of the seasonal rhythm in the flow of claims for unemployment benefits to draw a clear distinction between seasonal changes and those related to business conditions. It is fairly probable that the decline in claims loads in August will be followed by an increase this autumn. The load of claims and benefits in the unemployment insurance system is still very heavy for the present level of employment in the Nation, and it should be borne in mind that price inflation is not yet checked and that many industries have not yet passed through those phases of postwar adjustment that are usually accompanied by layoffs.

A moderate rise in unemployment by the end of the year is therefore in the realm of probability. Such a rise would not necessarily indicate a downturn in economic trends or the approach of a major depression. It could be in conformity with the economic outlook for a Nation shifting gradually from a postwar boom to the soberer pattern of an internally balanced and expanding economy. July in Review

The July upturn in claims for unemployment insurance under State systems did not seem to indicate any real increase in the volume of unemployment throughout the country, since it corresponded closely to the relative difference in number of working days between June and July. Both the number of weeks compensated for unemployment and the

72, 968 63,866

191, 272 120, 306 72, 511 62,732 59, 606

50,802

52, 102 22,500 21, 755 20, 792

workers in automobile industry, which resulted in a sudden increase of almost 40,000 in initial claims. Since this lay-off was of short duration, claims did not mature to compensable status.

amount expended for benefits moved upward also, but relatively less than claims. In all, almost 4.4 million weeks of unemployment were compensated, at a total expenditure of $76.7 million. The average weekly number of beneficiaries, on the other hand, went down from 1 million in June to 960,000 in July.

IN OLD-AGE AND SURVIVORS insurance, monthly benefits totaling $35.6 million were being paid at the end of July to almost 1.9 million persons; a year earlier, more than 1.5 million beneficiaries received $28.8 million.

Benefits on which payments were being withheld at the end of Junemost of them because the beneficiary was working in covered employment

were slightly less as a proportion of benefits in force than in June 1946 for all types of benefit except those to widows with young children, and for this group the increase was relatively slight. At the end of June 1947, 25 percent of widow's current benefits were being withheld, as against 14 percent for all primary benefits and 11 percent for wife's benefits.

IN PUBLIC ASSISTANCE, case loads for the Nation as a whole varied only slightly from the June levels. Payments during July under the four assistance programs combined totaled some $123 million. Among the States, however, there were pronounced changes as new appropriations became available at the beginning of the fiscal year and changes in State laws took effect. Topping the increases in case loads for the three special programs was the rise of 22 percent reported by Delaware in the number of families receiving aid to dependent children. In the other direction, July changes involved substantial reductions in both case loads and total payments in a few States; in Utah, for example, the case load for old-age assistance dropped almost 10 percent. Substantial increases in average payments occurred in July in several States, but a few other States reported considerable declines in the amount of their average payments. (Continued on page 48)

THE ALLOCATION of grants among States, though not significant while Federal aids were but a small part of total government expenditures, has taken on increasing importance as the size and scope of grants-in-aid have grown. Total Federal grants to States for the fiscal year 1946-47 are estimated at more than $1 billion, continuing a gradual upward trend. Grants for social security and related health and welfare programs constitute about 70 percent of the 1946-47 total; the other 30 percent is composed of aids for education, transportation, and the development and conservation of natural resources.

The importance of grants-in-aid was recognized by President Truman in his first Economic Report to Congress, when he pointed out that "the Federal Government is engaged in several programs of grants-in-aid to State and local governments involving large amounts of money. Further programs are planned. These programs. . . contribute greatly toward bringing all sections of the country up to the levels of productivity consistent with American standards of living." Therefore, the President reported, he had asked the Council of Economic Advisers to determine, in cooperation with other Federal agencies and State and local officials, "to what extent revised standards for the distribution of these grants may take into account more fully the needs for support that exist in various parts of the country."

