American industry possesses the finest physical plant in the world, but our ability to get goods from it depends, of course, upon the skill with which we manage it. Never has this truth been more important than today when we are engaging in much reckless talk about the necessity of balancing the budget. The same brokers' letters that three years ago were urging us to buy stocks at from thirty to forty times their earnings now warn us that the country faces ruin if the budget is not balanced by 1933, and the leaders of Congress and executive officials vie Avith one another in reiterating the same opinion. Speaking over the radio on March 12, Secretary of the Treasury Mills said: "There is no more important issue before the country. The foundation upon which the structure of restoring prosperity must rest is the unimpaired credit of the national Government." Two weeks later President Hoover himself in a special statement called a balanced budget "the very keystone of recovery" and predicted that "without it the depression will be prolonged indefinitely."
During the last twelve years the national government has reduced its debt from $26,600,000,000 to $16,800,000,000, or at the rate of over $800,- 000,000 a year. The per-capita debt is now 44 percent below the 1919 peak. With the national debt far smaller than in 1919, why should there be such deep concern over the credit of the United States? Is it not high time that we throw off our hysteria and examine sanely and sensibly the extent to which it is desirable to balance the budget? Is a balanced budget in truth "the keystone of recovery?"
The man in the street, who knows little about public credit, foreign exchange, the gold standard and such matters, is interested in the budget from the standpoint of taxes. He knows that in the long run the cost of operating the government comes out of his pocket, and a reduction in expenditures for the purpose of balancing the budget appeals to him as a way of making taxes less than they otherwise would have to be. But is this the way to keep down taxes? It is estimated that the present income rates would yield only $867,000,000 for the year 1932-33. But in 1929-30, they yielded nearly three times as much, or $2,411,000,000. Obviously the way to i-educe taxes is to revive business. And yet how is business to be revived? A rich county in New York State, which two years ago spent over $5,000,000 on roads, plans this year to spend less than $600,000. The president of a Middle Western university writes that next year his budget must be cut by at least 10 percent and perhaps more. In January, 1932, the railroads spent over 40 percent less on maintenance than in January, 1930. This morning's paper contains an editorial congratulating the town of Wellesley on reducing its expenditures. Is this the way to become prosperous? One need not be a student of economics to understand that we shall never regain prosperity by spending less and less. Prosperity can be restored only by spending more. And in this spending more, must not the government do its share and, indeed, take the lead? Surely it is far better able to risk an increase in expenditures than are most individuals and business enterprises. If the government can give greater aid to business by spending more than by spending less, we find ourselves face to face with the surprising conclusion that the way to keep down taxes is for the government to spend more! This may sound like "Alice Through the Looking-Glass," but it is not difficult to understand and (subject to certain qualifications) it is, I think, sound economics.
But what are the arguments given in favor of balancing the budget? Had the depression not produced an extraordinarily acute financial crisis, there would be little to be said for attempting to achieve a balance in the midst of a slump. But the financial panic has to some extent made a difference. Despite the fact that the panic is subsiding and hoarding is diminishing, the public lacks confidence. In the minds of a more or less hysterical people the budget has become a symbol, and so we must achieve a balance, it is said, in order to reassure the common man and to convince him that the country is sound. More important than this is the direct effect of the budget upon the money market. Failure to balance the budget would require the government to increase its borrowings. The bond market, which is none too strong, would be put under greater pressure, the prices of government securities and other high-grade bonds would sink, banks would suffer losses and might again be threatened with failure, enterprises which have bond issues maturing would experience trouble refunding them, receiverships would multiply and credit would be tight. Put in more positive terms, this argument asserts that a revival of business depends upon easy money and a revival of confidence, and that these two in turn depend in large degree upon a balanced budget. Finally, it is pointed out that foreign owners of dollar balances and American securities have anxiously been watching our "free gold"' figures for months and have demonstrated that they will withdraw their funds and even sell their American securities upon any sign that we do not intend to balance the budget. Failure to achieve a balance, by provoking large withdrawals of funds and capital, might drive us off the gold standard.
It must be conceded that, under present conditions in particular, there are substantial advantages i n having a budget which may justly be regarded as balanced. But what is a balanced budget? Secret a ry Mills says: "By a balanced budget we mean that the government will live within its income; that current receipts Avill be adequate to cover curi-ent expenditures and that borrowing will not be resorted to to pay the ordinary running expenses of t h e government." Let us accept this definition. But what are "the ordinary running expenses" of the government? Are new roads, new post offices, improvements to rivers and harbors, irrigation dams? every private business distinguishes between current expenses and capital investments. When it puts u p a new building, that is not an operating expense; i t is an investment, an addition to capital. A private business manager would be appalled if he were told that he must count the cost of the new building as current expense and must regard his company as incurring a deficit unless it could pay the entire cost of the new building out of revenues earned during the year of construction. He would regard anyone who computed deficits in this manner as crazy. And yet this is precisely how the federal government computes its deficit. No distinction is made between current operating expenses and outl a y for permanent improvements or additions to plant and equipment. New battleships, new tanks, new post offices, new roads, all count as ju'st so much current operating expense I By all means let us give the public the balanced budget that it desires—in the sense that all current expenses are paid out of current receipts. Let us raise enough new money by taxes to achieve a real balance, but, in determining how much we must raise, let us employ the same elementary accounting distinctions and concepts which every business uses every day. Let us not confuse current expenses with additions t o plant and equipment and let us not make the ridiculous assumption that the credit of the United States will not permit it to pay for permanent improvements by issuing serial bonds which would mature faster than the improvements depreciate. Certainly the credit of the government is good enough to permit it to finance permanent improvements by the same methods that business concerns employ.
