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)
Form F. R.

511(a)

r

TO
FROM

REMARKS:
After having 2 replies drafted, Mr. Secies
decided to drop the controversy and therefore no reply was made to Senator Byrd»s
letter of January 14., 1939> other than the
radio address of 1/23/39.

GOVERNOR ECCLES' OFFICE



•

.
Senator Byrd quotes the President's objective of an #80billion national income which would automatically balance the
budget froza increased yields fro© taxation &s if It were unattainable or contrary to the purposes expressed in the Democratic
Pl&tfors of 1952. The whole aeaning and intent of that platforn
was to bring about full recovery by private enterprise under
democratic Institutions. Nobody can say that ire have anything
approaching full recovery while we have Billions of unemployed—
people who are able and willing to work—and while we have great
quantities of idle capital as well as unlimited natural resources*
The probles, therefore, ig to put these factors of production
and of real wealth to work, to the largest possible degree toy
private capital and only to that degree by Goveriijaent as will use
productively idle aen, idle resources mad idle capital, not as a
substitute for but as a supplement and stimulant to private
activity until there is reasonably full recovery, % so doing,
human and material resources that otherwise would go to waste nay
be used to produce necessary, useful things, such as schools,
roads, highways, bridges, sluia clearance, conservation of forests
and of soil, hospitalization, CGC caeps, and numerous other things
both desirable, needed and useful to the nation. These are things
that private enterprise does not produce and cannot be expected to
produce•




It is sometimes said that government expenditure8 for these
purposes do not create things that of thea&aelveg produce new
wealth. Bat, certainly, no one who wants to preserve private
capiialiaa would argue that Government should go into competition
with American business and industry to create productive facilities* The whole point Is that at such times as business and industry find themselves unable to use idle sea, resources and
capital, that is the very ti.se, because it is a time of depression,
when the Government can and should do these very things. To do
them requires an increase in debt, just as business activity and
production, #a& building of factories are invariably accompanied
by an increase in private debt*
All of us individually dislike debt* Individually we admire
the Poor Richard aaxias, one of which Is, "Neither a lender nor a
borrower be** But if such maxiias, however good for the individual,
were applied to business or to our nation as a whole, we would
have economic prostration. We would have to go back to a primitive
systea of barter* All of us favor savings, but unless savings ar«
put to work, which usually results from soaebody's borrowing the®,
they are idle and unproductive, yielding no return to the owners
wad producing no real wealth* The cardinal consideration is to
jsalntain a flow of soney in the econoi^y* This is what the Government does when it borrows idle stoney that business cannot or does




~ 5not borrow, and puts It to work, giving eaployaent and creating
a desaand for goods that otherwise would not be cre&ted,
We are all agreed that a balanced budget la essential to
preserve the credit am! financial Integrity of any government•
We cannot continually have deficits* There is no real dispute
aa to the objective of attaining « balanced budget. The issue
*
is, how do we get it? Senator Jfyrd appears to believe that we
ceu get it by having the Government leave men, natural resource*
and capital idle at the very time when business and industry are
unable to utilise these things productively*
The Hoover Administration tried that for three long years
after the crash of 1929 and the record speaks for itself. It is
the aost convincing demonstration of the fallacy of that idea*
Wholly aside from social and humanitarian considerations and the
fact that government exists for the purpose of contributing to
the welfare of all of the people, it is economically unsound and
indefensible.
Sad the depression been cured toy the Hoover Administration
as its apologists tried to convince the American public in the
campaign of 1952, it would have been possible to balance the budget
and to reduce government expenditures. But between the time that
the drafters of the Democratic Platform adopted the general princi-




- 4 plus of that document, the depression had grown infinitely worse.
It Is not necessary to recall the unprecedented econonlc stagnation &ad collapse visited upon the country at the tine the
Roosevelt Administration took office.
It m&Bl be remembered that when this Administration took
office, reopened the banks and turned nation-wide despair into
new hope, it a&de a valient effort to reduce governstent expenditures and put through an eeonosy progr&a early in 1935* At
this time the national Industrial Recover;.' Act, which originated
with Aserlc&n business and industry and was ardently supported by
them, was pat into effect, heralded by its champions and procl&iaed by its very title as a major ae&ns to recovery* We all
know what happened*

Undoubtedly it contributed a greet psycho-

logical stimulus and it contributed temporarily a real stimulus
because business in general rushed into activity, as was said
later, wto beat the codes*. In anticipation of higher prices, it
stimulated a flush of purchasing which all too soon petered out*
W^y? Because underneath there was not a supporting bedrock of a
substantial and solid purchasing; power asong the aasses of the
As^rican people*
It was soon apparent that this device was not sufficient to
sake any great dent upon the ariay of the unemployed or to make
profitable business and industry that needed, most of




•I•
custoaers with a sustained and rising incoae with which to pur*
chase the products both of farm &nd factory*
It beeejae apparent that the Government's first obligation
in such an extreae eeonoaic situation was to revive and rehabilitate aass purchasing power. The principle hare involved
is fundamental in any true democracy. It will be reaeabered that
Mr. Hoover stirred up a treaaendous battle over the alleged principle that the Government, while it might appropriate funds to feed
starving araies, Mist not appropriate funds to feed starving huiaan
beings, that great principle , if it ever was & sound principle,
was rejected and repudiated by the people of the United States.
Senator % r d costpl&ins that he was not consciously "attacking*
the Government in his Boston speech of December 10th. If it is any
solace to his soul, heaven grant him the amendment that he was only
attacking the administration of the Government which, of course, it
is the right and privilege of any man to do* He then makes a very
impassioned defense of free speech md of free press—an admirable
defense, but sonewh&t in the nature of & red herring whm dragged
into this debate. The sa&e aay be said of his reference to Will
Rogers, who remarked, "lie ought not to spend aoney that we haven*t
got for things we don't need".
The point is that we do have the aoney. There is so shortage.
On the contrary, there is an oversupply relative to productive out-




