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PUBLIC SPEHDIHG AS A U&hSk TO RkCQVLRY A Statement of Chairman Eccles1 Position The bttainese situation in 1952-35. The salient feature of the business situation in 1952 and early 195S was the existence of unutilised capacity in practically every line of business. This was a reflection of the decline in the national income of over 50 percent, — from $81 billion in 1929 to $S9.5 billion in 19S£* Although, with the increase in population* the real need for goods was greater than ever* the income out of which goods could be bought h&cl shrunk and this gave rise to excess &nd unused productive capacity* The amount of unutilized capacity was incomparably greater and more widespread than anything that bed ever existed previously. In 1921 the national income showed a decline of only 14 percent froa 1920. In 1924 and 19E7 it actually increased over the previous years* The ja&xiaium shrink&ge in the national income in England in the recent depression was only 10 percent. The rapidly declining demand for all goods was reflected in falling prices &n& increasing losses for business. In 193£ incorporated businesses alone showed a loss of $6,5 billion. Confidence in the outlook for profits had been completely dispelled by the cmauLt-tive effects- of tare© jmifff of deepening depression* There, was a general desire for liquidity »»d increasing repugnance to indebtedness of anykind* On top of this came- the banking collapse. Such a development would be deflationary et &ny time* Coming ^when it did, however, its deflationary effects can hs.rdly be over-emphasized# Chocking accounts In banks, which bad already declined by nearly $7 billion to June 1932, showed & further decline of $1 billion by June 1933* In addition, over |B billion of time deposits were in tonka remaining closed after the banking holiday* It cannot be doubted that pftrt of the explanation for tht slownee-s of the recovery movement can be attributed to the desire of individuals and h u l M I I W to replenish balances wiped out from 1929 to March 1935. With the decline: in the national income, the revenue of municipalities, states and the Federal Government likewise- declinst:. Although tax rates warn rained and new tttBMi were imposed, the deficits of public booiea were increasing. This led in turn to curtailment of expenditures on the part of public bodies Otfor than the Federal Goverawnt. qroeoecti-> of a "natural* In these circumstances ths prospects for a natural recovary did not appear encouraging• Recovery entails an increase in the demand for consumers1 goods. Such an lacr^as:, in taRt&d must in general be dependent upon an iiacreasc in incoiiies rather than the spending of previously accumulated balances• According to recent investigations in tht Board1 s Division of Koscjarch, coasaaiers1 checking accounts foraed a w y MftU proportion of the total in 19S5. It is knovm that consuaiers* saviug,s had W i n seriously depleted in the depression, that over one-sixth of tho population waa being supported by public bodies, and that a proportion of th© remainder was being supported by relatives. Moreover, the widespread insocur*ity and. uncertainty would have militatedfcfftiftttthe drawing down of balances of those consumers who possessed them. It appears, therefore, that ta increase ia the d&aand for goods was dependent upon &a increase in coas'ciaers1 incomes, Income**, broadly speaking, caa foe increased ia two ways — by the disbursements of business sad by the dlsburae-meatis of public bodies• Th« prospects of s aatur&l recovery, therefore, depended upon increased disbarseaeatu by business* It V M not euough for business to aake the goods dattanded by consumers* ^° ^ If incoiuoss were increasedt business had to make disbursements for increased inventories or increased espial equipment* Various factors militated against such an incro&&e ia expenditures for inventory and fixed plant* The chief on© has already been stressed —- the existence of uputilised capacity* It must appear uneconomic to any business executive to add to his productive facilities when he is already using only a part of his existing facilities. African industry was geared, to supply a demaac foxgoods exceeding that experienced in 1929, A very large incrtf&je in deaand ovsr that prevailing ia 1932 had to be anticipated, tbtrtftorftg before increased facilities nonld be necessary. Even if there were confidence that ia three or five years such facilities could be profitably used, the prudent course would have appeared to be to delay their purchase in order both to avoid the rl&k of obsolescence and of sn Incorrect forecast* The factor of unutilized capacity appears to furnish the decisive answer to the argument that if the budget had b@@n balanced the resulting restoration