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PERSONAL AND
CONFIDENTIAL
March 20, 19k£*
Dear Senator:
I n response t o your telephone request
o f l a s t week, I am e n c l o s i n g a memorandum i n a n swer t o t h e statement o f Senator Ellender
published i n t h e Congressional Record o f March
5* I hope t h i s memorandum s e r v e s y o u r purpose*
I am s o r i y I o o u l d n f t g e t i t t o you s o o n e r , but
with a l l o f t h e o t h e r work i t was d i f f i c u l t f o r
the s t a f f t o do the kind o f a j o b 1 wanted done
b e f o r e now.
Assuring you o f my p l e a s u r e always t o
a s s i s t you i n any way I can, I am
Sincerely yours,
The Honorable Abe Hurdook,
United States Senate,
Washington, D. C.
Enclosure
MSE:VE:b
B&rch 16* I9I46
KH5LIC IHBEBTBDHBSS AW THE PBOFDSEB LOAH TO GISA! BHTTAXN
In the Congressional Record o f liarch fj* 1914&* Senator
Elldnder Inserted a t a b l e l i s t i n g f o r various countries the s i s e
o f p u b l i c debt* square trdles o f t e r r i t o r i e s * and nuisber o f population*
The Sarmfer pointed out that o u r 3oht i s nearly throe t i r e s
that o f Oreat B r i t a i n and i n excess o f the combined debts o f our
a l l i e s , w o n though o u r a r e a , o r population, i s hut 10 par cent o f
that o f o u r a l l i e s *
Ho concluded t h a t , t h e r e f o r e , 1m are i n no
p o s i t i o n t o extend loans to f o r e i g n countries*
I do not
to
take issue with the Senator 1 s f i g u r e s and t r u s t that they have
been c a r e f u l l y assembled b y the Library o f Congress s t a f f *
I em
concerned, however, w i t h h i s l i n e o f reasoning*
International comparisons can e a s i l y he misleading and
are airways a d i f f i c u l t matter*
parison o f p u b l i c finances*
This a p p l i e s p a r t i c u l a r l y t o a 00m*
The Senator c o n t r a s t s a t o t a l p u b l i c
debt o f 279 b i l l i o n d o l l a r s f o r the United States *dth a B r i t i s h
total o f 90 Allien d o l l a r s , o r *dth a total f o r our a l l i e s o f 2111
billion*
self*
This i s u s e f u l i n f o m a t i o n * but q u i t e inadequate by it**
I f w a r e t o draw a comparison between the debt p o s i t i o n
o f various countries* we ssust a l l o w not o n l y f o r t h e i r r e s p e c t i v e
debts i n r»oney terms but a l s o f o r t h e i r economic c a p a c i t i e s t o
support such debts*
- 2 The United States -with i t s v a s t wealth and resources
o b v i o u s l y can support a Touch l a r g e r debt than T?ould be f e a s i b l e
f o r the bulk o f small countries l i s t e d i n the Senator 1 s table*
The Senator* indeed, makes some allowance f o r t h i s f a c t
by l i s t i n g the s i s e o f population and square m i l e s o f t e r r i t o r y
as additional f a c t o r s *
capita terms.
He includes a comparison o f debt In p e r
On t h i s b a s i s the United States and United Kingdom
debts are both c l o s e t o f2,000* even though i n absolute terms the
United States f i g u r e i s three times as large*
Hot being t o o happy
t&th t h i s r e s u l t , the Senator proceeds to compare the per capita
debt o f the United States and t e r r i t o r i e s with that o f t h e B r i t i s h
Coraioixwealth rather than that o f the United Kingdom, and thus
f i n d s the B r i t i s h per capita debt t o b e $S6l as against $1*756 i n
the United States and t e r r i t o r i e s *
parison*
But t h i s i s n o t a f a i r com-
The B r i t i s h Commonwealth i s an a s s o c i a t i o n o f f r e e n a -
t i o n s -whose economic resources are those o f sovereign s t a t e s and
not a t the disposal o f t h e B r i t i s h Goverrsnent*
Thus, the i n c l u -
s i o n o f t h e Indian population o f 39O m i l l i o n g r e a t l y reduces the
per c a p i t a debt of the B r i t i s h Commonwealth.
