We Can Pay the War Bill

» By what bold strokes on the part of private industry and the government can we avoid a National Depression when the war is over?

by ALVIN H. HANSEN

1

ARE we bound to be impoverished by the war; will our standard of living fall drastically for a generation or two after the peace? I feel strongly that most people expect impoverishment and a lowered standard of living.

History suggests that countries recover from the ravages of war with amazing speed. John Stuart Mill referred to this fact in the middle of the nineteenth century, and we have had many evidences of it since that time. Dr. Arthur Lyon Bowley’s study of the standard of living of five English towns in the middle twenties disclosed that only half as many people were living below the poverty level as in 1913. Measured by various criteria, such as nutrition and housing, or the purchasing power of wages received, the standard of living was higher than before World War I.

Similarly we have a good many studies comparing the position of the working classes in Germany in the late twenties with that of 1913. These led to the same conclusion. Germany staged a perfectly amazing comeback in the latter part of the twenties. It is seen in the rebuilding of her merchant marine, the re-equipping and modernizing of her railways, the building of factories equipped with the most up-to-date machinery, the great housing program and public works of all sorts, and, in general, in peaks of employment at real wages higher than before the war.

When one comes to think of it there is no good reason to expect that we should be impoverished by the war or that we should have a lower standard of living — if we manage things at all wisely.

In the first place, I should like to point out that when we win we shall come out of this war, as a nation, completely debt-free. That is to say, we shall not owe any other country anything. We shall not have to pay tribute to any other country. (About the internal debt I shall have something to say later.) More important, however, is the fact that we shall come out of this war with a larger productive capacity than we have ever had. We shall have fabulous productive capacity in the great basic industries, in iron and steel, in machinery and machine tools and the like. And while certainly our peacetime industries will have been starved of modern equipment, — the more so the longer the war lasts, — these industries can very quickly be re-equipped with the best modern machines by reason of the productive capacity in the basic industries. Competent statisticians have suggested that our manufacturing productive capacity may be 50 per cent higher, or more, by the end of the war.

We shall also come out of the war with a larger proportion of our working population trained and skilled to work in modern industry than ever before in our history.

So, from the production and engineering standpoint, there is every reason why we should have a far higher output, a higher real income than we have ever experienced before, if we manage our economy so as to use our productive resources to the full.

With respect to this particular point, I should like to direct your attention to the calendar year 1941. I think we can learn a great deal from that year.

2

Our last peacetime year was 1941. Our war output was still a relatively small amount compared with the vast program upon which we have now embarked. We had not yet encountered restrictions. Our 20-billiondollar Federal budget, including 13 billions for defense, did not yet encroach seriously upon private consumption and private investment. Indeed, as the event showed, it induced (through the increased flow of purchasing power which the defense program poured into the economy) an expansion of consumption and investment. The year 1941 was a wonderful demonstration of the potentialities of expansionist economics.

In that year we had a per capita output 20 per cent higher than in any previous year in our history. From an engineering and production standpoint, that was an amazing performance. We had a record output of durable consumers’ goods — 10½ billion dollars — and at the end of the year we were better equipped, per capita, with automobiles and all sorts of durables than ever before. We had a higher level of output of non-durable consumers’ goods, such as food, and semidurables, such as clothing and the like, than we had ever produced before. Consumer expenditures totaled 76 billion dollars — 10 per cent in excess of the previous peak of 1929. Besides, the production of capital goods, public and private, was far higher in the year 1941 than ever before. War plant and equipment to the amount of nearly 10 billion dollars were financed by the government. And when one puts public and private together, one reaches a total capital formation of 28 billion dollars — about 9 billion dollars above the previous peak year, 1929.

We did all this on a 40-hour week, and we still had 5 to 6 million unemployed. Even today there are still 3½ million of the labor force unemployed. The year 1941 was a fabulous demonstration of output under modern technical conditions.

Compare the calendar year 1941 with the fiscal year 1943. It is now contemplated that we shall produce in fiscal 1943 some 70 billion dollars of war output. The President, in his January message, used the figure 56 billion dollars, which almost everybody thought was fantastic. We know now that it was considerably too low. In March of this year, war expenditures were 3 billion dollars; in July they totaled 4 billion. A year ago the figure was only 750 million dollars a month. The curve is rapidly rising to 6 billion per month.

Now if we spend 70 billion dollars on the war in the fiscal year 1943, that will be 57 billion dollars more than our war output in the calendar year 1941. These figures are so fantastically large that they challenge credulity. How can a country produce any such fabulous amount and still supply a sufficient output of civilian goods to maintain the health and efficiency of the population?