of confidence would in itself have led to recovery. T#ere is nothing in balancing the budget that would lead to an absorption of excels capacity &n& hence mke it profitable for business to increase its disbursements for plant and fenuipaent. On the contrary, balancing the budget, by curtailing the incomes of people receiving money from the Government and by reducing buying power through increases taxes, would heve been expected to decrease dea&nd and hunce increase excess capacity* The effects would have been analogous to a decrease in wage disbursements by industry accompanied by higher prices for procuets. there are various other considerations which in the resent depression militated against an increase in disbursements. It Is estimated that states, cities and counties spent over two and a half billion dollars annually on construction in the period 19£5~30$ and that their expenditures for this purpose in 1935 amounted only to approximately $800,000,000. An explanation of this decline is to be found in the reduced incomes &nc property values in municipalities, and tha existence of legal debt limitations• The electric power industry alone spent nearly one billion dollars on construction in 1929 and In 1950. Despite the fact that tfem M l less unutilized capacity in thio industry th&a In -slmcst any other, lti expenditure for construction in 19S5 wes only $150 million* tfela low l?vel of expenditure msy J e in part attributed to Bpeolftl legislation, affecting o utilities* Ba.ilroads, which spent over a billion dollar! annually up to 1929 on plant h*d equipment, r«4u*«4 their expenditures drastically* It is generally recognized that they could not and would not ©pond more on equipment until their traffic and revenues expanded, but extension of revenue depended upon expansion of business* Another larf-e outlet for investment |i In re&identisl err-.ctruction. In the years ltfl»M expendituret: in this, fiela aaoimted to over tllHi billion dollars annually. In 1952 they amounted to soiae $250 million* the explanation of the virtual cessation of buildingftpptarito be twofold. In the first place, thertnifllHtftin individ\ml tUltraii decreased people*,:, ability to build. Secondly, tlw c'arlnkage in incomes resulted in a drastic fall in rents, while builaing costr did not fell firstname.lastname@example.org# than to build* Hence, by and large, it sae cheeper to buy or rent A fall in costs was dependent upon (&) lower rstes of wages in the building trades, (b) lower transportation charges3 (c) lower material costs, and (d) lower interest r»i«#« By 1935 little progress had be-an made in lowering these various elements of coat and the prospects, apart from lower interest rfct«*j were not •onconre^ing* Moreover, a very large number of foreclosed properties overhung the market. Higher rents would follow increased incomes$ but Increased incomes, leaving Goveminent expenditures out of consideration, &re m&ittly dependant upon increased construction and. equipment expenditures. The magnitude of the deflationary forces that QOatlWM after the trough of a sever© depression may easily be underestimated. In the first place, there is a widespread repugnance, amounting almost to dread, of indebtedness* A substantial portion of any increased revenues may be used for the reduction of n e b indebtedness, or held in the form of cash to meet maturities in t f future. Corpora* he tions which adopted the policy in the depression of converting part of their equipment into cash by postponing repairs and replacements will be slow to depart from this policy, Individuals viho have witnessed or (ftxp^ri^nced economic insecurity may be eager to devot© any increaaes In incomes to insurance and serving. In addition, a portion of any increased income will be devoted to the repayment of debt incurred in the course of the depression, to payment of arrears of rente &nd taxes, and to reduction of loan? on inaur&nce policies. Two elements necesaary for recovery appear to have been the satisfaction of the widespread desire for liquidity and the Increased availability of c&pltcl at low retes of Interest, In the depression psychology prevailing in 193)2 rates of interest were low only on comparatively riekless investments. For most business men sad home owners, where the safety of principal waa at stake, the rates were vc*ry high. A period of increasing earnings would huve changed this picture but luifjuiilf earnings were dependent in turn upon increased disbursements, incomes and the deoand for goods. AnfflfWHitonof deaanafleyeltflwould have satisfied the ti for liquloity, ee.tte«d i&reetora to seek emiloysent for Idle and faeilit&twd the transition to lower interest rates* In this case, again, however, an expansion of deposits could, have come about, in the absence oi Govei-niaent