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LUNCHEON TALK BKFGBX tHS TEXAS CONGBESSIQNIL DIOUIGATIOS BY Mii^IMlRfi*1CCLE8 QM "imAflQtf*, OCTOBER 28, 1912. talking about the inflation problem means telling the atory of a big Job that laci't being done m well me it ought to be, Between thie morning and the olose of bueineee this afternoon, the Federal Government spent about 500 itiJlion dollars* Hinety~two per cent of thie mas spent for *ar purposes* today spsnt sixteen times as mdi as the Canadians spent* three and a half time* as much as the *ngUsh spent* Wo one really knows hem «uch Sussts and Germany are spending* but it is a fair guess that ws are spending as much as those two mighty imations cabined* although ws have less than one«ha!>f of their combined population. We are spending sonsy on a scale that shorn that we intend to win this war* but I am sorry to say that we are raising that money in a way that will hinder us rather than help us in winning it* Fighting a modern war means that the oitiUan population must do without* «e somstlmss talk as if it was the Government here in Washington that was asking the people to do without* If ths Government had done a better job df organising the economic eide of our war effort* the sacrificss we shaU have to make might have been a little smaller* But, basically* these sacrifices wsre not decided on in Washington* the sacrifices the American people are now beginning to make were imposed on them by decisions made in Berlin, Rome, and Tokyo* How big they will be and how long they will have to last will be dscided not in Washington, but on the battlefields of Xurope, Asia, and Africa* In ths coming year the gross product of our economic system ~ everything turned out by our t^rm$ mines, and factories including services will amount to some #175 billion, a figure considerably higher than ever before in our national history* But out of this vast flow of goods ths Government will take no less than #90 billion for war purposes* Fart of what is left over will be needed for repairing and replacing our capital equipment and for the irreducible minimum of non^miHtary governmental functions* the goods and services remaining for sale to civilian consumers, valued at prevailing prices, will amount to no more than #70 billion* That is — the value of a U the goods that can be sold to our people* that is all the money we ought to give the public to spend on these goods* If the people spend more than that amount on these goods, their spsnding will not bring them any more goods, hut only the same goods at higher prices* the cost of living will continue to rise and we will be puahed faster and faster along the road to Inflation, a road that we have already begun to travel* It is a shocking fact that next year we propose to give the public, not Just the #70 billion that they need to buy these goods at prevailing prices, but very much more than this* After paying their taxes, the public wiU have available to spend on these goods, not #10,000,000,000 mors than these goods are worth, not #20,000,000,000 more than they are worth, but #60,000,000,000 more than they are worth* We can expect the public to save part of this vast sxeass of purchasing power* If ws continue to encourage people to pay their debts, to buy eavings bonds, and to save In other ways, we can expect them to save about oae~half of this ami But the pressure of the other half, in the absence of stronger measures to deal with the situation than now see* to be contemplated, will drive prices up by at least one«*third of their present level and probably by a good deal more than this* It is no answer to say *but we have fixed prices* they cannot rise farther because the Government has said so.* the Government can fix prices but it cannot guarantee housewives that goods wiH continue to be available for sale at the prices it has fixed* He are beginning to see that this is so in the case of coffee* le see that it is so in the case of meet and before many more weeks have passed, we will see that it is so for many other things* We are going a step further* We are rationing these scarce goods* Ve are asking an effort to see that however small supplies may be, they are fairly distributed* That is one way of dealing with the problem* the more fundamental way of dealing with it, and a way more consistent with the framework of our American institutions, i& to reduce thie vast excess of purchasing power by a really adequate program of taxation and compulsory saving* Congress has done a magnificent job in enacting thefievenueAct of 1%2* that Act takes us a long way in the ri^it direction* 1 am sorry that I mat say, however, that it is just not on the ri#t scale to deal with the gigantic problems of war finance that are confronting us* fo do the financial job that needs to be done, the huge total of ft* 5 billion in taxes snd compulsory saving provided by the Revenue Act of 1942 should have been just about three times as big* In what I have said so far, I have emphasized the fiscal aspects of the inflation problem* there is another aspect — a monetary aspect* In the current fiscal year, the treasury will hav to borrow about 160 billion* Of that amount about #40 billion will have to be borrowed from the banks* In the next fiscal year beginning only eight months from now the figures will be even bigger