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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
corr@epo.ndingly#
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,