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Form F. R. 131 BOARD OF FEDERAL Oifice Correspondence To GOVERNORS RESERVE SYSTEM Date—October 16, 1937 Chairman Eccles Lauchlin Currie contribution to the growth in community expenditures In view of the revival of- interest in this subject I have had our monthly series brought up to date and am contributing the attached story to Current Comments next week. Confidential October 16, 19 L. B. Currie THE DECLINE IN THE FEDERAL COITRIBUTIO^ TO TEE GROWTH IN COfiMJMTY EXPENDITURES How the contribution is measured 1. The monthly expenditures of the Government and its agencies are checked item by item in order that expenditures that appear likely to result in current purchases may be separated from those that do not result in current buying. Appropriations to the Old Age Reserve Fund, for example, do not increase current buying. One-half of the proceeds of bonus bonds cashed were assumed to result in current purchases. 2. From the gross activity-stimulating expenditures are then deducted all tax receipts except estate taxes end gift taxes. Estate taxes are assumed not to result in a deduction from current expenditures. Doubtless the payment of a portion of income taxes likewise does not result in a contraction of current buying, but little basis exists for estimates of this amount on a monthly basis. It should be kept in mind, however, that by deducting all income taxes this particular series may tend to understate the Government^ contribution and to overstate the decline from 1956. Income tax payments are smoothed over a three-month period. Significance of ther contributiori The excess of activity-increasing expenditures over activitydecreasing receipts is one source of the increase in national money income. It should therefore be related to the factors affecting changes in the national income rather than to the national income totals themselves. The importance of this single factor in the recovery movement - 2 - may be judged by comparing it with the yearly increases in the national income: 1954 1955 1956 (In billions of dollars) Increase in national income over previous year 7.8 5.4 8.8 Net federal contribution 5.?, 5.1 5.8 This comparison makes no allowance for the fact that a substantial portion of income tar payments, at least in the earlier years, would not have been currently spent if they had been retained by the taxpayers, nor for the secondary spending arising from the original contribution. Significance of the decline in the contribution in 1957 The drastic decline in the monthly contribution this year from the levels prevailing in the second half of 1956 should not in itself be expected to bring about a business recession, since to date there has continued to be a net contribution, though small. The growth in the A. A. A. Index of Monthly Na tional Income from 95 in Janusrv to 97.5 in May appears to be in part attributable to higher wages and increasing building activity. These forces expended themselves by May. From May to September there was little change in the index. The Federal Reserve Board index of production leveled off after March. Moreover, there are disturbing indications that a portion of industrial production has been going into increased inventories. Monthly department store sales showed no increase this year up to August as contrasted with a substantial increase in the same period last year. Broadly speaking, it appears that privote income-increasing expenditures did not exnand this year at a rate sufficient to offset the decline in the federal contribution, so that the rate of recovery slackened. Prospects for the next six months The series under discussion has some bearing on the prospects for business activity in the near future. Instead of there being a net federal contribution to buying power in the first half of 1938, there may be a decrement, attributable mainly to increased tax receipts. One factor that has operated to increase national income will either be considerably diminished or become negative, depending upon the influence of increased income tax receipts. At the time of the recession in 1934 the federal contribution on a minimum basis continued to run above $250 million monthly. Net Federal Government Contribution to Coiiiiuunity Expenditure (Unit: #1,000,000) January February March April May June 1932 1933 1934 88 133155 165 166 173 164 139 187 195 172 215 384 244 253 255 200 272 264 280 232 256 240 383 1,838 2,392 3,285 3,407 126 148 90 109 131 162 97 82 134 73 140 258 283 286 217 268 286 290 272 183 268 284 229 263 469 152 296 346 300 299 1,646 1,856 3,238 3,154 3,770 Fiscal year JulyAugust September October November Deceaber Calendar year 1935 j 1936 291 184 244 314* 332 543 1937 237 107 50 99 46 101 2,502 103 32p 47p *Half the cash bonus payments made in 1936 are distributed over the month of payment, the two months preceding, and the three months following. p Preliminary Revised October 11, 1937. NET FEDERAL GOVERNMENT CONTRIBUTION TO COMMUNITY EXPENDITURE MILLIONS OF DOLLARS MILLIONS OF DOLLARS 600 600 500 500 400 400 300 300 200 200 100 100 -100 -100 1932 PREPARED BY M.KROST 1933 1934 1935 1936 1937 NET FEDERAL GOVERNMENT CONTRIBUTION TO COMMUNITY EXPENDITURE MILLIONS OF DOLLARS MILLIONS OF DOLLARS 600 600 500 400 300 200 100 -100 1932 PREPARED BY M.KROST 1933 1934 1935 1936 1937
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