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Z -459

ADDRESb AT MEETING Of
NATIONAL INDUSTRIAL CONFERENCE BOARD
N M YORK CITY
THURSDAY EVENING,

NOVBiH© 28, 1940

3Y

MARRINER S. ECCLES

Z-439

In appearing before the National Industrial Conference Board, it is
appropriate that I should appraise the national economic outlook as I see it
at this time. As Chairman of the Board of Governors of the Federal Reserve
System, I ¿ n primarily concerned with banking and monetary problems and with
a
fiscal policies as they affect monetary conditions*

I can speak only for my­

self, and not for my associates on the Board or in the Reserve System, or for
the Government. Many of the issues which I must touch on in order to present
a rounded picture of present and potential problems as I see them are by their
nature highly controversial. I wish to indicate my own views as frankly as
possible for what they may be worth as a part of the full consideration and
discussion that are required by the gravity of the times and the importance of
the problems before us.
Underlying my approach to all of these problems is my belief that
democracy and the system of free enterprise can function to provide reasonably
full and sustained employment for all of our available man power, in peace as
well as in war timos. The great bulk of that employment is and must be pro­
vided' by private enterprise. Public policy, therefore, should be directed to
creating an economic climate thut will give the greatest possible encouragement
to private initiative and private enterprise that is consistent with orderly
and continuous national progress.
The experience of the past decade has served to confirm my conviction
that having given this encouragement to private activity, Government should as­
sure employment on useful public works, on a basis that is noncompetitive with
private industry, for those able and willing workers whom private industry is
unable to employ. Far from being wasteful, that is the essence of conservation




- 2 -

for it means adding to the store of national wealth, in providing roads, schools,
hospitalization, public housing, and other betterments, that private enter­
prise does not and cannot be expected to provide. V e gain all these things in­
/
stead of irreparably losing the product of labor by keeping it idle. Such a
policy is economically sound, and when supplemented by an adequate social
security program of pensions, public health and relief for the unomployables,
compensates for the loss of buying power when the expenditures of private
enterprise decline. This in turn benefits private

b u sin ess

and restores

national income and national revenues*
While fundamental principles of Government policy do not change,
policies must vary as economic conditions change. Policy that is appropriate
to a period of deflation and under-employment is not appropriate for a time of
full employment and the inflationary possibilities that then arise. At a time
when activity is rapidly expanding, and we are approaching conditions of
reasonably full employment, the fiscal and monetary policies appropriate to
the depression period need to be altered to fit the changed conditions.
A condition of rapidly expanding employment and production has now
begun to develop, primarily as the result of our vast defense effort and British
purchases and their stimulative effects, both directly and indirectly, on the
entire economy.

I wish now to discuss what seem to me to be the major factors,

in the light of present conditions, that should be taken into account as they
affect the banking and monetary field, the budget and taxation.
We are again hearing much about the dangors of inflation. It is
vitally important to face the inflation issue squarely, but it is also important




- 3 -

not to become mere inflation alarmists. We have had too much loose talk about
inflation for seven years. First of all, we must distinguish between a price
inflation due to non-monetary causes and one resulting from monetary causes.
I have several times in the past defined the latter as a condition arising when
the means of payment in the hands of those who will spend it increases more
rapidly than the production of goods. This means that the economy has reached
the limit of its ability to produce, that is to say, full employment of its man
power and productive facilities, but that, nevertheless, the creation of money
continues, uncontrolled and unchocked. A price inflation, due to non-monetary
causes, arises when production in particular fields is interrupted or curtailed,
whether from bottlenecks, short-sighted wage and price policies, monopolistic
practices, by capital or layer, or related causes, when there is pressing con­
sumer demand for the goods produced in these fields and when there is neither a
shortage of facilities that exist or can be constructed or a shortage of man
power. The cure for such a condition is not le3s, but more production.