.

lets for its use. Mot only do we have no shortage of capital in
the United States, but foreign capital has flowed into our country
since 195$ in an unending stream, amounting to more than #7 billions.
If the Senator wishes to take the position that we do not need
schools, roads, slua clearance, and, in fact, innumerable other
things even more necessary, such as food &ia& clothing, he Is welcome to take that position*
He quotes with disapproval a Mr* Williaa T. Foster as having
said, "In the future we must prevent the oversaving and underspending which are the chief causes of the depression*, but the
Senator fails to say why he disagrees* The idea that these things
were the sole cause of depression would be absurd, but to wave thea
aside as if the very thought were ridiculous shows that the Senator
has not thought through and does not understand what were the leading causes of the crash in 1929*
Does he really believe that this great nation, with its unexampled record of progress in the past, is incapable of further
development and achievement and that it cannot attain a national
income of at least #80 billions a year? Does he think that
deaocracy and our economic ay*tea can be justified and can endure
if we are to be dooaed now to a low level of national income?
Such a condition could only exist either in a primitive econoay




- 7 under feudalism or an iron-fisted dictatorship which would sentence
great masses of the people to poverty end ordain that they should
endure it*
Many competent business men and economists have recognised
that the nation is capable of producing a national incoae of fully
$60 billions & ye&r. The Brookings Institution, a distinguished
and reputable group of economists, has stated in its publication,
"Income and Economic Progress*, page 8Ss
"If we are to achieve the goal of satisfactory
standard* of living for everyone, the first requirement is to Increase progressively the total aaount of
the income to be divided* Only as the aggregate
national income increases from 80 billions a year to
100 billions, to 150 billions, to 200 billions, w i n
the goal of a high standard of living for everyone be
attained*
"The distribution of income from year to year is
significance not for its aoaentary affects
upon the well-being of the masses, but for its possible
cumulative effects in promoting a fuller utilisation of
our productive facilities and a consequent progressive
increase in the aggregate income to be available for
distribution. We are not interested in aalntalning a
static situation in which the total incoae, even If
equally distributed, would be altogether inadequate;
we are interested rather in producing a dynamic situation
in which increasing quantities of newly created goods and
services would become available for everyone.11
Senator % r d also denounces the British economist, Dr. John
Maynard Keynes, as a "prophet without honor in his own country",
and refers to his "seductive schemes* and "fantastic fallacies11.
The Senator would do well to re&d Mr. Keynes1 "Economic Consequences of the Peace" and then to say whether this prophet—




honored or not—was wrong. He would do well likewise to familiarize
himself with the career of this same economist and his muaerous
economic works which do not have the contempt of authorities in
the field of economic© who have read and understand the®, even
though the Senator froa Virginia has nothing bat scorn for them.
the Senator then incautiously attempts to draw an analogy between British and American recovery* and to conclude that because
the British did not imbalance their budget and have achieved a
greater relative degree of recover? than has been realised in the
United States, this was due to the fact that the British budget
was balanced, the same principles apply to the British econoay
that apply to our own, but the facts are very different. In the
first place, the British national income did not fall nearly as
far as did ours. Our national Income dropped froa aore than #60
billions in 1929 to less than $40 billions in 1922, a cut of sore
than 50 per cent* The gross national ineose of Great Britain fell
froa approximately #2$ billions la 1929 to $21 billions in 1932,
or only about 10 per cent. Moreover, the public debt of Great
Britain had already reached a total of #87 billions in 1952, or
considerably aore then their entire national incase. The public
debt in the United States in 1952 was slightly aore than $Ld
billions, or about half of our depressed national income which
had already been cut in two*




-

By 13S7 the public debt of Great Britain had risen above
#58 billions and their national income was still such less than
the total of the debt, whereas, in the United States our Federal
public debt had risen above $56 billions, but our national income
had increased close to $70 billions. Thus, our national income
for one ye&r alone, though not fully restored, was still aore than
$50 billions greater than the total of our increased national debt.
So such situation existed in England. Their national debt,
having already reached vast proportions long before the depression,
they were in no position to permit its increase and were forced to
a policy of high taxation. In 1957 Great Britain collected more
than $4 billions in taxes, or about 15 per cent of the national
income. If we had applied the same high tax rates to our national
income in the same year, we would have collected $10 billions, or
sore than enough to neet the increased budget for relief and recovery and to leave a surplus.
Senator Byrd sees that the British balanced their budget, but
he neglects to point out that their public debt burden and their
taxes all along have been relatively far greater than ours. Would
he apply the remedy of increased taxation in order to balance the
budget at this tijae? Business is already complaining that taxation
is a deterrent. Of course, the Senator does not advocate any such