borrowing, only M a consequence of increased busineas borrowing and security flotations. The point ll occasionally aade that since the dtrr&ble good* of both toiumm^t ana producers were not being fully maintained •ad were wearing out froni 1929 to IA8t| a time would few reached when they would have to b* replaced anci \&m% this factor would bring about a natural recovery. Insofar as consumer durable goods are concerned, this belief r#«ti on the adsunption that OaBi^Wfft deliberately delayed purchases of automobiles, housea, eto», that they could have afforded to make and aceuaul&ted balances instead. In view of the drastic •hrlakftft o£ ladlfldvsl incomes and the increase in \inampioy«ent? it would s®@m auch more reasonable to assum© that cons'iaers cut down their purchst.t-H of durable goods froa necessity rather thfcn by choice, and thet renewed ourchasoe of such goods waited upon en increase in incomes* Similarly, the decrease in the production of durable producers* goods wad partly a reflection of decreased ability to buy, as, for exaaple, Mkf the M * c with railroads, and partly a reflection of th© absence of need for .-ih goods to meet current Gem&nds. It vtc Is pertinfcnt in this connection to point out-that expenditures just sufficient to maintain the plant necessary to satisfy the daaand for goods prevailing in 19-32 would not have been sufficient to incomes. It would appear, therefore, that "deferred8 demands would have remained deferred until a rise in incomes and in the deaand for goods would make it possible and profitable to satisfy them. It is conceivable that if unit costs can be reduced sufficiently profitable operations say become possible and this in turn say lead to pl&nt expenditures. Australia succeeded in bringing about a modest general reduction in costa both of capital and labor In 1931, In this country, however, by 1982 prices and output h&d declined so drastically and losses were so large that the prospects of bringing about a sufficient reduction in costs while maintaining current demands appeared hopeless, A msre enumeration of some of the inflexible costs that would have had to be drastically reduced indicates the magnitude of the task. Such coats include real property taxes, freight rates, power rates, trade union wage retesf and, for concerns in a weak financial position, interest charges* Technological improvements that permit reduction in unit costs proceed but slowly, considering the country as a whole. Moreover, output would b*Y4 hed to expand simultaneously vlth a reduction of unit costs,ftfotherwise the total aiEbureements of industry and hence the rational iWMNM would b&T« declined still further, calling in turn for further reductions in costs. Finally, there remains to consider the possibility of & recovery arising from thetiepferturefrom the ( o d standard and the fall in ;l exchange. It cannot be doubted t , - such a etftp was a necessary htt condition for r«OOT«Ty in "this country, but it hardly ap sufficient in itself to initiate a recovery* In a country wliose OBpertl are lATge relatively to Its haa? production the stimulus of incressing exports a&y be sufficient to lead to an upward trend in hmgfnt—* In this country, howler, & considerable expantdoa of exports would constitute a very small increase in total procuction. Moreover, as recovery proceeded it KM0U9 be difficult to maintain an undervalued exchsnge rate and to prevent imports increasing aa rapidly as ^-q>orts. Ou own experience wac that imports increased more rapidly than expert** To this ^>oint various poseibilitiss by metns of f'hich a "natural* recovery could tere occurred have been examined. Although cieiiuite proof is never obtainable in quectioas of this kind, « weighing of thvi probubllitieG leads to tne coaclasion that none of them *»ould b»V4 beeA sufficient to bring about recovery. This conclusion r##ti on the widespread unutilized capacity in 195E-S5, on the existence Of depression psychology* and U M persistence of deflationary trends, on the difficulty of reducing cofctb sufficiently to wipe out the enormous losses then prevailing, and on t f improbability of a bl sufficient increase in the world demand for American products to turn th: tide of business here* .