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Governor o f the Federal Reserve Board Washington

Governor o f Minnesota

A t a dinner given in their honor by

M arch N inth , N ineteen H undred


T wenty -E ight


G overn or o f the F ederal Reserve B oard, Washington


G o v e r n o r o f M in n eso ta


Governor V oung’s Address

M r . Toastmaster distinguished guests in the business an d bank­
ing life o f the Fourth D is tr ic t:


T is rather embarrasing to hear the flattering remarks of your Toast­
master in reference to myself, but nevertheless, I suspect that I am
human the same as any other person, and sometimes we like to hear those
flattering remarks even though they may embarrass us.
I am grateful for the opportunity to visit the Fourth Reserve Dis­
trict and I am particularly pleased to have the opportunity to again sit at a
table with Governor Christianson of the State of Minnesota in which I
still retain my legal residence. We are very fond of Governor Christian­
son in Minnesota, so much so that we have elected him to the chief execu­
tive office in that state. He is the best our state can produce. When he
speaks to you this evening upon taxation he will do it thoroughly in his
characteristic, forceful manner.
In accepting this invitation to come to Cleveland, it was the distinct
understanding that I was not to make a speech, although it was suggested
that I might say a little something with a good deal of emphasis on the
adjective “little” and that shall be the object of my talk, to be as brief as
possible and attempt to leave a story or a thought with you. That thought
is in reference to the organization and operation of the Federal Reserve
Banks and the Federal Reserve System.
You will recall that under the law each Reserve Bank has nine direc­
tors, six of those directors are elected by the stockholding member banks.
In other words, a majority. The Board of Directors dictates the policies
of the Federal Reserve Bank, selects the employees, appoints the officers
and fixes their salaries.
A Reserve Bank is autonomous in its operation as much as any cor­
poration operating under Federal charter possibly can be. In all, there
are twelve Reserve Banks and in all 108 directors. Twelve of these di­
rectors are chairmen of the Boards of Directors.
At the present time 36 others are bankers, and of the balance of the
directors 60 of them are represented by business. It is interesting to note


the various businesses that are represented on the Board of Directors of
Federal Reserve Banks at the present time. There are 19 manufacturers,
14 merchants, 4 farmers, 4 lumbermen, 2 insurance men, 3 investment
bankers, 3 retired business men, 2 publishers, 2 lawyers, 2 railroad men,
1 cattleman, 1 contractor, 1 public utility man, 1 mining man and 1 sav­
ings bankman.
I point this out particularly to show that the real control of the Re­
serve Banks does not rest with the bankers or with the Federal Reserve
Board but really with the business interests of the country.
Now there are certain functions of the Reserve Banks that are coun­
try-wide in scope. The collection of checks, wire transfers and so forth,
in which uniformity is not necessary but it is highly desirable, and in refer­
ence to the open market operations of the Federal Reserve System uni­
formity is quite necessary.
Therefore, under the law, a central board was created in Washington
known as the Reserve Board. This Board is a supervisory Board rather
than an administrative one, although its powers are really very far-reach­
ing. But to date I am glad to say that except on very, very rare occasions
has the Federal Reserve Board seen fit to exercise its far-reaching powers.
The Reserve Board, as well as the Reserve Banks, has learned and
observed that much more can be accomplished by cooperation and co­
ordination. That is the procedure that has been followed almost contin­
uously since 1914.
The law gives many far-reaching powers to the Federal Reserve
Board. One of those powers is that the Board can remove the officers or
directors of any Federal Reserve Bank, but as a safeguard so that the Board
will not act in an arbitrary matter, the law also gives a strong intimation
that the President of the United States can remove the members of the
Federal Reserve Board. So you see that there are wheels within wheels
and all of us who are associated with the System cannot, therefore, become
too arbitrary without getting our knuckles rapped from some source.
In addition, the law makes provision for a Federal Advisory Council.
Each Federal Reserve Bd'nk is permitted to appoint one member of that
Council. The Council is required by law to meet four times a year and
while the Council has no supervisory or administrative powers still, under
the law, it is permitted to require the Reserve Board to furnish it any and
all information in the Board’s possession. When this Board meets it dis­
cusses and considers the policies of the System, expresses an opinion upon
any matters that may be referred to it by the Reserve Board and offers
recommendations and suggestions for future policies.
I have pointed all these things out to remind you of what a wonderful
credit structure we have in this country. It is a protection, not only to


