Return to Grief

Last week Henry Morgenthau Jr. returned from a three-week visit to London where he had 1) received a feeler on becoming world statesman of Zionism, 2) talked long and seriously with British Treasury officials.

Subject of the talks was not hard to guess. Even during Morgenthau's short absence the home-front war against inflation has taken a turn for the worse. In Washington men knew that more than one price ceiling was cracking, that a vicious retail boom is on. Federal Reserve authorities gloomed that unless the Treasury can put its finances in order the U.S. will face a real bust-up.

In this fiscal year the Treasury will spend some $85 billions, will take in only about $27 billions. Next year it will take in perhaps $5 billions more, but it will also spend more. Hence by the middle of 1944 its borrowings will be such that the national debt, now at $86 billions, will have topped $200 billions.

The Citizens v. The Banks. If most of this colossal borrowing were done out of the pockets of private citizens or savings institutions, the situation would not be bad. For this kind of borrowing adds nothing to the country's already bulging money supply. The money that the Government spends is borrowed back, spent again and borrowed back, etc. But at the present rate of borrowing-from-citizens, the Treasury cannot possibly get the money it needs in this way. It is relying and will continue relying heavily on selling bonds to the banking system. This in effect pumps brand-new deposit money directly into the economy, with inflationary results.

The accompanying chart shows the trend of Treasury borrowing in each of the four six-month periods since the fall of France, when U.S. war spending began in earnest. Though purchases of bonds by individuals and saving institutions have increased in every six-month period since 1940, the net sales of bonds to banks has gone up from $1.3 billions per six months to $5 billions. The commercial banks now hold about $26 billions of Governments. By the end of 1944 Federal Reserve officials estimate they may hold $100 billions.

Worse still, the Federal Reserve itself has done a little buying, may have to do more, as it did in the case of the last Treasury issue. Then the system found it advisable to purchase over $400 millions (not shown on the chart, since the purchases were made only last month). Such buying by the Federal Reserve is close to outright greenback printing and, if it ever reaches a large or continued scale, would have much the same effect.

The grief that Mr. Morgenthau faced on his return was the necessity of finding means to break this inflationary trend. One way: higher taxes, to strike directly at consumption and to get at incomes of $3,000 and less, which today constitute some 45% of all income, and of necessity are the high spenders, the low savers. Another: forced savings, either by further refundable taxes or by forced sale of bonds. Either will be politically difficult, especially after the Treasury record during this year's framing of the tax bill. Offered a sales tax by Congress, Morgenthau turned it down. He also opposed the pay-as-you-go Ruml plan. Finally the Treasury cold-shouldered Senator George's sense-making Victory tax (now law).

For these mistakes Henry Morgenthau is not alone to blame, since from the beginning the Administration has pressured him into being little more than an errand boy for its policies. But soon Henry Morgenthau must frame and stick to a strong sense-making tax and borrowing policy such as England and Canada have by now adopted, or step down.

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