It

cannot be remedied by monetary means, except at the cost of restricting the
entire economy.
The immediate danger is that the upvard spiral of prices in particular
sectors of the economy will throw these soctors out of balance with the rest of
the economy, to the detriment especially of agriculture, unorganized labor and
both the low income and fixed incomo group?. Since our major objective at all
times, and especially when we cannot afford to lose time in building our defenses,
is full production and employment, it is essential in the general welfare that
business and labor avoid strikes and lockouts that interrupt the flow of pro­
duction, and likewise avoid pries and n e g policies that induce forward-buying
'.e




-

4 -

and inventory bulges due to fears of higher prices.
It would be best for all concerned if through self-discipline capital
and labor prevented these abuses from developing, but if they fail to do so,
regulation by Government will be necessary. Through increased efficiency and
operating for longer hours, capital and labor can increase production. To avoid
bottlenecks due to skilled labor shortages in certain fields, it will be
necessary not only to utilize existing skills as fully as possible by working
longer hours, but also to increase as rapidly as possible vocational and
apprenticeship training.
can be avoided.

In these ways bottlenecks and unwarranted price rises

Otherwise, governments have no choico, as we hsve seen in other

countries, except to intervene directly by enforcing priorities, by proVontiggstrikes and lockouts and by fixing prices as woll as wages and hours.
These ere vital considerations at this time when production mu3t not
merely be sustained, but must be greatly expanded to provide defense require­
ments and at the same time take care of normal civilian needs.

I do not think

it possible to over-emphasize the evils in the kind of inflation originating
in what essentially are monopolistic practices either by capital or labor. The
result is not only greatly to increase the cost of defense as well as the general
cost of living, but the need to redress the unbalanced conditions that inevitably
follow calls for increased subsidy payments to agriculture and increased pay­
ments in pensions and relief for the aged and the unemploycbles in order to try
to make up for their diminished buying power. Likewise, it leads to demands on
the part of all who are employed for increased wages and salaries to help them
meet the increased cost of living. The result is the familiar general upward




spiral of all prices which in the end benefits nobody, and defeats tha essential
national purpose of substantially full employment and production for defense as
well as for civilian needs.
I am aware that some men in business and in the ranks of labor feel
that they should be allowed to make up now for some of the lean years.

Past

losses cannot be made up now except at tho risk of those inflationary con­
sequences.

The price and profit increases necessary to make up for such past

losses would have to come out of the economy generally, at the expense of all
other groups.
This problem —

v'hat mny be called the bottleneck problem —

requires

that nov? more than ever before we keep a discriminating eye on price movements.
Any increase in business activity characteristically produces relative scarcities
in certain areas of production relative to the whole.
tend to cause price advances.

These relative scarcities

This is particularly true of a period dominated

by defense expend!tures. The defense program is concentrated upon specialized
sectors of the heavy goods industries.
supply in these areas.

Every effort must bo made to increase

To the extent that supply cannot be increased with

sufficient rapidity to keep pace with both Government and civilian requirements,
priorities and rationing may be necessary as a check upon undue price advances.
There would bo no economic justice in permitting the necessities of a
great national emergency to yield excessive returns to producers in specialized
areas at the expense of the rest of the community.

Primary responsibility for

preventing the breakdowns, the price distortions and consequences to the entire
econony that v/ould result from tho attempt to ti-ke advantage of the emergency




- 6rests upon business and labor leadership.

V e need above all in this crucial
'

period rapidly expanding production in the industries where preventable bottle­
necks are most likely to develop.

The time may come r;hon '* shall have to cur­
'e

tail private purchases of automobiles and private and public construction in
order to give the defense program the right of way in tho heavy industries.
But priorities and rationing should not be applied until we have exhausted
every effort to enlarge productive capacity in the bottleneck areas.
We must also keep a vigilant eye on speculative forward-buying and ex­
cessive inventory accumulations.

We should be alert to the possibility that the

large cash and credit resources available might be turned into speculative
channels under the favorable expectations which a prolonged defense program
creates.

We would be better protected against such speculative inflationary

developments if the volume of idle funds already existing were curbed and pre­
vented from increasing still more and if our bank credit structure were again
brought within range of control.
Whet I have been discussing are inflationary conditions due to bottle­
necks and other non-monetary causes.