%he alternative of Government Intervention Since the prospects-; of a nstur&l recovery igpeartt) so dubious, the only alternative was one initiated by th« Government through en increased spending anci deficit-financing program. In this way, it was expected, incomes would be increased, the dea&nd for goods would be increased, excess capacity would be absorbed, and it would become profitable for business to add to its facilities and for individuals to build n^w houses. As the national income incre&sed, tax yields would rise and th© need for emergency expenditures would decline• In the latter stages of the recovery movement, whtm it was proceeding under it£ own momentum, the emergency debt built up in the depression could be retired* *£he gjjagnltudfc of the spending program It is apparent that not all Government expenditures lead to en increase in buying. Refinancing expenditures, for instance, serve a highly useful service in preventing forced liquidation. They do not, however, result in a positive increase in the expenditures of the public. Similarly, ^ e n the Government epende mon^y that It collected in taxes and would have otherwise been spent by th© taxpayer, -01- there ie a transfer of buying power rather then a net increase. Although the ne§ sctivity-stimixUitliig: expenditures of the Governaent cannot bi exactly measured &n attempt ma iaade to n,i]lfOf1itH it by deducting from total expenditures all those expenditures which are of a refinancing or *capital~bolsteringw nsture, and all tsxes except estate taxes which are assumed to decrease in some measure the expenditures of the public. The results arc- presented in Table X* Table £ Net inco.T:e-ineyea3inK expenditures of the Federal the years .1955-4936 (In ailllons of dollars) 1,851 1,914 1935 1954 1955 S,S04 1956 (1st • *&M months) It will be observed that the net contribution of the Government to the buying power of the conMunity was little greatar in 1955 than in 1952f indicating the idLjWMil with which the spending program got under wsy. The contribution in the first tiaE months of 1956 # exclusive of the bonus, was I ^ than in ttM previous year. The actual receipts, total expenditures, recovery and relief expenditures, and the deficit for the fiscal years 19S4-56, are presented in Table II. Receipts, Expenditures and Pefjc^tg of tfte F€^|g|^j^vt. f Fisca,! Xearp MHrMt. Total and relief Receiat^ expenditures \f expeq,uitnrea Deficit %/ (In millions of dollars) 1954 ?,116 6,745 4,-D04 5,630 1935 5 # «00 8,802 5,657 S0G2 19S6 4,116 6,804 5,291 of debt retireoents and bonus payaeuts. It will be observed that receipts fam toum—i rtiwttlj; while total m+mfiUmn mmtomlm of debt r-tireaents and bonus have rouiaad constant. Eecovery end relief have declined, but this hats been offaet by &n increase in other continuing wmA regular t x p O M M of the Government, such as expenditures for national defense* the actual deficit h&& declined steadily. The explanation of the downward trend la th«? deficit ©s contrasted with tbf steadiness of the net &otlvity*>etiaul& ting expenditure® in Table I ia mainly to be found In the heavy repayments of loans by biLiakB to the Reconstruction Finance Corporation, which while increasing the actual deficit are not tniiatilaraO to decrease current spending* Th© reason for excluding the bonus payment la th$.t it repreaeated an obligation of the Governaent incurred ia Iftifa^ which woul^. have had to be paid in 1945« Moreover, it fc&$ not & part of the recovery and relief program, although undoubtedly a substantial portion of the payment resulted in a net addition to th© current expenditures of the public* In order to obtain soaie idea of the relative osgnitude* of the Government1 s contribution to income, it way be of interest to present some relative comparisonst Set activity^tiffiulstlng expenditure© of the Federal Govemaent, 19B4-S5, as e pereemtag® of 9 Percent The sua of the netioal income for Hal years 1934-45 The sum of the increases in the* national income for the years 1954-55 over 195$ (e) Th© total volume of all construction for the yeera 1927-£$ (Ku«aetfs Estia&tes) (d> Building contracts awartl&ttfbr the ye&rs 1954-55 (F. W, Dodge Corporation Reports) Th,e spending program en- the voluae of daoosit currency The volume of ehfeCKing account G in all banks, pluo Uta dem«nd deposits of the Government in comiGrei&l banks, expanuec between $8 and £$ billion between June 1933 ana June 1956. part 01 this increase WCJS a virlbuUble to an increase in the banks* holoings of Gov^rnaent-guaranteed bonds, part to the deposit of Incoming gold* and the major part to the increa.ee in banks1 holdings of the public cebt. The increase in the aenber bank holoinge of |4»S billioa M M M t i to 45 percent of the lucres s« in the gross public dtibt in this periocu This increase in checking eceouints »eans thet inaividimls and corporatione are holrdng some $8 billion more cash than in 195St in feet are holding somewhat more than in 1929• — This imquestionably has resulted in a great improvement in the liquidity of business and has been perhsps the major factor in forcing long-term interest rates d&rni to their pressnt level. Bo far, therefore, from Government borrowing absorbing the available savings of the coamuaity &nd thu© operating to dxivs interest ratse up, it baa in effect added greetly to the supply of loanable funds,. Tfcdi has, of course, been