THE FED’S 2003 DISINFLATION CONCERN AND A LOOK BACK TO MARCH 1933

On May 6th the Federal Reserve Bank at the time of its FOMC meeting did something it had not done in seventy years. It warned against disinflation, i.e. deflation.

There is always discussion regarding the rate of inflation, but we cannot recall hearing discussions concerning the rate of deflation as that could ultimately lead to the use of the word depression, a word that cannot be used in polite or, for that matter, in impolite society.

With this in mind we thought it would be interesting and worthwhile to have a look back to President Roosevelt’s speech before Congress urging a balanced budget that was considered to be the “first concern” of the nation. Broad powers were requested to, among many other things, reduce veterans’ compensation and to cut civil and military salaries. These were the days of the Great Depression.

On March 13th President Roosevelt would also submit a bill to Congress for a $500,000,000 bond issue to provide employment for 250,000 men in reforestation work around the country. This was the birth of the CCC – the Civilian Conservation Corps – reportedly the most popular experiment of the New Deal. The proposal, surprisingly, was opposed by organized labor but signed into law on March 31, 1933. Over its lifespan of 8 years 2.5 million men went through the CCC camps.

On March 10th the Gold Embargo was extended. Member banks of the Federal Reserve System were invited to reopen. “ Until further order no individual, partnership, or corporation, including any banking institution, shall export or otherwise remove or permit to be withdrawn from the United States or any place subject to the jurisdiction thereof any gold coin, gold bullion or gold certificates…”

70 YEARS AGO – Message From Roosevelt Stressing Economy Needs

These are Franklin Delano Roosevelt’s comments concerning the federal deficit and the U.S. economy as they appeared in the Pittsburgh Post-Gazette on March 11, 1933.

WASHINGTON: March 10. The text of President Roosevelt’s message to Congress today on slashing Government costs follows:

To the Senate and House of Representatives:

The Nation is deeply gratified by the immediate response given yesterday by the Congress to the necessity for drastic action to restore and improve our banking system. A like necessity exists with respect to the finances of the Government itself, which requires equally courageous, frank and prompt action.

– For three long years the Federal Government has been on the road to bankruptcy.

– For the fiscal year 1931 the deficit was $462,000,000.

– For the fiscal year 1932 it was $2,472,000,000.

– For the fiscal year 1933 it will probably exceed $1,200,000,000.

Need of Action Cited

For the fiscal year 1934, based on the appropriation bills passed by the last Congress and the estimated revenues, the deficit will probably exceed $1,000,000,000 unless immediate action is taken.

Thus we will have piled up an accumulated deficit of $5,000,000,000.

With the utmost seriousness, I point out to the Congress the profound effect of this pact on our National economy. It has contributed to the recent collapse of our banking structure. It has accentuated the stagnation of the economic life of our people. It has added to the ranks of the unemployed. Our Government’s house is not in order and for many reasons no effective action has been taken to restore it to order.

Upon the unimpaired credit of the United States Government rest the safety of deposits, the security of insurance policies, the activity of industrial enterprises, the value of our agriculture products and the availability of employment. The credit of the United States Government definitely affects these fundamental human values. It therefore, becomes our first concern to make secure the foundation. National recovery depends upon it.

Must Avoid Danger

Too often in recent history liberal governments have been wrecked on rocks of loose fiscal policy. We must avoid this danger.

It is too late for a leisurely approach to this problem. We must not wait to act several months hence. The emergency is accentuated by the necessity of meeting great refunding operations this spring.

We must move with a direct and resolute purpose now. The members of the Congress and I are pledged to immediate economy. I am, therefore, assuming that you and I are in complete agreement as to the urgent necessity, and my constitutional duty is to advise you as to the methods for obtaining drastic retrenchment at this time.

I am not speaking to you in general terms. I am pointing out a definite road.

The last Congress enacted legislation relating to the reorganization and elimination of executive agencies, but the economies thus to be affected are small when viewed in the light of the great deficit for the next fiscal year. They will not meet the pressing needs of our credit situation. Provision for additional saving is essential, and therefore I am asking the Congress for new legislation laying down broad principles for the granting of pensions and other veteran benefits, and giving to the executive the authority to prescribe the administrative details. We are unanimous in upholding the duty of the Government to care for those who suffer its defense and for their widows and orphans.

Great Complications

The application, however, of this great principle to large numbers of people involves complications – so great that it is almost impossible to draw legislation with sufficient flexibility to provide substantial justice in varying situations. The proposed legislation states the principles and, limited by them, permits the executive to draw the lines of differentiation necessary to justice.

In accord with the same purpose of substantial justice I request also the enactment of legislation relating to the salaries of civil and military employees of the Government. This would repeal the existing furlough plan, substituting therefore a general principle and authorizing the executive to make application of this principle. The proper legislative function is to fix the amount of expenditure, the means by which it is to be raised and the general principles under which the expenditures are to be made. The details of expenditure particularly in view of the great present emergency can be more wisely and equitably administered through the executive. The flexibility of the measures which I am proposing is not only practical but proceeds along the road of constitutional government.

Government Stability Conceived

Such economies which can be made will, it is true, affect some of our citizens; but the failure to make them will affect all of our citizens. The very stability of our Government itself is concerned and when that is concerned the benefits of some must be subordinated to the needs of all.

When a great danger threatens our basic security it is my duty to advise the Congress of the way to preserve it. In so doing I must be fair not only to the few but to the many. It is in this spirit that I appeal to you. If the Congress chooses to vest me with this responsibility it will be exercised in a spirit of justice to all, of justice to all, of sympathy to those who are in need of maintaining inviolate the basic welfare of the United States.

I ask that this legislation go into effect at once without even waiting for the beginning of the next fiscal year. I give you assurance that if this is done there is a reasonable prospect that within a year the income of the Government will be sufficient to cover the expenditures of the Government.

Franklin Delano Roosevelt March 10, 1933 message to Congress

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The Great Depression, the years of the early and mid 1930s, presented enormous challenges to all Americans. Oddly enough, as a young man I knew many who looked back on a lot of those days as being the best days of their lives. Activities and entertainment were centered almost exclusively on family and friends. All were in the same boat – nobody had any money.

Since September 11, 2001 Americans have again been presented with enormous challenges, as this country has not been able to fully recover from those attacks. This fact is reflected in our economy and in stock and bond markets.

For the stock markets to have a sustainable recovery there are two primary requisites:

– Confidence in the stock markets and the players – the investment bankers, the
corporate CEOs, the Exchanges, the accountants, the analysts, et cetera. Will
the $1.4 billion settlement be enough to make Wall Street change its ways without
holding CEOs personally accountable? We do not perceive a high level of investor
confidence at this time.

– Corporate profits must show a real promise of improving – despite the Fed’s Disinflation Concern.

John W. Hamilton
May 17, 2003