Looking beyond these immediate problems,

we should be prepared to protect the economy also agc-inst the evils of general
inflation due to fiscal and monetary factors.
As the result of gold imports, silver purchases, and purchases by
banks of United States Government securities the volume of bank deposits has in­
creased to the highest levels in the history of the country.

Demand deposits

ana currency now amount to $41.5 billions, or about #14.5 billions above the
peak of the boom period of the Twenties.




At the same time, gold and silver

- 7purchases have raised the volume of excess reserves to 07 billions, v/hich is a
wholly unprecedented volume, capable of supporting e bank credit expansion of
fully $60 billions in addition to the present total of deposits.
As long as these funds have been relatively dormant, they have not
presented a serious problem cxcept as they have tended to depress tho interest
rate structure to excessively low levels.

To avoid that extreme —

to keep the

bank credit picture within the realm of control that is the special responsi­
bility of central banking authorities —

I advocated, in connection with the

Banking Act of 1935, that Congress give tho Reserve System adequate powers to
absorb the excess, and I subsequently urged that consideration be given to the
main causes of this condition, th?.t is, to silver purchases and to the causes
of the inflow of gold from abroad v/hich are almost entirely responsible for the
present and continuing growth of excess reserves. The authority granted by
Congress has been entirely inadequate to copo with tho unprecedented growth of
excess reserves.

For that reason, the Bo?.rd of Governors as long ago as 1958

recommended in its annual report that Congress take cognizance of and deal with
this rapidly enlarging problem.
The need for dealing with it becomes increasingly imperative because
of the rapid expansion generated by the defense program.

It is essential now

that the excess reserves be brought within a range where they can be adjusted
to the needs of legitimate business through the open-market function of the Re­
serve System, and not be left as a basis for an uncontrolled multiple credit ex­
pansion such as could be built upon them.




- 8 I r the open-market function, I mean simply the authority which the Re­
$
serve System has to buy or sell Government and certain other securities for its
own account, these operations being carried out by the System*s Open Market
Committee.

The importance of these operations lies in the fact that when

securities are bought it increases member banks reserves.

Conversely, when

securities are sold from the open-market account it absorbs and thus decreases
the reserves of member banks.

The open-market instrument is a flexible one,

affecting only banks that desire to purchase or soil securities, largely in
accordance vyith their reservo position, whereas raising reserve requirements
affects all banks in accordance v'ith their classification.

I want to say in

passing that, contrary to a persistent popular fallacy, the Reserve System does
not use reserves deposited with, it by member banks to buy Government securities.
Such bank reserves are quite literally locked up by the System and cannot be used
as a basis for credit expansion.

The System has specific authority to create the

funds used in open-market operations.

These funds are in no way dependent upon or

related to such reserves as member banks carry with the Reserve Banks.
Regaining control over excess reserves is a necessary precaution against
the inflationary possibilities of over-expansion of bank credit based upon these
redundant reserves.

It i& not a step that would in any way restrict legitimate

business expansion, Government financing or development of tho defense program. It
is a safeguard against necessary expansion developing into over-expansion —

into

creation of the means of payment out of all proper relationship to production.
How this step may best be accomplished is a matter for Congress to determine.




- 9However, I see no feasible way to accomplish it except by increasing the re­
serve requirements of the banks to a point which would reduce the excess re­
serves to an amount that could be absorbed by the sale of Government securities
from the System’s portfolio, leaving only enough securities to take care of
System expenses.

In addition, adequate provision should be made for absorbing

future gold or silver acquisitions that add to excess reserves.

This power of

raising or lowering reserve requirements should be made applicable to New York,
the money center, or to all reserve cities, or to country banks, or to any com­
bination of the three groups.

This would provide for flexibility and make it

possible to adjust reserve requirements more in accordance with needs.
Furthermore, reserve requirements must be made applicable to all banks
of deposit, whether they be members of the Federel Reserve System or not.

It

is not equitable to ask only the member banks of the Reserve System to subject
themselves to increases when those who elect to remain outside the System, or
those who are now members and who choose to withdraw, can escape sharing in
what is a national responsibility.

This situntion is not only inequitable but

it renders monetary control ineffective so long as any bank that docs not like
the reserve requirements can relievo itself of the restriction by withdrawing
from the System.