the banking interests of the country but to all of the business interests.
Without going into the details of the many mechanical things that must
necessarily be of a uniform character in the System, I am going to describe
in detail the operation and the procedure that is followed in determining
open market policies.
I am taking open market policies because that is the most important
function of the Federal Reserve System at the present time and perhaps
will be for many years to come.
Open market operations of the Federal Reserve System are initiated
by the Federal Reserve Banks in this manner: The Reserve Banks have
selected a committee known as the open market committee which is com­
posed of five governors of five Reserve Banks. This committee meets upon
the call of its chairman, has all the information in reference to business
and industry and credit before it, discusses the situation and makes recom­
mendations to the Federal Reserve Board. The Board approves these
recommendations, or modifies them and approves them, then the recom­
mendations are referred back to the directors of each Reserve Bank. Each
Reserve Bank can approve or disapprove as it sees fit.
Open market operations is the one function in the Federal Reserve
System where uniformity is quite necessary and obviously so. If one Re­
serve Bank should follow an open market policy of selling securities to the
market and another should follow a policy of buying securities from the
market, the objects of one bank would be defeated by the actions of the
Much of this procedure you are all familiar with. I am bringing it
to your attention again this evening with the hope that you will reflect
and realize that this Reserve System is your Reserve System. If that
Reserve System is not following good policies, or following the views of
the majority, certainly the machinery rests with the banking and business
interests to correct those policies.
Therefore, gentlemen, I feel justified in appealing to you in rather
strong terms. You are the people who are capable of familiarizing your­
selves with the Federal Reserve System and its operations; you are the
people who are capable of determining whether that System is functioning
properly or not; you are the people who can exercise a powerful influence
in this country by passing the information on to others in an intelligent
and understandable way. In conclusion, let me remind you that regardless
of whether we want the position or not, we have become the world’s banker
and as such many opportunities are going to be presented to us and we
should be in a position to grasp those opportunities so that prosperity may
come to our own people.
Our credit structure is centered around the Reserve System, is one
of our most valuable assets and it seems to me that each and every one of
us should do everything within our power to protect that asset.


Governor Christianson’s
M r. Toastmaster
D istrict:


Gentlemen o f the Fourth Federal Reserve


W O U LD say that after the recommendation which I have just received
at the hands of my friend, Mr. House, this would be a most opportune
occasion for me to commence negotiations for a loan. They don’t always
treat me as well as that in Minnesota, Mr. Toastmaster.
I recall about two years ago when I was called to a small town in
the central portion of my state, a town of about a thousand people, to de­
liver an address of welcome to about three thousand delegates of one of
the large church denominations which had assembled there, coming from
every state in the Union and from some foreign countries, I was intro­
duced that evening by a chairman who was not as kind as Mr. House
w7as this evening. This chairman expressed some doubt as to whether a
small village like that would be adequate to the task of entertaining so
many people from abroad, so he proceeded in a vein of apology, explain­
ing what the difficulties and shortcomings were.
Finally, after five minutes of apologizing, he concluded by saying.
“But, my friends, when you come to Minnesota, you must take things as
we have them,” and then he introduced me as Governor of the State.
A1 Smith, Governor of the State of New York, made the remark at
the Governors’ Conference at Poland Springs, Maine, about two and
one-half years ago, that every American state should have at least two
governors. He said that one of them should stay at home and be on the
job, and I suspect that there is where a great many of the people of Min­
nesota believe that I should have been today, and then he said that the
state should give the other one a celluloid collar and a dinner coat and send
him out to make all the speeches and lay all the corner stones.
In Minnesota it would be one of his principal functions to dedicate
all of the new creameries. Why, since I became Governor about four
years ago, I have had to talk at all kinds of affairs and on all kinds of oc­
casions. When I am at home I generally have to talk for my luncheon at
noon and for my dinner at night and if I could now find somebody I could


