George Novack
(writing as William F. Warde)

Roosevelt’s Financial Problems

Source: Fourth International, Vol.4 No.1, January 1943, pp.11-14.
(William F. Warde was a pseudonym of George Novack.)
Transcription/Editing/HTML Markup: 2006 by David Walters.
Public Domain: George Novack Internet Archive 2008; This work is completely free. In any reproduction, we ask that you cite this Internet address and the publishing information above.

In the December issue of Fourth International I demonstrated that American economy was in the initial phases of inflation. I noted that inflation was not simply an American but a world phenomenon and that the process of inflation had its roots in the disruption and devastation of capitalist world economy caused by the war coupled with the unprecedented diversion of capital and labor from productive civilian production into unproductive military production. The inflationary process manifested in the cumulative rise of bank loans, bank deposits, currency in circulation and commodity prices was the inevitable economic consequence of these conditions. As the war is prolonged, all these conditions are aggravated in the extreme.

The financial problems and policies of Roosevelt’s administration must be viewed in the light of these general conditions. They control Roosevelt; he does not control them. Moreover, Roosevelt heads a capitalist government in the foremost capitalist country. He is duty-bound to protect and to promote the welfare of American capitalism. That means first of all the profits of our ruling monopolists. Capitalists produce commodities, in war as in peace, not for the sake of production but for the making of profits. Without profits—and plenty of them, as the Wall Street Journal and New York Times continually remind Washington—our industrialists have no “incentive” to produce.

That is why all suggestions emanating from official circles that they are going (always in the future!) “to take the profits out of war” are fraudulent. The American imperialists have embarked upon this war for the specific purpose of preserving their profits and increasing their profit-making possibilities.

How are the capitalists faring under Roosevelt’s “equality of sacrifice” program? Look at the following picture of “industry’s profit outlook for 1942 and 1943” presented in the December 4 United States News:

“Profits promise in 1943, as in 1942, to be better than anticipated. In 1942 profits will be about 18 per cent under 1941. Yet: except for that one year, the 1942 profits will be the highest since the 1920’s .

“In 1943, profits probably will be 10 per cent higher than in 1942 ... Prospect is that 1943 will be the peak year for war profits.

“In terms of dollars: corporation net income, before taxes, is likely to be $17,350,000,000 this year against $14,496,000,000 last year and $9,069,000,000 in 1940. Next year, corporation net before taxes will be about $19,240,000,000.

“But: after taxes, corporations will have left about $5,130,000,000 this year, against $6,250,000,000 last year And: next year they will have left a net profit of about $5,690,000,000. That is for all corporations, including those that will show a deficit. It reflects a rather healthy picture.

“When it comes to dividends: Prospect is that corporations will payout about $4,350,000,000 this year against $4,600,000,000 last year. They may rise somewhat in 1943. Tendency of Congress to be conservative in taxing corporation income improves the dividend outlook.”

It ought also to be kept in mind that 10 per cent of the taxes deducted from gross profit will return to the corporations in post-war refunds!

How are such enormous profits to be acquired in the face of ever-mounting costs of the war? In only one way: by exacting the necessary funds from the people. Roosevelt today finds himself confronted with a twofold task. While safeguarding capitalist profits and interests, he must make the masses cough up the costs of the war. The people must pay; the monopolists must profit. How is his administration going about to achieve these ends?

Costs of This War

Roosevelt’s financial problems are rendered difficult by the colossal costs of this war. In 1941 the United States expended approximately 32.5 billions for war purposes. The entire direct cost of the First World War to the United States from the time of its entry in 1917 until the peace treaty was ratified in 1921 has been estimated at 25.7 billions. That is to say, the United States spent more money before it actually entered this war than it expended during the entire period of the first war!

The direct expenditures of all belligerents in the First World War have been estimated at 200 billions. Authorized appropriations for the war program from June 1940 to October 1942 total 230 billions. Merely to initiate the first phase of its participation in the conflict, this country will spend 30 billions more than all the belligerents in the last war; This is 75 billions more than the United States government spent from the inauguration of George Washington as president until Pearl Harbor!

Consider these war costs from another angle. In 1918, at the height of the first war, the United States spent only one-fourth (or 25 per cent) of its annual income for war purposes. In the first months of 1942 the military budget took 36 per cent of the annual national income—the largest in history!—against 14 per cent in 1941 and only two per cent in 1938.

The rate of spending mounts dizzily. War spending in May 1942 was more than four times that for the similar month of last year. Expenditures are stepping along at the pace of a billion and a half dollars a week, six billions a month. $5,722, 000,000 was spent in October 1942. For the first year of the war, appropriations will reach 140 billions. This is far more than the expenditures of any other belligerent. England, according to Sir Kingsley Wood, Chancellor of the Exchequer, is spending 337 millions per week—about one—fourth of our total. According to Budget Director Harold Smith, the war costs of Germany, Soviet Russia and other countries are lower than ours.

