I was browsing my collection of old Fortune magazines and, in the December 1931 edition, came across an interesting article, a "think piece" on Taxation. The boom of the 1920s had ended, and the Republicans still held the White House, but change was in the air. Franklin Roosevelt and his team of New Dealers were in the wings preparing for the 1932 campaign. The federal budget was under stress as economic needs were rising even as tax revenues were falling. As a proper think piece, the article examines the history of taxation and federal budgets, then addresses the three main options faced by the government: spend less, borrow, or raise more.
Fortune Magazine was founded in the shadow of the Great Crash of 1929, somewhere between the Roaring 20s and the Great Depression. Aside from the wonderful covers and curiously dated advertisements, Fortune had very good writing and excellent research behind its articles. Articles might run long or short, from two or three paragraphs to ten pages, or more with side bars. They were often what we would now call "snarky", but always informative. Numbers were provided, statements were checked, and context was provided. To the modern reader, this is even more disorienting than advertisements for vacations in Stalin's USSR or Hitler's Germany.
We all know what the voters decided and what the government did. This is all history now. But, as with the speeches of Pericles, there is much that can be learned.
The article opens:
"During the twelve months ending June 30, 1931, the U.S. Government took in $3,300,000,000 and spent $4,200,000,000."
The scene has been set with this simple statement, and already some context is necessary. No, there are no omitted zeros in those numbers. Yes, that's how big budgets were back then. A billion, ten to the ninth power, dollars was a stupendous sum back then. Over the decades, the dollar has inflated. While inflation can be a problem, it does play an important role in economic growth and development. (I'll recommend David Hackett Fisher's The Great Wave for some perspective on this).
The 1920s were in many ways the first decade of our current modern era. It was in the 1920s that the U.S. population was first 50% urban. Women could vote, and first time brides were just as likely to be virgins as not. The automobile had replaced the horse, and car ownership was soaring. The United States had flexed its muscles as a decisive world power. The federal government was first getting involved in disaster relief and public welfare. The Democratic and Republican parties were slowly changing from their 19th century to their 20th century forms.
The federal government had racked up a $25,000,000,000 deficit in fighting the Great War. In 1912, the income tax had been legalized by a constitutional amendment, and taxes had been raised to fund the war. The resulting golden business climate of the 1920s had let the government reduce the war deficit by $9,000,000,000, but a series of tax cuts had reduced revenues, so that now, as the economy plunged into recession, funds were scarce.
The debate over spending, borrowing, conquest and taxation is timeless, but now the United States was an industrialized nation, a nation of city dwelling factory and office workers, not farmers. The United States was a world power; it could no longer be ignored as a bit player in the international scene. The government had taken on new responsibilities: to women with children, to the victims of floods and hurricanes, and even to those who had lost their jobs.
What was to be done?
Could the government spend less?
It is comforting to believe that balancing the budget is just a matter of reducing government waste. The Great War was over, and a pacifist spirit prevailed. Surely, the military budget could be cut. Surely, the post office could be run on sound business principles and not require subsidies. But, then as now, every subsidy and expenditure had its defenders and, then as now, "log-rolling" played a major role on the Congressional floor.
Worse still, the collapsing economy meant that the government had new expenses. Congress had already allocated an additional half billion dollars for public works in hope of helping the unemployed. There was another $900,000,000 for veterans, though most of this was coming from a special fund. In addition, the government agreed to forgo an expected $250,000,000 in war reparations from Germany which was having economic and political problems of its own. If it helps to tack an extra three zeros at the end of each number, go ahead. You won't be far wrong.
Could the government borrow enough?
Given that the government has extraordinary powers, there was never any serious doubt that the government could borrow whatever it wants. China, which was having economic and political problems of its own, wasn't around to sop up whatever paper the U.S. treasury cared to issue, but the United States government still had good credit.
The arguments against borrowing are both modern and timeless. Government borrowing squeezes out other borrowers to the detriment of the private sector and smaller governmental entities. This is the interest rates argument. Already, the United States was considered the "final credit reserve of the world", and for the health of the world economy "Liberty bonds [must] maintain a steady price".
The other argument against borrowing, then and perhaps less so now, was moral.
"If it is bad policy for an individual to go deeper into debt to meet his current expenses, it is worse for governments. It gives a bad tone to the whole national economic life. It is a method lacking in courage, debilitating to world confidence for the strongest government in the world to shift to another day and generation the solution of its own fiscal problems."
Just try to disagree with that! The 1920s were the era of the YMCA and of masculine Christianity, a response to urbanization and mechanization. Aside from the clarity and strong styling, that could have been written yesterday.
The only odd thing, to a modern reader of business journalism, is that spending less had already been dismissed. Could the editors of Fortune, or at the least the writers of Fortune, been calling for the courage to do the unthinkable? As Sherlock Holmes would have said, if he had existed, "How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?"
One of the great charms of reading original sources is the unexpected.
This diary entry has already grown long, and the possibility of raising more money, as ever, requires a fair bit of thought and discussion. Rather than test the limits of this web site's database and the endurance of the reader, I'll return to the issue of raising more money in another diary entry.