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FEDERAL EXPENDITURE, ECONOMIC GROWTH, AND
STABILITY
Robert T. Patterson, associate professor of economics, Claremont
Men’s College
I f we bear in mind the inherently close and complex relationship
of Government spending, taxation, borrowing and debt management,
as well as monetary policy, it is appropriate to separate out and focus
attention upon any one of these parts of the fiscal-monetary pattern.
In this compendium we are particularly concerned with the signifi
cance of Federal expenditure policy in terms of economic growth
and stability, although the spending of State and local governments
is not to be overlooked.
An earlier study, made in the same manner and for the same pur
pose as the one we are engaged in, dealt with taxation.1 In its pre
liminary section, entitled Focus of Tax Policy: Short-Run Stabilizaand Long-Run Growth,” various statements appear with respect to
the nature, causes, and relationship of economic growth and stability
which are germane also to a study of Government expenditure. A l
though the present paper undertakes to offer a fresh, but not in all
ways dissimilar, view, it seems worthwhile to call attention to basic
observations made in the earlier study. One, for example, is that
although there is “considerably less than unanimity among duly ac
credited economists about the true explanation of business cycles * * *
there is a broad range of agreement about the key role of monetary
and credit expansion and contraction in producing surges of business
and recessions.” Another is th at there is general agreement that
“a lack of balance between investment and consumption may pre
cipitate severe economic ups and downs.” Still another is th at “war
times excepted, when we have had a high level of business invest
ment in new producing facilities, we have had a high level of pros
perity, and when we have had a low level of such investment the
reverse has been true.” 2 These and other generalizations made in
that study, however qualified by the individual economist, may help to
clear the ground and further our progress.
The purpose of this paper is to note not only the significant changes
that have occurred in the amount and types of Federal expenditure
but also the variations in other economic phenomena which are asso
ciated with Federal financial policies. Emphasis is placed upon the
period since World W ar I I , for a part of the question which this and
the succeeding studies will attempt to answer is whether the Federal
Government has been doing, financially, what it ought to do and leav1 United S tates Congress, Join t Committee on the Economic Report, Federal Tax P olicy
for Economic Growth and Stability, papers subm itted by panelists appearing before the
Subcommittee on T ax P olicy, 84th Cong., 1 st se§s. (W ashington. Government P rintin g
Office, 195 5 ).
a Dexter M. Kee*er, Econom ic Stability and Growth, Federal T ax P olicy for Economic
Growth and S tability, pp. 7 -8 .
7
8
ECONOMIC GROWTH AND1 STABILITY
ing undone what it ought not to. The earlier history of Federal spend
ing and of economic growth and instability is of value, too, for it gives
perspective and shows certain important relationships and trends—
especially the trend in Government spending, which has been the most
dramatic of.them all.
F ederal E x p e n d it u r e , E c o n o m ic G r o w t h ,
.
and
I n s t a b il it y ,
1789-1933
Some generalizations will save much tabular space, yet keep the
picture clear. The interrelationship of Federal spending and economic
activity has been continually of major significance only since 1933.
U ntil then Federal expenditure (and taxation, borrowing, and debt
management) were often incidental and random influences, although
there were times when Federal finance dominated the economy. Most
notable of these were during and immediately after the W ar o f 1812,
the Civil W ar, and W orld W ar I. In quite a different way the unique
problem of surplus revenue, which appeared in the 1830’s and again
in the 1880’s and was associated with the political controversy over
the tariff, gave a special emphasis to Federal disbursements (expendi
ture, debt retirement, and even—in 1837—the division of excess ac
cumulated revenue among the S tates).
I t cannot be said that during the 19th century and the first th ird
of the 20th century those who understood Government finance were
unaware of or unconcerned with the effect of the Government’s fiscal
activities upon business. A t practically all times higher Treasury offi
cials were conscious of it, and when possible they made adjustments—
not always wisely—that were intended to mitigate its unfavorable in
fluences. Nevertheless, the concept of the role of government in the
Nation’s economic life was a narrow one: There was no clearly defined
fiscal policy; the spending power granted to Congress by the Consti
tution was, ordinarily, rigidly interpreted; and the Government’s
activities were, at most times, a small part of all economic activity.
