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February 6 , 1939.
Chtiiratan E c c l e s
L e t t e r from Professor
Lauchlin Currie
Hansen
I
t l i i n k you w i l l be i n t e r e s t e d i n t h e a t t a c h e d l e t t e r fro r 3 Hansen.
LBC: em
I
t.
Harvard U n i v a r s i t y
Graduate School o f P u b l i c A d m i n i s t r a t i o n
L i t t a u e r Center
Cambridge, Massachusetts
2 February 19:9
Dr. L a u c h l i n C u r r i e ,
F e d e r a l Reserve Board,
Washington, D. C.
Dear L a u c h l i n :
Many thanks f o r y o u r coraaents on ny P r e s i d e n t i a l a d d r e s s .
W i t h r e s p e c t t o the P r e s i d e n t on t h e b u d g e t , I should p r e f e r t o make
a much f u l l e r statement than i s p o s s i b l e i n a l e t t e r , w h i c h I hone
t o have the o c c a s i o n t o do some t i n e l a t e r .
The T r e a s u r y c o n f e r e n c e l a s t week I t h i n k was none too s u c c e s s f u l .
A t any r a t e e v e r y o n e , { e x c e p t I t i e f l e r who t h i n k s we n?ed t h e a d d i t i o n a l
s a v i n g s t o make o u r c o u n t r y more p r o d u c t i v e . He i s f o r f u l l Keserve
P l a n . ) , has agreed t h a t the b i ^ r e s e r v e should go, but t h e r e i 3 l o s s
agreement w i t h r e s p e c t t o u p p i n g t h e t a x r a t e s i n 1940. I n f a c t o f
the o u t s i d e r s who were p r e s e n t V i n e r , K i e f l e r , Brown and M r s . Burns
a l l f a v o r e d u p p i n ? t h e t a x r a t e s d e s p i t e a l l t h e arguments w h i c h I
t r i e d t o make. I have a f e e l i n g t h a t , u n l e s s new s h i f t s o c c u r w i t h
r e s p e c t t o employer and employee s e n t i m e n t , t h e P r e s i d e n t w i l l s u p p o r t
the increase i n the t a x r a t e s .
From t i e s t a n d p o i n t o f h i s p e s t connect i o n w i t h t h e p r e s e n t a c t I can see t h a t from a p r a c t i c a l v i e w p o i n t
t h i s i s much t h e e a s i e s t t h i n g f o r h i m t o do.
Very s i n c e r e l y
yours,
{Signed) A l v i n H. Hansen
J a n u a r y 27, 1939.
Chairman E c c l e s
Lauchlin Currie
Comments 011 H a n s e n ' s
P r e s i d e n t i a l Address
Hansen, i n h i s P r e s i d e n t i a l address, shows keener awareness
o f t h e n a t u r e and s i g n i f i c a n c e o f t i l e b a s i c changes t h a t have o c c u r r e d
i n American economy t h a n has any o t h e r t h e o r e t i c a l economist o f n o t e .
I t h i n k , however, t h a t he f a l t e r s a b i t when he eor.es t o t h e s o l u t i o n s .
The e f f e c t o f t h e p o l i c y he recormends would n e i t h e r be f u l l e n p l o y ment n o r v e r y bad unemployment. I t ' o u i I be, i n e f f e c t , s e t a i - s t a g n a t i o n .
I ari n o t a t a l l convinced by h i s s t a t e m e n t t h a t a <£>vernmentally T induced
r e c o v e r y would r u n i n t o any more b o t t l e n e c k s and p r i c e r i s e s t h a n v.*ould
a "natural recovery.
I t h i n k t h u t he has n o t n e a r l y s u f f i c i e n t l y s t r e s s e d t h e p o s s i b i l i t i e s o f so m o d i f y i n g t h e t a x s t r u c t u r e as t o p e r m i t a h i g h e r n a t i o n a l income on t h e b a s i s o f a s m a l l e r volume o f c a p i t a l i n v e s t m e n t .
