The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
November 11, 1934. 3 } Cjtt&dlTd JM PUBLIC The relation of money to national income» National monetary income is a product of the voluae of noney, deaand deposits &nd currency, and the- number of times it is turned over to inco»e receivers. During the depression we have witnessed a severe decline in the supply of money combined with a greatly decreased rate of spending. At present* desana deposits, the most important part of our money, are approximately two-thirds of their 1929 total. In addition, the deposits which are in existence ar© circulating at perhaps one-half of the average rate of turnover of the earlier period. This means that many deposit accounts are steril© so far as the economic system is concerned because of the unwll ingneas of their owners to use them either to purchase goods or services, or to pl&e© the funds into new investments which would go into the hands of corporations and business men to be used for th purchase of materials and labor. This concentration of deposits into a relatively small number of inactive accounts was strikingly brought out in a study made by the Federal Reserve Board for May 13, 1955 which showed that 45^ of all deposits of member banks were held In slightly over 46,000 accounts or one-tenth of 1% of all deposit accounts* While these figure* include both time and demand deposits, deaaaci deposits alone would probably show a comparable concentration in large holdings. In order to increase business activity, employment and national incoa© it i@ essential to have larger expenditures for goods and services. This means the'utilization of inactive deposits, an increase in the total volume of money by banks increasing loans and investments, or both. These are difficult to obtain with business o ;erating at a low level and the prospects of profits small. As long as unutilised capacity exists to the extent it - £ does today there is little incentive for new investment or borrowing by private individuals anc corporations to expand production* The government! on the other hand, is in a position to increase expenditures! which if properly financed would provide new stoney to go directly into the hands of spenders. This increase in consumer income and expenditure would, flow back through industry and voulg prorate a fuller employment of the labor supply and a fuller utilization of existing productive capacity. Only after this process has gained HMMMtMl and there is the prospect of sustained business activity will corporations and business men begin spending their now large cash balances* or start borrowing on abort or long tern for working capital or to increase plant and equipmenti Issues ana alternatives. As I analyse the situation we have reached an ispasse of circumstances that prevents an appreciable recovery of private business. At the same time there resains a large volume of unemployment with steadily growing numbers of people becoming store dependent than ever upon public relief. This relief is now upon an entirely inadequate basis either to promote recovery or to assure a peaceful acceptance of the conditions by the unemployed for very long in the future. The government is confronted with the necessity of deteralning its future course of action which resolves into three major lines of approach, 1, To continue to follow the defeatist policy of doling out larger and larger amounts for relief with little prospect of acre than maintaining the status quo in the hope that recovery will sometime develop automatically. Federal expenditures fox* relief cannot increase i coaeg sufficiently above the present level to promote an increased demand for goods large enough to turn spending into the channels of durable consumption goods and hence hare an immediate beneficial effect upon the now stagnant capital goods industries* Increased expenditure* on aurable goods not only increase the demand for production in industries where the bulk of unemployment occurs but also actually increases incases. From the standpoint of recovery Federal expenditures which result in an increase in construct!on are vastly superior to expenditures for relief, 2. To adoat & policy looking towards general cost reduction thru- out industry, involving a curtailment of relief expenditures and an attempt to balance the Federal budget would be taking a big gamble that severe deflation would not set in, and that private investment would more than fill the gap left by the decreased government expenditures which now become income to the recipients* |« To start an aggressive campaign of government spending with the dual purpose of providing work for all those who are capable of labor and are now involuntarily idlef and stimulate a revival of private business activity. The latter is the only one of the three that In isy opinion does not involve results which are distinctly dangerous to any administration* Importance of & positive announcement of a program* One of the most telling criticisms of the Administration is that it lacks a definite and comprehensive policy and is aimlessly drifting along. This condition cannot long exist and retain public support* It is tisie that a positive commitment is made that the government intends to provide employment for those out of work and urill aggressively carry out measures which attain this end. The following suggestions are offered as the skele* ton contents of & bold announcement to this effect* 1« Our greatest national lose ia ths waste of huaan and ©aterial resources, which arises from unemployment and low production. 