The federal budget: Have we a 'spending orgy'? (Fortune, 1934)

December 16, 2012: 9:30 AM ET

Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week, as congressional leaders and the Obama Administration continue with fiscal cliff negotiations, we turn to a feature from December 1934 on the ballooning federal budget during the New Deal era. 


The $14,000,000,000 that the President has been given to spend, the national debtthat will shortly be $32,000,000,000, and our present two-year predicted deficit of $9,295,000,000. Should we worry?

FORTUNE -- The prophets of doom are busy, and some of them have gone so far as to set the date for the end of the world. The end of the world will come some time during the opening weeks of January. That will be when the President of the U.S. goes before the Congress to deliver his budget message for the year known as Fiscal 1936. In the figures that his message will contain, whatever they are, the prophets of doom will see fresh evidence that the federal government is engaged in a "spending orgy" that is leading us remorselessly on to complete financial ruin.

What the President will say, no man can at the moment tell. Some months ago it became common knowledge that he could not possibly realize his original hope for a budget balance in Fiscal 1936, and that there would, in consequence, be at least one more year--the sixth consecutive--in which Treasury expenditures would outrun Treasury receipts. Whether the President will be able to give any assurance that Fiscal 1937 will show the budget in balance is a matter on which he himself is probably at present in doubt. It is only possible to say that if Fiscal 1937 shows receipts and expenditures that come anywhere near meeting, it will be at a great cost to someone, whether that someone be the taxpayer, the petit bourgeois, or the Forgotten Man.

It is not the function of this article to gaze into any such murky crystals as a fiscal year that will not end until June 30, 1937--or even to take sides with the simple soul who says: "You can't spend money you haven't got" in opposition to the mystical fellow who believes that something he calls "social credit" is capable of almost infinite expansion. Instead, let us see what we actually know about Fiscal 1935 (three months gone by as this is written), and begin by setting it in the matrix of its immediate predecessors. Have we a "spending orgy"?

The last time that the Treasury of the U.S. had a surplus was in 1930. Since then, consider the record of its deficits (including debt retirement).


The 1935 revised estimate is arrived at by the simple process of taking the known receipts of $954,000,000 and the known ordinary and extraordinary expenditures of $1,496,000,000 for the first three months of 1935, and multiplying them by four. The figures may not turn out so neatly, but they provide us with a rough assumption. On this basis, the country will have a two-year deficit (Fiscals 1934 and 1935) of $6,157,000,000. President Roosevelt, in his budget message to the Congress last January, predicted a two-year deficit of $9,295,000,000. That does not mean, however, that we are some $3,138,000,000 to the good merely because we are running behind his figure. Instead, the federal government is in the curious position of not being physically able to pump money into the country as fast as it is trying to--and in consequence the $3,000,000,000 "deficiency in the deficit" constitutes one reason why Fiscal 1936 cannot possibly be brought into balance. These billions are a financial hangover. If they are not spent in Fiscal 1935, then Fiscal 1936 will have to bear the weight of them.

Now if these were the operating figures on the annual statement of a gigantic corporation engaged in manufacturing for profit, they would certainly be cause for a good deal of pain among the stockholders. And there are plenty of people who take this stockholder point of view about government finance, as the unsettled condition of the market for U.S. Government securities at present patently attests. It may be that this purely factual and hardboiled philosophy will turn out to be justified--but it may also be that the social point of view it represents is so narrow that it will be its very narrowness that will cause the U.S. to falter in its financial path.

Certainly, anyone who thinks that the U.S. is not capable of carrying its present public-debt burden must refresh his memory of fifteen to twenty years ago. In 1917 the public debt was, roughly, only one-tenth of its present size--a little less than $3,000,000,000 which came to a per capita figure of $28.57. Almost overnight the huge issuances of Liberty Bonds multiplied this four-fold. By 1918 the debt was over $12,000,000,000, and in 1919 it reached a peak of $26,600,000,000 with a per capita figure of $251.60. Today it is only $600,000,000 more than that: the figure on October 15, 1934, stood at $27,200,000,000, but with a corresponding per capita figure of $215.15--somewhat smaller than the nation bore during the War. By June 30, 1935, so the President has stated, the debt will stand at $32,000,000,000, which will mean a per capita figure of $253, without war prosperity to make the burden easier.

