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Subdividing the current expenses and fixed charges, as distinguished from acquisition of property, the estimated amount of overhead and operating expenses is $566,000,000, of upkeep costs $23,000,000, and of fixed charges $232,000,000.

RECOMMENDATIONS WITH RESPECT TO FINANCIAL POLICY.

Before submitting recommendations for specific reductions of estimates or specific increases of revenues and borrowings, it would seem to be desirable to consider certain questions of policy having to do with the financing of expenditures.

In my opinion current expenses and fixed charges, including sinking-fund requirements, should be financed entirely out of revenues; that is, in planning to meet the Treasury needs of the Government it would be a mistake to provide the means for carrying on the current business and for liquidating the debt by incurring additional indebtedness. By this standard the least amount of revenue which would be required for the next fiscal year (assuming that the estimates sent in are approved by the Congress and incorporated in appropriations) would be $881,000,000. This conclusion is based on the assumption that all estimates for “ acquisition of property" and all“ unclassified” estimates would be initially financed by the Government out of borrowings, i. e., that all of these estimates for expenditures are properly classified as capital outlays. It is to be observed, however, that in the estimated appropriations and expenditures for acquisitions of property during the four years reported all replacements of obsolete or condemned equipment or other property are included; these should be charged against current revenues. The estimates sent to me as for capital outlays with corresponding expenditures for preceding years, are as follows:

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Total expenditures for acquisition of property... $190, 196, 406 $199, 585, 976 $153, 189, 441 $134, 280, 159 Land.

2,531, 825 6,596, 696 4, 223, 338 2,849, 445 Buildings.

20,958, 273 20, 896, 897 15, 947,814 14,990, 947 Other improvements to land and waterways. 74,974, 140 108, 486, 547 72, 339, 558 69, 708, 285 Equipment..

73, 542, 150 51,343, 856 54, 607,061 40,939, 301 Stores (increases).

7, 268,519 6,675,373 4,886, 730 5, 405, 233 Work in progress (increases or decreases).

115,522 1 202, 721 11,072, 858 11, 126, 358 Unclassified capital outlays..

10,805,947 5,789,328 2,257,798 1,513, 306 Unclassified expenditures.....

38,610,984 27,438, 334 17,369,031 16, 420,693

1 Decreases of stores; deduction from total expenditures. In order to determine what amount of these expenditures may properly be financed from the proceeds of bond issues and what amount would be considered as expenses to be financed out of revenues, it is necessary to clearly distinguish those expenditures which are for the acquisition of additional properties and those which are for replacement of old. From the present state of the records and reports these data are not available. With respect to the $73,500,000 estimated for equipment, however, this may be said: That a greater portion of the estimate is for battleships, ordnance, etc. It is doubt ful if the amount asked for is more than is needed to cover the wear and tear and the depreciation due to obsolescence of equipment already owned by the Government. Assuming that all of the $98,400,000 for land, buildings, and other improvements on land, and the $10,800,000 “ unclassified capital outlays," as well as the $38,600,000 of other “unclassified expenditures” are for new properties, the conclusion that these are additions or betterments should not be accepted without qualification for the reason that no provision is made for estimating structural depreciation. In fact, there is not at present any means for knowing what amount of property the Government owns against which depreciation must be estimated. From the inadequate data at hand it appears that the Government has acquired buildings and other improvements on land during the last 50 years the cost of which is considerably in excess of $1,500,000,000. If it be assumed that the average life of such structures is 50 years, then not less than $30,000,000 should be included in current expenses for depreciation due to obsolescence. This would leave about $115,000,000 of the expenditures for the acquisition of property to be capitalized.

THE EXCESS OF ESTIMATED CURRENT EXPENSES AND FIXED CHARGES OVER

ESTIMATED REVENUES FOR 1914.

From the foregoing it would appear that the amount of the revenues required to meet current expenses and fixed charges (including current upkeep of property and depreciation from obsolescence) is approximately $995,000,000.

The amount which the Secretary of the Treasury estimates will accrue in revenues during the next fiscal year is $970,000,000 (excluding refunds of revenues and trust-fund receipts), leaving a revenue deficiency of $25,000,000. From any angle of approach, therefore, either the estimates for appropriations must be cut down or provision must be made for increasing the revenue.

RECOMMENDATIONS

OF

CURRENT

FOR THE REDUCTION

EXPENSES.

In submitting recommendations under the requirements of the act of March 4, 1909, it seems evident that the overhead and operating expenses and capital outlays should be clearly distinguished from expenditures in the nature of fixed charges and debt payments. The amount of expenditures for these latter purposes is not to any considerable extent affected by economy or efficiency of administration,

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