Yet* i t i s obvious
that i t has l i t t l e o r no bearing upon the burden o f debt owed b y
the B r i t i s h Government*
T h i s , however* i s not the main f l a w i n the Senator* s
reasoning•
The b a s i c f a u l t i s that a debt comparison I n p e r c a p i t a
tenns i s q u i t e inadequate*
son i n absolute money terms*
I t i s but l i t t l e b e t t e r than a compariKelative population numbers { o r a r e a s )
o f -various countries a r e no measure o f t h e i r respective eoomjsiic
c a p a c i t i e s t o support p u b l i c debt*
Population d i f f e r e n c e s f a i l
to a l l o w f o r tlie vast v a r i a t i o n s i n per c a p i t a weal-Bi, incenses* and
productive powers o f differe&fc c o u n t r i e s , -which are the real d e terminants o f t h e i r r e s p e c t i v e a b i l i t i e s to carry a p u b l i c debt*
Thus, i t i?otild he o b v i o u s l y absurd t o arp^ae that India having a
population which i s nearly three times that o f t h e United States
could support a debt about throe t i n e s as large* o r o v e r 800 b i l l i o n d o l l a r s , even though i t i s w e l l knorai that India* s c a p a c i t y
t o produce i s but a small f r a c t i o n o f our c a p a c i t y t o produce*
Far b e t t e r than using population f i g u r e s , t h e s i * e o f a
country* e national income may b e taken as a rough i n d i c a t o r o f
a b i l i t y to c a r r y p u b l i c debt*
its
The h i g h e r a country* & national i n -
come* the more taxes can be raised f o r the f i n a n c i n g o f I n t e r e s t
charges o r the l a r g e r iri.ll the volume o f s e c u r i t i e s tend t o b e
Tshich investors are -willing t o h o l d .
I have prepared, accordingly*
a t a b l e i n which the debt p o s i t i o n o f t h e United States and some
o t h e r countries are compared i n these terms, shoeing t h e i r public
debts as a percentage o f t h e i r r e s p e c t i v e national incojaes#
The
f i g u r e s r e l a t e t o the l a t e s t a v a i l a b l e period and the p i c t u r e
would not b e vety d i f f e r e n t i f completely current data were a v a i l a b l e • The t a b l e shows that p u b l i c debt as a percentape o f national
income f o r both t h e United States and Canada equals about 170 p e r
cent as against 133 P*r c e n t i n A u s t r a l i a and £65 p e r cent f o r t h e
United Kingdosu
Measured i n these terms—which are f a r from p e r -
f e c t , but c e r t a i n l y ®ore adequate than those employed b y Senator
Bllender-*the comparative debt p o s i t i o n of the United States i s
thus ttuch superior to t h e B r i t i s h *
T h i s , i t should be pointed
o u t , i s the case even though t a x e s provided f o r a l a r g e r chare
o f B r i t i s h war expenditures and absorbed a l a r g e r f r a c t i o n o f
B r i t i s h wartime incomes than was the case i n t h i s count sy*
Taking
debt as a percentage o f national income, the present debt p o s i t i o n
o f the United States i s about equal t o the prewar p o s i t i o n o f the
United Kingdom*
I n considering the burden o f the p u b l i c d e b t , t a x a t i o n
f o r the f i n a n c i n g o f I n t e r e s t payments I s a major f a c t o r *
A com~
pari son between the r a t i o s o f i n t e r e s t payments on p u b l i c debt t o
national income f o r various countries i s thus s i g n i f i c a n t and has
been included i n the table*
Considered i n these t e r n s , the debt
p o s i t i o n i n the United States i n v o l v e s an oven l i g h t e r burden by
comparison because the average i n t e r e s t return on public debt i n
t h i s country i s below that i n the o t h e r countries*
This i s due
p a r t l y t o d i f f e r e n c e s i n the l e v e l o f i n t e r e s t rates and p a r t l y
t o d i f f e r e n c e s i n the d i s t r i b u t i o n o f outstanding debt with re«*
gard t o m a t u r i t i e s and types o f holders*
Thus, i n t e r e s t payments
as percentage o f national income are estimated a t 2*5 per cent f o r
the United States a s against about 5 . 5 p e r cent f o r Canada and
A u s t r a l i a and 5 p e r c e n t f o r t h e United Kingdom*
The present
r a t i o o f i n t e r e s t payments t o national income f o r the United
States i s l i t t l e o v e r one^half o f t h e B r i t i s h prewar r a t i o *
X do not vdsh t o suggest on the b a s i s of a l l t h i s t h a t
the e s o m m s wartime inore&se i n our public debt i s a matter o f
l i t t l e significance*
I do b e l i e v e , however* that given a ^dee
and prudent f i s c a l p o l i c y the resources o f the American sconoray
w i l l prove f u l l y adequate t o carry the debt*
A l s o , the f a c t s
which I have presented i n d i c a t e that the r e l a t i v e debt burden i n
the United States i s s u b s t a n t i a l l y l i g h t e r , not h e a v i e r , than that
o f the United Kingdom*
I t shcmld b e pointed o u t , f i n a l l y , that the question o f
r e l a t i v e debt burdens has only & v e r y I n d i r e c t bearing on our
a b i l i t y t o extend a loan to the B r i t i s h Government o r on the
B r i t i s h Government's need f o r such a loan*
The issue f o r the B r i t i s h Government i s n o t whether the
funds should be borrowed at hone o r abroad.