induce to introduce the vogue of after breakfast speaking, I should be
quite independent of my wife and family.
My friends, of course I believe in popular elections because I am the
product of one, but, frankly, I don’t see what there is about the approval
of a mere majority that should qualify a man to talk all the time—to talk
incessantly, to talk volubly, to talk interestingly, and they even expect a
man to talk intelligently upon every conceivable subject from the proper
feeding of infants to the settlement of the interallied war obligations.
But I assure you, my friends, it gives me great pleasure to be here to­
night to bring to the people of the sovereign State of Ohio the greetings
of the people of the sovereign State of Minnesota. I am particularly
happy to be here under such pleasant auspices.
I am glad to be here on this occasion with my friend, Roy Young,
whom we lost in Minnesota a few months ago, and, by the way, during
the last year Minnesota has made its contributions to the nation and the
world. About ten months ago a Minnesota boy winged his course into
the open spaces of the sky, crossed the waters of the Atlantic and wrote his
name in blazing glory against the sky. Minnesota is proud to have given
to the world and to history a boy whose name will last as long as time,
Charles A. Lindbergh.
Minnesota has made other contributions to the nation. We have
given you Frank B. Kellogg, Secretary of State. We have given you R.
E. Olds, Assistant Secretary of State; Carl Schulemann, Assistant to the
Secretary of the Treasury; Pierce Butler, Associate Justice of the Su­
preme Court of the United States, and now, only about five months ago,
we made another contribution, no less distinguished than the rest, in the
person of the man who is the honor guest of this evening.
Roy Young is excellent demonstration of the fact that after two
thousand years, something good can still come out of Nazareth, because
he is the product of a small town. He has spent his early banking years,
as I have heard, in one of the smaller communities of Northern Michigan.
He came to Minnesota about ten years ago to the Federal Reserve Bank
of the Ninth District, and during the greater period of the time which has
intervened he has served as Governor of that bank.
I am not going to call Mr. Young, however, a small town banker,
because he is not that. Mr. Young is a great banker that came out of a
small town. And, by the way, I think it is also suggestive of the democ­
racy of the Federal Reserve System, when a man coming from the Middle
West—and that part of the Middle West which I represent—should be
placed in this position as Governor of the Federal Reserve Board. I
daresay that ten years ago there was nobody in the State of Minnesota


who dared to believe that a man from Minnesota, a Minnesota banker,
could become the head of the banking system of America.
Mr. Young this evening has discussed private finance as regulated
and controlled by the Federal Government. It is my function, I assume
from the introduction, to discuss this evening public finance as represented
in taxation and public indebtedness.
In the making and the development of the automobile, the self-starter
antidated four-wheel brakes; in fact, I believe that the development of the
self-starter was responsible for the invention of four-wheel brakes, because
when automobiles were so equipped that they could be started easily and
quickly without losing breath or temper, they became numerous. Some­
times, I believe they became too numerous, so numerous that they clut­
tered up our highways and obstructed traffic, and accidents became fre­
Casualties occurred not only to fenders, but to automobile drivers
and pedestrians. The automobile supplied material for two kinds of
morgues: one for automobiles, and the other for men, because the automo­
bile is no respecter of persons. It divides humanity into two classes, the
quick and the dead. If you are not quick, you are dead.
So it became apparent to people that it was just as important to stop
an automobile quickly and certainly as to start it easily. Necessity again
became the mother of invention and the four-wheel brake was born.
Now, unfortunately, all of the joy riding of the present generation
hasn’t been done in automobiles. There has been financial joy riding as
well and there have been no end of politicians who have been stepping on
the gas.
Every organization existing for the purpose merely of boosting and
booming, every community seeking an appropriation for a new post office
or a new state institution, every politician or statesman, if you please, who
had made the discovery that he could get his picture on the front pages of
the newspapers and incidentally get more votes in the ballot box by se­
curing state aid or Federal aid for some purpose or other, every organiza­
tion of men or women laboring under the obsession that it could reform
the world by creating a new government bureau, has been a self-starter,
and, unfortunately, we haven’t been equipped with efficient brakes.
Of course, nobody has worried much about it because every chauffeur
has figured that when the catastrophe finally came and the machine, as the
result of the joy riding, finally went into the ditch, there would be another
driver at the wheel and perhaps other passengers in the back seat of pos­
terity who would pay the penalty of the joy ride.
Nevertheless, there are some of us who have been worrying and that
is one reason why, at the risk of mixing my figures of speech, I have chosen


