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January 7, 1934*
Any attempt to sell municipal bonds now held by the Government would
result in attracting to this source capital which it is desired to have
.vailable for Federal financing*

In other words, a sale of these bonds would

be in direct competition with the proposed Federal financing and it might
also have a very pronounced depressing effect upon the municipal bond Biarket
if a substantial amount of these were sold*

The selling of these securities

would be considered deflationary in that they would absorb a portion of the
funds which would normally go into the long term capital market, which funds
would tend to stimulate the capital goods industry*

It would be far better

to finance the holding of these securities by Public Works through Treasury
short term financing at low interest* As these securities are entirely
tax-free, in placing them in the hands of the public the Government would
lose the tax benefit which it would otherwise get if the same funds were invested in governments*
There are other reasons why it is probably desirable not to sell the

It is the view of students of the problem that better results might be

obtained through the Public Works program if municipal public works were
financed, not by loans as heretofore, but by direct payments just as is done
in the case of Federal and Civil Works Administration projects*

This course

is said to have numerous advantages*
In the first place it would be of material assistance in getting
the money to work quickly*

One of the slowest ways in the world to get

money to work is to lend it to a municipality and experience under the
present Public Works act has confirmed this impression*

If the money were

put out directly instead of through the medium of lending a great deal of
time would be saved*

The same result could not be attained by increasing


the percentage of the grant from SO per cent to a given figure short of
100 per cent, because the elements of delay would still be present* Further emore, the direct payment method would assure the extension of aid
to municipalities which at the present time lack borrowing power or credit
but where unemployment is particularly severe*
The force of the preceding arguments was back of the establish*
ment of the C«W»Z»

But the plan as outlined above would have several

additional advantages since it would result in the substantial structures
of permanent utility and would moreover stimulate the capital goods industries*

These two features so essential to recovery are for the most

part not present in the Civil Works program*
Moreover, a program based on direct payment would result in
placing the burden on the Federal taxing system which is based upon
ability to pay and would relieve the drain on the local taxing systems
which are not so based and rest for the most part on the general property

The result of most local systems is to cut directly into purchasing

power. This is not so with the Federal taxing system which affects only
surplus income* Furthermore, local communities are very heavily burdened
with debt which they are much less able to bear than the Federal Government
is able to support the Federal tax burden*

Then9 too, a municipality, just

like an individual, must balance its budget annually, itiereas the Federal
Government is free to balance the surplus of boom times against the deficit
of depression*
At the present time it is estimated that one and a half billion
municipal securities are in default* or nearly 10$ of the total outstanding,
and that many more are on the verge of defaulting*

This has forced the

-sclosing of the schools and the reduction of those on the public payrolls,
thus increasing the necessity of C«W#A* and Emergency Relief expenditures
to carry the unemployed*

The Municipal Bankruptcy Bill now being strongly

supported by many interests and the demand for Government to finance the
current requirements of municipalities are results of the Government's
pressure upon states and municipalities to use their credit to carry their
relief burden* or to provide employment through Public Works•

In my opinion

it is, therefore, a wrong policy to further increase the obligations of
municipalities, counties and states in order for them to expand their Public
Works program to give employment, when it only brings them closer to bankruptcy » ultimately forcing the burden on to the Government to finally take
care of the destitute and unemployed*
In case it should be decided to proceed with Public Works on the
basis of the Government providing the funds as a grant it would, of course,
be necessary as a matter of practical politics to make the grant retroactive•
It would never do to continue to exact interest and repayment from the municipalities which were quick to respond to the call and to make direct payments
to those that lagged behind*

A new basis for Public Works would mean can-

cellation ~ but this would involve not over $400,000,000*
In case it is desired to cancel it would be much more difficult to
do so if any of the bonds now in the hands of the Government have been sold
to outsiders*

In other words, if freedom of action in respect of future

Public Works policies is to be maintained it is extremely important that
municipal bonds now in the hands of the Government be not sold*