With this as a starting point, we can consider how far it would be wise for the government to go in stimulating business by expanding its construction program. Cannot the executive officers of the government and the leaders of the two parties in Congress agree upon a list of projects which :either must or should be built by 1934, 1935 or 1936? After the list has been prepared, let them agree on the projects which could easily be constructed at once. Such an expansion of construction might perhaps come to half a billion or even a billion dollars, but it would impose no additional burden upon the taxpayers beyond interest on the investment for two or three years or less. As a matter of fact, there would probably be no additional burden at all, because the economies of construction in the midst of depression would more than offset the extra interest charges. In addition, the construction would come at a time when it would do the most good in providing employment and reviving business. Last summer the newspapers reported that as part of the economy program an appropriation of about $50,000 to install air cooling in the White House had been stricken from the budget. Within several years, in all probability, this item will be restoixd and the installation will be made. But instead of the work's being done this year or next, when it would furnish much needed employment, it will be done several years hence, when the country is again prosperous and when employment is fairly good. It will swell the demand for labor and goods and thus accentuate the boom and the subsequent crash. Here we have epitomized the present fiscal policy of the government. Instead of moving the construction program of 1934 and 1935 ahead to 1933, the government is doing exactly the reverse. It is putting off, until a period of boom, zvork which might be done in the midst of depression.
But all of this, the reader may object, overlooks the effect of the government's borrowing upon the banks and the money market. Would not an increase in government borrowing delay recovery by making credit tighter? The argument that it would is a remarkable one. It overlooks the obvious but all-important fact that the government will use the borrowed funds to buy goods. Does anyone really believe that the money market would react unfavorably to an increase in the demand for goods? It is true that, despite the fact that short-term interest rates in many places are not high, credit is tight. But it is tight, not because of a great demand for loans—for they are much less than they were a year ago—but because depositors have withdrawn their money. Credit will become easier just as rapidly as the public regains confidence in the banks and the banks regain confidence in the public. The best way to restore confidence is to give the business of the country a definite prospect of an increase in orders. The government can create this prospect by formulating a sensible and carefully planned, but not too timid, program for expanding public works. This is why an increase in government construction is precisely what both the money market and business in general need. Especially is this true of the long-term money market. Funds have been piling up in the short-term market, creating an abnormal spread between short-term and long-term interest rates, because enterprises have had so few orders and have been making such small profits that investors have been afraid of distant maturities.
But what of the foreign owners of dollar balances and American securities? After the alarmist speeches of Mr. Crisp, Mr. Garner, Mr. Mills and President Hoover, would not a modification of our fiscal policy precipitate a "flight from the dollar" which might drive us off the gold standard? No one knows. It must be conceded that our leaders by their reckless speeches have fostered a dangerous popular psychology both here and abroad—a psychology which greatly increases the difficulty of shifting to a sensible fiscal policy. But suppose that foreigners withdrew balances and sold securities on a large scale. The stock exchange might be forced to set minimum prices, the Reconstruction Finance Corporation might be compelled to come to the aid of more banks, the government might find it necessary to control gold exports and to ration exchange, and possibly to protect the banks by a general guarantee of deposits. Some economic groups would be hard hit and the uncertainty which would at once envelop the whole economic situation would, of course, be more or less disadvantageous to all branches of business. Nevertheless, we must not overlook the fact that there would be compensating effects. How much the depreciation in the external value of the dollar would stimulate our export trade would depend upon the tariff policies of foreign countries, and whether a cheaper dollar would assist world recovery by helping our foreign debtors to pay their obligations to us would depend upon how the courts interpret thegold clause contained in most bond contracts. Of very great importance, however, would be the effect upon the internal price level. The decline in prices would be halted and a rise would set in—an enormously powerful stimulant to all business. But the chances are that no "flight from the dollar" would occur—at least not if the modification of our policy were made in a responsible fashion and with the cooperation of both parties. The situation in America today is far different from that which existed when foreign balances were being withdrawn last fall. The Reconstruction Finance Corporation has been created, the Glass-Steagall Bill has been passed, our banks have apparently ceased failing, and hoarded money is slowly returning. Foreign short-term balances have been substantially decreased and at the same time our "free gold" has been enormously increased—it is now believed to exceed foreign short-term balances. These changes give the government an opportunity to alter its policy without provoking undue alarm abroad.
In contemplating the possible results of a modified fiscal policy let us not overlook the fact that our present policy also has consequences. Not far ahead of us looms a fourth winter of unemployment, with the probability that from six to nine million men will be on the streets. Between now and that time it is imperative that vigorous and courageous steps be taken to revive industry. If nothing has been done, if leadership has not been shown by either political party, if the public enters that fourth winter with a deepened sense of hopelessness and despair, the demand will no longer be for moderate and controlled inflation and we shall find ourselves back in one of the old-fashioned cheap-money fights of the nineteenth century.
Sooner or later the enormous gold mine which the world has miraculously discovered in India is bound to produce an effect. But this is a year when business is disposed to do much waiting to wait for the outcome of tax legislation here and of elections here and in France, to wait for the results of Lausanne in June and Ottawa in July, to wait for the drop in prices to cease. Unfortunately by waiting for the drop to cease, business causes it to continue. Under these circumstances leadership in initiating a recovery is needed from the government. A public-construction program of a billion dollars would not in itself put more than one-eighth (possibly only one-tenth) of the unemployed back to work, but it is probably as large a program as could be satisfactorily managed on short notice. Its principal effects, however, would be indirect. By halting the drop in prices and by putting a little more profit into business, it would give many enterprises the courage to do some long deferred spending. This in turn would gradually cause consumers to spend more rapidly, and the upward spiral would be started. Surely our leaders in Washington can visualize what a fourth winter of unmitigated unemployment would mean. Why, then, do they tempt fate by planning a budget which will aggravate rather than diminish unemployment?