as my subject this evening, “Putting Four-Wheel Brakes on the Ship of
Increase in the expenditures of government has been one of the most
outstanding and disturbing developments of the last few decades. In 1890
the total expenses of Government in this country, Federal, State, and lo­
cal, aggregated $875,000,000. Thirty-six years later in 1926, they ag­
gregated $8,765,000,000. In other words, during the period of thirtysix years, the burden of Government in this country had increased ten-fold.
In 1890 the American people paid 7 per cent of their income for
Government. In 1926 they paid \ 2 l/ 2 per cent, or one-eighth of their in­
come for the privilege of being governed. In other w’ords, the average
American spends forty days every year working for the state or, if he works
upon an eight-hour basis, he works one hour every day to pay his taxes,
and these figures, startling as they may seem to you, don’t tell the whole
story, because Government has other means of raising revenue besides
levying taxes.
First Government taxes, taxes to the limit, if you please, and then it
issues bonds. It borrows money, and the increase in the indebtedness of
the states and their municipal subdivisions is a disturbing story, for in 1913
the total of the debts of the states and their municipal subdivisions was
$3,300,000,000. In 1927 it was $11,700,000,000. In other words dur­
ing that period, the total indebtedness of the states and their municipal sub­
divisions had increased more than three times.
During the last few years the indebtedness of the Federal Govern­
ment has been reduced. In 1919 Federal indebtedness reached its maxi­
mum at twenty-five and one-half billion dollars. We have cut off about
seven billions since that time, because in 1927 the Federal indebtedness was
eighteen billions and one-half, but don’t you see, while the Federal Gov­
ernment taxes have been reduced, while the Governments have been re­
ducing their indebtedness, the states and municipal subdivisions have in­
creased their debts?
In 1926 the new bond issues of the states and municipal subdivisions
in this country aggregated one billion, three hundred millions of dollars.
The total debt of the American people at this time—I am speaking of
public indebtedness—Federal, State, and local, has reached the staggering
total of thirty billions of dollars, which is 20 per cent, one-fifth of the tax­
able valuation of all of the non-exempt real estate in America.
We will assume you have a home with a taxable valuation of ten
thousand dollars and assume it is free of all encumbrances. You haven’t
put a mortgage on it. You have permitted nobody to file a lien against
it and you think it is clear. Well, my friend, you are in error, because
there is standing against that home its undivided share of the public in­


debtedness of America, a lien amounting to 20 per cent of its value, or two
thousand dollars; a mortgage, if you please, in the making of which you
had no part, except the part you may have played unwittingly by either
not voting, or not voting right on election day.
So, if we are going to find what Government really costs in this coun­
try and what Governmental expenditures are, we shall have to add to the
total tax bill the total borrowings every year, and if we do, we have
reached the conclusion that in 1925, the last year for which I have the
statistics, the total expenditures of Government in this country were eleven
billion, three hundred and some-odd millions of dollars.
Let us consider what that sum amounts to. I heard today that the
Wall Street Journal carried a dispatch from Petrograd the other day
saying that Professor Koslosky, a German professor, has estimated and
declared that if all of the pretzels in the world were straightened out and
placed end to end, you would discover that it couldn’t be done.
Well, if you want to take that eleven billion, three hundred millions
of dollars which represented the total Governmental expenditures of Amer­
ica in 1925, and express it in terms of dollar bills, and lay those bills end
to end, they would reach fifty-four times around the earth at the equator,
or, if you were to express them in ten-dollar bills, there would be one tendollar bill for every minute that has elapsed since the beginning of the
Christian era, and that represents what Government in this country costs
you as tax-payers in the one year of 1925.
I suspect that what most of you, and I recognize there is a pretty
heavy percentage of tax-payers in this audience, are interested in knowing
is where this joy riding is going to end. I am frank to say the end hasn’t
come yet and the end is not in sight because we know there has been a
tremendous increase during the last few years.
I told you that Federal expenditures had been reduced since 1919 to
the extent of two billions of dollars, but don’t be too cocky about that be­
cause, remember, in the first place that reduction is due in part to the fact
that the war is over and we are not making any war expenditures. It is
due in part to the fact that we have been dismantling our war machinery
and selling a lot of stuff that we paid for before, and that has reduced the
burden of taxation.
Don’t be too proud of the record of the Federal Government, because,
while Federal expenditures have been reduced to the extent of two bil­
lions of dollars a year, during the same period the states and their munici­
pal subdivisions have increased theirs, so that last year the total burden of
governmental expenditures in America, Federal, State and local, was only
about twenty million dollars lower than it was in the peak year of war
expenditures of 1920.