due in turn to the existaxee o? oxcete reserves which made it possible for banks to subscribe to Government bonds without curtailing their other eiJTKUm assets. m d the recOTrerv How fax- can the re overy to date be attributed to the shading program? It is obviously impossible to give a aatheaatically exact aasw©r to thi© question. In this, as in other problems of economics, we can only attempt to weigh the probabilities in the light of our understanding of the economic mechanism and of our Insight into the question of business motivation. We B&y approach the problem by Hating various factors on which there would appear to be little room for difference of opinion! X. The borrowing of newly-created money or of money that would otherwise be idle does not decrease the current expenditures of the community so far as that money ia concerned, though it »ay possibly decrease the spending of other money. 2. Passing thia money over to people on direct relief and work relief, to wage earners, and low-»sa|&ri©ci workers, probably results in an immediate increase in purchases of various kinds by alaoat a corresponding amount* 5. When business makes additional goods to satisfy thia increased demand, aore income is disbursed to lo?/ income groups, This in turn gives rise to additional purchases. 4, If this gives rise to profitable operations on the part of business, if it is not regarded a© a temporary spurt, and if costs can be reduced by new ©quipaent, capital expenditures will tak© place* This gives rise to additional income. 5, If rents rise to a point where it is wore economical to build a house than rent, new houses will be built. This gives rise to additional income. Th; se various statements are not proved, but a strong presumption of their validity is established, if it can be shorn that actual developments can be explained in their terms. Insofar as it can be shown that actual developments cannot be explained in other terms, the presumption that the major part of the recovery movement is attributable to the spending program is greatly strengthened* Turning to actual developments, it does not appear reasonable to attribute the boomlet of 1955 to the spending program, since the program did not really get under way until October of that year* The aost plausible interpretation of the 1985 rise appears to be that It was due almost entirely to inventory purchases engendered by the expectation of rising prices that were expected to follow the departure from gold, the adoption of the NBA, and the public works program. The short-lived character of the rise indicates that expenditures should b© continuing and steady in character if the groundwork is to be laici for an orderly recovery movement. Starting with the movement that began in the closing months of 1935, recovery has become increasingly more orderly &&& steady. This period also marked the beginning of the positive spending program. The national income produced in «9S4 increased $6.7 billion over 195§» Preliminary estimates, which very possibly are too low, indicate a further increase of $4*8 billion in 1955» Allowing for secondary spending on the on© hand and ior the oojatlmianc© of restrictive developments (for example, continued liquidation) on the other, there is nothing incompatible in interpreting the sum of the increases in the national income in 1934-55 over 1955 of $18 billion in terms of the net direct and primary contribution of the Government of $6,5 billion in the same period. The expansion in the demand for gooas and in the production of goods up to the close of 1935 was mainly in consumers1 goods. This is in accord with theoretical expectations. Only a small portion of Government expenditures was on heavy construction projects and the bulk of the recovery ana relief expenditures went directly to people in the low income classes. The existence of widespread excess capacity made it possible for Industry to meet the increased demands for consumer goods without adding to its plant facilities* In the latter pfert of 1955 and thus far in 1956 industry btri and there is finding it profitable to make expenditures for new equipment and plant. According to various indexes, rents have been rising and vacancies have been declining. This development has been accompanied by steadily increasing residential construction In this field* therefor©, the sequence of events is in accordance with theoretical expectations. The growth in deposits has already been mentioned. This is clearly attributable in major part to deficit financing. The substantial fall in interest rates in the face of heavy Government borrowings is likewise in accordance with expectations, since the resultant increase in funds available for investment had until quite recently met with no demand froa industry. Summarizing the discussion