F i n a l l y , I t h i n k t h a t he i 3 u n d u l y p e s s i m i s t i c over t h e p o s s i b i l i t i e s
o f p u b l i c investment l e a d i n g to d i c t a t o r s h i p .
The Swedes have /'one
much f u r t h e r i n t h i s d i r e c t i o n t h a n we have, and Sweden i s u n q u e s t i o n a b l y
one o f the s t a u n c h e s t democracies i n t h e w o r l d .
E x c e r p t 3 f r a n t h e P r e s l d e n t x a l A d d r e s s o f P r o f e s s o r A l v i n H. Hansen,
b e f o r e the .American Economic A s s o c i a t i o n , December 1938.
"We a r e -passing, so t o speak, o v e r a d i v i d e w h i o h s e p a r a t e s t h e
g r e a t e r a o f g r o w t h and e x p a n s i o n o f t h e n i n e t e e n t h c e n t u r y f r o m an
e r a w h i c h no n n , u n w i l l i n g t o enbark o n p u r e c o n j e c t u r e , can as y e t
characterize with c l a r i t y or precision.
We * r e m o v i n g s w i f t l y o u t o f
t h e o r d e r i n w h i c h t h o s e o f o u r g e n e r a t i o n were b r o u g h t up i n t o no
one knows w h e t .
O v e r w h e l r d n nLy s i g n i f i c a n t , b u t as y e t a l l t o o l i t t l e c o n s i d e r e d
by e c o n o m i s t s , i s t h e p r o f o u n d change w h i c h we a r e c u r r e n t l y u n d e r going i n the r a t e o f p o p u l a t i o n growth.
I n t h e ^ecade o f t h e n i n e t e e n t w e n t i e s t h e p o p u l a t i o n o f t h e U n i t e d S t a t e s i n c r e a s e d by 1 6 , 0 0 0 , 0 0 0 —
an a b s o l u t e g r o w t h e q u a l t o t t
o f t h e p r e - w a r and i n excess o f any
I n t h e c u r r e n t decade we a r e a d d i n g l e s s
o t h e r decade i n o u r h i s t o r y .
t h a n h a l f t h i s number t o o u r p o p u l a t i o n , o r o n l y 8 , 0 0 0 , 0 0 0 , w h i l e t h e
b e s t f o r e c a s t s i n d i c a t e an i n c r e a s e o f l e 3 s t h a n 6 , 0 0 0 , 0 0 0 i n t h e decade
w h i c h we a r e a b o u t t o e n t e r , "
p , 2,
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"Thus as a f i r s t a p p r o x i i i a t i o n we may say t h a t t h e g r o w t h o f p o p u l a t i o n
i n t h e l a s t h a l f o f t h e n i n e t e e n t h c e n t u r y was r e s p o n s i b l e f o r s h o u t
f o r t y p e r c e n t o f t h e t o t a l volume o f c a p i t a l f o r m a t i o n i n t h e U n i t e d
States,
I f t h i s i s even a p p r o x i m a t e l y c o r r e c t , i t w i l l be seen what
an i m p o r t a n t o u t l e t f o r inve;-tra«nt i s b e i n g c l o s e d by r e a s o n o f t h e
current r « p i d d e c l i n e i n p o p u l a t i o n g r o w t h , " p , 14,
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"We a r e t h u s r a p i d l y e n t e r i n g a w o r l d i n w h i c h we must l e a n more
and more h e a v i l y upon t h e advance o f t e c h n o l o g y i f
are t o f i n d
p r i v a t e i n v e s t m e n t o p p o r t u n i t i e s adequate t o m a i n t a i n f u l l e m p l o y m e n t , "
p. 18,
"And when a r e v o l u t i o n a r y new i n d u s t r y l i k e t h e r a i l r o a d o r t h e
a u t o m o b i l e , a f t e r h a v i n g i n i t i a t e d i n i t s y o u t h a p o w e r f u l upward surge
o f i n v e s t m e n t a c t i v i t y , r e a c h e s m a t u r i t y and ceases t o g r o , as a l l
i n d u s t r i e s f i n a l l y m u s t , t h e w h o l e economy must e x p e r i e n c e a p r o f o u n d
s t a g n a t i o n , u n l e s s i n d e e d now d e v e l o p m e n t s t a k e i t s p l a c e *
I t i s not
enough t h a t a new i n d u s t r y c o n t i n u e s a t a h i ; ; h l e v e l on a h o r i z o n t a l
plane.
