Economics and The Public Welfare

Chapter 53

The Spending Programme

The spending programme began in December of 1933 and was officially announced on January 4 of 1934. It was one more gigantic dose from the medicine man’s pharmacopoeia. The Administration had begun with the pledge of a reduction of 25% in the expenditures of the Government. The Democratic platform had promised it, and the President promised it in his campaign speeches. The President had apparently been in earnest about it as his Administration began. He had persuaded the Honorable Lewis W. Douglas, Congressman from Arizona, one of the very able and upright men of the country, to assume the position of Budget Director with the view to carrying out the pledge. Mr. Douglas had worked strenuously and effectively, cutting out a great many Government extravagances and reducing Department budgets, and in the course of this resisted an immense political pressure. Expenditures were high in view of the new farm legislation, the agricultural mortgage legislation, the activities of the Reconstruction Finance Corporation, and other special expenditures, but these were looked upon as emergency things which would drop into the background with recovery. A balanced budget was aimed at in the not distant future. Taxes were raised sharply. The new agricultural programme, which was to provide a great deal of money for the farmers, was still intended to be “self-supporting” in that the processing taxes on agricultural products were supposed to provide the money that the farmers got. It must be said, however, that the Agricultural Adjustment Act itself provided an extra 100 million dollars and that the Bankhead Amendment to the National Industrial Recovery Act provided an additional 100 million dollars, both to be obtained from borrowing. But, in terms of all the rest of the New Deal years, 1933 was not a year of heavy spending. The total governmental expenditures for the first eleven months of 1933 were $4,518,000,000.

Begins December, 1933. Expenditures were 505 million dollars for the month of November of 1933. They moved up suddenly to 703 millions in December and to 956 millions in January of 1934.

Keynes Had Seen President. Mr. Keynes had seen the President. Mr. Keynes and his followers had at one time believed that monetary manipulations alone could make prosperity, but Mr. Keynes had apparently already reached the conclusion that this was inadequate. In his book, The General Theory of Employment, Interest and Money (page 164), Mr. Keynes indicates that he has reached the conclusion that monetary manipulations need to be supplemented by government control of investment, and he had apparently reached this conclusion very definitely by 1933. The President accepted the doctrine. It is possible, of course, to attribute too much influence to Mr. Keynes in this connection, and one cannot pretend to know precisely what forces moved the President to this decision.

President Promises Deficit of Seven Billions by June 30, 1934. On January 4, 1934, the President announced the great spending programme in his Budget Message. The President indicated that there would be a Federal deficit for the fiscal year, 1934 (that is to say, by July 1 of 1934) of over 7 billion dollars. We must credit the President with every sincerity in this forecast of a 7-billion-dollar deficit. We must credit him with trying by every possible method to achieve it. The late unlamented CWA, the leaf-raking and snow-shoveling programme, was part of this expenditure. A multitude of other things were involved in it. The Government loan organizations were pressed to lend more money. The all-important thing was to get money, borrowed money, out of the Treasury, to make prosperity.

But, Despite Honest Effort, Achieves Deficit of Only Four Billions. But with all his good intentions, the President could not spend money that fast. The loan organizations were, after all, manned by men who had financial training and who felt a responsibility for the Government’s money. They could not make loans which were nothing but gifts. They had the same ingrained reluctance to give away money that the mules on the farms had exhibited in the preceding summer to trample down rows of corn or rows of cotton. It was against nature. The President’s achievement was great, however. He did achieve a 4-billion-dollar deficit1 by June 30, 1934, the end of the fiscal year.

Results of Programme. An evaluation of this spending programme and its effect upon business is not difficult. The curve of industrial production had dropped on the Federal Reserve Index (old series) from 100 in July to 72 in November of 1933. If we attribute all of the business history of the ensuing ten months to the Government’s spending programme, the record is very disappointing. Business rallied from the 72 index number of November, 1933 to 86 in May of 1934.

Then the curve turned sharply downward and by September, 1934, it had dropped to 71, one point below the level at which it started in November, 1933. In September, moreover, there came a grave disturbance in the Government bond market and a grave concern regarding the Government’s credit.

