I reluctantly vetoed the budget bill passed by the last session of the Congress because of a constitutional objection.  The House of Representatives subsequently modified the bill in order to meet this objection.  In the revised form, I believe that the bill, coupled with action already taken by the Congress to revise its rules and procedure, furnishes the foundation for an effective national budget system.  I earnestly hope, therefore, that one of the first steps to be taken by the present session of the Congress will be to pass the budget bill.

The nation’s finances have shown marked improvement during the last year.  The total ordinary receipts of $6,694,000,000 for the fiscal year 1920 exceeded those for 1919 by $1,542,000,000, while the total net ordinary expenditures decreased from $18,514,000,000 to $6,403,000,000.  The gross public debt, which reached its highest point on August 31, 1919, when it was $26,596,000,000, had dropped on November 30, 1920, to $24,175,000,000.

There has also been a marked decrease in holdings of government war securities by the banking institutions of the country, as well as in the amount of bills held by the Federal Reserve Banks secured by government war obligations.  This fortunate result has relieved the banks and left them freer to finance the needs of Agriculture, Industry, and Commerce.  It has been due in large part to the reduction of the public debt, especially of the floating debt, but more particularly to the improved distribution of government securities among permanent investors.  The cessation of the Government’s borrowings, except through short-term certificates of indebtedness, has been a matter of great consequence to the people of the country at large, as well as to the holders of Liberty Bonds and Victory Notes, and has had an important bearing on the matter of effective credit control.

The year has been characterized by the progressive withdrawal of the Treasury from the domestic credit market and from a position of dominant influence in that market.  The future course will necessarily depend upon the extent to which economies are practiced and upon the burdens placed upon the Treasury, as well as upon industrial developments and the maintenance of tax receipts at a sufficiently high level.  The fundamental fact which at present dominates the Government’s financial situation is that seven and a half billions of its war indebtedness mature within the next two and a half years.  Of this amount, two and a half billions are floating debt and five billions, Victory Notes and War.  Savings Certificates.  The fiscal program of the Government must be determined with reference to these maturities.  Sound policy demands that Government expenditures be reduced to the lowest amount which will permit the various services to operate efficiently and that Government receipts from taxes and salvage be maintained sufficiently high to provide for current requirements, including interest and sinking fund charges on the public debt, and at the same time retire the floating debt and part of the Victory Loan before maturity.