Post-War Potentials


By BEARDSLEY RUML, Chairman, New York Federal Reserve Bank

Delivered before the Massachusetts Bankers Association, Boston, Mass., May 25, 1944

Vital Speeches of the Day, Vol. X, pp. 565-569.

THERE are two difficulties in talking about the period that is to follow the war. In the first place, no one wants to give the impression in these decisive days that dreams about the future are being permitted to distract thought and energy from the paramount job of winning the war speedily and decisively.

The second difficulty in talking about the postwar period that what is intended to be analysis may be interpreted as prediction. I think -I can explain what I mean by an illustration.

Suppose I should tell you that when I get back to New York I am going to draw a triangle on the top of my desk, and suppose I should ask you to tell me about that triangle. There are many things that you cannot know about my triangle. You do not know exactly what shape it will be nor do you know its size, except that it is certainly smaller than the top of my desk. And so you can go on to other statements about my triangle. You know that the sum of the angles in the triangle add up to 180°. You know that the longest side is opposite the widest angle. You know that if the sides are equal the angles are equal. There are many other things that you know about this triangle—knowledge that does not come from the facts about the particular triangle that I am going to draw, but that follow necessarily from the points and lines and angles that occur in every triangle, including the one that I have told you I will draw on the top of my desk tomorrow morning.

In the same way, without predicting what is going to happen, we can draw certain conclusions as to necessary relationships that must exist in the postwar period. For example, we must either have 55,000,000 people employed or we shall almost certainly have so many people looking for work that we shall have a problem of mass unemployment. If we have 55,000,000 people employed, we shall either have a national income of 140 billion dollars, or we shall have an average work week of less than forty hours, or we shall have a price level lower than it is today. Thus, if we make certain assumptions, certain conclusions inevitably follow. If you assume a national income of less than 140 billion dollars, you must also assume one or more of the following conditions: mass unemployment, an average work week of less than forty hours, or a price level lower than it is today.

It is clear that we cannot have acceptable economic and social conditions in this country except under a higher level of prosperity than we have ever known. There are some very remarkable things about the present economic, productive, industrial situation. We have added 85 billion dollars worth of war production on to a consumption level that is higher than it was in 1940. In other words, the elimination of war production can result in high employment only by the corresponding increase in the current standard of living. In the aggregate, we have nothing to make up, we can only move ahead.

To make this miracle of production plausible from an entirely different point of view, consider it this way. Economists estimate that increases in productivity in recent decades have been on the average between two and three per cent a year. This progress goes on because of scientific advance, technical improvement, better public health, better education, better management, improvement all along the line.

Since 1929 this improvement in method has never been translated into actual production and consumption. So, for fifteen years there has been developing under the surface this increased capacity to produce. Since 1940 on account of the war, the scientific and technical advance has been very much more rapid than average.

Any way you look at it, nearly a generation's progress in standards of living must be made up before we will reach high employment. High employment requires a standard of living a generation in advance of where we are today. We face a compelling situation of unprecedented magnitude and consequence, and our social, political, and economic ideas must be adapted to the realities as they do in fact exist.

Business must guard itself from dangers from two quarters—on the one side from the regimenters, and on the other, from the economic appeasers. The regimenters would attack the employment problem by over-all and under-all regimentation of supply and demand, wages, prices and profits forgetting that the end result would be regimented employment.

The economic appeasers would get rid of the problem by saying that mass unemployment is inevitable and that we might as well make the best of it. To them eight million unemployed is the statistical consequence of a private, free enterprise system. The appeasers forget that the unemployed, and their families, and those who fear they too may soon be out of work, place less value on the free enterprisesystem than do the appeasers, and that there are more of them.

Business today does not accept either the necessity of regimentation on the one hand or the inevitability of mass unemployment on the other. But it would be folly to expect that business can make the transition from full wartime employment to high peace-time employment without cooperation from public government at every level—federal, state, and local.

These measures of cooperation between government and business are good, but, in my opinion, they are not enough. In addition, we require for success in the attack by business and government on the danger of mass unemployment a commitment on the part of government that, through an explicit fiscal and monetary policy, it will act when business, as business, cannot act to sustain employment and effective demand.

Business wants a fiscal program that will help it create good products, good jobs and good investments. Business does not expect a national fiscal policy to do the work of business for it. It does ask for cooperation in maintaining a flow of purchasing demand that will have some general correspondence to what agriculture, labor, and business are able to produce and distribute.

