GENTLEMEN OF THE CONGRESS:

When I addressed myself to performing the duty laid upon the President by
the Constitution to present to you an annual report on the state of the
Union, I found my thought dominated by an immortal sentence of Abraham
Lincoln's--"Let us have faith that right makes might, and in that faith let
us dare to do our duty as we understand it"--a sentence immortal because it
embodies in a form of utter simplicity and purity the essential faith of
the nation, the faith in which it was conceived, and the faith in which it
has grown to glory and power. With that faith and the birth of a nation
founded upon it came the hope into the world that a new order would prevail
throughout the affairs of mankind, an order in which reason and right would
take precedence over covetousness and force; and I believe that I express
the wish and purpose of every thoughtful American when I say that this
sentence marks for us in the plainest manner the part we should play alike
in the arrangement of our domestic affairs and in our exercise of influence
upon the affairs of the world.

By this faith, and by this faith alone, can the world be lifted out of its
present confusion and despair. It was this faith which prevailed over the
wicked force of Germany. You will remember that the beginning of the end of
the war came when the German people found themselves face to face with the
conscience of the world and realized that right was everywhere arrayed
against the wrong that their government was attempting to perpetrate. I
think, therefore, that it is true to say that this was the faith which won
the war. Certainly this is the faith with which our gallant men went into
the field and out upon the seas to make sure of victory.

This is the mission upon which Democracy came into the world. Democracy is
an assertion of the right of the individual to live and to be treated
justly as against any attempt on the part of any combination of individuals
to make laws which will overburden him or which will destroy his equality
among his fellows in the matter of right or privilege; and I think we all
realize that the day has come when Democracy is being put upon its final
test. The Old World is just now suffering from a wanton rejection of the
principle of democracy and a substitution of the principle of autocracy as
asserted in the name, but without the authority and sanction, of the
multitude. This is the time of all others when Democracy should prove its
purity and its spiritual power to prevail. It is surely the manifest
destiny of the United States to lead in the attempt to make this spirit
prevail.

There are two ways in which the United States can assist to accomplish this
great object. First, by offering the example within her own borders of the
will and power of Democracy to make and enforce laws which are
unquestionably just and which are equal in their administration-laws which
secure its full right to Labor and yet at the same time safeguard the
integrity of property, and particularly of that property which is devoted
to the development of industry and the increase of the necessary wealth of
the world. Second, by standing for right and justice as toward individual
nations. The law of Democracy is for the protection of the weak, and the
influence of every democracy in the world should be for the protection of
the weak nation, the nation which is struggling toward its right and toward
its proper recognition and privilege in the family of nations.

The United States cannot refuse this role of champion without putting the
stigma of rejection upon the great and devoted men who brought its
government into existence and established it in the face of almost
universal opposition and intrigue, even in the face of wanton force, as,
for example, against the Orders in Council of Great Britain and the
arbitrary Napoleonic decrees which involved us in what we know as the War
of 1812.

I urge you to consider that the display of an immediate disposition on the
part of the Congress to remedy any injustices or evils that may have shown
themselves in our own national life will afford the most effectual offset
to the forces of chaos and tyranny which are playing so disastrous a part
in the fortunes of the free peoples of more than one part of the world. The
United States is of necessity the sample democracy of the world, and the
triumph of Democracy depends upon its success.

Recovery from the disturbing and sometimes disastrous effects of the late
war has been exceedingly slow on the other side of the water, and has given
promise, I venture-to say, of early completion only in our own fortunate
country; but even with us the recovery halts and is impeded at times, and
there are immediately serviceable acts of legislation which it seems to me
we ought to attempt, to assist that recovery and prove the indestructible
recuperative force of a great government of the people. One of these is to
prove that a great democracy can keep house as successfully and in as
business-like a fashion as any other government. It seems to me that the
first step toward providing this is to supply ourselves with a systematic
method of handling our estimates and expenditures and bringing them to the
point where they will not be an unnecessary strain upon our income or
necessitate unreasonable taxation; in other words, a workable budget
system. And I respectfully suggest that two elements are essential to such
a system-namely, not only that the proposal of appropriations should be in
the hands of a single body, such as a single appropriations committee in
each house of the Congress, but also that this body should be brought into
such cooperation with the Departments of the Government and with the
Treasury of the United States as would enable it to act upon a complete
conspectus of the needs of the Government and the resources from which it
must draw its income.

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.