The transition to this mad dance of the billions was explosive. The leaders of the American bourgeoisie were caught unawares. On the eve of the fall of France, May 16, 1940, the President asked Congress for a military budget of one billion dollars, a sum which he thought adequate and which, he said, need not “d iscomboomerate” anybody! Twenty-four months later that modest one billion has swollen over two hundredfold. Such a precipitous jump has never before occurred in our history. And, notwithstanding Roosevelt’s assurances of two years ago, the enormous expenditures are beginning to “discomboomerate” everybody.

It is now officially anticipated that the United States will spend 78 billions from June 1942 to July 1943—22 billions more than Roosevelt estimated in January 1942. When the United States entered the war, estimates were that its cost would total about 100 billion dollars. Now Washington speaks of 300 and 400 billions. Even these revised figures are based upon the perspective of a relatively short war.

On November 30, 1918, the national debt stood at 19.4 billions. One year after Pearl Harbor the national debt passed the hundred billion dollar mark. It was 58 billions only a year ago. Mounting by the billions every month, it is expected to hit at least 140 billions by July 1943.

Such statistics indicate the prospects for the United States alone. Imagine the economic strain upon those belligerents which are not only much poorer but have been at war much longer! Can American capitalism undergo such stresses and strains without catastrophic economic consequences?

Roosevelt is no Aladdin and his Treasury Department has no magic lamp to conjure money out of thin air. The United States, to be sure, is richer and more productive than other countries. Nevertheless its productive forces and resources are not inexhaustible. They have very definite limits, as the current shortage of steel and skilled labor is demonstrating.

The United States government has only three ways of raising the sums of money required for the war: 1) it can tax; 2) it can borrow; 3) it can create new money.

Taxation has always been the primary source of federal revenue. The new tax bill has enormously broadened the base of direct taxation. Income tax payers numbered 7,000,000 in 1940; 15,000,000 in 1941; and 27,000,000 in 1942. They will embrace 50,000,000 in 1943. Tens of millions are about to meet the income tax collector for the first time. Everyone earning over $12 a week will have to pay a five per cent “Victory Tax.” The mass of consumers will also have to pay additional indirect taxes in the form of increased excise taxes.

The new revenue law, it is estimated, will raise about 24 billion dollars. The total tax bill (federal, state and municipal) of the American people will amount to 40 billions next year when the national income will be about 120 billions. That means one-third of the national income will be taken in taxes, one dollar out of every three.

Roosevelt’s Tax Program

Roosevelt and Congress have followed the same guiding line in this tax program as their Republican predecessors and all other capitalist governments. They soak the poor and spare the rich. Senator LaFollette justly remarked during the debates that the tax bill was so harsh on low incomes there would be “nothing left of the little man but pulp if this tax bill were adopted.” This did not prevent the Senator from Wisconsin from voting for the measure.

Congress left untouched all the special privileges: tax exempt securities, separate returns for husband and wife, depreciation allowances whereby the rich elude the tax net. It added dozens of new loopholes by which corporations could dodge taxes. While taxes on small incomes were raised about five billions, corporation tax increases amounted to only $l,799,000,000 half as much as the Treasury requested. And $550,000,000of this increase will be returned in post-war refunds. How Wall Street rejoiced when Roosevelt signed this bill!

Unprecedented as they are, the new taxes will nevertheless cover less than one-third of the war costs. While the federal government expects to collect 24 billions in taxes this coming year, it will spend 78 billions. That leaves 54 billions more money to be raised. As compared with these estimates, the government is spending at the rate of six billions a month and collecting 1.2 billions in taxes. This means that taxes are actually covering only about one-fifth of the bills. How is the balance to be met?

“Congress knows as well as the administration,” declared the October 10 New York Times, “that inflation cannot be prevented unless the tax bill is almost doubled.” Taxes are sure to increase. Treasury officials have already set a tentative figure of 16 billions as the goal in additional revenue to be sought through a combination of heavier taxes and more enforced “savings.” This ’means that the masses will have to give up not only such “luxuries” ad refrigerators and radios but must cut down considerably on the necessities of life. With wages frozen they will be squeezed twice as hard by the vise of taxation and the rising cost of living. Moreover the revenue derivable from excise taxes will shrink as civilian consumption contracts. When people cannot buy or operate automobiles, they do not pay taxes on licenses, tires, accessories, gas, oil, etc. New sources of revenue must be opened up.

Can all the contemplated taxes be collected? How can worker families pay hundreds of dollars in taxes when every cent they get is needed for the bare necessities of existence? Non-payment of taxes may well reach in time the same mass proportions as non-payment of debts in 1932.