-1Gadded tax load. This drives his to the only other alternative of
& reduction of goveraaunt expenditure.
If It were not such a ius.»«.rd to the preserve tion of the country,
If it were not so inhumane, it would be interesting to pat the
Seastor13 retrenchment program into effect so that we could have
another visual demonstration of the economic setback that would
inevitably result, but even that would not convince the Senator because he apparently does not understand enough of what has happened
in recent economic history, «hich should be convincing proof, without need for farther demonstration, that this is not the road to recovery and thus to a balanced budget*
Doubtless sose progress could be oade by Congress both In the
field of taxation and of expenditure so that the gap between that
the Government takes in and what it pays out would be narrower than
it is now* Such a course would be wholly desirable so long as it
was carefully charted so that the Government's contribution to purchasing power would not be withdrawn too sharply at the wrong tiae
and before we have had a fuller nea&ure of industrial and private
recovery.
In his reply to Chairman Bodes, Senator Byrd stated that
"stripped to the bone, the aaln issues between you and me relate to
taxes and debts. lou think the GovernmentVcan 'purchase1 prosperity
on borrowed money• I think that genuine prosperity aust come from




-u "the productive industry of the citiaens of our Republic"•
This clearly reflects the Senator1a aisconce?tion of the
problem and of the economic system. The effect of the Government' s borrowing is, first, to take idle, unused funds in the
hands of individuals and corporations and put those funds to
work. That does not reduce or add to the existing supply of
money. It serely puts it to work or gives it Telocity* The
aoney, after it is expended, again becoaes bank deposits. Thus,
this process neither adds to nor subtracts from the existing
volume of deposits* Nor does this take away fros private industry and business any funds that they need for their activity
in giving employment and producing goods* If the Government's
taking this idle mon&y and patting It to work did take it &w&y
fros business and if otherwise business vould use this aaoney
productively If Government did not, there would be some basis
for the Senator13 alarm about it* Such is not the case* If it
were, interest rates would reflect the competitive demand for these
idle funds*
Secondly, by selling its securities to the commercial banks,
the Government has created new stoney* Due to deflation and
liquidation of bank loans and thus of deposits, this all-important
part of our money supply shrank by one-third between 1929 and 1952.




- 12 The effect of the Government's sale of its securities to the
commercial banks was to replenish this supply of funds bv the
creation of new deposits or new money. It 1ft not a® if we had
a fixed supply of money, Honey expands and contract© In accordance with the demand for it, whether by Goveruaent or by
business, or both. Xn an international gold standard world,
automatic mad arbitrary limits could be put upon the supply of
money, but that is not the ease today*
As for Senator Bird's contention that genuine prosperity
must ©oae fro® the productive industry of the country, that i s —
or should be—self-evident. That is the only place It can coae
froa and the only justification for the Government's contribution
to purchasing power is to help bring about exactly that result*
In quoting fro* recent studies by the Twentieth Century Fund,
the Senator also approvingly cited their statement that "our
economic system would be far aore healthy if debt financing were
used less frequently* and that "measures should be taken to reduce its extent1*. The Senator appears to have missed the point
of this statement. What it &#ans is not that our government debt
or private debt should necessarily be drastically slashed, but
that in the future, instead of doing business so largely through
the creation of debt foras, there should be a far greater reliance
than in the past upon shareholding and the issuance of common and




preferred stocks rather than of bonds, mortgages and other foras
of debt. In other words, they were not talking about the government debt, as the Senator imagined, but about the far broader
question of the desirability of having aore equities and fewer debt
forns in our general economy.
that is one reason why the Adainistration has recommended the
abolition of tax-exempt securities both by the Government and by
States and municipalities, because, among other things, the taxexeapt feature puts a premium upon such securities and tends to
induce private capital to invest in these forms of debt instead of
in equities that iight be issued by business and industry*
A number of authorities have called attention to the fact that
the laws which have grown up over the yenr* have required banks,
insurance companies and saany other institutions to invest only in
high-grade bonds; that is to say, In debt forms. Thus, there is
great competition for such debt forms. These authorities point
out that if other means of financing, particularly preferred stocks,
were eligible for purchase, it would reduce the unduly heavy competition for debt forms on the one hand, and it would reduce, on the
other, the relative volume of debt, substituting therefor shares or
equities in industry and business generally*
That is what the economists really meant in the Twentieth
Century studies—not what the Senator appears to think they meant,
for he says that "this authority declares (that this) will impair



- 14 "the credit of the Government11 • If the Senator will go back and
re&d this carefully, he will see that they were not discussing
government debt at ell*
Senatory isyrd, pointing to the fact that the combined total
of public end private debt in the United States is no greater today than it was in \%t%f flings a challenge to what he calls the
theory and philosophy that there is a© occasion for a l a m about
it* Would the Senator be equally alarmed if priYate business had
incurred a larger proportion of debt and the Government & smeller
proportion? Does he think we can have reasonably full employment
and production unless there Is an increase of debt by somebody?
Why are not the British business sen alarmed when their debt is
relatively so much greater than ours? Bas not the Senator become
alarmed at the wrong things?
There would be danger In this great volume of debt, both
public and private, if our country were destined to stagnation
or retrogression. But debts are relative things* They are great
or snail relative to income* When our national income had shrunk
to less than #40 billions & year in 1932 and our national debt was
approximately #20 billions, the debt load and the debt burden were
relatively far greater than was the case in 1957 when, although our
national debt had increased to about #57 billions, our national incase had risen to $70 billions*




