Behind the Budget


THE budget of the Federal Government is a plan for future receipts and expenditures.

The President estimates, for instance, that tax collections will amount to 1000, to use a simple number; that running the army, the navy, the state department, relief, and the rest will amount to 1100, leaving a deficit of 100. Or he estimates that expenditures will amount to 950, with an indicated surplus of 50.

Various departments of the government then go ahead and collect taxes and spend them. The final result at the end of the year may or may not agree with the budget estimates. If a cash surplus should turn up, some of it could be used to reduce the government’s indebtedness. If a cash deficit develops, then, unless it has other funds available, the Treasury must go out and borrow the difference.

No distinction is made in either the budget or the Treasury bookkeeping between expenditures for running expenses and expenditures for permanent structures like dams, post offices, hospitals. The government never follows business procedure in capitalizing its assets; it dumps them all into the year’s running expenses.

During the war, Treasury deficits were, of course, prodigious, and the national debt ran up like Fujiyama. During the 1920’s, surpluses appeared, and some of the Liberty bonds were bought in and retired. Since the depression, the debt has again been rapidly climbing.

A large part of this debt is owed by the government to the banks for deposits created by them against government bonds put in their vaults. The rest represents savings of individuals borrowed by the government, either directly, as in baby bonds, or through the medium of life-insurance companies or other institutional reservoirs for savings. A substantial part of the debt is offset by debts owed to the government. Thus the Treasury borrows money and advances it to the RFC. The RFC lends it to the Pennsylvania Railroad. Another considerable part is offset by permanent plant and structures. Neither offset appears in the present budgetary procedure.

The next presidential campaign will probably be fought on the issue of ‘economy.’ The proponents of thrift will line up against the spenders. The air will be blue with passion and oratory, most of it irrelevant to the facts and the real issues involved. The real issues transcend party lines, the New Deal, Mr. Roosevelt and Mr. Hoover. Before the air gets bluer or blood pressures mount higher, suppose we try to assemble the facts and see what some of the real issues are. If our reasoning is valid, these issues will have to be reckoned with by future administrations of any political persuasion — Republican, Conservative Democrat, New Deal, or Progressive.

Preliminary to the analyses, I have a few prejudices to confess. First, I am fundamentally a pay-as-you-go man. I don’t like debts; I never have liked them. I shy away from them personally. I don’t buy a motorcar until I have the cash in hand. I don’t often lend money to my friends because of the strain on the friendship. In books and articles I have frequently complained about the ‘debt burden.'

Second, as an accountant I have been skeptical for many years about the federal budget and Treasury bookkeeping as officially presented. It doesn’t mean anything significant to me. As a taxpayer I feel that I am entitled to a much clearer account of what has happened to my money. Here, briefly, is the story of my disillusionment.

Shortly after I left college, my father, Harvey S. Chase, took me to Washington to help him set up a new federal budget procedure. President Taft had appointed him a member of the Commission of Economy and Efficiency, to do this. My father said that the old budget made little sense. It dealt only in cash receipts and cash disbursements. It did not allow for capital items. No business kept its books in such primitive fashion. Not even an expert could tell where Uncle Sam was at.

So, with Republican encouragement, my father tried to formulate a capital budget. Presently he hit a stone wall, in the opposition of a corps of Treasury officeholders. A budget that was good enough for Alexander Hamilton was good enough for them. My father was a tough fighter in those days — but they were tougher. The capital budget, despite President Taft’s interest, was not introduced then and never has been. Sweden has one, but not the United States.

This was a vivid experience for a cub accountant. Twenty-eight years ago, by working on the Treasury books, I lost my faith in the federal budget. Ever since I have regarded it with suspicion, and have looked elsewhere for more useful information about national finances.

The Government borrows money and buys or builds houses, forest land,1 post offices, highways, dams, office buildings, and so forth. There they are, good solid evidences of community wealth. Their depreciation or amortization should be charged to the budget over the life of the asset. The whole outlay should not be charged in the year it is bought or built. I refuse to be frightened by a catalogue of debts which seems to me to reflect not facts but bad bookkeeping.

My third prejudice is more recent. In 1932 I was converted, by reading John Maynard Keynes, to his thesis about compensatory spending. Since then I have found ample corroboration, both practical and theoretical. Mr. Keynes has recently refined his presentation, in a book called The General Theory of Employment, Interest and Money, and to-day many leading economists agree with him too. The theory centres around the devastating effects of idle capital. Someone must invest this capital when unemployment is severe, or the whole economy is in danger of collapsing. If private citizens won’t or can’t spend or invest, the government must.

This seems to be virtually a law of survival for interdependent, power-age communities. The New Deal has followed this thesis only in a left-handed, half-hearted manner. The Tory government in England has done better.


