1941: Public Finance

No adequate conception of the extent to which the public finance of the nation is dominated by the defense program is possible without some realization of the stupendous requirements of that program as well as the rapidity with which its demands have increased.

Some perspective may be gained from realization of the fact that our total national defense expenditures for the years 1917-1920 amounted to about $21,000,000,000, the largest single year's expenditure having been $10,965,000,000 in 1919.

During the fiscal year ended June 30, 1941, actual net receipts of the Federal Government, excluding additions to social security funds and returns of surplus funds from government corporations, amounted to $7,289,000,000, the largest in the history of the United States. The sharp increase in this amount over the estimates contained in the budget message of January 1940 results primarily from two factors: first, additional tax legislation during 1940, and second, a higher level of business activity than had been expected. The gross Federal debt on June 30, 1941, amounted to $48,961,000,000, an increase of about $6,000,000,000 during the year. The figure stood at $57,620,000,000 on December 31, 1941. The President's budget message of January 7, 1942, estimates that the gross debt will stand at $70,612,000,000 by June 30, 1942, and $110,421,000,000 a year later.

Estimates of the receipts of the government, as well as expenses, have been revised sharply upward for the fiscal year ending June 30, 1942. The original estimate in the budget message of January 1941 was $8,275,000,000, but higher taxes and increased business activity resulted in the revision of this figure a year later to $11,944,000,000. On the basis of existing tax legislation, estimated receipts for the year ending June 30, 1943, are $16,487,000,000. The President has requested that additional tax legislation should add $7,000,000,000 to this sum.

The country was staggered in 1940 by defense appropriations aggregating about $17,000,000,000. However, it seems by now to have become somewhat inured to huge figures, and has taken the additional 1941 authorization of more than $60,000,000,000 more or less in its stride. Included in this figure is about $13,000,000,000 appropriated for lend-lease purposes. The nation is confronted by two major problems: first, the raising of the billions required, and second, their expenditure. It is quite probable that the second problem, which is not the concern of this article, may be the more difficult of the two. Ciphers are not bullets and appropriating billions does not automatically provide defense.

The question of how best to finance the defense program is one of the most important problems confronting the country. Aside from the obvious desirability of cutting non-defense expenditure to a minimum, the two possibilities are of course taxation and borrowing. Both will have to be used, but the proportionate reliance to be placed upon each is a matter upon which opinions differ widely. The Secretary of the Treasury has frequently expressed the desirability of meeting two-thirds of the cost from taxation and one-third from borrowing. As a result of the greatly increased financial requirements, the present program seems to be to raise as much by taxes as possible without destroying the economic strength of the nation, and to rely upon borrowing for the balance. The budget estimates for the fiscal year ending in 1943 provide for raising about 40 per cent of total expenditures by taxation, exclusive of additions to the social security fund.

Taxes were increased during 1940 by two tax bills, and were further sharply increased by the tax legislation of September 1941. From the standpoint of the average individual taxpayer the effect of this latter legislation is very serious. Exemptions are lowered from $2,000 to $1,500 for married couples and from $800 to $750 for single persons, thus requiring the annual filing of an estimated 5,000,000 new returns. The effective tax rate in the lowest tax-paying bracket, including both normal tax and surtax, becomes 10 per cent instead of 4.4 per cent, and rates for intermediate income groups are also much higher. Corporation tax rates were likewise substantially increased, as well as excise taxes on a wide range of consumer goods. The estimated revenue to be raised by the new bill was about 50 per cent of total Federal receipts for the previous fiscal year.

As already mentioned, $7,000,000,000 in additional taxes are requested by the President. The administration and Congress have had opposed views on many phases of taxation in recent years. It remains to be seen whether the ideas of Congress or the Treasury will prevail in the tax legislation of 1942. Adequate price control is an essential if the costs of the defense program are to be kept within current estimates. Although it has been considering the matter for nearly six months, Congress seems to have made very little progress towards adequate price regulation. Unwillingness to include wages, or adequate farm price regulation, in the proposed legislation may defeat the purpose of the bill. The sale of defense bonds has been rapidly accelerated in recent months, and this development is an important one from the standpoint both of raising revenue and of diminishing the degree of threatened inflation. The Government's borrowing program is facilitated by the continuation of interest rates at unprecedentedly low levels. State and local government financial problems are playing a distinctly secondary role for the time being. See also BUDGET OF THE UNITED STATES; FINANCIAL REVIEW; INCOME TAXATION; TAXATION.

1940: Public Finance

The year 1940 saw spectacular developments in the field of public finance in this country, growing out of war conditions. Such developments were spectacular not merely for what happened during 1940, but much more so because of what they portend for the future. The world war has resulted in the embarkation by this country upon a program of national defense and taxation, the ultimate size of which defies reliable estimate. During the fiscal year ended June 30, 1940, actual net receipts and disbursements of the Federal Government, excluding social security receipts and payments, amounted to $5,386,000,000 and $8,998,000,000, respectively. The deficit for the year was thus $3,612,000,000, as contrasted with the original budgetary estimate in January 1939 of $3,326,000,000. The increased deficit was due almost entirely to the fact that receipts were less than expected, since aggregate disbursements were almost exactly what had been anticipated.

