View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.


March 28, 1940


1. Present Business Position and Outlook
The Budget message was prepared at a time when business activity was establishing a new high records The message
emphasized strongly that many of the expenditure estimates were
based on an expectation of continued high business activity,and
that if this expectation did not materialize, it might be essential to reconsider the recommendations.
The expectation of continued high business activity has
definitely failed to materialize. Industrial production, after
advancing sharply from 103 in August to a peak of 128 in December,
has already returned to its prewar level, and this decline has
involved a reduction in private employment of about 1,000,000*
The downward movement, though it has slackened somewhat
during recent weeks, still continues and there is no clear indication that we are approaching bottom. At best, a further period
of business hesitancy seems almost certain and the recovery thereafter modest and gradual. On the other hand, the weight of the
evidence suggests that business may decline substantially further
and that the upward movement may be deferred until the third quarter
of 1940 or even later.

For the calendar year 1940 the index of industrial activity can scarcely average higher than 110 as compared with ICS in
1939; this higher average level of activity, if realized, would
increase private employment barely enough to offset the annual
growth of 600,OCX) in available workers. At best, the volume of
unemployment in 1940 will not be significantly below the 19S9
2. Present W.P.A. Program
The W.P.A. rolls, now at 2,300,000, are 800,000 lower
than in December 1958, when the volume of business activity and
employment were about the same as at present. The W.P.A. must lay
off another 800,000 by June 30 to keep within the present appropriation. Under the original Budget recommendation of #1,000,000,000
for the fiscal year 1941, the average level of W.P.A. employment in
the coming fiscal year will be only 1,350,000 workers, and W.P.A.
must cut its rolls below 1,000,000 in the autumn to keep within this
average and leave some room to meet enlarged winter needs. Under
the present program, therefore, the number of W.P.A. jobs in the
autumn will be 1,400,000 less than at present and 2,200,000 less
than in December 1938. The scheduled reduction from present levels
will cut off the income of three million adults and over three
million children.


Basis for Recommendations
A cut of 1,400,000 in W.P.A. polls would have serious
political and economic effects at any time. Superimposed upon the
present sharp business decline, the results may be disastrous.
From 1936 through 1939 the W.P.A. program provided employment for
an average of 25 per cent of the unemployed; under the original
recommendation for fiscal 1941 this figure will at best average
only 15 per cent and will fall below 10 per cent in the autumn.
The provision for relief employment is therefore extremely meager,
judged by the standards of recent years. Quite apart from the
principle of need, moreover, curtailment of relief employment, at
a time when private employment is diminishing, accentuates the
contraction in buying power and intensifies the cumulative forces
of deflation. The least that prudence dictates is that the Government should not add to the already increasing number of jobless.
But this is not enough. The Government should do more than merely
abstain from adding to the already increasing number of jobless.
It should take energetic measures to halt the decline. W.P.A. rolls
should be increased quickly to 3,000,000 and held at that level until
the current business decline is definitely reversed.
4. Recommendations
In order to carry out this program, it is recommended that
you ask Congress for the following appropriations^^ (p.




a. An immediate deficiency appropriation of
$150,000,000 for the remainder of this
fiscal year.

b. An appropriation of 11,200,000,/for the
fiscal year 1941, with the provision that
the funds will be fully available for
expenditure within the first seven months
of the fiscal year.
5. Method of Financing
These recommendations would involve a maximum increase
in expenditures of about $800,000,000 between now and the end of
January 1941 over the amount indicated by the Budget for this
period. The increase would be offset to the extent of about
$500,000,000 by the excess of tax receipts over the Treasury estimates which is now assured by the current heavy March income tax
collections and by the Treasuryfs substantial underestimation of
customs revenues.
As of February 1, 1941, therefore, the Treasury cash
balance would be about $400,000,000 and the public debt about

$44,500,000J after allowing for the additional W.P.A. expenditures
here recommended. These figures do not include any proceeds from
new taxes recommended in the Budget message. Thus, the proposed
increase in W.P.A. expenditures can be met easily without reducing
the Treasury cash balance below a safe margin, without exceeding
the statutory debt limitation, without using gold in the Stabilization IHand, and without the issuance of silver certificates.


The statutory debt figure of #44,500,000,000 as of
February 1, 1941 is arrived at by carrying savings bonds at
their maturity value, in accordance with the administrative
practice followed by the Treasury. The maturity value of these
savings bonds will on that date exceed the cash redemption value
shown on the face of the bonds by about #1,000,000,000. There
are sound legal reasons for believing that this involves an overstatement by this amount of the outstanding debt subject to
statutory limitations. Thus the true margin of safety on
February 1, 1941 will be about #1,000,000,000 larger than the
Treasury figures, under current administrative practice, reveal.