- IS The Senator sees the debt, but he appears to fail to see
its relationship to national incoae, and thus missed the point
which the President and© in hlis -annuel mutMge to Congress«

When

he says or implies that the Mmiaistnition regards the Federal
debt as a national blessing, that is sheer aisrepresentation*
Nobody has contended that it is a blessing, but merely an unavoidable ;aca«ns to the larger objective of full recovery and
restoration of national incoae. Viewed in this proper light, it
oan hardly be considered the frightful blight that the Senator's
alar* about it would indicate*
It is an expedient, a necessity, just as in the ease of the
increase in our imtion&l debt daring the World War, when our debt
increased by #25 billions in the period of approximately two yar.rs*
Nobody has contended that that increase in debt R & S a blessing*

It

was a necessity to fight the war, Just as the present increase in
debt has been a necessity to fight the depression.
The Senator cites that our public debt, national, state and
local, now averages #450 for every aan, woa&a &xtd child in the
country* Without questioning the accuracy of this figure, but
accepting it for the sake of argument* why does he not include the
burden of private debt and see what that averages, plus public debt?




-16If he Is alarmed at the volume of public debt per capita, why
not also be alarmed at the voluae of private debt per capita?
If business, as we all hope, goes ahead to give more employment
and production, it will do so by borrowing money, which means
creating private debt* The Senator is not opposed to that* By
what curious process of reasoning does he oppose the saute principles when employed by Government to utilize idle capital, resources and aan power when private activity is unable to do so?
Be then falls into the coreaon error of saying that the present generation has placed a aortg&ge on present as well as
future generations and that "we are handing down to our children
a staggering indebtedness which they did not incur but will be
required to pay (not heirlooms, but chains)*. The Senator's
fallacy appears to spring froa the notion that persists throughout his argument, that we have just a fixed national income out
of which to service and pay up debts* let he knows that this is
not the case. If ever we achieve an $80-billion national income,
our children and our grandchildren, whoa we hope will have an
even greater national incoae, far froa being in chains, could
afford to pay off the public debt and still have auch aore left
over after taxes than we as a people enjoy today*
This is a f^xj eoaaon and ancient fallacy which the Senator
and so sseny others share* In his "History of England", Lord




- 17 54&c&ulay called attention to it a long tiae ago* Recounting how
the British debt rapidly aiounted and how "shallow politicians were
repeating that the energies of the people were borne down by the
weight of the public burden*, yet how England's wealth grew notwithstanding the alara over the ai*e of the public debt, he wrote:




"It can hardly be doubted that there must have been
some greet fail&ey in the notions of those who uttered end
of those wad believed that long auecesaion of confident predictions, so signally falsified by a long succession of indisputable facts. To point out that fallacy is the office
rather of the political economist than of the historian.
Here it is sufficient to say that the prophets of evil were
under a double delusion* They erroneously imagined that
there was an exact analogy between the case of an individual
who is In debt to another individual and the case of a
society which is in debt to a part of itself$ and this
analogy led the® into endless mistakes about the effect of
the system of funding. They were under an error not less
serious touching the resources of the country. They aade
no allowance for the effect produced by the incessant progress of every experimental science, and by the incessant
efforts of every aan to get on in life. They saw that the
debt grew? and they forgot that other things grew as well
as the debt*
•A long experience justifies us in believing that
England a&y, in the twentieth century, be better able to
bear a debt of sixteen hundred millions than she is at
the present tiae to bear her present load* Bat be this as
it say, those who so confidently predicted that she mist
sink, first under a debt of fifty millions, then under a
debt of eighty millions, then under & debt of a hundred
and forty millions, then under a debt of two hundred and
forty ailllona, and lastly under a debt of eight hundred
Billions, were beyond all doubt under a twofold aistake.
They greatly overrated the pressure of the burden? they
greatly underrated the strength by which the burden was
to be borne**

- 18 You will note that the *aonstrous* British debt which existed
in Macaulay's day was 800,000,000 pounds. Today it is 7,797,000,000
f>ounds sad the British people are •till not ruined nor h&Y© the
children O P grandchildren of the alarmed false prophets, referred
to by Macaulay, been in chains, borne down hopelessly by the debt
saddled upon the® by reckless ancestors*
Their taxes are high—so high, indeed, that if we had the
sane rates in our country, our budget would be balanced today*
Yet, as the Senator himself points out, Great Britain is relax lvely aore prosperous than we are* Omn it be that there is some reason
for British prosperity, other than the mere collection of high taxes
to belauee th© budget, in which th@ Senator from Virginia sees sueh
great sublet
We had the balanced budget* the gold standard, and none of the
things of which the Senator now complain* in 1329• It did not sere
us froa the worst economic collapse in history. The Hoover M ~
ministration tried for three ye&rs to balance the budget, but
national lncooe steadily went down, revenues steadily diminished,
and the budget got more and aore out of balance*
let, notwithstanding its 'unbalance and notwithstanding the
other acts of the present AdainistretIon, of which the Senator so
bitterly coaplains, we had a very large degree of recovery in 195£>
and 1936, &a&9 Indeed, until the middle of 1957* In these latter




- 19 years business profits were very large* Private activity had swung
into action to & very large degree. And as e result for a period
of nine months in 1957, the Treasury collected acre than it spent•
On a cash basis of income and outgo, we not only had & balanced
budget, but a surplus of approximately $100 millions«