State expenditures have doubled since 1919 and they have trebled
since 1913. Now what are we going to do about it? Is there any way
in which this increase in public expenditures can be halted or must we face
complacently a constant increase in this burden of government?
Of course, it is only fair to say that a part of the increase is due to
the reduced purchasing power of the dollar. Government buys in the
same market in which you and I, as individuals, buy and the higher cost
of living is inevitably reflected in the higher cost of government. But,
my friends, that does not afford an adequate explanation. There are
forces and factors over which the Government does have control that are
responsible and if we want to affect the situation as citizens, it becomes
necessary for us to discover what those factors and forces are. Eliminate
the leaks wherever they exist.
The old ambition of communities, the disposition to multiply and in­
crease the functions of government, these are largely responsible for what
we have experienced.
About 125 years ago, Thomas Jefferson declared that government
governs best which governs less. I don’t happen to belong to Thomas
Jefferson’s party, as the Toastmaster has informed you, but at the same
time there is some of the philosophy of Thomas Jefferson that I believe in.
It may be that we need more government than we assume we do, be­
cause out of the increasing complexity of modern life has arisen the neces­
sity of more regulation. But, nevertheless, my friends, I am convinced
of this: that we have about all the regulation we need now and that when­
ever anybody proposes to establish a new governmental bureau or new
governmental activity for the purpose of regulating, controlling or direct­
ing somebody, we should at least put up a sign, “Stop, Look and Listen.”
A nation that depends upon law for everything rests upon a fragile
reed. You remember the maxim, “If you want a thing done do it your­
self.” I would say that if you want to have somebody else do it, if you
cannot do it yourself, at least hire somebody to do it who is close enough
to you so that you can watch him while he is doing it.
We are not doing that at the present time. We try to have our
problems solved by governmental bureaus at Washington and at the state
capitol, manned by newly fledged collegians who are trying to tell experi­
enced people how they should conduct their affairs and run their business.
And what has the result of this tendency toward over-elaboration of
government done? In the first place, it has led to a multiplicity of laws.
We have a legislative session in Minnesota every two years.
I was down in Massachusetts a short time ago and asked the governor
of that state how often their Legislature met. He said, “Ours meets
every year.” I said, “Thank God ours meets only half as often as that.”


These Legislatures usually pass about 500 new laws whenever they
meet and the government at Washington wrestles also with several thou­
sands of bills at every session.
Have you noticed that almost every new law that is passed results in
the creation of some new state or Federal agency? We have so increased
and over-elaborated this governmental machinery of ours in this country
that we have at the present time no less than 2,700,000 public officials,
employees and functionaries in the United States of America and in addi­
tion to those 700,000 pensioners, worn out politicians out of jobs.
That brings the total up to 3,400,000 people, an army almost as large
as the one we mobilized for service in the Great World War.
Take the number of men and women and children engaged in gainful
production in this country and one-twelfth of them represents the number
engaged as government officials, employees or pensioners, and it costs us
every year to support that army $3,800,000,000, nearly one-half of the
nation’s tax bill, and still we are wondering in the face of a continued over­
elaboration of this machinery why the taxes of the people are increasing.
So I suspect if we want to stop this increase in the cost of govern­
ment the first thing that we will have to decide to do is to get along with
less government or at least to put a stop to it when somebody tries to in­
crease its functions and activities unduly.
I recognize, of course, that situations arise which will have to be met
but at the same time my plea is that whenever any such situation arises
in the mind of anybody, that someone at least be at hand to call a halt to
determine whether or not it is necessary to have any further over-elabora­
tion of this tremendously large governmental machine.
I said that the states and their municipal subdivisions have been the
principal offenders, and that whereas the cost of Federal Government in
this country has been reduced the cost of state government has continued
to increase during the last few years. That may suggest the question,
“Why is it that the Federal Government can reduce its expenditures or at
least keep them from increasing and the states cannot?” I believe that
the answer can be found in the difference in the form of organization of
the Federal Government from that of the typical state government.
The Federal Government is the highly centralized one. At the head
stands the president of the United States and under him are the members
of his cabinet, and the various members of his cabinet are arranged prac­
tically with all the activities of the Government at Washington under
them, so that if a president, like President Coolidge, stands for a policy of
economy he can, by handing his orders down through the members of his
cabinet, reach every agency of the government and compel economy.
Consider on the other hand the typical governmental organization


which prevails in the average American state. The average American
state has no chief executive. It calls its governor its chief executive by
courtesy, but he is only one of several state executives, all of whom are
elected by the people and are responsible to the people alone.
To be sure, he has the power of vetoing appropriations at the end
of a legislative session, but this constitutes a very unsatisfactory control of
appropriations because in most states, while he can strike out an item of a
legislative appropriation, he has no power to reduce it, so when the legis­
lative appropriation bill comes at the end of a session, after the Legisla­
ture has gone home he has the choice between striking out items of ap­
propriation and suspending entirely the activity which this represents, or
allowing those items as they stand. If he allows them as they stand in
the form of the organization which prevails in the typical state govern­
ment, he has no further control over the expenditures of the money that
is authorized.
Very frequently in many of our states we find that executive de­
partments are headed by boards. If that is the case very frequently a board
of three, often with overlapping terms in my state, is appointed for terms
of six years, one going out every two years, so that a governor during the
first term of his service would get control of only one-third of his own ad­
He would have to serve two terms at least before he would have the
power to displace two members of any board and thus secure a majority
on it to control its activities. And even after he has secured a majority
he cannot be sure of controlling their activities because very often they
carry out his policies only by carrying them out through the door or throw­
ing them out through the window.
The function of the typical governor in the typical American state is
confined to acting as umpire between rival candidates for political jobs
and receiving for his reward the umpire’s traditional due.
You might say that the Legislature in the state has the power to
control expenditures by all means, but I challenge that statement. I want
to say it depends on the members of the Legislature. You cannot hold
them up to that degree of accountability because they have no power com­
mensurate with that responsibility. You ask any of them if they have
the power to reduce appropriations? They have the power to grant or
withhold money,—that is an inherent power of a legislative body, but wait.
The Legislature meets only once in two years and when it meets it
usually is in session only for a limited number of weeks and during that
time it must consider all the intricate details of numerous state activities,
it must pass appropriations and requests aggregating in the average Ameri­
can state from $50,000,000 to $60,000,000. It is impossible for a body


