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INFLATIONARY DANGERS AND THE BUDGETARY SITUATION Summary of Statement Before the House TTays and Means Committee, Executive Sessioxi, October tykz* By M» S« Eccles, CftairmaSf; Board of Governors or tne Federal Reserve System. mmmmtmmmmmmmmmmmtmmmrnmmmmt The Federal Government budget figures for fiscal year lS^-ljlj., according to tho latest official published estimates, are as follows: Expenditures (including net outlays to Government (Billions of dollars) corporations and agencies) T 7ar activities 100 Interest on debt 3 Other 6 Total " 109 Receipts Individual income taxes Corporate income and excess profits Othor (net) Total Deficit Decline in Treasury Balance Increase in public dobt 18 llj. 7 39 70 - 1 159 Assuming continuance of the war on"the present scale and no change in taxes the 19i|i+-i]-5 budget may bo roughly of this same order of magnitude. This huge amount of expenditures adds tremendously to individual incomes, while tho goods being produced are for war purposes laid cannot be purchased with these incomes. This is an inherent and unavoidable result of war, and the reason why wars are generally accompanied or followed by inflation. The only way to bo sure that inflation will be avoided is to balance Government expenditures by taxos. But it is a practical impossibility to increase taxes as rapidly as expenditures. So far our taxes equal little more than a third of our expenditures, and it should bo the aim of public policy to mcke them gradually approach nearer to tho lovol of expenditures. 17e should certainly be in a position to balance tho budget end possibly retire debt in tho immediate postwar period* if necossary, to avert an inflation. Tho attached chart shows the trend of individual incomes, personal taxes, consumer expenditures, and savings for recent years with projections into 19144-* based on estimates presented to the Committee by tho Treasury. Those figures show that incomes have increased much more than taxos and that unless additional tax^s are imposed, a continued increase in this margin seems likely. The situation for the fiscal year 19lj.3-lil|. is indicated by the following estimates, given in round numbers: Individual incomes will be about 0150 billion M Personal taxos 20 Goods and services available for M purchase by civilians 90 Balance available for savings or for bidding up prices 1+0 " If this ZhO Billion is ell saved, there should bo no inflation this year. But, to this hO billions of necessary savings should bo added about 3h billions saved last yoar, 16 billions the yoar boforo, and another l\0 or 50 billions that may be saved next yoar and possibly tho yoar after, should war expenditures and taxes continuo rt around prosont lovols. Host of thoso savings aro boing accuraulatod in liquid forms currency, bonk deposits, and war savings bonds — and aro readily available for spending, Holdings of curroncy, bank doposits, and U. S« Government Securities by individuals now total closo to $90 billion, or about twice as much as in prowrr years, At present rate of expansion thoy may bo considorrbly more than 150 billions at the end of the war, I11 addition, businesses hold 50 or 60 billions of liquid rssots — 3 or 1+ times tho prewar level. Thoso funds represent a potential of buying power that could be added at any time to current income and thus oroato c demand for goods and services vastly in excess of curront production. The figures indicate that currently people are saving a largo part of thoir incomes;vbut the record also shows that they aro spending more than they should and thrt this is interfering with the effective prosecution of tho war; Consumer expenditures have boon larger than earlier estimrtes had indicrted thoy would bo — 90 billions compared with estimrtes of about 80 billions ->- this ii due in part to higher prices and in part to incroased production. This moans that scarce facilities and manpower, nuoded for war purposes, have been used to maintain consumer living standrrds at rbove prewar levels. Price control progress are running into great difficulties in keeping prices rnd wcges from rising, and some increases rre occurring, T "Jhile these figures are necessrrily estimrtes, thoy reflect conditions in a broad way end can bo usud srfely as guides to policies. They prosont in simple symbols the reasoning that should form the basis of policy decisions. Suppose they should be wrong? VJhat are the possible errors? Government war expenditures have been running at a rate cf billion dollars a month, compared with a budget estimate of Bis billions, but it was expected that expenditures in the earlier months would be less than in later months, and some further increase is scheduled. - 3 - Any reduction in expenditures, therefore, will depend upon revisions of schedules, m d this is n matter on which there is no published information. Rocoipts are running close to schedule; it is yet too early to judge the full effect of the tax legislation of lr.st summeri but it is not likely thrt final results will vary from estimates by more than one or two