The answer to that question is twofold. In the first place, modern economic societies, even in good years, have a very considerable amount of slack in their system. In 1941, as I have just said, we produced an unprecedented output and still had 5 to 6 million of the labor force unemployed, and we did it on a 40-hour week. If the unemployed labor force is absorbed; and if working hours are increased, let us say, to an average of 48; and if in addition we tap the large potential labor supply not ordinarily included in the labor force, as we did indeed in the last war, — younger people, older people, women, and all those employed in more or less useless occupations in which people find employment when there is a slack demand for labor, — the total potential expansion is a very considerable amount. By taking up the slack, we can produce perhaps 18 or 20 billion dollars of the 57-billion war output that we must produce in the fiscal year 1943 over and above that of the calendar year 1941.

Secondly, modern societies are extraordinarily rich; that is to say, they have vast accumulations of wealth, which from the social standpoint means an accumulation of stocks of goods of all sorts. It means manufacturing plant and equipment, railroads, public utilities. It means stocks of durable consumers’ goods, automobiles and household equipment, electrical appliances and the like. It means large stocks of raw materials, semi-finished and finished goods. Already possessed of a very large amount of durable goods, whether capital goods or consumers’ goods, it is possible for us to quit producing those things for a long time while continuing to use what we have. The result is that the utility derived from these things keeps on flowing at about the same rate as before, even though the public ceases to buy them altogether. Our peacetime consumers’ industries are well equipped with plants and machinery and they can keep on producing for several years without any significant decline in output, even though there is not a single new machine installed. We can thus convert our productive resources away from both producers’ and consumers’ durables over to the war effort. It is estimated that by this conversion we can increase war output by something like 22 to 25 billion dollars over and above the 1941 level. Difficulties will arise, particularly with respect to rawmaterial shortages, but these are believed to be manageable within the limits of the projected program.

That brings us up to 45 billion dollars out of our 57 billion dollars increased war output that we must make over and above the calendar year 1941. The rest of it must come from a conversion of resources away from the non-durable and semi-durable consumers’ goods, including clothing and the like. We can probably spare 10 or 12 billion dollars converted over to the war effort without feeling the pinch appreciably. In other words, the point I am making is that even though we do produce 70 billion dollars of war output in the fiscal year 1943, we shall discover, much to our surprise, that our standard of living, in contrast to our volume of consumption expenditures, will be pretty high. If we look at these figures superficially, we may be inclined to think that our standard of living must fall drastically. It will indeed fall in the sense that we shall not be buying things at the former rate, but we shall continue to enjoy things we already possess, and our standard of living will not fall anything like so much as the figures seem to indicate.

We shall have plenty of food, I am sure, and we shall have plenty of the necessities of life to maintain health and efficiency, and we shall continue to enjoy all these stocks of durables that won’t wear out for quite a long time.

3

Such a gigantic conversion in so short a time, with the consequence that half of our productive resources will be devoted to war, involves of necessity a terrific dislocation of industry. Must there follow from it a tremendous inflation of prices?

We know that wars in the past have always been accompanied by price inflation; but we know also that in this war the experience to date is rather different. This indicates a large advance in social and economic planning. All countries began this war with a quite different attitude toward planning and control from that which prevailed in the last war. The result is that in most countries we find thus far nothing like the price inflation that occurred, if one makes a month-by-month comparison, at a comparable period in World War I.

We are doing much better than we did in the last war. In the last war, in a comparable period, we had experienced a rise in prices more than three times the increase in prices at the present moment. If one considers England, one may accept the argument of Professor Arthur Cecil Pigou that there has not been any important price inflation at all. It is true that wholesale prices and the cost of living were readjusted to a higher level almost immediately upon the outbreak of war. This rise, however, was due not to inflationary pressures but rather to the fact that the British decided to allow the pound to drop. Under world conditions then prevailing, import prices rose in England by the full amount of the depreciation. Import prices were further increased by higher freight rates. These two main factors account for the British price rise.

With respect to this country, we have had a relatively moderate increase up to the present time, corresponding on the whole to the slightly steeper price increase that occurred in the first two years of World War I. If we had stopped there (say at the level reached at the middle of 1916), we should not have had any price inflation worth worrying about. Then, as now, the price increase — up to the middle of 1916 — was very largely associated with, and indeed facilitated, the increase in output.