The problem of the distribution of Federal grants-in-aid among States has received less attention in the past than questions of what function to aid or the proportions such aid should assume. Yet the Federal allocation influences the amount of money that a State has to spend for a particular service, which in effect determines

• Bureau of Research and Statistics, Division of Finance and Economic Studles. This article was prepared as part of Bureau Memorandum No. 65, The Principle of Equalization Applied to the Allocation of Grants-in-Aid, by Byron L. Johnson.

the level of adequacy of the program. Equally important to adequacy, of course, is the effectiveness of a program's administration, but only the nature and evolution of Federal allocation formulas are considered here.

Federal "grants-in-aid," as used here, refer to payments for cooperative programs, which are made from the Federal Treasury to State governments, including their appointed or constituent departments. Such grants have been or may be made for many and varying reasons: to stimulate new programs, to combine local control with national money-raising powers, to assure a national minimum in programs of vital interest to all, to equalize service levels and relative tax burdens of a program, to improve the combined Federal-Statelocal tax system, and to aid in maintaining or approaching full employment.

The purposes for which grants are made have been most important in determining the financial arrangements adopted. Often, however, the purposes have not been fully realized because the financial provisions have been poorly adapted to the objectives. Most of the earliest grants were designed to stimulate the adoption or expansion of certain State-local programs. More recently, especially since the passage of the sixteenth amendment, which empowers Congress to tax incomes, grants have been occasioned by the greater Federal fiscal powers and the growing reliance on government for various types of health and welfare services. When a national interest is recognized and when local administration has distinct merits, whether for administrative, political, or constitutional reasons, the allocation and matching

techniques employed

should be designed to maintain a basic minimum program without placing undue burdens on taxpayers in some States. Such techniques are particularly important in the more expensive and more essential health and welfare programs. If the Federal share in the total program is to

be fairly substantial, the most efficient and economical use of Federal aid would in many cases be a distribution that would take into account relative State-local need for and ability to finance the service-that is, an equalizing allocation and/or matching formula.

Allocation formulas cannot be considered apart from matching formulas when a matching requirement exists; it is the total level of activity effected by the operation of both furmulas together that is significant. Matching funds required of the States usually bear some uniform ratio to Federal aid; for one program the matching varies with State per capita income when it falls below the national average.

Allocation formulas are of two major types, statutory and discretionary. Within either category, allocations may be based on one factor or a combination of several factorsuniform lump-sum amounts, some general or special measure of population, area, star-route postal mileage, representation in Congress, and so on. For several programs, they depend on the amount of State-local expenditures for the purpose. In a very few instances, they are based on some relatively complex measure of specific program need.

Over the years, as the State functions aided by the Federal Government have increased in number and broadened in scope, bases for the apportionment of funds among the States have also changed in character. The evolution of allocation formulas, however, has not been nearly so progressive as has the growth, both in size and purpose, of the grants themselves. Thus, although today many of the actual and proposed allocation formulas are better adapted than were earlier ones to meet varying degrees of need in the several States, large sums of money are still being distributed among the States with only approximate regard for need and, in almost every instance, with no relation to the relative abilities of States and their subdivisions to finance the services themselves.

Earliest Measures of Allocation

The earliest grants were allocated among States in the simplest manner,

either in uniform amounts or in proportion to representation in Congress. The latter factor corresponds roughly to population (with some overweighting for small States) and thus is a crude measure of need.

The land grants for public schools and universities were uniform for each geographic subdivision. Those for public schools were initially one section of land out of every township, to be reserved for the maintenance of public schools within the township and to be granted to the inhabitants of the township. Later the grants were increased to two and, finally, four sections of every township. In addition, not more than two complete townships were to be given each State perpetually "for the purposes of a university," to be applied "to the intended object by the legislature of the State." Another section of every township was to be reserved "for the purposes of religion."

In 1837 the surplus above $5 million in the United States Treasury was apportioned among the States "in proportion to their respective representation in the Senate and House of Representatives of the United States." The Morrill Act of 1862, making land grants to the States for colleges for agriculture and mechanic arts, used the same basis for apportionment. Each State was granted 30,000 acres of land or its equivalent in land scrip for each Senator and Representative in Congress to whom it was entitled by the apportionment under the census of 1860. This act was the first to aid a State function for which the Federal Government later assumed a continuing responsibility. It was also

611.5 421.2 55.7

Regular grants, excluding those for emergency relief and public works, amounted to $304,700,000.

the last of the general land grant acts.