Demand deposits arc* tho iwijor part of our money supply —

and

control over their expansion and contraction must reach all banks that are in a
position to create them.
As long as we have a vast oversupply of excess reserves, the induce­
ment exists throughout the banking system to expand and to put these resources




- 10 to work in loans and investments.

When the economy is reaching the stage of full

production and employment that inducement should be removed.
Not only do the excess reserves afford an opportunity for over­
expansion but they also tend to depress the interest rate structure to excessively
low levels.

I have continuously advocated a policy of monetary ease as the

appropriate accompaniment of a period of under-employment, but I hove never
favored artificially low rates such as have boon brought about through an un­
controlled surplus of excess reserves.

No such oversupply of excess reserves

is necessary to carry out a policy of monetary encouragement to business re­
covery.

Instead, excessively low interest rates tend ultimately to induce in­

flated prices of Governments, municipals, and other high-grade securities.

Tho

effects are reflected in credit lines generally, and are folt by insurance
companies, savings banks, educational institutions, and other fiduciaries
representing the accumulations of many millions of our people, small as well as
large savers.

Moreover, this creates a future problem for monetary authorities

because at such time as it may become necessary to curtail further credit ex­
pansion, as a safeguard against inflationary developments, this, step cannot be
taken without causing a decline in the price of outstanding securities.
Although some interest rates have bocome extrewely low, rates in
the home and farm mortgage field have been relatively slow to respond to the
general decline and are not now to > low, in my judgment.

I think there would be

no justification for increased rates on home or farm mortgages, and that increases
in such rates would be unwise and unwarranted.




The volume ~ f existing idle funds
>

- I l ­

l's so large that some of the higher bond and mortgage rates may go lo’
ver even

though there is no further expansion of existing funds.
I am concerned with interest rates not as an end in themselves, but
as a means to the end of stability in the progress of our economy.

Excessively

low rates do not contribute to stability any more then do excessively high
rates.

Neither is fair to lender and to borrower.

It is one thing to have

interest rates low as the result of the pressure of savings or investment funds
on the market.

It is a quite difforent thing to depress the interest rate

structure abnormally through exccss reserves erected by causes extraneous to our
economy.

I have always contended, and I reiterate now, that these abnormal

pressures should be removed, and they must be removed as an essential element
of defending the economy against possible inflationary over-expansion later on.
As an additional measure I favor exempting deposits held with the Re­
serve Banks and vault cash held by banks from assessments for Federal deposit
insurance.

While I have never been against interbank deposits, I do not favor

over-concentration of funds that serve no useful purpose at money market backs,
but tend to depress short-term rates to such low levels that the very banks which
concentrate their funds in the money centers find themselves in an adverse
competitive position.

Nor is it to the interest of the money market banks to

accumulate excessive correspondent bank balances on which they can earn nothing,
but on which they pay the assessment.

Furthermore, if a bank’s funds are locked

up by the authorities to serve as reserves, it is not fair to the bank to require
it to pay assessments on the locked up funds that earn nothing for the bank.
Another reason for exempting reserves is that there is no risk involved in de­
positing those funds with Reserve Banks and thus no justification for assessing




- 12 a premium to insure them.
Some of the large city banks have been much interested in getting legis­
lation that will exempt them from paying deposit insurance assessments on the
interbank deposits they hold.

It seems to me that since they pay no interest

to the depositing banks on these funds, that the more equitable amendment would
be to exempt the originating bank from paying the assessment if these funds ere
deposited with Reserve Banks.

In other words, if any bank is to be benefitted

by exemption from the assessment, it should be the originating bank which deposits
the funds as a reserve in the Reserve System, and not the bank that gets the use
of tho funds without paying anything for them.

It is not in the interest of the

city bank to have interbank deposits in abnormal amounts because they cannot be
profitably used by reason of their volatile nature.

The city banks should be

interested in having only such correspondent bank balances as reflect the busi­
ness done by the correspondent banks and the services rendered for them.
I have dwelt at some length on the general subject, with some of its
ramifications, with regard to controlling monetary inflation by controlling ex­
cessive bank reserves.

