Federal Finances and the New Deal

I

MY subject is the relation of the future condition of the federal finances to the whole body of experiments and policies known as the New Deal, as distinguished from the merits of any or all of these experiments and policies. My thesis is that the fate of the New Deal, taken as a whole, will ultimately be determined by the answer to the question whether the federal expenses can be met without an excessive rise in prices — ‘inflation’ — on the one hand, or taxation beyond bearable limits on the other hand. My premise (for which I shall give reasons) is that the majority of the people will be unwilling to permit the necessary fair period of trial to the new measures, if the majority become convinced that a continuance of the policies will involve either a radical cheapening of their money (and consequent impairment of their savings and purchasing power) or, alternatively, an oppressive increase in taxation.

I shall seek to appraise the strength of the contending forces which will fight out this controlling issue. And finally I shall venture — with a due sense of uncertainty — a few observations as to the outcome of the struggle which, now only in its initial stages, must inevitably continue to a finish.

I shall discuss these questions in what, I hope, is an impartial spirit. And I shall discuss them from the standpoint of one who believes that, in the long view, it will be better for our country if the New Deal policies are allowed a reasonable ‘test period’ in which their individual and combined merits may be determined in the fire of experience, rather than that the whole programme shall be swept aside in a wave of reaction due to causes having nothing to do with the merits of the policies as such. The dangers inherent in such a reaction (caused by the revolt of a baffled and disillusioned people and following upon an imprudent management of the nation’s finances) have, I believe, been too little recognized both by friends and by opponents of the New Deal.

II

Both common sense and the teachings of history confirm the conclusion that it is unreasonable to expect a majority of the American people to support or even tolerate the New Deal if it once becomes apparent to them that further continuance of the policies would result in breakdown of the nation’s financial stability.

I may illustrate my point by a simple example, of a sort which almost any man of business or lawyer could recall in his own experience.

Let us suppose that a manufacturing establishment with five hundred employees has run into difficulties through a combination of circumstances. The market for its product has decreased; its inventory has become excessive; the price for its product has been cut in half; it has been obliged to reduce wages and salaries and to lay off employees, who are, in consequence, either disgruntled or despairing; parts of its plant have deteriorated; the morale of its officers and employees has fallen. In this state of affairs, the workers and proprietors have called in a new and promising manager who starts in at once with a new vigor. He exhorts the executive staff and the workers; he holds out hopes of reëmployment to those who have been laid off and of relief to those who cannot be immediately taken back. He proceeds with a series of novel reforms in the conduct of the business; he inspires new hope, and the personnel, almost without exception, take on new life and spirit. Under these stimuli morale is enhanced and, although production is increased only temporarily, prices for the factory’s product rise; wages are increased at least in proportion; through reduction of hours of work, some of the unemployed workers are brought back, while generous relief payments are made to those for whom a place cannot be found.

Under these conditions, it is but natural that virtually all concerned should be pleased with the change. Here and there, indeed, some of the more experienced might inquire how much increased indebtedness the balance sheet of the enterprise will show. But, on the whole, the verdict on the new manager and the new policies is favorable and even enthusiastic.

But now the first year has passed and it is time to receive a comprehensive report. It appears that the bonded debt of the enterprise is increased by $40,000; the costs of operation are likewise on a higher level, and the volume of business, after the initial spurt, has fallen off again. New doubts are expressed by workers and proprietors alike, because the more informed and experienced realize that their interest in the long run is a common one. But the infectious spirit of the new manager and the obvious improvement in many directions carry the day; and the judgment of the majority is to give the ‘new deal’ in the enterprise a further period of trial.

Time passes; the picture becomes more confused; the price of the product is again slightly increased, but costs also tend to go upward and the market does not expand. More important still, the relief payments to the unemployed workers (or those on part time or improvement or ‘made’ work) have grown by leaps and bounds. The net result is that the new manager is obliged to inform the second annual meeting that he has been forced to borrow further and the debt of the enterprise is now increased by $40,000 more.

By this time the prior murmurings have increased, human nature has begun to react in an age-old manner, and, although the manager is still permitted to proceed, it is only with the grave warning that unless he can accomplish his purposes without any further material increase of debt a change will become necessary. It will by this time be sufficiently apparent that, although the enterprising manager may have a short further period of trial, his every act will be closely scrutinized, and that if on further occasions he is obliged to report a still further increase in debt, unduly burdening the business for a long period, he had best look out for another job.

If we enlarge this example about 100,000 times, may it not be considered a fair picture of the progress of affairs in the United States and the likely reaction of a majority of its proprietors — the voters — unless the threatened instability of the nation’s finances is got in hand?