That cash

balance was achieved, not by ©lashing government expenditure, not
by imposing high rntes of taxation comparable to those of the
British, but because national income was restored to a level of
from #20 to #50 billions a yer.r aore than it was in 1952. Tax
revenues accordingly increased. That is exactly the President's
prograa now, which the Senator opposes as he has opposed it since
he was & rivkl candidate for President in 1952 and held out until
the last against the President's noain&tion.
Senator Ktyrd harks back more than a century to quote Thoaas
Jefferson and Andrew Jackson, great statesmen of pioneer days,
when the country was just beginning a growth that has been the
amazement of the entire world. The economics suitable for pioneer
days, or even for a pre-war,peaceful world in which the gold
standard almost universally prevailed, are hardly applicable to a
war-torn, economically distressed universe today.
With regard to interest rates, the Senator brushes aside the
point that the interest on the public debt amounts today to only
a little sore than 1 per cent of our annual national income, and




- go states that there should be counted in also the interest on local
and state debts, which, ho soys, would sake th© interest burden
2 | per cent* Very good, but in his attacks upon the Administration,
he was assailing the Increase in the Federal debt.
However, if he is going to talk about the debt burden, why include only state and local debts?

Why not consider all debts, both

public and private, for that is the debt burden upon our people as a
whole.
Senator Byrd says that, all this is beside the real point and
that what is significant 1& that interest rates are now low because
business activity is low. But why is business activity low? Because of insufficient markets for its goods—because of inadequate
buying power. Outlets for investaent today for the profitable employment of our savings are t&r more restricted than was the case
when we were a fast growing nation with an ever-widening frontier,
when our supply of capital was Halted, when we had more outlets
and opportunities for investment than w@ had c&pitel to supply the
demand. Business not only borrowed savings and put thea to work as
rapidly as savings accumulated, but borrowed heavily froa abroad,
and all this vast stream of soney went into the building of America*
Today we have no such rapidly expanding frontiers* We have
the phenomenon ot more savings, sore capital, than can find productive outlet in new enterprise. That is the dominant reason why




-n the owners of capital today put their soney Into government
securities notwithstanding the low yields, instead of putting
their aoney into the building of new plants to produce goods*
In addition, we have witnessed since 1952 the moat extraordinary inflow of foreign capital in our history, seeking
refuge and seeking outlet here because since this Administration
took office America has been all along, notwithstanding the
prophets of evil, a better haven than any other in the world today. Thus we have been glutted with foreign funds*
Why have these accumulations of domestic and foreign capital
failed to go into new production, as was the case through nuch of
our history? It is not because of an unbalanced budget because
the aoney which the Government has borrowed froa these individual
and corporate owners of the capital was only taken over because
it was idle, because the owners of these funds could find no
profitable place to put thea. The Government's spending of this
money created business that otherwise would not have been done*
It resulted in profits that otherwise would not have accrued*
And It has flowed right back again into bank balances, largely
held by corporations and still seeking outlet. Although the
Senator seems to feel that aoney thus borrowed and put to work by
the Government is somehow contaminated, whereas, if private business put it to work it would be sanctified, it does not appear




- tz that the merchant or Little storekeeper sees any difference between the dollar spent ia his store, for example, by & Wk worker
and a dollar spent in his store by an American citizen fortunate
enough to have & job In private industry*
Senator Byrd raises a very fundaaental question when, ia
effect, he asks why it waa that the United States recovered froa
the depression of 1921 and 1922 without an increase in Federal ex*
penditures and, indeed, with & reduction in them, fhe school of
thought which has ©sauaed & U along that recovery would coae from
so-called "natural forces* if Government would only get out, of the
way, should look a little saore closely at the history of that postwar recovery*

It case at a tiae when the nation turned froa war to

peace, when industrial Europe was still prostrate, when there was
one of the isost severe housing shortages in our history, when the
productive plant of the country nrndod to undergo a rapid conversion froa © wartime to a peacetime basis, when we were still
asicing huge foreign loans, a&ny of which have since proved uncollectible. Many experts have pointed to the housing revival as
the leader of that recovery, but there was also a tremendous expansion in the capital and durable goods industries, especially ia
automobiles and public utilities among others. However, the 1921-22




period was characterised by a drastic fall in prices after the
high prices of n&r days* This price decline was precipitated
by what at that time »as called the "buyers1 strike11. We hay*
not h&d since 1929 either the foreign narkets* the latent
domestic purchasing power, or by comparison, the urgent unfulfilled needs, nor have we at the moment th© prospect for expansion of new industries that existed then*
I® discovered in the let® twenties that savings accumulated
faster than outlets for their productive use* They went into
bidding up the stock market and other equities* and into building
huge apartment houses and office buildings that have never been
able to justify the investment*

