To the Senate and House of Representatives:

In accord with my constitutional duty, I transmit herewith to the
Congress information upon the state of the Union together with
recommendation of measures for its consideration.

Our country is at peace. Our national defense has been maintained at a
high state of effectiveness. All of the executive departments of the
Government have been conducted during the year with a high devotion to
public interest. There has been a far larger degree of freedom from
industrial conflict than hitherto known. Education and science have made
further advances. The public health is to-day at its highest known
level. While we have recently engaged in the aggressive contest of a
national election, its very tranquillity and the acceptance of its
results furnish abundant proof of the strength of our institutions.

In the face of widespread hardship our people have demonstrated daily a
magnificent sense of humanity, of individual and community
responsibility for the welfare of the less fortunate. They have grown in
their conceptions and organization for cooperative action for the common
welfare.

In the provision against distress during this winter, the great private
agencies of the country have been mobilized again; the generosity of our
people has again come into evidence to a degree in which all America may
take great pride. Likewise the local authorities and the States are
engaged everywhere in supplemental measures of relief. The provisions
made for loans from the Reconstruction Finance Corporation, to States
that have exhausted their own resources, guarantee that there should be
no hunger or suffering from cold in the country. The large majority of
States are showing a sturdy cooperation in the spirit of the Federal
aid.

The Surgeon General, in charge of the Public Health Service, furnishes
me with the following information upon the state of public health:

MORTALITY RATE PER 1,000 OF POPULATION ON AN ANNUAL BASIS FROM
REPRESENTATIVE STATES

General Infant

First 9 months of-- 1928 11.9 67.8 1929 12.0 65.8 1930 11.4 62.0 1931
11.2 60.0 1932 10.6 55.0

The sickness rates from data available show the same trends. These facts
indicate the fine endeavor of the agencies which have been mobilized for
care of those in distress.

ECONOMIC SITUATION

The unparalleled world-wide economic depression has continued through
the year. Due to the European collapse, the situation developed during
last fall and winter into a series of most acute crises. The
unprecedented emergency measures enacted and policies adopted
undoubtedly saved the country from economic disaster. After serving to
defend the national security, these measures began in July to show their
weight and influence toward improvement of conditions in many parts of
the country. The following tables of current business indicators show
the general economic movement during the past eleven months.

MONTHLY BUSINESS INDICES WITH SEASONAL VARIATIONS ELIMINATED [Monthly
average 1923-1925=100]

Industrial Factory Freight- Depart- Exports, Imports, Building
Industrial Year and produc- employ- car ment store value value
contracts, electric month tion ment loadings sales, all types power
value consumption

1931 December 74 69.4 69 81 46 48 38 89.1

1932 January 72 68.1 64 78 39 42 31 93.9 February 69 67.8 62 78 45 41 27
98.8 March 67 66.4 61 72 41 37 26 88.0 April 63 64.3 59 80 38 36 27 82.2
May 60 62.1 54 73 37 34 26 82.0 June 59 60.0 52 71 34 36 27 78.1 July 58
58.3 51 67 32 27 27 79.2 August 60 58.8 51 66 31 29 30 73.5 September 66
60.3 54 70 33 32 30 84.0 October 66 61.3 57 70 33 32 29 84.4

The measures and policies which have procured this turn toward recovery
should be continued until the depression is passed, and then the
emergency agencies should be promptly liquidated. The expansion of
credit facilities by the Federal Reserve System and the Reconstruction
Finance Corporation has been of incalculable value. The loans of the
latter for reproductive works, and to railways for the creation of
employment; its support of the credit structure through loans to banks,
insurance companies, railways, building and loan associations, and to
agriculture has protected the savings and insurance policies of millions
of our citizens and has relieved millions of borrowers from duress; they
have enabled industry and business to function and expand. The
assistance given to Farm Loan Banks, the establishment of the Home Loan
Banks and Agricultural Credit Associations--all in their various
ramifications have placed large sums of money at the disposal of the
people in protection and aid. Beyond this, the extensive organization of
the country in voluntary action has produced profound results.