of that kind to acquaint itself so thoroughly in so brief a period with all the
functions of a great state as to make even an intelligent guess as to the
amount of money that is needed.
The best that the Legislature can do is guess liberally because if it
doesn’t guess liberally, if it guesses too low, it may cripple an activity and
trust to luck that the men who get the money will be careful in its ex­
You say that the heads of the state departments appropriate it for
their use and that they can be held responsible, but I am wondering if it
isn’t asking too much of frail humanity to expect the heads of any state
activity to refrain from spending money that has been appropriated for
their use. Every such man believes that his own activity is more impor­
tant than any other activity in the state and he sees so many thousands of
uses for which he could use the money.
In order to meet this situation in 1925 we adopted a new scheme of
organization of the government of Minnesota. We consolidated a few
departments but don’t believe that the mere consolidation of state depart­
ments is going to produce very much economy in itself because all that
such consolidation does is to make a regrouping of the activity and the ac­
tivity is still there.
We adopted, in connection with our reorganization, a new budget sys­
tem and this budget system is sufficiently unique so that I might discuss it
for a few minutes.
Our budget system is not a mere compilation of departmental requests,
it isn’t merely an attempt to scale down the departmental requests for legis­
lature. It goes farther than that.
After the Budget Bureau under our system has presented its budget
to the Legislature and the Legislature has voted the money, we have a
string on that money so that before the head of the Bureau or Depart­
ment that enjoys that appropriation can spend a dollar of it he must get
specific approval for the expenditure from the Budget Board.
In other words, every three months the head of a state department
must file with the Budget Board a requisition for the part of its appropria­
tion that it desires to spend during the next three months. And until that
Budget Board has filed its written approval of the expenditures not one
cent of the appropriation in the treasury is available for that use.
The Budget Board can do one of two things with a requisition com­
ing from a department head. It can refuse it or it can allow it. Yes, it
can do a third thing; it has a third alternative. It can reduce it.
Now let us see, by means of a hypothetical case—purely hypothetical,
I assure you—how this is designed to function. We will suppose the head
of a department of Minnesota wants to buy ten automobiles. That is


nothing because I can remember one time the head of our state department,
under the old system, bought fourteen automobiles in one afternoon, and
didn’t have to ask anybody for permission.
Under the new system the quarterly budget would have to contain this
item—we will say he wants Cadillac automobiles— :
“ 10 Cadillac Automobiles . . . $35,000.”
That would come before the Chairman of the Budget Board. He
would send for the department head and say, “ I notice you have made a
requisition for the purchase of ten new Cadillac automobiles for $35,000.
I don’t know whether we are going to allow you that requisition. We have
studied the functionings and activities of your department. That is our
business. The only business we have is to watch you fellows and we have
decided that you will get along with six new automobiles for the present.
If it should develop later that you need the seventh, we would buy the
seventh, but for the present you will get only six. Furthermore, we have
made a survey of the relative efficiency and economy of operation for vari­
ous motor cars for your inspectors to go around the state with, and have
concluded they don’t need Cadillacs. We have been standardizing on a
cheaper car. Instead of getting ten Cadillacs, we are going to buy six
And you will get six Fords. And you will like it, after while.
Now some of you might ask some questions at this juncture. I sup­
pose the first would be, “Doesn’t this budget system of yours cause a good
deal of friction?” I am answering frankly—it does. I am going to go
one better and say that any budget system that is worth the paper the law
which created it is written on will cause friction, because if there is no
friction between the people who want to spend the tax-payers’ money and
those who are charged with the responsibility of saving it, it is a pretty
sure thing that it is the tax-spenders’ and not the tax-payers’ interests which
are being taken care of.
The budget system has caused friction in Washington, I am told. A
great many people down there don’t like General Lord. Some of them
don’t like Coolidge. There is friction in the operation of any budget sys­
tem that is effective, because the budget is a brake. And what is it which
gives a brake its effectiveness?
Suppose you had a brake and the adjustment between the brake band
and the brake drum was such that the two didn’t get together when you
put your foot on the brake pedal and there was no friction? W hat is
going to happen? You are going down the road about 50 miles an hour
and you see another fellow coming from another road in a little Ford.
You put your foot on the brake pedal and the brake band doesn’t come in
contact with the brake drum, and no friction is set up. The result is you