These are figures for the national government only--and certainly a per capita jump from $28.57 to $253 is a big jump. But compare the per capita debt imposed by national, state, and local governments in the U.S. with the debt similarly imposed in France and the United Kingdom. In 1933 (the last year for which figures are available) the total per capita debt burden in the U.S. was $337. In France it was $479--and in the United Kingdom it was $974. (Exchange figured at old parities.) It is that sort of comparison that makes the more radical type of fiscal authority believe that the total U.S. debt can reach forty or fifty or sixty billions before the nation's credit is strained beyond its elastic limit.

Opposed to him, however, the "sound economist" says this is rubbish. Any such increase, he insists, would be bound to lead to a credit crash from which there would be no recourse but inflation, which brings in its train the inevitable "stabilization crisis"--i.e., the moment when one inflates no more and definitely faces the horror of revaluating the currency at a level that has all but wiped out the creditor class.

Those who feel that the unbalance of relationships between expenditures and receipts must necessarily spell the ruin of federal credit must equally refresh their memories. In the seven years between 1910 and the entry of the U.S. into the War, the government four times had a Treasury deficit. These deficits were relatively small, but the prosecution of the War shot expenditures up until they were nearly four times as large as Treasury receipts in 1918 and again nearly four times as large in 1919. The $18,500,000,000 that the Treasury poured out that year makes even the $7,000,000,000 of ordinary and extraordinary expenditures in 1934 seem small by comparison. The strain was terrific, but nobody bothered about it, for the courage and purpose to bear it--"Give till it hurts"--was everywhere manifest.

Certainly a balanced budget is a pleasant thing. Certainly it is a desirable thing. But there are those who, not without reason, question whether it is an essential thing, except over a long period of time-perhaps ten years, perhaps the duration of the business cycle. Their more conservative brethren answer that this is all very well but that it is impossible to plan intelligently for as long a period as ten years or as indefinite a period as a business cycle. They make the point that the economic future always looks brighter than the economic present: that everybody is quite positive that it will be simple enough to balance the budget in 1946 whereas 1936 is too imminent to be the subject of illusion. Yet it remains true that Great Britain, the home of budget making, where unbalanced budgets are almost as revolting as the use of the word "bloody," has recently been through four successive years of exchequer deficits without suffering permanent damage to her credit, and Italy has endured deficits for seven years of Mussolini's regime without faltering in her Fascist strength. The whole question of credit is so intimately bound up with confidence that it is impossible to say where one begins and the other leaves off. And confidence drives its roots down to this: have the people of the U.S. an essential belief in the wisdom of present governmental spending? If they have, credit will remain unshaken; if they have not, we are in for a pretty bad time of it.

The noted British economist, John Waller Hills, stated an obvious but often overlooked truth in saying that a nation is rich not when it is able to tax heavily but only as measured by the wisdom of its expenditures. In wise budget making, consideration of expenditures should come first; the ability to raise the funds is a question for subsidiary consideration. Consequently, this month FORTUNE confines itself to the spending side of the budget. Next month it will undertake a study of where the money for the expenditures is to come from, and in the course of time it will consider the doom-prophet's statement that the money to meet the "spending orgy" cannot be raised. Here, however, only the most rudimentary breakdown of Treasury income is necessary. For the first three months of Fiscal 1935 the sources of revenue were as follows:


As we have seen, these sources fell short by some $542,000,000 of meeting expenditures during the first quarter of Fiscal 1935. Just how much the tax revenues of the Treasury can be increased in Fiscal 1936 few people consider themselves wise enough to say today. But there was a good deal of solid ground for Federal Relief Administrator Harry L. Hopkins to stand on when he said: "this country does not know what real heavy taxation is." In 1932, the last year for which comparative data is available, the federal government took only $14.33 per capita in taxes--although state and local taxes raised the total per capita burden to $65.27. In the United Kingdom that year the corresponding figure (at the old parity of the pound equal to $4.86) was $94.46, of which the national government took about 80 per cent. By that measure we still, in 1932, had a considerable potential ahead of us. We still have some of it left today although just how soon we may reach the point at which increased rates enter the area of diminishing returns no soothsayer can tell. In a depression, the price of a balanced budget is high. The feeling everywhere exists that next year's federal tax rates will run considerably higher than this year's--yet for all anyone knows Treasury psychology might be to lower some rates next year and take an additional loss of a few hundred millions in the hope that lowered taxes might provide an additional business stimulant.