The following table indicates direct expenditures of the Federal
Government in aid to unemployment, agriculture, and financial relief
over the past four years. The sums applied to financial relief multiply
themselves many fold, being in considerable measure the initial capital
supplied to the Reconstruction Finance Corporation, Farm Loan Banks,
etc., which will be recovered to the Treasury.

Agricultural Public works 1 relief and financial loans

Fiscal year ending June 30-- 1930 $410,420,000 $156,100,000 1931
574,870,000 196,700,000 1932 655,880,000 772,700,000 1933 717,260,000
52,000,000

Total 2,358,430,000 1,177,500,000 1 Public Building, Highways, Rivers
and Harbors and their maintenance, naval and other vessels construction,
hospitals, etc.

Continued constructive policies promoting the economic recovery of the
country must be the paramount duty of the Government. The result of the
agencies we have created and the policies we have pursued has been to
buttress our whole domestic financial structure and greatly to restore
credit facilities. But progress in recovery requires another element as
well--that is fully restored confidence in the future. Institutions and
men may have resources and credit but unless they have confidence
progress is halting and insecure.

There are three definite directions in which action by the Government at
once can contribute to strengthen further the forces of recovery by
strengthening of confidence. They are the necessary foundations to any
other action, and their accomplishment would at once promote employment
and increase prices.

The first of these directions of action is the continuing reduction of
all Government expenditures, whether national, State, or local. The
difficulties of the country demand undiminished efforts toward economy
in government in every direction. Embraced in this problem is the
unquestioned balancing of the Federal Budget. That is the first
necessity of national stability and is the foundation of further
recovery. It must be balanced in an absolutely safe and sure manner if
full confidence is to be inspired.

The second direction for action is the complete reorganization at once
of our banking system. The shocks to our economic life have undoubtedly
been multiplied by the weakness of this system, and until they are
remedied recovery will be greatly hampered.

The third direction for immediate action is vigorous and whole souled
cooperation with other governments in the economic field. That our major
difficulties find their origins in the economic weakness of foreign
nations requires no demonstration. The first need to-day is
strengthening of commodity prices. That can not be permanently
accomplished by artificialities. It must be accomplished by expansion in
consumption of goods through the return of stability and confidence in
the world at large and that in turn can not be fully accomplished
without cooperation with other nations.

BALANCING THE BUDGET

I shall in due course present the Executive Budget to the Congress. It
will show proposed reductions in appropriations below those enacted by
the last session of the Congress by over $830,000,000. In addition I
shall present the necessary Executive orders under the recent act
authorizing the reorganization of the Federal Government which, if
permitted to go into force, will produce still further substantial
economies. These sums in reduction of appropriations will, however, be
partially offset by an increase of about $250,000,000 in uncontrollable
items such as increased debt services, etc.

In the Budget there is included only the completion of the Federal
public works projects already undertaken or under contract. Speeding up
of Federal public works during the past four years as an aid to
employment has advanced many types of such improvements to the point
where further expansion can not be justified in their usefulness to the
Government or the people. As an aid to unemployment we should beyond the
normal constructive programs substitute reproductive or so-called
self-liquidating works. Loans for such purposes have been provided for
through the Reconstruction Finance Corporation. This change in character
of projects directly relieves the taxpayer and is capable of expansion
into a larger field than the direct Federal works. The reproductive
works constitute an addition to national wealth and to future
employment, whereas further undue expansion of Federal public works is
but a burden upon the future.

The Federal construction program thus limited to commitments and work in
progress under the proposed appropriations contemplates expenditures for
the next fiscal year, including naval and other vessel construction, as
well as other forms of public works and maintenance, of a total of
$442,769,000, as compared with $717,262,000 for the present year.

The expenditure on such items over the four years ending June 30 next
will amount to $2,350,000,000, or an amount of construction work eight
times as great as the cost of the Panama Canal and, except for
completion of certain long-view projects, places the Nation in many
directions well ahead of its requirements for some years to come. A
normal program of about $200,000,000 per annum should hereafter provide
for the country's necessities and will permit substantial future
reduction in Federal expenditures.

