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BOARD DF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

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

Date APm is. 1947

Chairman Eooles
Richard A. Musgravet
Alfred Sherrard

Subject: H.A.M. report on "The American
flA^

Individual Enterprise System"

The general attitude towards fiscal policy expressed in this twovolume report is one of scepticism. It is not denied that variations in
taxation or in government expenditure can, in principle, influence the
level of business activity, but great emphasis is placed on the practical
obstacles to the suooess of such a compensatory policy. The report is
more favorably disposed towards monetary and credit controls, but argues
that they should be used primarily to restrain a boom rather than to stimulate activity during depression.
Taxation. The sections on taxation are concerned mainly with the
burden of supporting enlarged Federal activities, and especially with the
effect of taxes on investment incentives. The present personal income tax
is criticized as being too progressive--"this degree of progression penalizes risk taking and discourages individual initiative." (p. 753) Complete elimination of capital gains taxation and of the corporation income
tax is proposed. The Federal government should abandon estate taxes,
leaving them for the states "because the various states would strive competitively for lower rates in order to attract well-to-do persons*" (p. 759)
All of these implied suggestions would have the effect of drastically
reducing federal revenues. Since no alternative tax souroes are suggested,
it is presumed that this is to be accompanied by a parallel cut in expenditures. On this point too, however, no concrete suggestions are offered.
Government expenditure. All public expenditures are condemned
"unless at the same time it can be shown that such outlay has more usefulness to the public at large and to the individual citizens themselves than
the income which they themselves must forego and pay to the government in
taxes in order to finance the proposed expenditure." (p. 737) Government
outlays should not be varied deliberately in order to offset fluctuations
in private spending. Even the modest proposal of the President's Conference on Unemployment, in 1923, to postpone planned public works construction at the peak of a boom in order to ca.rry it out during the subsequent depression, is condemned. "Elections are always just around the
corner, and politicians cannot be expected to leave the spending for needed
improvements in their districts to be exploited politically by their opponents." (p. 936) If this difficulty could be overcome, the backlog of
public m>rks would be too small in airy case to have a significant effect
on business activity, and the projects would not be located where additional
spending \ms needed most.
Later, and larger, programs of public expenditure designed to
combat unemployment are likewise condemned—partly on grounds of ineffectiveness and partly on• grounds of waste, competition with private enterprise, and loss of freedom. The major arguments are (1) that government




- 2 -

spending feeds on itself, politically, and cannot be held within bounds; (2)
that it frightens investors and may therefore actually have a depressing
effect on production; (3) that it leads to continual deficits, a growing national
debt, and eventually to financial collapse; and (ij.) that it is inefficient and
unproductive.
Monetary and credit controls* The report places considerable emphasis on expansion and contraction of credit as a cause of economic instability.
The Ibderal Reserve System can combat this tendency mainly by curtailing credit creation during the boom* It is pointed out, however, that expenditure
is not determined solely by the supply of money, but depends also on changes
in the intentions of businessmen and consumers.
Explanation of the great depression. Although the report denies
the effectiveness of fisoal policy in stabilizing the economy and places only
limited hope in monetary and credit policy, it is not pessimistic about the
future. This apparent contradiction is explained by the interpretation offered
for developments after 1929* "K&sdirected governmental action contributed
extensively to the conditions leading to the 1929 debacle, just as it did to
the depression of the nineties, of the seventies, etc.ft (p. 858) The chief
mistake, it appears, was the failure of the Federal Reserve System to restrain
excessive oredit expansion during the twenties. A high tariff and unwise foreign lending, encouraged by government, contributed to the collapse.
The seriousness of the situation in 1932 is minimized in the report.
The economic system clearly was not in such a state of collapse that it must
have an outside stimulant in order to get started on the uptrend again." (p. 937)
It is pointed out that the Federal Reserve index of industrial production
reached its lowest point in the middle of 1932 and had risen over 50 per cent
by June, 1933* ^he fact that in "March 1933 th© index was only one point above
the July 1932 low (5I4. as compared with 53) is not mentioned, and no connection
is admitted between the rapid recovery from March to July 1933 and the inauguration of a new Administration in March. The course of economic events
throughout the thirties is described as "politically induced stagnation.ft
ff

(p. 959)
Since the collapse of 1929 and the long subsequent depression are
seen simply as the oonsequence of misguided government policy, it is not surprising that the H.A.M. "Program for America's Future" (Chapter XX, pp. 977 ff•)
is largely negative.