In World War I, the major price inflation in the wholesale markets occurred in two relatively brief intervals: (1) in the nine or ten months at the end of 1916 and the early part of 1917, and (2) in the post-war period from April, 1919, to July, 1920.

We have now reached a point analogous to mid-1916 just before the great World War I inflation developed. War expenditures have risen from 750 million dollars a month, a year ago, to 4 billion dollars a month in July of this year, and will probably reach 5 or 6 billions by December of this year. The money income receipts of individuals have twice the money value (in terms of present prices) of the consumers’ goods that will be available during the fiscal year 1943. We must take drastic measures now.

We must tax excess corporate profits to the limit. But we must also adopt much heavier taxation of incomes below $3000. Here indeed is the great mass of excess purchasing power from which arises the main inflationary pressure. It may well be that we ought to adopt a war consumption tax levied at retail, billed separately so as not to confuse the tax with the price. I am wholly against a retail sales tax for peacetime. It is bad for business and bad for employment. If passed during the war, it should carry a clause providing for its automatic repeal as soon as the emergency is over. But during the war it could mop up a large amount of purchasing power.

And even a greater volume of excess purchasing power should be mopped up through a program of compulsory savings.

4

It is perfectly clear that, after the war is over, we cannot undertake a stupendous reconversion of our resources rationally without continued effective controls. It is utterly foolish to conceive of this reconversion period as in any sense normal. The reconversion will entail just as drastic a distortion of the economy as the conversion from peace to war. And if we let our controls go as soon as the war is over, we shall certainly have a violent post-war inflation. It will not afford much comfort to have prevented a wartime inflation only to experience a tremendous inflation when the war is over. When the reconversion process is completed we can then safely remove the wartime controls.

The reconversion will be on a far vaster scale than in World War I. Millions of people will gradually be discharged from the military forces and from the war industries. The automobile industry alone will have a million and a half people employed — a million more than the automobile industry employs under peak peacetime conditions. Add shipping, aircraft, the iron and steel and the machine-tool and the metal industries, and it is clear that there will be some 15 million people who must be shifted over from the military forces and the war industries to peacetime employment.

After World War I we experienced an immediate post-war boom. That boom gave us a serious post-war inflation. It was based upon essentially three things. First of all, the peacetime industries had been starved of plant and equipment during the war and there was a higher investment from September, 1919, to September, 1920, in plant and equipment than we had at any time during the war period or in the boom years of the twenties. On top of that, we had a violent scramble for raw materials, a building up of inventories all around, which led to a strongly speculative boom. In addition, the export of agricultural products to Europe increased after the war despite the high levels that had been reached during the war.

This time, similarly, if the war lasts any considerable period, there will be large accumulated shortages of automobiles, household equipment, and electrical appliances. There will be large accumulated shortages in housing and in plant and equipment for the peacetime industries. On the basis of all of these, we may expect in these areas a very intense boom.

But the change-over this time will be so enormous, so many millions will be involved, that we may also expect, side by side with boom and inflation, a large amount of unemployment. This we must strive to prevent by making systematic plans for reemployment.

Now we come to a longer view of the postwar situation. What may we expect after the change-over following the immediate post-war boom in durables? History indicates — though there are economic historians who dispute it — that wars are a tremendous stimulant to technological progress. Out of dire necessity created by war spring new products, new methods of production, new uses of resources. We are discovering in this war new substitutes. The whole rawmaterials picture is going to be drastically different. The developments now going on with respect to substitutes and methods of production may well revolutionize the building industry. Out of the tremendous new experience in the fullest possible use of our resources, there is good reason to believe that we shall experience a technological revolution so far-reaching as to provide the basis for a substantial private investment boom.

One thing more we do know. We need only look back into our history to learn that we must expect a serious post-war depression sooner or later. I hasten to add that depressions are not simply a phenomenon caused by war. We have frequently had depressions, long and serious, that had no connection whatever with war. We must therefore conclude that unless we adopt bold policies very different from those pursued in the past we shall sooner or later run headlong into very serious depressions. And there are many potent reasons why we may indeed expect worse depressions in the future than in the past.

Modern societies are more sensitive to depressions, are subjected to greater strain in periods of unemployment, than were earlier societies, which were more rural in character. It is the urban and industrialized community that suffers most severely under depression, because this community peculiarly experiences the phenomenon of unemployment. The rural economy indeed suffers a fall in prices, but the population can obtain sufficient food. For this reason there is a powerful tendency, in depression periods, for the urban population to go back to the land in order at least to obtain subsistence.