The f a c t t h a t new r a i l r o a d m i l e a g e c o n t i n u e d t o be b u i l t a t
a b o u t t h e same r a t e t h r o u g h t h e s e v e n t i e s , e i g h t i e s m d n i n e t i e s was
not s u f f i c i e n t .
I t i s the cessation o f growth which i s d i s a s t r o u s .
I t i s i n c o n n e c t i o n w i t h t h e g r o w t h , E i a t u r i t y and d e c l i n e o f new
i n d u s t r i e s t h a t the p r i n c i p l e o f a c c e l e r a t i o n operates w i t h p e c u l i a r
force.
And when g i a n t new i n d u s t r i e s h«ve s p e n t t h e i r f o r c e , i t may
t a k e a l o n g t i n e b e f o r e something e l s e o f e q u a l m a g n i t u d e emerges.
I n f a c t n o t h i n g has emerged i n t h e decade i n w h i c h we are no-.' l i v i n g ,
and n o t h i n g s u f f i c i e n t l y s i g n i f i c a n t has y e t l i f t e d i t s head o v e r
t h e h o r i z o n t o make t h e p r o s p e c t b r i g h t a h e a d . " p p . 1 9 , 20.
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" V a r i o u s measures a r e open t o us i f v.e w i s h t o m a i n t a i n f u l l
employment, and, i n v i e w o f t h e p r o d u c t i v e r e s o u r c e s s e t f r e e by t h e
c e s s a t i o n o f p o p u l a t i o n g r o w t h , r a i s e t h e p e r c a p i t a r e a l incorte p e r
annum by en Jiraount g r e a t e r t h a n t h e n i n e t e e n t h c e n t u r y r<;te o f advance.
Consumption may be strengthened by t a p p i n g t h a t volume o f v o l u n t a r y
savings which f o r m e r l y f l o w e d , under the s t i m u l u s of a r a p i d r a t e o f
p o p u l a t i o n growth, i n t o c a p i t a l f o r m a t i o n .
P u b l i c i n v e s t m e n t May be
u s e f u l l y nade i n human and n a t u r a l r e s o u r c e s and i n consumers* c a p i t a l
goods o f a c o l l e c t i v e c h a r a c t e r d e s i g n e d t o serve t h e p h y s i c a l , r e c r e a t i o n a l and c u l t u r a l needs o f t h e community as a vihole.
But we
cannot a f f o r d t o be b l i n d t o t h e u n m i s t a k a b l e f a c t t h a t a s o l u t i o n
Ion?? t h e s e l i n e s r a i s e s s e r i o u s p r o b l e m s o f economic w o r k a b i l i t y
and p o l i t i c a l a d m i n i s t r a t i o n .
"Ho w f a r such a p r o g r a m , w h e t h e r f i n a n c e d by t a x a t i o n o r by
g o v e r n m e n t a l l o a n e x p e n d i t u r e s , can be c a r r i e d o u t w i t h o u t a d v e r s e l y
a f f e c t i n g t h e system o f f r e e e n t e r p r i s e i s a p r o b l e m w i t h w h i c h econo m i s t s , I p r e d i c t , w i l l have t o w r e s t l e i n t h e f u t u r e f a r more i n t e n s e l y
than i n the p a s t .