This subject, however, cannot be considered separately

from the other sources of money-creation, that is, Government deficit-financing
through the banks, and gold and silver policy.

As an integral part of the

general policy that is necessary for the period we are entering, we must dis­
courage the purchase of Government securities by banks.
deposits.

For that creates new

With the volume of bank deposits and currency greatly in excess of

the highest levels we have ever had, it becomes important that wo do not continue
to add to this total, particularly at a time when one effect of the defense program
is to activate the existing volume of deposits os they are drawn upon by business




- 13 -•
and put to more active use.

Instead, Government securities should be sold to

private and institutional investors«

This has the effect of using existing funds

rather than creating additional deposits.

When the Government borrows existing

funds it does not reduce the supply because as soon as these funds are expended
by the Government, they go right back into the money system again, chiefly as
bank deposits.

Another popular mistake is to suppose that Government deficit-

financing creates excess reserves.
or other currency acquisitions.

Instead, they originate from gold, silver,

When the Government sells its securities to the

banks, instead of creating excess reserves, this absorbs them because the new
bank deposits thereby created have to be based upon or charged against the bank
reserves.
So long as banks have an oversupply of excess reserves, they have every
inducement to invest in Government securities.

That inducement can only be re­

duced or removed by reducing or removing the excess reserves which, as I have
sought to indicate, should be adjusted to the normal requirements of business.
If this is done the rate on Government bills and short-term notes would be likely
to increase sufficiently to attract the large amounts of idle corporate balances,
representing reserves of various kinds, that have accumulated.

For the most part,

these funds are now deposited in banks and earn nothing for the corporate owners.
They would be inclined to invest them in short-term Governments if the yield were
raised from the prevailing artificially low levels.

At the same time, longer-

term issues should be adapted to the requirements of insurance companies, savings
banks, and individual or institutional investors.

Thus the non-banking market for

Government securities would bo broadened out to absorb whatever Government fi­
nancing may be necessary during the period in which we are ranking large defense
outlays.




- 14 But deposits as well as reserves are also increased as gold and silver
continue to flow into our money system.

Even if we had authority to offset the

effect of the gold and silver acquisitions on excess reserves, these acquisitions
would still continue to add to deposits, unless we are prepared to deal with
these factors at their source.

I have publicly stated my opposition to the

purchase of foreign silver as unjustified from a monetary standpoint.

If, for

other reasons, at this time it is considered desirable to assist silver-producing
countries, that could be done by making loans secured by silver or other assets.
Therefore, Congress should repeal the present legislation, and at the same time
cancel out the billion and a half of seigniorage which could be used for issuance
of additional silver certificates.

Likewise, I favor canceling the authority

under the so-called Thomas amendment to issue $3 billions of greenbacks.

Both of

these sources of funds, if resorted to, would add to excess reserves and to de­
posits, and would greatly accentuate the problem of the monetary authorities.
While the expenditure of the gold stabilization fund would have the
same effect, the problem of gold presents a particularly difficult question.

I

believe that Congress, in considering all the interrelated elements of the
monetary picture, should consider whether or not it would be rise to make credits
available at low rates, as a means cf aiding the British, taking as collateral
their gold, as well as their security holdings here, in Canada, or elsewhere,
rather than to continue to accumulate more and more of the world’s gold supply
at the cost of inflating our banking and credit structure.
I have come last to the problem of the budget —
of least importance.

but not because it is

As long as we continue to operate on a deficit basis, it

will be necessary for the Government to go to the market for the funds to make




- 15 up the difference between tax collections and expenditures.

I believe that we

should at this time take further steps to close the gap between income and outgo
as far as can be done without either confiscatory taxation or the retarding of
private enterprise.

So long as the Government is rapidly increasing its total

expenditures, I do not see how these outlays can be covered on a pay-as-you-go
basis because the increased national income and the tax revenues resulting there­
from cannot be realized until some time after the sums are spent.

In other words,

there is a lag between the time when the Government has to raise the money and
the time when it takes effect as income among the people who ultimately receive
it in paymont for goods and services.
fiscal years 1941 and 1942.