go into the ditch and probably into the hospital and perhaps into the
morgue. So the operation or development of friction in the operation of
a budget brake is absolutely essential to its functioning.
You might ask, “Doesn’t this thing make the governor a czar?” Well,
I would say in reply to that that the governor, who of course is the court
of resort when there is a difference of opinion between the man who wants
to spend the money and the Budget Board, trying to save it, does have
certain power but it is only the amount of power he needs to have in order
to meet his responsibility to the people.
And it doesn’t confer nearly as much power as the operation of the
government at Washington, which centers all executive power in the chief
executive, because after all the only power the governor has under this
system that he didn’t have before is the power to save the tax-payers’
money, and unless somebody has that power and exercises it, it is a sure
thing that the interests of the tax-payer are not going to be served.
Now so far in my argument I have shown there has been a tremendous
increase in the cost of government in this country. I have indicated some
of the reasons for this increase and told you that in my opinion the princi­
pal reason is that the average state government does not afford the means
for anybody to compel economy, and I have also outlined briefly the method
we have used in Minnesota and the machinery set up to give the chief ex­
ecutive that power.
The final point of my argument is this: That there cannot be any
effective tax reduction in this country until we eliminate public indebted­
ness or at least reduce its volume.
Do you know that at the present time 12^4 per cent of the taxes which
the American people pay is required to meet interest charges on public debts
credited in the past? And that doesn’t take into consideration the amount
of taxes that is levied to meet payment upon the principal. That does
not take into consideratidVi sinking fund requirements. Obviously, there­
fore, if all public indebtedness could be eliminated in this country you
would immediately reduce the average rate of taxation 12^4 per cent or
Do you know that of the $1,300,000,000 of new bonds issued by the
states and municipal subdivisions last year practically all of it was con­
sumed or at least the totals equaled by various sums which those same gov­
ernmental bodies paid out in interests and for sinking fund of debts that
had theretofore been credited?
So we have already reached the situation as to public indebtedness in
this country that practically all of our annual borrowings are consumed to
take care of indebtedness credited in the past, and after we have borrowed
the money we are no better off than we were before.


Ogden Mills, Under-Secretary of Treasury, made an address at the
University of Virginia last summer which to me was illuminating and in
which he compared the cost of making recurring improvements first, out
of current tax receipts and secondly, out of borrowings.
He cited this hypothetical case and said that suppose a state contem­
plates an improvement amounting to $10,000,000 a year running over 25
years, a total of $250,000,000. If it finds that out of current receipts it
can be financed by taxing the people $10,000,000 a year, of course the
total cost of the improvement is $250,000,000 to the state.
If, on the other hand it proceeds to raise the money by issuing $10,000,000 in bonds every year, four per cent bonds, expiring in twenty-five
years, the first year the state will get $10,000,000 proceeds from the sale
of those bonds and from the cash outlay basis is considerably ahead of the
game and still not to the extent of $10,000,000 because you must first
make a deduction of $400,000 for interest and another deduction of
$400,000 for sinking fund, leaving only $9,200,000 net advantage from
the cash outlay basis.
He points out that by the end of the tenth year when you sell your
bonds for $10,000,000 it will require $7,300,000 of that money to meet
interest charges and sinking fund requirements for bonds issued up to that
time, leaving only $700,000 of the proceeds to go into actual construction
He points out that by the end of the fourteenth year the $10,000,000,
the entire proceeds of the sale of the bonds, will be required to meet the
interest charges and sinking fund requirements of the bonds issued up to
that time and by the twenty-five years he finds that whereas the bonds will
produce $10,000,000 the state will have to pay $15,000,000 for interest
and sinking funds, thus leaving the tax payer $5,000,000 worse off than
if he had decided to pay as he made his improvements.
He points out that whereas under the pay-as-you-go plan those im­
provements would be $250,000,000, under the other method the improve­
ments will cost $380,000,000.
And under either system those who use the facility for which the
expenditure was made would have the same amount of use out of the im­
provement. We will assume the money was expended for paving roads at
$25,000 per mile. Each year under either plan there would be exactly
400 miles of paving laid. So there would be no difference at all in the re­
turn to the people of the state in the way of the use of the utility for which
the money was expended.
My friends, in closing, I want to say that I believe the time has come
when we must call a halt to increasing public expenditures and increasing
taxation because we have pyramided this burden to the point where it has


