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BOARD OF GOVERNORS OP THE FEDERAL RESERVE SYSTEM Office Correspondence Ta Chairman Ecoles Date. August 18, 19i|!j. Subject: "American "White Paper" Rrotn Professor Hansen Attached is the first -working draft of our project. We have had two meetings this week and I have assigned sections of this working draft for further development to the different members of the working group. We are meeting again next week, after which a revision will be made, and I shall keep you informed from week to week» August 17s F0ST1NAR BMPLOYIffiHT PROGRAM Introductioni 1. Our sights have been raised. During the war period we have achieved the entire war program and at the same time raised consumption standards above prewar levels—all of this in spite of the withdrawal from the labor force of twelve million in the most productive age groups* We have produced $200 billion of civilian and military goods If we let %and services a year in the peak of the war effort. the postwar income fall to the 1939 pre-war level (slightly above the boom year 1929) we shall have 20 million unemployed. (insert paragraph on organisational and productive achievements of private enterprise.) 2* The legacy of the war. Four years of war conditions will increase both the promise and the difficulties of the postwar period. Tochnological progress will improve our capacity to produce after the war. We shall have a greatly increased labor force ovon after several millions of women, old people, boys and girls have withdrawn from the labor market. The reconversion of the economy to a peace basis will give rise to difficult problems. Our chances for success later will depend to a large extent on the adequacy of our transition policy. In the wake of the war are the potentialities of a postwar re^stocking and reequipment boom* Without planning, the prospects point to violent fluctuations-*-demobilization crises, booms and depressions. 3« Private enterprise primary factor in our economy. Government must act as balancing*, contributing and sustaining factor. I. Governmental Aims and Responsibilities. 1. It is a primary aim and responsibility of government to underwrite and maintain full employment. Pull employment means adequate employment opportunities, but it does not mean forced or strained employment. It does not moan that older people who should bo retired continue to work; it doos not moan that younger people who should bo in school should work; it does not mean that, in general, mothers and housewives would leave the home; it does not mean a long work weok or ovortimo. Full employment must be defined within tho pattern of a program of - 2a reasonably short v/ork week, say ij.0 hours, a suitable provision for leisure in terms of vacations on pay. It is not a program of continuous strain and forced effort, such as a war employment program must necessarily be. 2. The. government assumes responsibility to promote economic stability, to prevent both inflation and deflation. To this end the government must be prepared to take vigorous measures to provont a threatened slump, deflation of prices and a cumulative decline in business activity and employment. The government, moreover, cannot escape responsibility to preserve the value of money and theroby to safeguard the savings of tho people. This moans that government is prepared to take steps to prevent any inflationary development "vi&th respoct to pricos, and especially the cost of living. 3# The government must, moreover, assume responsibility to promote rising living standards for all its citizens. To this and it must undorwrito and guarantee a national minimum of income and social sorvicos* It must therefore undertake an adequate* program including * a, social soqurity, including unomploymont and oldage insurance, and provision for temporary and permanent disability b» public health c. education d. a comprehensive veterans program e. minimum wages and labor standards f• a farm security program It* Tho government must assume responsibility to promote the most efficient use of labor and resources. To this end it should undertake a large program of scientific research, promote comprehensive planning with respoct to land use, both urban and rur&l, undertake basic development and improvement projects, both regional and urban, and facilitate the movement of population into the aroas and industries which can contribute most to real income. -3 5. Tho government must assume responsibility to encourage and promote now enterprise and provide the basis for the expansion and vigorous growth of private enterprise in general. To this end it must ensure an adequate total demand for goods and servicos,'promote healthy labor relations and the settlement of industrial disputes through collootive bargaining, and provide a tax structure which encourages risk-taking and business expansion. II• Basic Requirements. The basic requirements for the achievement of (a) full employment, (b) economic stability and (c) rising living standards are the following : 1. An adequate total volume of expenditures, public and private. The maintenance of an adequate volume of effectivo demand to provide full employment for our productive resources, to provide adequate job opportunities for our labor force, to provide adequate markets for business and agriculture requires a flow of expenditures by individuals on consumer's goods and services, by business on capital outlays, and by government on social services and dn improvement and developmental projects* Government must assume responsibility to so manage its expenditures dn social services and An improvement and developmental projects that the total flow of expenditures, public and private, will bo adequate and stable. It must be proparod, therefore, to vary its Expenditures to offset fluctuations in private expenditures, and to place a cushion under the total volume of expenditures so as to ensure an adequate % total demand for goods and services. X must also promote business expenditures not only by>' 1a*g a high level of consumption but also by opening up new private investment outlets. This government can do by underwriting a national minimum of social services and of individual income, by undertaking basic development projects, by initiating research, and by appropriate tax policies. 