Measures of Allocation Up to World War I

Except for the general "loan" of 1837, all grants to States until 1879 were land grants. In that year the passage of the act to aid education of the blind marked the beginning of a whole series of money grants to States under permanent legislation. From then until the First World War, though a number of Federal aid acts apportioned funds among the States in uniform amounts, distribution under some acts was made according to more refined measures of need, usually a population factor. A few acts used an entirely new basis.

Grants for manufacturing and distributing embossed books for the blind and "tangible apparatus" for their instruction, initiated in 1879,1 were, and are now, allocated according to the number of pupils in public institutions for the education of the blind. This factor is a direct measure of the relative need for the service within each State.

Similarly, grants for homes for disabled soldiers and sailors are allocated among States on the basis of a uniform amount yearly for every inmate in such a home. The act of 1888,2 initiating Federal grants for

1 The benefits actually received by the blind under this program, however, are in kind. Federal funds go to the American Printing House for the Blind, which in turn distributes books and teaching equipment.

The matching provision was incorporated in the appropriation act for the fiscal year 1890.

this function, provided for an annual payment of $100 for each inmate. An early amendment set a historical precedent in that it was the first to require the States to match Federal funds with a similar amount. This principle of State matching has since become almost universal. Federal aid for homes for disabled soldiers and sailors was subsequently increased and since 1943 has been $300 a year for each inmate.

The bulk of the grants during this period, however, consisted of uniform lump-sum allotments to States. No doubt a certain minimum sum is needed to provide the basic organization required in any State to perform the aided function, but such an allocation does not adequately measure each State's total need for a particular service. As an example of the lump-sum allotment, the Hatch Act of 1887, to aid in financing agricultural experiment stations, provided that each State receive annually $15,000 for this function; an additional $15,000 annually was authorized by the Adams Act of 1906. The second Morrill Act, passed in 1890, provided for a grant of $25,000 annually to each State for the agriculture and mechanic arts colleges established pursuant to the land grants of 1862 for this purpose; and the Nelson amendment of 1907 increased this sum by another $25,000 a year,

The first discretionary grant was authorized by the Weeks Act in 1911 for the purpose of cooperating with States in preventing and fighting forest fires along watersheds of navigable streams. The Secretary of Agriculture was empowered to enter into cooperative agreements on such conditions as he deemed wise, provided that each Federal allotment was matched by a similar amount from State and local funds.

Annual Federal grants for the maintenance and support of State and municipal marine schools, started in 1911, introduced the first "open-end" or indefinite matching grant. An open-end grant sets no specific limit on the amount authorized and carries the implication that the Federal Government will advance or reimburse all or some stated portion of State (and local) expenditures for the program and that a Federal deficiency appro

priation will be made if necessary. In their more usual form, open-end grants offer Federal aid within some indefinite, but implicit, limit. In the case of the grants for marine schools the amount of the Federal grant was not specified except that the sums expended by States or municipalities would be matched dollar for dollar with a maximum grant of $25,000 per school. This grant was thus logically a forerunner of the arrangement adopted for public assistance financing in the Social Security Act.

A deviation from the consistent use of lump-sum apportionments for agricultural education came with the passage of the Smith-Lever Act in 1914. This act, giving Federal aid for agricultural extension work, provided for the distribution of a large amount on the basis of rural population, to be matched dollar for dollar by State funds, as well as a much smaller sum in uniform lump-sum allotments. Allocation Measures From World

War I Until the Depression The Federal-aid highway program, in addition to being the first really significant grant-in-aid program from a fiscal point of view, departed markedly from the traditional closedallocation formulas. The Federal Aid Road Act of 1916 for aid in the construction of rural post roads laid down the basis for subsequent highway allocation formulas. Three factors were specified for use in the allocation of funds among Statesarea, population, and rural and starroute postal mileage-and all three were given equal weight. A limitation was placed on the formula, however, in that aid could not exceed $10,000 per mile of road constructed. Dollar-for-dollar matching of Federal funds by State funds was required.

