Sound Recovery Through a Balanced Budget: There Is One Way Out


GOVERNMENT spending as an instrument of reëmployment has been a miserable failure. Despite the expenditure of billions of dollars, almost as many people are unemployed to-day as when the programme began. For private employment, which was increasing greatly in 1933, dropped off sharply when Government spending increased, and the subsequent losses in private employment have more than offset the jobs created by Government spending.

The few who have been given jobs on the Government payroll do not have permanent, productive employment, but merely synthetic, temporary employment that lasts only as long as the Government continues its spending. And our mounting Federal deficit, which already exceeds $14,000,000,000, is a clear warning that such spending cannot be definitely continued if we are to avoid national bankruptcy.

If the Government’s spending programme had been merely ineffective in creating employment, that would be sufficient to condemn it. But it has been more than just ineffective. It has been an actual detriment to reëmployment and recovery. This is because all precedents show that Government deficits resulting from such a spending programme lead to debasement of the currency, destruction of savings, and frequently to revolutionary social changes. As a result, the programme has naturally discouraged the investment of savings in private enterprise. Yet such investment of savings is the only thing that can reëmploy the millions now idle. That is the function of savings.

Much publicity has been given to the fact that the volume of security offerings has increased greatly in the past eighteen months. This steadily mounting total of new security issues has created the general impression that new capital investment is again under way on a substantial scale. An analysis of the purpose of such offerings, however, shows that this is not the case.

From October 1, 1933, to August 31, 1935, the savings invested in American business through the purchase of security issues registered with the Securities and Exchange Commission amounted to $1,899,420,262. This figure does not represent the total value of all issues registered, but is the net amount actually received by issuing corporations. Of this total, $1,652,323,818, or 87 per cent, was used for the replacement or retirement of existing issues, or for the purchase of existing investments. In other words, 87 per cent of the total proceeds from new security offerings during that twentythree-month period did not involve a single dollar of new capital investment.

This leaves 13 per cent of the total, or only $247,096,444, which could by any stretch of the imagination be regarded as new capital investment. This is probably a much higher figure for new investment than was actually the case, for it includes large amounts used for vague or unclassified purposes, which may or may not have been in the new capital category.

Although the total of new security offerings has been mounting rapidly, new capital investment represents a constantly diminishing proportion of the total. In the last quarter of 1933 (the first period for which records of the Commission are available) the total proceeds of new offerings were $149,443,574, of which 35.8 per cent represented new capital, based upon the method of computation previously explained. In the full year 1934, the proceeds from all new issues totaled $536,512,566, but the proportion of new capital investment fell to 17.3 per cent. During the first six months of 1935, the proceeds of registered security offerings mounted sharply to $535,558,220, but only 9.9 per cent was for new capital purposes. In the single month of July 1935, the proceeds received by corporations from new issues amounted to $458,423,630, but only 8.6 per cent was for new capital purposes. And in August 1935, out of a total of $219,482,272, only 3.8 per cent represented new investment.

Here is clear statistical proof that the rate of new investment is steadily declining, despite a growing volume of new security offerings, and despite low long-term interest rates that normally might be expected to increase the volume of new productive investment. The reason for this drying up of new investment, of course, is that a growing fear regarding the Government’s finances and general policies has made borrowers and lenders doubtful of the safety of newly made investments.

Such figures for new investment through publicly offered security issues are pitifully small when consideration is given to the fact that reliable estimates indicate that there exists to-day a potential demand for $19,000,000,000 of new capital by American industry merely for replacement of obsolete plants and equipment. This $19,000,000,000 demand for industrial replacements, if it can be released, is sufficient to give employment in the coming year to a large majority of the employable people now idle. In amount, it far overshadows the outside limits of any possible Government expenditures. Moreover, it will go for productive uses. But it can be released only by the investment of savings. How, then, can such investment of savings in new productive enterprise be encouraged? The answer to this question is the answer to the whole problem of unemployment.


The investment of savings will be encouraged only when an atmosphere of confidence in the future has been created. The first step must be the adoption of a fiscal policy by the Government that gives convincing evidence of a sense of financial responsibility. This means, in short, a cessation of needless and deliberate expenditures and an immediate, determined attempt to bring the national budget into balance.

