeping in mind that the tax system must produce

at least as much total revenue for next year as it is producing this year.

one
The Federal tax system affects every wage earner and every business

man in the country. We in the Treasury are constantly studying the tax

first
second

problem with two objectives always before us: that the tax burden shall

be distributed as fairly as possible A
and
1 that the collection of taxes
shall be k simple and convenient and) as little burdensome to the taxpayer as in possible.

It is with these aims that, by direction of the President, we
have been reviewing the whole tax structure in the last few months and

in process if

are just now1 presenting to a committee of Congress the information we

have collected. The study has not been directed toward raising new
revenue, but to determining whether there are inequalities and injustices
in the distribution of the tax burden, whether there are some taxes

403

-2whose cost of collection and whose burdensome effect outweigh the revenue
gain, and whether we may simplify collection and make the taxpayer's

record keeping le as difficult by changes in the administrative provisions
of the law.

study
invited
In making this survey we have welcomed the assistance and the
^

g groups

advice of groups
of taxpayers and of individuals, We want to hear
1

side
of
the
story
about the taxpayer's difficultion We want all the facts we can get,
sought

and we have been at pains to seek both facts and opinion. Our tax
1

revenues come largely from individual earnings and business profits. We

do not wish to retain levies which have the effect of drying up the
sources of tax revenue. The laws should be so written and administered
that the taxpayer can continue to make a reasonable profit with a minimum

of interference from his own Federal Government. Of course, tax policy
can not be determined from one individual case alone. We must look at

the whole picture. We must take testimony and we must examine actual tax

and
test returns and

404

-3We realize that our tax laws are too complicated; we want to
make them less so. We realize that there are inequities; we want to
eliminate as many of them as we can. Taxation IS not Just a Treasury

problem, but it is . problem before all taxpayere. All are entitled to
irabmit their experience and their opinions and it is our purpose to meet
them more than half ways

The amount of our income tax revenue is only about half our total

wide
internal revenue
ss than three million people out of 130 million
pay income taxes. Both propostions are probably too small. We would

be applying the principle of capacity to pay more justly if we were to

to in crease the number of income tax hayes

reduce the number of nuisance taxes, and at the same time to onbond the

income-tears Taxpayers who are squarely confronted with their tax burdens
are bound to take a more active interest in the way the money is being
spent by the Government on their behalf.

To sum up the attitude of the Treasury toward the collection of
revenue: Our fiscal policy for next year is based on receiving as much
revenue as we are receiving in this fiscal year. We want to adjust

405

-4-

inequalities tax

and remedy defects in the laws. In doing this we have souglet

and have gwin
BOOK the help of the taxpayer, promising him a syspathetic hearing. If

operation

we find that the operation1 of any particular tax is unfair busionseme,
we stand ready to make public the results of our findings.

406

November 4, 1937
9 am

Present:

Mr. Magill
Mr. Upham

Mr. Gaston

Mrs. Klotz

HM,Jr: (Reading the attached draft of Magill's
part of the speech on taxes.)
Why do you say 'By direction of the President'?

( first line, third paragraph.) He did not direct us to

do that, did he?

Mr. Magill: Yes, he did.
HM,Jr: All right.
Mr. Gaston: First, as a matter of fact, he did
in calling on Doughton and Harrison a year ago and again
in the April 2nd message.
HM,Jr: (continuing to read)
### we have been reviewing the whole tax structure

in the last few months and are just now in the process of

presenting to a committee of Congress the information we
have collected. The study has not been directed toward
raising new revenue but to determining whether there are

inequalities and injustices in the distribution of the tax

burden, whethere there are some taxes whose cost of collection and whose burdensome effect outweigh the revenue gain
and whether we may simplify collection and make the tax-

payer's record-keeping less difficult by changes in the ad-

ministrative provisions of the law."
Mr. Magill: I think you can leave out "by changes".
That was a phrase I fought for yesterday.

HM,Jr: Leaving it out makes it all the more inclusive.

407

-2-

Mr. Magill: I think leave it out, because as a
matter of fact we have been simplifying it by administrative
changes irrespective of the law.

HM,Jr: I wanted to say something funny.

morning!

Mr. Magill: Yes; it's early enough this morning.
HM,Jr: I want to introduce the new Mr. Magill this
(Continuing to read)

"In making this study we have invited the assistance
and the advice of groups of taxpayers and of individuals. We

want to hear the taxpayer's side of the story. We want all

the facts we can get and we have sought both facts and opinions."

I want to say 'obtained' instead of 'sought.'
Mr. Magill: I think so, and maybe we will get a good
laugh out of that.
HM,Jr: (Continuing to read.)
"Our tax revenues come largely from individual earn-

ings and business profits. We do not wish to retain levies
which have the effect of drying up the sources of tax revenue."
I would say "We do not wish to imposeThat's
leviesstronger
which
tend to dry up the sources of tax revenue.

and simpler.

Mr. Gaston: Yes; it's good.
HM,Jr: (Continuing to read)
"We realize that our tax laws are too complicated;

we want to make them less so. We realize that there are inequalities; we want to eliminate as many of them as we can."
You say that up above.

Mr. Magill: No, not that.
HM,Jr: "We realize there are inequities; we want

to eliminate as many of them as we can." Don't we say that about

408

-3-

inequities on the first page?
Mr. Magill: You say we have been trying to determine whether there are inequalities. Now we come down
and say we realize there are inequities.
HM,Jr: Is that paragraph necessary?

Mr. Magill: I don't think it's necessary.
HM,Jr: It's just repeating.
Mr. Magill: I think it's a good statement.

HM,Jr: It's all right.
it out.

Mr. Gaston: I think it is the proper way to round

HM,Jr: All right.
(Continuing to read.) "The amount of our income

tax revenue is only about half our total internal revenue.
Less than three million people out of 130 million pay income taxes. We would be applying the principle of capacity
to pay more justly if we were to reduce the number of nuisance taxes and at the same time to increase the number of
income tax payers.'
You mean reduce the number of nuisance taxes?

Mr. Magill: No. Reduce the number of hidden

taxes on sales.

HM,Jr: No, because you say it is a hidden tax

you can't be expected to know what we were talking about.

Mr. Gaston: I think there is another way, of

going a little further. I would say, 'Because of taxes
hidden in the cost of merchandise

Mr. Magill: It's short.
Mr. Gaston: But that conveys the idea that it
is hidden in the cost of what you buy.
HM,Jr: Because he never will let that go by, I

409

-4-

mean
thewant
word
He will never let it go by.
He
won't
to 'hidden'.
admit that.
Mr. Gaston: You could say 'taxes that are included in the cost of what you buy'.

HM,Jr: He will never let that go by. I think

the word to use, and that is a word he has used himself,
and that is 'reduce the number of consumers' taxes -- or
taxes on the consumer. I

Mr. Gaston: Consumer taxes is good.

Mr. Magill: One question I would have on consumers'

taxes is that it is simply a tachnical question. It's a
question of how technical you are supposed to speak or to the
person reading it, but I think it is perfectly descriptive.

HM,Jr: I know he will never let me say hidden taxes
or taxes hidden in what you buy, in your merchandise; but he
will let me say consumers taxes.
Mr. Gaston: Instead of saying consumers' taxes, say
taxes on consumers.

Mr. Magill: No; that's worse. I would rather say

consumers' taxes. Just a question of how technically you
to speak. Your listeners will understand what you mean.

want

Mrs. Klotz: Will it be incorrect?
Mr. Magill: It's only incorrect in this sense: there
is a tax on the automobile you buy. Technically it's a tax
on the manufacturer. Actually you will find it is billed to

you separately when you buy the car, so it's a consumer' tax
in the sense that you obviously pay it as such, but technically

it's not on you.
Mr. Gaston: It is a hair-line distinction. Some

States have a gasoline tax which is a tax on the man who sells
it, but in the other States it is on the person who buys and
has exactly the same effect.
HM,Jr: Any editorial writer pick me up on that?

Mr. Magill: I would not think so, because the

410
-5-

editorial
writertaxes.
would classify all manufacturers' taxes
as
consumers'
Mr. Upham: Yes, I agree with that.
Mr. Gaston: Yes.

HM,Jr: And the interesting thing is, Wallace can't

sayon
anything
because he does not consider processing taxes a
tax
the consumer.

Mr. Magill: Must be a nice blind-fold, or worse.
HM,Jr: But, you know, that is his position.
would like to use the word consumer, because, just you and
I talking, when is the consumer going to get a break out of
this Administration? I like the word consumer.
Mr. Gaston: You hit into a complex there of all
these consumers associations that fight sales tax.
Mrs. Klotz: I objected to nuisance because I did
not understand it in that sense.
Mr. Magill: Do you want to say taxes paid by consumers?
Because then you would be accurate. Even the
Internal Revenue Bureau would not object to that, I don't
believe. I think you had better say consumers taxes.
HM,Jr: I personally like to play on the word conI

sumer and I am, somewhere else in the speech, not saying it

so baldly, when is the consumer going to get a break? But

in the thing on Agriculture I may want to bring it in -- we
start to react. Here's a whole mass of the population that
we might get on the side of the Treasury and that's the housewife. On a certain level of income, people will spend just
may push the consumer too near the wall and then he might

so much for beef, pork, and no more.

Make it read: "I would like to reduce the number

of consumer taxes and at the same time to increase the number

of income tax payers.

(Continuing to read) "Taxpayers who are squarely

confronted with their own tax burdens are bound to take a
more active interest in the way the money is being spent by
the Government on their behalf.

411
-6-

This is what I would like to say. I think that

is kind of weasley. Taxpayers who are squarely confronted
with their own tax burdens are, of course, much more keenly
alive
to the
way the money is being spent by the Government
on their
behalf.'

Mr. Magill: I think that's all right.
HM,Jr: Is that all right?
Mr. Upham: I like it better.

Mr. Magill: It's quite all right.
HM,Jr: 'Active interest' does not describe the way
the taxpayer feels today! (Much laughter from the group.)
This is the way I have it: Taxpayers who are squarel
confronted with their own tax burdens
are bound to be more keenly alive.
Mr. Magill:
Mr. Upham: Than what?

Mr. Magill: Your 'than' is in the previous sentence,

in substance, where you are talking about consumer taxes.
HM,Jr: 'Taxpayers who are squarely confronted with
their own tax burdens are
bound to be keenly alive to the way
Mr. Magill
the money is being spent.
are around to be keenly alive to the
HM,Jr:
way the money is being spent by their Government on their
behalf.'
Mr. Upham: Stop at Government.

behalf'.

Mr. Magill: That's better.
Mr. Upham: I didn't like 'their Government on their

HM,Jr: I would like to leave it off.Not 80 keen on
how they are going to spend it on themselves, but on the other

412
-7-

fellow. 'Keenly alive to the way the money is being
spent by their Government. 1

(Continued reading) "To sum up #

you

want me to sum up?

Mr. Upham: Sounds like you are summing up your
speech.

Mr. Magill: I have added this: "The Budget now
nearing completion is predicated on a definite estimate
of receipts, based on the existing tax structure. It is
a cardinal point that the tax system, as revised, must not
yield a smaller return for 1939 than the present system would
yield."
HM,Jr: I am going to read the whole thing once

more. I think it's all right.

You don't think that that last thing there would
not come up in the front, instead of the summation? I
think that ought to come in the second sentence. "Let us
stop at this point to consider briefly the revenue side of
the picture. The Budget now nearing completion 1s predicated on a definite estimate of receipts, etc.'
Mr. Magill: Yes.
HM,Jr: I would leave out briefly. It deserves
plenty. Why say briefly? Then the new paragraph: "The
Budget now nearing completion, etc."

Mr. Magill: The objection occurs to me, just as
a matter of continuity of your thoughy, you are talking
about revising the system before you say anything about the
character of the revisions.
Mrs. Klotz: Yes.
Mr. Magill: That's the previous two pages. You
are telling them the reasons why the system might be revised and then this, it seems to me, should come at the end.
Mr. Gaston: I agree with Roswell on that particuYou have previously in the speech considered
lar point.
the revenue side of the speech from this standpoint: whether
we ought to have a great deal of additional revenue. Now

413
-8-

you are considering the character of taxation. At the
close you are merely expressing thoughts you have expressed
in other parts of the speech. It's a revision within the
present limits of yield.
Mr. Magill: You can cut that out 'to sum up' if
you wanted to, because the first couple of sentences is a
new thought.

HM,Jr:

Yes.

That is what was bothering me.

Mr. Gaston: It could well be cut out.
HM,Jr: Simply say, 'The attitude of the Treasury
toward the collection of revenue is
word.

Mr. Magill: Now, 'collection' is not a very good
Mr. Gaston: I would cut that whole sentence out.

Mr. Magill: I think I would too.
Mr. Gaston: I would cut that entire sentence out.

HM,Jr: Here's a funny thing. I don't get it yet

in the thing. "The Budget now nearing completion is predicated on a definite estimate of receipts, based on the existing

tax structure. It is a cardinal point that the tax system,

as revised, must not yield a smaller return for 1939 than the
-present system would yield.' " But what about if business
does that cover -Mr. Magill: That covers it, you see. That proposition in one sense is an open-ended proposition.

HM,Jr: That's all right. That's what I wanted.

What time are you due on the Hill?

Mr. Upham: All the way through I have had a liking

for that word nuisance. I am afraid people are going to say,

good.

Mr. Magill: I don't know.
HM,Jr: (Then read the draft aloud.) I say it is
I am satisfied.

414
-9-

'What do you mean when you want to get through with con-

sumer taxes.?' The biggest consumers tax is Social Sec-

urity tax."

HM,Jr: The President will say, "Oh, how about
liquor and cigarettes?"

them.

Mr. Magill: Yes, that's more likely.
Mr. Gaston: But we are not going to get rid of

Mrs. Klotz: Nuisance tax to me always meant an
unimportant thing.

Mr. Gaston: You are quite right.
Mr. Upham: I am shooting for big game. I agree
with Magill. It's a strong statement and a good statement.
HM,Jr: If the President passes that word, then he
has to face immediately after that Marvin Jones and his processing tax.

00o-o0o

415

Let us stop at this point to consider briefly the
revenue side of the picture, always keeping in mind that
the tax system must produce at least as much total revenue.

for next year as it 18 producing this year.
The Federal tax system affects every one in the country.
We in the Treasury are constantly studying the tax problem

with two objectives always before us: First, that the tax
burden shall be distributed as fairly as possible and, second,
that the collection of taxes shall be as little burdensome to
the taxpayer as possible.

It is with these aims that, by direction of the President,
we have been reviewing the whole tax structure in the last
few months and are just now in the process of presenting to
a committee of Congress the information we have collected.
The S tudy has not been directed toward raising new revenue,

Rathe we have sought to d termine
but to determining whe ther there are inequalities and injustices
in the distribution of the tax burden, whether there are some
taxes whose cost of collection and whose burdensome effect
in add tion we want to
outweigh the revenue gain, and whether we may simplify col-

lection and make the taxpayer's record-keeping less difficult
by changes in the administrative provisions of the law.)
In making this study we have invited the assistance and the
want
advice of groups of taxpayers and of individuals. We

416
-2-

to hear the taxpayer's side of the story. We want all the
obtained

facts we can get and we have sought both facts and opinion.
P

Our tax revenues come largely from individual earnings and
mersine

business profits. We do not wish to retain levies which
tend to
have the effect of drying up the sources of tax revenue. The
laws should be so written and administered that the taxpayer
can continue to make a reasonable profit with a minimum of

interference from his own Federal Government. Of course,
tax policy can not be determined from one individual case alone.
We must look at the whole picture. We must take testimony and
we must examine actual tax records and returns.

We realize that our tax laws are too complicated; we
want to make them less so. We realize that there are inequities;
we want to eliminate as many of them as we can.
The amount of our income tax revenue is only about half

our total internal revenue. Less than three million people
our total population
out of 130 million pay income taxes. "e would be applying
the principle of capacity to pay more justly if we were to

Consumer taxes hidden taxes onsales,

reduce the number of nutrance taxes, and at the same time to
1
increase the number of ,income-tax payers. Taxpayers who are

June
keenly alue
squarely confronted with their own tax burdens are bound to
take a more active interest in the way the money is being
spent by theyGovernment on their behalf\

To gum up the attitude of the Treasury toward the collection

found tabe keenly alive to

417
-3-

Our fiscal policy for next year is based on
receiving as much revenue as we are receiving in this

fiscal year. We want to adjust inequalities and remedy
defects in the tax laws. In doing this we have sought
the help of the taxpayer and have given him a sympathetic

hearing. If we find that the operation of any particular
tax is unfair, we stand ready to say so publicly.

The The Budget now nearing completion is predicated

on a definite estimate of receipts, based on The

existing tan structure. etis a cardinal point

that the tay system. as revised, must not field

a swaller return for 1939 Than the present
system would yierd.

418

Draft
November 4

Let us stop at this point to consider the revenue
side of the picture.
The Federal tax system affects every one in the

country. We in the Treasury are constantly studying
the tax problem with two objectives always before us:

First, that the tax burden shall be distributed as fairly
as possible and, second, that the collection of taxes
shall be as little burdensome to the taxpayer as possible.

It is with these aims that, by direction of the President, we have been reviewing the whole tax structure in
the last few months and are just now in the process of
presenting to a committee of Congress the information we
have collected. The study has not been directed toward
raising new revenue. Rather we have sought to determine

whether there are inequalities and injustices in the distribution of the tax burden and whether there are some
taxes whose cost of collection and whose burdensome effect

outweigh the revenue gain. In addition we want to simplify
sollection and make the taxpayer's record-keeping less

difficult.

In making this study we have invited the assistance
and the advice of groups of taxpayers and of individuals.

419
-2-

We want to hear the taxpayer's side of the story. We
want all the facts we can get and we have obtained both
facts and opinions.
Our tax revenues come largely from individual earnings and business profits. We do not wish to impose
levies which tend to dry up the sources of tax revenue.
The laws should be so written and administered that the
taxpayer can continue to make a reasonable profit with
a minimum of interference from his own Federal Government.

of course, tax policy can not be determined from one individual case alone. We must look at the whole picture.
We must take testimony and we must examine actual tax

records and returns.

We realize that our tax laws are too complicated;
we want to make them less so. We realize that there
are inequities; we want to eliminate as many of them
as we can.

The amount of our income tax revenue is only about

half our total internal revenue. Less than three million
people out of our total population pay income taxes. We
would be applying the principle of capacity to pay more
justly if we were to reduce the number of consumer taxes
and at the same time to increase the number of income tax

420

-3-

payers. Taxpayers who are squarely confronted with
their own tax burdens are bound to be keenly alive to
the way the money is being spent by their Government.
The budget now nearing completion is predicated

on a definite estimate of receipts, based on the exist-

ing tax structure. It is a cardinal point that the
tax system, as revised, must not yield a smaller return
for 1939 than the present system would yield.
We want to adjust inequalities and remedy defects

in the tax laws. In doing this we have sought the help
of the taxpayer and have given him a sympathetic hearing.

If we find that the operation of any particular tax is
unfair, we stand ready to say so publicly.

421

November 4, 1937
11:25 am

Present:

Mr. Taylor
Dr. Haas

Dr. White

Mr. Gaston

Mr. Seltzer
(T-436)
HM,Jr: Page 4.
Does that statement still hold
good: "We are in the eleventh month of one of the most active months in the business history of this country"?
Mr. Seltzer: Sure.
Dr. White: One of several. One of many. Little
dangerous to spell out 'eleventh month'. The eleventh
month was the worst. Maybe you had better say we are now
at the close of

one of the

HM,Jr: Why not say we are now in the close of

Dr. White: At the close.
Mr. Seltzer: We have six weeks to go.
much.

HM,Jr: I don't like it. I am not going to argue
Mr. Gaston: Near the end. Or near the close.
HM,Jr: Nearing the end. How's that?
"The basic need today is to foster the
Page 5.

application of the driving force of private capital to the

present favorable circumstances. If "From the present favorable circumstances.
Mr. Seltzer: From the standpoint of the foregoing
discussion, yes.

422
-2-

HM,Jr: I suppose 80.

Mr. Gaston:
I think he distinctly wants to say
if circumstances
are favorable.
Mr. Taylor: "Existing" will do the same thing.
HM,Jr: Existing. What I am trying to get away
from
is
at
the moment.
What I am going to do now is how
does the thing
fit me today.

If you feel like doing it, take
five pagesMr.
outSeltzer:
of it.
all right. HM,Jr: Well, I won't do that now, but that's
I wish I had made this speech a month ago.

Dr. White: It would still be in print.
ferent.

HM,Jr: Yes, but the timing would have been difMr. Taylor: Page 7. "Commercial banks" -- cut

out 'now' and say are again utilizing'. Just move it up.
HM,Jr: Are again utilizing their credit resources.
Good!
Mr. Seltzer: Any objection to cutting out page 8?
HM,Jr: If you don't mind, today I am just going

to run through it once without cutting it. That's another
job. I am just looking for things that would stand out,
that would hit the President. I am showing this to Eccles.
He wants to take it home with him. I am showing it to

Mr. Parker, Chief Editorial Writer of Scripps-Howard.
Why do you underline 'account' on page 9?

Mr. Seltzer: You are not giving up the chance of

getting more revenue.

HM_Jr:
Which side
of my mouth am I laughing out
of? I wouldn't
underline
that.

423

-3-

Mr. Taylor: At the top of page 9, how about

changing figures to 'factors'?

Mr. Haas: No; too broad a term.
HM,Jr: We give you figures in a few minutes.
Mr. Haas: Factors of the business situation?
mind.
sunk.

point.

HM,Jr: No, I think you are wrong, if you don't
I don't want to get into factors. If I do, I am
I am thinking in terms of figures. I get your
Have you fellows had a chance to read my tax thing?

I am going to read this out loud to Wayne. This has taken

a lot of time. I just want to read this.

(Reading) "Let us stop at this point to consider
briefly the revenue side of the picture, always keeping in

mind that the tax system as modified must produce at least
as much total revenue as the present tax system.
"The Federal tax system affects every one in the
We in the Treasury inestudying tax problems have
country.

two objectives always before us: First, that the tax burden
shall be distributed as fairly as possible, and, second,
that the collection of taxes shall be as little burdensome
to the taxpayer as possible.
"It is with these aims that, by direction of the
President, we have been reviewing the whole tax structure
in the last few months and are just now in the process of
presenting to a committee of Congress the information we
have collected. The study has not been directed toward
raising additional revenue. Instead, we have sought to
determine whether there are inequalities and injustices in
the distribution of the tax burden and whether there are
some taxes whose cost of collection and whose burdensome

effect outweigh the revenue gain. In addition, we want
to simplify collection and make the taxpayer's record-keeping

less difficult.

"We realize that our tax laws are too complicated;
we want to make them less so. We realize that there are
inequities; we want to eliminate as many of them as we can.
"In making this study, we have invited the assistance

424
-4-

"and the advice of groups of taxpayers and of individuals.
We want to hear the taxpayer's side of the story. We want
all the facts we can get and we have obtained both facts and
opinions.

"Our tax revenues come largely from individual earn-

ings and business profits. We do not wish to impose levies
which tend to dry up the sources of tax revenue. The laws
should be so written and administered that the taxpayer can
continue to make a reasonable profit with a minimum of interference from his own Federal Government. Of course, tax policy
cannot be determined from one individual case alone. We must
look at the whole picture. We must take testimony and we must
examine actual tax records and returns.
"The amount of our income-tax revenue is only about

half our total internal revenue. Less than three million

people pay out of our total population pay income taxes. We
would be applying the principle of capacity to pay more justly
if we were to reduce the number of consumer taxes and at the
same time to increase the number of income tax payers. Taxpayers who are squarely confronted with their own tax burdens
are bound to be keenly alive to the way the money is being spent
by their Government.

"The budget now nearing completion is predicated on a

definite estimate of receipts, based on the existing tax structure. It is a cardinal point of our policy that the tax system,
as revised, must not yield a smaller return for 1939 than the
present system would yield.
We want to adjust inequalities and remedy defects in

the tax laws. In doing this, we have sought the help of the
taxpayer and have given him a sympathetic hearing. If we find
that the operation of any particular tax is unfair, we stand
ready to say so publicly.' If

Mr. Taylor: You said that before.
HM,Jr: We feel that it is worth while repeating.
This originally had a little heading to sum up' but we took

that off. But outside of repetition, how do you like it?
Mr. Taylor: Very well.
HM,Jr: Sez you?

425
-5-

Mr. Taylor: I think it is fine.
HM,Jr: That's what I wanted to know. That was
only finished this morning at 10:15.

Mr. Taylor: I think it is excellent.
Mr. Taylor: Do you want to stick in a 'sincerely'?
HM,Jr: Where? What page?

Mr. Taylor: 12-b. "We sincerely want to adjust
inequalities"
HM,Jr: Where would you put 'sincerely'?

Mr. Taylor: Right at the beginning.
HM,Jr: What do you think, Herbert?

Mr. Gaston: I think the whole thing is intended
to indicate a sincere effort to get the taxpayer's side and
remedy -- I don't think the word sincerely adds anything to
it.
HM,Jr: Do you mind leaving it out?

Mr. Taylor: Not a bit.
HM,Jr: Herbert, page 14, second paragraph: "Public
highways, other public works" wouldn't you say just public works?

Why the other?
works.

works.

there.

now

Mr. Gaston: Of course, public highways are public
HM,Jr: Why not leave out public highways, public

Mr. Gaston: That's all right; it is not essential

HM,Jr: I would leave out 'other'.
Mr. Taylor: Top of page 14. "These are running
about the same as 1932." It is a tricky figure, because

426

-6-

advance
carrying
charge.
of running, operating
expenses,inwere
higher
than inExpenses
1932.

Mr. Seltzer: I gave the Budget figures. That
gave
totals
and
on that
we are running on a lower basis
in fiscal
year
1938
thanbasis
in 1932.
Mr. Taylor: They will crucify you on that.
Dr. White: It's a question of the total.
HM,Jr: I think he has a point there. If the regular Departments are running higher, I don't want to use the
figureout
andthat
all whole
you need
to do is leave out that sentence. Just
leave
sentence.

Mr. Taylor: That's right.
Mr. Gaston: I think it can well be left out.
is right. HM,Jr: I would leave out that sentence if Taylor
Mr. Gaston: I would go further. I would leave it

out anyway, whether he's right or not.
HM,Jr: I am on page 17 now.
money.

I haveisasked
Where
it? you five times to include Section 32

Mr. Seltzer: It's a source of revenue; it's not a

matter of expenditure.

HM,Jr: All right.
Mr. Gaston: On page 18 I notice that right in the
middle of the page, that program cannot endure and cannot
render lasting aid to the farmer'
Mr. Haas: Of course, that goes into the whole definite thought. When I said 'soundly based' I meant based on

how
money
you could afford to spend for it, based on practical much
business
sense.
HM,Jr: Who changed it?

Dr. White: I did.

427
-7-

HM,Jr: Based is better.
On page 19, after the first paragraph, 'requires
the cooperation of the farmer as well as the other sections

of the public' One sentence: don't you think it is about
time the consumer got a break?

Bottom of page 19. 'ordinary balance of the budget
next year in addition to some measure of debt retirement'.

Some?

Mr. Seltzer: Well, what do you want to claim? All
you are really claiming is recoveries. You use recoveries
for debt retirement.
HM,Jr: 'ordinary balance of the budget next year'

period. period.

Mr. Seltzer: O. K.
HM,Jr: Herbert?

Mr. Gaston: Yes. I think so for November 10th, which

isn't September 10th.

HM,Jr: And Herbert, look through. If I say anything

about debt retirement, take the darn thing out.

The President O. K'd this once. He's going to do it
again Saturday. I will be in a cold sweat until I get through

his place.

Mr. Seltzer: The draft he O. K's is the one with
half our language; not this one.
HM,Jr: You have plenty of time. That's where the
ex-editor of the World comes in. Easy enough to take your
shears.

You left out the word 'enthusastic'.
Mr. Seltzer: No. That falls on page 21.

Dr. White: I am a little bit worried about the state-

ment:

enthusiastic about the direction we are going'.

HM,Jr: We have not got there yet. We are on the

top of page 20.

428
-8-

Mr. Taylor: Bottom of page 20.
HM,Jr: What do you want, Wayne?

Mr. Taylor: Don't like -- I think you ought

to say, if you make that comparison between the two years,
you ought to indicate that the bonus was in the preceding
year.

Mr. Gaston: We are considering it from the
standpoint of receipts from the public and expenditures

that go out to the public and it doesn't matter if it is

bonus.

HM,Jr: I think that's all right. The fact

remains we are better off in cash out of the drawer than

we were the year before.

'I am enthusiastic about the direction, I
Mr. Seltzer: Aren't you?
HM,Jr: No! No!

Nuts!

Dr. White: You can say there is adequate reason

for gratification with respect to progress being made in
the budget or something like that -- relate it definitely
to the budget.

HM,Jr: Just cut out that whole sentence. Just

start 'I firmly believe'.

Mr. Haas: Much better.

HM,Jr: I think it is better. Herbert, are you -

you are with me?

Mr. Gaston: Yes. I was just considering eliminating the whole paragraph.

HM,Jr: No. I think that's a good point.

Mr. Gaston: All right. I check.
Mr. Seltzer: If you leave out the first part of

that, it sounds as if you are now regretting that you went

429

-9-

so fast last year or going so fast this year. You have
just picked up a $2-billion reduction in one year.
HM,Jr: You fellows can shoot this out. Nothing
You have time. You can come back.
jelled yet.
Mr. Gaston: 'I have already indicated my belief'.

Last paragraph on page 21.

HM,Jr: Can you hold that a minute. I am not
down there. Middle of the page. 'Not easy to achieve,
but a goal we can safely hope to reach'. I would leave
that sentence out entirely. A week later the stock market
is off five points. The goal will by no means be easy to
achieve. I would leave that out.
Mr. Taylor: Yes, sir.
HM,Jr: You see, what I am doing today is adjust
this thing to what has happened this week.
Mr. Gaston: Are you ready for the next sentence:

'I have already indicated my belief'. Now I don't think

we have talked about $600,000,000 sinking fund and I think
we
had better forget it and I would say 'surplus for debt
retirement'.

Mr. Seltzer: O. K.
HM,Jr: O. K.

Mr. Gaston: Leaves the implication that we still
have a chance of having some surplus. If business just
holds up, we will have it. When you predict, just on the
eve of a balance from last year's income, you are predicting
that 1938 will fall back to the business level of 1936.
Dr. White: If you say to accumulate a large surplus
the didactic interpretation
HM,Jr: Cut out the word 'large'.
Mr. Seltzer: I would like to suggest a change.
'More than two-thirds of this year's budgetary improvement
comes from increased revenue, rather than from reductions

in expenditures' O. K. Reduction of expenses of $700,000,000
would be an improvement. Or something like that instead of

430
-10-

going back to your tax system.

HM,Jr: I was going to say to leave that out.

Mr. Taylor: Yes, it does not follow at all.
HM,Jr: I do want to say two-thirds, etc., and
the next sentence: This clearly indicates that increases
in taxation are unnecessary, etc., I would leave that
next sentence out.

Mr. Gaston: You don't then have much explanation

of the significance of the statement that two-thirda
HM,Jr: Herbert, take another look at it when you
go out of here.
Mr. Taylor: The first part of that paragraph on
page 22, There are equally compelling considerations on the
expenditure side." I think the last sentence takes away
from it.
HM,Jr: What's that?
Mr. Taylor: "But it would be clearly unwise, and
disruptive to many sections of private industry, if we were
suddenly to slash Government expenditures by more than the
amount I have indicated.
HM,Jr: I think that next sentence is kind of
superfluous. I am saying cut it down to 700 millions.
Why should I shut the door.
Mr. Gaston: Of course, when you say you ought
to achieve a balanced budget by reduction of $750,000,000

expenditures and that you don't favor doing this, there are

reasons why you should not raise taxes to do this. I don't
know whether we need to say much about reasons on expendi-

tures side.

HM,Jr: All right. We will put a question mark
there, and we won't do anything. I have a question mark.

It's S only a question mark so far.

Most of the Social Security tax -- at this point
Mr. Magill wanted me to tell you people on this illustration

431

-11-

of the life insurance policy issued to veterans and the
way we set that up is a good example. I wish you would

think it over.
Mr. Seltzer: He talked to me about it.

thought it was much simpler this way.

Mr. Taylor: And this way is not the same. It

isn't so. I haven't read it all through. I have a
violent argument to make about that statement.

HM,Jr: What I am going to do is ask you to take
the Social Security part and go to Mr. Taylor's room with
him, because I have to get a little rest before I see
Eccles. Now, what copy can I give Eccles? I have one
here. Bell was to have one to read between now and three

o'clock. He didn't have the tax part.

Mr. Gaston: He had the tax part.
000-000

# 10 - preliminary 432

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 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

433

-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 occupity 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.

434

-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

unsolved. 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.

435

-4essentially different from those which faced us four years
ago. Many measures are required for their solution. One
of these measures in the present juncture is a balanced
budget.

Early in 1933, after three years of progressive
deterioration, our whole economic mechanism was demoralized.

We had lost six hundred twenty-three millions of gold to
other countries in the first seven months of 1932; and,
after a temporary reversal of this movement, three hundred

nineteen millions of gold went out during the last ten
months of the calendar year 1933. These gold losses,

coupled with the withdrawal of both gold and other kinds
of currency for domestic hoarding, created an intolerable
banking situation; because the loss in bank reserves tended

to produce a tenfold contraction in bank credit. Under these
conditions, there was no agency outside of the Federal

436

-4AGovernment with the resources and the courage to bring

about a business revival.

Today the situation is greatly changed. The total
monetary gold reserves at the beginning of this month were

in excess of twelve billion eight hundred million dollars,
or nearly three times those of 1929. We now have more than
enough gold to meet every conceivable foreign demand; and
we have 80 improved our monetary arrangements through the

Stabilization Fund and other means that we can meet foreign

demands for gold without any disruption to our banking,
trade, and industry.
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 precedes a serious depression.

437

-4BThe present situation is not characterized by the
existence of huge inventories,

438

-5high interest rates, over-extended credit positions, or
great surpluses of housing accommodations, capital equipment,

et cetera. We have not reached the stage of full employment

of our productive resources. 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 to see private
business expand. We believe that the bulk of the remaining
unemployment will disappear as private capital funds are

439

-6increasingly employed in productive enterprises. We
believe that one of the most important ways of achieving
these ends at this time is to balance the Federal budget.

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 was 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 put to work capital funds that would otherwise
have remained idle.

440

-7The situation today is greatly changed. 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.
During the first six months of the present calendar year,
the insured commercial banks of the country reduced their
holdings of Government securities by six hundred eighty-five

million dollars 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.

441

-8There 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.

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. Moreover, the rates of
interest on our borrowings have been lower, for comparable

securities, than at any other time in the history of the
country.

We wish to preserve the financial power of the Federal
Government to aid in restoring economic order in the future,

442

-9if the need again arises. To preserve this power, we must

liquidate during prosperity the debts incurred during
periods of depression.

To seek an ordinary balancing of the budget next year,
we must therefore accomplish a net improvement of seven

hundred million dollars in our budgetary position. In
estimating revenues, it is far worse to overestimate than
to underestimate. We must not count on an increase in

revenues next year from the existing tax structure, nor
should we impose additional taxation. We should plan to
reduce our expenditures by seven hundred million dollars;

and then, if the tax receipts rise above those of last
year, the excess should be used to reduce the national debt.

We ought not to increase the total tax burden at this
time.

443

- 11 Our immediate goal, then, should be to reduce

expenditures by seven hundred million dollars. In addition,

every dollar that the Treasury realizes from the liquidation
of revolving funds, and from other repayments of loans and

capital advances, should be set aside for debt retirement.
In no event, in my opinion, should we contemplate total net

expenditures in excess of the level of this year's estimated
receipts. That means that our expenditures must not exceed

six billion six hundred fifty million dollars for the
coming year.

Our problem is clear. Our expenditures must be cut
seven hundred million dollars.
But where can cuts totaling this amount be made? After
studying the whole problem day and night for several months

I have come to the following conclusions: First, little
or no money can be saved in the regular operating expenses

444

- 12 of the Federal Government, including the national defense

and interest on the public debt. The increased volume of
services now demanded of the Government make it almost

impossible to achieve significant reductions here. Second,
and on the other hand, by focusing attention on the four or
five classes of expenses that have been mainly responsible

for our past deficits, I am convinced that the necessary
savings can be made.

I have before me a table in which I have set down my
rough estimates of the reductions that should be possible

next year in several classes of expenditures.

445

- 13 ESTIMATED POSSIBLE SAVINGS FOR FISCAL YEAR 1938-39
Savings

1. Public Works expenditures this year,
including emergency funds, but
exclusive of highway expenditures,
are estimated at

Next year they should be cut to

573
500
73

This would save

2. Highway expenditures this year,
including emergency funds, are
estimated at
Next year they should be cut to

253
100
153

This would save

3. Unemployment Relief and the CCC

camps this year are estimated to cost
Next year they should be out to

1,680
1,200

This would save

4. Miscellaneous and Supplemental Items

this year are costing

Next year they should be cut to

180
50

130

This would save

5. Agricultural Adjustment Program
this year is costing
Next year the cost should be no more,
or

480

475
475
O

The saving being
836

6. Total savings on above items

7. Less increase in Social Security expenditures
8. Net savings

117
719

446

- 14 -

First, I have set down the item of public works,
whether financed by emergency or regular appropriations,

but exclusive of highway expenditures. This item during
the current year will account for five hundred seventy-three

millions of expenditures. Next year, despite the fact that
available unspent appropriations for this purpose already
approximate seven hundred millions, I believe that the
expenditures should be limited to five hundred millions,
which would produce a saving of seventy-three million

dollars. I believe further that we should reconsider the
public works program already formulated for the future by
the various Government departments, programs which would

involve an average annual expenditure of about seven hundred

million dollars for the next four years.
Second, I have before me the item of highway expenditures,

estimated at two hundred fifty-three millions this year; an

447

- 15 amount that may well be cut to one hundred million next year

to produce a saving of one hundred fifty-three million. In

this connection, also, I believe it would be wise to alter
the existing programs for the future, which would call for
new appropriations totaling more than four hundred million
dollars during the next two years, and return to the average
annual level of Federal highway expenditures prior to the
depression -- less than one hundred millions.
Third, I should like to see our outlays for unemployment
relief and the CCC camps, which, exclusive of other recovery

and relief expenditures, are running at sixteen hundred

eighty million dollars this year, reduced to twelve hundred
millions, which would produce a saving of four hundred eighty
millions.

Next, I believe that our outlays for miscellaneous and
supplemental items, which amount to one hundred eighty

448

- 16 -

million dollars this year, reduced to fifty millions next
year, which would save one hundred thirty millions.

The total savings that I have listed amount to eight
hundred thirty-six millions. We must deduct from this
figure a probable increase of one hundred seventeen millions

in Social Security expenses, leaving a net possible saving,
exclusive of any saving in agriculture, of seven hundred
nineteen millions, or more than enough to achieve an
ordinary balancing of the budget.
Both because of the real problems involved in the

present level of our agricultural expenditures, and because

it may not be possible to achieve all of the savings that
I have listed, I strongly recommend that the present level
and character of our agricultural expenditures be given
very serious reconsideration.

449

- 17 -

I ask you to consider what I have to say on this point
in the light of the fact that I have been deeply concerned
for more than twenty years with the problems of agriculture,
especially farm management and farm finance, and that I am

most keenly interested in doing all that can be done to
remove the economic disadvantages that the farmers have

suffered. That very interest impels me to believe and to
state with all the force at my command that agriculture can
not rely on merely temporary expedients. We must have a
long-range program to maintain the independence and the

purchasing power of the farmer. That program must take

into consideration his opportunities in the foreign markets
as well as at home, and we must keep always in mind its

effects upon our whole National economy. To endure, and to
be of permanent help to the farmer, the program must be

thus soundly based. It will be of no lasting service to

450

- 18 -

the individual farmer, or to the Nation's agriculture as
a whole, to offer what we shall later be compelled to
withdraw. The farmer himself does not want subsidies, but
rather such fair prices and such balanced production of
crops as will make subsidies unnecessary for his decent
economic status.

The plight of agriculture in the depression called for

special aid not only in the farmer's interest, but in the
interest of all of us. Much that was done was on an emergency
basis. The emergency devices must now be resurveyed. No

more than any other branch of our economic life can
agriculture prosper on permanently unbalanced Federal budgets.

Besides the one hundred sixteen millions included in

this year's budget for the general work of the Department
of Agriculture, there are, among other items, estimated
expenditures of four hundred seventy-five millions for the

451

- 19 -

soil conservation program, thirty-three millions for rural

electrification, fifty-five millions for the Federal land
banks to provide lower interest rates, one hundred millions
for commodity loans, and one hundred twenty-five millions

for resettlement. These items total nine hundred three

millions for this fiscal year.
I am also aware that discussion is now taking place in
Congressional committees of additional measures in aid of

agriculture that may involve large expenditures. The
magnitude of the sums we are already expending for
agricultural purposes demands that the whole program be
re-examined on the basis of a determination of how much we

should spend and can afford to spend in this one direction.
The farmer's lasting welfare also demands that this be done.

452

- 20 There may be some persons who would counsel a more

drastic reduction of expenditures or a program of far
heavier taxation in order to make certain a substantial

reduction in the public debt in this fiscal year. There
are serious objections to such a course.

We are definitely in a transition period between
unbalanced and balanced Federal budgets. We are making

great progress toward a balanced budget.

Relatively few persons realize the remarkable fact
that the net improvement this year in the budgetary position
of the Federal Government will amount to more than two

billion dollars. In other words, the net deficit this year
is estimated at less than seven hundred millions as compared
with more than twenty-seven hundred millions last year.
The net improvement of more than two billion dollars

that is taking place in our budgetary position this very

453

- 21 year provides the best answer to those who have publicly

despaired of our willingness or our ability to balance the
Federal budget.

I am enthusiastic about the direction in which we are

going; but I firmly believe that there is just as much
danger to our economy as a whole in moving too rapidly in

this direction as there would be in not moving at all.
The minimum goal that I propose will by no means be

easy to achieve. But it is a goal that we can safely,
honestly, and reasonably, hope to reach.

I have already indicated my belief that it would be
unwise to raise taxes at this time solely to accumulate a
surplus of six hundred million dollars for debt retirement.
More than two-thirds of this year's budgetary improvement
comes from increased revenue, rather than from reductions

in expenditures. This clearly indicates that further

454

- 22 increases in taxation are unnecessary, for a continued
expansion in business activity would produce adequate

additional revenues on the basis of the present total tax
structure.

There are equally compelling considerations on the

expenditure side. I strongly favor a vigorous program for
the progressive reduction of Federal expenditures to the
minimum demanded by the Government's increased responsibilities.

But it would be clearly unwise, and disruptive to many

sections of private industry, if we were suddenly to slash
Government expenditures by more than the amount I have
indicated.

In addition to these considerations, there is a new
and important aspect of our budget that must now be considered

in analyzing the economic effects of Federal expenditures

and receipts. The Social Security Act has introduced new

455

- 23 items into our budget. A major one of these, the annual
appropriation for the Old Age Reserve Account, calls for
the investment of this appropriation in Government
obligations. The same Act also provides for the investment
in Government obligations of moneys paid by the States
into the Unemployment Trust Fund.

The funds paid into both of these accounts operate

just like payments made by an individual to a private
insurance company. Such a company invests your premiums

in Government obligations, in farm and urban mortgages, in

railroad, industrial, and public utility bonds, and in other
forms of investment approved by one or more of the forty-

eight different State laws. All that the insurance company
has when it has invested your premiums in this manner, are

bundles of pieces of paper representing all kinds of promises
to repay your money with interest to the insurance company.

456

- 24 The Federal Government, in connection with the Old Age
Reserve Account and the Unemployment Trust Fund, also

invests your money in pieces of paper. But these pieces of
paper are Government bonds and not private promises to pay.

It is not overstating the case to say that your money is
safer in Government bonds than in a multiplicity of private
obligations, though, of course, I am in no way reflecting
on the soundness of private insurance companies.

It is very clear that the credit of the Government is
the soundest in the nation. And if anything should happen
to your Government, nothing else would have any value at all.
When the Treasury invests your old-age taxes and your
unemployment compensation taxes in Government bonds, however,

it reduces the amount of the public debt held by private

investors. This is obviously so if the Treasury buys bonds

in the market directly for the accounts. The rates of

457

- 25 interest which the Treasury is required by law to pay on
funds invested for these accounts are higher than those
which can be obtained at present by purchasing suitable
Government obligations in the open market. Hence, the
Treasury is issuing special Government bonds to these accounts.
-

Other things being equal, the sale of special obligations to
the Old Age Reserve Account and the Unemployment Trust Fund

results in a corresponding reduction in other forms of the
public debt.

Next year, as a result of the Social Security Act and
the related State laws, it is estimated that the Federal
Treasury will receive more than one billion dollars net for
investment in Government obligations for these two accounts.

With a balanced budget, this billion dollars will be used
to retire public debt now in the hands of private investors.

458

- 26 In other words, the Treasury next year will be adding one

billion dollars to the supply of funds in the capital market.
Even during the decade of the Twenties, when the Treasury

was receiving large payments of interest and principal on

war debts, and from the sale of surplus war materials, the
maximum reduction made in any single year in the public debt

held by private investors was one billion three hundred
millions.
My object this evening has been to present, as clearly
and as frankly as I know how, a comprehensive picture of

Federal expenditures and the budgetary outlook. I have tried
to make plain the underlying economic reasons, as well 9.8 the

humanitarian ones, for the past deficits; and I have tried
to bring out clearly the underlying economic considerations
that now demand a balanced Federal budget. I have shown

why, in my opinion, this balance should be sought by a

459

- 27 reduction of seven hundred million dollars in expenditures,
and why a large surplus for debt retirement would be

undesirable at this time if it must be achieved by eliminating
essential Federal services or by increasing the existing tax
burden.

The principal objects of our budgetary policy have been,
and I hope will continue to be, to promote a large volume
and healthy character of business activity, a maximum volume

of employment at good wages in private industry, fair
treatment for our agricultural population, adequate revenues
to meet the increased services now demanded of the Federal

Government, and the preservation of the credit and currency

of the United States, on which depends the security of jobs,
property values, and orderly business relations.

460

nor t
11 20 00 11

$80
461

-4essentially different from those which faced us four years
ago. Many measures are required for their solution. One
of these measures in the present juncture is a balanced
budget.

Early in 1933, after three years of progressive
deterioration, our whole economic mechanism was demoralized.

Under these conditions, there was no agency outside of the
Federal Government with the resources and the courage to

bring about a business revival.
Today the situation is greatly changed. We are now

meaning the end

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 precedes a serious depression. The present situation

is not characterized by the existence of huge inventories,

462

-5high interest rates, over-extended credit positions, or
great surpluses of housing accommodations, capital equipment,

et cetera. We have not reached the stage of full employment

of our productive resources. 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

existing

the driving force of private capital to the present, 1 favorable
circumstances. We want to see capital go into the productive
channels of private industry. We want to see private
business expand. We believe that the bulk of the remaining
unemployment will disappear as private capital funds are

463

-7-

A different situation prevails today. Our industrial
recovery has created large new demands for private capital.

again
Our commercial banks are now utilizing their credit
resources again for the financing of private industry.
During the first six months of the present calendar year,
the insured commercial banks of the country reduced their

holdings of Government securities by six hundred eighty-five

million dollars 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.

464

- 14 Federal Government, including the national defense and

interest on the public debt. 1 These are now running about
the same as in 1932; and, in view of the increased volume
of services now demanded of the Government, I do not believe
that significant savings can be looked for here here.) Further,

our expenditures under the Social Security Act will probably
increase by a hundred million dollars or more in the next

fiscal year.
On the other hand, by focusing attention on the several
classes of expenditures that have been mainly responsible

for our past deficits -- public highways, other public works,
unemployment relief, and agriculture --, I am convinced
that the necessary savings can be made.

Let me give you a rough idea of the possible savings

in these fields.

465

- 18 Despite the magnitude of the sums we are now expending

for agricultural purposes, you are all aware that discussion
is taking place in Congressional committees of further
measures in aid of agriculture that may involve large
additional expenditures.

I am strongly in favor of a long-range program to
maintain the independence and the purchasing power of the
farmer. That program cannot endure and cannot render

based

lasting aid to the farmer unless it be soundly constructed.
The farmer himself does not want subsidies, but rather such

fair prices and such balanced production of crops as will
make subsidies unnecessary for his decent economic status.
A sound program must take into consideration the

farmer's opportunities in the foreign markets, as well as
in those at home; and the character and cost of that
program must be determined with full recognition of its

466

- 19 effects upon our whole national economy and of the

limitations imposed by the Federal finances.

Balancing the budget is in the interest of our
agricultural as well as of other parts of our population;
and it requires the cooperation of the farmer as well as
other sections of the public.

With the solid support of the public, I believe that
economies totaling seven hundred millions or more can be

achieved in the four fields that I have cited. Since the
estimated increased costs of our social security program
are more than offset by estimated reductions in miscellaneous
and supplemental items, it should be possible to achieve

an ordinary balancing of the budget next year, in addition
to at least some measure OI debt retirement, and without.
increased taxes.

467

- 20 There may be some persons who would counsel a more

drastic reduction of expenditures or a program of far

heavier taxation in order to make certain a - substantial
reduction in the public debt in the next fiscal year. There
are serious objections to such a course.

We are definitely in a transition period between
unbalanced and balanced Federal budgets. We are making
great progress toward a balanced budget.

Relatively few persons realize the remarkable fact

that the net improvement this year in the budgetary position
of the Federal Government will amount to more than two

billion dollars. In other words, the net deficit this year
is estimated at less than seven hundred millions as compared

with more than twenty-seven hundred millions last year.
This net improvement of more than two billion dollars

that is taking place in a single year provides the best

468

- 21 answer to those who have publicly despaired of our willingness

or our ability to balance the Federal budget.
.

I em enthusiestic about the direction in which we are

going-but I firmly believe that there is just as much
danger to our economy as a whole in moving too rapidly in

this direction as there would be in not moving at all.
The minimum goal that I propose will by no means be

easy to achieve, But it is a goal that we cen safely,
honestly and reasonably, hope to reach.

I have already indicated my belief that it would be
unwise to raise taxes at this time solely to accumulate a tange
surplus of six hundred million dollare for debt retirement.
More than two-thirds of this year's budgetary improvement
comes from increased revenue, rather than from reductions

in expenditures. This clearly indicates the fur ther
increases in taxation are unnecessary, for a continued

469

- 22 expansion in business activity would produce adequate

additional revenues on the basis of the present total tax
structure.

There are equally compelling considerations on the

expenditure side. I strongly favor a vigorous program for
the progressive reduction of Federal expenditures to the
minimum demanded by the Government's increased responsibilities.

But it would be clearly unwise, and disruptive to many

sections of private industry, if we were suddenly to slash
Government expenditures by more than the amount I have

indicated.

In addition to these considerations, there is a new
and important aspect of our budget that must now be considered

in analyzing the economic effects of Federal expenditures
and receipts. The Social Security Act has introduced new

items into our budget. A major one of these, the annual

470

November 4, 1937

3 p. m.
Present:

Mr. Magill
Mr. Seltzer
Mr. Haas

Dr. White

Mr. Oliphant

Mr. McReynolds

Mr. Taylor
Mr. Upham
Mr. Bell

Mr. Gaston

Mrs. Klotz

HM,Jr: This thing has gotten so important, it
isn't a question of getting down to words; it's a
question of the whole policy being at stake now.
Now this is what has happened. I had -- in the
first place, may I say that anything I say here today
18 terribly confidential. For those who have not seen
the speech, and there are a few who haven't, most of you
have, I can sketch it in a few words.
The first section of the speech lays out why we
should stop spending above the present level. It compares the difference between now and 1932 and why conditions are different now than they were in 1932-1933,
and then we go on to explain where the money can be
saved and that we should attempt to save 700 millions

the coming year and bringing the total expenditures
down to the total receipts this year, and if we do that
we don't have to ask for new taxes; we are opposed to
any new taxes, and the budget will be balanced. We

make no effort to even talk about statutory debt retirement. I crossed that last week.
What we do say is that if the budget is balanced
we then will have 1 billion in Social Security with
which we can take 1 billions dollars worth of Government
securities in the hands of the public, retire them and
set up in the place of that billion of special securities

471

-2on the

Treasury books. The total debt will be changed,
but we shift it from the hands of the public into the
hands of the Treasury.

We then have about three pages on taxes, which

are the philosophy, myown philosophy, about treating

people fairly. We say if there is anything that bears
down
say so.unnecessarily hard, we are courageous enough to

And that's the general philosophy without going
into any special things.
Now, Mr. Eccles comes along and talks equally
confidentially to me, and for once we had two hours

without Taylor having to pull us apart. We both kept
our good humor and Eccles' philosophy -- I will try to
put it as simply as this -- that the thing that is the
matter is the high cost of labor; that when labor got
so high, through various things happeneing, one thing
after another, that he has charts to show it, that instead of labor getting the benefit of the increase the
people are only working two and three days a week and,
therefore, the labor man is not getting the benefit of
increased wages on a weekly or monthly basis, that the
cost of the products have gone up and gone higher,

building costs are up 20%, that labor and a dozen industries that control building supplies have either
accidentally or on purpose have got a combination of
keeping up building needs and therefore building has
gone like that (gesture of HM,Jr) and as long as that
situation is 80 and the cost of hiring skilled labor
is so high, people will not build houses and railroad

people will not buy railroad supplies, etc.
The whole thing is built up on that particular
philosophy and he justifies the whole depression due
to the cost of labor and he has a lot of charts to show

it.

So I said to Eccles, As to your general talk,
whether that particular thing is responsible for the
depression or not, I said, I am not going to argue with
you. I don't think it 18. But I agree with you on
everything you said about costs and why people will not
build houses, etc; I agree with you. We are together

472
-3-

there. I will sign your document on surplus taxes.
The only things he brings on taxes -- we are not very
far apart -- he wants to have some exemptions for the
small man, and he wants to give a fellow a two-year
exemption if he will spend the money for expansion,

not for debt retirement because that's deflationary.
We
are not very far apart on that. That's the only
thing he talks about on taxes.

But this is where we go opposite roads. He
says that at this stage we must speed up our expendi-

tures and that we must spend through Hopkins and through
where we go apart. He read my speech carefully and

Agriculture fast, to stop this deflation. And that's

said my speech is deflationary; that it would have
been very nice a month ago, but I just can't give it;
shouldn't. That this is a problem that only one person
can handle and the President -- why should I go out on
the end of a limb; this is the President's problem;

has to say these things in his message to Congress on

the 15th; I am a fool to do this; this is the Presi-

dent's party.
So I said to Eccles, Well, let's just stop at
the point of what we are going to do for the next couple
of months. He's very frank. He does not want us to
do something which he thinks will temporarily cure the
situation for fear that if we do, that will let up the
pressure on the President, but do what he thinks is fundamental. of course I talked about gold, stop sterilization and spend gold. Well, again he said that he had
that in the back of his mind for fear the President
would grab it too quickly.
I say that we can take 50 millions a week and
pay off our bills with gold; pay for 450 millions
notes in December, and altogether 1 billion between now
and the first of January. Eccles says all that does
is to increase the excess reserves and there is plenty
of money there to do the job; doesn't pay anybody to
work.

What he wants to do -- then it came out -- he
wants us to take the gold, not pay off any debt, but
spend it by putting it through Hopkins and Wallace.

He first said we won't increase the budget, but I said,
of course, that's silly. He said we won't increase

473
-4-

the debt but we will increase the budget. Now what he
wants to do is deposit -- we will use round figures -1 billion of gold and spend it through increasing our

expenditures over and above the budget summation by say,

a
billion. I can't go along with it. I just can't see
it.

I am trying to be very quiet and terribly fair,
both to him and to myself. That's the whole story.
Now I said to him, Have you any reason to believe that
to
the President will do this? He said, He listened
me. I said, Have you any more than that? He said,
No. Well, I said, I talked to the President last night
and had one of the worst rough and tumble talks with him
in I don't know when, and all he would say is that there
are 2,000 men holding a pistol to his head and they are
going to fight this thing out to see who controls America.
Every time we get in a Jam that's what the President says
and I have yet to find the 2,000 men because I don't think
2,000 men would see their fortune go in half in order to

control America if they can't control their own business.
ing is that the President wants to sit there, as in a
poker game and sit there until hell freezes to see who
can last the longer. In the meantime, while this is going on, the ground is slipping from under our feet as fast
as I have seen it slip since I have been in Washington and
up to last night at six o'clock, I can't see any sign on
the part of the President that he wants to do anything
and I told Eccles this: that before he comes out with
his attack on labor and puts the whole blame on labor,
how are we going to stand here with all this gold locked
up? Then again we came back to the point where he says
deposit the gold, spend it through excess expenditures.
There's the whole picture. I think I have put it down
as simply as I can; boiled down two hours conversation.
We have got this speech here. It is the 10th
of November and I swear I don't -- I am a big enough
person -- as far as Henry Morgenthau, Jr. is concerned
it's not so important, but we are playing and the stakes
is the United States. That's what we are talking about
and I am willing to do anything to get results and, as I
say, Henry Morgenthau, Jr., is the leas important.

I don't believe there is any indication of it. My feel-

Want to break the ice, Herbert?

474

-5-

Mr. Gaston: I should think that you want first
to try the effect of what you propose. We may have
to have large expenditures later on. I don't think

you ought to advertise fear by being too soon about
such a demonstration.

HM,Jr: Do I gather you mean deposit the gold
and pay off the debt weekly?

Mr. Gaston: Yes. That's what I would do. It's

quite possible before the winter 1s over we will be
driven into very much larger expenditures for relief.

HM,Jr: I should say one very important thing,
then, you would throw the question of excess reserves
in our lap and we will need legislation to handle and
whatever legislation you need to handle it, I am more
than willing that you should have it.
What would be the effect if I sent word up to
New York that I could not speak or was not ready? The
situation was such that

Mr. Gaston: I think it would be better if you

made a speech even 1f the character of your speech was
changed.

HM,Jr: I think if I announced I would not speak
it would just scare them.
Mr. McReynolds: Do more damage than anything you
could do.

Mr. Magill: Oh, absolutely, I would speak!
Mr. Taylor: Can't you eliminate from the field
of possibility any of Marriner's recommendations?
HM,Jr: How, Wayne?

Mr. Taylor: All right. The labor situation. As

far as anything immediate, you can't do anything about it
if you wanted to do it.
HM,Jr: Check.

475

-6-

Mr. Taylor: No. 2. You can't take Agriculture
and Harry Hopkins expenditures and play on them like
an accordian. They won't act quickly either; impossible to do it. Impossible to increase or decrease
in a month or two months' period, such as Marriner is
suggesting, those particular expenditures.
HM,Jr: It could be done with WPA when it was

first started.

Mr. Taylor: But now you have an entirely different situation. You could do a much better job, if
that's what you want to do, if you take an aeroplane
and fly it from here to San Francisco and drop off
$100,000 each mile. You would get a nice distribution
there. That's the only way you could do it quickly.
I think you have to eliminate all three from the picture.
HM,Jr: Of course, what I can't get out of my
head and that's this: certainly up to within a couple
of days, certainly up to Monday, the President was all
for cutting expenditures.

Mr. Bell: That's right.
HM,Jr: And demonstrated that he did want to cut

expenditures. Took it out of George Haas, a slice right
off his ear. And I think that there are certain things
that the community wants to know and I think one is are

we going to spend more money or less money, so what I am

going up there and saying is we are not going to spend
any more than we are now. Now if I go up as Secretary

of the Treasury and make a wobbly-speech and say I don't
know whether we are going to spend any more money or not,

I just add to the fear. I am not sure that Marriner is
right that this is 'deflationary speech. I am not sure.
I think what people want to know is this: have we a
policy down here and what is it. I facetiously keep
saying, Let Henry Wallace tell me what is his program.
Does he want to grow more crops or less crops? It's
the same thing here. Do we want to spend more money
or

less money? The interesting thing is in this talk

I had with the President, when we gotall through we had

a misunderstanding and he did not understand what I was

talking about;for some reason he thought I was talking
about raising the price of gold and for fifteen minutes

476
-7-

we argued. Mrs. Morgenthau heard us. When I finally
could get a word in, I said: What I am talking about is
I am just raising the point should I bring some people
down Saturday and Sunday to discuss whether we should
stop the sterilization of gold, deposit our gold and
lower excess reserves? Oh, he said, wonderful! go
ahead. Bring your people down. That's marvelous!
Sure, bring them down and talk about it.
Now, I have gone all through this thing with some
of the boys here. I have gone over it with Wayne Taylor
and some of the others. I say the only way you can correct this thing is to make the shoe pinch, and pinch hard
enough. I would just like, before this thing goes too
far, to correct that part of this deflation which the
Treasury is responsible for. We are responsible for
locking up 12 billions of gold and I would like to correct that before this thing goes so far. Now, Eccles
or no Eccles, you could see that he won't do anything on
his excess reserves, but if we just did that -- oh, yes,
another thing. He said, Why, the result of that would
be 80 quick everybody would jump in and everybody would
be worse off than ever.
Mr. Gaston: I think you need to distinguish between a deflationary policy and deflationary speech.
HM,Jr: But what I am getting out -- for instance,
I could, say, Sunday night announce two things (1) that
the Treasury stop sterilizing gold and (2) that we were
going to pay off the debt each week of 50 millions with
gold and pay off 450 millions in December with gold. It
works out around 900 million. Then, having done that,
then I go ahead and say we must keep expenditures down.
One balances the other.

I think -- these trick words, deflationary and inflationary -- what at this juncture is fear
inspiring and what is not. I think 1f you were to go up
Mr.

Gaston:

there and connotate that things were dreadful, you would
scare people to death. If you went up and make a speech

that, after all, the ship is on an even keel and we are
not wrecked, it would be confidence inspiring and not fear
inspiring. Regardless of what we may have to do in the
future, I would rather make this kind of a speech than
the kind that would scare them.

477
-8-

Mr. Seltzer: I would like to see you put in

that speech your new gold policy.

Mr. Taylor: I don't think it belongs in there
even if you decide to do it.
HM,Jr: The time to do it is Monday. At the
rate this thing is going, the time to do the gold thing
is Monday morning. Last night was the first time I
got these feelings in my bones and I got this thing in
my mind that the President has to do some thing now;
this week. I had not got that feeling until yesterday.
The thing finally crystallized yesterday and I called
him up, but something has to be done now. And I don't
believe Franklin D. Roosevelt is going to go up and lash
hell out of labor.
Mr. Taylor: Even if it were right, there is not
a chance in the world he would do it.
HM,Jr: I am going to ask the fellows who have

not been sitting in at all. What would you think, Mac?
Mr. McReynolds: If the President will support -with the President 8 knowledge of what you are doing and

his willingness that you should go ahead and do it, that
you should give the speech. As far as your gold sterilization is concerned, if that needs to be done it can be
done today, Monday or a week from Thursday, whenever it
needs to be done, but I don't think that ought to be
tied up with what you have got and you are always going
to have response whenever you come to talk about a bal-

anced budget after a long period of increasing the deficit and my judgment is that the effect of your speech
as it is now drawn would be ten times as good as it would
if you got up and said we are going to spend 7 billion
more next year to prime the pump. If you come to the
point, the first of January or before, when the President
has to change, if conditions justify it, then is the time
for him to change, but I think you ought to go ahead with
it. I don't think there is enough of what has yet come
in to warrant your putting your tail between your legs
and running, and I don't think you ought to do it.
Mr. Bell: Well, I have some reservations about

certain parts of the speech. I can't see that it is

478
-9-

wholly deflationary. Maybe where you retire a little
debt or anticipate it is deflationary, but not enough
to hurt. I have some hesitation in having the Secretary of the Treasury stick his neck out by saying that
there will be a reduction of 700 millions in expendi tures
and then have the President, two months later, send a
budget message which shows that the 700 million reduction

has not been obtained. On the gold, I don't see how
depositing the gold in the Federal Reserve system and
retiring debt will have any effect on the business situation except to raise the price of Government securities.
The banks will take the money and try to invest it in
Government securities. I don't see that that will have
any, or very little, effect on the business situation,
but I should think that the speech changed a little
should be delivered about as it is.
HM,Jr: I will come back for concrete suggestions
in a couple of minutes.
Mr. Oliphant: I would not deliver that speech,
but I would deliver the sort of speech that Secretaries
of the Treasury before you have delivered. I know
your natural aversion to getting up and not saying very
much, but it may be a case where you need to sacrifice
your feeling about that, and then go there and sort of
make a general statement that Secretaries of the Treasury
make on occasions of that sort and the reason I say that
is because I have that feeling in my bones that you mentioned a few moments ago, largely from a thought that
came to me from Leo Pressman of their increased flood
of telegrams. The reason I suggest it is because certainly the situation is either different or may be different, greatly different, from what it was when you
framed that speech in your mind and I think you ought
to keep your hands completely free and I would agree
with Dan that it would be most unfortunate for you to
make that statement about cutting expendi tures and have
the President be forced to send a message to Congress

recommending it and putting people in position to say
the Secretary did not foresee this as short a time ago
as November 10th. I know it has always been your role

not to make a speech unless you had something real to say,

but this happens to catch you with too little time to
really take cognizance of this very rapidly shifting
picture that we got this afternoon and the thing to do

is have someone draft for you the general sort of orna-

479
-10-

mental speech that Secretaries of the Treasury ordinarily
make on occasions of this sort, and then your hands will
be
perfectly
free
to meet your problems as the feelings
in your
bones
shift.

Mr. Magill: That's not quite my feeling. I look

at it two ways.

I will say, first, there may be some changes in
the speech that ought to be made. I think Dan's point
is important. I don't know how that is going to shape
out. The first question is what is the Treasury's
policy? What do we want to do and, second, what effect
is it going to have on the public to announce what we
really have in our minds. My own feeling would be -I have thought about it previously -- to do the sort of
thing Herman says and give them a "stuffed shirt" speech
would be almost as bad as to give them no speech at all.
Everybody is going to be on to what you are doing. Now
on the other hand, I take it that this speech as drawn
does actually represent our best judgment as to what the
Treasury policy should be on the subject.
My own guess is that, so far as the country is
concerned, that it would be very much welcomed. It

will have a distinctly good effect. I think if it could

have been coupled with the kind of tax statement we had

in mind that the effect would have been excellent. So
while I have no particular use for these terms "deflation-

ary" or "inflationary" either, I don't believe in the deflationary part at all. As far as it will have any ill
effect, it will be very much the contrary. What is
happening, as I get it, is because of people's forecast
of what is going to happen in the future and the depression is due to a state of mind that they don't think
they know what this Administration is going to do. They
think you are going on with a 2 billion deficit. You
come out and tell them this and I think your lay-offs
will begin to stop.
Mr. Oliphant: Maybe I should have introduced my

statement with this statement: that it is my conviction
that sitting in this room we don't know what the Treasury policy is and we can't because of the rapidly changing
picture. And this: as to other things, when we are in
a crisis, we have to operate on a 24-hour basis. I did
not have in mind a stuffed-shirt speech, I assure you.

480
-11-

HM,Jr: You point out who should write it.

Mr. Oliphant: Gaston. I did not suggest
stuffed shirt speech. A stuffed shirt speech is not
unique with this Administration. There has been
a

many creditable speeches by Secretaries of Treasury
which did not announce Treasury policy when it was
not

H",Jr: There was a fellow in here last Friday.
Viner brought him in. That's Himmelblau, who has 300
small businesses he does accounting for besides teaching.
Each one of the people is running his business on this
picture: that they are cutting their budgets, cutting
their expenditures, waiting to find out what the Government is going to do. He has the confidence of 300
businesses and if the Federal Government would only

indicate, not that they are going to save any money,
because nobody would believe me if I said that, but if
they would just indicate that they are not going to spend

any more, that would be satisfying to his clients. Of
course, the thing that I think is there -- the fact that
there is no Treasury policy, no monetary policy, is one
of the things that adds to the fear. They just don't
know which way we are going and if I haven't got the
courage to say what it is I have been trying first
to make up my own mind. The President agreed to this
speech last Saturday. He made his corrections and he

agreed to it. Last night he began to have his doubts,
but Saturday he agreed to it and he took all the time he
wanted. No one hurried him. He took all the time and
he agreed to it. He has agreed certainly that to save
money at this time is what the country wants.
Mr. Bell: Didn't you say he had some doubts?

HM,Jr: Last night; yes.
Mr. Bell: He had seen Eccles in the meantime.

HM,Jr: Exactly. And he said I should see him.
had seen Eccles and said I should see him. I said,
He
Should I see him? I haven't, but I am having lunch with
him today. He said, I think you ought to get his memorandum and read it. I want to give Hopkins credit.
talked to him. I did not get any signs from Hopkins
I

481

-12-

that he had to spend any more money. Did you?

Mr. Bell: No, sir.
HM,Jr: And he gets that every day.

Mr. Bell: Hopkins is cooperating beautifully.
HM,Jr: I know about Pressman and I know the
meeting he was at.

HM,Jr: The two are just like this (making gesture)
playing into each other's hands and fortunately we had
somebody meet them where they were and we got the whole
story. Pressman dishes it out and Henderson dishes it
back.

Mr. Bell: You also get the same kind of story from

Aubrey Williams.

HM,Jr: Well, I wish you would all think this thing
over.
What I am going to do now is get Bell's corrections
and suggestions and I would like to see you all again in
the morning.

Mr. Taylor: While you have us here, I would like

to ask a question. What this situation 1s, it's aThere
sitdown strike on the part of business and capital.
isn't any other thing that's the matter with it.
Mr. Bell: How about buyers?

Mr. Taylor: All part of the same thing. What are
the two principal things they are sitting down about?
Dr. Haas: Do you think, Wayne, that capitalists,

the ones who have taken the biggest licking so far, do you
think they would sit down and give themselves that beating?
Mr. Taylor: They don't know whether they are doing
it that way or not. For some reason, they have sat down.
One of the reasons they are sitting down about, they all
come out with the same two things.

Mr. Oliphant: If they see a profitable business in

Mr. Oliphant: I happened to run into Leon Henderson

482
-13-

front of them, they don't and if they don't they do.
If they do, they don't.
Mr. Taylor: I assume there is a bad situation.

You have a sit down strike between business and capital.
Mr. Gaston: No.

Mr. Oliphant: No.

Mr. Taylor: What the hell do you call it?
Mr. Seltzer: Of course the automobile people would
like to make, well, as much business as they want to.

Mr. Taylor: If you will bear with me for a moment,
I think there is a sit down strike on the part of business
and capital and they are sitting down for two things. One
is, the tax structure and the other is they want to know
what the direction of the Administration towards labor is
and those are the only two things that they have in their
minds. Can you do anything in any one of those two
fields -- labor and the tax structure?
HM,Jr: Let's go around. George.
Mr. Haas: I would say that before you would consider spending there are other things you can do -- pre-

liminary. In other words, don't give the patient a major
operation because of the risks involved in it. You should
give them more delicate medicines and one of those is that
I think that you have had a deflationary policy. You
had a business cycle that had not spent itself. The deflationary policy started not in any one thing. First,
we put speed on by sterilizing gold. Then the Reserve
Board ran their reserve requirements up much too rapidly.
At the same time Government expenditures dropped off very
sharply. Now you could drop off Government expenditures

sharply if you did not do the other two things or not to
the extent that you did the other two things and it may
be a matter of opinion as to the first thing we should

do and -- as a good many people agree with me on that -you should change and let the world know that you have
changed your policy from deflationary to an inflationary.
Now the word inflationary does not bother me and I should

think it would bother other people less than it did before

because I think one thing has demonstrated that we have

483
-14-

got some brakes.

With regard to this balancing of the budget, if
you diagnose the situation carefully you find the field
when you examine the business situation, that this business cycle has not spent itself; you will find fields
where there is an actual shortage in capital goods, the
field of construction particularly people who make commitments in that field, want to know the direction of
Government finance. I don't think you can take one
particular remedy and say that will do, but I think if
you came out clearly with some action that clearly reversed your deflationary action and were done in a big
way, then I think you can make your budget balancing
speech and the inference would be that the Secretary is
making this and he intends to take every action to bring
business activity up to a balanced budget; that he is
fully aware that the only way you can balance the budget
is through prosperity, but he expects prosperity.
HM,Jr: The first reaction of Eccles was that an
immediate price change would be bad, and Eccles did not

want a price change at this time because, he said, if
you get a fillip the President will not move any on labor.
Dr. Haas: One thing on labor is that I agree that
labor costs have mounted very sharply. But take interest rates. You will pay almost any rate of interest and
you will pay high labor costs too, provided you have got
a profit outlook ahead of so.
So what I would do, I would, at this moment my
off-hand opinion right now would be, I would consider
very carefully doing this gold before your speech and on

the run of that, give this balancing the budget speech.
You may not want to time yourself. You may be able to
meet Danny's objection. But at the same time, give the
speech somewhat along the lines as it is now written and
then later on if you are forced to spending, it seems to
me you have an out. You sized the situation up. YouIf
have every justification for sizing it up. It's not the
deep depression of 1933. It's somewhat different.
it goes into something else, then I think the circumstances are different and I think you can apply different
remedies and I don't think anybody is going to hold you

to it.

484
-15HM,Jr:

fellows first. All right. We will take the research
Dr. White: Well, with me, I find my mind is
somewhat opposite from what has been said, largely by
Herman first and George. You know where I stand on

the gold matter. With respect to the speech, it ap-

pears to me that the important objective, which I take
it you have; certainly I have -- and which I think is
the only objective is business conditions, future and
present cusiness conditions, and it appears to me that
the speech has to be regarded, and your views have to

be regarded in the light of their relation to, their

effect on, business conditions and on future as well
as present -- long-range business conditions. There,
it seems, you are taking a very definite position, which
represents a certain view. With respect to the desirability of one move or another, it appears to me that
must be evaluated in the light of how it contributes
to business conditions and I might say there is by no
means unanimity of position with respect to the stand
that is being expressed here that what is needed is a

balanced budget or assurance of a balanced budget to bring
about improved business. There is difference of opinion
on that score.

It appears to me that it is necessary to go a

little slower, therefore, since the Administration policy

is extremely important in this. It is a vital -- it's

a matter possiblyof depression, possibly of recession,
but potentialities of developments under these conditions
are so enormous that we have to proceed very carefully.
Hence I should like very much to see you take the position which is counter to the Administration position on
so vital a matter unless you are perfectly sure that you
are right, Mr. Secretary. So long as there is a reasonable measure of doubt, and may I say, Mr. Secretary, that
there is a very definite, a reasonably definite doubt,
and I think I could support the opposite view with a
great deal of cogency and others could too. Since the

matter is so vital and since, further, that you are taking a strong position on this point, may not alter conditions in the way you would like -- it might bring about
opposite conditions -- under those circumstances it should
be the Administration position -- after all, the Secretary
of the Treasury is not committed to have a definite policy
on a balanced budget when, and this is the qualification,

485

-16-

when there is a larger issue at stake of business conditions. He can have his view when that view 1s the unan1mous view of those who are significant in the Administration. Then he can make a strong speech. I should
like to see you make the speech and I think it would re-

quire some changes. It would lose in force. Granted.
And it would lose in effectiveness. But I think you can
still have a pretty good speech and leave yourself where
you are not taking the position, which I feel is not warranted by sufficient unanimity at this time in 80 major a
crisis.
HM,Jr: Let me ask you this question. Supposing
I began to pay off each week the bills with gold and paid

off the 450,000,000 on the 15th of December with gold,
what do you think the effecys would be -- the announcement

of that, say, Sunday night?

Dr. White: I think it would be bullish. I would

not expect too much because you are dealing with psycho-

logical reactions of the business man and they are not
always rational. The question in our minds is not whether

it will be bullish, but on the contrary how bullish. The
most you can say is it won't be greatly effective. That's

the first step we can take and it may surprise us.
HM,Jr: Let me ask you this. Have you had time -I raised this Tuesday -- have you traveled along the road
far enough to feel that you are ready to recommend that?

Dr. White: Very strongly. We have been thinking

about this for a long time. We took this position a few

weeks ago and it is not something I thought of over night.
HM,Jr: I saw your memorandum.

Dr. White: That includes my judgment, but it's not
a question I have thought about.
HM,Jr: But you are ready to recommend it?

Dr. White: Definitely.
Mr. Bell: What effect does the deposit of 300 million
have?

Mr. Seltzer: An excellent effect in this respect:

486
-17-

that if your Government bond market and higher grade
bonds had collapsed with other securities in the last
couple
of months, your situation today would have been
much worse.

HM,Jr; High grade private bonds have stayed up

beautifully. What we have done is we have turned the
thing from banks selling to banks buying and they started
the last week in September.

Mr. Bell: Isn't that about the effect of your

gold policy in these two steps, to help the price of

Government securities and the other, long-term, will
help but it will not help the capital market in the_
sense that you will get new issues?

HM,Jr: You will have to take me a little on faith
in this, but certainly everybody, if I could name him,

he would have the respect of everybody in this room.
I consider him one of the most respected and intelligent

bankers in the country. He is urging me to make this

move on gold sterilization simply to show that Washington
recognizes that having made that move we have gone too

far and we simply want to remove it, and he assures me

that if we do that that all of the influence which he
has, and which is very, very considerable, will be put
behind to explain to the financial community that this
is a wise move. Now he is a man of sufficient influence
that a statement from him of that kind is of tremendous

importance. Now I wouldn't do this thing just on one
man's say so, but what I was getting at with the President last night was to invite the same sort of people
and have them down here for two days and talk the thing
over, the same people who howl about taxes, but if I can
get two-thirds of the financial community of New York to
say'this is fine; we will back you up and we will sell
it to the country, that's half the story. That's half
the story.
And the President keeps talking about people hold-

ing a pistol to his head and I said, to this man, This
is between you and me. I can't do anything for you
and you can't do anything for me. We don't have to
give anything. And this gentleman did not ask any
promises. He was begging me to do it and he did not say
If you do this, we will back you up if you do 80 and'Weso,'
and he never raised that question. He never said,

487
-18-

won't sell this thing unless you do such a thing in
the tax field; begging me; practically going down
on his knees for me to make this kind of a gesture
and never once bargained with me. This is just something that Henry Morgenthau, Jr. has to decide.
'You can't do anything for me; I am not asking you.
It's just between the two of us. There is no bargain.
If we can do something which is sound and we don't have
to deal or sell our soul or give up any of the reform
of this Government, I say try it. What harm can there
be? I am not trading. Eccles wants to trade with me.
Nobody is going in my back door making any deals with
me. This is just between the President and the Secretary of the Treasury; nobody else. It does not tie
his hands. He can build ten TVA's as far as I am concerned.

Mr. Seltzer: I fully agree on the gold policy,
that we ought to change it. That's your question?
HM,Jr: Speech first.
Mr. Seltzer: Speech? There is this. On an
ordinary balancing of the budget, taking next year by
itself, you are setting up a billion surplus for debt
retirement. It's true that a long time in the future
we are going to have some additional obligations and

that's why we set up a surplus, but the current effect

is a billion surplus for debt retirement.
Mr. Bell: Funny surplus.
Mr. Seltzer: It is none the less a surplus. If,
therefore, you dump in through gold an additional billion in the capital markets, some of the reasons for
seeking this other surplus disappear. However, notwithstanding, I would hold to your present position on
the basis of balancing the budget in the ordinary sense
in the belief that business conditions will permit it.

I keep in mind, however, that you are going to take away
from the taxpayers a billion more than you give back to
them except in the form of debt retirement.
Mr. Upham: So far as the speech 18 concerned, I
should like to see you make very much the kind of speech
you have written, although I have not seen the exact

language. I think it is all the more important that

488
-19-

you make that kind of speech if we are going to find
ourselves faced with the necessity of spending more

money. I think that kind of speech will be about the
only kind of reassurance there is to business.
HM,Jr: Suppose I make it as it is, softening it
a little, on the 10th and then on the 15th the President
sends a message to Congress advocating the spending of

more money.

Mr. Upham: Then the monkey you said you did not
(General laughter)
mind being

HM,Jr: I did not say monkey.

Mr. Upham: But the public is going to be awfully

glad that there is such a monkey in Washington.
HM,Jr: Couldn't you use something else? (Laughter)

Dr. White: If you want to sacrifice yourself, but
before you fight for victory I think you want to be sure
victory is desirable. Fight to the last ditch 1f you
were positive that the thing you were fighting for was
right and that's where I have my most sincere doubts.

Mr. Oliphant: Suppose on the night of the 9th,

Mr. Secretary, you were assailed with much graver doubts

than you have now as to the possibility of a serious depression with large increase in expenditures in January
and February. With your candor and frankness in public
utterances and in your private conversations, I don't
think -- though I haven't read the speech, but taking
your summary of it -- I think you would be put to it to
make it the next day and I don't want to see you hands
tied by the speech.
Mr. Gaston: That means two speeches.

Mr. Taylor: You can't make a speech on the 10th and
then have the President say the opposite thing five days

later.

HM,Jr: Of course, I am seeing him Saturday. I would
personally feel very much happier about making the speech
if we did the gold thing Sunday night for Monday morning

papers and then making this speech -- then got that thing

489
-20-

across and then make the speech or make an announcement

Wednesday night and incorporate it in the speech that I

feel the situation is such at this time in order to bal-

ance the budget we have to release this gold which 1s

locked up and put it to work, and having done that, that

will make this thing possible if anything.

Mr. Haas: Your speech as you now have set it up
is not a balanced budget speech of the type some people
have in mind that you balance the budget regardless;

that is, if you increase expenses you increase taxes.
If you analyze it, if the budget is going to be balanced
it's because business conditions

HM,Jr: But it 18 pretty cleverly done.
Mr. Bell: I think that part of the speech is pretty
good, that you are not expecting this thing to continue.
Dr. White: But it could be changed, not a great
deal, and still make it less subtle.
HM,Jr: Here's the thing I asked myself. Let's
say that it did not -- I think I am big enough -- is this
the kind of speech that should be made at this time by
the Secretary of the Treasury. Let's start all over
again. Let's forget the heartaches and the brains and
the tired hours and everything else, and I am big enough
if we started all fresh and we knew a month ago that the
situationwas going to be as it is now, would I be making
this? To have to sit down and write a fresh speech
naturally just scares me to death.
Dr. White: I don't think that's necessary.
I

think we could take that and write something as the OCcasion requires.
HM,Jr: Do conditions require doing something for
gold now and we should do it Sunday night? That's number

one. Should it be done? And I can tell you right now
I am not going to argue with Mr. Eccles about it. I
won't try to sell Eccles this thing. He's coming in
tomorrow morning again, but I am not going to sit down
and give myself a series of sick headackes between now
and Sunday night.

Mr. Taylor: You simply tell him you decided to

490
-21-

do it.

You have this group coming down over the week-

You could talk it over with them and that's where
I assume you got the idea. That's one man's opinion.

end.

You can consult that group because they are the group

you want to sell it for you.
HM,Jr: That's right. It's the most combined -I would have two-thirds of the financial community and
I don't have to give them this. You don't believe it?
Mr. Upham: Yes. Two-thirds of the financial
HM Jr: Two-thirds of the financial market. Twothirds of the people who sit around the various clubs and
talk the thing over the table.
Mr. Taylor: On the basis of that discussion you

will determine whether or not that particular thing is
an important factor in the situation.

HM,Jr: Oh, yes! But I also feelif a fellow is

going to do that Sunday night, as a month from now

Mr. Taylor: Sure! If that's the answer you get,
I don't think you are going to get that answer.
Mr. Upham: I don't either.
Mr. Taylor: I don't think that that 18 a factor
in the situation.
HM,Jr: I have already gotten it.

O. K!

Mr. Taylor: You have got it from one man.
HM,Jr: It so happens that the whole group were

opposed to our sterilizing. I am not going out to sell
it to then. I am going to ask them.
Dr. White: You are going to confine yourself to

that one question?
HM,Jr: Yes.

Mr. Taylor: The reason I ask what is the reason

for this recession, there are a lot of things more important to them than this gold.

491

-22-

HM,Jr: I am going to tell them I am not at
this time going to talk taxes; I am just going to
talk gold.

Mr. Taylor: So you will be sure to get their

reaction on gold.

HM,Jr: 'Do you think I ought to do something
about gold at this time? And, gentlemen, when you
come down I am going to ask you, please, don't come
down if you want to talk taxes because I don't want

to talk taxes at this time.
Mr. Oliphant: Or utilities.
taxes.

HM,Jr: Or anything else, but I want to emphasize
All right, Dan, let's you and Herbert Gaston

and I get your suggestion. Will you all think this
thing over very, very carefully?
(All left the meeting with the exception of Bell,

Taylor, Gaston and Haas.)

Mr. Bell: I have not had a chance to study it -both drafts. They are largely alike -- some things
in one and not in the other. The one I have been reading more carefully was the one I read last night.
Some of the questions I would raise would be

very minor. You say you are glad to discuss this
problem before the members assembled here tonight.'
Seventy-five percent will be guests. You realize that.
And that the war was 'unbelievably costly'. Well, it's
not unbelievable because it is a fact that stares you
in the face and I would like to find some other word.
And 'we deliberately used an unbalanced budget'.

I wonder if that's what you want to say, that you deliberately went on to a program of spending in spite
of an unbalanced budget.

HM,Jr: No.

Mr. Gaston: No. We deliberately unbalanced it.

HM,Jr: I think you are wrong. I think if you

492
-23-

asked
this. the President he would say he deliberately did
Mr. Gaston: Under those situations you wanted
more expenditures than revenue. You deliberately

wanted an unbalanced budget.

HM,Jr: That's what he followed.

Mr. Bell: I suppose you want to say this: 'On
the contrary, from all these standpoints, conditions
are favorable for a continued increase in the level of
business activity.
Mr. Haas: That's all right.
that.

Mr. Bell: Well, I think it is all right to say
Mr. Haas: He has to say that if he comes to these

conclusions.

Mr. Bell: That's all right if the economists
think that's a good thing to say. I assume you want

to hit the difference between 1933 and 1929.

HM,Jr: Between 1933 and 1937. George would get

sore if you called him a politician.
Mr. Bell: 'The basic thing is to foster the application of the driving force of private capital to
the present favorable circumstances. At this moment

they are not very favorable.
HM,Jr: That has been changed to existing. You

are quite right. We changed that.
Mr. Bell: I don't know what this means over here.
'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.' Technical conditions.
don't know the reasons for the stock market decline.
We

We say technical.
Mr. Gaston: He goes on to say what those technical
conditions are.

493
-24-

Mr. Bell: Were they technical?
Mr. Haas: You might substitute another word.

Mr. Bell: We are creating a new term in budget.
The 'ordinary budget.
HM,Jr: That is very deliberate.
Mr. Bell: I know what you mean and you have explained.

HM,Jr: I am always frank with my people, Bell.

The President called it 'layman's' We call it business'. Now we call it 'ordinary'. If you can give
me a better term
Mr. Bell: I can't other than just to say 'seek
a balanced ordinary budget including Social Security
and excluding debt retirement. I admit that's complicated. I don't object to it, but it creates a term.
Now, you talk about 700 millions reduction in

'In addition, every dollar that the
Treasury realizes from the liquidation of revolving
expenditures.

funds, and from other repayments of loans and capital
advances, should be set aside for debt retirement.
That means to keep within the budget you have outlined
I have to get 850 million reduction in expenditures

instead of 750 millions.

HM,Jr: How would you put it?

Mr. Bell: I don't think you can use repayments
of loans and capital advances for debt retirement when-

ever your deficit exists
Cut that out. You mean that's another
HM,Jr:
150 million?

Mr. Gaston: It does mean another 150 million.

HM,Jr: Throw it out. This is good, Dan. You
have been very helpful. Throw it out.

494
-25-

Mr. Bell: Page 24.

Mr. Taylor: Stop at page 23. I did quite a

lot of work after talking to the boys in my room on
Tuesday, changing the wording in that section, the
Social Security thing. That's where Dan is now.
Most of them are eliminations.
They bare not very big.
Instead of saying operating
Starting on page 23.
very much', I would say 'handled very much like'.
HM,Jr: I am not going to argue. If this makes
Wayne happy, go ahead.

Mr. Taylor: Down below, starting the sentence
"All that the insurance company has , I would cut
out that sentence.
HM,Jr: You know that's the President of the United

States.

Mr. Taylor: I realize that.
Mr. Bell: That suits me.
Mr. Taylor: Here's what I want to do, Dan. I

want to say: 'The manner in which these funds must be
invested is laid down by the State laws and embodies

the very sound principle of diversified risks."

Mr. Bell: You can't do that with the Government.

Mr. Haas: You go on to explain it.
Mr. Bell: Of course, I see how you do it.
Mr. Taylor: Top of page 24. It would read: "The

Federal Government, in connection with the Old-Age Reserve Account and the Unemployment Trust Fund, also in-

vests the money which it receives in the manner laid

down by Congress in Government obligations. Government

obligations, of course, represent the most diversified

risk available in this country as they rest on the tax

obligations of all industries and all individuals. I
substitute

Mr. Bell: That's all right.

495

-26-

HM,Jr: It rests on the sovereign right of the
State. That's the technical way, isn't it, Bell?
Mr. Bell: Yes; it's sovereign power.
Mr. Taylor: I would cut out "But these pieces
of paper, etc.
Mr. Bell: Does that eliminate everything with
reference to your money and your funds?

Mr. Taylor: Yes.
Mr. Bell: Because you are talking to people who
haven't got any interest in this.

Mr. Taylor: If you will notice, I have cut out

all "pieces of paper".
Mr. Bell: Then that's the question I was raising,
exactly.

Mr. Taylor: In the last paragraph on page 24,
I would say, "When the Treasury invests" and don't say,
"Now, when the Treasury

Over on the next page, at the bottom of page 25,

change it from "with a balanced budget" to -- stick an

'if'

HM,Jr: No, I would leave it that way.
Mr. Taylor: Then I would cut out the last sentence,
"In other words the Treasury next year will be adding
one billion dollars to the supply of funds in the capital
market." Absolutely irrelevant.
Mr. Haas: No, it is not.
HM,Jr: In other words, the Treasury would be add-

ing one billion?
Mr. Taylor: That's not what you are talking about.
Has no bearing on what you have been talking about before.

HM,Jr: Will you fight that out?

496
-27-

Mr. Bell: On page 25 of mine, I think you

said 24, "Now when the Treasury invests your old-

age taxes and your unemployment compensation taxes --

those are not old-age taxes because they are not

earmarked. I want to cut out "your" and "taxes".
Mr. Haas: You really invest the appropriation.
Mr. Taylor: Change it to old-age "receipts"
and unemployment compensation "receipts".

Mr. Bell: That's right. Or funds. Funds is

just as good.

"However, the rates of interest which the Treasury is required by law to pay on funds invested for
these accounts are higher than those which can be obtained by purchasing suitable Government obligations

in the open market. I don't think you can say that.
Mr. Haas: Correct it or cut it out.
HM,Jr: I would do one or the other.

Mr. Bell: Next page. Change "bonds" to "obHence the Treasury is issuing special
ligations.
is using the funds so obobligations, etc.
tained to reduce the amount of its obligations sold

to or held by private investors." Indirectly only,

because you are using the funds to finance the deficit
and thereby reducing your borrowings by that amount
rather than reducing the amount in the hands of investors.

Bottom of page 27. (Page 26 of attached draft.)
This is not important and I don't know whether it should
go in: "I have shown why, in my opinion, this balance
should be sought by a reduction of seven hundred million
dollars in expenditures, and why a large surplus for debt
retirement would be undesirable at this time 1f it must
be achieved by eliminating essential Federal services

Make it Federal relief for services.

HM,Jr: All right.
Mr. Taylor: Change it to responsibilities.

497

-28-

Mr. Bell: All right.
That's all I have, except the general question
of using the figure of 750 millions without laying a
little more stress on the assumption of the revenue
not coming above this year's and trying to hold expenditures. You very definitely said that. "I am convinced that this reduction can be made.' . I hate to

see you make that statement because I am not convinced.

HM,Jr: All right. We will qualify it.
Mr. Bell: I am not convinced and I don't want
you to say it.
HM,Jr: How would you change it?

Mr. Bell:Well, I think what could be done, in the
first part of the speech, is to lay a little more stress
on the assumption that next year's revenue will be the
same. That what you are going to talk about for 1939
is that revenue will be the same. If we are going to
have a balanced budget in 1939, we have to reduce our
expenditures by 750 millions to come down to your estimated revenue and that shows you the task before you.

HM,Jr: I think that's very important.
Mr. Bell: There is one more thing, and we will
get a chance at these figures again. You talk about
a billion reduction in the debt. In setting up the

old-age revenue and the unemployment trust fund revenue

against expenses under the Social Security Act and expenses under trust funds, we come out with about 840
millions excess investments.
HM,Jr: For next year?
Mr. Bell: Yes, so we may want to change that
billion or we may want to say Social Security fund and
some other investment funds to make it a billion.
000-000