Although, in this period, there was never any large, planned ex
penditure program intended to promote economic growth, there was
an astonishing increase in real national wealth and income. I t was
not due to any single cause—climate, natural resources, the industrial
revolution, the frontier, population growth, the character of the peo
ple, education, a Federal Constitution, saving and investment, an im
proving monetary system, economic instability, or some other—but to
a complexity of causes. Planned Federal spending for broad economic
effects, however, was not one of them.
Along with the remarkable growth of wealth and income there was
marked economic instability. Prices rose and fe ll; booms, panics, and
depressions ran their course; many fortunes were made which waves of
bankruptcy wiped out. There were periods of mass unemployment
with attendant misery and despair. The purchasing power of specie
and paper currency varied with the phases of the business cycle; and
at times when the currency was irredeemable its value depreciated
drastically, though in each such instance redeemability finally restored
it. The credit of the Government, too, fluctuated, Sometimes m ark
edly and adversely, when the requirement of war or of unwise peace
time fiscal and monetary policies threatened the future value of the
Government’s obligations or cast a shadow upon its integrity.
ECONOMIC GROWTH AND STABILITY
9
Instabilities such as these were concomitants of great economic
growth. Their various effects upon it, however, cannot all be sepa
rated out. Some of them would seem to have been far from conducive
to long-run growth. Others, however, may have been essential to it.
Any decline m the Government’s credit and any marked decline in the
value of the currency with its attendant inflationary effect on the price
level—as such instabilities induced consumption spending and specu
lation rather than saving and investment—were probably not, although
in the shorter rim the inflationary stimulation could, like a narcotic
acting upon the human system, make them seem to be. The panics
and depressions—drastic perhaps in proportion to the debris of finan
cial excesses, unwise investment, and false values which they cleared
away—may well have been a necessary p art of long-run real growth,
though during them those who suffered would have found this hard
to believe.
Because of the enormous change in magnitude of Federal expendi
ture over the course of time table 1 shows, in millions of dollars, the
trend prior to 1933, while later as well as some overlapping data, in
billions of dollars, appear in tables below.
T a b l e 1 .— E x p e n d itu r e o f th e F e d e r a l G ov ern m en t: s e le c te d y ea rs, 178 9-1932
[In m illions of dollars]
1 7 8 9 - 9 1 _______________________________________________________________________
4. 3
1 8 0 0 __________________________________________________________________________
1 0 .8
1 8 2 5 __________________________________________________________________________
15. 9
1 8 5 0 __________________________________________________________________________
39. 5
1 8 6 5 __________________________________________________________________________
1, 2 9 7 .6
1 8 7 5 __________________________________________________________________________
2 7 4 .6
1 9 0 0 __________________________________________________________________________
520. 9
1 9 1 0 __________________________________________________________________________
6 9 3 .6
1 91 9
1 8 ,5 1 4 .9
192 0
6 , 4 0 3 .3
1 9 2 5 __________________________________________________________________________
3 ,0 6 3 .1
1 9 3 0 __________________________________________________________________________
3 ,4 4 0 .3
1 9 3 2 __________________________________________________________________________
4, 659. 2
S o u r c e : A n n u a l R e p o r t o f th e S e c re ta ry o f th e T r e a s u r y o n th e S t a t e o f th e F in a n c e s ,
19 5 6 .
F ederal , S t a t e ,
and
L ocal E x pen d itu re
Before observing further the trends o f Federal expenditure and
economic growth and the nature o f various phenomena associated with
them, it is appropriate to note certain trends in expenditure by State
and local government and their relation to that o f the Federal G ov
ernment.
D uring the 19th century, except fo r a time when State governments
participated in canal construction and in railroad building and bank
ing, their expenditures were kept to a minimum and were mostly con
cerned with the functions o f general government, although some out
lays were made fo r education, assistance to agriculture, and fo r con
struction and operation o f asylums and hospitals. In the 20th cen
tury, and especially from 1920 onward, State government expenditure
increased enormously, rising from about $350 million in 1913 to $21.7
billion in 1956. Construction and maintenance o f highways, support
o f education, and social-welfare activities accounted fo r the greater
part o f this expansion. The relative amounts o f these and other ex
penditures have varied widely among the individual States.
ECONOMIC GROWTH AND STABILITY
10
Local government expenditure increased almost continually from
1800 onward. Before 1860 municipal activities expanded greatly due
to population increase, urbanization, and a public demand for more
and better services at the local governmental level. Thereafter the
increase continued, but at a slower rate and with retrenchments in
depression periods. Between 1913 and 1956 expenditures by local gov
ernments rose from $1.5 billion to $28.3 billion. The major outlays
today are for education, construction and maintenance of streets and
highways, and public health and sanitation.