Business knows that fiscal policy alone cannot produce a healthy condition of high employment and high production. In addition to a sound fiscal policy, there must be government stability, protection against illegal aggression, confidence in the outlook for profitable relationships between volume, costs and prices, access to markets and to capital and to the means of production. But sound fiscal policy, will aid strongly in getting the high production and high employment we all want; it will also check tendencies toward restrictive practices that spring from fear of insufficient effective consumer demand.

To put it another way, it is inescapable that the national state, through a clear and workable fiscal and monetary policy, must complement and supplement the activities of private business in the maintenance of high production and high employment.

To make this proposition more effective than a mere statement of intent, there are a number of corrective measures that the government must adopt for the sake of its own effectiveness. At the present time, even if a fiscal and monetary policy to complement and supplement the activities of private business were generally agreed upon, there is no possibility under the present organization of the federal government of its being made operative or effective.

There are three principal causes for this inadequacy, and ways must be found for eliminating them.

The first change that needs to be made is in the organization of the executive branch of the federal government. The administration of any fiscal policy at all calls for cooperation among agencies and for singleness of policy in at least several respects: the federal budget; the federal lending policy at home and abroad; the credit and monetary policies under the jurisdiction of the Federal Reserve System; the creation and refunding of federal debt, which is now managed by the Treasury; the tax program; and, possibly, the activities of the Securities and Exchange Commission. These several functions are all intimately associated in giving reality to any governmental fiscal and monetary policy. Today, these functions are scattered among several departments and agencies, and, during the 30's, there was clear evidence of conflict in basic policy. This meant that during nut period the administration could have no consistent or, continuing fiscal policy and was unable to use the full power of fetal measures to support its attempts to reach the humane goals it had set for itself in other fields.

A similar situation exists in Congress with the several committees of both House and Senate that must consider legislative policy on fiscal and monetary matters. Even if a consistently strong policy should emerge from the administrative branch, it would be subject to delay and possible damaging amendment before the necessary legislation would be forthcoming. As far as taking the initiative is concerned, Congress is handicapped both by organizational and procedural difficulties and also by grossly inadequate staffing of its technical services.

Another very serious difficulty is the lack of close collaboration on policies of expenditure and taxation between the federal government on the one hand and the state and local governments on the other. This weakness has been well understood for years, but the initiative which might have been expected from the federal government in analyzing the problem and making constructive suggestions has not been forthcoming.

Here, at the point of fiscal and monetary policy, where the relations between government and business are of the greatest importance for the working out of the postwar employment and production problems, business may properly be apprehensive. It may be apprehensive, not that the intentions of government will be hostile or even indifferent, but that, unless the preparatory organizational work is done now, the federal government will be helpless in executing even the most elementary collaborative program.

To help stimulate discussion of postwar national fiscal policy, I have drawn on a number of sources and put together a suggested nine-point postwar national fiscal program. Perhaps it would be more accurate to call it a framework rather than a program, since I have tried to make it general enough so that it might be acceptable to a majority within all groups—business, labor, and agriculture, Republicans and Democrats.

Many of you are familiar with these nine points, but for completeness, let me take a few minutes to repeat them once again.

First, we want no public spending for its own sake and no projects merely because they support purchasing power in general. Let us base our budget estimates on the efficient and economical carrying out of worthwhile activities to accomplish our national purposes.

Second, let us lower our tax rates to the point where they will balance the budget at an agreed level of high employment. We do not want a deflationary tax program at times of less than standard high employment. Taxes should be reduced where they will do the most good in creating demand and in encouraging private enterprise.

Third, having set our tax rates to balance the budget at high employment, let us leave them alone, except as there are major changes in national policy. When employment goes beyond an agreed level, or if, with high employment, we have a boom in prices, let us hold the surplus or use it to reduce the national debt, not as an excuse for further tax reduction.

Fourth, let us hold on to the principle of progressive income taxes and estate taxes as the best way of reversing the tendency of purchasing power to come to rest. Let us reduce the rates on the individual income tax to stimulate consumption and to make possible investment in new enterprise on a business basis.

Fifth, let us plan our public works, not to balance the whole economy, but to help toward stabilizing the construction industry. Our objective should be to provide in this basic industry continuous activity within agreed limits throughout the year and over the years. This would requireadvance planning of public works—federal, state and local —scheduling, and the holding back of a large reserve of optional projects.