Taxation has already encountered such objective economic and political limits. No country has ever financed a major war by taxation alone. In the last war the United States raised only one-third of its expenditures through taxation. It borrowed the other two-thirds.

The Treasury has to borrow the bulk of its expenditures. How is it planning to do this?

The sale of war bonds and stamps is expected to bring in 12 billions this year. But sales have not equalled expectations to date-and will undoubtedly fall off still more as taxes cut more heavily into workers’ incomes.

Small investors can absorb less than a quarter of the government borrowings. The government must therefore turn to the banks and other big financial institutions for the money it needs. The banks entered the war period already heavily loaded with government obligations. In 1933 the banks held $6,887,000,000; in 1940 $14,722,000,000. At present about 46 per cent of government securities are in the hands of the 15,000 commercial banks in this country. They are now buying bonds at so fast a rate that they are expected to hold some 48 billions by June 30, 1943 and 74 billions a year later.

The situation and its significance has been summarized by the New York Times as follows:

“The Treasury now expects to spend about $80,000,000,000 in the fiscal year ending next June 30, and about $100,000,000,000 in the following twelve months. The new tax bill is calculated to bring in only about $25,000,000,000. [1] That leaves $56,000,000,000 to be borrowed this fiscal year and a still larger amount next year. The most optimistic estimates do not put the total of bonds that can be placed outside the “commercial banks at more than $20,000,000,000. That leaves $35,000,000,000 for the commercial banks.”

It is not easy to raise such sums. In December the Treasury set out to borrow nine billion dollars—only a fraction of the total required. Yet this is the greatest financial operation in American history. The largest previous amount ever borrowed at one time by the Treasury was 6.9 billions on the Fourth Liberty Loan in 1918. Half of this borrowing was directly covered by the banks. And then Morgenthau had to raise this nine billions to 11 billions!

To enable the banks to shoulder this burden, the Federal Reserve System has had to take a series of extraordinary actions. It has lowered the rediscount rate to one-half of one per cent, the lowest in the history of central banking; it has reduced reserve requirements; it has made record purchases of government obligations on the open market to keep banks well supplied with reserves. The net result of these measures has been to shift part of the burden from the shoulders of the commercial banks to the central banking system. But the load has simply been shifted—it has not at all been lightened or removed.

The inflationary pressure has thereby been enormously increased. Banks are buying government bonds, not with accumulated savings or their own capital, but on credit provided them by the Federal Reserve System. The result, as the New York Times warns, is credit inflation:

“Every dollar of that $35,000,000,000 absorbed by the commercial banks contributed to inflation because it means an expansion of bank deposits by that amount, an increase in the money supply of the country. It places, too, a terrific strain upon the whole banking system that can only be met by drastic reductions of reserve requirements.”

For months a behind-the-scenes battle has been going on between the Treasury and the big banks on methods of financing the war and the rate of interest on bonds. The Treasury floated its offering of four billions in October by a very narrow margin and only after a direct, last-minute appeal to the banks and insurance companies to bail, it out. Now, taking advantage of the Treasury’s difficulties, the bankers are demanding higher taxes for the masses and higher interest rates on their loans to the government. They want to duplicate their extortions of the last war when the First Liberty Loan paid 3.5 per cent, the Second 4 per cent and the final Victory Loan 4.75 per cent. Now they are asking for 2.5 per cent in place of 2 per cent for their loans.

So far Morgenthau has managed to hold the Wall Street wolves at bay. But the economic forces of capitalism are working in their favor. As the government’s credit becomes weaker with each succeeding bond issue, it is only a question of time before the Treasury will have to bow before the bankers and offer them premiums of one kind or another to obtain the money it needs.

The Mechanism of Credit Inflation

The principal means of the circulation of liquid funds in this country consist not of paper currency but of bank deposits and checks. An important and growing proportion of these bank deposits does not come from previous deposits. It is created by means of loans by the banks to their customer-borrowers.

The more money an ordinary person lends, the less he has. But the opposite is true of a bank. The more money it lends, the more it has on deposit. How is this seeming paradox made possible? Ordinarily only a small percentage of the bank’s depositors withdraw their funds at any given time. Banks are thus enabled to make loans on the basis of these “idle” funds, that is, to extend credit by taking advantage of this specific fact. These loans are credited to borrowers as deposits to their accounts. The money thus available is credit money. The U.S. government is today the biggest borrower on the money market.