5

The thing we need to grasp very clearly is that the key to employment, the key to full activity in our future economy, lies essentially in the field of capital or investment expenditures. (Ways and means of increasing consumption should not, however, be neglected.) Yet investment is a relatively small part of the whole economy. Nevertheless it is essentially the dynamic and controlling part. It is in the investment area that the state needs to enter in a much larger way than it has in the past. But this does not mean that the government must enter the field of production, since public development projects can largely be constructed under private contract. Moreover, it is only a relatively small sector that the government needs to enter — one that private enterprise, for the most part, cannot enter at all.

I want to present just a few simple figures that will illustrate that point. In boom years, when we have the largest amount of investment, net investment represents only about 12 per cent of the total flow of the national income. The rest of the output consists of consumers’ goods and services. There is not the slightest reason why the government would need to interfere in the production of consumers’ goods (except the community services which government alone can perform). It is necessary only that it perform a balancing function in the area of investment. If the state plays a bold role, we may expect the opportunities for private investment to be expanded and enlarged under the stimulus of a sustained market.

Bold government action is especially necessary when private investment outlays drastically decline. At the end of a vigorous private investment boom, when a large outlay has been made in office buildings, hotels, houses, producers’ plant and new kinds of machinery, a temporary saturation point is reached. Temporarily rich and profitable investment outlets, made possible by new technological developments and population growth, have been exhausted, and only marginal and submarginal outlets remain. At this point optimism vanishes and the economy develops into a down-spin. We had reached an extraordinarily high saturation of investment in this country in 1929. Thus the boom died a natural death. Indeed, I doubt if one can find at any other time in history such an extraordinarily high degree of investment saturation as was reached, notably in the United States and in Germany, in 1929.

The essence of depression is a decline in private investment outlays. If we are going to achieve a full-employment economy, the state must enter as a balancing wheel and engage boldly in large public development and improvement projects as a counterweight against impending depression. If investment outlays are maintained, then one can be quite sure that general consumption will continue on a high level. If a temporary saturation has been reached in consumers’ durables as well as in producers’ capital, the gap which must be filled by public investment is still larger. But consumption in general will not decline if the income of consumers is increased as productivity rises. But when capital outlays decline and when people are unemployed in the capital goods industries, consumption falls off. And when consumption has fallen, that in turn accelerates the decline in investment. When consumption expenditures have diminished by a considerable amount, what sense does it make for a consumers’ goods industry to enlarge its plant and equipment? There is already overcapacity in view of the falling market.

But if the government steps in boldly, it will be discovered that the induced contraction causing a cumulative decline in private capital outlays will not develop. For example, from 1929 to 1932, private capital outlays fell by 15 billion dollars. Now one might say that the government would have had to step in with 15 billion dollars of public improvement outlays in order to sustain the economy. That, I think, is a vast exaggeration. If the state would step in boldly — and it won’t do merely to make a bluff and hope that large outlays will not be necessary, as some writers have assumed — then we could be sure that private investment outlays would not decline in such drastic manner as they would if the cumulative secondary influences were allowed to develop. It is conceivable that about half the decline in capital outlays would have done the trick in 1929. Instead of falling by 15 billion dollars, private capital outlays might have fallen by only half that amount had the state boldly stepped in and sustained income and employment with productive and useful public projects.

6

There are many areas in which we can raise the productivity of our society by public development and improvement projects. We have twenty or thirty river valleys in this country, the full development of which would raise our productive capacity, open up private investment opportunities that otherwise would not be present, and in general raise the real income of our society. In the rural area there are a large number of public improvement and development projects that would enrich our natural resources, including soil conservation, irrigation, flood control, and reforestation. Urban redevelopment offers a vast scope for investment in terminal facilities, express roads through and around the cities, airports, parking spaces, playgrounds, and public and private housing. We need also to consider ways and means of fostering foreign development projects in China, Latin America, and other retarded areas. We are not going to be able, in my judgment, to get any large amount of foreign investment by the methods that have been used in the past. We shall have to implement such institutions as an RFC on an international scale. But if public development authorities undertake the large-scale projects, including river valley development, roads, port facilities and communications, we can expect private capital to enter the manufacturing and industrial area in large volume.

