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Form F. R. 131
BOARD DF GDVERNDRS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
Xo

ChaiTTTiaTi Eficles

From

Lauchlin Currifi

_

Date_ogtgbgr.29,195s. _
Subject:

Meeting of F i s c a l Advisory

_

^25^*^

As I have prepared quite a raft of material for your possible use
in connection with the meeting of the Fiscal Advisory Committee, I
thought you might like to look over it beforehand in order to decide
what, if any, you would 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 somewhat
the element of guess work involved in the problem of timing. I have
attached brief comments to each chart.




Form V. K. 131
BDARD DF GOVERNDR5
OF T H E

FEDERAL RESERVE SYSTEM

Office Correspondence
To

^ 5 * ™ * ? Eccles

prom

Lauchlin Currie

Date
Subject:

October 29, i??e ?

Fiscal AdvisoryL
_ _

I am attaching some material for the next meeting of the Fiscal
and Monetary Advisory Committee, along 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 am attaching some
charts with brief comments.
4. In the list of investigations required I suggest that the
title of (l) 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 yearfs 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 Coumittee 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 Employments"




October 29, 1938.
THE IRAMSTEEOil PROBLEMS IM COMPENSATOKY FISCAL POLICY

A more descriptive title would appear to be "The Problem of Timing
in Compensatory Fiscal Policy**

Any transition that may be made from

deficit financing to debt retirement is merely one stage in the continuous problem of gearing fiscal operations to private business activity
to the end of achieving and maintaining full employment.
The urgency of the problem need not be stressed here. The only
question is how far the problem is subject to solution. This, in turn,
boils down to the two-fold task of improving, on the one hand, both our
analysis and the quantitative approach to the problem and, on the other
hand, improving the technique necessary to carry through the policy which
is indicated by our analysis.
A broad analytical and quantitative approach is very briefly summarized in the accompanying memorandum.
It is believed that with present knowledge and data more precise
information than at present is available on which to base broad trends
of fiscal policy can be obtained. With intensive study and the development of more and better relevant data, the basis for policy should be
subject to continual improvement. It is emphasized, however, that whatever precision we can hope to obtain will still leave a wide possible
margin of error, particularly in the short run, and that, therefore,
efforts should be made to secure as much flexibility and appropriate
automaticity in fiscal operations as possible*




October 29, 1938.

COMPMSATOBY FISCAL POLICY
The Problem of Timing

A.

Broad Statement of the Problem

1. A steady increase in consumption is the prime requisite of
a progressive economy*
2. The desirable rate of increase in consumption is as rapid a
rate as can be achieved without excessive price advances and inventory
accumulations. This does not mean no, advance in prices. It means no
greater advance than is compatible with sustainable growth in investment, income and consumption,
3. The desirable rate of increase in consumption may be expected
to vary with the degree of excess productive capacity, the number
and nature of bottlenecks and shortages, the temper of the business
community, etc., being higher when emerging from recessions than when
approaching the limitations imposed by physical productive capacities.
4. Growth in consumption depends on growth of incomes of wageearners, low-salaried persons, farmers and small business men, modified
by the expansion and contraction of consumer saving and consumer debt*
(See chart).
5. A growth in incomes is dependent upon whether the amount
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 stream through the failure of current
income to be spent on current consumption*




-2-

6. Hence, the growth of consumption is dependent upon a growth
in private capital and public expenditures in excess of current
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, assinning no change in private capital and public deficit
expenditures.
7. Assuming the goal to be the attainment and maintenance of full
employment, fiscal policy should be directed towards
(a) supplementing (or offsetting) the volume of private
capital expenditures and/or
(b) modifying the relation of consumption to income,
8. The former type of action (a) is concerned with the relation
of government expenditures to receipts; the latter (b) with the source
of receipts in relation to the direction of expend!tures.
B#

Broad Quantitative Approach to the
Problem

1. Calculate national income necessary for full employment*
2#

Estimate maximum sustainable rate of increase in national

income to achieve (l).
3. Ascertain ratio of capital investment plus government contribution to income in the past,
4. Consider how far developments of recent years may be expected
to call for a different ratio.




-3-

5. From (l), (3) and (4) calculate amount of private capital
formation plus contribution by non-federal public authorities necessary for full employment*
6.

Determine desirable rate of increase in capital expenditures

to arrive at full employment*
7. Estimate the probable expenditures in each important field
of capital expenditures.
8#

If a deficiency appears likely, consider how far this could

be made up (a) by a continuing federal contribution and/or (b) through
a modification of the ratio of consumption to income; if an excess
appears likely, consider how far this could be offset (a) by a negative federal contribution and/or (b) through slowing up the rate of
increase in consumption relative to the growth in income*

C. The Handling of the Short-term
Compensatory Problem
19

The type of approach outlined in B, while valid within

broad limits, necessarily entails a possible margin of error large
in relation to the magnitude of the federal contribution*

Inventory

movements, changes in consumer debt, housing and foreign developments
are particularly difficult to forecast over the short terra,




2. Therefore, the practical approach should be along two lines:
(a) Securing such longer-term modifications in the
fiscal policy of the Government as appear




called for as a result of the broad,
over-all type of statistical investigation outlined in B #
(b) Securing as large a measure of flexibility and
appropriate automaticity in Government
receipts and expenditures as possible,
both within and outside the budget, so
as to be in a position to secure the
appropriate reaction to unforeseeen short-tern
business developments.

LIST OF CHAETS

1.

Gross National Product and Private Capital Formation plus Net
Government Contribution, 1925-1937.

2.

Gross Capital Formation plus Net Government Contribution,
1925-1937.

3*

Expenditures on Producers* Durable Goods, 1925-1937.

4. Gross and Net Federal Contribution to Buying Power, 1932-1938.
5. Income Payments and Consumers1 Expenditures, 1929-1938.
6# Compensation of itoployees of Public Service and of Manufacturing,
1929-1938.
7. Production and the Quantity of Retail Sales, 1929-1938.
8. Producers1 Durable Goods and Their Utilization, 1929-1937.