A general increase of bank loans will obviously cause a general increase of bank deposits and a general rise in the amount of purchasing power in circulation as these deposits are drawn upon in payment of obligations. How much credit can the banks extend or create? This must be determined in practise. There are limits which banks cannot transgress in creating credit money without endangering their own solvency and therewith the financial system of the country. Since the establishment of the Federal Reserve System in 1913 commercial banks have been able to expand their credit facilities considerably. The limits of credit expansion for the commercial banks are fixed by federal regulations.

The Federal Reserve System has safeguarded the solvency of its member banks by requiring every bank to keep on hand a certain cash reserve to meet the demands of its depositors. This cash reserve has been cut down for commercial banks from 25 per cent in 1912 to 10 per cent by the Federal Reserve Act of 1933. In the past a bank could loan out ninety dollars in credit for each ten dollars of cash in its vaults without being called to account by the Federal Reserve examiners. Any creation of credit money beyond these limits was considered credit inflation which could quickly impair and imperil the entire fiscal structure.

To get the money it needs to finance the war, and in particular to raise the $9 billion loan this December, the United States government has been compelled in the first year of the war not only to lower the rediscount rate but to destroy all their indispensable safeguards. According to a United Press dispatch from Washington on November 24:

“’All federal and state limitations on the nation’s banks were removed today to permit unlimited purchases of most government securities to help finance the war. At the same time the banks were authorized to make short-term loans to individuals wishing to purchase more government securities than their immediate capital permits.”

What other conclusion can be drawn from this sweeping move than that, from now on, there are no fixed limits to the creation of credit money? This is the point made by the New York Times in its editorial the following day:

“The commercial banks … must face the prospect of breaking with some traditional guide-posts of ‘sound finance.’ In particular they must expect to see the proportion of their capital to liabilities fall far below the time-honored ratio of one to ten.”

Late in December the Federal Reserve System increased to 4,739 the number of banks which” qualify as special depositories of government funds. These special depositories are permitted to subscribe for government bonds without putting up cash. Instead they simply credit the Treasury on their books with a deposit equal to the amount of their subscriptions to government bond issues which the Treasury draws upon. This means that all restrictions upon reserves have been abolished in practice. The New York Times (Dec. 7) estimated that “book credit is being used to the extent of about 70 per cent in banks’ payments for the new securities.” The lid is off! Secretary Morgenthau, writing in the December issue of the Army and Navy Journal blandly explains:

“Governments have been known to debase their coinage, issue new currency and rely on the credit manufacturing mechanism of the banks to provide them with the necessary resources to conduct war. These practices did not reduce by one iota the sacrifices people were called upon to make during the war.”

Secretary Morgenthau preferred not to mention the fact that he, too, must now “rely on the credit manufacturing mechanism of the banks.”

This credit inflation is occurring under conditions of war economy which pile up one disproportion upon another. There is, first of all, the widening gap between the available supply of consumer goods and the amount of purchasing power. “There is no getting away from the fact,” stated the October 10 New York Times, “that income payments to individuals in the United States will total about $120,000,000,000next year, while the available supply of consumer goods and services in which this income could be spent will have shrunk to about $70,000,000,000. This will leave $50,000,000,000 which, if not taken in taxes or borrowed voluntarily or compulsorily, will be available to bid up the prices of the ever-diminishing supply of consumer goods until they burst through ceilings.”

The authorities are hoping to siphon off these scores of billions through taxes and forced savings. Meanwhile purchasing power is piling up in unprecedented volume and at an unprecedented rate.

Individual savings in 1942 “were estimated by the Department of Commerce at the unprecedented total of 26 billions, more than twice as great as in 1941 and more than three times as great as in 1940.” (New York Times, December 18, 1942.) The Securities and Exchange Commission has stated that there is “evidence of a further acceleration of such funds in the near future.” The Times warns that these billions of dollars represent “the greatest single threat to check inflation of the currency.”

At the same time currency in circulation continues to increase at a record-breaking rate. Last month I stated that the total “should soon pass 15 billions.” This mark has since been surpassed and there are no signs of any check in its upward course.

All these swelling billions hang over the market like a reservoir brimming over with spring rains. Sooner or later they must burst the dams and pour through the market in the most destructive torrent of runaway currency inflation this country has ever experienced. Every additional step taken by the authorities to expand credit, every bar they let down, pushes the country farther along the road of credit inflation and makes it more and more difficult to finance the war by borrowings. The longer the war, all the more swiftly is the Treasury impelled to the printing press—that last resort of financially hard-pressed regimes.

We have so far seen only the early blossoms of the inflationary process. The bitterest berries are still to come.


1. It will be observed that the annual estimates emanating from authoritative circles, including Roosevelt, differ considerably from one another, in some cases ‘by five or ten billion dollars and more. From one month to the next, the estimates undergo “revision.” This confusion reflects the “discomboomeration” ‘in ruling circles.


Last updated on: 25.8.2008