Except for highway grants, the other new or increased grants in this period tended to use lump-sum allotments or some general or specific population factor. At least one act permitted discretionary allocation. The matching principle became generally accepted during this period.

With the passage of the SmithHughes Act in 1917, Federal aid in the form of annual grants was extended to a new function-vocational education.

Funds for the various major groups of vocational subjects to be aided were, and still are, allocated among States according to some measure of population. Under this act, Federal grants for salaries of teachers, supervisors, and directors of courses in agricultural subjects are allocated on the basis of rural population; for courses in trade, home economics, and industrial subjects, on the basis of urban population; and for the preparation of teachers of vocational education subjects, on the basis of total population. For each category, the minimum annual allotment to a State was originally $5,000 but was increased eventually to $10,000. All Federal aid must be matched dollar for dollar by State and local funds.

Additional annual appropriations were authorized in 1929 for salaries of teachers, supervisors, and directors of agricultural subjects and of home economics. Funds for the former are allocated among States on the basis of farm population alone and for the latter on the basis of rural population; 50-50 matching is required for both. The use of farm rather than rural population as a base for the allocation of funds for agricultural subjects represents an effort to relate the distribution formula more closely to the population group to be served. The separation for allotment purposes of home economics from its earlier linkage with trade and industrial subjects appears to indicate a desire on the part of Congress to aid home economics departments in rural rather than urban schools. Further legislative refinements along these lines were made later, together with additional appropriations, and will be discussed below.

Closely allied to the grant program for vocational education is that for vocational rehabilitation, started in 1920.

The Vocational Rehabilitation Act of that year provided grants to States for the vocational rehabilitation of persons disabled in industry and for their placement in employment. These grants are allocated among the States according to population, with a minimum allotment in any year of $5,000 to a State and a requirement of 50-50 matching by the State. A subsequent additional appropriation, first made in 1930, fol

lows the same pattern except that the minimum allotment under that appropriation is $10,000.

Certain health functions received Federal aid for the first time during this period. A deficiency appropriation in 1916 started a series of small grants for special studies and demonstration work in rural sanitation. States requesting demonstrations had to agree to pay half the costs. The Chamberlain-Kahn Act of 1918 made appropriations for 2 fiscal years for the prevention and control of venereal diseases. Federal funds were distributed among the States on the basis of population, and in the second year the allotments had to be matched equally from State funds. The Sheppard-Towner Act of 1921, which provided funds for the promotion of the welfare and hygiene of mothers and infants for a period of 6 years (later extended another 2 years), heralded the entrance of the Federal Government into the field of maternal and infant health. These funds were distributed among States partly on a uniform lump-sum basis and partly according to population; $5,000 of each State's lump-sum allotments and the total population allotments carried a requirement of equal State matching.

During this period also, the Federal Government increased its grants for several Federal-State functions already established: education of the blind, State homes for disabled soldiers and sailors, highways, agricultural experiment stations, and extension work. Each additional grant was allocated among the States on the same basis as its predecessors, though minor changes were made in the highway grants.

The 1921 Highway Act brought the 1916 allocation formula into basic legislation ("section 21") for the interstate and intrastate Federal-aid highway system. The major modification of the formula at that time was an increase in the Federal percentage (normally 50 percent) for States containing unappropriated public lands exceeding 5 percent of their total area. In these States the Federal share was increased by one-half the percentage that the area of such lands is of the total area of the State. The maximum

Federal aid per mile was also increased, and in the cases just mentioned this maximum was further raised in proportion to the increase in the percent of Federal aid granted.

A Federal grant was made by the Clarke-McNary Act of 1924 for cooperative farm forestry and forest-fire prevention. The funds were to be used at the discretion of the Secretary of Agriculture, who was again empowered to enter into cooperative agreements with State officials. Federal aid had to be matched by an equal amount of State funds.

