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I do not think anyone in the country is more anxious than I am
to lessen or remove the wide swings in business activity that entail
so much misery and social unrest.

No problem facing our generation

seems to me as important as this one.

It was because of this feeling

that I originally went to Washington.

It was because of this feeling

that I accepted the chairmanship of the Board of Governors.

It was

because of this feeling that I am continually •urging the necessity
of coordinating monetary and fiscal policies in a grand frontal attack
upon this most pressing of all economic and social problems.
I should like to make it clear that I am expressing my own personal
views and am not speaking for the Board of Governors or the Administra­

The problem, as I see it,• not one of party politics but of

economic realities.

Wide swings in business activity occur in all

capitalist countries regardless of the form of government and regardless
of the party in power.

When we are all agreed as to the desirability

of the end, it would be most unfortunate to have the determination of
the proper means become a matter of party politics and settled in the
heat of a political campaign.
lican solution.

There should be no Democratic or Repub­

In my opinion, there is only one feasible solution

and that should be equally espoused by both parties.

Heaven knows, there

are plenty of other things about which honest differences of opinion may
legitimately exist.

I think that we have the knowledge and the means to achieve
at least a partial solution of the problem of economic stability,
but I also think that the solution cannot be achieved without
widespread understanding of the elements of the problem and wide­
spread agreement as to the proper course of action called for.
In order to place the problem of securing greater stability
in its proper setting let me sketch for you very briefly a few of
the more significant developments in the past ten years.

In the

first place, I do not think that the depression was caused by the
malpractices of particular individuals or by the stock market crash.
Such explanations are too easy and fail to take account of the
stubborn fact that building started down in 1928 and general business
activity began to decline before the crash.

Moreover, they cannot

explain the worldwide character of the depression.

We have to look

much deeper into our economic system to locate the real trouble.
I do not pretend to understand all that happened in the business
world in the late Twenties.
highly significant.

Certain facts, however, I think are

One fact is that corporations reporting net

earnings in the period 1923 to 1929 paid out in dividends only #38
billions of their total earnings of $70 billions.

The difference was

in part put back into plant, which in some cases resulted in excesses;
in part loaned to speculators,

which weakened Federal Reserve control

in part invested in other corporations, which tended to decrease
competition; and in part added to cash balances, which tended to
decrease consumer buying power.
The second significant fact is that a substantial part of the
money used to purchase consumer goods was borrowed.

The purchases

of the mass of consumers were in excess of their incomes.

When con­

sumers either could not or would not borrow any more, the demand for
goods was bound to decline.

This is what I think happened in 1929.

Birring power was becoming deficient in relation to our capacity to

When industry could not sell its output it immediately began

to restrict its expenditure on capital goods, but every restriction
of expenditures led to a decline in incomes and every decline in incomes
led to a further decline in the demand for the products of industry.
We had entered upon the vicious circle of deflation.
There were at least two other important factors contributing to
the violence of the depression.

In the first place, consumers, spec­

ulators, and corporations all set to work repaying their debts.


every time they restricted their expenditures in order to repay debt
the demand for goods fell off, output diminished, and incomes were
further reduced.

Debtors were fighting a losing battle, since any

portion of the debt they were able to pay off resulted in a further
decline in the national income and made the burden of the remaining debt
more crushing.

The other main contributing factor was bank liquidation.

Due to

credit contraction and bank failures the supply of deposit currency,
the major portion of the purchasing power of the community, declined by

When finally the depositors lost all confidence in the banks,

the whole system collapsed.
These various factors, mutually intensifying, wreaked terrific
havoc in our economic life.

The amount of income produced declined from

$80 billion to #40 billion, despite the fact that our population and
efficiency were increasing and we had the finest industrial plant and
natural resources in the world.

At the beginning of 1935 it is estimated

that 15,700,000 workers were completely out of work and that the majority
of the remainder were working only part time.
Since 1933 the trend of business has been unmistakeably upward.
Liquidation has apparently run its course and the capital market is
beginning to function again.

The national income has risen about 50 percent

and with it has risen the value of all property, real estate, stocks and

With the increase in the demand for goods, corporations are begin­

ning to discover it profitable to re-equip and extend plant.

With the

rise of rents and real estate values individuals are beginning to discover
it profitable to build new houses.

