The theory continued: Government spending on the First [[New Deal]] had been proved to be a powerful. People realized that government pump priming could lead to a self-sustaining economic recovery. The government set up built in stabilizers to maintain prosperity, such as the Federal Deposit Insurance Corporation (FDIC).
Their thesis was as follows. The people do not spend all of the income they receive on consumable goods and services. Each year they save great sums. These savings are thus withdrawn from the function of spending. They must be brought back into the stream of spending some way or the system collapses. The orthodox method of accomplishing this in the past has been through private investment. People who save and who do not wish to spend their money for food or clothes or consumable goods are willing to invest it. If they invest it they put it into what are called capital goods—goods designed to produce other goods such as houses, buildings, machinery, etc. If they do this the money is used to create jobs, experts, technicians, etc., and this gets into the hands of people who will consume it. To keep the capitalist system going there must he a continuous flow of all savings into investment—into new industries and the expansion of old industries. That was considered a perfectly sound theory for many years. It was the basis of the opinion of those who appealed to President Roosevelt in 1933 to adopt a program that would encourage business expansion. Instead the president promoted anti-business rhetoric and class warfare causing uncertainty, and job creation suffered.
The New Deal economists, however, as John Flynn cited, were just learning this important principle. But the Brain Trusters concluded that a continuous flow of savings into private investment was no longer possible. This is possible only when business men wish to borrow funds for new enterprises and expansion of old ones. But this would happen again, they said. Expansion on a sufficient scale in new enterprises and expanding old ones is hopeless because the economy has reached the end of its expansion era, as described above. The only way to avoid the inevitable collapse of the system, they proposed, was for the government to step in and borrow those sums which business refused to borrow and to spend the money on all sorts of welfare, educational, social and other public enterprises.
Government spending had already plunged the nation into debt to the tune of nearly $40 billion. Continuous spending of funds borrowed by the government would mean a continuous expansion of the government debt. Government debt, they argued, is not like private debt. It does not have to be paid. The government can keep it afloat indefinitely by redeeming old bonds with new bonds. Moreover the interest on the government debt will not be a burden. "The debt is due by the people to themselves," they said. The people owe the debt. The people own the bonds which represent the debt. The government taxes the people to pay the interest on the bonds. It takes the taxes out of the pockets of the people and then pays it back to them in the form of interest. It is just taking it out of one pocket and putting it in the other.