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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 record.

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 per-

iod 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 105 in
1939; this higher average level of activity, if realized, would
increase private employment barely enough to offset the annual
growth of 600,000 in available workers*

At best, the volume of

unemployment in 1940 will not be significantly below the 1939

2. Present W» P. A. Program
The W. P. A. rolls, now at 2,300,000, are 800,000 lower
than in December 1938, 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 cxfc 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 le^s 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.

3. Basis for Recommendations
A cut of 1,400,000 in W.P.A. rolls 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 Govern-

ment should not add to the already increasing number of jobless®

4. Recommendat ions
In order to maintain W#P.A. rolls at their present level
of 2,300,000 workers until the decline in private employment has
been definitely reversed, it is recommended that you ask Congress
for the following

a p p r o p r i a t i o n s *

a. An immediate deficiency appropriation of $80,000,000
for the remainder of this fiscal year®
b. The appropriation of tj#000,000,/recommended in your
Budget message for the fiscal year 1941, but with the
added provision that the funds be made fully available
for expenditure within the first seven months of the
fiscal year.
These recommendations will merely permit W.P.A. to maintain
its present rolls; they will not enable ?f.P.A# to add to its rolls


any of the workers now being laid off by private industry, nor any
of the new workers coming on ihe labor market at the rate of 50,000
a month.

On both humane and economic grounds, this constitutes a

minimum program.

5. Method of Financing
Maintenance of W*P«A# employment at an average level of
2,300,000 workers through January 1941 would in no way interfere
with the fiscal program outlined in the Budget message last January.
Although this wodd involve a maximum increase in expenditures of
about $500,000,000 over the amount indicated by the Budget for this
period, the increase would be offset 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 Treasury*s substantial
underestimation of customs revenues*
As of February 1, 1941, therefore, the Treasury cash balance
would be about $700,000,000 and the public debt about #44,500,000,000,
after allowing for the additional W.P.A. expenditures here recommended*
These figures do not incMe any proceeds from new taxes recommended
in the Budget message*

Thus, the proposed increase in W.P.A. ex-

penditures 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 Fund, ard without the issuance of silver certificates*


Th© 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 practi ce 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

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, on the basis of current administrative
practice, reveal.