The system which we loosely call capitalism is largely built on debt.

In any given period of production, enough money is released in the form of wages, salaries, interest, dividends, profits, to buy back the goods and services produced. This axiom is accepted by nearly every student who has analyzed the circuit of money. If the only goods produced were food and clothing — consumers’ goods — and we all spent our incomes as fast as received, the financial system could never break down. The result would be a pure pay-as-yougo economy. But standards of living would not rise.

We have never had such a system. Our plan has been to save part of our income, and buy with it not consumers’ goods but capital goods — machines, factories, plant. This buying is called investment. We make an investment by lending our savings to a promoter or entrepreneur, and he buys the capital goods. He also contracts a debt. Our investment is his debt. By virtue of the new plant, greater output becomes possible, progress is possible, standards of living can rise. Out of this increasing production it has been assumed that a return on the investment was both feasible and equitable.2

This investment-debt procedure is the heart of capitalism. By forgoing present consumption, consumption per capita can be increased in the future. For many years the system worked. People saved and invested, the capital goods were bought, standards of living rose. But the system can work smoothly only if savings are promptly invested. If savings are in effect hoarded, it means that some of the goods already produced cannot be sold, except at a loss. It means that the idle money is presently reflected in idle machines and idle men. Capitalism has always been potentially vulnerable. Its Achilles heel was a condition, or a time, when opportunities for investment should decline in relation to savings.

For many years in this country we have been saving close to 20 per cent of our national income. For at least two decades we have been finding it increasingly difficult to invest that amount in private productive enterprise. Only about half of our national expenditures for non-consumers’ goods, during the past eighteen years, has gone into industrial plant, according to the figures presented by Dr. Lauchlin Currie before the Temporary National Economic Committee. Of this plant investment less and less comes from savings of individuals. To-day large corporations accumulate their own savings and do not need to borrow ours. Since 1933, more than 90 per cent of all expenditures for plant and equipment has come from corporate surpluses and depreciation reserves. Less than 10 per cent has been borrowed in the regular capital markets.3 Meanwhile our banks are stuffed with unspent balances. Reserves are at an all-time high.

If the present ratio of savings to national income is going to be maintained, there are two major channels for savings, other than industrial plant: residential and non-profit construction, and public construction. For the eighteen years from 1921 to 1938, gross expenditures for things other than consumers’ goods were divided: plant and equipment, 55 per cent; housing, 23 per cent; government outlays, 13 per cent; all other expenses, 9 per cent. For three years of recovery, 1935 to 1937, the division was: plant and equipment, 44 per cent; housing, 9 per cent; government, 20 per cent; all other expenses, 27 per cent. Most of the last item was an abnormal increase in expenditures for building up inventories.

For generations we have encouraged our children to be thrifty and save their pennies. ‘ Thrift ‘ and ‘ saving ‘ are words which have come to be tenderly regarded in the folkways. ‘Hoarding’ and ‘debt’ are bad words. But sometimes savings in effect are hoarded because investments cannot be found. And a good share of our investments are in the form of the other fellow’s debts. Our money itself is built on debt. Most of it is bank credit or check money. The other side of the deposit is the debt of a borrower from the bank. Paper money can be regarded as a form of public debt, without interest. Automobiles, refrigerators, radios, electric stoves, trucks, harvesters, are often bought on the installment plan. This is a debt plan, and the average interest rate is around 15 per cent.

Thrift, savings, investment, debt, are thus closely related. One sequence might run: Because of being taught the idea of thrift, Adam Adams saved $1000; he invested the money in a Baltimore & Ohio bond, and thus holds part of the debt of that great — though insolvent — railroad. The thriftier some of us are, the more debts are likely to be contracted. Periods of prosperity are always accompanied by rapid increases in the total debt of the community; depressions are accompanied by a slowing down of debt accumulation. In boom times, new plant is being constructed — factories, skyscrapers, subdivisions, highways, ships. Of course the total community debt goes up like a jack-in-the-box. That is the way the system has been working for a long time, both here and abroad.

Chart 1 illustrates the point. It shows long-term debts in the United States since 1900. The bottom line is government debt, both federal and local;4 the middle line is private debt;5 the top line is the sum of government and private debt.

We have had two mighty booms in this period — the war boom and the New Era. Observe how the first was accompanied by an uprush in government debt (mostly Liberty Loans), and the second by an uprush in private debt. Observe how the total debt has tended to flatten out since the great depression. Observe especially how, at the precise moment when private debt began to fall, public debt began to rise.

Chart 2 shows the course of federal debt compared with state and local government obligations since 1915.6 See how the decline in federal debt during the 1920’s was offset by the increase in local debt. States and cities were Tinbalancing’ their budgets to the tune of about a billion a year — mostly for school buildings, roads, and utilities.