As a matter of fact it is well to remember that budgets are something quite new in American governmental life. It is hard to realize that the U.S. is so adolescent a nation financially that no notable agitation for the existence of a federal budget ever began to make itself felt until the administration of President Taft, whose Commission on Economy and Efficiency set up the first definite recommendations for bringing order out of the chaos of congressional appropriations. President Wilson, interrupted by the War, never got any place with a budget, and it was not until Warren Gamaliel Harding, acting under the authority of the National Budget and Accounting Act, passed in 1921, appointed Charles Gates Dawes to the brand-new post of Director of the Budget that even the most rudimentary budgetary control over expenditures was first effected. Before that time congressional committees had appropriated funds as seemed good to them, and nowhere was there any correlation of spending activities. The executive arm had no weapon except a presidential veto of individually objectionable bills. Whether the Treasury ended a year with a surplus or a deficit depended largely upon the whim of the Almighty.

Mr. Lewis Douglas, who took a morbid departure from the post of Director of the Budget last September, was activated, according to one commentator, by this reasoning: if the budget is to remain chronically unbalanced, the job of "directing" it vanishes and a man of honor must therefore relinquish an empty title. And yet it can hardly be said that Mr. Daniel W. Bell, his acting successor, has an empty job. Theoretically he is the President's personal agent for the coordination of governmental spending--and no President in history has ever had executive control of so vast an amount of money. Between his inauguration and the middle of October this year, Mr. Roosevelt has had at his disposal some $14,000,000,000.

New Deal Map

Click to enlarge.

Let us pause for a moment at that $14,000,000,000. It is a figure more than half as large as the present national debt. Mostly it represents the financial irrigations of the New Deal. You will find charted (right) the ways and courses by which--in theory at any rate--it is blessing the parched lands of the depression. It is purely an abstract figure, for its total represents neither money actually spent nor money necessarily existing to be spent. It is merely the total of appropriations made (with the exception of some RFC and FCA moneys that are a holdover from the Hoover Administration) since President Roosevelt took office. It is not precisely a budgetary figure, and yet it must be considered when the budget is considered because this figure, essentially, is the cloud that the anti-New Dealer believes is overshadowing the nation's credit.

Let it be remembered that this $14,000,000,000 is essentially all emergency money. Practically none of the agencies for disbursing it existed before 1932 and the RFC was the only one of any importance in existence before 1933. None of them have anything to do with the supposedly classical pattern of the federal government. If Calvin Coolidge could be brought back to life to view this vast new superstructure of government he would probably think himself on Mars. And because of this new structure, no budget in the world before was ever like the budget of Fiscal 1935.

Fiscal 1934 was really Anno I of the New Deal. The original budget for 1934 was Mr. Hoover's, but Mr. Roosevelt made it his own, first by revising its expenditures downward and then by giving them a much more violent wrench upward. Moreover it was in Fiscal 1934 that Mr. Roosevelt first made his distinction between "ordinary" and "extraordinary" expenses. (The extraordinary expenses are now more euphemistically termed "emergency" expenses.) This was an important distinction, for it is a matter of historical record that countries that set up double budgets are likely to salve their fiscal consciences by scrupulously balancing the ordinary budget by throwing any causes for unbalance into the emergency budget. Thereupon they pay less and less attention to bringing the emergency budget into anything that remotely suggests balance. Let us first consider the ordinary budget for Fiscal 1935 by way of threading our way back eventually to Mr. Roosevelt's $14,000,000,000.

daniel_bellFiscal 1935 calls for ordinary expenditures of $2,487,000,000. The rate of expenditure so far suggests that it will be slightly more than that figure. These ordinary expenditures are low--lower than they ever were even in the most parsimonious days of Coolidge economy. And ordinary expenditures are nicely offset by a predicted Treasury income of $3,427,000,000 (omitting processing taxes) for Fiscal 1935. Theoretically these expenses are for maintaining the Army and Navy, running the postal service, forestry reserves, Shipping Board, Department of Justice, State Department, and other administrative bodies. Actually, however, the U.S. has already done the trick of throwing many an "ordinary" expense into the emergency column. Thus $437,000,000 worth of highway construction comes from Public Works funds, and $238,000,000 worth of naval vessels from the same source. The balancing of the ordinary budget by these means is not much of a feat, and the ordinary budget itself is of only minor importance in the larger scheme of things. So we turn to the emergency budget, whose expenditures President Roosevelt estimated at $3,474,000,000 in his budget message for Fiscal 1935.

