America's Fiscal Constitution (33 page)

President Roosevelt would build a memorial to Jefferson in the nation’s capital. He also followed the Jeffersonian obsession with clearly articulating the purpose of debt. Like Hoover, Roosevelt carefully distinguished between spending for emergency relief and spending for normal government operations. In one of his first radio “fireside chats,” the Democratic Roosevelt noted that it “may seem inconsistent for a government to cut down its regular expense and at the same time to borrow and to spend billions for an emergency.” He then explained that the government had “imposed taxes to pay the interest and installments on [the emergency] part of the debt.”
³⁰

Congress passed major legislation at an unprecedented pace during Roosevelt’s first months in office, beginning in March 1933. For several months old battle lines faded. The prohibition of alcoholic beverages had been one of the most contentious public issues. Yet Congress quickly passed Roosevelt’s bill to legalize the sale of beer and wine as a means of raising revenues, which would soon almost equal those produced by the personal income tax.

Members of Congress from both parties indulged Roosevelt’s experiments. When the president ordered reluctant cabinet officials to quickly draft legislation creating an organization of uniformed civilian workers to perform hard labor on public lands, the head of the American Federation of Labor denounced the plan as “Hitlerism.” Within days in April 1933, however, Congress had authorized creation of the Civilian Conservation Corps. In the following months, 1,300 camps would employ 275,000 workers—mostly young men—who sent a significant portion of the $1 per day they earned back to family members.
³¹

Other elected officials also felt free to innovate. Senator Arthur Vandenberg, a Republican newspaper publisher from Michigan, worried that the RFC would save only large banks and proposed the creation of a trust fund, financed with a tax on bank deposits, to insure some amount of all bank deposits. Senior Roosevelt administration officials opposed Vandenberg’s idea because of concerns about the impact of a tax on banks. Because the program was intended to be permanent, no one considered paying for it with debt. Vice President Garner liked Vandenberg’s idea and lined up support from Senate banking expert Carter Glass. Garner prompted Vandenberg to offer his program as an amendment to the second Glass-Steagall bill. Bank panics ceased and deposits began flowing back into banks after the establishment of the new Federal Deposit Insurance Corporation, the FDIC.

The FDIC’s use of a trust fund financed with dedicated taxes was nothing new, of course. That sort of financing solidified the bond between new taxes and new obligations. In the defense of his Albany Plan of 1754, Benjamin Franklin noted that higher taxes would “fare better when [people] . . . have some share in their direction.”
³²
Hamilton and Madison had originally earmarked new whiskey taxes for retiring debt assumed from the states, while Gallatin placed revenues from higher import taxes into the Mediterranean Fund that was dedicated to defraying naval expenses for combating piracy. The traditional concept of trust funds that linked specific spending and taxes would be used more extensively than ever in the 1930s.

T
HE
D
RIVE TO
B
ALANCE THE
B
UDGET

Two actions in 1935—one by Congress and the other by the Supreme Court—thwarted the Roosevelt administration’s goal of balancing the budget as the economy bounced back from its low two years earlier.

Congress passed and then overrode Roosevelt’s veto of a bill that required the federal government to pay over $2 billion to citizens who had served in the military during World War I. Eleven years earlier Congress had overridden Coolidge’s veto of legislation that gave veterans a bonus due with accrued interest in 1945. The certificate documenting this obligation had since become the most valuable possession of many veterans. Veterans demanded that the federal government cash out those obligations at a reasonable discount. Roosevelt agreed to that demand only if Congress
passed a new tax, such as a higher inheritance or estate tax, to fully offset the cost. Congress instead instructed the Treasury to pay for the bonus to veterans with new currency. When Roosevelt strongly objected to any attempt to make federal spending “free,” Congress passed the bill without that particular requirement.

The president believed that the veterans’ bonus was not an appropriate use of debt during a downturn, since the program did not condition payment on a specific hardship or work requirement. Every emergency appropriation so far, he said, had been “predicated not on the mere spending of money to hasten recovery, but on the sounder principle of preventing the loss of homes and farms, of saving industry from bankruptcy, of safeguarding bank deposits, and most important of all, of giving relief and jobs through public work to individuals and families faced with starvation.”
³³
Roosevelt raised the political stakes by delivering that message before a joint session of Congress at which he signed the veto with dramatic flair. Congress nonetheless overrode the veto with a lopsided, bipartisan vote. Even this use of debt was consistent with historical principles, as it merely substituted balance sheet debt for an existing obligation that had been created off the balance sheet.

The Supreme Court also undermined Roosevelt’s drive to balance the budget when it invalidated a tax dedicated to pay for a farm program designed by Roosevelt’s agriculture secretary, Henry A. Wallace. Wallace, whose father had served Harding and Coolidge in the same position in the 1920s, crafted legislation that taxed food processing in order to finance payments to farmers who limited their production to “allocated” acreage. He hoped that restriction on production would raise farm prices.

Roosevelt was furious at the Supreme Court’s action, which he considered an overreaching interference with domestic policy. The president viewed the food processing tax as far more conservative than the radical farm program favored by Senator Huey Long of Louisiana. Roosevelt was determined to show conservatives on the Supreme Court the consequences of their insistence on more established forms of taxation. He asked Congress to fill the budget hole with higher taxes on millionaires, large businesses, and estates.

The veterans’ bonus cost the federal government $1.77 billion in fiscal year 1936 and $556 million the next. In fiscal year 1935, before being struck down by the Supreme Court, the food processing tax had produced $526 million—14 percent of all federal revenue—a share equal to all
personal income taxes.
³⁴
Without the veterans’ bonus and with revenues from the processing tax, the fiscal year 1936–1937 budgets, excluding relief spending, would have balanced even though unemployment remained high.
³⁵

Pragmatic administrators stretched the value of limited federal dollars. They included Jesse Jones, chairman of the Reconstruction Finance Corporation; Henry Morgenthau Jr., secretary of the treasury; and Harold Ickes, secretary of the interior and leader of the Public Works Administration.