The National Debt.

The gross Federal debt on June 30, 1940, totalled $42,968,000,000, an increase of $2,528,000,000 for the fiscal year; fully guaranteed obligations of Federal agencies stood at $5,528,000,000, an increase of only $78,000,000. Corresponding figures for debt and guaranteed obligations at the end of October 1940, were $44,137,000,000, and $5,810,000,000, respectively.

National Budget.

The budget message of January 1940, covering the fiscal year ending June 30, 1941, estimated net receipts of $5,548,000,000 and expenditures of $8,424,000,000. This would result in a deficit of $2,876,000,000 which it was expected would be met to the extent of $700,000,000 by the return to the treasury of surplus funds of various government corporations. The estimated expenditures included a regular appropriation for national defense of $1,540,000,000, the largest in our history since 1920, and an additional emergency appropriation for the same purpose of $300,000,000. The President, however, accompanied his budget message by a request for additional taxes sufficient to cover the emergency defense estimate of $300,000,000, as well as a similar item of $160,000,000 spent in the previous year. This would further reduce the estimated deficit to $1,716,000,000.

National Defense.

Developments in the war in Europe, culminating in June in the declaration of war by Italy and the surrender of France, resulted in an overwhelming demand in this country for a defense program on a scale unprecedented in peace time. In furtherance of this defense program huge sums were requested by the President and appropriated by Congress; the staggering total of such appropriations during 1940 amounted to approximately $17,000,000,000. This figure, moreover, will undoubtedly be substantially increased as additional defense requirements arise from time to time. The President's lease-lend program for supplying armaments to Britain may add additional billions to the sums to be raised by the United States Government.

Of course, only a small part of the $17,000,000,000 just referred to will actually be spent in the current fiscal year. Treasury estimates last August indicated that it was expected that defense expenditures in the current fiscal year would total about $5,000,000,000 as contrasted with the original provision for a total of $1,840,000,000. The current lag in expenditures throws some doubt upon whether the $5,000,000,000 figure will be reached, but, if it is, the estimated deficit for the current fiscal year will be increased by more than $3,000,000,000, with tremendous deficits to be expected in subsequent years.

Financing the Defense Program.

The question of how best to finance the defense program is one of the most important problems confronting the country. The two possibilities are, of course, taxation and borrowing. Undoubtedly both will be used, but the proportionate reliance to be placed upon each is a matter upon which opinions differ widely.

There is already an indication that taxation increases are to be relied upon to an appreciable extent. Two important tax measures were passed by Congress in 1940, and further tax increases seem to be expected in the near future. There is some feeling that further taxes should not be levied until more reliable estimates of the productivity of present tax laws under the existing condition of a rapidly rising national income are available. The most important provisions of the first Revenue Act of 1940, signed in June, were as follows: (1) for individuals, personal exemptions were reduced by one-fifth, sur-taxes were substantially raised for incomes between $6,000 and $100,000, and a special levy of 10 per cent of the amount of the tax due was imposed for the next five years; (2) for corporations, rate increases were small but were superseded by those of the second Revenue Act of 1940; (3) miscellaneous provisions included a 10 per cent increase in estate and gift taxes, broadening of admission taxes, increase in alcoholic beverage and tobacco taxes, and an increase in the debt limit from $45,000,000,000 to $49,000,000,000.

The second Revenue Act of 1940, signed in October, increased the normal tax rate on corporate income from the 19 per cent of the first Revenue Act to 24 per cent. More important, it levied a high rate of taxation on excess profits, the rate rising to 50 per cent on such profits in excess of $500,000. Excess profits were those in excess of either the 1936-39 average or 8 per cent on invested capital, whichever base the corporation might choose. It has been estimated that the two tax measures together should give an annual yield of about $2,000,000,000, though this figure will increase as the national income increases.

The raising of funds by the government through sale of securities was facilitated by the fact that interest rates, which were already very low at the close of 1939, declined further during 1940 to reach in November the lowest levels in history. Long-term United States treasury bonds sold during that month at a price to yield 1.94 per cent as compared with a figure of 2.35 per cent in December 1939. The highest annual interest rate paid during the year on the weekly $100,000,000 offering of 91-day treasury bills was less than one-tenth of one per cent, and in nine weeks of the year such new offerings sold at a premium instead of a discount. Higher taxes, removal of tax exemption on new issues of government bonds, and increased Federal Reserve control over the credit system of the country seemed likely at the close of the year. See also TAXATION; UNITED STATES: National Defense.

1939: Public Finance

During 1939, the government continued its heavy expenditures for relief and national defense in spite of a growing demand for economy in Congress. Existing revenues remained inadequate to meet the necessary expenses and since no new taxes were added the deficit mounted. In spite of the war crisis which shook the market for Government bonds in the fall, the Treasury was able to borrow sufficient sums to meet the deficit at advantageous rates of interest.

