Benjamin Strong Jr. to William G. McAdoo

Identifier

WWP18542

Description

Benjamin Strong Jr. writes William G. McAdoo regarding the definition of the word “budget".

Source

Benjamin Strong Jr. Papers, New York Federal Reserve Bank

Language

English

Text

Dear Mr. Secretary:
What you say in your letter of February 13th about a Budget System is unfortunately only too true. Many people seem to believe that the word “budget”, were it enacted into statute law, would work some mysterious cure of our government’s financial malady. But most of them don’t know what a budget is!
The fact is that the word “budget” really signifies a typically British government institution, the evolution of centuries of experience, which has never been allowed to develop in our government, but which is nevertheless just as possible with us as with England, because the constitutional basis of the English Financial System is substantially identical with the constitutional basis of the financial powers exercised by our Congress.
The raising and appropriating of money for the British government, solely by authority of Parliament, had its earliest origin in Magna Carta. King John’s oath, taken at Runnymede, undertook that “No scutage or aid shall be imposed in our Kingdom unless by the general council (now Parliament) of our Kingdom”, and in the English Bill of Rights it was stated “Henceforth shall no man be compelled to make any gift, loan, or benevolence, or tax, without common consent by Act of Parliament”. And it was proclaimed to be unlawful for the Crown to levy money “for and to the use of the Crown by pretence of prerogative for other time and in other manner than the same was granted by Parliament.”
The British Parliament alone has the Constitutional right to raise money for the Crown and the Parliament alone has the right to vote expenditures for the Crown. A long series of contests between the Commons and the Lords culminated in 1911 in giving the House of Commons exclusive power over money bills, and the House of Lords since that date is practically deprived of the power even to reject a money bill.
I refer to this simply to indicate that the constitutional basis for the exclusive power of the British Parliament (and in recent years actually the Commons) to raise and appropriate the expenditure of money, had its origin in the earliest days of the development of the English unwritten constitution and is no less rigid and restrictive than are the provisions of our more modern written constitution.
Up to this point there is distinct similarity, almost complete in fact, between the revenue raising and the spending powers of British Parliament and of our Congress, but from this point on a tremendous divergence in practice appears. A study of the English System discloses how experience has enabled the British Government to adopt methods of finance which are within the constitutional powers of the Government (executive), do not abridge the constitutional powers of the Commons (Legislative), but are nevertheless practical, effective and economical. This our Government has never succeeded in doing, largely on account of the jealous and selfish exercise of the “spending”, I might say the “wasting”, power by Congress. Our Government in financial matters is in the position of the unfortunate head of a family who has been dragooned into permitting a wife and extravagant daughters to draw checks on his bank account regardless of the condition of his balance and the amount of his earnings. As exhibiting the strength of the English System in contrast with the weakness of ours, I enclose a quotation from an authoritative work published in 1915 on the English Finance System, by a well known English author, who is a member of Parliament.
Whether the method which should now be adopted is called a “Budget System” or by some other name, will make little difference so long as the chief object to be attained can be accomplished. This object, so carefully evolved in England, is to bring the revenues and expenditures of the Nation into balance, and to do so by providing a certain amount of “stretch”, if you please, on both the revenue and expenditure sides of the account and to control or restrict present unlimited Congressional appropriations. I think I am correct in saying that the whole British system rests upon a few simple principles which I will endeavor to briefly state:
1. A great part of the revenue of the Kingdom is fixed, constant and continuing under permanent statutes which apply to practically all sources of income, such as customs, excise taxes, licenses, stamp taxes, taxes on rents, etc., etc., with the exception of the two great sources of revenue which are adjusted each year by Parliament in order to effect a balance with the estimates. These two sources are the income tax and the tea duty. Therefore, when the Ministers of the Crown prepare the budget, the “votes” are brought to a balance with the income and the income to a balance with the “votes” principally by an adjustment of the rates on these two items of taxation, taken in connection with the fixing of the “estimates” for the annual “supply” votes.
2. All revenues of the British government are paid into one fund, known as the “Consolidated Fund”, and all money spent must be paid out of that fund upon authority of appropriation acts of Parliament. This is substantially the same as our “General Fund.”
3. A very large proportion of the Government’s expenditures, the same as a very large proportion of its income, is based upon permanent and continuing statutes, thus reducing the annual votes authorizing such regular expenditures to pro forma appropriation bills, while most of the expenditures for the annual “supply service”, as distinguished from the “continuing services”, which hold over from year to year, are based upon annual “estimates” or votes.
4. Only the Ministry can propose a vote of money to the House of Commons. No member of the House can offer a vote of money by a private bill, or even introduce an amendment to the appropriation bills offered by the Ministry, which would necessitate an increase in the Ministry’s estimates. Any member of the House can offer a vote to strike out a proposed expenditure, or to reduce it.