2# Economic stability. This involves a pricing and wage adjustment program consistent with expansion and progress. The broad ain should be stability of prices, particularly the cost of living. We must guard against a high pricing policy which permits industry to ^reak^even11 at low capacity output* The program involves an orderly upward adjustment of wages -iland money inoomes generally in proportion to the general increase in per capita productivity* Industries which enjoy a more rapid increase in productivity than the general average should reduce prices so as to give the widest possible benefit to consumers generally, and to tfcp larger consumer markets for the expanding product. Thus an industry experiencing exceptionally rapid progress would be oxpoctod to lower i t s prices to the consumer as in the case of the automobile. In general, however, as productivity in the whole economy increased mo nay income w>ujd bo expected to rise so as to maintain substantial stability in the cost of living as a whole, thereby pern&tting^goneral rise in real income commensurate with tho increase in per capita productivity. 3* The most efficient use of resourcos, including labor, land and other natural rosourcos, and capital f a c i l i t i e s . This involves the utmost mobility of labor and flexible adjustment in the use of resources so as to eliminate wasto and inefficiency* Submarg*<r land should be taken out of use, and labor and capital in a declining industry should be encouraged to transfer to other regions and other industries. III. Tho Problem of Transition and Reconversion. k. Tho transition period between the defeat of Germany and the defeat of Japan. 1# The extent and magnitude of demobilization of armed forces and war workers. 2» Adequate unemployment compensation for dismissed war workers and veterans until re-absorbed into the expanding private industry; provision for transportation expenses. 3» A program for increased production of civilian goods. B» The transition period botwoen the defeat of Japan and tho postwar re-stocking boom. 1* Over-all reconversion program to peacetime, including tho use of govornmont-owned war plants, f a c i l i t i e s , and supplies as a means of facilitating reconversion and a rapid increase in civilian production. 2. A program of public works, federal, state, and local, having due regard to regional dismissal of war workers and regional redistribution of veterans. -5 3# An analysis of the commodities that are likely to experience serifcus price decline, including agriculture, raw materials, etc.? an analysis of commodities, the supply of whioh may quickly become scarce and which may involve inflationary developments. )+• An analysis of the problem of reduced take-home pay owing to a reduction in overtime (xnd penalty pay and the question of adjustment of wage rates, partly to rectify inequalities and partly to offset in a measure the decline in take-home pay# Such adjustment of straight-time pay would in njost cases bo upward, but in some cases where wartime wages are out of line, it would involve a downward adjustment* In general, in the transition period thero will be some adjustment of prices downward, while certain specific prioes owing to the wage adjustment program would have to rise. To reach a proper equilibrium between total wage and salary pay roll and a postwar full employment incomo of, say $130>-i|.0 billion, there must be som© general upward adjustment of straighttime pay on the one si do, and somo decline in the general level of prices. If both adjustments occur, neither should be seriously disturb ing* 5« A study of an appropriate level of .taxes during this period especially the problem of the maintenance of the excess profits tax and the level of corporate and individual income taxes. C. The Period of Re-stocking of Consumer1 s Durables and Re-equipment of Production Facilities. 1# Retention of rationing and price control where necessary, including control of land values. 2. A tax program designed to check inflationary tendencies. 3« A systematic program to suoure an optimum redistribution of population to areas and industries consistent with the requirements of a peacetime econony* J4. Control of public -works and residential construction so as to pronote a smooth transition and prevent boon excesses« -6 IV. Policies for Full and Stablo Employment with Rising Living Standards. A* Action Programs* 1* The development of new enterprise, and the stimulation of private business in general* An expansionist and developmental program should include ways and means of encouraging new business and new enterprise. Such a program involves among other things the thorough reform of the patent system and the institution of an adequately financed institute of governmental research, the findings of which would bo available for all business, large'and small aliko* New enterprise and small business should, moreover, be fostered by a mutual loan insurance system similar to the FHA and underwritten by the fedoral government. Such a system of mutual loan insurance would enable new enterprise and small business to obtain credit at gilt-edged interest rates* Moreover, the mutual loan insurance organization should provide competent technical assistance to new enterprise and small business in the planning of a new venture and in conducting business continuously on an efficient plane. 