They did not flow Into new pro-

duction* and the basic reason is that relatively the purchasing
power or the markets .have not existed since 1929 for now goods
th&t prevailed l&aediately after the *er ended &nd in the early
twenties* It is for this reason that the Adainistration,
recognizing that the old diagnosis no longer fitted the case,
undertook to revive purchasing power at hoa© after the Hoover
Administration had waited for aore than three years for natural
forces* to which the Senator still subscribes, to come to the
rescue.
As to the question of th® paying off of public debt, Ch&irsan Secies nowhere has stated that he believed we need never pay
off our debt* that is another unwarranted Misunderstanding* Th*



point is that as private debt expenda, public debt ®&j be paid
off, but that to pay off public debt while priv&te business is
3till short of reasonably full recovery, would have a devastating
deflationary influence under present day conditions.
This point is also dealt with by the Twentieth Century Fund
in their study, "Debts and Recovery*• Under the he&ding, "The
Mythology of Debt Maturities*, they said {page 14):
only do fe» debtor© intend to get out of debt
when their obligation* aature, but the economic system
is so Bade up that any sudden and general atteapt to get
out of debt would be a groat calamity. If the bank*
tried successfully to pay off their debts, for instance,
they would deprive us of aost of what serves ss money in
this county, &nci we should have a catastrophic fell of
prices. If aerehanta all paid off their debts in & short
tise, they would either have to go out of business or to
press their debtors unmercifully. Everyone who had a
charge account, for instance, would h&va to pay it off
and make all future purchases for cash, which would disrupt aarkot® for such thing's as clothing and furniture.
"Sisdlar objections would apply to the paying off
of any important class of debts**
Thus, the point is the timing of the paying off of public
debt, just as tho s&xe vital consideration applies to the tlaiag
of government expenditure* This question of tiding and the
effect of & too sudden withdrawal of the Government's contribution
to baying power in 1957, as compared with 1956, has been explained
by Dr. illvia H« H&asen, Professor of Political Economy at Harvard
University* Speaking before the Academy of Political Science in
Hovomber, 1957, before the Administration launched its prograa in




th© spring of 1958f he said:
"We are currently witnessing a rapid shift la iacoaecroating expenditures both public and private* The props
which have been lifting the level of consumption are being
withdrawn* The sutoaobile boon has tapered off. We are
moving toward & saturation point in installment sales* The
government stimulus to consumption la In process of being
completely withdrawn* in a dramatic reversal fro» a plus of
three billion dollars to a minus of four hundred million
dollars within a aingle year* The full force of this sadden
change upon our recovery has perhaps not been adequately
appraised* One explanation for this is probably that the
public has fixed its eyes on the formal balancing of the
budget* ind since this is not yet balanced, the iapression
is abroad that the government is still lavishly spending
more than it Is taking fross the public in tax receipts*
But this is looking at the form and not the substance*
From the standpoint of consumption stimulation, the feconomic
budget1, so to speak, in contradistinction to the formal
fiscal budget, will already in the current jmr, according
to the President's estimates, be Jiore than balanced. In
other v*ords, when we take account of the social security
taxes, including both old-age and unemployment insurance,
it is found that the government in this fiscal year 1ft
actually exerting a deflationary pressure on the volume of
consumption.
"I do not draw the conclusion that there is inevitably impending a aajor recession* But X do say that
If we are to avoid some considerable recession, either
consumption mist be pushed forward or else investment must
be pried loose from the narrow limits imposed by the immediate requirements of the existing volume of consumption*
*W« cannot lightly assume that consumption, unaided
by government spending, will of itself continue to rise**
His perception was right* The too sharp withdrawal of government stimulation was an important factor in the sharp recession,
which was not reversed until the Government again stepped up its
activities.




- 26 A* to the dilesaaa presented by this problem of an abundance
of capital with relatively meager outlets In new production,
Professor Hanson, In the course of the saae address, had this to
says




"the all-important desiderata are total income and
employment. Had gorernaentsl expenditures been combined
with & planned prograa of cost reduction, there .light
have followed an expansion of income and employment not
only via a stimulation of consumption, but also via a
stimulation of new Investment* This progrua we hare not
adequately achieved, and now that the consumption stiaulua
Is being withdrawn, the forbiddingly high level of costs
renders It difficult for investment to hold back the receding tide. Thus we are left without the necessary
volume of total expenditures, whether for consumption or
invest lent, to carry us on toward full recovery,
"This is the fatal error we have made. Bat X oust
not overstate the ease. For there is one other consideration that troubles as and raises uneasy doubts
whether, though we had Managed our affairs ever so wisely,
we should even so have been safely and securely on the
road to full and sustained recovery* X refer to certain
technological and other conditions which in part determine the voluaa of investment outlets* For it is not
true, as is soaetiaes alleged* that technological conditions have been uniformly and at all tiaea equally
favorable for new investment outlets* Hot every period
can be characterised as a kind of new industrial revolution*
The introduction of power-driven machinery was followed by
a prolonged period of difficult re&djustaent. la a later
age. as the curve of railway construction eventually
flattened out* it was discovered that there was no adequate
ground for the easy optimism that plenty of promising investaent possibilities would surely appear to fill the g&p.
In point of fact they did not appear in adequate volume,
and so there ensued toward the close of the last century
a prolonged period of secular stagnation* Xt is true that
in the course of tiae technology gave birth to the electrical
and autoaobile age and with it a new era of highway construction. Altogether these devolopaents swallowed up vast
mum of capital; but it Is not difficult to see that this