I recommend that the furlough system installed last year be continued
not only because of the economy produced but because, being tantamount
to the "5-day week," it sets an example which should be followed by the
country and because it embraces within its workings the "spread work"
principle and thus serves to maintain a number of public servants who
would otherwise be deprived of all income. I feel, however, in view of
the present economic situation and the decrease in the cost of living by
over 20 per cent, that some further sacrifice should be made by salaried
officials of the Government over and above the 8 1/3 per cent reduction
under the furlough system. I will recommend that after exempting the
first $1,000 of salary there should be a temporary reduction for one
year of 11 per cent of that part of all Government salaries in excess of
the $1,000 exemption, the result of which, combined with the furlough
system, will average about 14.8 per cent reduction in pay to those
earning more than $1,000.

I will recommend measures to eliminate certain payments in the veterans'
services. I conceive these outlays were entirely beyond the original
intentions of Congress in building up veterans' allowances. Many abuses
have grown up from ill-considered legislation. They should be
eliminated. The Nation should not ask for a reduction in allowances to
men and dependents whose disabilities rise out of war service nor to
those veterans with substantial service who have become totally disabled
from non-war-connected causes and who are at the same time without other
support. These latter veterans are a charge on the community at some
point, and I feel that in view of their service to the Nation as a whole
the responsibility should fall upon the Federal Government.

Many of the economies recommended in the Budget were presented at the
last session of the Congress but failed of adoption. If the Economy and
Appropriations Committees of the Congress in canvassing these proposed
expenditures shall find further reductions which can be made without
impairing essential Government services, it will be welcomed both by the
country and by myself. But under no circumstances do I feel that the
Congress should fail to uphold the total of reductions recommended.

Some of the older revenues and some of the revenues provided under the
act passed during the last session of the Congress, particularly those
generally referred to as the nuisance taxes, have not been as prolific
of income as had been hoped. Further revenue is necessary in addition to
the amount of reductions in expenditures recommended. Many of the
manufacturers' excise taxes upon selected industries not only failed to
produce satisfactory revenue, but they are in many ways unjust and
discriminatory. The time has come when, if the Government is to have an
adequate basis of revenue to assure a balanced Budget, this system of
special manufacturers' excise taxes should be extended to cover
practically all manufactures at a uniform rate, except necessary food
and possibly some grades of clothing.

At the last session the Congress responded to my request for authority
to reorganize the Government departments. The act provides for the
grouping and consolidation of executive and administrative agencies
according to major purpose, and thereby reducing the number and overlap
and duplication of effort. Executive orders issued for these purposes
are required to be transmitted to the Congress while in session and do
not become effective until after the expiration of 60 calendar days
after such transmission, unless the Congress shall sooner approve.

I shall issue such Executive orders within a few days grouping or
consolidating over fifty executive and administrative agencies including
a large number of commissions and "independent" agencies.

The second step, of course, remains that after these various bureaus and
agencies are placed cheek by jowl into such groups, the administrative
officers in charge of the groups shall eliminate their overlap and still
further consolidate these activities. Therein lie large economies.

The Congress must be warned that a host of interested persons inside and
outside the Government whose vision is concentrated on some particular
function will at once protest against these proposals. These same sorts
of activities have prevented reorganization of the Government for over a
quarter of a century. They must be disregarded if the task is to be
accomplished.

BANKING

The basis of every other and every further effort toward recovery is to
reorganize at once our banking system. The shocks to our economic system
have undoubtedly multiplied by the weakness of our financial system. I
first called attention of the Congress in 1929 to this condition, and I
have unceasingly recommended remedy since that time. The subject has
been exhaustively investigated both by the committees of the Congress
and the officers of the Federal Reserve System.

The banking and financial system is presumed to serve in furnishing the
essential lubricant to the wheels of industry, agriculture, and
commerce, that is, credit. Its diversion from proper use, its improper
use, or its insufficiency instantly brings hardship and dislocation in
economic life. As a system our banking has failed to meet this great
emergency. It can be said without question of doubt that our losses and
distress have been greatly augmented by its wholly inadequate
organization. Its inability as a system to respond to our needs is
to-day a constant drain upon progress toward recovery. In this statement
I am not referring to individual banks or bankers. Thousands of them
have shown distinguished courage and ability. On the contrary, I am
referring to the system itself, which is so organized, or so lacking in
organization, that in an emergency its very mechanism jeopardizes or
paralyzes the action of sound banks and its instability is responsible
for periodic dangers to our whole economic system.