and the story about the part borrowed from the banks will be even worse* ihen we sell these huge amounts of Government securitlee to the banks, we increase their deposits* their deposits are the checkbook money that our people will try to spend on our diminishing volume of civilian goods and services* the volume of things the people can buy Is getting smaller and smaller) the amount of money that they can spsmd on those things is getting bigger and bigger. It does not make economic sense* Besides the explosive effect on prices of this increasing volume of money, it involves the most serious dangers for the future soundness of our banking structure* *hese deposits are coming into existence as a part iiit process of war finance* but they wiH remain as a constant threat economic stability and to our banking structure even alter peace comes, Moreover* the preannea of these securities In the portfolios of our banks Imposes upon the Eeserve system an unavoidable obligation to prevent a fail in the prices of those securities and the resulting disaster to our banking structure* this obligation seriously ititerferes with the exercise of the instruments of credit policy which the Sj$%m might otherwise uae to check a post-war inflationary situation* Hie powers with which the Reserve System has at its disposal to deal idth this situation are entirely inadequate. No central banking powers could be adequate to deal with this situation on the scale m mhich it is now developing. Our only effective remedy is to tax more and borrow less and to see that our borrowing represents the savings of the people and not the result of bank credit creation, this is the problem as I see it. It is not a small scale problem* it has enormous dimensions. It is not a problem that will develop some time in the remote ffcturej it is a problem that began to develop before we entered the war and is spreading and growing worse as we sit here today, Wiat can be done about itf I believe that our financial policies are developing in the ri#it direction* but we are not moving in that direct tioa fast enough. We have m**de and are continuing to make three major mistakes in our financial policies, »e have leaned too heavily m voluntary savings! we have not placed sufficient restrictions on mass growth of pusv Rasing powerj end we have borrowed too heavily from the banks, Large* scale borrowing from the banks ought to be a last resort whan a nation can no longer tax and can no longer borrow from its people. Instead of that* we have used it as our primary source of funds9 in a period ifeen we are still far from the limits of our taxable capacity and far from having ej&aueted the public*s ability to save and to lend to the Government, Voluntary savings have their place in war finance, but it is not the place shich #e have mistakenly assigned it, Our voluntary savings program has two great defects. The savings that have been lent to the Government under this program are not stable, Savings bonds can be converted into cash at no loss to the holder and that cash can be added to the vast flood of cash that threaten* to overwhelm us, This is a danger that we shaU have to face not'only during the war but afterward* ishen the danger of inflation may be even sore serious than at the peak of our war effort* In the second place* voluntary savings under our present program are Just not big enough to do the Job, Voluntary savings should be continued* but only as a supplement to an adequate program of compulsory savings, Voluntary savings should be used as an outlet for the funds of our citizens uhose economic circumstances* or nhosa patriotism makes it possible for them to land the Government even mora than the share assigned to them under a compulsory plan. In the restrictions it places on mass purchasing power* the Revenue Act Just enacted goes in the right direction but again it does not go far enough. The 24 per cent rate placed on income subject to income tarn under the Act (5 per cent Victory tax* 4 per cent normal tax* 13 per cent initial surtax) is still not high enou$u The whole of the 24 per cent* or the i&ole of any higher rate, ought to be collected at the source instead of merely the 5 per cent that represent* the Victory tax* ie need stronger measures along these lines* ¥h#y ou^ht to he strong enough to make a *&®aificant reduction in the Government requirements for funds to be supplied by the banks, perhaps strong enough to out those requirements in half * In the fisoal field, as in other fields, we have been guilty of unjustified optiaisa. The policies now being pursued are leading us toward disaster* It is my hope and belief that these policies can be changed before it is too late* m & m TAX AND COMPULSORY SAVIMQ LIABILITY II UKIWD STATES, D8ITSB UtfODOK, AHD CM ADA (Married, t«o dependent®) October 28, «42 United State* United Kingdom Set ineoM before #2,000 5,000 20,000 Total Refund #106 861 #35 109 69,086 1,200 7,220 100,000 475 Total Refund Total Refund #304 1,655 #114 #275 225 1,747 #138 600 83,900 260 80,307 11,020 260 11,336 1,091 1,091 XSTUUTSS OF GROSS PRODUCT AND NATIONAL IXCOIIK (Billion* of Current Doll&r*) October 28, »42 Calendar Year* 0ro»* Product Depreciation and depletion 1941 1942 1943 120 150 175 7 12 15 Bu*ine«* Taxes IS 22 22 National 95 116 13t
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