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U.S. Finances
LU llllf W        ' BRITISH KMBASSY,
fy*//       WASHINGTON, D. C. ,
January 19th, 1939
IP!
Ho* 68 B
My Lord,
^ /^f1 With reference to sir Ronald Lindsay's despatch
No* 15 S of the 6th January, 1938, I have the honour to
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enelose herewith copies of the President's "budget message
M ' to the Congress, containing the estimates for the fiscal
sjhcC* f>*<L4*+j year ending June 30th, 1940.
(C fw.«^ 4'     2» The table "below sets out for purposes of
*V?y> comparison the "budget figures* under general headings,
fte+em* . for the ten fiscal years from 1931 onwards, the year in
which the present series of deficits began, (The
differences between these figures and those previously
given, e.g. in the memorandum enclosed in sir Ronald
0^/'*//   '   Lindsay's despatch Ho. 670 £ of the 19th July last, is
due to a change in the method of treatment of the
financing of semi-autonomous lending bodies like the
Reconstruction Finance Corporation.)
Receipts     Expenditures Net deficit
(excluding debt
retirement.)
($ million)
1931 3,190 3,671 481
III 7
1932 2,006 4,5^5 f|| 2,529
V
1933 2,080 3,364 1,784
1954         3,116 6,011 2,895
Wm              1935          3,800 7,010 3,210
1936 4,116 8,666 4,560
1937 5,294 8,442 3,148
'^^Jfa      1938        6,242 7,626 1,384
,       «   C1939(est.)!,520 S 9,492 fg.m?
tfp*      51940     " 5,669 <8,995          j <R ao*
The Right Honourable^o ^£1. l¥rV . 1 bThe/
The Viscount Hallfffic1, K.G., v    J l%3 f ? X
etc.,       etc.,       etc. VALM:CB:TKB:Dn
The most striking feature of the table is the rapid
increase in the pace of Government expenditures, and
it will be noticed that despite the economic recovery
which has taken place since the summer of 1938, the
expenditures contemplated for the coming fiscal year,
while somewhat below the record peace-time level expected
in 1938-59 are still well above any previous peace-time
year, including 1936, the year in which the main part of
the veterans' bonus was paid*
3. The theory on which this continued very high
level of spending is defended is set out in the
President98 annual message on the state of the nation
3 (enclosed with my despatch No. 26 of the 10th January)
rather than in the budget message*   This theory is that
the chief factor to be borne in mind is the total
capital investment, private as well as public, and not
the level of Government debt only;   that the total of
private investment has decreased since 1939 by as
much as the public debt has increased;   that if private
capital does not go te work its place must be taken by
Government funds;   that a big reduction of Government
investment - or spending - at the present time would
bring about a new economic relapse;   and that by
keeping total investment, whether public or private,
going, the national Income will very shortly be raised
to a level, eighty billion dollars, at which revenues
will automatically increase sufficiently to balance
the budget without higher tax rates.    (Copies of a
letter recently addressed by the Chairman of the Board
of Governors of the Federal Reserve System to Senator
^"Tw) Byrd are attached hereto in which the theory is more
fully set out than in the President's messages to the
Congress/
if
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Congress.    I do not think it necessary to send you
the Senator's long and orthodox rejoinder.) With
this theory in view the Budget expenditures hare on the
present occasion 'been classified on the basis of a new
division between "ordinary** and "extraordinary*
expenditures, the "extraordinary" expenditures being
those which can, In theory, more readily be contrasted
or expanded according to the rise and fall in private
investment, or in the national income.   These "extra-
ordinary" expenditures are in the main on public works,
in one form or another.
4. I do not think that it is necessary for me
to discuss at length the economic dangers inherent in
the position*   The situation is unchanged in essence
since the date of Sir Ronald Lindsay's despatch of
July 19th last*   The policy is of course a gamble on a
fuller measure of economic recovery than has yet been
reached since 1929 and it is of interest to point out
that Government revenues have never yet, except in the
year 1980, reached to within 2$ thousand million dollars
of the present level of expenditure.    The policy has
naturally been severely criticised in the Conservative
press, largely on the lines that a balanced budget has
been made dependent on business recovery, while the
unbalanced budget is itself, by the uncertainty it
creates, a faetor preventing business from recovering.