The Ministers are the representatives of the Crown (executive) so that this situation, which seems quite extraordinary to an American, appears in a measure to defeat the purpose of the Bill of Rights to vest in Parliament (legislative) exclusively the right to raise and appropriate money. That is not, however, the case, - as the powers of the Ministry are based upon a “self-denying ordinance” of Parliament (legislative) which in effect results in Parliament redelegating to the Ministers of the Crown (executive) the exclusive right to propose votes for revenues and expenditures, Parliament reserving the right, on the other hand, to reject the proposals of the Crown in whole or in part, but not to increase them. Of course, at any time Parliament could change all of this by repealing the act of “self-denial”. An act to repeal the so-called “self-denying ordinance” would in fact deprive the Ministers of the Crown of the privileges which this statute has conferred upon them, but as the continued exercise of these privileges is dependent upon the Ministry maintaining a majority in the House of Commons, the rejection of a Ministry’s budget and estimate would have the same effect as would the repeal of the powers now exercised by the Ministers of the Crown, because the Government would “fall”.
5. The estimates for all expenditures are prepared annually by the Ministry (executive), as well as supplementary estimates, which estimates are the result of a long series of careful study made by each department of the government in conjunction with the Treasury, and it is only upon these estimates that votes for expenditures are based. They must, however, be authorized by an Act of Parliament, in which the power of the House of Lords is now limited simply to the right of suggestion and criticism.
6. As the bulk of the revenues of the Kingdom are collected in two comparatively short periods each year and as the system of budget and estimate, after long experience, has brought the income and expenditure of the Kingdom to a very nice balance, provision has to be made for a wide fluctuati9on of income throughout the fiscal year, for the British Government is conducted in normal times upon a very narrow balance in the “Consolidated Fund.” This is done by a carefully safeguarded system of short borrowing, conducted either directly with the Bank of England, or with the money market through the Bank of England.
7. The Ministers of the Crown who prepare the estimates and the budget, perform in considerable measure the work now performed by our Congressional Committees and, of course, being members of the House of Commons, they, or their representatives, are always present to explain and defend the goverment’s financial program.
It may seem at first glance as though the adoption of anything comparable with these methods would be absolutely out of the question in this country, but I am very sure that they appeared to be quite as impossible in England before Mr. Gladstone undertook his tremendous task of financial reform, which he succeeded in acomplishing and which has resulted in the perfection of the present English System.Now the question is - what changes are feasible under our constitution and how may we profit by their experience? There should really be no fundamental legal difficulty because the constitutional bases of the two Systems are substantially identical. A real reform however will require many acts of self-denial by Congress in voting expenditures and some radical changes in our methods of raising revenues. The following might summarize what is needed
(a) All legislation involving appropriations of money which are not continuous (such as interest on the debt, etc.) to be made solely upon the initiative of the administration.
(b) Complete budget to be submitted by the administration annually, the estimates of income thereunder to be calculated so as to cover the expenditures recommended for the current year by the administration (executives).of regulation and control.
As to the budget itself, once the administration can exercise some control over the spending of money, the preparation of a budget covering the income will be greatly simplified, and if this work were done under the direction of permanent under-secretaries, men of experience and ability, who were trained in the work and satisfied to continue in the service, it would doubtless be better done than is possible by the present system.
This plan would not be feasible unless coupled with it members of the Cabinet were given the right to appear in the House and possibly the Senate as well, in order to explain and defend the proposals of both the budget and the estimates and no doubt this privilege should be qaccorded to the permanent under-secretaries as well.
Under some plan such as the above a considerable part of the annual expenditures could be made continuous and put upon a thoroughly scientific basis and at the same time the adjustment of the revenues could be effected by annual changes to the extent necessary only in certain of the larger items of revenue of a non-political character.
One of the curses of our financial system has been the influence of political considerations in establishing rates of duties on imports. Political and private considerations, commonly paraded under the title of “protection”, have no regard for revenues whqatever and a thorough going reform of our finances would necessarily involve taking the tariff out of politics and investing the Tariff Board with fairly broad discretionary powers, certainly with considerable authority for guiding Congress in fixing the scale of those duties which would be classed as “permanent.” Certain items which might produce large revenues could be left in the “fluctuating” class, as in the case of the English tea duties; - such for instance as a duty on rubber and on coffee, neither of which is produced in this country, and consequently not subject to political influences, as in the case of sugar.
Probably the largest item for annual readjustment to bring the budget into balance with the estimates should be the Income Tax.
The task of bringing about improvement in our financial affairs is no greater than that which Mr. Gladstone faced, and it will certainly take a temendous struggle to bring it about; but the results will justify the effort.
I realize that in this time of great pressure upon the officers of the government it is difficult for them to give attention to a new and complicated problem such as this one, but that should not be the excuse for laying the subject aside. This is one of those matters to be dealt with by private and unofficial investigation and inquiry, or, at any rate, by some committee or body not compposed of members of Congress. Our government is now embarking upon a program of expenditure far beyond anything heretofore undertaken and under conditions where extravagance and waste are most likely to develop. Is it not, therefore, proper that adequate measures to regulate and control the government’s revenues and expenses should be undertaken without delay?
Respectfully yours,

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Letter

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Citation

Strong, Benjamin, 1872-1928, “Benjamin Strong Jr. to William G. McAdoo,” 1917 February 19, WWP18542, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.