We are now, we may hope, well launched

on the road to full recovery.
What is the explanation of this happy change in our circumstances
from the dark days of 1932-1933?

It cannot be attributed to the efforts

-5 of private individuals or corporations.

As I just pointed out,

individuals and corporations are only now beginning to borrow and
spend on durable goods.

The explanation is, I think, perfectly

The recovery is mainly attributable to the fiscal policy

of the Government.

It was the Government that poured $4,200,000,000

into railroad and financial institutions, set up machinery for the
refinancing of billions of dollars of farm and urban mortgages, and
by so doing stopped the terrific spiral of liquidation and bankrupt­

It was the Government that spent $7,800,000,000 since 1953 in

public works, work relief, and straight relief.

Besides discharging

the community*s responsibility to care for the destitute, such expend­
itures have operated to increase the demand for goods.

More people

were employed to make these goods and their incomes, in turn, were
spent in large part for additional goods, It was the Government which
through its new issues, subscribed to in part by banks, was/responsible
for a restoration of the deposit currency wiped out in the depression.
In real terms, that is, in terms of the community’s welfare and
in terms of the production of goods and services, the Government's
expenditures have not constituted a burden on the community.
have been a positive benefit.


In money terms the cost has been sur­

prisingly small, in view of the magnitude of the accomplishment.
The increase in the Government*s gross interest-bearing debt from
the beginning of the fiscal year 1954 to the middle of the fiscal year
1936 was $8.02 billion.

The recoverable expenses of the Government,

-6 -

after making an ultra-conservative allowance of 25 percent for bad
debts, amounted to $2.25 billion.

The increase in the Government's

cash holdings, including the Stabilization Fund, was $5.15 billion.
The net increase in the debt, therefore, m s $2.64 billion.


absolutely this appears a large figure, it is small relative to the
national wealth and the national income.

Even after allowance for the

payment of the bonus, which is not part of the recovery program, and
a further deficit in 1936 and 1937 arising from emergency expenditures,
the figure will remain small in relation to our debt-paying capacity.
The carrying charges on the total Federal debt have increased
from $599 million in 1932 to an estimated $750 million in 1936, or
only $150 million per annum.

The carrying charges on the total Federal

debt amount to less than lj percent of our present depressed national
income, and to less than 1 percent of the national income of 1929.
The carrying charges were a higher percentage of our national income in
1921-22 than they are at present.
The end of the deficits is now, I think, in sight.

With the increase

in the national income, tax revenues are increasing rapidly.

If new

taxes are introduced which yield the amounts envisaged by the President
we should be very close to a balanced budget in 1937.

The bold policy

of stimulating recovery bids fair to be brought to a successful conclusion.
I have not recounted the highlights of the economic developments
in the past decade for their own sake, but, rather, for the light they
may shed upon the proper handling of the problem of economic stability

in the future.

The lessons or morals I would draw from our experiences

are as followsî
In the first place, they point, at least to me, to the necessity
of modifying our tax system in such a way as to facilitate the even
and uninterrupted flow of money through the economic system.

I do not

know what the final form of the recent tax proposal will be but I am
heartily in sympathy with the idea of making it more difficult for
corporations to accumulate great amounts of cash.

The prospects of

securing a more even flow of money would be greatly enhanced if corpor­
ations could be induced to maintain a fairly steady proportion between
their cash holdings and the volume of their operations.
In the second place, I most fervently hope that one lesson we
will all take to heart is the wisdom and, indeed, absolute necessity
of having the Government's expenditures vary in a direction counter to
private expenditures.

If the Government contracts its expenditures and

retires debt when individuals and corporations are doing this also, then
our problem is hopeless of solution and little can be done through
monetary control.

If, on the other hand, the Government acts as a balance

wheel, restraining the flow of money on the upswing and expanding it
on the downswing, then the prospects are immeasurably better of securing
at least a moderate degree of stability*
The final lesson I would draw from our recent experiences is the
absolute necessity of conscious and deliberate control of the supply

-8 -

of money in order to forestall as far as possible excessive
expansion or contraction in the volume of the community's expend­
If we have learned the importance of coordinating these three
instruments of policy we may be nearer than we have dared to hope
to the ideal of a more stable economic life.

If, on the other hand,

we have learned nothing and refuse to make any effort to achieve
stability, then I think we will deserve the breakdowns and disruptions
that will surely occur.