As the depression deepened, local government credit began to melt away. Private credit, as Chart 1 indicates, melted even faster. That left the Federal Government as the sole agent capable of underwriting the debt structure and saving the American economic system from collapse.

The chief underwriting instrument to begin with was Mr. Hoover’s Reconstruction Finance Corporation. This agency placed two billions of government credit under tottering banks, insurance companies, and railroads. A large fraction of the increase in public debt has been due to the government’s bolstering up of private debt. A glance at the portfolio of the RFC will show you how the two are intermingled. If private debt is moral and government debt is immoral, then immoral debt has been extremely helpful in underwriting good, moral, private debt.

How does it happen that while nearly every individual debt, public or private, must be paid off according to contract, the total of long-term debts outstanding has been growing for a long time? Because, as old debts are paid, new and larger ones are contracted. Often a specific old debt is ‘refunded’ at maturity. It is paid, not by cash, but by a new debt. Old bonds are exchanged for new.

How our economy would operate with a declining net debt has never been tried except once — between 1929 and 1933. It was not a very encouraging trial. The national income fell from eighty billion dollars to forty.

It seems quite obvious that if all debts were suddenly paid off the present economic machine would be wrecked, promptly and permanently. Creditors would have more cash than they could possibly spend for consumers’ goods, while avenues for reinvestment and the creation of new debt would be closed, by definition. Thrift, savings, and most investment would disappear. Debtors would be penniless following the herculean task of raising the funds to pay their creditors. We should have to go back to barter, or set up a brand-new money system. The system we are used to would be expiring in the throes of a kind of financial lockjaw.

Any given debt can be paid without injury to the system, but only on the proviso that another debt, as great or greater, appears somewhere else in the economy at substantially the same time. At least that is the way things have been in the past.

That is why I do not grow haggard worrying about the burdens my grandchildren will have to bear. The principal of the public debt cannot be paid off without wiping out a vast field of investment, thereby ruining the economic system. What would the banks and insurance companies have to invest in? The principal can, of course, be reduced in prosperous times when private debt is expanding — as during the 1920’s. It is a gross misconception to compare the public debt or the corporate debt to your personal debts in all particulars. You would like to be free of debt. But you would also like to have some life insurance and some investments. There cannot be a system to be called capitalism without a huge and growing debt structure. At least there never has been. Perhaps you prefer corporate debt to government debt. But do you put your own savings there? It is curious how the people who damn the government the merriest have most of their money in tax-exempt securities. It is a little like spreading the news around: ‘You know that old Fourth National will blow up any day now. That’s where I keep all my money.’

Whether we like it or not, our Federal Government has become the balance wheel of the American economy. Dr. Alvin Hansen of Harvard says: ‘Governments all over the world are in process of becoming intermediaries between ultimate savers and investment outlets; but the process of production is still carried on by private enterprise.’

More important than the principal of a debt is the carrying charge. What does it cost a year in interest and amortization? In England they do not speak of a man as being worth a million pounds, but rather as being worth £30,000 a year. For many financial matters the annual rate is a better measure than the gross total. In a debt structure which goes on indefinitely, a principal of $30,000 at 1 per cent per annum is no more burdensome than a principal of $5000 at G per cent. Each costs the debtor $300 a year.

Here is a table taken from the New York Times, March 26, 1039, showing average yields; a yield is a closer estimate of annual cost than an interest rate.

Average yields 1939 1929 1919
U. S. Government bonds 2.43% 3.60% 4.62%
High-grade municipal bonds. 2.70 4.27 4.46
High-grade corporate bonds. 3.00 4.73 5.48
All corporate bonds. 3.81 5.21 6.26

If this keeps on, the interest rate or important sections of it will hit zero in the lifetime of many of us. It has marched almost halfway to zero in twenty years. Note that the decline from 1919 to 1929 was in a boom period, and the somewhat greater decline from 1929 to 1939 was in a depression period. The interest rate is one indication that capital is getting too abundant, that opportunities for investment are drying up. The Times story from which these yields were quoted declared that in March 1939 there were eight billion dollars of United States Government obligations quoted on the market, at a price yielding the investor nothing. The interest rate had in effect reached zero for those issues.

On June 30, 1921, the principal of the federal debt stood at 23.7 billion dollars. The annual interest burden was then 1030 millions. On June 30, 1938, the principal had grown to 36.6 billions. But the annual interest burden was 947 millions — actually less than in 1921. The total interest charge for long-term public and private debt combined is much less to-day than it was in 1929. Chart 1 and the yield table above explain why this must be so. The combined principal is a little greater, but the interest rate has fallen sharply. The chief business of investment bankers in recent years has been refunding old debts with new issues at lower rates of interest.

