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Ff^ E I. 11
trJ * t 3

58

BOARD DF GOVERNORS
OF

FEDERAL

Office

Miss Egbert

RESERVE

SYSTEM

C o r r e s p o n d e n c e

To

THE

nate

October si, i?38.

Subject:

Currie

I left this with the Chairman Saturday night.
I would like to have the charts returned, as I did not have an
opportunity to make any copies of them*




COPY
October 29, 1938.
Fiscal Advisory Committee
Chairman Eccles
Lauchlin Currie

I am attaching some material for the next meeting of the Fiscal
and Monetary Advisory Committee, aiong the lines you suggested.
1. The first is a one-page statement of the problem wherein
I suggest that the title be changed from "Transition Problems" to
"The Problem of Timing in Compensatory Fiscal Policy", You might
want to secure this change as the present title restricts us unduly.
2. If time permits and there is sufficient interest you may
want to present a slightly longer and more technical statement,
which I am also attaching.

3. For illustrative purposes indicating some of the basic
factors involved in compensatory fiscal policy, I a a attaching some
r
charts with brief comments.
4. In the list of investigations required I suggest that the
title of (1) be changed from "Amount of national income to balance
budget (a) at different price levels" to "Revenues that will be
yielded by the present tax base at various national income levels,
(a) currently, (b) after a year*s lag".
An additional topic might be "The probable trend of main classifications of expenditures, (a) on the basis of past experiences and
present plans, (b) at various employment and national income levels".
The National Resources Committee interprets the investigation
entitled "Bottlenecks" to mean all the factors that prevent the
attainment and maintenance of full employment. This entails considerable duplication with our problem of timing. I should like
them to do more intensive work on probable labor and plant bottlenecks under the broad heading of "The Rate of Increase in Production and Consumption and Incomes that can be sustained without
excessive price and inventory maladjustments."
An additional topic of a monetary nature might be "The Rate
of Interest in Relation to Price Movements and the Attainment of
Full Employment."

LBCrem




October B9,
TOE m m i T i o n PHOHLMIB XH cosaps&iAmY FISCAL POLICY
A more descriptive title wuid appear to be "The Problem of Tiding
in Compensatory Hacal Policy". Any transition that s r y be m d e froii
a.
deficit financing to debt retirement is luerely one stage in the coutinuous problem of geerins fiscal operations to private business activity
to the oad of achieving and muint&iniag full mplQym&xiU
The urgency of tho problem n m & not be stressed hdre* The only
question is how far the probity is subject to solution*

This, in turn,

boils tern to the two-foia %mk of improving, on the one hand, both our
analysis and the quantitative approach to tho problem and, on the other
hand* improving tho technique necessary to carry through the policy tfhich
ia indicated by our analysis*
A broad analytical and quantitative approach is very briefly

r-

lj&ed in the aeca&pfmyln& iM&sora&du&u
It Is believed that with present fenowlad^ and data siora precise
tnformtion than at present is available on which to base brood treade
of fiscal policy can be obtained*

Uith intensive study and the develop-

ment of more and better relevant data, the basis for policy should be
subject to continual itsprovemont* It la mphasiaed, however, that whatever precision we con hope to obtain, will still le?ive a wide possible
mrgin of error, particularly in the ehort run, and that* therefore,
efforts should be m d o to secure as touch flexibility and appropriate
automatic!ty In fiscal operations as possible*




October £9, 1SI58#

CQMPEl^SAJOKY F1BC/L POLICY
The Problem of Timing

A»

Broad Statement of theProblem

1* A steady increase in consumption is the prism requisite of
a progressive economy*
Hm

Tha desirable rate of increase in conswaption is as rapid a

rate as can bs achieved without excessive price advances and inventory
accumulations*

This does not t m m no advance in price©. It means no

greater advance than is compatible with sustainable growth in investment, incotie and consumption*
3#

The desirable rate of increase in consumption m y be expected

to vary with the degree of excess productive capacity* the number
and nature of bottlenecks and shortages, the topper of the business
casualty, etc*, being higher when emerging from recessions than when
approaching the Hesitations imposed by physical productive capacities*
4* Growth in conmirsption depends on growth of incomes of
earaers, low-ealt*ried persons, farmers and smell business xaen, modified
by the expansion and contraction of consumer saving and consumer debt*
(See chart)*
S* A growth in incones is dependent upon whether the *&:ount
added to the spending stream through capital expenditures and public
expenditures in excess of tax receipts is greater than the amount
withdrawn from the spending streaa through the failure of current
Income to be sp$nt on current eoneraiption*




