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Taken to TJhite House, but not left
with President




- The Emergency Situation
Business prospects are steadily deteriorating*

Production, which

flattened out for a few months, has again resumed a downward course,
the index of production falling to an estimated 75 in May as contrasted
with 80 in January and 117 last August.

(In March 1933 it was 59)•

Retail sales and the national income have declined every month this

We face a further contraction in income derived from the production

of consumers1 durable goods, new plant and equipment, exports, agricultural implements, mining, and general wage and dividend cuts*
income M t h


benefits will be #1*Lbillion lower this year.

The working off of inventories and consumer credit is an unending
process, since liquidation in these fields results in a decline in sales
and incomes, which in turn induces further liquidation, as in 1929-1932*
Inventories of #20 billion with a national income of #56 billion would
be relatively as high as inventories of #25 billion with a national income
of #70 billion*

The only way to arrest the decline in inventories is to

arrest the decline in the national income.
In short, the danger of a prolonged worldwide depression is acute
and can be averted only by the most energetic action*
II - The Inadequacy of the Spending-Lending Program
The negligible increase in spending in the next six months is completely inadequate to turn the tide:

The substantial increase in Government spending in the last

quarter of 1933 to a new high level was not reflected in a rise in the


national income until the fall of 1934,

Inventories were low in 1933 in comparison with today.


Consumer debt was well-liquidated in 1933, whereas today

it is not far short of the 1929 level*
4. By 1933 a lot of deferred maintenance and repairs had

This had been made up in mining and manufacturing by the

time we entered this depression, expenditures on new plant and equipment
last year approximating the 1928 level*

Our physical plant is now

geared to produce much more than in 1933 and consequently excess capacity,
and the resulting lack of incentive to build or repair plant, is widespread*

In 1933 we were aided by increasing world production* Btow

world production is falling and this will be reflected in our sales abroad,

In 1933,


At the beginning of this year,

automobiles were under 3 years of age.

were under 3 years of age*

With a higher level of prices and wage rates now, a given

amount of Government spending will not create as much employment or
production as it did in 1933.
Ill - Implications
1. If business does not stage a substantial revival before October
there is a likelihood that the Hew Deal will lose ground at the polls,
if well-established historical precedents in this and other countries
are any guide*

From the social and economic point of view, the real

danger of a resulting fatal impasse between the Executive and Legislative
branches of the Government cannot be ignored*



The only possibility of achieving a balanced budget within the

life of this Administration rests on stopping deflation this year*

The thoroughly sound principle of a compensatory fiscal policy

is being discredited through faulty execution. We are adding to purchasing power in a year of major depression far less than we did in 1936,
a year of rapidly advancing production*

We have ruled out the alternative

of forcing a balanced deflation through securing reductions in certain
prices and wage rates and yet have not adopted the only remaining alternative of maintaining sufficient buying power to justify those prices
and wages*

Under the present program, the peak of expenditures over taxes

will probably not be attained until the second half of 1939, two years after
the downturn in business*