billion dollars. But suppose, to tako an extreme example, the deficit should bo as much as 10 billion dollars less than current estimates, what effect would this*have on the estimates and how should this affect taa policy? Reduction of such an amount in war expenditures might have the offoct of reducing national incomo or permitting an increase in the production of civilian goods; in either event, the balanco availrble for saving would probably bo reduced from around I4.O billions to around 30 billions. This would still bo tromendous, especially on top of all the savings thrt have boon accumulrted. YJhile, in view of other controls and influences, the necessary amount might bo saved during the war, it would add to the store of trouble for the future. The existence of such balcncos v/ill make possible extreme fluctuations in economic conditions in the postwar period. Trx legislation has at no time since the beginning of the defense program in 1^1*0 boen rdequato to forestall inflationrry dangers inherent in the war program. No amount of curtailmont of expenditures, short of seriously restricting tho conduct of the war, ca.n remove the necessity for a considerable further increase in taxes, if inflationary dangers aro to be avoided now and in tho future. Tho potential dangors in tho present budget situation are unmistakable; the way to reduce these dangors is clearft I believe the people willing to follow that road. This v/ill mean personal sacrifices, but fmr loss than would result from inflation now or later. - k - In this connection, the following, from a letter written by an Army Sergeant in West Africa, is significant. The letter was sent to President Coffey of the University of Minnesota, who is Chairman of the Federal Reserve Bank of Minneapolis. It strikingly indi6ates the kind of leadership that men in the armed services are expecting from those charged with responsibilities for protecting the home front: "Never before has the need been so great for men of vision and ideals to exert a guiding force in building our economy. f? Right now the monetary and price situation is probably the greatest problem facing usf Victory is inevitable, but dark clouds of inflation still loom ominously on the horizon of peace. Ralph Robey points out in a recent iss\ae of Newsweek* that the excess purchasing power which we are piling up during the war will continue to affect our economic structure after the war* He disproves the theory that this excess will be drained off in the purchase of consumption goods after the war, since every dollar of production means another dollar of buying power in and of itself. "You well know the results of inflation. But this time there will be even greater cause for discontent and unrest. This time we will have some ten million men and women from the military services who will form a formidable group if their plans are shattered by inflation. "You might be surprised at the number of men who are making plans already for their return to civilian life. Publicly they may not say much about it, but I have talked to innumerable men who are saving all of the money they possibly can for the time that they get back* Some are married or plan rto be married and they are putting money into a house, a farm, or furniture. But this is rare. The majority are saving their money - counting it carefully - and dreaming of the comforts that it is going to buy. "But the point is that they are dreaming of these things in terms of pre-war prices. We in the Army are not vitally affected by prices. Those of us in foreign service chalk up differences against the country in which we happen to do our small amount of buying. Those of us in the States buy little anyway. Certainly w© read about the price of furniture advancing 100% or some other price index going up 5 0 B u t it doesn't strike home the way it would if we looked at a radio that we almost bought before the war for twentyf ive dollars and now find that we have to pay fifty dollars for it. "After the war that is the experience that each and every one of us in the Army is going to have. We have saved our money - denied ourselves many pleasures, and we are dreaming of a down payment on a house, of new clothes, marriage, etc. But our air castles will fall with a very discomforting thud when we find that we can buy only half, or a third, or some smaller fraction of the commodities we had planned. That is when the protesting murmurs of ten million hearts will swell to a crashing crescendo of condemnation against our government. The results may well be catastrophic. "That is the possibility; but none of us over here believe that it will actually oocur. We have confidence that men of knowledge and judgment who are in positions of influence * * * will solve this problem for us. Our confidence is unlimited; you cannot afford to £aiit" INCOMES AND TAXES OF INDIVIDUALS SEASONALLY ADJUSTED. ANNUAL BASIS BY QUARTERS BILLIONS OF DOLLARS BILLIONS OF DOLLARS 180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 U i I 1939 i_Li 1940 1941 1942 1943 1944
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