Such a policy would promptly create new faith in the currency and the future value of invested savings. It would remove the Government from its present position as a direct competitor of private business. It would automatically restrict other activities which tend to destroy the value of private property. It would allay fears of inflation and the serious social changes which so often accompany inflation. The result should be a tremendous gain in the investment of savings for new productive uses that will create employment everywhere.

If it is granted that such a course is desirable, the next question is whether it is possible of accomplishment. Not all of the expenditures that account for our enormous deficits were avoidable. Relief must be given to those whose jobs have been destroyed by the depression. Advocacy of a balanced budget does not imply a desire or willingness to see people starve. This is the usual charge brought against those who object to mounting government deficits at times like the present.

The writer has no knowledge of the extent to which permanent charges have been imposed on the budget since he left Washington in August 1934. At that time, however, expenditures of the regular Government departments, plus interest on the public debt, amounted to less than $2,700,000,000 annually. Assume that this figure was maintained for the fiscal year 1936 — which would not have been difficult. Add to this $1,250,000,000 for relief expenditures. Include also another $1,000,000,000 for public works projects already contracted, and provide that no further contracts shall be made. This indicates that the expenditures of the Government in 1936 could be held to a total of $4,950,000,000 by determined efforts. This is exclusive of AAA expenditures, which will presumably be balanced by receipts from the processing taxes, provided the latter are not declared unconstitutional.

On the revenue side, the estimated income of the Government for 1936 is approximately $3,797,000,000, exclusive of receipts from processing taxes, realization of assets, and railroad pension taxes. There is serious doubt that this figure will be attained, but for the purposes of the present discussion it will have to be accepted as the best estimate available. If the Reconstruction Finance Corporation and other Government credit agencies were to be converted into purely liquidating agencies, approximately $1,000,000,000 could be obtained from such sources. This would bring the receipts of the Government to $4,797,000,000, as compared with expenditures of $4,950,000,000. Thus in the fiscal year 1936 the budget could be brought within $153,000,000 of actual balance, exclusive of statutory debt retirement.

Assume now that the costs of Government departments, relief, and interest on public debt remain exactly the same in 1937 as in 1936. The cost of public works in 1937, however, if no new contracts were made, would fall from about $1,000,000,000 to $500,000,000. This would bring Government expenditures (again exclusive of AAA) to $4,450,000,000, which is $500,000,000 less than proposed above for 1936.

The recovery in business that would logically follow the adoption of a sound fiscal policy by the Government could reasonably be expected to increase tax revenues in 1937 by at least $100,000,000 over the officially estimated figure of $3,797,000,000 for 1936. A continuation of the liquidation of the Reconstruction Finance Corporation and other credit agencies could be expected to produce at least another $900,000,000 of revenues. This indicates the possibility of total revenues of $4,797,000,000 in 1937, as compared with total expenditures of $4,450,000,000. Thus could the budget be actually balanced as soon as 1937, with an excess of $347,000,000 available for debt retirement.


There will be many who will protest that the $1,250,000,000 proposed for relief expenditures in these hypothetical budgets is far too small. The important thing is to avoid profligate donations by the Federal Government and to prevent states and municipalities from shouldering off on the Federal Government the entire burden of the relief bill. If such states and municipalities continue to contribute as much toward relief as they did in 1934, then the total amount, exclusive of private charities, will exceed $2,000,000,000 annually, of which the Federal Government’s share will be approximately 60 per cent.

If it were practicable, we should all like to see the country’s deserving idle workers supported in better fashion than the present rates of relief payments make possible. But in view of our mounting Government deficits it would be highly dangerous. There is nothing cruel or inhuman in this attitude. It would be far more inhuman to continue a reckless spending programme, for such a course will deliberately impoverish the entire people.

In the first place, people on relief want jobs in private industry, and such excessive Government spending, because of the mistrust and fear that it creates, prevents any substantial increase in private employment. This naturally means that such Government spending must continue. And its continuance means that ultimately 125,000,000 people will suffer the ghastly social and economic effects of a collapsed currency.