Sixth, let us modernize the social security programs as far as their fiscal influences are concerned. Since their beginning they have been highly deflationary. For old age security, let us set our rates and benefits so that they come somewhere near balancing; and for unemployment insurance, let us set our rates so that intake and outgo balance at high levels of employment as it may be defined.

Seventh, let us keep the important excise taxes for the time being, and get rid of the rest. If employment and production lag overmuch, let us get rid of these too, except when they have some social purpose, since they are deflationary. We need no general sales tax for fiscal policy purposes, now that the individual income tax is on a current basis.

Eighth, let us arrange our lending abroad, whether for stabilization, relief, or long-time reconstruction, so that it will support rather than contradict fiscal policies adopted to strengthen our domestic economy.

Ninth, and indispensably, let us press for a reorganization of the parts of the federal government that have to do with fiscal policy and administration. We want clarity in policy, consistency in administration, and cooperation between the executive and legislative branches. We shall expect that necessary cooperation of fiscal policy and monetary policy at the federal level will be attained easily along the way. Having gone this far, we will then want to study more intensively the problems of coordination between federal and local governments, since all public expenditure and tax policies affect national fiscal policy itself.

This nine-point program raises some questions, and leaves a great deal to be filled in. But if the program makes sense, there are no constitutional or technical reasons why it could not be adopted as a framework now, to be ready once peace is declared and we are able to resume our peacetime way of life. During the transition period after the war, the nine-point program itself cannot be expected to eliminate the need for important public expenditure for relief and rehabilitation. But it will provide a flow of purchasing demand, which springs authentically from the tens of millions whose tax burdens will have been reduced. It will express in a mosaic aggregate the popular interpretation of the American way of life as pictured in consumer preferences. Against this background, the readjustments of employment and the reconversion of business and industry can more readily occur. I have remarked elsewhere "Why not leave at home, for expenditure by the individual, money that would have to be pumped out again to sustain employment?" The nine-point program is a way of carrying out the policy implied in this simple question.

The nine-point program suggests answers to four basic questions that loom large in the minds of people today.

First, what about taxes after the war? Second, what about the national debt? Third, what can we expect from public works? And finally, what about social security?

With respect to postwar taxes, the second point called for a reduction of tax rates to the point where the budget will be balanced at an agreed level of high employment. This means a drastic change in our whole attitude toward federal taxation.

First of all, we must be clear that when we speak of a balanced budget, we mean the whole budget, not a special section that excludes many important financial transactions. And by "balancing" we mean a budget that will be as nearly as possible neither inflationary or deflationary in its effect on national income.

Next, it must be understood that we are thinking of a budget of about eighteen billion dollars, outside social security which should be separately financed. We must realize that we will move on to a new budget level after the war and we must have high levels of employment to support it soundly.

Third, we must have some notion as to what we mean by high levels of employment. Opinion today seems to be centering on the figure of 55,000,000 workers at a 40-hour week as being a fair standard for high employment. It might be a million more or less, depending on a number of assumptions as to what is likely to happen. The figure can hardly be less than 53,000,000 or more than 57,000,000. Expressing this concept of standard high employment in dollar terras, this means a national income at present price levels of $140,000,000,000. It is against this national income that we should set our tax rates to produce revenue to balance an $18,000,000,000 budget.

It is obvious that under this policy large immediate reductions in tax rates should be made when war demands are satisfied. Present rates will produce over forty billion dollars. The question of what rates should be reduced and how much is an exceedingly delicate political and economic problem. To give an example to show what might be done, if we retain three billion dollars of income from the major excises, that is, tobacco and alcohol, the federal tax on corporations could be reduced to five per cent, and the individual income tax could be reduced by a third in the aggregate; and we could still raise eighteen billion dollars. Such a budget might still be deflationary because of the character Of the expenditures contemplated and even further reduction of tax rates might well be in order.

This, then, is the significance of the second point. Large reduction of tax rates is a powerful and immediate restorative of normal peace-time demand, which controls itself as soon as standard high employment has been attained. It is one of the two giant arms that will lift us to high peacetime production and that will keep us there.

The second question on everyone's mind is the question about the national debt. I believe that on reflection everyone will agree that we cannot speak with positiveness about this problem, not only because we do not know what the magnitude of the debt is going to be, but also because its existence on such a scale presents a new situation as far as the public finance of this country is concerned. It is a problem that must be studied with complete intellectual detachment, without politics, bias or emotion of any kind, without thinking in terms of tradition instead of in terms of ideas.