2, We aaist do collectively through governmental action what private business enterprises are unable to do individually* 5# Therefore* the government is ado/ting & far reaching program of expenditures upon desirable projects with the dual purpose of providing new employment and of reviving business activity from present low levels. it The money spent on such projects will be new income and as it moves back throafn industry there will be a sailtiple expansion of national income* 5, It is not the intention of the government to disturb or compete with private business. Federal spending will be decreased as soon as private business takes hold, and a fuller employment of labor and existing capital facilities is obtained* 3, Sith the expected increase in national income there need be no worry about a continued unbalanced budget because deficits will disappear M d the public debt retire ent begin* 7# Sufficient controls are available and will e applied to check an unwarranted boom. - 5 . Objectives and criteria. In order to assure the success of a public works program the following features should be concentrated uponi Xt No formal coEasitment with regard to the absolute volume of expenditure or a set time limit should be made at present. These matters are difficult to determine with &ny assurance of accuracy In advance, for in economic questions our power of prediction is limited. £# As a tentative position ne should attempt to obtain large funds so that the program can be established upon a basis calling for large in&edi&te expenditures* The objective being that expenditures will be expanded until employment is provided for all persons who are capable and willing to work# . ^hile no brief is held for any particular type of works projects the program as a whole should be approved and carried into operation with a minimum of delay, Large and rapid spending is essential so that consumer ineoaes will be increased fast enough to give business a large initial and sustained stimulation in order that it say confidently increase production and employment. Thus, a cumulative increase of sales, production, and profits will more than offset any curtailment in private investment that isight result froa the possible adverse effects that large flotations of government securities might have upon the capital Markets* 4. To obtain beneficial results the financing should be arranged to provide funds which would not otherwise be spent. This means either the creation of new money by selling governments to m $ m conaiercial banks or the reserve banks, or the giving of velocity to existing deposits bj sales to the holder® of new unutilized checking deposit balances* In other words this program will be an addition to sad not a subtraction from private investment or spending• 5# So far as practical the detail® of the program should be highly flexible with a large degree of administrative discretion to expand or contract operations as experience in the future dictates, the problen of preventing Congress from tying the administration's hands by legislative conditions anc restrictions is one that wil require careful engineering* Adadnistrat ion. ^N There are three categories of the proposed construction prograa* (a) direct Federal expenditures in specified projects, (b) State and ssunicipal programs with Federal aid, and (c) private capital expenditures with government subsidy, guarantee, or sponsorship* Without attempting to discuss the advantages ana disadvantages of specific projects there are different types of administrative problems to be met in each class of the program in order to attain the objectives proposed above• (a) Mrect Federal« The problem here is to have decentralisation of control among the several Federal agencies irhich are charged with the responsibility of carrying out the particular projects which they are best equipped to handle. A central executive board should be get up to coordinate the program and to see that the projects are devised upon a basis that will accomplish the results which are sought and later, after the program is Inaugurated, to speed up or contract the various programs as a survey of changing conditions may dictate• — 7— (b) State and, Municipal, So far as the Feceral Government is concerned the approval and the financing of the projects which say be submitted by local bodies mist be handled with an organisation which has the power to sieet the valid type of problems which it will be confronted with, and to have a great deal of discretion in its final decisions* (c) Private expenditureg. Of foremost importance here is to adopt policies which wil3. isake expenditures profitable. At the taoisent high labor and other costs are an important factor in curtailing private construction* It Up politically unfeasible to attempt to appreciably lower such costs. Therefore, we must attack the other side of the picture by granting subsidies to draw in private capital. Moreover, the incentives should be such that various types of construction will be attractive to large numbers of individuals an:.; business enterprises. Also, the prospect of loss must b$ small so thtt lending institutions will be ansious to place their idle funds in the hands of sorrowers* In sui&nary, the watchwords of the program should be profit, decentralisation, and use of existing agencies. Controls for the future« M t h the revival of private business activity to more noraal levels, it isay be that an unwarranted inflation say develop• We must rely upon the monetary powers at our control to prevent this possibility fro» becoming seriously active. Latar# we mxBt be on guard to prevent the recurrence of drastic deflations ana depressions. Appropriate monetary control would again be the first line of defense. However, we might set up no«f a permanent public works board which will be able to expand quickly projects - 9 — that hair® been worked w t in advancef M H M supplementing monetary action and smking it more effective* Our taxing power might also be used to introduce greater stability into our economic system.
@FedFRASER