Measures of Allocation During the 1930's

The depression and the resulting changes in the role of government caused a tremendous expansion in Federal grants to States, both as to functions covered and the amounts of money involved. The urgencies of the day focused greater attention than previously on the problem of distribution of these large sums of money. Consequently, many of the allocation formulas written into legislation or adopted by administrative interpretation of general statutory language were more complex than the earlier ones, largely because of the effort to measure need more accurately. The first active recognition of the principle of equalization came in this period. Certain of the existing formulas were changed somewhat to adapt them better to the ends sought. At the same time, however, many old formulas with their less exact measures of need were repeated in new legislation.

Relief, public works, and employment office acts.-The first of the depression grants came with the Emergency Relief and Construction Act of 1932 to relieve destitution, broaden the lending powers of the Reconstruction Finance Corporation, and create employment. To accomplish part of this objective, $120 million in Federal aid was appropriated for highway construction work, to be distributed according to the section 21 formula (3 area, 1⁄2 population, and 3 post-road mileage). The amounts apportioned to the States were available as a temporary advance and could be used by the States to match their regular Federal-aid apportion

ments. These amounts were to be reimbursed, however, beginning with the fiscal year 1938, by annual deductions from the regular allotments.

Subsequent highway-aid legislation, designed to increase employment through emergency construction, did alter the distribution formula, however. Grants for this purpose under the National Industrial Recovery Act of 1933, the Hayden-Cartwright Act of 1934, and the Emergency Relief Appropriation Act of 1935 provided for the apportionment of seven-eighths of the funds for the Federal-aid highway system according to the usual formula; the other one-eighth was allocated on the basis of population. This, in effect, gave the population factor the greater weight of 1024, as compared with weights of 24 for area and for postroad mileage. This adjustment in the formula channeled more of the highway aid into the most populous States, where the unemployment problem was more acute. Matching was dispensed with during this emergency period.

The 1935 Emergency Relief Appropriation Act also gave Federal aid for the elimination of hazards at grade crossings. The distribution of these funds was based on an adaptation of the highway-aid formula. Onehalf of the funds was distributed according to the population, 4 according to mileage on the Federal-aid highway system, and 4 according to railroad mileage (instead of area). No State matching was required.

To supplement the normal Federal aid functions, enormous grants were made at this time for public works and direct relief. The Emergency Relief and Construction Act of 1932 had provided that the Reconstruction Finance Corporation might make "self-liquidating" loans to State and local governments to aid them in providing necessary relief. This device, intended to stimulate Statelocal expenditures, did not prove effective and was soon replaced by grants. The Federal Emergency Relief Act of 1933 authorized grants of $500 million for relief. Half of these grants could be used to reimburse one-third of the expenditures of State and local governmental units for relief; the remainder was to be used

when the funds available within a State from all sources, including Federal, were found to be less than estimated relief needs. Not more than 15 percent of the total Federal appropriation under this act could go to any one State.

From the date of this act through the fall of 1937, when the grant programs under the Social Security Act were in virtually full operation, Congress authorized more than $3 billion for relief purposes through the medium of the Federal Emergency Relief Administration. (Another $3 billion was expended directly rather than through grants in 1936 and 1937 by the Works Progress Administration.) These grants deserve close interest because of their size and the various methods of allocation used. It was left to the discretion of the Administrator of the FERA to distribute most of the funds among the States, and the traditional matching requirement was waived in most cases.

According to one authority, the 1933 legislation was the product of a compromise between two schools of thought in Congress.' One, fearing the use of discretion by an administrative official, wanted to write the allocation formula and matching provisions into the law. This group felt that the matching approach was desirable because it "gave more to those States with the greater expenditures, or 'need'." The other group believed that State expenditures did not necessarily represent an accurate measurement of need and that reimbursement would only increase the inequity, since the States spending the most would receive the most. This school held out for administrative discretion in the disposal of the funds.

Before the first year was out, all relief grants were made on a discretionary basis; later grants did not include matching provisions, on the ground that 50-50 matching defeated the principle of equalization and was ill adapted to the exigencies of the relief situation of 1933-35. The activities of the FERA represented the first attempt by the Federal Government to distribute funds on a "variable grant" basis.

3 E. A. Williams, Federal Aid for Relief, 1939.