There are, however, certain points on which I think we can be reasonably sure. First, I think we can be reasonably sure that the easy answers are probably wrong. By that I mean that it is certainly not true that the debt is not important simply because we owe it to ourselves. I must say that if anyone tells you that every child born in this country has a debt of $25,000 hanging around its neck, it is perfectly fair to say that at the same time it has a silver spoon worth $25,000 in its mouth.

Let us dismiss the proposition that the debt is of no importance because we owe it to ourselves. It is important.

The other simple suggestion that is also probably wrong is mat the debt can be amortized by fixed annual installments over a period of years without regard to the state of employment and production. This simple answer is taken from the traditional and sound practice of business and private individuals with mortgages and other indebtedness. From this familiar practice it is inferred that we can and should amortize the debt by fixed annual installments over a period of years regardless of the then existing economic or employment situation.

There are, however, some things we do know. We know that the interest on the debt is more important than its face value. We know that the debt will be paid off, principal or interest as it becomes due. I think we know that the amortization of the debt will take place under conditions which are consistent with the prior requirement of high employment and high production. These are basic principles which we can use in approaching the problem of the national debt.

Prof. O. M. W. Sprague, speaking in Youngstown, Ohio, made the following remarks which I think are most interesting in this connection.

"The powers of the central bank, the Federal Reserve System, are better understood and better organized than they were during the last war. The use of these powers has resulted in a stable market for government securities. If the use of these powers can result in a stable government bond market during time of war, with the debt increasing at an unprecedented rate, it is obvious that the same powers can be used to preserve a stable bond market in time of peace. Under these circumstances, it is hardly conceivable that a situation will arise in the future in which these powers will not be used. This means easy money and no quantitative control of inflation by monetary policy. Such controls as we adopt must be qualitative and, with the cooperation of bankers, such qualitative controls can probably be effectively applied in many areas."

Now, what about public works? Much has been said and written about public works as a means of providing employment and of evening out the business cycle. Lately, we have become familiar with the phrase "a shelf of projects" to be ready if business should become depressed.

We must not expect too much from a public works program as a general support for high employment. If we believe in the policy of no wasteful public expenditure and no spending for its own sake, the administrative and technical difficulties make proper timing extremely difficult, and reduce the potential volume well below the requirements of a true depression. Public works alone cannot do the job.

In addition to magnitude and to administrative difficulties, there is another reason for abandoning the idea of using public works as a general cure-all for the business cycle. This other reason is the human undesirability of bringing hundreds of thousands of men into the construction industry and forcing them out again as an offset to the free play of economic forces elsewhere in the business system. These men are not statistical units that can be properly moved from one column of an accounting sheet to another in order to preserve a general balanced level of employment. Nor can they be shifted long distances from their homes to places and at times convenient to the business cycle.

The most we can expect, and this is no small gain, is that public works can be planned and undertaken in such a way as to even out the activities of the construction industry itself, thereby providing a reasonable level of construction throughout the year and year after year. Some rough approximation could be made of what aggregate employment in construction would be suitable over a period of years, and, to maintain the desired volume of construction, public works might be undertaken when private construction fell off.

What level of employment in the construction industry should we take as a long-time normal? This suggestion has been made that we might take as a rough standard the average rebuilding of our physical plant once a generation. This suggestion has the appeal of picturing each generation turning over to the next generation new, modern structures instead of old, outmoded houses, schools, and factories. It has been estimated that such a program would require about eight per cent of the national product and would keep 6,500,000 men employed on and off site; but this figure should only be taken as a preliminary approximation.

It is important to have some such standard, both to indicate how far we ought to go in bringing forward the scheduling: of public works planned for future years, but also to restrain us from avoidable public expenditure for construction at times when private demand is extremely high. It is likely that immediately following the war, and for some years thereafter, we shall have a considerable boom in private residential building. It may well be that this boom, together with industrial demands and public works that cannot be postponed, will be more than sufficient to carry the construction industry to a standard normal. If this should happen, and if at the same time there should be substantial unemployment, there would be a temptation to accelerate postponable public works, even though a full quota in the construction industry had already been reached. Barring local situations and public works actually urgently needed for public safety and welfare, it would be wiser to hold back public works, in spite of the presence of some unemployment. There are other effective weapons that can be used to fight unemployment, and it would only make the business outlook worse to create so high a level of employment in the construction industry that it could not be maintained, a level that would say to all who could hear, "Crisis ahead!"