6#

H e n c t h e growth of consumption 1b dependent upon a growth

In private capital and public expenditures in excess of currant
receipts, assuming no change in the relation of consumption to income,
or on a rise in the proportion of the national income spent on consumption, assuming no change in private capital and public deficit
expenditures.
Assuming the goal to be the attainment and maintenance of full
e&ployment, fisoal policy should be directed towards
(a) supplementing (or offsetting) the volume of priv&te
capital expenditures and/or
(b) modifying the relation of consumption to income*
S#

The former type of action (a) is concerned with the relation

of govesimant expenditures to receipts; the latter (b) with the source
of receipts in relation to the direction of expenditure^
B#

Broad Quantitative Appro e c to the
th
Problem

Xm

Calculate national income necessary for full eaployanmt*

S#

Sstimate maximum sustaimble rata of increase In national

income to achieve (1}#
Ascertain ratio of capital investment plus government contribution to incoaa in the past*
4#

Consider how far developments of recent ye&re may be expected

to oall for a different ratio*




5, Proa (1) > (S3) and (4) calculate amount of private capital
foraation plus contribution by nonfederal public authorities necessary for full employment*
6«

Determine desirable rat© of increase in capital expenditures

to arrive at full mploymmt*
7#

Estimate the probable expenditures in each important fiold

of capital expenditures,
8» If a deficiency appear© likely, consider how far this could
be mftd© up (a) by a continuing federal contribution and/Or (b) through
a modification of the ratio of consumption to income; if an excess
appear® likely, consider how far this could be offset (a) by a negative federal contribution and/or (b) through blowing up the rate of
increase in consumption relative to the growth in iucone*
C»

The Handling of the Short-term
Compensatory Problem

Xm

The type of approach outlined in Bf while vnlid within

broad liiaits, necessarily entails a possible mrgin of error large
in relation to the magnitude of the federal contribution. Inventory
saoveqaaents, changes in consumer debt, housing and foreign developments
are particularly difficult to forecast over the short tern.
2#




Iberefore, the practical approach should be along two lineai
(a) Securing such longer-tern modifications in the
fiscal policy o? the Governmentfieappear

called for m a result of the broad*
over-all type of statistical Investigation outlined in B*
(b) Securing ae large a measure of flexibility and




appropriate automaticity in Government
receipts and expenditures as possible,
both within and outside the budget, 00
as to be in a position to secure the
appropriate reaction to unforeseeen short-tana
buftiaess devaiopaente#

October 29t 1938*
Chairman Socles

Meeting of 71seal Advisory

Lauehlin Currie

Coroiaittee

As X have prepared quite a raft of material for your possible use
in connection with the meeting of the Fiscal Advisory Conmittee, I
thought you might like to look over it beforehand in order to decide
what, if any, you wild use and also to give you a chance to suggest
any changes Monday morning*
Even if you do not propose to take along any material, I should
like you to look over the charts as an indication of the type of
work which, if carried on on a current basis, would reduce sonewhat
the element of guess work involved in the problem of timing* I have
attached brief comments to each chart*
LBC:em




LL&2 OF CHARTS
X* Oroas Jl&tional Product and Private Capital Formation plus Nat
Oovermaant Contribution, 1925~193?#
E#

Grosa Capital For&ation plus Het Government Contribution,
1925*1937.

g»