T a b l e 2 . — The recent trend in State and local expenditures, 1958-561
[In billions of dollars]
'■i
Year
•.
State
Local
16.8
18.7
20.4
21.7
1953 ................................................ - ..................................................................
1954
............................................................................................................
1955
...................................................................... ..............................
1956 ......................................................................................................................
21.7
23.8
26.2
28.3
. Total
38.5
42.5
46.6
50.0
i Without exclusion for transactions between levels of government.
Source: U. S. Department of Commerce, Bureau of the Census, Summary of Governmental Finances,
1955,1956.
Before the middle of the 1930’s expenditure of the Federal Govern
ment was the lesser p art of all Government expenditure, except dur
ing wars and for snort periods following them. Ordinarily, since
1890, Federal expenditure was between 25 and 30 percent of the total,
local expenditure was 50 to 60 percent, and State expenditure ranged
from 10 to 20 percent. In the period 1953-56 State and local expendi
tures together varied from 80 to 37 percent of all Government ex
penditure while Federal expenditure was between 63 and 70 percent.
During that time local expenditure exceeded that of the States by
about 30 percent, and nearly a third of State expenditure was of an
intergovernmental nature.
T a b l e 8 — Percentage distribution of Government expenditure: Selected years,
1890-1956
Year
Federal
1890-..........
1 9 13......___
1919___ — .
1939...............
1933...............
1936...............
35.6
26.8
87.5
27.0
35.7
52.7
i i 'V .
State and
local
64.4
73.2
12.5
73.0
64.3
47.3
Total
•
100
100
100
100
100
100
Year
1940... .........
1944 ...........
1948
1955..............
1956 . - _
Federal
48.5
92.1
67.6
64.2
63.3
State and
local
51.5
7,9
32.5
35.8
36.7
Total
100
100
100
100
100
i
Sources: William J. Shultz and O. Lowell Harries, American Public Finanoe, 6th edition (New York:
Prentice-Hall, Inc., 1954), p. 20; and 17. S. Department of Commerce, Bureau of the Census, Survey of
Governmental Finances In 1958, 1956.
11
ECONOMIC GROWTH AND STABILITY
T h e M o r e R e c e n t E x p a n s io n o f F e d e r a l S p e n d i n g
The following tables show the nature and trend of expenditure by
the Federal Government in more recent tim es:
T a b l e 4 . — Budget receipts and expenditures: Selected fiscal years, 1900-57
[In billions of dollars]
Year
1900.
1910.
1920.
1930.
1935.
1940.
1945.
1946.
1947.
1948
Net
receipts 1
Expendi
tures
0.6
0.5
.7
6.4
3.4
6.5
9.1
98.4
60.4
39.0
33.1
.7
6.7
4.2
3.7
5.1
44.5
39.8
39.8
41.5
Surplus or
deficit (—)
Year
(2)
(2)
1949_______
1950...............
1951................
1952...............
1953_______
1954___ ____
1955.......... .
1956...............
1957 3.............
.7
-
2.8
-3 .9
-53.9
-20.7
.8
8.4
Net
receipts 1
Expendi
tures
37.7
36.5
47.6
61.4
64.8
64.7
6 .4
68.2
70.1
39.5
39.6
44.1
65.4
74.3
67.8
64.6
66.5
69.3
Surplus or
deficit (—)
- 1 .8
- 3 .1
3.5
- 4 .0
- 9 .5
-3 .1
- 4 .2
1.6
1.6
* Total receipts less refunds of receipts beginning with fiscal year 1931, and less transfer of tax receipts to
the Federal old-age and survivors' insurance trust fund beginning with fiscal 1937 and to the railroad
retirement account beginning with fiscal 1938.
2 Less than $50,000,000.
3 Preliminary.
Sources: Annual report of the Secretary of the Treasury on the State of the Finances, 1956; and Treasury
Bulletin, August 1957.
T a b l e 5 . — Expenditure by major functions, fiscal years 1988-40
[In billions of dollars]
1933
1934
1935
National defense..................................
Veterans’ Administration___ _____
0.7
.9
0.5
.6
0.7
.6
Public works.......................................
Aid to agriculture................................
Relief and work relief.........................
Other departmental............................
Interest on public debt.......................
Other2..................................................