Despite the cries and alarms, the credit of the United States Government to-day is a wonder to behold. Some Treasury bond issues have been oversubscribed as much as twenty times. In 1932, when the federal debt was about half what it is now, 3 per cent government bonds sold down as low as 83. To-day 2½ per cents are selling at 102. Money from all over the world is flowing into the United States, as the safest haven on earth. It used to be said that capital, if it did not like the state of affairs, would flee the country. To what other country, pray, will it flee?

I don’t like debts; but, in the light of the above facts, I cannot work myself into a panic about the public debt. What keeps me awake nights is unemployment. I hope to live to see the day when long-term debt is not central in the American economy. But that day will not be to-morrow. It will come slowly by a series of readjustments in our financial habits.


Chart 3 answers one of the questions which I have been asking since meeting the Treasury officials under President Taft. How much of the government’s expenditures in recent years have been for running expenses, and how much for capital goods? The chart gives a rough idea of what a capital budget would look like. The figures are the result of an analysis made by Fortune and checked by technicians of the National Resources Committee. The chart was introduced in the TNEC hearings and covers the period from 1931 through 1938.

It tells its own story. I do not need to explain it. Taxes during the eight years just about covered running expenses. Included in the latter are battleship construction and the AAA, items which a more careful capital budget might put in another category. Twenty-one billion dollars was borrowed. It is customary in conservative circles to write this all off as good money poured down the sewer. Having seen Boulder Dam and Grand Coulee, two of the mightiest and most enduring structures ever built by man, I am unable to agree with this. It would be hard to get a block of concrete four times the size of the Great Pyramid down any sewer. Out of this 21 billions, about 14.5 billions was spent for permanent structures, some of them self-liquidating, some not. An ample depreciation allowance for the eight years has been figured at almost three billion dollars — about 20 per cent of the principal.


That leaves 11.5 billion dollars for the net value of plant constructed. The rest, 9.5 billions, is the measure of the deficit in the war against the depression. At least, it is my measure. You may want to make it more or less. But if you hold that the whole 21 billions is deficit, you are violating all the principles of sound accounting. If you jump to the other side and hold, as some do, that the 21 billion dollars is all an asset, because without it the economic system would have been sunk, you are reciting perhaps a poetic truth but hardly an accounting one. Somewhere between the two extremes the truth, as usual, lies. This chart is close enough for my purposes. We have been going in the hole, in the sense of getting no goods directly for our money, at the rate of a billion and a quarter a year.

During the war against Germany, the rate was about 6 billion dollars in the hole a year. Chart 4 7 tells this story. In the four years shown, the Federal Government more than covered its running expenses from taxes, borrowed 23 billion dollars more, and spent the whole sum, a cool 36 billions, for war purposes — ‘shot and shell.’ There were a few stray assets after it was all over, — some ships to tie up in a cove on the Hudson River, some emergency camp buildings, — but most of it was worn out, rusted out, eaten up, or shot away. But the deficit spending was so lavish that we enjoyed one of the greatest periods of prosperity in our history. Everybody had a job; prices were roaring; employers were begging for more men.


These two charts will repay some meditation. They are cast in terms of dollars and cents, but their psychological implications are profound. When we really want to lick somebody like the Kaiser, we make the financial system lie down and roll over. Nobody worries about balancing the budget, or grandchildren staggering under burdens too great to bear. But when we set out to lick a depression, our hearts are obviously not in the work. The queer thing is that it could probably be licked as easily as the Kaiser, and without killing anybody.

Chart 5 is taken from an article by Geoffrey Crowther, editor of the London Economist, published in the New YorkTimes, May 21, 1939. It shows, in terms of man power, how the Nazis banished unemployment in Germany after 1933. They used a method similar to ours in the war — Chart 4. They taxed, borrowed, and spent until all unemployed persons —some six million to start with were sucked into the economic machine, and nearly as many more were added. Observe how the increased employment is divided: about an eighth went into the army, three eighths into munitions and public works, and the rest into the ’production of more consumers’ goods. To-day there is a serious labor shortage in Germany. Prosperity of a sort has been achieved. But it is a ‘shot and shell’ prosperity, reared on spending for implements of death.

What will happen to a country which some day is bold enough to abolish unemployment by spending for instruments of life — for houses, schools, medical care, for conservation, parks, playgrounds, for the arts?


When somebody wants to discredit the government, he talks about ‘bottomless extravagance,’ ‘an orgy of spending.’ He says: ‘You can’t drink yourself sober.’ Nobody does this more vigorously than General Hugh S. Johnson. Many persons applaud such sentiments and vow to vote the spenders out of office. Suppose that they do. The incoming party must then assume the responsibility for rescuing the economic system — or at least for keeping its nose above water. This is no light responsibility, as we have seen. The incoming party must now do a great deal of spending, while the deposed party takes its turn at denouncing ‘reckless extravagance’ and ‘shameless raids on the Treasury.’