Taxes on 1940 incomes are paid in the

There may be a lag of a year or a year and a half

before money borrowed for defense, in effect, shows up in expenditures, then in
higher national income, and finally in increased tax receipts.
It would not be wise to try to put sufficiently high rates into effect
to close the gap entirely until we have reached a condition of full production
and employment.

But at that time, the tax system in effect should be adquate to

bring about the balancing of the Federal budget.
Revision of the tax structure should not be delayed until a full-employment income is reached.
future.

We should begin to re-design the tax system in the near

First and foremost, we should revise our corporate, individual and in­

heritance tax structure so as to close very important existing loopholes that
make tax rates much less effective than they should be.

For instance, there is

not much use in raising individual surtax rates if corporations are permitted to
hold back earnings in the form of idle funds instead of paying thorn out as dividends
to stockholders.




If the estate and the individual surtaxes are to be made as pro­

- 16 -•
ductive as they should he, then the gift tax must also be revised.

The excess

profits tax, which is clearly inadequate, should be revised to apply to all earn­
ings above a certain ceiling, say, of 10 per cent of invested capital, with such
exceptions as may be necessary as a matter of equity or to stimulate new business.
The present law allows an option under which corporations are able to make ab­
normal earnings after all taxes, including the excess profits tax, are paid —
earnings in some cases larger than they have ever been before.

I am heartily

in accord with the proposals of the Treasury with reference to the excess profits
tax and to eliminate tax free securities.
The present tax structure, strengthened in the ways I have indicated,
will bring in enormous revenues once the national income has risen to $90-100
billions.

As national income approaches these levels, rates should be raised

still more if necessary to balance the budget.
In addition to our own large defense expenditures, the amount of which
we cannot foresee at this time, there is the increasing amount of help to Great
Britain which must also be taken into account.

If the total of these reaches a

much larger figure than is now apparent, it may be nccessary to impose selective
consumption taxes on those things that are most essential to defense and the
least essential to civilian consumption, in order to divert production and income
to defense purposes.
price inflation.

This may become necessary es a measure against a general

But such taxes should not be imposed until we have first placed

on the statute books a tax structure sufficiently progressive to insure that the
defense program will not increase the current inequality of wealth and income.
Indeed, tax policy should be designed to minimize this inequality, bringing about




-

17 -

a wider distribution of the benefits as well as the burdens.

When full employ­

ment and production have been reached, increased consumption taxes are the most
effective means of preventing a general prico inflation, but they presuppose the
prior enactment of steeply progressive income and estate taxes.
Diroct responsibility for taxation is, of course, outside the realm of
monetary policy, but the subject of taxation cannot be separated from the primary
concern of those charged with monetary pov,ers and responsibilities.

It is not

possible to appraise monetary policy realistically without taking account of the
effect of taxation and of Government financing cn the banking and credit structure.
I f e the time arrives when monetary restraints may become necessary, deficitfhn
financing should be discontinued, thereby bringing the budget into balance.

The

time for such action will arrive when the economy hns roachod full production,
that is, substantially full employment, and both monetary and fiscal policy may
need to be invoked to maintain a proper relationship between production of goods
and creation and use of money.
Since it v/ould be practically impossible to balance the budget while
public expenditures are rapidly increasing and before a much larger national income
has been achieved, we might consider viewing certain expenditures for defense as a
capital investment.

In effect, it may be considered a necessary substitute for an

equal amount of capital expendittire by private industry which in borrowing for
capital outlay would amortize the debt over the life of the investment.

If we

w§re to treat the investment in ships, bases, arsenals, factories, powder plants
and the other capital investments paid for by the Government as private business
would treat similar capital investment, wo might then consider covering only the
amortization, operating and maintenance costs out of current receipts.




- 18 No matter how these outlays may be regarded for bookkeeping purposes,
the defense program is demonstrating before our very eyes the feasibility of
raising the national income through governmental expenditures.

Nor can there

be any doubt that once a full income is achieved we can, out of a full income,
raise enough taxes to cover expenditures.

We can then have a balanced budget.

A full defense effort will bring very large profits.

Profits of

manufacturing and of trade were already very favorable in the five-year average
1936-1940.

