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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 Ji at this Juncture, Government withdrawal is not the 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.