Volume 177, April 10 – April 11, 1939

DIARY Book 177 April 10 - April 11, 1939 - - Book Page Albania Bullitt reports on effects of Italy's move against - 4/11/39 177 414 Annenberg, Moe See Tax Evasion Appointments and Resignations Magruder, Calvert: FDR gives permission to HMJr to dis- cusa General Counselship with Magruder - 4/10/39 185 Automobile Industry See Business Conditions - D - Baby Bonds See United States Savings Bonds Bailie, Earle See War Conditions Bank of America Giannini (Mario) to confer with Delano - 4/11/39 290 Business Conditions Haas memorandum on situation for week ending 4/10/39 194 Automobile Industry: Seltzer report after Detroit visit - 4/11/39 247 Haas reports on visit to corporations furnishing Treasury with confidential new order figures - 4/11/39 364 - C - China Manchukuo marking of goods: See War Conditions Countervailing Duties Italy: Possibility of countervailing duties on silk goods discussed by HMJr with FIR and Sayre - 4/11/39 240 Situation discussed; present: HMJr, Gaston, Gibbons, White, Foley, Cairns, Moyle, and N. R. Johnson - 4/11/39 295 Cairns reports on conference he and W. R. Johnson had with Sayre - 4/11/39 389 s) Sayre memorandum 391 b) Attorney General asked for opinion (proposed Treasury Decision attached) 393 Regraded Unclassified - D - Book Page Decatur House Mrs. Beale thanks Mrs. HMJr for suggestion that matter may be brought to attention of Director of Budget - 4/11/39 177 237 Pelfesse,Mational Propertions (Tresury) in case -> amp. Treasury, S.E. Agre, State 4/11/39 289A -F- Farley, James A. Discusses with HWr continued rise in postal receipts despite falling off of business - 4/10/39 186 Federal Reserve Board H.Wr and Ranson discuss statement sent to House and Senate without informing Treasury - 4/10/39 145 Ransom and HMJr discuss conference with entire Board con- cerning matters to be discussed in future between two agencies - 4/10/39 189 - G - Germany United States exports to - - 4/11/39 373 Giannini, Mario See Bank of America General Counsel See Appointments and Resignations Gold For transportation of, see War Conditions - II - Harris, Basil See War Conditions - I - Iceland State Department prepares informal memorandum regarding - 4/11/39 375 Italy See Countervailing Duties Regraded Unclassified V - