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Before going into the probable effects of a public works program
upon the volume of production, the l e v e l of business a c t i v i t y and
hence national income, i t w i l l be w e l l to consider just what objections
are l i k e l y to be raised to such a program of Governmental spending.
The more i n t e l l i g e n t c r i t i c s admit that at certain periods a public
works program introduced i n conjunction with a l i b e r a l central bank
policy may prove of genuine value.

However, i f the c a p i t a l market i s

weak, i f the demand for bonds i s highly i n e l a s t i c , i f the credit of
the Government i s uncertain then a Government issue of any considerable size may easily effect the bond market seriously and thus d i s courage the expansion of private enterprise and make p r o f i
almost impossible.


Under these circumstances a program of public works

would be highly dangerous and could have no other e f f e c t than to prolong and intensify the depression.

The reason for this i s that i n a

c a p i t a l i s t i c economy we must assume that the fundamental work of production w i l l be carried on by private enterprise and that therefore
any sound revival of business must be predicated upon private enterprise entering the investment f i e l d .

When the Government emits a

(1) The following discussion i s largely based upon an analysis by Alvin
H. Hansen and Herbert Tout. The reason for selecting this analysis
i s that i t represents the thought of one of the leading American
economists who has a rather high standing among the more enlightened group. I think i t i s therefore worthy of consideration, whereas
the comments of f i n a n c i a l editors and writers i n the conservative
journals are not, because they do not analyze the problem but
simply dogmatically state the emotional reaction of the conservatives.

- 2 large issue of bonds i t weakens confidence i n the capital market and
therefore postpones, delays and discourages private enterprise.
To the argument that public works would increase the demand for
commodities thereby increasing business a c t i v i t y and raising the price
l e v e l would save private business from being forced to make distress
sales of securities, the reply i s made that the unfavorable effects
of a public works program to be financed by borrowing i s immediately
upon the bond market but that the favorable e f f e c t upon the commodity
market takes some time to appear.

Moreover, the favorable influence

i s f e l t only i n certain sections of industry while the unfavorable one
i s not only earlier but more general throughout industry i n i t s effect.
I t i s further contended that although certain f i e l d s are stimulated by
public works, thereby increasing the demand for certain raw materials
and paying wages to certain workers, i f the c a p i t a l market i s weak a
damper may be placed upon private enterprise and hence operations elsewhere may be curtailed.
I t must be admitted that these objections to a public worts program are very r e a l indeed at certain times provided the Government i s
not w i l l i n g to proceed with a large enough public works program to take
over the whole gap that would be l e f t by private enterprise withdrawing
from making new capital construction and hence restoring the rate of
investment to a normal l e v e l .

Therefore they cannot be neglected by

the proponents of a government spending program.
However, I cannot believe that this l i n e of objection to a public
works program has any r e a l v a l i d i t y under conditions as they exist at

This view I realize i s counter to the position of many lead-

- 26 ing economists, but I believe i t can be supported with a good deal of

I t seems to m that the economists who hold otherwise have

been taken i n by surface indications rather than the underlying factors
which are fundamental i n the present depressed condition of the c a p i t a l

They are too much impressed by the great volume of comment

which appears i n the f i n a n c i a l journals to the e f f e c t that investors'
confidence i s at a very low ebb and therefore can only be revived by a
return to the old t r i e d and conservative p o l i c i e s which have been long
hallowed by experience with an economic system which was f u l l y u t i l i z e d
and where you were always pressing against the l i m i t s of the supply of
c a p i t a l , labor and natural resources.
They neglect i t seems to m the fact that new investment by private
enterprise depends not only upon the so-called "confidence11 of investors
but also depends upon the prospects of p r o f i t s i n the very near future
and the existence of an increasing volume of business a c t i v i t y .


situation now i s that there are small prospects of p r o f i t s and therefore
the demand for funds to be used i n new c a p i t a l construction i s almost
completely lacking.

I t i s true that there i s a continual wearing out

of c a p i t a l goods and that there have been long delays i n necessary repairs and replacements, but certainly these w i l l be put off as long as
possible i f there i s no indication of increasing business a c t i v i t y .
Moreover, there i s evidence of a large amount of funds which would be
available for investment provided the profitable operation of business
was i n prospect or that there were any need of increasing factory
capacity to take care of future increases i n production.