Jones, a conservative Texas banker and businessman, leveraged the RFC’s public dollars with project financing in the form of bonds backed by mortgages, banks, and revenue from infrastructure projects instead of Treasury credit. By 1939 the RFC had made $10 billion in loans, an amount equivalent to all other Depression-era federal emergency efforts combined. By that time all but $1.9 billion had been repaid.
³⁶

While Jesse Jones wielded power derived solely from congressional confidence in his business acumen, Secretary Morgenthau’s influence rested on his personal relationship with the president. Morgenthau was Roosevelt’s neighbor in New York’s rural Dutchess County, and the two families had vacationed together for years. Morgenthau, whose somber and precise manner projected the image of a conservative banker, pressed Roosevelt to balance the budget once the worst of the Depression had passed. In 1937 he told his polio-afflicted friend that it was time to “throw away the crutches and see if American enterprise could stand on its own feet.”
³⁷

Secretary of the Interior Harold Ickes worked to ensure that the federal government financed only public works projects that had enduring value. Ickes, a former Theodore Roosevelt Progressive, met with Roosevelt weekly to review the details of each project recommended for federal funding. Roosevelt and Ickes approved grants to help local governments finance hundreds of water and sewer improvements, schools, roads, and hospitals. Contractors for federal agencies built hydroelectric dams and naval vessels, including the aircraft carriers
Enterprise
and
Yorktown
that years later played a critical role in the decisive Battle of Midway.

Roosevelt urged Ickes not to rush the construction of public works. After all, if the economy recovered, they could avoid spending borrowed funds. The president also directed Ickes and others to refrain from claiming that public works created indirect jobs as a result of spending by construction workers. Roosevelt wanted to prevent creating the false
impression that the federal government could create prosperity by spending vast amounts of borrowed money. Modern construction required specialized skills and could not efficiently employ more than a small fraction of unemployed Americans.

S
OCIAL
I
NSURANCE

Emergency grants from the Federal Relief Administration, at the cost of less than 2 percent of national income, helped prevent starvation and homelessness during the winters of 1933 and 1934.
³⁸
The Civilian Works Administration financed temporary jobs. Four million of those jobs ended in the spring of 1934, when Roosevelt argued that no one would “starve during the warm weather.” The president objected to putting able-bodied citizens “on the dole” of long-term public assistance, which he likened to a “narcotic.” In November 1934 he told Woodrow Wilson’s former advisor, Colonel Edward House, that he was “seeking . . . the abolition of relief altogether.”
³⁹

The president’s views about “the dole” reflected the American political mainstream, as did his commitment to assist people who had lost their savings and were too old to work. Huey Long’s “Share the Wealth” plan suggested confiscating the wealth of the richest Americans and redistributing part of it to pay old-age pensions. A mild-mannered California physician, Dr. Francis Townsend, generated a groundswell of support for his plan for the federal government to pay $200 a month—enough to support a comfortable standard of living—to everyone over the age of sixty.
⁴⁰
Townsend claimed his pension plan would stimulate the economy and proposed the program be paid for using revenues from sales taxes.

Townsend had hold of a potent issue. Americans of all ages feared the grim fate of elderly citizens who had exhausted their savings during the Great Depression. Employers of the era typically did not provide pensions for retirees. By 1934 dues-paying members supported several thousand “Townsend Clubs,” which could swing the balance in a close congressional election.

State and local governments also sought federal help in providing services to indigent older Americans. The federal government had unintentionally already borne a portion of these costs when some states—most notably in the South—diverted grants intended for the relief of laid-off workers in order to support citizens who were too old or disabled to work.

Fifteen months after taking office the president appointed the Committee on Economic Security to recommend “some safeguards against misfortunes which cannot be wholly eliminated in this man-made world.” Roosevelt endorsed plans paid for “by contribution rather than an increase in general taxation” to provide for future retirees and temporarily unemployed workers. He asked Congress in January 1935 to enact the committee’s recommendations in part to help “quit this business of relief.”
⁴¹

The committee recommended that pensions be funded with a tax on some percentage of the pay of employees who would later become eligible to receive a pension. A payroll tax for pensions would be split between the employer and employee, while a payroll tax for temporary unemployment insurance would be paid directly by employers. The administrative or federal funds budget would continue to provide matching grants to states for poor children, blind people, and older Americans who did not qualify for benefits under the new contributory pension program. That form of public assistance, or welfare, was the least controversial part of the House Ways and Means Committee’s bill that was entitled the Social Security Act.

The Social Security Act gave states the responsibility for administering the unemployment insurance program. To prevent states from abandoning the program in order to lower taxes and attract new employers, the federal government imposed a federal tax on payrolls and credited amounts back to states that maintained unemployment insurance. The system of contributory unemployment insurance was not intended or financed to sustain unemployed workers over long periods of time.

The proposed old-age pension system could not help the 6 percent of Americans already over sixty-five in 1935, since they had no history of contributions that qualified them to receive benefits. The new pension system could, however, satisfy the widely perceived need for minimal and portable pensions for future retirees. President Hoover had earlier offered the rationale for a pension system funded half by employers and half by employees: “Medical science and work in public health controls had so prolonged the average life of the population that, instead of the two or three percent living beyond 60 years of age a century earlier, we now had 10 or 12 percent. The burden of the destitute and old people was too great to be met by the old-fashioned county commissioners with their ‘poor-houses.’”
⁴²