.4
.2
.4
.4
.7
.3
.7
.8
1.8
.3
.8
.5
Grand total 8_............................
3.9
6.0
1936
1937
1938
1939
1940
.9
1.1
2.3
.3
.8
.3
0.9
2.4
0)
.7
.9
2.3
.3
.7
.3
0.9
1.1
.2
1.0
1.0
2.4
.4
.9
.3
1.0
.6
.3
.8
.9
1.9
.4
.9
.5
1.2
.6
.3
1.0
1.2
2.6
.5
.9
.4
1.6
.6
.4
.9
1.6
1.9
.6
1.0
.5
7.0
8.7
8.2
7.2
8.7
9.0
i Less than $30,000,000.
* See annual reports of the Secretary of the Treasury for breakdown of this item.
* Adjustments of some of these data have been made to more recent annual reports. Some figures do not
total because of rounding.
Source: Annual Report of the Secretary of the Treasury on the State of the Finances, 1940.
T a b l e 6 . — Expenditure by major functions, fiscal years 1941-47
[In billions of dollars]
1941
National defense and related activities...........
1942
1943
1944
1945
1946
6.7
28.3
75.3
89.7
90.5
.6
11
.1
5.4
.6
23
.1
4.2
.6
1.8
.1
1.9
.7
2.6
.3
2.2
2.1
36
1.7
2.5
48 9
.7
4.3
4.7
3.0
2.1
17.3
4.4
7.3
5.0
3.0
5.5
13.8
34.4
79.7
95.6
100.4
63.7
42.5
i In table 4 this item is excluded.
Source: Annual Report of the Secretary of the Treasury on the State of the Finances, 1947.
1947
12
ECONOMIC GROWTH AND STABILITY
T a b l e 7 .— Budget expenditures by major classifications, fiscal years 1948-57 1
[In billions of dollars]
1948
1949
1950
1951
1952
1953
1954
1955
Major national sectirity.................. :................. 11.8
International affairs and finance....................... 4.6
Veterans' services and benefits.......................... 6.7
Labor and welfare............................................... 1.3
Agriculture and agricultural resources..............
.6
Natural resources................................................
.6
Commerce and housing...................................... 1.4
General Qovem ment... ..
. .. ................... 1.3
Interest on public d e b t.................................... 5.2
12.9
6.1
6.7
1.6
2.5
1.0
1.9
1.1
5.4
13.0
4.7
6.6
2.0
2.8
1.2
2.0
1.2
5.7
22.4
3.7
5.3
2.1
.6
1.3
2.2
1.3
5.6
44,0
2.8
4.9
2.2
1.0
1.4
2.6
1.5
5.9
50.4
2.2
4.3
2.4
2.9
1.5
2.5
1.5
6.5
46.9
1.7
4.3
2.5
2.6
1.3
.8
1.2
6.4
40.6
2.1
4.5
2.6
4.4
1.2
1.5
1.2
6.4
1956
40.6
1.8
4.8
2.8
4.9
1.1
2.0
1.6
6.8
1 Details of expenditure within these classifications are shown in each annual report of the Secretary of
the Treasury on the state oTthe finances, 1948-56.
Source: Annual Report of the Secretary of the Treasury on the State of the Finances, 1956.
Two broad generalizations may be made at this point. In the period
1933-40, Federal spending more than doubled, most of the increase
being due to expenditure policies related to the great depression.
Thereafter until the present time defense spending has dominated, but
in markedly different amounts and at quite different ratios to all other
expenditure in the annual budgets.
I t does not seem conceivable that huge expenditure for war and de
fense can be conducive to long-run economic growth and stability.
Some people hold th at a modicum of such expenditure at certain times
can be, but there is certainly room for argument. As for the other
expenditures of the Federal Government, some are productive, some
are wasteful and uneconomic, and some are merely transfer payments.
The assignments to other panelists indicate that these various kinds
of expenditure are to be considered elaborately and thoroughly for
their implications with respect to economic growth and stability.
E
c o n o m ic
G
row th,
1790-1957
National-wealth data are, at best, rough estimates. The latest year
for which they are available is 1952. Since between 1940 and 1952
the purchasing power of the dollar (as measured by consumer prices)
had fallen by 47 percent, the 1952 figure of $1,128.4 billion in total
national wealth would be $597.8 billion when adujsted to 1940 dollars.