to this point, various considerations were advanced to the effect that the probabilities were strongly against a natural recovery getting under way in 1935. The recovery that actually occurred is explainable in terms of the spending program and the sequence of events has been in accordance with theoretical expectations* It if now proposed to consider whether the recovery can be attributed to any other factor* It is well-known that business disbursements to wage earners have increased in the past three years. The important question, however, la whether these increased disbursements were a reflection of an increase in demand generated from other sources?. or whether business disbursements initiated the increase in incomes and the demand xnor goods. Information is available which throws some light on this question. Recent investigations have indicated that business deposits experienced a rerj large increase from 19S5 to the close of 1955» How can such an increase be accounted for? It is known tha instead of borrowing, business was reducing its indebtedness in this period so that the increase did not arise from this source, A sample study of corporations indicated that only a small portion of the increase could, be accounted for by the sale of marketable securities held in corporation treasuries. The repatriation of American business capital held abroad could likewise account only for a small portion of the increase. Finally, business probably advanced more credit to consumers -18- than it collected in debts from consumers. We are loft, therefore, with the remaining possibility. B >siness must have received more from the community in the sale of roods than it paid out in wages, dividends and other payments to the factors of production. This means, in other words, that while business increased its disbursements in answer to an Increase in demand it did not initiate th© Increase in income® and demands by paying out aior© than it received from the sale of products. If business had paid out mor© than it received in the sale of goods it would have expended money on additions to plant and equipment, maieing up the difference by drawing down Its balances, by borrowing, or by new stock issues* It appear??, therefore, t c t the impetus and motivating force behind fft the recovery to date Is to be found in the other important source of new income, the net activity-stimulating expenditures of the Government* Present phage of the recovery movement In the past six month? there have been encouraging signs that the recovery movement is beginning to progress to a point where it can proceed under it* own nonentiou The machine tool industry has been active. Additions have been made to plant, particularly in the steel industry. Building construction is increasing. Railroad equipuent buying Is growing and promises to increase still further, and there are indications that the utility industry may soon be forced to acid to its facilities• The magnitude of 6ueh expenditures, however, is es yet comparatively small, both in relation to such expenditures in the Twenties and in relation to the curreat voluae of weaving. While the need for the Government*s net contribution to the increase in the national income is diminishing, there is no assurance that it can be dispensed with entirely at this time. It would, in other words, entail grave risks of imperilling the progress of the recovery movement either to cut expenditures abruptly or to impose heavy taxes of a kind that decrease the buying power of the low income groups* It the promise of a substantial increase in ©quipaeat buying and building construction is borne out it should be safe to decrease the Government's contribution substantially in 1957, This would permit an approach to a balanced budget* The actual deficit, exclusive of the bonus and debt retirements, in the fiscal year 1956 was $E,7 billion* With the yield frcm the new tax on undistributed earnings and the increased yields from income taxes arising from the rapid growth of individual and corporate incomes thia year, there appear to be reasonable grounds for believing that the deficit in the fiscal year 19S7 will be substantially less than in the fiscal year 19S6f and that it will be still further reduced in the calendar year 1937, Problems raised by the spending program (a) The burden^ of the < e t r E ^ s question may be considered tbj both in accounting terms and in economic terms. In accounting terms the burden of a debt cannot be determined unless the debt is related to national wealth and the interest charges related to national income* —£0— The tot&l gross debt, after giving effect to the boaua payment, amounted to slightly less than $54 billion on June 30 of this year. As an offset to this debt the Government had a proprietary interest in loaning agencies