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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.
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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
lj
l.
7
39
70
- 1
159

Assuming continuance of the war on"the present scale and no change
in taxes the 1 i i - ] 5 budget may bo roughly of this same order of magnitude.
9|+iThis 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.
1 e should certainly be in a position to balance tho budget end possibly
7
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 1 1 4 * based on estimates presented to the Committee by tho Treasury.
94Those 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 1 l . - i | is indicated by the
9j3ll.
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 I.
4O
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