We have not, perhaps, reached in this country even the stage of the second annual meeting in our illustration. But the murmurs of the experienced and farsighted are beginning to be heard; and common sense teaches that, unless quieted by more prudent policies, the murmurs will rise from an undertone to general utterance and next to a loud and perhaps sullen roar, and at last to an imperative and possibly sudden demand for a change of administration.

When one considers the matter coolly, there is indeed nothing in the history or psychology of the American people to justify the belief that they would seriously contemplate leaving in power a government which, however beneficent its purposes and popular its head or helpful its reforms, proves itself unable to manage with reasonable prudence the strictly business affairs of the country.

It is not as if the majority of the people were either ill-informed or inert. On the contrary, the majority of the voters are well aware that they and their families would inevitably suffer serious damage, or worse, if anything resembling a real breakdown of the national finances should occur. The majority of the people may not be deeply or widely educated; indeed it is certain that they are not. But on the other hand, they are sufficiently informed by the news which comes to them from the press, the magazines, and the radio, of the damage suffered in Europe by the wage earners and the middle classes through the impairment of national finances.

It would, therefore, be a delusion to suppose that even at the present moment the majority of the people are not fully conscious of the loss of real value in their savings, wages, and salaries which (at least temporarily and possibly for a long period) would ensue upon a continuance of the vast deficits in the national budget.

If no great organized resistance has appeared, it is a mistake to suppose that this is due to a lack of popular capacity to grasp the future implications of continued national expenditures in excess of receipts. A shrewd common sense is too widely diffused among the people to permit of any such conclusion.

Rather, I suggest, the absence of any strong resistance up to the present time is due to other causes — to the ineptness or misfortune of the former régime, to the sporting spirit of the American people which inspires a wish to give the new chief-of-state a ‘fair show,’and, undeniably, to admiration of the charm and vigor of the new leader.

The point to observe, however, is that this state of affairs is necessarily temporary. With all imaginable tolerance, good will, and personal admiration, it must, in the long run, remain true that, as a matter of common sense, and because they have too great a stake involved, the majority of the American people would, however reluctantly, be obliged to seek new leadership if the present régime were unable prudently to manage the financial affairs of the nation. Those who judge otherwise do not, I believe, fairly appraise either the common sense or the capacity for action of the American public.

This conclusion is in no wise dependent on the results of the recent election, for the country has not yet suffered the impact either of greatly increased federal taxes or of much higher living costs.

We may therefore, I think, confidently assume that whether the sponsors of the New Deal will be permitted to test even reasonably all their policies and experiments will depend primarily upon the answer to this question: —

Will the administration be able so to manage the national finances as to convince the country that a continuance of the New Deal will lead neither to radically cheapened money nor, alternatively, to excessively high federal taxation ?

III

If, then, it be granted that the New Deal must ultimately stand or fall upon the question of ability to preserve national financial stability, it remains to seek an appraisal of the strength of the opposing forces whose conflict will determine the issue.

At the outset one is struck by the fact that the contending masses are not mobilizing either on traditional party lines or even on ‘conservative’ or ‘liberal’ lines. It is a vital fact that the Republican Party has wholly failed to grasp the issue of sound national finance. Some of its spokesmen have indeed uttered protests against the effort to ‘spend ourselves into prosperity.’ But these cries have been little supported by action. Indeed, on the acid test of supporting the President in his veto of the increased veterans’ benefits and civil-service pay, in April 1934, only two Republican members of Congress (significantly they were representatives from Massachusetts) could be found to cast their vote against these large fixed charges.

Nor does the cause of sound national finance lack support from liberals. If all true conservatives naturally postulate that sound money is fundamental to national welfare and that a balanced budget is ‘always and everywhere the foundation of monetary stability,’ it is also true that liberals are more and more recognizing that stable national finance is essential to a fair trial for the New Deal. They recall the wise saying of the President himself in his Economy Act message of March 10, 1933: ‘Too often in recent history liberal governments have been wrecked on rocks of loose fiscal policy’; and that it ‘is too late for a leisurely approach to this problem.’

In the front line of the forces of stability will, therefore, be found strangely assorted comrades, — Republicans and Democrats, conservatives and reactionaries, liberals and even radicals, — standing together, though for diverse reasons and motives, in a common cause.

Moreover, there will be adherences and absences from the front-line troops on either side which at first blush may seem surprising. For example, the bankers — though some may struggle valiantly as individuals — will hardly form a compact and aggressive division. This is sufficiently clear from the recent convention of the American Bankers Association, where a far from fighting spirit was shown on the question of making a prompt and determined effort to achieve a balanced budget. Under the circumstances, however, the defection is normal. Besides their inherent caution, the bankers of the nation are, as a group, so much subordinated at the moment that they may be compared to a battered and shell-shocked division which must be rested and exhorted before it can again be fit for hard fighting.