Here are a few gigantic facts which we must not forget for a moment, any more than an electrician dares to forget the proximity of a high-tension line: About one third of our working population to-day, aided by machines and power, can produce all the necessities required by the whole community. Farmers constituted 90 per cent of the population in 1790; now they constitute about 20 per cent, and half of them are not needed as commercial producers of food and fibre. As the number of workers required to produce necessities shrinks, the rest of the population must either think up something else to do or just settle down as consumers. Both things have happened. We have a great and growing army producing what once were luxuries — automobiles, electric refrigerators, oil-burning furnaces, radios. We have a growing army in the service trades, the amusement trades, and the professions. We have a huge expansion of government services. We have also eight to twelve million unemployed. Most of this new work my great-grandfather would have classed as fripperies and folderols. He would have voted against it. People talk as though it could be voted down to-day; as though we could cut off the support of two thirds of the population and not obliterate the market for the rest.

It is too late to get rid of our high-voltage machinery, too late to argue for handicraft policies in a world of mass production. To-day, in 1939, this country has been bound into one vast exchange network, in which almost nobody produces any salable article by his own labor, in which it takes many thousands of workers to provide an average meal, in which no family is self-sufficient. The most drastic remedy you could think of — say chloroforming the unemployed — would not save us from the problems of unemployment. Indeed, this would produce a major business panic, because of the five or six billion dollars’ worth of goods which the unemployed now consume in a year. For even the idle perform an important economic function. As long as they stay alive they must somehow consume, and so they help to keep sales of goods up and surpluses down.

Look at it this way. We exist by exchanging products and services with one another. The exchanges are consummated with a device called money. No money, no exchanges, no production. The transfer of goods for money, and of money for goods, at a rate to keep the community supplied and employed, is the most important economic function there is. Another name for the transfer is spending.

The act of spending was not among the virtues taught us in our childhood. It is considered far from a virtue by critics of the government to-day. The word is pronounced with a sneer and a roll of the eyes. How much of this is due to politics and how much to a misunderstanding of economic facts, I do not know.

A large volume of unemployment is ipso facto evidence that the exchange of goods is too sluggish. There is only one cure for it, and that is to speed up the rate of exchange, or spending. If entrepreneurs will borrow money, build new factories, and employ men to produce more capital goods, that will check the drift toward depression. If a group of benevolent millionaires should hire an army to bail out Long Island Sound, that would also halt the depression. If the government should borrow money and pay it to men for goose-stepping in circles, or for equipping the Missouri River with a fleet of battleships, or for erecting a copy of the Great Pyramid of Gizeh in Central Park, or for constructing a fine new hospital — any of these projects would check the depression. The New England hurricane, in September 1938, promptly raised the sales of retailers in that section. (Per contra, when Henry Ford closed his plants to change over to Model A, he brought on a minor depression.)

The above projects have one thing in common. They all put idle money to work. Idle men receive the idle money and go to the grocery store on Saturday night and spend it. Their families are hungry. The money will be spent quickly. The whole exchange network will be speeded up. A grateful quiver will run from retailer to wholesaler, to jobber, to farmer, to railroad man, to trucker, to manufacturer. This new spending — this ‘orgy,’ if you please — is almost instantly converted into sales on the books of some grocer, merchant, coal dealer, gas station, landlord.

A recent study of PWA construction work since 1933 shows about a billion dollars advanced to private contractors, and by them paid out as wages to workers on the several projects. These in turn were spent as follows: —

1. For food.... $350,000,000

2. For shelter — rent, coal, power, repairs, etc. 191,000,000

3. For clothing. 130,000,000

4. For transportation — automobiles, gasoline, tires, oil, railroad fares, buses, etc. 109,000,000

5. For recreation — movies, radio, sports, etc. 65,000,000

G. For furnishings — beds, rugs, refrigerators, etc. 53,000,000

7. For health — doctors, dentists, hospitals. 50,000,000

It would be hard to classify this budget as waste and extravagance. This is business as usual, and it is the other side of government spending.

Perhaps the PWA projects were illadvised. That is another question. Was the 350 million dollars spent for food ill-advised? Where would American farmers have been without this help to move their crops? Certainly these PWA projects were better than Mr. Hitler’s lethal projects shown on Chart 5.