I do not find the argument in this form very convincing,
but it is certainly true that a high rate of Government
spending m or to adopt the phraseology of the budget
message, an increase of Government investment - is not
by itself calculated to lead to the required rise in
national income, unless other factors which have
hitherto/
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hitherto held back recovery are eliminated. A discussion
of these broader aspects of the problem would carry me
far outside the scope of this despatch.    But even
assuming that the desired increase in the national income
can be brought about - and I personally find it net
unreasonable to suppose that this might be successfully
accomplished before very long - the position would be by
no means free from danger,    With the vast amount of
unused credit facilities now lying idle in this
country, if once the inflationary movement does begin to
take hold,., it is likely to be very difficult to control
it without precipitating a new depression in which event
a new burst of spending would presumably, according to
the theory, be embarked upon, only starting from an
even higher initial level of expenditure.   And in any
case the difficulty of expanding or contracting the
"extraordinary" expenses accprding to the rise or fall
in private investment or in the national income, is
bound in practice to be very great.   Many of these
public works, e.g. the flood control schemes, plans to
deal with river pollution, road building, etc. would be
very difficult to cut down at any time in the face of
local demand for their continuance.   Moreover the lapse
of time necessarily involved in either setting up or
discontinuing any large scale public works must at the
best make the weapon an exceedingly clumsy one, owing
to the impossibility of timing its employment. Apart
altogether from theory the simplest summary of the
situation is that deficits are likely to continue for
the remaining period of Mr. Roosevelt's term as
President, and that it is, for obvious reasons, impossibl
to look farther ahead than that.
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6, It must of course, as always, "be borne in
mind that the President's figures of expenditure
represent his preliminary recommendations only, made
six months before the fiscal year opens, and that the
final appropriations, which lie with the Congress, may
differ considerably from the President's figures.    It is
not yet clear how the division of groups will work out in
the present session of the Congress, but while it appears
likely that the Congress will adopt a more independent
attitude 'than in recent years, and while the influence
both of the Republican and of the right wing Democrats
has no doubt been increased, I should not anticipate
that this will lead to any large reduction in the
appropriations below the President1 s figures.   There are
of course violent general attacks on the Administration's
spendthrift policy, and an effort is at present being
made to cut the relief deficiency appropriation for the
current year, but the proposed cut, even if carried
through, is of cfliite moderate dimensions, and a general
desire for economy is a very different thing from a
determination to drastically reduce specific items of
expenditure which are popular in themselves. Pressure
from the constituencies in fact seems calculated to
prevent any really substantial cut in the big items of
expenditure proposed.
6. As a result of these deficits the gross
Federal debt has risen from $16,185 millions on the 30th
' • * * ~ »
June, 1930 to $39,500 millions at the date of writing.
The increase is however really less than the gross figures
taken by themselves would indicate.   The budget message
lists $16,431 millions as durable improvements and
recoverable loans and investmentsj   but it is clear that
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the bulk of this expenditure (e.g. on roads, Civilian
Conservation Corps work, etc.) is not recoverable in the
ordinary sense, although it nay of course increase the
real wealth of the country, and hence lead indirectly
to increased Government revenues.   However seme $6,500
millions of Government obligations are held ay
Government agencies and trust funds, and there is a
"balance of some $2,500 millions in the Treasury General
Fund, as well as $2,000 millions in the Stabilisation
Fund.   On the other hand Government guaranteed bonds
outstanding amount to some $5,000 millions* The
Government* s profligate budgetary policy has not
injured its credit, as is shewn by the fact that United
States Government bonds are standing at an all time high
level, and the computed average rate of interest on the
total outstanding interest bearing debt is about 2.58£
against 2.59$ in June last, and 5,8$ in 1930*
7. I am mot including in this despatch any
detailed comparison of individual sub-heads in the
budget for 1939-40 with the expenditure in previous years,
for the reason that the appropriations, as stated above,
rest with the Congress, and individual figures may be
materially altered in the course of Congressional
debate.   But it will of course be noticed that the cost
of national defence, which never exceeded $700 millions
a year for 1931 to 1936 has since then risen as
follows:-
1935/
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§ millions
1956-36
880
1936-37
895
1937-38
980
1938- 39 (est.)
1939- 40 (est.)
1,017
1,336
8
Finally I enclose herewith a supplementary
request "by the President for an appropriation of §876
millions to enable the administration of relief
thro/ugh the Works Progress Administration t o be carried
on through the remainder of the current fiscal year.
This request is at present tinder discussion in the
Congress, and the amount requested may he somewhat
TOducedf^ParoBi the "broad "budgetary point      view however
neither this request nor the possibility of its
reduction is of very great importance, since a supple-
mentary appropriation for this purpose was mtici^ted
when the estimate of the outturn of the 1938-39 budget
was prepared in Jane last.   That estimate was for a
deficit of a little under $4000 millions, and this
estimate still stands.   The net deficit for the 6 months
to the 31st December has been $1,650 millions.
10. Copies of this despatch and of the Enclosures
are "being sent to the High Commissioner fo^fche
United Kingdom in Canada, the Prime Ministejpiof
Australia, care of the Dominions Office, Ht||l£a;Jestyfs
Treasury and the Department of Overseas Trade.
I have the honour to be,
with the highest respect,
My Lord,
Your Lordshipfs most obedient,
humble servant,
(S<H>)   V. A. Zi. MAMOT
H.M. Charge* d1 Affaires.