With respect to public improvement projects, there is one matter that I should like to stress. The question may well be raised: Are these things going to be self-liquidating? Will they pay for themselves? Yes, a good many of them will be self-liquidating. We are told that the TVA, for example, will probably bring back to the Treasury 100 cents on the dollar. But whether it does or not, I contend that it was still, from the standpoint of the whole economy, a tremendously profitable and productive investment, even though it brings back only 50 cents on the dollar. This is true by reason of the secondary effects on private investment outlets, the increase in productivity of the whole area, the increase in the total real income of the country as a whole. Consider urban redevelopment. Is there anyone who believes that we shall escape from the log jam that our cities are in, with the growing slum and blighted areas around the heart and center of our modern cities, without the Federal government’s stepping in and furnishing the funds for the acquisition of such areas? The Federal government might not recover the full cost in future rentals from the land. But the opportunities thereby released for private investment, and the general economic stimulus flowing from urban redevelopment, would nevertheless make the venture profitable.

It is not necessary to regiment our economy in order to achieve and maintain full employment. All we need to do is to ensure an adequate volume of investment reinforced by means to increase consumption. It is in the areas of the public utilities, the railroads, roads, housing and public improvement and development projects, that the great bulk of our capital outlays have always been made. In some of these areas the government can effectively aid in opening up private investment outlets, while others are appropriate spheres for direct public investment.

Take railroads, for instance. We could retain private enterprise in the operation of the railroads but permit the government to own the right of way and the terminal facilities. The private companies could still operate the railways just as they do now; but if the state owned the right of way and the terminal facilities, it would be possible in depression years to move forward with large capital outlays in those areas. The private railroads cannot and will not do so in periods of depression.

In addition to public investment in developmental projects, another important change must — and I think will — be made in our economy. Let me cite what happened in England after the last war. We are likely to experience something like the same process as a result of this war. The most striking change that occurred in the English post-war economy was the significant shift in tax structure and in the direction of expenditures. If you compare the 1913 tax structure with that of the twenties, you will see a marked shift toward a highly progressive income and inheritance tax. A similar revolutionary change is now going on in this country as a result of the war. On the expenditure side, England undertook a greatly expanded social and welfare program — minimum standards of social security, education, and health. This shift in the tax structure, together with the increase in social expenditures, had a stabilizing and sustaining effect on employment and on the national income. This favorable effect has been stressed by Sir William Beveridge, the distinguished founder of social security in Great Britain.

Following the war, we must undertake a large increase in social expenditures, financed through a steeply progressive income and inheritance tax. We shall have a much larger Federal welfare budget than before the war. These social expenditures must include, among other things, an adequate nutrition program. In terms of the demands (partly psychological) that are made upon people under modern conditions, a considerable part of our population cannot afford adequate food. Why should we not spend money on school lunches as well as on school equipment? It makes little sense to send undernourished children to expensively equipped schools.

Within the controls that I have mentioned we shall, I think, retain a freely functioning price system. There is by now ample evidence that an expansionist society with full employment makes it much easier to attack the restrictive practices which tend to hold costs and prices at abnormally high levels. Thurman Arnold has said that he found, as we were getting on toward full employment, the job of attacking the restrictive practices easier. We all know that, with respect to tariffs, it is impossible to move toward freer trade when there are 10 or 15 million unemployed. Tariffs can be reduced effectively only as we approach full employment.

All the special interest groups become powerful and strong in periods of depression, falling prices, and unemployment. Take our building trades. Everyone knows how inefficient they are and what restrictive policies they pursue. We shall never get anywhere in removing those restrictions except under the conditions of a full-employment economy. So long as the threat of serious unemployment prevails, we shall continue to have those restrictive practices. In an expansionist economy we can achieve a freer price system than we have been accustomed to in the past.

Many economists have urged in recent years a reduction of costs and prices as a means of recovery. I venture to suggest that the cost and price structure will move into better balance and become more manageable under an expansion program, as the year 1941 abundantly illustrates. There were doubtless areas, for example in 1939, where wage rates were too high. But as the economy moved into expansion and the fixed costs spread over a much larger volume of output, it was discovered that wage rates in general were too low. Witness the fact that profits prior to taxes in 1941 were 50 per cent higher than in the seven best years of the twenties, and that even after deduction of the high 1941 tax liabilities they were still equal to profits after taxes in the seven boom years.

It is easy to see that costs are likely to be too high when the economy is operating at half-capacity. What is needed is to combine the control of costs with a program of expansion.

A question that always arises when one discusses public development and improvement projects relates to taxes and the public debt. Here also the year 1941 affords a revealing experience. In 1941 we reached an income of 95 billion dollars. We achieved that income, as everyone will admit, mainly through the increase in military expenditures. We got it on a 20-billion-dollar budget for the calendar year.