Shall we therefore conclude that any spending for any project, or for no project at all, is good for the modern economic machine? If unemployment is high and the rate of goods exchange low, we should draw just this conclusion. When there are no unemployed, or very few, we should draw a very different conclusion. At full employment, if the government or anybody else steps in to divert man power to useless projects, extravagance and nothing else result. Anti-spenders see no difference between full employment and partial. Yet this distinction is cardinal for an understanding of how a high-energy economy works. At partial employment, an earthquake, a hurricane, or a flood is an economic godsend.

Anti-spenders have the authority of classical economists behind them. No classicist that I have read would admit the possibility of involuntary idleness, long continued. Some of the classical formulas which hold for full employment are meaningless under modern conditions. In 1860, in the middle of a period of the most rapid expansion the world has ever known, it was natural for the great classicists to ignore the possibility of involuntary idleness. For their followers to ignore it to-day is uncritical, if not disastrous. What the people of other nations are rapidly learning, and what we must learn, is that a waste of money is not so great an evil as a waste of man power. Money may be apparently ‘wasted* in a program to make more jobs, but the community gains. More jobs mean more production and more goods. Money may be apparently ‘saved* in an economy program, but the community loses — as jobs, exchanges, production, fall away.

Our economy has shifted from an era where money (gold and silver) meant wealth in itself, to an era where its prime function is to move goods. We suffer grievously because our mental habits make it difficult for us to appreciate this change in function.

Do you remember the grave warnings about inflation two or three years ago and how we shivered and shook with Major Angas? It has not come yet, and it will not come so long as there is a large reserve of unemployed man power. When full employment is reached, then is the time to worry about a price inflation. That is one of Germany’s worries right now. But most prices cannot rise out of bounds while there are millions of men eager to go to work, and thousands of idle machines ready to turn.

I hope it is clear by this time that spending is essential to keep the modern world going. The real divergence comes in the matter of who is to initiate the spending. Many people feel that if private business initiates it, the result is safe and orthodox. They do not call it spending, however, but ‘prudent investment.’ If the government does the initiating, on the other hand, it is considered perverse, and the ‘spending-extravagance’ theme is played until it becomes a stereotype.

If we could all agree that some form of spending or investment must be initiated and maintained when the economy is on part time, that would be one point gained. For my part, I should be quite satisfied if private enterprise would take the lead. But what if it can’t? What if private industry is unable to carry the full burden? It has not, as a matter of fact, done so since before the war. Look at Chart 1 again.

There is a stock answer for this — the lack of ‘confidence.’ People say that if the government would stop spending and balance the budget, then business men would joyfully borrow idle savings and begin constructing new plants. This I think is putting the cart before the horse. Business men are not in the habit of expanding their productive facilities when orders are falling off. The first effect of balancing the budget would be a sharp decrease in orders. Millions of men and women would no longer have pay checks to spend in grocery stores on Saturday nights. A business man who knows his business does not usually expand his plant until the machines he has are running at somewhat near capacity.

England was pulled out of the depression primarily by a great government housing program. This so stimulated business that after a while private capital took over the bulk of residential construction. You cannot expect private individuals to initiate a huge spending program just because they have a song in their hearts. But they will come in after an organized group really starts something. That is what happened here after 1933. The government took the lead and private business followed. In 1937 as much was being spent for plant and equipment as in the middle 1920’s.

‘Confidence’ is a kind of heaven, a point in theological space. If you ask a hundred business men what they propose to build when they recapture their confidence, where they propose to build it, and how much they will put into it, you will find that ninety of them have no blueprints. I do not doubt that some New Deal legislation has depressed many people, any more than I doubt that some has saved many banks from closing their doors.

There was plenty of confidence in 1929, but in that year investment declined in relation to savings, and the Brookings Institution found a general condition of excess capacity throughout American industry. Investment opportunities have been and are increasingly depressed by:

1. The decline in the growth rate of population.8

2. The end of the frontier.

3. The stalemate in foreign loans,

4. The growing efficiency of new machines, requiring fewer dollars of capital per unit of output.

5. The absence of any great new’ industry to stimulate investment, as the motorcar industry stimulated it in the 1920’s.

In the face of these long-term trends, I for one am uneasy about encouraging spending by stopping it. I think that business men are indulging in too much wishful thinking in this connection. Most of them do not want any more capacity in their own industry, but they hope that there is a wonderful field for it in some other industry.

I do not see how a government policy in the direction of a reduced transfer of money could fail to make matters worse. A conservative President, however, say Mr. Dewey or Mr. Garner, might try it in 1941 and see what happens. It would be an interesting clinical test of the economic value of confidence. I suggest, however, if I may be so bold a fine, deep cyclone cellar for the President to pop into after about three months. The last time we balanced the federal budget was in 1937. From June 30, 1937 to March 30, 1938, the Treasury books showed a cash surplus of about one hundred million dollars. This was accompanied by the swiftest downrush in our industrial history.