2m A comprehensive long range nation wide development and improvement program* Such a program includes: a. regional resource development The developments that have alreacfy been undertaken in the TVA, the Columbia River Valley and elsewhere indicate the need for and the expansionist effect of rosourco development in different regions of the United States. Others that urgently need development are the Colorado River Valley, the Arkansas River Valley, the Missouri River Valley, the Ohio River and Groat Lakes area, and different segments of the Atlantic seaboard. b. urban redevelopment and housing There is an urgent need for urban redevelopment throughout the United States* Everywhere we witness the decay of cities in their central areas and. the spread of slum -7 and blight* Measures must be taken at the earliest possible moment to overcome this process of deterioration. In such a program each level of government must play a part, the federal government mainly providing the financing involved in the acquisition of the slum and blighted land and in subsidizing low cost housing. The comprehensive planning must be done by the cities themselves and the cities themselves must assemble the. land and undertake the lease or sale of the land to private development companies and the building and,management of public low cost housing. Emphasis in an urban redevelopment program must bo placed upon the need for comprehensive master planning for tho urban communities, the control of donsitios, tho development of neighborhoods, including parks and playgrounds, and the improvement of transportation, including improved terminal facilities and express highways through and around the cities. The assembly of tho land, the program of demolition of existing obsolete structures by creating an increased vacancy will serve as a stimulus to private housing. At the same time it is quite impossible to house properly the present slum dwellers without providing in subsidized low cost public housing for that portion of the wage earning class whose incomes are inadequate to pay the economic rent for a standard dwelling. c. public aspects Of transportation, including public roads, port facilities| airports, and waterways. d. agricultural development program Underwriting a national minimum of social serviced, including social security, public health, education, veterans program, minimum labor standards and farm security program. International economic collaboration. The International Bapk for Reconstruction and Development formulated at Bretton Woods provides the machinery for sound international investment and for tho development of tho resources of backward areas. The Bank, in fact, is a system of international mutual loan insurance under which new development projects in the backward countries can obtain loans in tho leading capital markets of the world underwritten by all the nations of the world and up to the extent of their - 8 subscriptions in tho Bank, thereby ensuring gilt-edged interest rates for all such projects. Moreover, each projeot -would havo the benefit in its planning stage of a competent study and analysis of its productivity and soundness and ulsc the benefit of tochnical advice. The development of backward areas serves to promote a high level of employment and income in a country like the United Stated partly by providing an outlet for our surplus savings, partly by providing a market for our heavy goods industries, steel machinory and equipment of all kinds, and partly by promoting a higher levol of trade over tho long run vdth these backward countries as their standard of living and purchasing power rises. B. The financing problems of an employment program. How shall we finance tho national minimum and the program of national development and expansion outlined above? The program wo find will bo finanood partly from a system of progressive taxation and partly by borrowing. Many of the development projects will be more or less self-liquidating and therefore clearly justified. Whether such a program can in the long run be adequately financed frcm progressives taxation and from the amortization payments on self-liquidating project is so as to prevent a rise in the federal debt cannot easily be categorically answered. It is at any rate possible to set out clearly tho limits within wh^ch tho use of the public credit is necessary. It can be convincingly shown that the limits are such that there need be no fear that the national debt will rise proportionately moro rapidly than the national income• Accordingly, tho problem remains a thoroughly manageable one. How far the uso of the public credit is needed depends, indeed, in a large part upon tho oxtont to which the underwriting of a national minimum by government may raise the ratio of private consumption expondituros to disposable private income and tho extent to which tho national development programs may enlarge tho outlet for private investment sufficiently so private capital requirements will be able to use tho flow of private saving. C. Administrative and legislative machinery. To enable tho govornraont to underwrite and guarontoe full employment and high lovols of income and business activity on a sustained basis it bocomes necossary to improve substantially tho administrative and logislativo machinery of government having to do with theso problems* It will bo necessary to sot up on the adr&nistrative sido a national