Can a r i s i n g p u b l i c d e b t owned i n t e r n a l l y be s e r v i c e d by a schene o f t a x a t i o n w h i c h w i l l n o t a d v e r s e l y a f f e d t t h e m a r ' i n a l r e t u r n s o n new i n v e s t m e n t o r t h e m a r g i n a l c o s t o f VorrowingT
Can any t u x system, d e s i g n e d t o d e f l e c t v o l u n t a r y s a v i n g i n t o connuni t y e x p e n d i t u r e s on a s c a l e s u f f i c i e n t t o a c c o m p l i s h t h e i n t e n d e d
r e s u l t a , be d e v i s e d w h i c h w i l l n o t p r o g r e s s i v e l y encroach on p r i v a t e
investment?
"As so o f t e n i n economic l i f e , we are c o n f r o n t e d by a d i l e m u a .
C o n t i n u e d unemplo;ymant o n a v a s t s c a l e , r e s u l t i n g f r o m i n a d e q u a t e
p r i v a t e i n v e s t m e n t o u t l e t s , c o u l d be e:\pected sooner o r l a t e r t o l e a d
s t r a i g h t i n t o d i c t a t o r s h i p ; b u t so a l s o , by an i n d i r e c t r o u t e and a
s l o w e r p r o c e s s , m i : h t a g r e a t l y extended p r o g r a n o f p u b l i c e x p e n d i t u r e s . "
pp. 2£, i 3 , £4.
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Thus we a r e c o n f r o n t e d w i t h v a r i o u s a l t e r n a t i v e s .
On t h e one
s i d e , t h e r e i s the p r o p o s a l t o r i s k a n e g a t i v e governmental o o l i c y
i n t h e e x p e c t a t i o n t h a t t h e r e c u p e r a t i v e f o r c e s t o w h i c h we have
l o n g been a c c u s t o ed w i l l , i n t h e absence o f p o l i t i c a l i n t e r f e r e n c e ,
r e - a s s e r t t h e m s e l v e s . On t h e o t h e r s i d e , t h e r e if? t h e p r o p o s a l t o
go f o r w a r d u n d e r f u l l s t e a n w i t h u n r e s t r ? i n e d g o v e r n m e n t a l e x p a n s i o n
u n t i l f u l l e n p l o y a o n t h a s bean r e a c h e d .
Those who have no d o u b t s
whatever about t h e c o r r e c t n e s s o f t h e i r economic a n a l y s e s - s i l l n o t
h e s i t - t e t o make a b o l d c h o i c e o f p o l i c y . B u t o t h e r ? , impressed
w i t h the s t u b b o r n ecooomie r e a l i t i e s o f a r a p i d l y changing w o r l d , on
t h e one s i d e , and the f r a i l t i e s o f hua?m n a t u r e i n i t
power t o make
t h e a p p r o p r i a t e a d a p t a t i o n t o change, on t h e o t h e r , w i l l n o t be so
s u r e , and many p r e f e r t o t a k e a a i d i e course — c.:c t h a t r i s k s n e i t h e r
a n e g a t i v e p o l i c y n o r a breakdown o f c o l l e c t i v e maimg'-ment."
pp.*)4-25.
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" I suggest — the f i g u r e s are o n l y a rough a p p r o x i m a t i o n — t h t
we c o u l d not a f f o r d t o l e t o u r income f a l l m a t e r i a l l y below $65,000,000,000,
o r below # 6 0 , 0 0 0 , 0 0 0 , 0 0 0 as a minimum. A 3cale o f n e t i n c o m e - c r e a t i n g
g o v e r n m e n t a l e x p e n d i t u r e s adequate t o p r e v e n t a f a l l i n income below
t h i s l e v e l can, i t seens t o me s c a r c e l y be q u e s t i o n e d , and would c u r r e n t l y ,
I b e l i e v e , corariand t h e s u p p o r t o f most e c o n o m i s t s . As the n a t i o n a l i n cone, however, approaches # 7 0 , 0 0 0 , 0 0 0 , 0 0 0 , I suggest t h a t t h e n e t i n c o n e - c r e a t i n e governmental e x p e n d i t u r e s ought t o be t a p e r e d o f f .
