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October 1, X9M Secretary Jforgenthau Mr. Ecelee Re* Consents on unemployment insurance* At a time like the present when there is a large volume of unemployment it is to be expected that verious schemes involving some font of so-called unemployment insurance should be urged for enactment qp> the Government and should gain considerable support in some quarters* It is true that unefflploy&ent insurance lias some aerit, and an inauguration of it would have certain desirable effects. If the funds were handled capably we might expect that benefit payments in periods of depression would maintain consumption in the lines of industry producing basic necessities and favorable repercussions would be felt throughout all industries. Also, a prea&utt schedule night be set up so as to encourage employers to regularize production, thus tending to decrease the seasonal peaks of certain industries and to cut down th* labor surplus attached to such industries end employed only ia peak seasonal perils* Finally, unemployment exchanges if included in ta# unemployment insurance scheme would increase the fluidity of labort provide a acre efficient organization for relief and increase our Jmowledge about the unemployment problem. However, in spite of these beneficial results une»ploy»ent insurance schemes entail difficulties, and we aaist not be mislead by the glib claims which their proponents make for them* If uneioployment insurance were set up on a national oohamo large fund® would be Involved* How thess© fund& are invested in periods of prosperity and liquidated in periods of depression would have a aoa~ alterable effect upon the volume of business activity and the lev©! of national income* If they are handled in a haphazard manner we Might well expect that unhealthy booms would be furthered and depression periods increased In intensity* I have a gie»orsndus analysing the dif fioulti«» that are involved that I will be glad to have you rr-ad« Strangely enough in Bost discussions of unesployisant insurance this very important c;u«»tlon of how the reserve funds shall be handled is almost entirely ignored* Aflftich*ore i»port«nt objection to unemployment inmrmce le %hm% it only treats a syapto® of the industrial iaal«dju8t»ent0 without any atteapt to get at the basic factors which create them* Thus if a oo»«* ptrehensive unen^loysjent insuraneci progre* were inaugurated it &ight l@ad to complacency on the part of leaders in Government and a feeling that we hav® solved the problem of unesspl0y»ent» Hy general position upon unemployment insurance is that it night be all right to introduce soaie for© of it into our economic system in th© future for the reaeons mentioned earlier but by gll means we &ust r©&eit,ber that this it*, not going to introduce any *cure all11 into the ayete* and that much sore importantttieasuret-.mitt be taken and gr@at@r controls introduced over basic jfactors in our econosdc life if we are to obtain stability* Such a program for increasing eeeurity and introdueing stability ibould ooaoentrate it see©© to a© upon the operation of our aoney liyet©» because money factors are of the greatest importance In permitting both boon periodo and depression periods to go to great lengths and to got out of control with disastrous effects upon basin* sse activity and national income* Unemployaent arises in largest volume at tinea when we are having a severe contraction of bask credit and hence a destruction of bank money which is the cost important typw which us now use. Under such circumstance £ ire also find that deposits are hoarded by corporations and individuals and this places a further depressing factor upon business activity and leads to further curtail* arent of eaployiaent* Thus at the present we fine that bank deposits have shrunken aoðiog like $0$ from the prosperous days of 2&£6 and 1929, while the velocity of circulation of these deposits has declined by 50#« If the President ejtpeets to increase the price level to any** thing nearly approximating the 1926 lerel m6 to Increase indugtrial production and hence eaployment, it is essential that the available money supply and its velocity of ^circulation be increased by very appreciable otk-ur.ts or his program will be dooaed to failure* Of cour»e, we have gotten ourselves into a very aeverely depressed conciitioa and therefore «acli more drastic action will have to be taken to work ourselves out of it, hence it »aj b© necessary for very large Qovenment expenditures before they will take hold and private industries trill come back into the picture, but an the President answered critics in his speech the other night,"Wo country however large can afford to wmisa Its Jas«an resources** ior should we worry about ©a unbalanced budget in carrying out such a program because if we have a large increase Is national income there will be no difficulty at all in balancing the budget from normal tax revenue. It is only when we have a very «uch • 4 ahrunkwi national income that the tax burden becomes onaroue* 9* must get the people of the country thinking in terms of a balanced budget over a period of years in steed of & balanced budget within any one given fiscal year, &B a long run proposition we should provide for *ore direct and forceful action by the body which is entrusted with the responsibility for monetary control* It seems to me that if this body would take action immediately aft:r a decline has started «u<sh of the cuoulatiye effect* of deflation could be averted. Also, if tb& GoTernaect were willing to start out immediately with a spending program which wae designed to fill the gap which private enterprise had left by it» curtail* »ent of new capital construction the monetary policy would be desirably supplemented. le night obtain & better control over the velocity with whioh funds are spent if we had & tax system which was core aJ*viUiulB end which deeigned to effect a more even flow of funds* However, tills ideati of weloaityf while extremely significant, is one which is iiffioulf analyse and one to whioh %s« Governmental policy is not *&*ptvd to ©ontrolling. In other words t we nsiet concentrate upon decreasing the volume of unemployment and to adopt and carry out policies designed to keep employment at a ; axiwuc, and if as the President said In his speech Sunday night *X stand or fall by %y refusal to acoept as a necessary condition of our future a permanent army of unemployed°, it will b@ well to take such seasures promptly. In my opiniony no scheme of unoaployment insurance offers the prospect of doing this to any really significant extent* It is unemployment engendered in the depression phaee of the mm § «• business cycle, when all industry aad business is curtailing operation* and turning men out, that calls for immediate and sustained attention for here is the groat w»sie of our ieaterij»l and husiaii ?<*sources* At best unemployment insurance can but slightly improve the level of production over the period of a business cycle. Altnough it sight decrease seasonal and technological uneffiploaient these after all are of minor significance* Moreover, ita benefits in providing a better or* ganited labor ssarket asd a ©ore efficient organisation that might be used to administer relief while desirable are not of prime importance In salving the real problems of the economic syste» irhich apparently works so badly in certain periods. In conclusion, X suggest that we attompt to put through an Insurance of incase upon a national basis for th© unesployables through the Intro* diaction of f|d age and incapacity peneions of some type* QneispioyBeBt insurance on the other hand would be deflationary if introduced at th# present tiae even tiiough there were a delay of say one or two years before the syeten were actually inaugurated and I b©li©v« that this a&gbt wait until a later date» inasmuch as unemployment insurance is not of fundamental significance in solving the employment problem for the country as a whole.
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