And in so turning we collide with the new supergovernment of the U.S., which would so astonish (and presumably displease) Mr. Calvin Coolidge. It is a thing of vast and complex ramifications. The chart above, already referred to, makes that clear enough at a glance--yet many a simplification has been made in the chart in the interest of journalistic lucidity. The agencies set forth there are the agencies responsible for the existence of the emergency budget.

Anyone disposed to study these agencies from the ground up must immediately make an important distinction between those that lend and those that spend. Moreover, in considering the projects that the spending agencies husband, one must distinguish further between the self-liquidating and the non-liquidating. Neither of these distinctions is easy to make, for many a subtle interconnection exists between the spenders and the lenders, and it is not always easy to say when the spender's project will definitely be self-liquidating, any more than it is easy to say that all of the lender's loans will be eventually repaid. By way of tackling the problem, let us begin with these two vast money pools, RFC and PWA, thence proceeding to a few of the more typical smaller agencies.

RFC [Reconstruction Finance Corporation]

THE RFC is sound and going. The $500,000,000 with which Mr. Hoover started it off in 1932 seems pretty small potatoes compared to the $6,000,000,000 that is now the RFC resource for reconstructing American business. Despite its vastness it is probably as liquid as many a huge bank--and although this liquidity is pretty viscous there are few conservatives so extreme as to charge off any considerable percentage of its loans as "bad debts." It has advanced about $1,500,000,000 to various agencies that come more under the head of relief than reconstruction, and some of this, of course, is water over the dam. But under Section 5, which empowers it to undertake its tremendous operations in financing agriculture, commerce, and industry, it has lent about $4,500,000,000 (disregarding repayments), and this money, circulating in the channels of private commerce, industry, and agriculture can certainly be considered safe enough, even though the RFC has many and many an asset it does not want.

Biggest users of RFC facilities have been the banks which, at one time or another (up to September 30), have availed themselves of $2,500,000,000 of RFC funds--of which 45 per cent has been repaid. It is interesting to note that although RFC began its career in the purely passive role of lender to distressed business, it soon took on a parallel active role. This it did of necessity; many a time a bank was not able to supply RFC with collateral sufficient to make possible an essential loan. In such cases RFC told the bank to increase its capitalization and, as security for its loan, took over new shares of the bank's voting preferred stock. Moreover, it frequently extended the practice of preferred-stock purchases to banks known to be strong--so that such purchases would not be an automatic imputation of weakness. As a result of this, RFC is able today to talk to the banks in a voice heavy with authority--and the federal government has thus a means at hand whereby it can, if it chooses, force banking to a greater respect for its wishes.

As indicated on FORTUNE's chart, RFC's $6,000,000,000 is a more or less arbitrary figure. That is the amount of money that RFC has budget_guysallotted. To provide it with money for its huge revolving fund, it issues notes ($3,500,000,000 are currently outstanding) most of which have been sold to the Treasury. (It was early discovered that Treasury notes were more attractive to the public than RFC notes; hence only $245,000,000 worth are now in hands other than the Treasury's.) In addition to this, however, RFC has what is referred to as an "open check book" on the Treasury for three purposes. These are (1) to purchase or lend on the preferred stock of national and state banks and trust companies, previously referred to, (2) the exercise of the cotton option, and (3) the furtherance of the National Housing Act. The RFC has just begun to use this open check book for the last-named purpose, but its drafts on the Treasury for the first stand now at the considerable figure of $1,010,000,000. But so far as the budget is concerned, RFC is at present more a blessing than a menace. Excluding its advances to other emergency agencies it has already taken in $120,000,000 more than it has paid out during the first quarter of Fiscal 1935, at which rate this figure would reach $48o,ooo,ooo by the end of the fiscal year. When the President estimated a Treasury deficit of $1,986,000,000 for Fiscal 1935 he was counting on an excess of credits of just that amount.

