Financing Post War Prosperity


By BEARDSLEY RUML, Chairman, New York Federal Reserve Bank

Delivered over the NBC network on the "For This We Fight" program sponsored by the NBC Inter-American University of the Air in cooperation with "The Commission to Study the Organization of Peace" and "The Twentieth Century Fund"

(Undated, assigned date of Oct. 15, 1943.)

Vital Speeches of the Day, Vol. X, pp. 95-96.

TODAY most businessmen agree that our Number One task after the war is to provide jobs for people who are able and willing to work. This is the goal of high production and high employment at which all of us are shooting. By far the greater part of the jobs will be provided by private business. But we must also understand that if business is to assume its full responsibility, it must have the active cooperation of government in keeping employment and production at high levels.

Government can give this help in two ways. It can provide jobs through the ordinary and well-recognized government services, such as education, or through other means such as regular or special public works projects. The other means government can use is to manage its own money affairs in such a way as to encourage and support business activity of all kinds.

I should emphasize that the various things that the government does with and about money matters—which includes taxation, borrowing and lending policy, interest rates and many other things—should have a unified sense of direction. This was definitely not true of our policy during the thirties. Some agencies of government felt that by spending money they could reasonably hope to create jobs and in many cases they did. Other agencies were unwittingly following deflationary policies. The policy of one agency was in direct conflict with the policy of other agencies. In the postwar period we shall, of necessity, have more unified control. Government policies and agencies must not cancel each other out. They must move in the same direction.

In what direction do we want them to move? Our first goal is to get as much production and create as many jobs as we can. The best way we know of doing this is to keep private business as active as possible. Government policies should foster and encourage this at all times. But whenever private activity slackens, because of the business outlook, the policies of government should replace the purchasing power which has declined because of the falling off of private business. Thus government supports private activity and compensates for any falling below the high employment and production that we want. For this reason, such a policy is sometimes referred to as a "compensatory" fiscal policy.

Assuming, then, the general desirability of government to take up the slack in private employment whenever it occurs, it is worth while to point out certain things about this "compensatory" system that are often misunderstood.

In the first place, such a policy does not mean that we will always need to have a deficit in the national budget and operate in the red all the time. In times of high production and high employment we will be able to balance the budget without difficulty. In boom times we will not only be able to balance our budget, but we will want to start paying off our national debt in substantial amounts. We will want to do this in order to provide a brake on a business system that might be entering a false and dangerous boom.

Such a policy does not mean spending for its own sake. At no time would there be any need for wasteful expenditure. When government lends or spends, it should put its money into projects that are really necessary, efficient, and productive.

I repeat that the disbursements of government are not the only way of supporting high production and high employment. Indeed they may not be the best way. Our tax policy will have a great effect on these matters. If we want to keep employment at high levels, one way to do it is to give the average man greater purchasing power by reducing taxes. Why not leave at home, for the individual to spend, the income that otherwise might have to be pumped out again in order to maintain high employment? Such .reduction of taxes should be made where it will do the most good in creating demand and in encouraging private enterprise; And note particularly that under this "compensatory" policy we don't have to wait until our national budget is balanced before we start reducing taxes.

I would like to set forth one basic principle that I think should govern our tax policy in the postwar years to come.

We should set our tax rates at a figure that will enable us to balance our national budget when we have a satisfactory high level of employment and production. If we have plenty of jobs and if we are turning out lots of goods and services and our national income is high, we can handle the budget on tax rates substantially lower than they are today. We should set our goals for high production. The war, very dramatically, has shown us what we can achieve if we want to strongly enough. When our national business activity goes above these adequate levels then the same tax rates would bring us enough revenue so that we can start reducing our national debt. If activity falls below these levels we can prudently leave the tax rates where they are. Doing so will reduce the tax payments from individuals and will stimulate business activity. The idea is on the one hand to use a reduction of the national debt to check an excessive business boom and on the other hand to use government fiscal and tax policy when private business activity falls off to expand and increase activity—and thereby provide the jobs we want.