Bank failures rose in 1931 to 10 1/2 per cent of all the banks as
compared to 1 1/2 per cent of the failures of all other types of
enterprise. Since January 1, 1930, we have had 4,665 banks suspend, with
$3,300,000,000 in deposits. Partly from fears and drains from abroad,
partly from these failures themselves (which indeed often caused closing
of sound banks), we have witnessed hoarding of currency to an enormous
sum, rising during the height of the crisis to over $1,600,000,000. The
results from interreaction of cause and effect have expressed themselves
in strangulation of credit which at times has almost stifled the
Nation's business and agriculture. The losses, suffering, and tragedies
of our people are incalculable. Not alone do they lie in the losses of
savings to millions of homes, injury by deprival of working capital to
thousands of small businesses, but also, in the frantic pressure to
recall loans to meet pressures of hoarding and in liquidation of failed
banks, millions of other people have suffered in the loss of their homes
and farms, businesses have been ruined, unemployment increased, and
farmers' prices diminished.

That this failure to function is unnecessary and is the fault of our
particular system is plainly indicated by the fact that in Great
Britain, where the economic mechanism has suffered far greater shocks
than our own, there has not been a single bank failure during the
depression. Again in Canada, where the situation has been in large
degree identical with our own, there have not been substantial bank
failures.

The creation of the Reconstruction Finance Corporation and the
amendments to the Federal Reserve Act served to defend the Nation in a
great crisis. They are not remedies; they are relief. It is
inconceivable that the Reconstruction Corporation, which has extended
aid to nearly 6,000 institutions and is manifestly but a temporary
device, can go on indefinitely.

It is to-day a matter of satisfaction that the rate of bank failures, of
hoarding, and the demands upon the Reconstruction Corporation have
greatly lessened. The acute phases of the crisis have obviously passed
and the time has now come when this national danger and this failure to
respond to national necessities must be ended and the measures to end
them can be safely undertaken. Methods of reform have been exhaustively
examined. There is no reason now why solution should not be found at the
present session of the Congress. Inflation of currency or governmental
conduct of banking can have no part in these reforms. The Government
must abide within the field of constructive organization, regulation,
and the enforcement of safe practices only.

Parallel with reform in the banking laws must be changes in the Federal
Farm Loan Banking system and in the Joint Stock Land Banks. Some of
these changes should be directed to permanent improvement and some to
emergency aid to our people where they wish to fight to save their farms
and homes.

I wish again to emphasize this view--that these widespread banking
reforms are a national necessity and are the first requisites for
further recovery in agriculture and business. They should have immediate
consideration as steps greatly needed to further recovery.

ECONOMIC COOPERATION WITH OTHER NATIONS

Our major difficulties during the past two years find their origins in
the shocks from economic collapse abroad which in turn are the aftermath
of the Great War. If we are to secure rapid and assured recovery and
protection for the future we must cooperate with foreign nations in many
measures.

We have actively engaged in a World Disarmament Conference where, with
success, we should reduce our own tax burdens and the tax burdens of
other major nations. We should increase political stability of the
world. We should lessen the danger of war by increasing defensive powers
and decreasing offensive powers of nations. We would thus open new
vistas of economic expansion for the world.

We are participating in the formulation of a World Economic Conference,
successful results from which would contribute much to advance in
agricultural prices, employment, and business. Currency depreciation and
correlated forces have contributed greatly to decrease in price levels.
Moreover, from these origins rise most of the destructive trade barriers
now stifling the commerce of the world. We could by successful action
increase security and expand trade through stability in international
exchange and monetary values. By such action world confidence could be
restored. It would bring courage and stability, which will reflect into
every home in our land.