As
v?e approach t h i s income l e v e l , t h e ecororaic s i t u t i o becomes i n c r e a s i n g l y explosive.
B o t t l e - n e c k s b e g i n t o appear*
Costs r i s e .
Labor
a g g r e s s i v e l y demands wage i n c r e a s e s . R i s i n g c o s t s l e a d t o i n v e n t o r y
s p e c u l a t i o n . We encounter the f a m i l i a r v i c i o u s s p i r a l o f r i s i n g c o s t s
and r i s i n g p r i c e s w i t h growing i n e f f i c i e n c y .
At t h i s l e v e l t h e spending
program becomes r e l a t i v e l y i n e f f a d t i v e as a zaej.ns t o r a i s e the r e a l i n cowe o f t h e co m u n i t y .
T h i s danger p o i n t if? c l e a r l y reached sooner I n
a d e m o c r a t i c c o u n t r y t h a n i n a t o t a l i t a r i a n s t a t e . A t v»hat p r e c i s e p o i n t
i t i s reached depends upon t h e degree o f d i s c i p l i n e an-* s e l f - r e s t r a i n t
w h i c h t h e v a r i o u s economic groups have achieved o r can a c h i e v e under
democratic i n s t i t u t i o n s .
What I am s u g g e s t i n g i s t h s t i n t h e U n i t e d
S t a t e s t h e upper l i m i t o f t o l e r a n c e i n t e r n s o f s o c i a l and economic
s t r e s s e s end s t r a i n s may be set a t around # 7 0 , 0 0 0 , 0 0 0 , 0 0 0 ,
A t the
# 6 0 , 0 0 0 , 0 0 0 , 0 0 0 Income l e v e l we can a f f o r d t o spend h e a v i l y t o f o r e s t a l l
any f u r t h e r d e c l i n e ,
"The o b j e c t i o n w i l l almost c e r t a i n l y be r a i s e d t h a t t h e argument
w h i c h I have d i r e c t e d a g a i n s t c o n t i n u e d g o v e r n m e n t a l spending can e q u a l l y
w e l l be d i r e c t e d a g & i n e t p r i v a t e i n v e s t m e n t , once t h e upper danger ssone
has been reached, I s h o u l d doubt t h e v a l i d i t y o f t h i s c r i t i c i s m .
If
the sovernnont continue® t o pour o u t f u n d s a t a l a v i s h r?. t e , wage-earners
and employers a l i k e a r e l i k e l y t o t a k e t h e easy course w h i c h l e a d s t o
hi
c o s t s and h i g h e r p r i c e s .
B u t , i f r e l i a n c e c o u l d n o t be p l a c e d
upon a stream o f p u r c h a s i n g power e x t e r n d t o b u s i n e s s i t s e l f , we c o u l d
e x p e c t , I t h i n k , a more v i g o r o u s r e s i s t a n c e t o uneconomic c o s t - r a i s i n g
demands. P u b l i c spending i s the e a s i e s t o f a l l r e c o v e r y methods, and
t h e r e i n l i e s i t s danger. I f I t I s c a r r i e d t o o f a r , we n e g l e c t t o a t t a c k
t h o s e s p e c i f i c m a l a d j u s t m e n t s w i t h o u t t h e removal o f w h i c h we cannot
a t t a i n a workabl
c o s t - p r i c e s t r u c t u r e , w i t h o u t w h i c h i t 1s n o t p o s s i b l e
to achieve the o t h e r w i s e / v a i l a b l e f l o v o f p r i v a t e i n v e s t m e n t , " pp.25,26,27
@FedFRASER