Indeed, for a great many companies they were larger than in any

previous five-year period in their history.

Many of our industries have learned

how to live very well even under quasi-depressed conditions.

At a national in­

come level of from $90 to $100 billions, profits can be expected to rise to un­
precedented levels.

Without a steeply progressive tax structure these profits

would bring increased concentration of wealth.
to let the defense program yield this result.

Business leadership cannot afford
We shall do well, therefore,

after the tax collection lag of the first years of defense expansion is overcome,
to raise the whole of the budget through taxes.
There is one more suggestion in this field.

Some considerable borrowing,

in lieu of taxes, from the mass of the population, in the form of a modified
Fbaby" bond, would be highly desirable, especially after a full employment income
has been reached.

If savings bonds are held widely through the country, by the

whole population, a degree of security is achieved against unforeseen contingencies.
In so far as such bonds may, after the defense effort is over, be converted into
cash and the proceeds spent, business activity would thereby be stimulated just at
the time when it needs to be sustained.

Such a program would provide in some

measure a post-defense cushion against depression.




It therefore would seem to me

- 19 wise, as employment increases and the income of the mass of the population rises,
to intensify the national campaign to sell as many savings bonds as possible,
especially to the middle income classes.

Such borrowing would not preclude us

from balancing the budget because we could use the proceeds from the sale of
savings bonds to retire a part of the Federal debt now outstanding in the hands
of banks and corporations.
Our productive capacity is greater today than ever before.
by far the peak roached in the boom of the Twenties.

It exceeds

If we have the will to do

it, we have the organization, man power, end resourcos to provide both adequate
defense and a higher standard of living than any hitherto reached in our history.
We are witnessing in the defense program what can be achieved in national
prosperity, income and employment through adequate governmental expenditures.

It

is l y hope that the country will never forget this lesson; that we shall hence­
a
forth use fearlessly the resources of the state to help maintain employment and
business activity at a full income level.

Once such a program is boldly adopted

as a permanent policy, businessmen can plan their operations on the expectation
of a gradually rising national income.
the past.

This they have never been able to do in

Such a policy, boldly conceived and persistently carried out, would

revitalize private enterprise.

There is nothing in this program that calls for

Government operation of productive processes.

All production, even on Government

projects, can and should be carried out under private contract.
wpuld be assured a full market.

Private business

The necessary tax bill would be a small price to

pay for an assured market adequate to absorb all the productive capacity of
modern industry.




Think what such a market would meetn to business!

- 20 After the capital investment in defense is made, wc will still have
the heavy cost of maintaining our armed forces, which should be met out of current
receipts.

In addition, it is reasonable to expect at that time there will be

largo accumulated deficiencies in private construction of all kinds and other
capital requirements.

But it is unlikely that the volume of private activity

would be enough to make up for the deficiency in production and employment once
the heavy defense outlays, including the large exports of military supplies to
Great Britain, are over.

At that time, it is of crucial importance that we be

prepared to make the transition to a peace-time basis without precipitating a
period of idle men, idle factories, declining national income and increased
Federal deficits.
It would be tragically ironic if we, as a nation, solved the problem of
unemployment by making instruments of destruction, but vrere unable to maintain
employment by making the things of peace.

It is not for the purpose of returning

men to the breadlines that we ere making this vast defense effort to preserve our
political and economic system.

The transition will bo effected more readily

if at that point the budget is in balance.

On the samo principle that I stated

at the outset, we should then be prepared to have Government take up the slack of
employment, employing surplus labor, beyond what private activity absorbs, in
useful ways.

There are many with which you are familiar, such as public health

ind hospitalization, and particularly the urgent need for a va3t reconstruction
m d improvement of our entire highway system to keep pace with automotive progress.
There is no excuse for defeatism, for having a static economy frozen
i a level of under-employment.
t




We are moving towards relatively full utilization

- 21 of our men and our machines bccause of defense needs.

When peace is restored to

this world, we can, if we have the will and the wisdom, divert such of our pro­
ductive facilities as are now employed in tho destructive work of war into con­
structive work of peace.
world —

Thereby wo can lay the foundations for a nevr and better

a world in which democratic institutions can survive.