investment board or a - 9fiscal authority to cooperate closely with a joint congressional fiscal committee. Under a broad legislative grant a program of public construction should be laid out for a period of 5 to 10 years. The national investment board or fiscal authority should be allowed to adjust and fluctuate the total expenditure so appropriated according to the requirements of economic stability. A long ranpe public construction program should bo planned in advance to the blueprint stage and should include a properly balanced assortment of projects, short term and long term, so that the construction could be adjusted so as to stabilise the entire construction indu$tryf public and private, at a high level. The public construction involved includes, in particular, three typos* (a) standard public works, (b) dovolcpmont projects of all kinds, large and small, and (c) public housing. The public investment board or fiscal authority should, moreover, operate within a broad grant of power by Congress an4 within specified limits imposed by Congress, should be empowered to make variations in income tax rates and in social security pay roll taxes as a moans to regularise the flow of total expenditures and to promote economic stability. V# Conclusion: The Rolo of tho State and theftol©of Private Enterprise. The statement should conoludo with an analysis of the role of the federal government in underwriting and maintaining an adoquato volume of effective demand and purchasing power so that businoss can find adequate markets and operate at sustained and high levels of activity. The interrelationship between tho federal government and state and local government should be explored, each performing appropriate functions so as to proserve local economy to the utmost possible extent and yet take full advantage of tho vast fiscal powers of the federal government, as a moans of ensuring* full functioning of state and local governments within thoir appropriate spheres. Undor suoh a systoxn the government will ensure and underwrite on adequate volumo of purchasing power and effoctive demand by Maintaining a national minimum of social services, by undertaking an improvement and development program of public works, regional resource development, urban redevelopment and public housing, and by underwriting and making loans to private business and to foreign countries. The combined flow of expenditures can within this pattern be varied so as to assure stability and high levels of employment and business activity. Theso ©xponditures of tho state involve direct ownorship and operation only in limited fiolds such as public power and, in the case of local government, public housing. Public ownership of power facilities does, indood, involve moro or loss - 10 competition with private enterprise, but the line of demarcation between public and private can and should be worked out* Basic and comprehensive rogioual development programs cannot in the nature of the case be undertaken by private enterprise. But within the soopo of those broad regional public development projects private enterprise, including private power, can be fittod in so that public and private enterprise in such development projects mesh and dovotail with ono another, oach reinforcing and supplementing the other. Proporly worked out, it can bo seen that such a program fundamentally does not moan that the state supplants private enterprise, but rather enlarges outlets for private enterprise• Here and there such a program does, indeed, impinge upon cortain special private interest groups, but this is incidental to a broad comprehensive program which invigorates and opens up fields for private enterprise. Such a program does not impose direct controls upon business regulating what it is to produce at what price, goods to bo sold, or how production is to be organized. Tho program loaves individual private enterprise quito free to operato within the framework of a freo market and under conditions of open competition. The program is designed to ensure a propor functioning of the free market and tho prico system by undorwriting tho total effectivo demand. It is not a production control program. It is a program to underwrite and sustain a flow of total expenditures, public and private, adequate to provido sustained market a. Such a program is designed to promote tho growth and expansion of private enterprise. Thetfoleof tho state is a marginal one. Tho government supplements and sustains private expenditures by usoful and productivo community expen<Jitures designed on the one side to ensure high standards of community Services and tjio improvement and development of our human resources, and on the other side to improve and develop tho material resources of tho nation. Tho production of goods and services will bo carried on by private enterprise except in such limited cases as cloarly can bottor be undertaken by the government—federal, state, or local. In the usual case even public development projects when properly planned ahead can bo undertaken under private production contract. Such a program should be undertaken on a continuous and sustained basis.. It is a program designed to underwrite a continuous high lovol of employxrtent and income nn a sustained basis. Such a program • 11 provides insurance against any drastic cumulative deflation and depression. Nevertheless, while operating on a continuous and sustained basis, there must be sufficient flexibility in the pro-i gram to offset disturbances and fluctuations in the functioning of the econory and provide not only a high level of income and employment, but also substantial economic stability.
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