- 27 "latter episode is nearing completion and, as baa
happened before, nothing else of equal magnitude has so far
appeared above the horiaon. Add to this the wholly new
fact of a rapidly approaching cessation of population
growth. Let the perennial optimist reflect on the
enormous messes of capital that found investment outlets
during the nineteenth century for no other reason than
that the population of England quadrupled, that of
Europe trebled, while that of the United States increased
fifteen-fold* For these and other reasons we shall do
well to ponder deeply the problem of the long-waves, or,
if you prefer, the problem of secular stagnation, the
magnitude of which say well, in the period which lies
before us, quite overshadow that of the business cycle.
Viewed against this background, goveraaontal expenditures
take on a new significance."
Is for inflation dangers, everyone will agree that we cannot
go on indefinitely creating debts and piling up deficits. However,
inflation results when we create too such money relative to real
wealth* We ssust remember that laore than 30 per cent of what we use
for money Is bank credit. In addition, we have our supplies of
currency, including gold and silver. Bank credit noraally expands
and contracts in accordance with the needs of business, When we
create too much debt, too great a voluae of bank deposits which are
a fora of debt, or, in other words, when we create too imich money
and too little production of real wealth, then money becomes cheap
relative to real wealth* That is monetary inflation.
We should look upon money as a seans to an end, and we aust
consider its creation and extinguishment In relation to the creation
of real wealth, of which it is but a symbol and a shadow. So long as
idle facilities and idle aan power are being used to create real
wealth, and are not at the saae time being taken away froa private



industry* it eanaot b@ said that Inflation is t&kiag place..
Senator % r d appears to se@ && inconsistency in the fact
that various govornaenx officials, including Chairaan Eceles,
have pointed to the Inflationary danger® in continued budgetary
deficits «nd yet today advocate the continuance of the deficit.
Again, the- point is one of proper tisdng* We bad a vivid
demonstration in 1957 when the sharp withdrawal of the Government* s net contribution to the spending stream was followed by
the aost precipitate industrial downturn on record. This ®@&nt
a downturn likewise in national Income9 and as a result* & d o m tura in th© M M W I collected by the Treasury*
twist ill J at this Juncture, Government withdrawal is not the
i
road to & balanced budget or, in other word®, to & B mud of the
deficits. If the Government*a contribution to the spending stra&»
oannot safely be suddenly and drastically reduced, then th© oaly
other alternative is an increase in tex&tioa. Pot#ifely h? spreading the incom® tax base andferingiiigrates on the iatermediate
groups more in line with other rates in the higher income tax
brackets, some* more revenue could b© derived. Bit a tax on consumption at this tins would set bacic the ecanoay, not advance it*
then private business recovery wag rapidly advancing in 1936,
Coalman Secies, &mng others, advocated that a beginning b© s&de
in taperimg off the government contribution because at that tin*




- 29 -

private business was making an Increased contribution to the
spending str@®». This is at the heart of the concept that the
Government* s functioning should be tined in & compensatory
asnnar.
p
Senator Byrd and other critics of the M;iinistr&ti on
apparently fail to understand is the necessity for a more
flexible governmental functioning. Very siaply stated, it aeons
that in depressed tines, instead of trying to offset shrinking
government revenue with higher taxes or reduced expenditure,
tlist the Govsmaent frankly accept deficits temporarily, not
permanently, so that the Government's net contribution to the
spending stress may tend to prevent deflationary forces froa
continuing downward and in order to stistulate an upturn. Then,
&t the other swiag of the cycle, as business recovery progresses,
the Government shall taper off its contribution as prlv&te contributions to the spending stream are aade so that the deficits
aay be eliminated, the budget balanced, and the debt reduced,
the sea© general considerations apply to taxation, namely,
that inste&d of trying to increase t&x rates in a depression
when business and individuals are least able to stand the added
rates, it would be better to reduce taxation teapor&rily at
least, ovexi though it increased the deficit, so that the remission of taxes would tend to stiaul&te revival. Conversely,
in boon tiaes, instead of reducing t&xes as ve have done in the



- so past, it would bo a tyiser procedure to increeae the rates both
as a ise&ne of restraining unhealthy speculative developments
and as a means of staking up for the deficits incurred on the
other side of the cycle*
Surely this is not an approach lacking in economic soundaeas or inconsistent with our system. In feet, it is the only
logical alternative to avoid the impossible policy Qt government inaction and non-intervention .in depression—e. policy
which the Hoover Adsi :istr* tion vainly tried—-orf &t the other
extreao, to avoid regimentation and dictatorship*

It is en-

tirely a. practical approach to an admittedly difficult situation
that did not arise in pioneer &&j® or when Government was not
compelled to Intervene on the large scale aade necessary by
present day problems and by changed conditions throughout the
world*
There are Manifest difficulties of edi&niatr&tlon^ich are
perceived by Senator S^rrd* Certainly. once the objective is
fully understood, even though the timing &nd direction of expenditures were far froa perfect, it would be preferable to
what hus clearly baen In the past £ failure adequately to appreciate the unbalancing influence of wrongly timed expenditures
and taxes* While Senator Byrd seeas to consider these administrative difficulties insuperable, a good mm? others do
not agree,




-51Thus, 1 B their Illuminating volume, "Toward Full Employment", the authors devote a good deal of attention to how the
problem might be organized on a practical basis. These authors
are practical sen. They are, Henry S. Denaison, President of
the Dennison Manufacturing Company; Lincoln Fllene, President
of William Filene!s Sons Company; Kalph £• Flanders, President
of Jones and L&mscm Machine Ckmp&nyf and Morris E. I»©eds,
President of Leeds and Horthrop Coapaay.
In advocating exactly the general approach adopted by the
Administration and in their discussion of the principles of a
flexible budget, which they strongly advocate, they reach the
conclusion that this is the most pr&ctie&ble and the soundest
approach to the problem* These business men c& not be dismissed by Senator Byrd as "crackpote".
Senator Byrd seems to find it astonishing that a vital point
to be considered In depression tisses is the deficit, but,
obviously, the Government cannot make a net contribution to the
spending stre&a either if it reduces its expenditures or if it
collects as much or aore in taxes than it pays out* The only way
it ean make a net contribution is through deficit-spending. It
does not follow, of course, as the Senator seeas to think, that,
therefore, the bigger the deficit, the better the result. He
loses sight of the feet that at best the Governaent** contribution