This can be

seen by the fact that banks are holding large amounts of excess re-

- 4 serves and individual depositors are holding large cash balances upon
which they are obtaining l i t t l e i f any return.
To talk about the pessimism and loss of confidence which would be
entailed i f a large public works program and Governmen borrowing were
promoted at the present time i n contrast to the favorable psychology
that would be enjoyed with an increase i n new investment by private
enterprise i s beside the point.

The so-called optimism which would be

encouraged by the "boldness of some entrepreneurs who have the courage
to act on the assumption that p r o f i t s are i n sight" when i t i s recognized that the large corporations of the country which control such a
large part of our i n d u s t r i a l production have large cash balances which
they could use immediately for any new investment that offers them the
prospect of p r o f i t s without any recourse at a l l to further borrowing
either from banks or from investors through the organized security

Moreover i t i s these corporations which could afford to be

"bold" but why should they be when their f a c i l i t i e s are only p a r t i a l l y

Certainly i t appears to m that people who take the viewpoint

that the Government action of further unbalancing budget by a prospective public works program of large volume d e f i n i t e l y have the burden of
proof upon them to show that there i s an appreciable volume of applications for new capital funds which are simply held o f f the market waiting
for a favorable time to be put out into the hands of investors and such
issues would be adversely affected by the Government action*

I t seems

to m that investors and banks would be w i l l i n g to make commitments on
long-term at low rates provided there were requests for such accommodation on the part of business enterprises of recognized f i n a n c i a l
While on this subject of confidence i t seems to m that the other

- 5 side of the picture can be presented i n a more convincing fashion than
the presentation made by the conservatives and their spokesmen which
usually proceeds along the following l i n e s .

To reestablish confidence

of investors and thereby bring about an expansion i n the private c a p i t a l
market the Government must end uncertainty as to the monetary policy
and relax restrictions upon business enterprise, bringing about greater
hope for business p r o f i t s i n the future and by balancing the budget
through a contraction of Government expenditures.

This type of attack

goes upon the assumption that there i s awaiting a large demand for new
c a p i t a l and that i t i s primarily the investors who are holding up the
process of new investment.

As I pointed out above a more reasonable

view i s that there i s l i t t l e hope of p r o f i t s and l i t t l e need for plant
expansion and therefore l i t t l e demand for new investment on the part of
business enterprise.

Thus any of these so-called "confidence creating11

measures, while they might relieve the minds of a few of the orthodox
and conservatives, would have l i t t l e value i n actually starting a flow
of funds into c a p i t a l formation.

I t i s only after revival has started

and business i s receiving orders and the p o s s i b i l i t i e s of a continued
upward trend become p l a i n l y evident that business men regain confidence
and therefore certain enterprises begin to f e e l a need for new working
c a p i t a l and hence make such requests to banks, and that large corporations which have i d l e cash balances begin to spend them for materials
and labor.

Later when production starts to press against the l i m i t s

o§ existing production f a c i l i t i e s we can expect the arising of a r e a l
need for new c a p i t a l that would bring out a demand for long-term accommodations.

So far as new industries are concerned i t doesn't seem to

- 6 m that with a low l e v e l of consumer purchasing power which now exists
there i s any great prospect of expansion unless there exists an incentive to increase the volume of consumer indebtedness which has shrunken
greatly i n amount during the depression.

Here again, however, i t i s

only when these consumers see a prospect of increasing their individual
incomes that they w i l l be w i l l i n g to incur new indebtedness to make
purchases of more durable types of consumer goods.
As I view the situation the banking set-up i s capable of meeting
great increases i n loans and investments with no fear at a l l of pressing against reserve requirements, and that the rediscount rates of the
Federal Reserve are s u f f i c i e n t l y low and money rates s u f f i c i e n t l y easy*
Anyway there i s such a plethora of funds available that Federal Reserve
rates are of l i t t l e significance.

What we must attempt to do i s to

increase the volume of funds i n the hands of spenders and thus a movement through the system would increase national income.

I cannot see

that pushing Government securities out into the market would c u r t a i l i n
any way the investments which are being made by private enterprise and
i f the banks are w i l l i n g to take Government securities on short-term
there i s created entirely new money which i f used for a public works
program can only have beneficial effects upon business a c t i v i t y and
national income.

Personally I believe that the so-called lack of

confidence shows up almost e n t i r e l y through the Government market and
that this i s where we should center our attention.

The suggestions

which were incorporated i n the recent memorandum which we wrote to the
Secretary i f adopted would be very helpful i n improving the banks1
outlook to/rards investing i n Government securities.

M .