T a b l e 8. — Estimates of national wealth, in current dollars, selected years,
1790-1952
[ I n b illio n s of d o llars]
______
1 7 9 0 _______
______ _
I 8 6 0 ___ ■_______
— ______ _____
1 8 2 5 _______________ ____________
1 8 5 0 ________________ ____________
1 8 6 0 __________ __ _ ___________
1 S 7 0 __________
__ ____________
1 8 8 0 _______________ ____________
___________
1890
_ _
__________
1900
___________
-
1 .2
2 .4
3. S
7 .1
1 6 .2
1 2 6 .5
4 3 .3
6 5 .0
8 7 .7
__
__
1 5 2 .0
1910- _
—
1 9 2 0 __
______ _
_ _
3 7 4 .4
1930— _
_ ______________
4 1 0 .1
3 4 4 .9
1935
______ ______________
1940 _
____ __________
4 2 4 .2
1945
_
_ ______________
5 7 0 .6
1 9 4 9 ____
_____ ___
_ .
8 9 8 .2
1952
_ _
_
2 1 ,1 2 8 .4
1 T h is figure h a s been reduced to a gold basis.
3 T h is to ta l fo r 1952 includes la n d v a lu a tio n a s of 1949, th e l a te s t y e a r f o r w hich such
d a ta is av ailab le.
S o u rc e : U. S. D e p a rtm e n t of Commerce, B u reau of th e C ensus, H isto ric a l S ta tis tic s of
th e U n ited S ta te s, 1789-1945, an d S ta tis tic a l A b s tra c t o f th e U n ited S ta te s, 1956.
13
ECONOMIC GROWTH AND STABILITY
Estimates of gross national product—the total national output of
goods and services at market prices—go back only to 1869. Table 9
shows total and per capita gross national product in constant (1947)
in the purchasing power of the dollar. In table 10, however, are
shown total and per capita gross national product in constant (1947)
dollars for the period 1929-56.
T a b l e 9 . — Gross national product or expenditure, in current dollars, selected
years, 1869-1951 1
[In billions of dollars]
___ ____
1 8 6 9 -7 8
_
7 .0 1941 _ _________
. __________
1 2 5 .8
1 8 7 4 -8 3 —
„ ___________
8 .9 1 9 4 2 ___ _
_____________________ 1 5 9 . 1
1 8 7 9 -8 8 . - _
1 0 .7 1 943_________ __ _____________
1 9 2 .5
1 1 .9 1 9 4 4 __
1 8 8 4 -9 3
_
__ __________
_____________
_ _ 2 1 1 .4
_________ 1 2 .7 1945
1 8 8 9 -9 8
__
_____ _____
_____
2 1 3 .6
1 8 9 4 -1 9 0 3 _______ __ ___________
1 5 .7 1 9 4 6 ____ ___ _ __________________ 2 0 9 . 2
1 8 9 9 -1 9 0 8 __
.. _
_ _
_ 2 1 . 6 1 9 4 7 _________
__________ _ 2 3 2 . 2
_ _ 2 8 .8 1948______________ _______________
1 9 0 4 -1 3
_____ _____
2 5 7 .3
_______
40. 1 1949 _________
.
_____
1 9 0 9 -1 8
__
2 5 7 .3
2 8 5 .1
1 9 1 4 -2 3
— _ _ _ 6 1 .9 1950
_
____
_______
8 1 .2 1 9 5 1 ____
__
_ _______________ 3 2 8 . 2
1 9 1 9 -2 8 _
—
____
7 9 .1 1 9 5 2 ______________________
1 9 2 4 -3 3 ____
... - ____
_____ 3 4 5 . 5
_ 1 0 4 .4 1953 _____________ ____________
1929 _
— _
3 6 3 .2
1930 _
.
3 6 3 .2
_
9 1 .1 1954
3 9 1 .7
1933 __ _____
_
__ 5 6 .0 1955 __
_ _
_____
4 1 4 .7
1 9 35__
_
—
7 2 .5 1956
__
_ _
1 9 4 0________
...
_______
1 0 0 .6 1957 ( M a r c h ) ____ _______ ____ __
1929 are averages per year by decades, as calculated by Kuznets.
1The figures prior
S tatistics of the United States, 1789-1945, and Departm ent of
S o u rces: H istoric
Commerce, Office of usiness Economics, Survey of Current Business, July 1957.
and per capita gross national product in constant {Wifi)
dollars, selected years, 1929-56
T a b l e 1 0 . — To
T otal
Y ear
P e r capita
Y ear
B illio n s o f
d o lla r s
1929
.......................