Our national income in 1929 was some eighty-two billion dollars. It should be one hundred billions to-day. We are a one-hundred-billion-dollar country. We are tooled up for that. We can produce that. We have been educated to consume that. So long as we fall short of it, crops will rot in the fields, machines rot in the mills, men rot in the streets, funds rot in the banks.

Unemployment is the real index of national well-being. Policies which reduce it are economically beneficial, and vice versa. A net increase in spending automatically increases employment. There are three chief ways to do this: —

1. Borrow idle savings and hire idle men.

2. Create new bank money and hire idle men.

3. Tax away idle savings through income and inheritance taxes, and hire idle men.

The first two increase debts, the third does not. Taxes on sales are normally of no help in reducing unemployment. They only transfer purchasing power from a taxpayer to a government employee or pensioner. (The Townsend Plan turnover tax is of this nature.)

We have here the beginning of a formula for operating a modern economy. Every nation is experimenting with it to-day. Government spending which increases net jobs is not robbing citizens, but on the contrary is helping every citizen. The cartoons depicting taxpayers groaning under a load of relief workers are erroneous. The relief workers, by purchasing food, clothing, shelter, and so stimulating the exchange of commodities, are helping to keep the taxpayers solvent. This can be convincingly and horribly proved by stopping relief and watching the unemployment index rise.

Either private industry or the government can borrow idle savings. The evidence accumulated over the last two decades, and shown in Chart 1, indicates clearly that private industry cannot take the responsibility alone for absorbing the unemployed. What we need, then, is not pump priming, hut a two-cylinder pump. One cylinder is private investment; let it work for all it is worth. But beside it must stand another cylinder representing public investment. Its function is to undertake useful investments in which private business is not interested, — say low-cost housing,— to take up any slack, and to assume the lead in employing men in deep depression.

The theory that the function of government spending is to prime the one-lunger pump of private investment has not worked. I do not believe it will ever work. The time is overdue for a permanent new cylinder on the investment pump.

This brings us to the question which chiefly worries the Economy League, and which worries all of us to a degree. How can we promote full employment without running up debts to the point of bankruptcy and repudiation? Granted that the public credit is strong in 1939, how will it be in 1949, 1969? If private and public debts continue to grow as they did from 1900 to 1930, where will it all end? If public debt must now become a major investment outlet, how long can Uncle Sam hold out? Isn’t it better to halt spending, even if unemployment does remain massive, to balance budgets, and keep debts down?

This sounds sensible when we say it as words, but is unworkable in a condition of underemployment. It is a solution which assumes that one can choose a point at which to stop. There is no such point in a dynamic economy. Unemployment feeds on itself, round and round downward. Remember 1929 to 1933. To let unemployment accelerate is a step toward economic suicide. Suicide for the sake of unborn generations is not good enough for those of us who are trying to keep alive to-day.

That is why drives for economy make so little progress. In times like these, every dollar cut from a budget means a day’s food for some family gone — if not on the first exchange, then on the second or third. You fire the taxeaters. The corner grocer soon feels the pressure of your zeal, and fires a clerk. Bums and saints, economizers and spenders, we are bound together in one network. It is the price the power age exacts for its vast potential productivity. Legislators are hard men, but seldom hard enough to sentence children and women to slow torture. That is what budget cuts usually mean. If the torture were only short-lived, the community could stand it. But the wound will not heal; it will only spread like a cancer.


Spending cannot be stopped except at the cost of social disintegration. But the debts do not necessarily have to climb to the moon. There are at least two ways to hold them down: (1) reduce the ratio of savings to national income; (2) finance new investment by a minimum of long-term debt, at a minimum interest burden.

England has been making remarkable progress with the first. Before the war, she used to save for investment about 15 per cent of the national income. Now the ratio is less than 7 per cent. Excess savings have been reduced by a stiff income tax, and have been routed into housing subsidies, slum clearance, oldage pensions, unemployment insurance, medical care, and other social benefits.

Our saving ratio is nearly three times that of the English — around 20 per cent of national income. If we could get it down to 10 per cent, we should move that much nearer a pay-as-you-go economy. Instead of finding outlets for two billion dollars of private and public investment, out of every ten billions of national income, we should need to find outlets for only one billion. This would cut the idle-money problem in half. Another method would be to reduce the element of forced saving in life-insurance premiums. At present we buy insurance and we save — both in the same premium. If we bought only straight insurance, and relied more on old-age pensions, we could be as well protected. Pensions, financed by income taxes, cut down the ratio of savings, route idle money into circulation, satisfy a mammoth and growing political demand for security in old age.