The European governments, obligated to us in war debts, have requested
that there should be suspension of payments due the United States on
December 15 next, to be accompanied by exchange of views upon this debt
question. Our Government has informed them that we do not approve of
suspension of the December 15 payments. I have stated that I would
recommend to the Congress methods to overcome temporary exchange
difficulties in connection with this payment from nations where it may
be necessary.

In the meantime I wish to reiterate that here are three great fields of
international action which must be considered not in part but as a
whole. They are of most vital interest to our people. Within them there
are not only grave dangers if we fail in right action but there also tie
immense opportunities for good if we shall succeed. Within success there
lie major remedies for our economic distress and major progress in
stability and security to every fireside in our country.

The welfare of our people is dependent upon successful issue of the
great causes of world peace, world disarmament, and organized world
recovery. Nor is it too much to say that to-day as never before the
welfare of mankind and the preservation of civilization depend upon our
solution of these questions. Such solutions can not be attained except
by honest friendship, by adherence to agreements entered upon until
mutually revised and by cooperation amongst nations in a determination
to find solutions which will be mutually beneficial.

OTHER LEGISLATION

I have placed various legislative needs before the Congress in previous
messages, and these views require no amplification on this occasion. I
have urged the need for reform in our transportation and power
regulation, in the antitrust laws as applied to our national resource
industries, western range conservation, extension of Federal aid to
child health services, membership in the World Court, the ratification
of the Great Lakes-St. Lawrence Seaway Treaty, revision of the
bankruptcy acts, revision of Federal court procedure, and many other
pressing problems.

These and other special subjects I shall where necessary deal with by
special communications to the Congress.

The activities of our Government are so great, when combined with the
emergency activities which have arisen out of the world crisis, that
even the briefest review of them would render the annual message unduly
long. I shall therefore avail myself of the fact that every detail of
the Government is covered in the reports to the Congress by each of the
departments and agencies of the Government.

CONCLUSION

It seems to me appropriate upon this occasion to make certain general
observations upon the principles which must dominate the solution of
problems now pressing upon the Nation. Legislation in response to
national needs will be effective only if every such act conforms to a
complete philosophy of the people's purposes and destiny. Ours is a
distinctive government with a unique history and background, consciously
dedicated to specific ideals of liberty and to a faith in the inviolable
sanctity of the individual human spirit. Furthermore, the continued
existence and adequate functioning of our government in preservation of
ordered liberty and stimulation of progress depends upon the maintenance
of State, local, institutional, and individual sense of responsibility.
We have builded a system of individualism peculiarly our own which must
not be forgotten in any governmental acts, for from it have grown
greater accomplishments than those of any other nation.

On the social and economic sides, the background of our American system
and the motivation of progress is essentially that we should allow free
play of social and economic forces as far as will not limit equality of
opportunity and as will at the same time stimulate the initiative and
enterprise of our people. In the maintenance of this balance the Federal
Government can permit of no privilege to any person or group. It should
act as a regulatory agent and not as a participant in economic and
social life. The moment the Government participates, it becomes a
competitor with the people. As a competitor it becomes at once a tyranny
in whatever direction it may touch. We have around us numerous such
experiences, no one of which can be found to have justified itself
except in cases where the people as a whole have met forces beyond their
control, such as those of the Great War and this great depression, where
the full powers of the Federal Government must be exerted to protect the
people. But even these must be limited to an emergency sense and must be
promptly ended when these dangers are overcome.

With the free development of science and the consequent multitude of
inventions, some of which are absolutely revolutionary in our national
life, the Government must not only stimulate the social and economic
responsibility of individuals and private institutions but it must also
give leadership to cooperative action amongst the people which will
soften the effect of these revolutions and thus secure social
transformations in an orderly manner. The highest form of
self-government is the voluntary cooperation within our people for such
purposes.

But I would emphasize again that social and economic solutions, as such,
will not avail to satisfy the aspirations of the people unless they
conform with the traditions of our race deeply grooved in their
sentiments through a century and a half of struggle for ideals of life
that are rooted in religion and fed from purely spiritual springs.

HERBERT HOOVER The White House, December 6, 1932.