of $2*5 billion, a cash balance of $4,8 billion, and & Stabilisation Fund of |£ billion. Since the ultimate disposition of the Sabilissatloa Fund is a little uncertain it ifl the more conservative course not to deduct it from the gross debt in arriving at a net fignore* The net debt, therefor®, was approximately $£7 billion on June 50. Although accurate figures of the national wealth are not available* it appears evident t c l t the net debt is a small ffk percentage of the net wealth of tfe* country. The value of listed stockc alone, which must represent only a small portion of tlM national wealthy amounted to $51 billion on July 1, 1956* The interest charges on the Government debt amounted to $750 million in the fiscal year 1936, This was only 1$ percent of the estimated current depressed national income of $60 billion. In the fiscal year 19S£ the interest charges amounted to lj percent of the national incoae* Despite the increase in the debtf therefore, the burden of the debt actually declined fro® 1952, This h£E been due to falling interest rates &n& rising incomes, Tfhile a further reduction of the average yield on Government securities cannot be counted on, there is fairly good assurance of a steadily increasing national income* Since, therefore# further additions to the debt should be of modest proportions, there is a reasonable assurance that the burden of the debt will decline steadily with the progress of recovery, The increase ia the net debt attributable to the recovery and relief spending program from June 50, 1955, to June 50, 1936, is lesa then |7 billion, the increase in interest charges atttibut* able to the spending program is correspondingly small. It does aot appear, therefore, that in accounting terms the burden of the debt has been increased as a con sequence of the spending program. In economic terms a debt incurred at home simply Means that the nation is borrowing from itself* fhen a debt is retired the nation is paying itself. The only way in which the creation of a domestic debt can worsen a country's economic position is when the proceeds of the debt are used to divert people fro® the making of considers1 and producers* goods to the production of uneconomic things. In the present case, as was argued above, the expenditure of thft proceeds of borrowing© resulted in the employment of p#©pl# who would otherwise have b©@n idle and in the production of goods that would not otherwise have been produced. Froia this point of view, therefore, the spending program has not only been costless to the coromualty but has actually improved its economic condition. £) The danger to. baakg It hfcs been generally recognia* d th&t the purchase of Government securities has c?nabled the banks i-o convert losses into profits. A f r J li MMHitla*! expressed, however, that this development, while le-B teraporsrily favorable, may result in heavy losses to banks at soae future date If and when interest raters rise substantially. Although tills oannot be ruled out as a possibility the dangers may easily be exaggerated. It nfiy, in the first, place, be pointed out that the possibilities of loss are Mall in the cage of obligations nurturing within five years. Of the total direct Government obligations held by meiaber banks cf $10,564,000,000 on March 4, 1956, $6,771,000,000 matured within five years. Should the aarket value of the remaining #5,794,000,000 fall by as much as t«n percent, this would amount only to #579,400,000. Thia if only 7.3 percent of the capital funds of »©mber banks. Ther<sj does not zoornvt to be any good reason why memberfeufcias a cla&s should ever IMWI to realize this paper loss if It occurred. Wholesale liquidation would be called for only in a severe contraction, gueh as occurred in 1951-S2. It is to be expected, however, thfit with the FEIC anc. the recent changes brought about in the Federal Reserve Act,, the ocaa«don and necessity of a period of forced liquidation will be avoided. Finally, It my be pointed out that m&ny authorities feel that long-term Ultwf it N t M are ueatiuecl to remain at comparatively low levels for 1 long period. A considerable rise in short-term rates need not result in a corresponding rise in long-term rates* Even in 1929 the average yield on Government bonds was 5,66 jMBrcent. It is interesting to observe that the British banku held almost as large a percentage of their assetb in Government bonds as do the American member banks, the percentage for British banks being 40 percent on December 51, 1954,aaa for Aaericea banks, including holdings of Government~giMr&nte@d securities, 41 percent on March 4, 1956. (e) The danger of *lnflfctlona H m y people, obeerring that inflation in various countries in the war and early post-war period coincided with unbalanced budgets, have expressed fearsftfcfttan