With rigid economy, vigorous salvage operations, and adequate revenues from
taxation, a surplus of current receipts over current expenditures can be
realized and should be applied to the floating debt. All branches of the
Government should cooperate to see that this program is realized. I cannot
overemphasize the necessity of economy in Government appropriations and
expenditures and the avoidance by the Congress of practices which take
money from the Treasury by indefinite or revolving fund appropriations. The
estimates for the present year show that over a billion dollars of
expenditures were authorized by the last Congress in addition to the
amounts shown in the usual compiled statements of appropriations. This
strikingly illustrates the importance of making direct and specific
appropriations. The relation between the current receipts and current
expenditures of the Government during the present fiscal year, as well as
during the last half of the last fiscal year, has been disturbed by the
extraordinary burdens thrown upon the Treasury by the Transportation Act,
in connection with the return of the railroads to private control. Over
$600,000,000 has already been paid to the railroads under this
act-$350,000,000 during the present fiscal year; and it is estimated that
further payments aggregating possibly $650,000,000 must still be made to
the railroads during the current year. It is obvious that these large
payments have already seriously limited the Government's progress in
retiring the floating debt.

Closely connected with this, it seems to me, is the necessity for an
immediate consideration of the revision of our tax laws. Simplification of
the income and profits taxes has become an immediate necessity. These taxes
performed an indispensable service during the war. The need for their
simplification, however, is very great, in order to save the taxpayer
inconvenience and expense and in order to make his liability more certain
and definite. Other and more detailed recommendations with regard to taxes
will no doubt be laid before you by the Secretary of the Treasury and the
Commissioner of Internal Revenue.

It is my privilege to draw to the attention of Congress for very
sympathetic consideration the problem of providing adequate facilities for
the care and treatment of former members of the military and naval forces
who are sick and disabled as the result of their participation in the war.
These heroic men can never be paid in money for the service they
patriotically rendered the nation. Their reward will lie rather in
realization of the fact that they vindicated the rights of their country
and aided in safeguarding civilization. The nation's gratitude must be
effectively revealed to them by the most ample provision for their medical
care and treatment as well as for their vocational training and placement.
The time has come when a more complete program can be formulated and more
satisfactorily administered for their treatment and training, and I
earnestly urge that the Congress give the matter its early consideration.
The Secretary of the Treasury and the Board for Vocational Education will
outline in their annual reports proposals covering medical care and
rehabilitation which I am sure will engage your earnest study and commend
your most generous support.

Permit me to emphasize once more the need for action upon certain matters
upon which I dwelt at some length in my message to the second session of
the Sixty-sixth Congress. The necessity, for example, of encouraging the
manufacture of dyestuffs and related chemicals; the importance of doing
everything possible to promote agricultural production along economic
lines, to improve agricultural marketing, and to make rural life more
attractive and healthful; the need for a law regulating cold storage in
such a way as to limit the time during which goods may be kept in storage,
prescribing the method of disposing of them if kept beyond the permitted
period, and requiring goods released from storage in all cases to bear the
date of their receipt. It would also be most serviceable if it were
provided that all goods released from cold storage for interstate shipment
should have plainly marked upon each package the selling or market price at
which they went into storage, in order that the purchaser might be able to
learn what profits stood between him and the producer or the wholesale
dealer. Indeed, It would be very serviceable to the public if all goods
destined for interstate commerce were made to carry upon every packing case
whose form made it possible a plain statement of the price at which they
left the hands of the producer. I respectfully call your attention also to
the recommendations of the message referred to with regard to a federal
license for all corporations engaged in interstate commerce.

In brief, the immediate legislative need of the time is the removal of all
obstacles to the realization of the best ambitions of our people in their
several classes of employment and the strengthening of all
instrumentalities by. which difficulties are to be met and removed and
justice dealt out, whether by law or by some form of mediation and
conciliation. I do not feel it to be my privilege at present to, suggest
the detailed and particular methods by which these objects may be attained,
but I have faith that the inquiries of your several committees will
discover the way and the method.

In response to what I believe to be the impulse of sympathy and opinion
throughout the United States, I earnestly suggest that the Congress
authorize the Treasury of the United States to make to the struggling
government of Armenia such a loan as was made to several of the Allied
governments during the war, and I would also suggest that it would be
desirable to provide in the legislation itself that the expenditure of the
money thus loaned should be under the supervision of a commission, or at
least a commissioner, from the United States in order that revolutionary
tendencies within Armenia itself might not be afforded by the loan a
further tempting opportunity.

Allow me to call your attention to the fact that the people of the
Philippine Islands have succeeded in maintaining a stable government since
the last action of the Congress in their behalf, and have thus fulfilled
the condition set by the Congress as precedent to a consideration of
granting independence to the Islands. I respectfully submit that this
condition precedent having been fulfilled, it is now our liberty and our
duty to keep our promise to the people of those islands by granting them
the independence which they so honorably covet.

I have not so much laid before you a series of recommendations, gentlemen,
as sought to utter a confession of faith, of the faith in which I was bred
and which it is my solemn purpose to stand by until my last fighting day. I
believe this to be the faith of America, the faith of the future, and of
all the victories which await national action in the days to come, whether
in America or elsewhere.