Expenditures on Producers* Durable Qooda, 1925-1937 •

4* Oroee and Bet Federal Contribution to Buying Power, 1932-1936*
5#

Income Payment a and Conaum&ra1 Expenditures, 19£9-1938*

6* Compensation of Saployees of Public Service and of K&nufucturing,
1929-1938*
7* Production f n the Quantity of Be tail S&lee, 1929-1938*
id
8* Producers1 Durable* Goo da a&d Their Utilisation, 1929-1937*




conmum

k x p m m i s akd total income p a y w m s

Sfhis chert indicates*

(a) the close correspondence of consumers1 expenditures with
the Income of «Rge earnors, f aimers, salaried workers and snail
business nen.
(b) that the savings of this group vary with incorae* Despite
the contraction of consumer debt from 19S9 to 193£ and the aspanaion
up to 19$?, consumption fell leas than incomes In the foraer period
and rose less in the l&ttar* In the early stages of a decline
cox^auiaption appears to fall more rapidly than income (1930, 1938) *
(c) that the rate of Increase in consumption was exceptionally
rapid in the latter part of 1936 when we were approaching plant
capacity in various fields.
(d) that not only did incomes cease to expand in the spring
of 1937 but that consumption actually declined* This was a fatal
aggravation of an otherwise sufficiently critical inventory situation*
(e) the monthly average of national income produced, which
includes interest, dividends and business savings, is superimposed
in red on the chart to bring out the fact that total income shrank
more than consumption in the depression, and rose tsore rapidly in
the recovery* $he rise in the monthly average in 1937 was, of course,
held down by the bad last quarter*




FKQKtfCERS* 13JKABLB GOODS AKD TcIKlK TJTILI&ITIOK* 1929 ~ 1937
This chart In designed to illustrate roughly the chtmges In the
degree of plant utilization, relative to 19£9* Although the composition of dosa&nd in relation to the composition of plnnt facilities
would have to be intensively studied in any investigation of possible
bottlenecks, use of the chart may be justified to bring out the broad
facts*
(a) that as a result of the long depression the slack in the
labor supply by 1937 was far greater than the slack in plant facilities,
relative to 19&9* ®ils is a grave type of malad juistment and constitutes
a sharp limitation on the r&to at %*hich the unemployed can be absorbed,
after the bulk of excess plfint capacity ha® been absorbed*
(b) that in late 1986 we were approaching the 1929 degree of
utilisation of our plant facilities* Since thera is reason to believe
that the production index did not adequately represent the increase
in production from 1933 to 1937, it la quite possible that in December
1936 we actually attained the 1929 level of utilization*
(c) that v&en the degree of plant utilization, relative to 19&9,
passed 60 percent,the rate at which additions to the stock of producers*
durable goods were bein& made, speeded up*




PHYSICAL BiOmCTIQK AMD CIS QPAIHITY O f SBTAIL 8XUSS* 1929-1938,
f

This chart indicates
(a) that the physical quantity of retail sales shrank far
JLeee than i$oney incomes or physical production in the depression
end that, in general, the amplitude of the fluctuations In the
eerie® is much less than that in others*
(b) that the volume of retail enlee in late 1986 and early
195? exceeded the volume in 19£9*
{o) that the volume of retail eales shrank substantially
frois late 1956 to the middle of 193?•
(d) the divergence of production fro& retail sales is attributable to the wider variations in production of capital goods and
of changes in the physical volume of inventories*




THE

(mm

mi me

FBDEBAL COIMAISU?IQH TO

wrima

POWER

This chart shows*
(a) tha draatlo &<*tur$ of the reduction iu the federal contribution
In 1937f partly attributable to a reduction in expenditures but mainly
to
increase in tax receipts. Social security taxaa plnyofi m important role*
(b) the sizable incraaaa in groaa and nat expenditures in tha
firat h^lf of 1938.
(of tentative mtin&tm of th$ grom and net contribution for the
raamindar of %im fiscal year.




COMPMSATIOK O f EMPLOYEES. 19£9~1938*
f

Ihis chart indicates:
(a) the increase in importance of incomes derived from
public authorities in relation to Incomes derived from mining,
manufacturing and construction* If the compensation of employees
on public construction and fern benefit payments ware included»
the compensation of employees derived from public service would
actually have surpassed the compensation derived fro& ainingt
manufacturing and private construction in the sugmer of 1938*
(b) the maintenance of consumer inaomee derived fxon publio
authorities in the depression in contrast with the large shrinkage vx
In compensation derived from mining* memufiicturing and construction*
(c) the substantial expansion in the incomes derived fron
public service in the first h^lf of 1988, itt&ch more than
counter-balanced the decline In mining, manufacturing and construction* This Is the main reason why consumer income
depicted
on another chart shrank so little in the late recession &n comparison with the drastic shrinkage in production*