The National Budget.

When Congress convened in January, the President presented the budget for the year 1939-40. The plan for expenditures gave a total of approximately $9,000,000,000, including $2,266,165,000 for relief and $1,319,558,000 for national defense, the highest appropriation for any peace time year. Since revenues were estimated at $5,669,000,000, the deficit was expected to be $3,326,000,000 and the total debt on July 1, 1940, would stand at $44,458,000,000. The present debt limit set by the Second Liberty Loan Act is $45,000,000,000. In discussing the budget, the President stressed the need for government expenditures as a stimulus to business. Although he advocated the retention of the excise taxes and the three cent postage rate which would have expired this year and suggested the possibility of new taxes he did not press the need for new revenue and adopted the attitude that the increase of the public debt under conditions of depression was not a matter for concern. The President also suggested further changes in the form of the budget. In the previous year, Congress had voted that in the case of the Commodity Credit Corporation only impairments of, or additions to, capital through current operations should be included in the budget for the United States, instead of the total appropriations for funds for their use. The President suggested that the same principle be extended to all independent agencies of the government. He also suggested that capital expenditures of the government be placed in a separate budget from ordinary expenditures. The net effect of these changes would be to reduce the total of expenditures currently.

Appropriation Bills.

The actual passage of the appropriation bills was the occasion for a strong minority to present the need for economy. When actually passed, the appropriations amounted to $300,000,000 more than the budget demanded. The economy drive cut $50,000,000 from the Deficiency Appropriation Bill for relief and made necessary its passage in two parts, cut out entirely a lending program of $500,000,000 proposed by the President in July and not included in the original budget, and attached numerous provisions to the Relief Appropriation Bill.

The increases in expenditures for national defense were in line with the practice of other governments. The original Military Appropriation Act, approved April 26, provided $508,789,824 while the War Department Appropriation Act (Civil) carried $305,188,584. On July 1, the Supplementary Military Appropriations Act added $223,398,047. Besides these were appropriations for the Navy of $773,049,151 and for Naval Air Bases of $65,000,000. These bills will allow increases in the numbers of men in the army and navy, increases in armaments, new fortifications for the Panama Canal Zone including new military roads, and numerous new air fields and added facilities for training pilots.

The Emergency Relief Appropriation Act was passed only on June 30. It provided the full budget, the economy drive having been directed against the deficiency appropriations for the fiscal year 1938-39. These latter appropriations had in the end amounted to $825,000,000. The new bill appropriated $1,755,600,000 of which $1,477,000,000 was for the Works Projects Administration, successor to the Works Progress Administration. To the expenditure of these funds were attached a series of conditions intended to cut the relief rolls and make private employment relatively attractive. The requirement that projects must pay prevailing wages was dropped and wage scales were allowed to differ in different geographical districts only according to differences in cost of living, while maintaining the existing general average for the country. This meant raising wages in the south and lowering them in the north. Persons were prohibited from working on Federal Projects for periods of more than 18 months continuously, with the hope that a period of complete unemployment would give an added incentive to finding new jobs. Aliens and persons belonging to organizations advocating the violent overthrow of the government were excluded from relief, and administrative officers were required to take oath to defend the constitution from all enemies.

The National Debt.

During the fiscal year ending June 30, 1939, actual Federal expenditures amounted to $9,210,000,000 while receipts were $5,668,000,000 leaving a deficit of $3,542,000,000, a figure somewhat larger than that anticipated for the year 1939-40. For all governments, Federal, state and local, total expenditures were $17,470,000,000 and revenues $15,992,000,000. Taxes thus amounted to $114 per capita or 21.8 per cent of the estimated national income. In the later months of 1939, in spite of the recovery in business, expenditures continued at a rate similar to that of last year, increasing expenditures for defense offsetting declines in expenditures for relief. As a result the additions to the public debt continued to mount. Increases in revenues resulting from the trade expansion cannot be expected until next spring.

The total amount of the direct Federal public debt had been $39,427,000,000 at the end of December 1938, while guaranteed obligations amounted to $4,992,000,000. At the end of October 1939 (latest figure) the direct debt was $41,036,000,000 and guaranteed obligations were $5,449,000,000. Of the direct debt 69 per cent were bonds, 18 notes, 3 per cent bills and 10 per cent special issues.

The condition of the financial markets was such that these securities were absorbed at very low rates of interest. Treasury bills sold at nominal rates. In fact, there was such a demand for them that the Federal Reserve Banks allowed their holdings to run out during the summer. Bond yields also were low. In January, they were 2.47 per cent but they declined to 2.13 per cent by August. At the time of the outbreak of the war in September, the brunt of the demand for liquidity fell upon the government security markets. Rates on Treasury bills rose to .10 per cent, the highest point since 1937, while bond yields rose to 2.74 per cent. The Federal Reserve Banks stepped in and bought some $400,000,000 of these securities and the Treasury postponed its September financing. By the end of November, the rates had dropped again and the Treasury was able to carry through its fall financing without difficulty. See also BANKS AND BANKING; BUSINESS.

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.