The Silent Panic in Government Bonds, September, 1934. The published figures of Government bond quotations on the New York Stock Exchange are startling enough. The 3 3/4’s of 1946-1956, which had closed at 106 1/32 on September 4, dropped to 103 21/32 on September 12; the 3 3/8’s of 1943-1947, which had closed at 103 20/32 on August 25, dropped to 100 10/32 on September 12; the 3’s of 1951-1955, selling at 100 5/32 on September 4, had a low of 98 11/32 on September 12, and closed at 97 27/32 on September 17; the 4 1/4’s of 1947-1952, closing at 112 3/32 on September 1, closed at 110 30/32 on September 5, at 109 8/32 on September 12, and at 108 24/32 on September 19. The average yield on United States Government bonds, as computed by the Treasury, which had stood at 2.85% as the average for July, 1934, rose to 3.20% as the average for September, 1934. The three- to five-year Treasury notes performed much worse than the long-term Government bonds. They had had a yield in July of only 1 1/2%, but this rose sharply in the September panic to nearly 2 1/2%.

But these figures are the publicly recorded figures based on quotations on the New York Stock Exchange. The bulk of Government bond transactions is in the “over the counter” market, a market in which the bond departments of the banks play a very important role. Here there was quiet panic. Government bonds in large blocks in the worst of the panic period, September 4 to September 12, were often very difficult to sell and would sometimes break a point between sales. Telephone communications between interior banks and their New York correspondents, with the interior banks frightened and the New York banks none too happy—in which orders were given to sell large blocks “at the market”—not infrequently found the New York bank suggesting to the interior bank that the price be limited and that time be given to work off the order.2

The episode passed. The Government bond market cleared up. The supposition was that the Stabilization Fund stepped in and manipulated the market, using the Federal Reserve banks as agents, and doing things which the Securities Exchange legislation of 1934 had forbidden to private financial institutions. But the Government was not obliged to make a report to the Securities and Exchange Commission, and one can only state what the financial community believed at the time, rather than what was publicly known. A responsible Federal Reserve official stated privately in 1946 that only the Federal Reserve banks acted, and only with their own funds, and that the amounts involved could be obtained from their published records. It appears, however, that his memory is in fault. One finds no increase in the Government bond holdings of the Federal Reserve banks for the month of September, 1934. Indeed, there was a decline as compared with the month of August. Nor is there any appreciable change in the total Government security holdings of the Federal Reserve banks in the period, August, September,3 and October, 1934.

Those who look upon Government spending as a sure magic for bringing about business revival should study very carefully this period, November, 1933, to September, 1934. This episode in our very recent history should surely shake confidence (on the part of those who have it) in pump-priming through Government deficits as a certain means of bringing about large results or lasting results. The first ten months brought business back to a point below where it started, and damaged the credit of the Government. It was very costly, and the results at the end of ten months were less than zero.

Contrasted with Economy Programme, 1921-1923. It is worth while to contrast the spending, pump-priming policy of the Government in 1933-1934 with the old-fashioned economy programme of the Government in 1921-1923, in a preceding chapter. In 1921 the Government did not know about the new wisdom of Mr. Keynes. Its financial job was to protect its own solvency, to protect the currency, to reduce public expenditure as rapidly as possible from the wartime levels, and to cut taxes. Business recovery, of course, the Government desired, but business recovery was for the people to bring about and not for the Government to engineer. Employment was something for the people to find, not something for the Government to give. The Government, as a matter of course, protected the currency in its full integrity. The gold standard was unshaken. The Government steadily reduced public expenditures (not including public debt retirement) from $6,403,000,000 in the fiscal year 1920, to $3,295,000,000 for the fiscal year 1923.

The Government cut taxes, also, but not so much. Taxes in the fiscal year 1920 were $6,695,000,000 and for 1923 $4,007,000,000. The Government reduced public debt in the crisis year, the fiscal year ending June 30, 1921, by 300 million dollars. And from June 30, 1920 to June 30, 1923, it reduced public debt by approximately 2 billion dollars.

The Government steadily reduced Federal employees and Federal payrolls. Army and Navy were, of course, reduced, and there was also a steady decline in the number of civilian employees of the Government.

In August of 1921 the tide turned from acute depression, and we had a labor shortage in the spring of 1923.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.