1933
- ________
1940____
1945 ............................I 9 6 0 .......... ....................
1951......................... .......
$149.3
103.7
171.6
263.1
264.7
282.9
T otal
P er capita
B illio n s o f
d o lla r s
$1, 225
825
1,299
1,880
1, 745
1, 833
1952.................................
1953.................................
1954________________
1955............................
1956.................................
$293.7
305.3
301.3
322.8
332.0
$1,868
1,920
1,850
1.954
1,973
Source: D a ta for gross national product, 1929-56, and for per capita gross national product 1929-54, S tatis
tical A bstract of the U nited States, 1956 an d Survey of C urrent Business, Ju ly 1957; per capita calculations
for 1955 an d 1956 are based on d ata in Survey of C urrent Business, Ju ly 1957.
Although gross national product is commonly used to measure or
suggest the level of prosperity, its size could quite conceivably bear
an inverse relationship to national well being. If, for example,
Germany had used such calculations in the period 1920-23 when its
currency depreciated to one-trilliontli of its 1914 value and the
nation was sinking deeper into poverty, the figures on gross national
product would have reached very high levels. Even when gross na
tional product is adjusted to changes in the price level it reflects a
variety of activities which do not add to national well being: that
part of government spending which is wasted or goes for war or for
armament, giveaway programs, that part of private domestic in
vestment and net foreign investment that may eventually be lost, in
direct taxes, personal consumption expenditures which rest on debt
that must be paid out of future income.
97735—57----- 3
14
ECONOMIC GROWTH AND STABILITY
I f we could reduce our defense program, eliminate waste and loss,
and prevent further depreciation in the purchasing pow7er of the
dollar, the figures on gross national product would certainly decline,
assuming no compensatory increase in the volume and value of goods
and services produced for civilian use. Under such conditions it
would certainly be erroneous to say th at national economic well being
had declined along with the decline in gross national product. Eco
nomic growth, although indicated by the rise in gross national prod
uct as expressed in constant dollars, was probably not as great as the
figures suggest.
T
he
I
n crea se in
the
F
ederal
D
ebt
Due to deficit budgetary policies which were at first associated
with depression and then with the prosecution of wars and with
defense preparations, the Federal debt has risen astronomically since
1930. Simply stated, most of the present debt represents the excess
of Federal expenditure over revenue during that period of time. A l
though consideration of the Federal debt and its management must
here be ancillary to our study of Government expenditure, the role
of the debt in its present largely unfunded form may be of even
more significance—in an adverse way—for economic growth and
stability than future expenditure policies, good or bad, which are
carried out within a balanced budget.
The problem of the debt ties in closely with monetary policy, and
it is quite technical. Suffice it to say here that a very large p art of a
huge debt is payable on demand and within a short period of time.
That is, much of the debt can be converted into currency, bank de
posits, and bank reserves at the whim of the holders. Thus, any
general expectation of fiscal (or monetary) policy that is conducive
to further depreciation of the dollar would increase the preference
for goods and other property over dollars and fixed-dollar obliga
tions, with the likelihood of a resulting inflationary price rise of such
violence and dimension that only the most rigid overall controls
could repress it. The present unfunded debt has a tremendous in
flationary potential. I t is, of course, the result of a long period of
unfunded deficit expenditures.
T a b l e 1 1 . — Principal of the public debt and gross debt per capita: Selected years,
1900-51
Y ear
T otal gross
d eb t
Gross debt
per capita
(to nearest
dollar)
Y ear
B illio n s o f
d o lla r s
1900________________
1910_____ ___________
1920____ ___________
1930. ................. .............
1935_____ ___________
1940_____ ___________
1945___ _____ _______
$1.3
1.1
24.3
16.2
28.7
43.0
258.7
T o tal gross
debt
Gross debt
per capita
(to nearest
dollar)
B illio n s o f
d o l la r s
$17
12
228
132
226
325
1, 849
1946_______________
1947______________ _
1950..................... ........
1955_______________
1956_______________
1957 i....... ....................
$269.4
258.3
257.4
274.4
272.8
270.5
$1, 905
1,792
1,697
1,660
1,623
1, 582
1 Prelim inary.
Source: A nnual R eport of the Secretary of the T reasury on th e State of th e Finances, 1956; per capita
gross d e b t figure for 1957 is derived from T reasury B ulletin, 1957.