This stabilization should be attempted not only for the country as a whole, but also regionally. The full requirements of stabilization will not have been met unless the overwhelming majority of the workers in the construction industry are able to spend at least two days a week at home every week. This means that the planning and scheduling of public works must be done both in financial and geographic terms.

Taking everything into account, it seems to me unreasonable, indeed I feel that it is reckless optimism, to expect that public works expenditures can be counted on as a balancing factor for the economy as a whole. However, if we could only achieve reasonable balance in the construction industry itself, a great deal would have been accomplished. Public works, indeed, would be the second great arm that would bring us to high prosperity.

A reasonably continuous level of activity in the construction industry within the year and over the years would greatly increase the efficiency of the industry. The traditional recurrent idleness of men and equipment in the construction industry has forced, for sheer survival, the adoption of practices which all deplore. These practices, I feel sure, can be largely eliminated once the industry comes to have confidence in continuity of activity. But as these practices now exist, they are a serious obstacle to the use of the construction industry as a publicly-supported agency for employment.

As for social security, our sixth point suggested that the social security program be modernized as far as their fiscal influences are concerned. We all recognize that the attainment of high levels of employment will still leave many individual men and women in need. A modern industrial society with its enormous productive capacity can give a certain minimum protection to the individual citizen against the occasion of unemployment, destitution in old age, accident, and disease. It can assess the burden of this minimum protection with reasonable fairness against the aggregate national product. I do not believe that such humane provision will weaken our energies or our ambitions, nor do I feel that we requirethe spectacle of fortuitous human distress to teach us the wisdom of avoiding error and evil.

But whatever provision for social security is adopted as public policy, let us be sure that in financing it we aid rather than hinder the gaining of high employment, which is, after all, the best social security for most people.

Now, then, if we can agree on these basic principles; on taxes, reducing taxes to balance the budget at high employment; on the debt, to make sure that amortization of the debt is consistent with maintaining high employment. If we could agree that public works should be used to stabilize the construction industry and not to even out the whole business cycle, and that the social security program should not be deflationary at times of unemployment, I think we will have gone a long way, a very long way indeed in clearing away many important obstacles to high employment.

These measures of themselves will not guarantee high employment. These principles do not solve all the difficult problems that are presented by the four questions, but they do represent a starting point on which we can get agreement on a non-controversial, common sense basis.

We are still left, however, with the administrative and legislative aspects of fiscal policy and here I think we may well insist that action be taken now. At the present time, under the existing organization of the Federal Government there is no possibility of either adopting a fiscal policy or administering one.

The necessary organizational reforms must be made before anything else can be done with confidence. It is time to stop dreaming about spending our way into prosperity or balancing the budget at times of mass unemployment. Neither prosperity nor a balanced budget can be attained unless we have both legislative and executive coordination, so that the measures that must be taken will be taken.

Let me go back and repeat what I have said before so that there may be no misunderstanding. Measures of fiscal policy can clear the way and can facilitate; they cannot produce goods and services, they cannot give employment. They can create a situation in which high employment becomes possible as business and industry and commerce find the way.

Plans for world economic relationships have recently received a great deal of governmental attention and public discussion. For the success of all these international plans, a high level of employment and production in the United States is everywhere conceded to be indispensable. With high prosperity, we shall require large imports of raw materials, and we may even welcome the economic advantages of lower tariffs on foods and manufactured goods. With high prosperity, we shall be less greedy for foreign outlets to take up low-cost excess capacity and we will be more willing to see our exports directed to the world's essential needs.

The critical program for high prosperity has been too long neglected in official circles. The Baruch-Hancock report, reassuring as it is, does not take us far beyond the phase of reconversion. This is good as far as it goes, but it leaves much important planning to be done by others. The Senate and the House have Committees that are studying the problems of peace-time reconstruction. This too is good, but I doubt whether effort to date is proportional to the task. It would be interesting to know what budgetary provision has been made by Congress for its own postwar planning studies. The problem of domestic recovery should no longer be so neglected nor should it be relegated to the private agencies of agriculture, labor and business. Much as these private agencies can and must do, they cannot do all, indeed they cannot even do their part, without proper governmental leadership and cooperation.

We must succeed at home if we are to succeed abroad. Our great contribution to world peace and freedom can only be made if we are able to use our unparalleled advantages in establishing here, at home, a high standard of prosperity and democracy.