become so heavy as to seriously threaten the industrial and economic struc­
ture of this country.
After all, human instrumentalities, the functioning of government,
the civilization itself, rests upon a foundation consisting of the strained
backs and the tight muscles of the men and women who must work.
If you contemplate the construction of a new building out here, you
first lay foundations adequate to support the kind of structure you intend
to build. If you build a one-story structure, you plan your foundation ac­
cordingly and it would be folly, after you had laid the foundation, to change
your plans and put up a twenty-story building on the same foundation. If
you did, some day you would come downtown and you would find the
foundations had become sagging. Some day cracks would appear in the
walls and the building wrould come down ultimately.
The serious question is, if we continue to build in superstructure upon
the foundation of men and women, whether it will not ultimately become
so heavy as to break down those human foundations. That is the thought
that I desire to leave with you this evening.
In closing, my friends, I want to say that it has afforded me great
pleasure to come to Cleveland and a great pleasure to present these thoughts
of mine to you this evening. I have had a wonderful time here. This is
my first visit in this great city, this Colossus which stands at the entrance
of the great Northwest. I have had the opportunity to see some of your
industries. I have seen the wonderful residential development out here
at the outskirts of the city, and I am going home marvelling at the enter­
prise and the progress you are making.
I talked in a jocular vein at the beginning about governors going
around making speeches and I believe it is distinctly worth while; in fact,
I ’d almost recommend to the people of Ohio that these people ask Vic
Donahey to come to Minnesota.
It is worthwhile for us to come in contact with the people who are
living in other parts of the nation and I believe that for that reason we
are able to maintain the solidarity that makes it possible to keep these fortyeight different states, with different conditions prevailing in all of them and
with diverse interests binding them together, firmly under one flag.
It has a tendency to do away with the misunderstandings and the dif­
ferences which separate us from time to time. There has been too much
of that during the last few years in the way of jealousies between differ­
ent sections of the country and between the different states. There are
jealousies between the towns and the countries and the rich and the poor
and between the young and the old, between the learned and the unlet­
tered, jealousies even between married folks and those who ought to be.


A community may have all the visitations of Job, the community may
suffer from fires and floods and even fevers and famines and fallacies and
foolishness, it may have a short crop of everything in the world except
possibly old maids, and still it may grow.
But if you have a suspicious people breathing the thought that some
man or some community is getting too much money, that some individual
is getting too many friends or that some part of the country is getting too
much wealth, then all the peace and the happiness of the country is gone.
It is a strange world that we live in. If a man doesn’t make money
now he is a fool and if he does he is a thief. If a man goes to church he
is a hypocrite and if he doesn’t he is a sinner. A man, if he is socially in­
clined and goes out among people, ought to be at home attending to his
business and if he doesn’t go he wasn’t wanted. If a man does something
for the community in which he lives he is buying favors and getting ready
to run for office. If he doesn’t do anything he is selfish and crusty. If
he puts on good clothes then he is putting on airs and if he doesn’t put
good clothes on he is a disgrace to the community and ought to be invited
to move out of the town.
This disposition to find fault, to tear down without supplying con­
structive reform, is one of the most distressing tendencies of any commun­
ity, and it is a strange thing we all of us have been guilty of. We have
found that taking a slap at somebody has been the easiest way to attract
attention. Of course, those whom we have slapped have, I suppose, some­
times deserved it.
But whether they have or not, I believe there is so much of a con­
structive nature to be done in this world that we could spend profitably at
least as much time in supporting and constructing and upbuilding as we
do in criticizing and destroying.
He is the best citizen who uses his ability and his opportunity for the
community good; not he who owns property and lets it lie foul, but he who
improves it, beautifies it; not he who doubts and scoffs and jeers, but he
who dreams, if while he is dreaming he has the energy, the willingness,
the persistence, and the courage to work, to make his dreams come true.
H e is the best citizen of any community and I must believe that that
is the kind of citizenship you have here in this Fourth Federal District. I
am sure that that is the kind of citizenship you have here in the City of
Cleveland, because if you didn’t I would be unable to explain the marvels
and the beauties that I have seen today.
I thank you, gentlemen.