As the contest develops it will also appear, I suggest, that the small but sometimes powerful group of persons of large means will throw but little weight into the scale on either side. This class would lose least, or even not at all, in a great inflation, having means of protecting themselves through speculation and the holding of equities — while as to taxation they can seek the refuge of tax-exempt bonds. Thus they will not have the vital stake in the contest which might lead them to the forefront of the battle.

On the other hand it may be safely predicted that organized labor will be a cohesive and powerful force on the side of stability. Already the American Federation of Labor has shown a keen insight into the threat to real wages inherent in a depreciated dollar, following upon unbalanced budgets; and as the pressure increases, self-interest alone will doubtless compel a disciplined resistance on their part.

But the main body of the anti-inflation army will, as the critical contests draw near, be composed of that great body of average, middle-class citizens who own a little more than they owe, who for lack of knowledge and means to speculate must necessarily keep their savings in fixed-income securities (largely in savings-bank and life-insurance funds), and who are mainly dependent upon wages and salaries. These include the millions of ‘white collar’ workers (civil servants, teachers, clerks, and the like), skilled mechanical and engineering workers, pensioners and annuitants, educational and charitable institutions and their staffs, the clergy, and many other similar groups — in all a vast array. Indeed this great army will so outnumber the forces of financial instability that there could be no doubt of their victory save for two questions: —

Will they be paralyzed by defeatism? Have they waited too long before realizing their danger?

IV

Of all the reasons casting doubt upon the outcome of the struggle for stabilized national finance I suggest that the possibility of a defeatist spirit is the most important. Here the analogy to the development of a great war is applicable. Granting the truth of Napoleon’s maxim that victory goes to the heaviest battalions, it is implicit in the saying that the battalions shall be inspired with a will to success at least equal to the enemy’s.

Undoubtedly there is now a widespread, though usually whispered, spirit of impending defeat even among those to whom a radical cheapening of the nation’s money would mean no less than disaster. Mainly this feeling exists among those who, for lack of attachment to any organization, find themselves baffled to give effect in action to their instinct of self-preservation.

This particular cause of defeatism may, perhaps, be merely temporary. In conformity with an old rule of human nature, this form of despair vanishes as the recruit takes his place in the ranks and finds himself moving with others under competent direction. As the danger gathers, will adequate organization and leadership develop for the forces of stability?

The other main source of defeatism is doubtless the superficial hopelessness of checking the growth of the relief expenditures. Encouragement has been given even by responsible writers to the idea that forces have been set in motion which no effort can now control; and the feeling has been ironically expressed in the popular saying, ‘Who ever shot Santa Claus?’

In the face of a supposedly large volume of reëmployment we have been confronted with the paradox of a growth in the relief rolls. Only recently we have been officially informed that 20,000,000 persons will be ‘on relief’ in the coming winter, notwithstanding the reëmployment of several million workers. In these conditions the questions naturally arise; What is to prevent these beneficiaries, combining with the veterans and the speculators, from piling up the emergency expenditures month by month until the inevitable breakdown occurs? In view of the infirmities of human nature, must not this process run its course? Have not forces been set in motion which are beyond control? Is it not the part of wisdom to give thought to salvaging the pieces when the car smashes up at the bottom of the hill, instead of wearing ourselves out in an exhausting effort to bring it under control?

But there is nothing new about this sort of sentiment. As long as hard contests continue in the world, — presumably forever, — some of the contestants will be afflicted with similar feelings and will be able to supply ample arguments to satisfy themselves that the struggle will be futile. All that can be said is that it probably does not comport with the interest or psychology of most of our people to take the impairment of their savings and earnings ’lying down.’ After the initial dismay this form of defeatism will, I suggest, be dissipated and is, indeed, likely to be replaced by a firm intention to end promptly an intolerable situation.

What will aid more than anything else in restoring a spirit of resistance is the formulation of concrete plans to deal with the relief problem within the limits of the people’s capacity. No one should or does deny the obligation to protect the unemployed. But more economical methods must plainly be pursued through the return of responsibility to local communities, through tightened administration, and through less expensive methods of relief.

There has indeed been a marked absence of well-considered plans to deal with the relief question, which is now universally recognized as the crux of the federal financial problem; and this lack of a definite way out is a partial cause of the prevalent tendency to complain or despair rather than to organize and to act. Here again is a manifestation of human nature. A man wandering in a dark cave surrounded by vague dangers will lose his courage and believe himself exhausted; but when even a spark of light; appears at the entrance he forthwith finds his strength and spirit amazingly revived.