I recently received a letter from a New York business statistician who said: “You can’t sustain full employment without a public expenditure of 50 billion dollars a year.” I replied that in 1941 we reached a 95-billion-dollar income on a 20-billion-dollar budget. At full employment (which we had not reached in 1941) we can produce at current prices a national income of 110 billion dollars. On such an income it is possible to raise very large taxes without encroaching on private expenditures. Thus in 1941, after all tax liabilities had been met, there was 6.5 billion dollars more available for private expenditure than in 1929. Nevertheless, we should finance some part of these public development and improvement projects out of borrowing — particularly self-liquidating public works. As for those that are only partially self-liquidating, it may well be justified, from the standpoint of the whole economy, to finance a part of them by borrowing. We shall always want to finance the great bulk of the Federal budget by taxes, if for no other reason than that we should very rapidly develop large inequality in income distribution without a steeply progressive tax structure.

For a hundred years we have enjoyed a percentage increase in real output of about 4 per cent per annum. I think we may reasonably expect at least a 3 per cent per annum increase in our real income in the future. The increase in productivity is advancing as rapidly as ever. Those who say that we are in such a tangle that we are no longer able to produce efficiently ought to look at the rising trend in output running straight through the twenties up to the year 1941. The output for 1941 lies slightly above the trend. There is no evidence of any decline in increase of productivity despite the fact that we have reduced working hours very materially.

We shall have at the end of the war, at current prices, a national income of from 110 to 120 billion dollars, and perhaps a public debt nearly double that figure — a ratio which British experience has demonstrated to be thoroughly manageable. A 3 per cent annual rate of increase in the national income would permit a substantial increase in debt from one cycle to another without any increase in the ratio of debt to the national income.

7

With respect to the national debt, there are some points which we need to keep in mind. In the first place, there is an essential difference between an internally held debt and an externally held debt. In the case of an externally held debt, payments have to be made across the exchanges; and that may break the exchanges and disrupt the whole world economy. England could not pay the debt owed us between the two wars because of the difficulties of the exchanges. No such problem arises with respect to an internally held debt. In the case of an externally held debt, moreover, should a nation succeed in transferring the payments, it is in fact paying tribute to a foreign country, thereby lowering to that extent its own real income. With respect to an internally held debt, the all-important question is who owns the bonds and who pays the taxes. We are all inclined to think of this problem in terms of the situation in England in the period after the Napoleonic Wars. At that time it was to a large extent true that the public debt was held by the rich. Taxes weighed heavily upon the mass of the people, and it was possible to say that the productive elements of society were paying tribute to an idle rentier, bond-holding class.

That is no longer true of any great modern nation, and certainly not of our own country. Today about 85 per cent of our bonds are held by small savers or by institutions all of which perform a useful social service, the benefits from which flow to the entire community. They include educational institutions, life insurance companies, savings banks, commercial banks, government trust funds such as the old-age and unemployment insurance funds, and the like. The interest charges flow to institutions (covering necessary costs of operation) which render service to the entire community. Therefore no burden is placed upon the productive elements of society by reason of the public debt.

There is another thing worth mentioning. Let us suppose that the holdings of bonds correspond precisely to the distribution of the Federal tax burden. (I do not suggest that any such perfect correspondence between the holding of bonds and the payment of taxes is necessarily an ideal situation. But in order to assist thinking through the problem, let us suppose this to be the case.) Suppose I as an individual, for example, holding a thousand-dollar bond, get $25 interest each year. I pay, however, $25 extra taxes in order to service the public debt. I take $25 out of one pocket and put it back in the other pocket. If in fact the public debt were held in that manner, it would literally be true that a public debt, no matter how large, would be completely neutral on the economy, except for one very small qualification: namely, the very small use of productive resources necessary to collect the taxes — a bookkeeping charge of negligible proportions.

The taxes and the bonds are not, of course, evenly distributed. There is, however, reason to believe that after the war there will be a mass holding of government bonds by individuals directly, and indirectly by institutions broadly representing the public. Thus a large public debt in conjunction with a highly progressive tax structure may actually result in a better distribution of income than we have had in the past.

The war program has improved our perspective. We know now what the American economy can do. We need, in the post-war world, economic statesmanship with vision. In the past we have sadly neglected our natural resources — our material and human potentialities. There are, for example, in the Arkansas River valley, in the Columbia River valley, rich resources that cry for development. Urban redevelopment presents a great challenge and a great opportunity. We have been penny wise and pound foolish. We need a dynamic leadership by American business, unafraid to use the state as an engine of expansion and economic progress.