unbalanced budget here might likewise result in inflation. Tfcf term •'inflation* i& generally used to denote a sustained period when the demand for goods is outstripping the production of goods* It 1$ characterised by rapidly rising prices, speculative inventory buying, shortage of labor, and increasing inefficiency. It li obvioiiLly a condition to be avoided at all hazards. If the wsir and post-wer f gti of inflation ©re studied more closely it will be observed that they all »hare the same characteristic of heavy and increasing Govenaaant deficits resulting in a rapid increase in the supply of money, %% ft time when industry waa o&dy opcrsting e.,t capacity fend, no more KOO^S could be The lessons ^ my learn from th*sa 8<pTJ<HICO are, f i r s t , Ih&t @ i t i s or paramount importance to achieve & balanced budget* . including provision for debt retirement, M capacity production i s approach d ejad, secondly, if this i i not possible, to prevent Gowrnment borrtvl&g from resulting in sn expansion, of the dipjtit Mill H I J of the covjnti%y ftt ^ttch tiiM*« W M in aiiEenti^l element of a Federal I f ttlting pTOti'r** - s t3tafct I t iteuld be corapenfcaiory in both directione. W must be ftfi prepared to adopt aetiviby-aepr^ssing e measured at eertain tiiaes t i we are to adopt activity-stiiaulatiiig mefeLJures at others, Tn^re does not appe£tr to be any cause for elarra ag yet* As pointed out above, the recovery and relief expenditures of the Government hftVt been, declining for tlM | M t three fiscal year© N r &nd reveautiB have been Increasing. The recovery iaoveaent it beginning to ast;uac the •ppoartnfH of I natural recovcrjr» Ualess Congress auakee vary large new i^jMroprlnticmfl sud m l t f t bueia^se recedes* & ufel&acfcd budget I i aefinitely in &ight. Both psrtiee are eosimitted to tkX» objective* There i s another way in which defioit financing in a depression a&y l#ftd not to iafli-tioa but to & mideslrable boom. n If too great & V& M oi4 aapobit currency t i built up tc tho process, i t m&y 4M l a t e r prove to be excessive for conditions of healthy prosperity, even though the Federal budget a&y at that time be in balance. This aspect of the problem 1» of particular concern to the Reserve Adainietration. BM voluate of currency and checking accounts in M BTSMtrt approaching $S£ billion, which i i over $5 billion in SJWN of 1929, I t i s impossible- to datsvsj&ai whet the probable turnover or this saonay will b& when recovery ie fully achieved• I t &i worth noting, however, that from 19£$ to 19&9 the total Sfffly of Boas? p i f d on the SJflMft UVM llMM lillimfTl the productive processes in • year, re«ulting in the creation of iMMns equal toftppr03d.3as.telythree tisjfl Iks amount of aoitoy* Shr>'ild, lyy siny chsjiee, this* ratio b© restox-ed, the present supply of mon&y vould correspond with & atvtion&l income of over $90 billion. I t May be hazarded tfcftt such an lacoms would not be excessive in relation to our capacity to pEfrdhft goods. I t is obvious^ however, thet this Is Sftisthiajfefcfctmust be closely watched. A further largs «B|Wttft4#a of deposit curr©ae^ would e a t a i l a definitfc risk of a t—fsgjf oov&atint at aoae futur© time developing into a boom* In seeking toftppffmiMthe Lpending program to date i t i s difficult I t svold the teMfSTS of being either unduly c r i t i c a l or vmciuly ©athusiaatie* TIIQ fftft that ^lie appraisal hAM has rim ix% favorable t^rrxa should .not b« interpreted fee liu'let-iting tbftt the view ifi held tl*t the 1f*ntlH| Aegnitude and method could aot have been enormously improved or thitt th& experiment has been brought to a 3uccesaful conclusion* There are, howerer, tiro basic consider©tionts which here made the appraisal more favor&ble than would otherwise be the case. One is that en economic experiment almost by necessity has to be cotifueed, iaoerfect, and made up of a&ny diverse eleBtats^ some working &t croes purposes, 1c rauet, in other words, have a different standard of judgment than would be proper in, say, a chemical experiment itoijPi the right things can bo cone at the right tiae, in the right magnitude, and definite proof if obtainable. The second basic consideration is that, dangerous M an economic or social experiment may be, it nay be or&n note d&ngeroua not to xmke it, longerons as it v&s for the Government to embark upon "t f spending pro^raa finaaeed by borrowing in th© p&Bt three it my be h~l<i that It i a s even more dangerous aot to Isave ri on this coitree. In vi<^w of theae considerations the. program has worked out surprisingly well to date. If It can b« brought %m a successful conclusion — and the prospect now eppesrs reassuring, we will have acquired knowledge of a powerful weapon to combat the evils of economic instability in the future. July 51, 1956,