In truth it is entirely feasible to stabilize our national finances (not at some indefinite future day, but within a year) through a combination of reduced federal expenditure for relief, — and this without undue hardship, — together with additional taxes which would be within bearable limits. Doubtless definite plans to this end may be expected — if not from government, then from private sources. Their publication and discussion may be expected to dissipate much of the existing sentiment of defeat which now rests upon a feeling of frustration.

I believe not only that feasible methods exist to balance our national accounts, but also that it is not too late to apply them. A period, though perhaps short, still remains wherein the administration and the public will be given an opportunity to check the slide toward national bankruptcy which, beyond a certain point, would indeed attain irresistible momentum.

The event will depend mainly upon the vigor, intelligence, and spirit of the public. But it will also depend upon the wisdom and resolution of their chosen representatives.

V

I have emphasized the trend of public opinion as the finally decisive factor. In fact, however, who can say what relative part in the decision will be taken by the personal decisions of the President?

I would not revive the old and often futile debate as to whether the chief-of-state leads or is led by the opinion of the mass. The truth is that sometimes he can disregard public opinion, sometimes he can form it, sometimes he waits to follow it, and sometimes he is driven headlong, as if for his life, before an overwhelming tide.

However this may be in general, it is undeniable that in the immediate future the individual outlook of the President alone will exercise a vast influence upon the fate of the federal finances.

Will he take hold in time? Will he firmly resist inordinate further expenditures? Will he resolutely advocate practical measures to make a reality of his announced policy to achieve a balance of receipts and expenditures in the fiscal year 1936? Or will he drift and be driven by the forces of instability until disaster is precipitated?

The answers to these questions will indeed depend ultimately upon the course of public opinion. But immediately will they not largely depend upon the character and predisposition of the President himself?

Here one would have to consider the President’s background, his training, his prior utterances, and the character of his advisers — all acting upon and yet daily affected by the underlying tide of majority opinion as it gradually develops.

One would be bold indeed to predict with confidence the workings of an individual mind, a hazard far greater than a prediction of the trend of mass opinion which tends to conform to more general laws. And yet one may venture one observation. The President and his advisers are human beings and are thus influenced by the normal human desire that a favorable verdict shall be pronounced upon their work. They will have no wish to be regarded in history as no more than benevolent and well-meaning men who, when the test came, were lacking in practical capacity to manage prudently the practical affairs of their people.

As bearing on the present situation, Professor C. J. Bullock recently referred to Machiavelli’s chapter in The Prince on the liberality of rulers. Almost exactly four hundred years ago the Florentine wrote these words: —

Therefore, a prince . . . ought not to fear the reputation of being mean, for in time he will come to be more considered than if liberal, seeing that with his economies his revenues are enough that ... he is able to engage in enterprises without burdening his people.

And further: —

There is nothing wastes so rapidly as liberality, for even whilst you exercise it you lose the power to do so, and so become either poor or despised, or else, in avoiding poverty, rapacious and hated. Any prince should guard himself, above all things, against being despised and hated; and liberality leads you to both.

If some of the maxims of Machiavelli seem hateful, by our present standards, others remain as the essence of wisdom. Is it too much to hope that, as the months pass, those in power may ponder the advice of this old expert in the art of government?

VI

I have tried to suggest why the fate of the New Deal is inextricably bound up with the question of whether its sponsors prove able to manage prudently the financial affairs of the country. More concretely, I have said that the question is whether the administration can carry through an adequate test of its policies without either an excessive rise in the cost of living (radical inflation) or excessive taxation. And I have tried also to indicate some of the factors which will determine the issue.

In summary, these suggestions come to this: —

If the administration (whether upon its own initiative or under a growing public pressure) can establish a more effective control over federal expenditures and, by such control, aided by reasonable additional taxes, can bring about in the near future a balanced budget which alone can be the basis of sound money and public confidence, the majority of the people will then be well content to afford every fair opportunity for the New Deal experiments and policies to prove themselves.

But, on the other hand, if the deficits should continue, with the inexorable choice ahead between radically increased prices and radically increased taxes, it would not be in accordance with experience or with the temper of the American people to suppose that the New Deal would long survive. In such circumstances it would seem that, for good or ill, and whatever the pity, the New Deal would soon lie among that collection of benevolent but unworkable experiments which history records.

Moderate men sympathetic with the New Deal must hope that it will not find shipwreck on what the President has called ‘rocks of loose fiscal policy.’ And other moderate men, however desirous of the termination of policies which they deem unsound, must also wish that the end of the New Deal shall not be the result of the chaos which would ensue from a collapse of national financial stability.

In either case there is an obligation to do more than complain in private. Irrespective of differences on other questions, is it not the duty of all who have the welfare of the country at heart — New Dealers, Old Dealers, conservatives, and liberals — to take active part in the coming battle to sustain the finances of the nation?