PWA [Public Works Administration]

There is no exact way of telling how much of PWA's gigantic appropriation of $3,700,000,000 will be an eventual charge upon the U.S. taxpayer. Although PWA is essentially a spending and not a lending organization it has already exacted for itself a good many quid pro quos. Nor is it meant by this merely that its expenditures for roads, bridges, post offices, etc. have added to the "social capital" of the nation. They have, but whether you think of them as good or evil depends solely on your own political and social complexion. But in addition to this, PWA has so far allocated over $1,000,000,000 to self-liquidating projects, and firmly (if perhaps too optimistically) expects to get it back. First, some $325,000,000 has gone for federal self-liquidating projects like Boulder Dam, and other reclamation and irrigation projects under the Department of the Interior, into the Bonneville Dam, into subsistence homesteads, and into low-cost housing projects carried out by the Public Works Emergency Housing Corp. To states and municipalities it has set aside for loans (not grants) some $550,000,000, which it expects to get back just as much as the RFC expects to get back most of its loans to states and municipalities. Then, too, PWA has lent about $200,000,000 to railroads. Herein the character of its loans differs from RFC's inasmuch as PWA money has gone for the purchase of new equipment and for repairs, as opposed to RFC loans to railroads, which are principally for refinancing purposes.

There is the billion-odd. In other words, almost one-third of the PWA appropriations are allowed out on the theory that they will come home safely and bring an interest increment with them. Of the balance of the $3,700,000,000 little can be said. Some $750,000,000 can be regarded as having been expended with no hope of return (except in the form of "social capital") on CWA, FERA, and ECW. But there is no use adding that sum to the billion above and then asking what has become or will become of the balance of the $1,950,000,000 that is left of PWA appropriations. About $200,000,000 has been allotted to other emergency agencies such as the FCA, AAA, and NRA. A large portion of the remainder is to be spent on non-liquidating public-works projects-- rivers, harbors, highways--and most of it has been allocated for such purposes. So far, in Fiscal I935 PWA has spent about $275,000,000 on public works, and if the present rate of expenditure is continued it will have spent $1,100,000,000 by the end of the fiscal year. There is every possibility, however, that its rate of expenditure will increase through the year, so that it is difficult to tell at the moment how much of a charge PWA is going to be to the present budget. Later in this article FORTUNE will make a broad guess concerning the portion of this and other expenditures that the public will eventually have to make good.

Three typical

There is still another way in which to classify the agencies of the New Deal's extraordinary expenditures. That way is to sort them out according to whether they are self-supporting institutions; whether, per contra, they are bound to be an eventual charge that the taxpayer must meet; or whether they lie in a shadowy domain between the two. We can proceed in a moment to some generalizations, but before we do, let us consider one agency typical of each classification.

The Commodity Credit Corporation is an example of the first classification. Its primary function is to lend money to farmers on the security of their cotton and corn crops. Its $3,000,000 capital stock (purchased with PWA money) is held by the government. It draws its operating funds in the form of loans from the RFC and there is, in theory, no limit to its credit. A farmer who borrows from it is required to conform to the acreage-reduction program of the AAA--and the corporation in turn agrees to carry his loan until such time as cotton reaches fifteen cents per pound and corn seventy-five cents per bushel (pre-War parity prices). Specifically, RFC has allotted a total of some $600,000,000 to it. Its record so far in Fiscal 1935 indicates that outstanding loans are being repaid faster than new loans are being made--the excess of collections over disbursements having been $90,000,000 in the first quarter of the fiscal year. Here, quite clearly, is a New Deal agency just as solvent as the RFC--and the fact that it has been given $600,000,000 of public money with which to finance the farmer does not mean that any such sum, or any sum at all, will have to come out of the taxpayer's pocket as the result.