15
ECONOMIC GROWTH AND STABILITY
F
ull
E
m plo y m en t and t h e
P
u r c h a s in g
P
ow er o f t h e
D
ollar
Since the United States entered World W ar I I the only important
element in our economy that has shown stability is employment (or
unemployment). Although the total civilian labor force has in
creased from year to year it has been almost fully kept at work. The
percent of that force which has been unemployed at any one time
since 1945 has ranged from a high of only 5.5 in 1949 to a low of 2.5
in 1953. These figures may be contrasted with the 24.9 percent un
employed in 1933.
W ar and defense expenditures have undoubtedly had much to do
with this phenomenon of long-run relatively full employment. When
wars ended or defense expenditures were reduced, however, consumer
and business spending and increased outlays by State and local gov
ernments took up much of the slack. In this period the marked in
crease of all debt, public and private, appears to have been an impor
tant sustaining influence on the high level of employment. W ith the
Nation’s productive resources continually and practically fully used,
and with the purchasing media of the country augmented by mone
tized debt and an easy-money policy, increasing demand for goods and
services pushed against a supply that could not so rapidly be in
creased. The result was the inflationary phenomena of rising prices
and a decline in the purchasing power of the dollar, as well as con
tinual full employment.
T a b l e 12.— Unemployment, 19^1-57
Percent of
civilian labor force
unemployed
9.9
4. 7
1 .9
1 .2
1 .9
3. 9
3 .6
3 .4
5. 5
Y ear:
194 1
194 2
194 3
194 4
194 5
194 6
194 7
194 8
1949
Percent of
civilian labor force
unemployed
1950
.
5. 0
__
1951 _
- 3. 0
1952 .
.
2.
1053 _____
_
2.
1954____ _
.
_
1955 _____
4.
1956
.
...
_
—
3.
1957 ( J u ly )
4.
Sources : D ata for 1946-55, S tatistical Abstract of the United States, 1956 ; calculations
for 1956 and 1957 are based on data in Federal Reserve Bulletin, August 1957.
T
a b le
13.— Purchasing power of the dollar, 1939-57
[1 9 4 7 -4 9 = 100. Obtained by computing reciprocals of Consumer Price Index compiled by
Department of labor, Bureau of Labor S ta tis tic s ; these reciprocals are expressed as
percentages w ith average of base period 1947-49=: 100]
Monthly
Monthly
average
average
Y e ar:
1 6 8 .4
194 9
1939_
_ 98.2
__ 1 6 6 . 9
1940_
195 0
_ 97.3
__ 1 5 9 . 0
1941_
195 1
- 90.1
19 42 „
1-13.5
195 2
_ 88.1
135. 1
1943_
195 3
_ 87.4
__ 1 3 3 . 0
1944_
195 4
_ 8 7. 1
__ 1 3 0 . 0
1945_
195 5
- 87.3
1 1 9 .9
1946_
1956:-----------------------------------80 .1
__
:
0
4
.
7
1947_
1957 (Ju n e) _________________ 8 3 .2
9 7 .3
1948_
S o u rc e s : D a ta f o r 1 9 3 9 -5 5 , S t a tis tic a l A b s tr a c t o f t h e U n ite d S ta te s , 1 9 5 6 ; c a lc u la tio n s
f o r 1 9 5 6 an<l 1957 a r e b a se d on d a ta in F e d e r a l R ese rv e B u lle tin , A u g u s t 1957.
16
ECONOMIC GROWTH AND STABILITY
In the years between 1941 and 1957 the conjunction of circum
stances which stimulated public and private spending was consonant
with the provision of the Employment Act of 1946 “to promote maxi
mum employment.” Except, however, as the full employment con
cept made deficit spending ( and the inflationary way in which it was
financed) more acceptable th at it otherwise would have been, most of
the pressure for spending by the Federal Government came from
other sources, which, nevertheless, put heavy demands on the labor
market. Elsewhere in the economy the full employment doctrine was
being implemented automatically by the increasing amount of p u r
chasing media which flooded the economy.
I f one is willing to believe th at war and defense expenditures have
been for those purposes only, then we must look to other parts of the
budgets of this period for any deliberately intended “full employ
ment” spending. Other papers in this compendium will undoubtedly
do that. The point to be made here is that the Federal spending and
the kind of financing that took place brought and helped to sustain
relatively full employment, but it was accompanied by a depreciation
in the value of the dollar to less than half of what it had been at the
beginning of the period. Let us observe just one aspect of th at depre
ciation—its effect on savings.
