BRITISH EMBASSY,
1USHI1BTCI D.C.
July 3rd 1959.
Ho.737 E*
My lord,
I have the honour to inform Tour Lordship
that the President, taking advantage of an enquiry
addressed to him by Senator Byrnes regarding the
effect of a louse Amendment to the Administration's
relief bill, has issued in the form of a latter dated
21st June, 1939, to Senator Byrnes, a new plan
to achieve an economic revival in the United States*
Copies of the text of the President's letter are
.... If annexed to this despatch.
2* Briefly the scheme contemplates, as a
permanent policy, the maintenance of a revolving
fund, to be fed through the issue of Government
guaranteed securities, and used for the purpose of
lending money at a low rate of Interest for certain
types of public improvements described in the letter
as "self-liquidating".     These comprise water and
sewage works, bridges, hospitals, toll roads and
special highways, the purchase of railway equipment
to be leased to the railways, rural electrification,
tenant farm purchases, and loans to foreign governments
"for the purpose of promoting our foreign trade** The
various schemes outlined are to have a duration of
between 2 and 7 years and they provide for loans
totalling in all $3,060,000,000, of which it is
contemplated/
The Right Honourable
The Viscount Halifax, K.G.,
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etc*, etc., etc*
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contemplated that loans to an amount of $870,000,000
should be made in the fiscal year, 1940. The contemplated
loans to foreign governments amount to $500,000,000,
of which #200,000,000 are suggested for 1940. In
addition to the above it is proposed te Increase by
$800,000,000 the borrowing power of the United States
housing authority for the purpose of housing schemes and
slum clearance*
3. It is understood that this scheme is to a
material extent baaed on proposals made by Mr. Adolpfe
Berle, the Assistant Secretary of State and a member
of the Hew Deal inner circle, although Mr* Berle* s
proposals have probably undergone substantial modification
in the course of examination by the Administration* It
also corresponds to suggestions made in a speech on
16th June by Mr* Secies, Chairman of the Federal Reserve
Board, who also used the inappropriate term "self-
liquidating".     The scheme is indeed a mere outline in
whleh many details remain to be filled in, for example
the rates of interest to be charged by the Government
lending agencies*   Mr. Berle has, I believe, urged that
in certain cases the Government should be prepared to
lend funds without interest, while the President's
proposal confines itself to the expression "a low
rate of interest"•   Further, it is not clear how this
scheme for the lending of money at low rates of
interest is to be fitted in with the existing relief
programme by which grants are made to local authorities
for a proportion (usually 45%) of the cost of public
works*
4. The/
-s-
4* The President has indicated that the
Administration is already at work outlining the type
of legislation required, and that he will ask Bongress
to deal with this legislation at its present session*
5. The scheme has met at the outset with a good
deal of criticism in the press and in Congressional
quarters, mostly of a partisan character. The main
criticism is of course against the proposal for additional
public borrowing and lending as such, and it is pointed
out how, when a budget seems hopelessly unbalanced
already, the arguments against still further spending
are loss effective than when the budget is in balance.
Some caustlo references are made to the use of the
expression "self-liquidating". Doubts are expressed
whether the scheme can bo confined to projects which
are not competitive with private Interests, and the
history of the Tennessee Valley Authority shows that the
Administration will have to watch its atop on this side*
Senator Borah has come out strongly against the proposal
to expand loans to foreign governments, and the press
points out that a policy of this kind is somewhat
singular on the part of a government which has hitherto
given little support to private persona who have made
loans to foreign countries, and with a Congress which
has adopted such a rigid attitude with regard to war
debts.   It has, however, been explained by the Adminis-
tration that the proposed loans are aero properly in
the nature of export credits, and that the proceeds would bo
spent in the United States and largely for Latin America.
The/
The addition of the phrase "to foreign governments
ia now admitted to bo unfortunate and possibly fatal.
6* So much for the immediate reactions to the
President's proposal. If the matter ia regarded from
outside it must be pointed out that oven without
this scheme there is plenty of now expenditure in
prospect.   It is true that it is estimated that the
rate of spending under existing relief and other
schemes is likely to alow down temporarily to some
extent this summer and autumn.   But on the other hand,
the President*a budget for 1940 allows for a deficit of
$5,300,000,000 (as compared with a probable deficit of
$3,500,000,000 for 1939), and there are a number of
projected increases. For example, the President's
budget provides for only 2,000,000 parsons on relief
as compared with 3,000,000 in 1939; and the 1940
provision may have to be increased in due course. The
Senate has increased the provision for farm parity and
surplus commodity payments by over $300,000,000 and
a major part of this increase will probably go through.
Amendments to the Social Security Aot which are now
before Congress may involve increased government
borrowing on the market of some $600,000,000 in 1940,
and more in later years.   The Senate Commerce Committee
has recommended an additional $300,000,000 expenditure
in 1940 for rivers and harbours.   One might have thought
that with a budget deficit growing in this manner,
there was no need for an imposing now schema of the
kind issued by the President. Ho doubt its issue is
to bo attributed to a large extent to political
con si derations/
considerations and to the desire of the Democratic Party
for a return of prosperity in 1940 wfaloh will float them
through the new elections*   But apart from this there is no
doubt a sincere belief on the part of the Presidents New
Deal advisers that recovery cannot be expected to com
from private initiative, that capitalism lias reached a
statie state, and that an increasing substitution of
public projects for private enterprises ia essential to
prosperity*   One of the most remarkable points about the
President's proposal is that, in describing it as a
¦permanent policy" of the government, he appears to have
committed himself to this view.
7* There are many responsible circles outside the
Administration which, while they approve on the whole of
the government's spending measures in recent years (including
the new scheme) as a necessary interim poliey, hold that
there are all the factors present now for a substantial
revival, which is only held back by the extreme uncertainties
of the conditions under which business has to operate*
These uncertainties include recurring probes and attacks
on particular classes of business, the erratic character
of the present Administration* s own poliey, the uncertainty
as to the outcome of the 1940 elections, and the uncertainty
arising from the international situation*    From this
point of view all that is asked for is peace and quiet in
order that business may make its calculations on a fine
basis*
8* In spite of these uncertainties, a moderate revival
of business is expected to continue this year. The fear is
even/
oven expressed that If the Republican party return
to power in 1940, they may be too hasty in removing
the restrictions Introduced by the present Administration,
and may find themselves Incapableof controlling the
ensuing boom.
The cleavage between the two vlews seems at
present to bo Irreconciliable, and it is more than
likely that the course of events will never furnish
any conclusive proof which group is right.   On one
hand the President's new seheme may do much less than
he thinks to speed up economic aetivity In the near
future* Schemes of the type required will take time
to work out, and in many cases It may be that the
money spent would have been spent anyhow, and that the
only effect will be to lessen the interest charge to
the borrower at the government's expense* On the other
hand, if the prophets of a business revival prove
correct* the Hew Dealers would always be in a position
to claim that the credit must be given to the government
and not to the business community*
I have the honour to be,
with the highest respect,
My Lord.
Tour Lordship's most obedient,
humble servant,
(SfflM R*0 .LINDSAY.
I am •ending a copy Of this despatch to the Department
of Overseas Spade*