Typical New Deal agency at the opposite pole is Federal Emergency Relief Administration. In its October issue FORTUNE dealt extensively with this institution and its appendage, the Federal Surplus Relief Corporation. It will not retrace that ground here beyond pointing out once again that if FERA money is being spent wisely by states and localities in the relief of destitution, then its operations cannot be regarded as pure economic waste. It has rehabilitated tenant farmers. It has provided useful work for members of society at present otherwise economically surplus. And considered from another angle, it provides relief much more cheaply (by means of the direct dole) than more complex organizations like the Civilian Conservation Corps or the PWA.

william_julianUnder present circumstances, then, the humanitarian can scarcely do other than point to FERA with pride; the budgeteer, on the other hand, has no recourse but to view it with alarm. Relief is currently costing the country some $145,000,000 a month, and FERA contributes about 70 per cent of it. The $1,500,000,000 appropriated to FERA since it was established in May 1933, is all but spent--and all of it is money out of the window. Moreover, there exists little hope that FERA will be less of a drain on the federal budget in Fiscal 1935. It is true that forty-two state legislatures convene in January, and that when they do FERA will be ready for them with a club. The club will be a demand that they contribute more generously to relief of their own needy, backed by a threat to withdraw federal relief if they don't. Yet even were all states able and willing to assume a much greater burden by increasing their own taxes this could have very little effect upon FERA's expenses for Fiscal 1935; it could scarcely be before April or May that any increase in state-tax collections would make itself felt. In the meanwhile, more and more people are piling on the relief rolls and it looks, therefore, as if FERA would spend well over $1,500,000,000 in Fiscal 1935. For all its good works, it stands as the single most serious financial drain upon the budget, and almost regardless of what Fiscal 1936 may bring forth, it seems likely to hold its unhappy prominence for another year at least.

Typical of the agency that stands midway between these two extremes is the Home Owners' Loan Corporation. Here is a budgetary demi-virgin. It was created in June 1933 to grant long-term mortgage loans at low interest rates to enable home owners to refinance defaulted mortgages and save their homes from foreclosure. The corporation's $200,000,000 worth of capital stock is held by the Treasury, and funds were provided by RFC for the purchase of it. It is authorized to issue bonds to the amount of $3,000,000,000, and by August 31 it had sold $1,440,000,000 worth to the public, of which all but $630,000,000 worth are guaranteed by the government. Against these it had loans outstanding to the amount of $1,350,ooo,ooo.

Theoretically, then, HOLC is independent of the budget. Yet it will eventually have to be reckoned with there because too often the home owner whose mortgage it has refinanced considers that he has now cast his burden upon the Lord and has little, if any, obligation to repay the government agency that brought him out of his crisis. When HOLC's day of reckoning comes, some unpredictable but possibly large fraction of the loans it has made will be defaulted by the mortgagee to the consequent detriment of HOLC's own bond issues--despite HOLC's earnest belief in the soundness of its operations. And since over half of these bonds are government guaranteed, eventually the taxpayer will have another bill to meet.

Let these examples suffice and let us now return to Mr. Roosevelt's $14,000,000,000. It should be clear by now that this $14,000,000,000 does not represent the cost of the New Deal to date. But what does represent the cost?

By way of answer let us suppose that all the New Deal agencies were gathered together to constitute the portfolio of a gigantic investment trust. What then would the prudent trustee do in estimating the worth of his acquisitions? For answer let us take our three categories, the self-supporting, the out-of-the-window, and the doubtful and allocate each one of the New Deal agencies under these headings. Here, roughly and approximately, and heavily subject to human fallibility, is the way the agencies would range--not considering such contingent liabilities as HOLC bond guarantees:


The grand total is Mr. Roosevelt's $14,000,000,000. Suppose that every doubtful item in the center column comes to no good end. At the New Deal's worst, then, its cost so far is $7,500,000,000. The "so far" is, however, an important consideration. When the New Deal can begin to decelerate its spending owing to business improvement or when it may be forced to, by a crisis in credit, is once again something that no man has the wisdom to predict. Meanwhile, the $7,500,000,000 is most certainly far from an ultimate figure.

There is one further way in which to break down the expenditures of the New Deal. That is by a classification of who its beneficiaries have been. If we so regard Mr. Roosevelt's $14,000,000,000, here is what we find:


Let it be remembered once again, however, that at worst so far only seven and a half of all these billions is irretrievable or possibly irretrievable expense. These commitments of the New Deal have been made, roughly speaking, over a period of eighteen months. During that same eighteen months the total national income was probably $70,000,000,000. And thus it would appear that, under the New Deal, the American people have given a tithe to succor the industrial, financial, agricultural, and individual victims of the depression. Is it too much?

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