- 32 cannot be unlimited or without regard to the debt situation or
the creation of new deposits. There are aany eircuaseribing
factors, all of which h&v© to be considered*
Likewisef it is not merely a question of the admittedly
Halted amount which the Goveraaent can contribute to the spending stream, but equally vital la how the contribution is made.
If it is atade with a view to stimulating private busineas recovery, that Is one thing• If It is made in a way that discourages private business recovery, it defeats the fundamental
objective of the whole program,
Tiaing is also important, as we witnessed fro© the experience
•

of 1956 and 1957. Thus, even if the Government had no debt whatever and if we were in a period of full employment and speculative
excess, to have the Government contribute sore to the spending
stream at that tiaae would be unsound. In other words, it is not
simply a question of whether we do or do not have any public debt*
Manifestly, with no debt, the wrong timing would be bad, just as
if the debt were insupportable it would be unwise to embark upon
deficit-financing. This is evident from the British situation
where the debt was already so large that it was considered important
not to increase it and better, therefore, to balance the budget,




not fey a sharp reduction of government expenditures, but by increased taxation*
{The Senator's failure to coaprehend the lassie principles involved is evident from the fact that he otskes the stateaegrb that
because Mr. Hoover had deficits amountIng to oore than |S
billions in 198£9 w® should have had recovery. Bat this Is to
aiss the whole point*

The Hoover Administration unbalanced the

budget. Indeed, it had no choice because the budget unbalanced
itself due to the fact that instead of adopting this rejpy prograa
on a scale adequate to halt the deflation, they did virtually
nothing until lete in the depression when money v&& rushed into
banks, insurance companies* and other business and financial institutions in the attempt to prop thesa up while the credit
structure continued to erasable. They failed completely to put a
bottom under purchasing power, which Is at the very basis of a
program of this character*
Senator Byrd echoes the familiar platitude that he is In
favor of getting business prosperity restored by restoring confidence* This, he thinks, will arise from "restoring confidence
on the part of the business coaiauiiity in the fairness of the Government (it is to be noted, in passing, that here the Senator uses
the term "Government11 instead of "Administration", though he
thought it objectionable to say he was attacking the Government)




- 54 R

by eliminating needless frictions and restraints end by freeing
the enterprise of a great people who want jobs, not ch&rlfcyf work,
nott&xes." Surely no fairainded ®&n would take exception to any
of these noble phrases. Everybody Is for all of that, the
practical point is, however, how can confidence be restored?
After the crash of 192$ we did not have these things, these
Administration policies, of which the Senator complains, and there
was no confidence. Business grew steadily worse. In 1355 and 1956
we did have innumerablo things of which the Senator complains and
against which h® voted, I and,yet, we had a very large recovery of
business. Indeed, it might be said that there was too much confidence of the wrong kind* Certainly business profits were rery
large, comparing favorably with the late twenties.
The Senator sseas to think that confidence is something abstract that can be conjured Into being by soaie form of incantation
such as Sr. Hoover practiced so assiduously, but unsuccessfully,
when he was assuring the nation that prosperity was just around
the corner. Confidence is based upon something far more tangible;
aaaely, the prospect for asking & profit, the prospect for asking
a profit arises when business sees an opportunity to build plant*
or to use existing ones to produce goods to sell to c isto&ers.
That saans that customers must hsve some money with which to purchase the goods.




this is Just another way of saying that pureh&siag power is
& vital consideration, though one would aeror guess it from reading the Senator's statements*

Instead, he avows his faith in the

Natural forces* of recovery i& spite of the practical experience
of the past decade. He states with an air of finality that we
*had pretty good business in the United States, with occasional
interruptions, for 150 years before the era of deficits began in
1951*.
He is still aystifled as to what produced the recovery beginning in 19X4. It could not by &ny chance, «eeordlng to his
view, be remotely connected with the Government1s stimulation
of purchasing power. The downturn in 1937, of course, had nothing
whatever to do with the withdrawal of that stimulus to purchasing
power* It was all due to "natural forces11. He does concede that
there were occasional interruptions in the past, but, of course,
these interruptions of prosperity In the past had nothing to do
with the ebb and flow of purchasing power. That w&a "natural
forces* too*
Senator Eyrd attempts to prejudice the Administration's
position by pretending to believe that it contemplates debt for
the sake of debt* Thus, he violently denounces what he e&lls the
"doctrine that debt for its own sake is good, that deficits for




"their own sake are good, and that as expansion of hank credit
for the purpose of financing deficits is good8. That is sheer
misrepresentation*
After excellently stating that the general flow of purchasing power wist com© out of production itself, Senator Byrd
then lapses Into the observation that "all the financi&l
aanipalations of government deficit-spending desired to create
additional purchasing power serely mess up and distort the
picture"• Something is definitely oessed up and distorted, but
it appears to be the Senator's thinking and not the economic
situation or the recovery program.