To meet the require-*
?rents o f the economic s i t u a t i o n , they must b e borrowed abroad,
because t h e need o f the B r i t i s h people i s f o r an import o f food
supplies* c l o t h i n g , raw materials» i n d u s t r i a l equipment and o t h e r
Items e s s e n t i a l t o the r e s t o r a t i o n o f the B r i t i s h economy t o a
peacetime b a s i s *
To import these t h i n g s , the B r i t i s h Hovomnent
needs the f o r e i g n exchange, with which t o pay f o r thorn*
Such f o r e i g n
exchange can b e obtained o n l y by exports o r by borrowing abroad*
I t cannot b e obtained b y domestic borrowing*
The need o f the
B r i t i s h Government f b r t h e l o a n would thus be j u s t as great I f
her p u b l i c debt was but a f r a c t i o n o f t h e actual amount*
The a b i l i t y o f t h e American people t o extend M s
loan
t o Great B r i t a i n , i n t u r n , i s not so much a question o f American
indebtedness as a question o f our a b i l i t y t o spar© the raw materials
and c o i m o d i t i e s which we shall export t o the British*
Considering
the stnn^ard o f l i v i n g which we have been a b l e to maintain during
the war and oonsidrinsr the economic exhaustion o f our a l l y , there
i s no doubt i n my mind that we can and must a f f o r d t o do so*
Having made c. tremendous e f f o r t t o win the v i c t o r y , i t would seem
foolhardy indeed t o shun a small s a c r i f i c e t o help b u i l d the peace*
MAH3WAL DT-'BT. XKTPRPlT CMRflTS, AMD WAT I PEAL ISCOKg
( b i l l i o n s V, S . d o l l a r s }
Katioaal
Incoitss
Calendar Tears
1939
19U1
194U
1945
Fiscal y e a r s ,
Ending Karch 31
1939
1941
1944
1945
Fiscal year*.
Ending March 31
1939
1941
191*4
1945
Fiscal years.
Ending June 30
1939
1941
19*4
1945
•
National
Debt (end
o f period)
Interest
Payments
Debt
as percent o f
national income
United States
70.8
96.9
160.7
161.0
41.9
57.9
230.6
278.1
.969
1.1is
5.001
4.099
59
60
143
17?
1.37
1.19
1.87
2.55
84
87
139
170
2.93
2.42
2.73
3.45
175
4.6s
265
4.72
5.09
Canada
4.3
5.2
8.1
8.4
3.6
4.5
11.3
.126
.126
.221
.290
United Singdoa
22.4
25.0
32.7
34.3
39.2
46.0
79.5
90.8
1.036
.855
1.545
1.747
184
243
3.42
Australia
3.0
2.9
4.2
4.2*
1.5
1.6
4.8
5.6
.01+8
.052
.123
.142
50
55
114
133
Assumed the saae a s i n 1944 f o r lack o f f a r t h e r i n f o r o a t i o n .
Interest
as percent o f
national income
1.62
1.79
2.93
3.38
Hofcesi Foreign c u r r e n c i e s converted t o S*
each&nge rata*
d o l l a r s a t the o f f i c i a l
Sources
national incoitto - Federal Reserve B u l l e t i n , February I9I46
• Federal Beserve B u l l e t i n , February I9I46
national debt
I n t e r e s t charges • Federal Reserve B u l l e t i n , February I9I46
tT*
Canada t
g«t
National income - Monthly B u l l e t i n o f Business S t a t i s t i c s
national debt
- P u b l i c Accounts
I n t e r e s t charges - P u b l i c Accounts
n a t i o n a l incane
National debt
I n t e r e s t charges -
Australia t
National inee&e
-
National debt
I n t e r e s t charges -
White Paper on War Finance, dad # 6623
19U*, 19^*5 Finance Accounts
1939, 19^41 Financial Statements
a s debt
! 9 3 9 - i 9 l * l G*
S h i r r a s , Federal Finance
i n Peace and War
19l& A u s t r a l i a n Legation
Yearbook 19^4 and Quarterly £uiae»ary o f
A u s t r a l i a n S t a t i s t i c s June I9JUU end
June I 9 l a
Yearbook I9I4I and Quarterly Suruaary o f
A u s t r a l i a n s t a t i s t i c s June 1 9 ! ^
June 19h5
@FedFRASER