Gross
H&tlonal
Product

Capital Foraation
Plua Goverument
Contribution

1925-29

85.2

1S.1

1929
1950
1951
1952
1955
1954
1955
1956
1957

90.6
80.4
64.5
46,0
46.8
66.5
62 .1
71.2
78.0

16.7




11.1
8*5

8
5.7
5.6
8.8
15.9
14.4

GROSS CAPITAL

TOMtAgPLUS

MKT FEDERAL CQl;THIBUTIOM#

This chart, presenting a breakdown of capital #:xpendituros plus
government contribution for the years 19£fr*195?> indicates*
(a) the various fields in which increased ineoiae<*generuting
expenditures must take place If we are to achieve a national income
requisite for full mplo^ent.
(b) the high l&vel of expenditures for Inventories in 1936
and 1937 and hence the extrene instability of the total income~gener&ting
expenditures in those years.
(c) the importance of the decline in the net gov$rasaent contribution In 193? in slowing up the rate of increase in total inco&e-generating
expenditures*
(d) the importance of residential building in the years 1925-29
and the lag in this series in the recovery in comparison with the extent
of the recovery in producers* durable goods expenditures relative to
1925-29*




GKQS3 KATIOBAL PfcOPPOT
Subnets* gross product series i© used with the deduction of Government savings and iuputed r&nts, both of ^hich iterss are of doubtful
validity* Gross product differs from net product, or netio&al income,
by the amount of depreciation charges on business and residential capital*

GROSS PKXY/vP-S CAPITAL K)KMTIO^ PLUS

OOVKl&MiSK? COKTHIBUTIO^

Capital fomation includes Tarborgh*^ estimates covering producers*
durable goods; Subnets* aeries for net ch*mga in inventories carried,
through 1937 by the mm of Dan and Bradstreet Material, and the net
change in claiua against foreign countries plus net purchases of gold
and silver* rfhe net Govarment contribution covets both the Federal and
the State and local gover&Rfints*
latter the change in debt outstanding ae estimated by the treasury io used* ffhe federal net contribution has been carried back to 19250 by. the method developed in this
Section* ?or the period 1925 to 1930, .the change in the outstanding
debt is'used as th^ best series available*




vmwcms*

wbjosls goods ciL&g

This chart brings out:
(a) the divergence in the movement of capital expenditures in
mining and manufacturing since 1933, m compared with capital expenditures in the utilities and railroad fields* Mining and manufacturing
expenditures recovered their 1925-29 level* while both railroad and
utilities legged way behind,
(fa) the relative importance of these different types of producers*
durable goods in the total of business capital formation, A recovery
in the railroad and utility fields to the late Twenties1 level of
capital expenditure would mean an increase over the actual 1937 outley a of about #1 billion* This would bring the 1937 total for producers'
durable goods up to |8»3 billion, still softewh&t short o t the late
Twenties* level. The rest of the deficiency is accounted for by cossuerciril buildings, which fell from en annual average of fl«l billion in
the late Twenties to lees then |4QQ nillion in 1957,




GROSS NATIONAL FltOUCTCT ASP GB0£3 CAPITAL TOBMAiTlOK PLUS MET

POVgfflMHff CO^TKIEUTIOll
Ihis chart is designed to ehowi
(a) Bhat the mount of private cnpital formation plus
the contribution of public authorities will have to be to achieve
various gross national income levels if the same relation between
these sariea prevail* in the future na prevailed in the average
period 19^5*19S9 and a^ain in 1987» (The comparison la between
gross capital formation end &roaa national income* She relation
between gross and net capital formation and net national income
can be derived.)
(b) How investment increased relative to consuEjption
from 1952 to 1937* Another way of aaylng this is that, due to
the Increasing deelre and ability to save, a given mount of
capital formation expenditures plus federal contribution generated
proportionately leas national incone in 1937 then in eax'lier year*u
(c) How vs?ry slight was the increase in the combined
capital and net government expenditure® in 1957 over 1956, compared
with earlier years,
(d) That our problem in attaining the requisite national
income la to secure higher capital expenditures plus Government
contribution than prevailed in 19B9, and/or to increase conmmption relative to eapltal expenditures through tax legislation*