1938: Public Finance

Early in 1938, the Federal Government became aware of the seriousness of the new recession in business and took steps to counteract it. These steps necessitated much increased expenditures, particularly for relief and public works. At the same time, the drop in national income reduced the revenues of the Government and made it necessary to borrow increasing amounts. The result was that at the end of the year the national debt reached the maximum in our history.

The National Budget, 1938-39.

On Jan. 5, when Congress convened, the President presented the budget for the fiscal year 1938-39. This budget, instead of calling for a decrease in expenditures, anticipated an increase. The total was approximately $7,000,000,000. This allowed for an increase of a billion dollars for relief and public works and a billion dollars for national defense. Although the President expressed the hope that no new borrowing would be necessary, he felt that relief and recovery were of primary importance. Meantime, the estimate of the deficit to be expected for the fiscal year 1937-38 rose from $418,000,000 to $1,088,000,000.

Expedients against Recession.

The actual passage of the appropriation bills was not effected until May and June. Meantime business conditions became worse. Although the rate of decline slackened, the degree of recession was disturbing. In April, the President again presented the situation to Congress with urgent advice that the rate of expenditures be speeded up. He now asked for an appropriation for relief of $3,000,000,000; for public works of $1,000,000,000; and for housing of $300,000,000. At the same time, the Treasury announced a change in its policy with respect to gold. All the gold which had been sterilized since 1936 was restored to the monetary system. This gave the Government $1,400,000,000 with which to meet current expenditures.

Modifications in General Revenue Bills.

On May 11 the General Revenue bill was passed, calling for an expenditure of $5,300,000,000. Two features of the previous revenue bill had led to sharp debate in Congress and were modified in the new bill in spite of the opposition of the Administration. (a) The first of these modifications dealt with the undistributed profits tax. The tax provided for in the previous law assessed a levy, at a progressive rate, on profits retained in the business rather than paid out in dividends. This penalty might, at a maximum, amount to 27 per cent. Under the new law, businesses with net incomes of less than $25,000 were exempted entirely, and the maximum penalty on other business was limited to 2½ per cent. (b) The other modification dealt with the capital gains tax. Capital gains had formerly been subject to taxes on a scale varying with the length of time the securities had been held. The new law changed the rates and the periods. Gains on all securities held for less than eighteen months were to be treated as regular income; on securities held from eighteen months to two years the tax rates would be 20 per cent; and on securities held more than two years, 15 per cent. Both of these modifications were considered to be beneficial to business and financial interests. As revenue measures, the original laws had not proved as successful as anticipated.

Other Appropriation Bills.

The other major appropriation bills were passed shortly thereafter. The Naval expansion bill was passed May 13 and carried appropriations of $1,156,000,000. On June 10, the relief bill appropriated $3,700,000,000 for relief and public works. This bill carried a proviso that, except in case of emergency, the appropriation should be allotted so as to cover the complete period to June 1939. The Agricultural Adjustment Administration appropriations had been provided for in February, and in April a bill allowing the Reconstruction Finance Corporation to lend $1,500,000,000 was passed.

The National Debt.

Actual receipts and expenditures of the Government naturally varied from the budget estimates and from the appropriation bills. During the fiscal year ending June 30, 1938, actual expenditures amounted to $7,626,000,000, compared with $8,442,000,000 during 1936-37. Receipts were $6,242,000,000, compared with $5,294,000,000 during the previous year. The excess of expenditures over receipts was $1,384,000,000, a figure much less than half what it had been in 1936-37 or 1935-36. The gross debt grew by only $740,000,000 during the year. This comparatively small increase can be attributed to the use of part of the gold released from the inactive account.

Although the Federal finances at the end of the first six months made a relatively good showing, during the last half year the increased expenditures and decreased revenues were more apparent. The new relief program had already begun before June. In April, expenditures had been $202,000,000, compared with an average of some $160,000,000 for the first three months of the year. In June, they jumped to $314,000,000. Although they declined in August to $216,000,000 they increased again to $262,000,000 in October (the latest available figure). General expenses of the Government increased in a similar fashion, and the new appropriations for defense added somewhat more. Total expenditures in the October quarter were $2,965,000,000, compared with $2,518,000,000 in 1938. Receipts of the Government now began to show the full effect of the recession. Income tax payments in the October quarter were $618,000,000, compared with $634,000,000 last year; while other internal revenue declined from $897,000,000 to $847,000,000 and other revenue from $237,000,000 to $176,000,000. Thus, total receipts for the quarter were only $1,841,000,000, compared with $1,983,000,000 in the previous year.

The result of these changes was a large increase in the national debt. In the October quarter alone, this increase amounted to $1,258,000,000. At the end of October, the total interest-bearing debt was $37,897,000,000. By the end of the year, it was expected to reach $39,000,000,000, the record level for the Government debt of the United States.

Fortunately, the security and money markets were able to absorb this increasing debt at low rates of interest. Bond issues, both Treasury and United States Savings bonds increased during the year, while the amount of bills declined. In spite of the new issues, the yield on Government bonds declined. In January, it was 2.65 per cent; and at the end of November, 2.51 per cent. The rate on Treasury bills declined even more. At the end of November, the rate was only .02 per cent, compared with an average of .45 per cent last year. See also NATIONAL DEBT.