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April £» 19S7*


Desirable course of business
Zt would be highly desirable for consumer decKinds to increase as
rapidly as, but 90 ware rapidly than our ability to Increase production,
so that production and exaployaont would continue to expand with little,
if any, advance in prices*

In this way the upturn could be prolonged,

people on fixed incomes would not suffer from a rise in the cost of
living* inventory and conaodity speculation would be avoided, Interest
rates would raaain low, and there would be a better chance of avoiding
a subsequent drastic recession*
^Difficulties and dangers
$here was so much excess plant capacity and unemployed labor of all
types and skills from 1954 to 1936 that increased production could
quickly respond to increased dssaands with no advance of prices*
condition has now changed*


Although all the excess plant capacity has

not yet been absorbed and there is still a large number of unskilled
unemployed* within recent aontha practical plant capacity has been reached
in m m & basic lines and the supply of skilled labor has apparently been
pretty wall absorbed*

She steel Industry is operating at practical

If denend In the steel consuming industries expands wore

rapi&ly than additional steel capacity can be built* the consequence
will be an impetus to price rises, forward buying, duplication of orders,
end the mergence of boom psychology, which may readily extend to other

Demand to satisfy the enormous volume of capital and housing


deficiencies accumulated in the past seven years may be superimposed
in too short a ti-a© on the demand to satisfy normal growth requirements*
The problem is essentially one of timing.

copper* given tine*

workers, given ti^e*

We can produce nor©

We can obtain foore skilled building trade

Tha danger Is that the demand for goods may

increase too rapidly for additional goods to b $ produces* so that prices
villi rise rapidly In a sellers* j c r c t If the recant rate of increase
in cosasodity prices should continue it will be slsaost iiaposeiblu to
prevent an eaeeessivf cyclical rise in interest rat^s and a fall in bond
prices. All the predictions of e continuance of Xo* interest r^vfces
were based on the assumption of a continuance of

orderly revivals

Kxporioncw in the j &t has been thot a rising trend of ecsaso&ity prices
has always been accompanied by rising interest r&tes*
Hox> the? denser m y be minisiised#
At this stage or the business cycle end for the next few years
it appears desirable to restrain the rate of increase of consumer demands
by widening the difference between consumers* incomes and spending on
consumer goods*

The most effective *&y of accomplishing this is through

increased taxation*

Just ss a bddgetary deficit results in en increase

in consumer spending, so a budgetary surplus, in tho present circutastances, wuld tend to moderate the m t e of growth in spending*


would* on the one hand, laeen th&t out of a given increase in inecsaes
less will be spent on consumer &oods*

This would reduce tho pressure on

deficient plant capacity in tho capital goods industries*

It would*

os the other hand, m&tm that through federal debt retirement more
money $?ould be available for investstent*

This trould tend to restrain

the rise in interest rates and fall in bond prices*
On general social grounds it wuld be undesirable to impose
additions! taxes on the low lneoao groups*

through social security

taxes, indirect taxes and customs duties, thoir tax burden is already

The surtax rates on ths highest income brackets appear to be

about as hi^h as th*3 traffic will bear*

Tim Intermediate incone

brackets, those froa $5,000 to $50,000, could, howovor, very well stand
additional taxes. More tax collections f m s this group would result
in a reduction in ^nsussption without hardship and would, through
federal debt retirement, result in a t increase in the savings of the
The importance of prompt action
The theory of a compensatory fiscal policy, which has been followed
by this Auraixiistration, implies higher taxee end debt retirements v&an
the recovery movement has become aelf-generatins end threatens to
proceed at too rapid a pace to be eustained*

This stage haa no1^ been

If additional income taxes are lapoaed in this session of

Congress they will not be collected until 1938. If action is delayed
until the next session, there will be great pressure against any retroactive
levy against 1937 income© so that it is likely that the tax would not
become operative until 1939, ishich nay ha xsueh too late to be effective*

It would be foolhardy on our part to count on isore Xhnn three or four
years more of the upward Bcnraasmt*
four years*

It ha® already been uu&or ray for

If the recent price morzm&m should. contl3sue, th$ upswing

i&ay eorae to an

even sooner*

If* therefore* additional t^xen are

not isrposocJ at this ti?se there ^111 bo grave danger th^t the upward

become disorderly, co&raodity prices, ths cost of lining,

and interest rates will rise, a&d Ke will rater the next depression harlzig
mad© little progress in reducing the dobt built up in th© previous oxie*