The case is analogous to that of the employer who doubled the wages of all his employees. Sentimentally, this was a highly desirable thing. But unfortunately the increased payroll soon wrecked his business, and left all his employees without jobs or income of any sort. By his misguided generosity he had done them a great disservice.

If Government expenses are cut to the figures proposed above, there is reason to believe that present tax rates, aided by a subsequent improvement in business, will be sufficient to produce the necessary revenues for a balanced budget and gradual debt retirement. If, however, this course is not followed, drastic increases in tax rates must occur.

The longer we wait to balance the budget, the greater will be the load of taxation each of us will have to carry. The public is being grossly deceived as to the true cost of the present programme in terms of taxes. So far the Government has been able to conceal such costs by financing its deficits through the issuance of bonds. But this process cannot be continued indefinitely. Ultimately the Government must endeavor to raise its revenues to a point sufficient to balance its expenditures and begin retirement of its enormously increased debt. Only then will the average citizen learn the cost to him and his children of the present extravagant and futile Government spending programme.

The amount of tax income necessary to meet present Government expenditures is so great that it is futile to believe that it can be raised merely by greater taxation of large incomes. There just are n’t enough large incomes to produce the necessary revenues. This means that the burden of increased taxes must fall upon citizens with small and medium incomes.

The necessary income would probably have to be raised both by a general sales tax at a high rate and by a drastic increase in all income tax rates, together with a reduction of income tax exemptions to a figure in the vicinity of five hundred dollars. Even under such a drastic and extremely painful tax programme, made doubly drastic and doubly painful by about two to three billion dollars of processing and social security taxes, it is doubtful whether revenues would be sufficient to meet the present rate of expenditures.

At the very best, if Government spending continues at the present rate, the only alternative to drastically increased taxes is national bankruptcy and the destruction of currency and savings. So, in either case, the average man must pay the piper in the end.

It is important also to remember that we cannot achieve a satisfactory recovery based upon an increase in internal trade alone. Our foreign trade must be restored. The free flow of trade between nations is an essential requirement for any substantial recovery.

Our foreign trade has suffered a far greater decline than has our internal trade. For 1934, the index of exports stood at 47 per cent of the 1923-1925 average. The import index for 1934 was only 43 per cent of the 1923-1925 average.

No worth-while recovery in foreign trade can be expected until the present chaotic conditions in the foreign exchange markets have been corrected by stabilization of currencies and removal of exchange restrictions. The greatest barrier to the attainment of these objectives has been the complete financial irresponsibility of the United States Government. This has been evidenced by its reckless spending, its deliberate depreciation of the dollar, its confiscation of gold, and its silverbuying policy which has threatened or actually upset the values of the currencies of certain other nations.

The first step needed for the correction of this situation is to stop reckless Government spending and make a strenuous effort to bring the Federal budget into balance. This would reestablish in the eyes of the world the financial responsibility of our Government and would enable other Governments to deal with us confidently on matters of currency stabilization, foreign exchange, and foreign trade.

The depression has been world-wide. But a study of the present economic position of leading countries of the world shows that those which have enjoyed the greatest and best-sustained recovery have been the ones that have balanced their budgets or made strenuous attempts to do so. This is more than mere coincidence. Great Britain, Sweden, Denmark, Australia, Canada, and Argentina, all of whom are putting their financial houses in order, have experienced a far greater recovery than has the United States.

Evidence of a grim determination to bring our Federal budget into balance is the thing that will lay the foundation of faith in the future that is necessary to encourage the investment of savings in productive enterprises. As this process continues, new employment of a permanent character wall be created in private business and industry. This in turn will reduce the tremendous number of people on relief, and will permit a sorely needed reduction in Government costs and taxes. This is the one way out. If we do not follow it, we shall continue in a vicious spiral of Government spending that defeats its own purpose and ends in utter collapse.

(In his fifth and concluding article, Mr. Douglas will discuss certain conditionsother than those strictly financial—which must be corrected before full reëmployment and recovery can be expected)