The effect of the depreciation of the dollar on certain kinds of sav
ings is vividly illustrated in a recent study made by Prof. W alter E.
:Spahr.3
Although the following portion of it is offered to show only one
aspect of the overall effect of inflationary policies, its implications are
broad. Moreover, just since December 1956, the terminal point for
most parts of the study, some further loss in purchasing power has
occurred.
The losses in purchasing power of the following sample
items of savings should constitute an arresting illustration
of the subtle and far-reaching destructive powers of a depre
ciated currency while it contributes to high prices and ex
pansion in productive activity and profits (often paper
profits) in various other kinds of activities. This economic
disease is analogous to a cancerous growth and is not widely
understood, partly because people’s savings are remote as
compared with considerations relating to immediate income.
Instead of computing the purchasing power of the savings
in these six categories as of December 1956, in terms of the
dollar of 1939, the computation rests upon a much smaller
item—the average holdings in each 6 categories—4 for the
period December 1939 to December 1956, and 2 for the period
December 1939 to December 1955.
The loss in the purchasing power of these six items alone—
losses of over $184 billion—is approximately 97 times the loss
of $1,901 million of depositors in banks for the years 1921-33.
3 Losses In Purchasing: Power A rising From Our Depreciated Dollar, Economists* Na
tional Committee on Monetary Policy, New York, 1957.
ECONOMIC GROWTH AND STABILITY
T a b l e 1 4 .—
17
18- and 17-year average holdings
United States savings bonds (18 years)____________________
Time deposits, all banks (18 years)------------------------------------Savings capital, savings and loan associations (18 years)___
Life insurance in force (17 years)_________________________
Annuities in force (17 years)_____________________________
Social-security trust and unemployment funds (18 years)___
$42,180,000,000
50, 704,600,000
13,786,100,000
203,424,900,000
1,112,600,000
17,834,200,000
Total average holdings_____________________________
329,042, 400, 000
Loss in purchasing power on these average holdings_________ $184, 263, 744, 000
Percentage loss__________________________________________
56
Bank deposit loss, 1921-38________________________________
$1,901,000, 000
C o n c l u sio n
Granting that there has been substantial economic growth in the
past two decades, even though in actuality it was not as great in
amount as the adjusted gross national product figures indicate (see
table 10), it is valid to question (1) whether the real growth of wealth
and income would not have been greater under some other set of con
ditions of Federal expenditure, and (2) whether the conditions under
which the growth has occurred have been such that some of their effect
will carry over to impede growth in the future.
Further study is needed to determine whether, in an unregimented
society, we can have maximum long-run growth without the cleansing
function of the downward phases of the business cycle, however they
may be modifiable by sound policies and practices and by financial
self-restraint on the part of both the Government and the people.
Expectation th at markets will go down as well as up is itself a power
ful restraint upon financial excesses.
The continual desirability of full employment has been emphasized
under the assumption that it is essential to stability and long-run
growth. This assumption must now be questioned. Full employment
may be a wholesome phenomenon or an unwholesome one, depending
upon many circumstances. How that level of employment is reached
and maintained is an important consideration. Perhaps we should
look upon full employment as a worthwhile incidental goal to be
sought in every sound way, but, when reached, to be regarded as a
signal for great caution.
Because at times in the past there have been great suffering and
loss due to unemployment, it does not necessarily follow th at con
tinual full employment is the measure most conducive to long-run
growth. The prospect, in the coming decades, of great employment
transitions and fewer working hours for almost everyone, due to
automation and other technological advances, should help to reconcile
us to some unemployment as well as to governmental aid to those on
whom the brunt of it will fall.
The real goal is maximum long-run growth. How much long-run
stability we can expect in a dynamic, growing economy is still a ques
tion, but we are now seeing evidence that full employment induced by
inflationary Government spending and borrowing is not the way to
achieve it. Under the conditions that have developed, the prospect for
any real stability is small compared with the likelihood of either
severe deflation or marked further inflation, an alternative being rigid,
overall, governmental control of the economy.
18
ECONOMIC GROWTH AND STABILITY
Another, and far more desirable, alternative is the development and
application of fiscal and monetary policies of a kind th at will prevent
severe deflation while requiring the funding of near-money forms of
public debt and encouraging public and private th rift and a high
level of business investment.
@FedFRASER