Private investment can extricate itself from long-term debt to a degree, by shifting from a bond-and-mortgage basis to a stock-and-equity basis. It would not surprise me to see the railroad debt composed along these lines within the next few years. Stocks do not have to be paid off at a given date. Dividends do not have to be disbursed unless earned. A liability from corporation to stockholder remains, but it is not so burdensome and rigid as a bond or a mortgage.

How to make public investment — the other cylinder of the pump — operate at a reduced rate of debt accumulation is perhaps the outstanding challenge to modern statesmen. The New-Dealers have not yet produced an adequate long-term program.

Let me address a few unsolicited suggestions, then, to the next administration, whatever party it may represent. A canny opening move would be to go back to President Taft’s idea and put the federal budget on a sensible accounting basis. Then, when you spend money for capital goods, citizens will not think that it is being spent for running expenses, or being recklessly squandered. The Swedes have a fine technique for operating a capital budget.

Second, I suggest that you really exploit the income tax, using the British example to siphon idle savings into active spending for old-age pension and other social benefits. This will help to balance the budget and move the whole economy toward a pay-as-you-go basis. Go into the middle brackets. You will hit me there, but I know what is at stake. Your tax program should also include the elimination of tax-exempt securities.

Third, I suggest that you shift your public-works program as rapidly as possible from an emergency status (o a permanent status. Move from the WPA kind of thing to the PWA kind of thing — firm, durable projects, well engineered, assisted by first-class mechanical devices, at rock-bottom costs. If the public-works cylinder is here to stay, it should be of the best possible quality.

A fourth step would be to decrease the interest rate so that carrying charges for public investment may be very low, and the debt burden held to a minimum. A concrete proposal can be found in the testimony of Mr. A. A. Berle, Jr. before the Monopoly Committee in Washington last May. He called for capital banks of a new type to finance long-term investments, both private and public. Interest rates would be selective, being very low for, say, hospital construction; low for large-scale housing projects; somewhat higher, but still reasonable, for small business men.

These banks could be government-owned, privately owned on a limited dividend basis, or jointly owned. They could take over most federal and local government financing for capital projects, removing such items from public budgets entirely. They could handle guarantees of private projects — as the Federal Housing Administration now does; loans to Latin America — as the Export-Import Bank now does. They could make direct loans for slum clearance, housing, railroad equipment, transmission lines, rural electrification, forest and conservation projects, bridges, highways, schools, health centres, water and sewage works, and so on.

Some such plan as this might greatly reduce unemployment, while restoring and replenishing the resources of the country, at 2 per cent, 1 per cent, even less in some cases. It could put all idle savings to work. The return would be low, but safer than returns are to-day. There are no safe investments in a society where unemployment is great.

As private business and investment picked up, the government cylinder could decrease its activity. The difference between the two cylinders, furthermore, is often verbal rather than real. The motorcar industry has been dependent on both — private capital for automobile factories, public capital for the roads; each meaningless without the other.

Organizing these banks would call for the best financial knowledge and experience in the nation. Some very stiff problems would arise. I think that men of the necessary calibre can be found, willing to serve their country in a time of great need. They must be men big enough to see their profession in dynamic terms, not in the rigid formulas of a past generation.

But perhaps the new administration will not like my suggestions, or Mr. Berle’s capital banks. Very good, gentlemen, what alternatives do you propose? The old handicraft-age formulas are useless; ‘confidence’ is a prayer, not a program. Some definite plan, and that shortly, our economy must have. We cannot go on indefinitely as the last great nation on earth bowed down with unemployment. Other nations have revamped their monetary devices, financed armaments, employed every able-bodied man and woman. We have an opportunity to finance better things than shot and shell. If we cannot agree on a plan — Democrats or Republicans or Progressives among us — a man on horseback may come riding in with one before so very long.

This I think is the real issue, which the stench and clamor of the next election will do so much to hide.

  1. Sometimes even Republicans advocate this. The New York Herald Tribune, for instance, said editorially on April 8, 1939, in respect to a bill in Congress to appropriate $10,000,000 for a national forest in Michigan: ‘We believe that the nation will approve an opportunity to make a public investment that will be noncompetitive with private industry and that will provide an economic future for 127,000 inhabitants.’
  2. When savings are invested in one’s own business, of course no debt results. When they are invested in stocks a kind of liability results from corporation to stockholder, but not a legal debt.
  3. From the testimony of Dr. Oscar L. Altman before the TNEC.
  4. Figures from reports of the Secretary of the Treasury and from the Department of Commerce.
  5. From estimates of the National Industrial Conference Board, the Department of Commerce, and the AAA. No short-term debt is included.
  6. Federal debt figures from reports of the Secretary of the Treasury. State and local figures from the Department of Commerce. Both long- and short-term obligations are included.
  7. Prepared from annual reports of the Secretary of the Treasury.
  8. Discussed in my article in the Atlantic for February 1939.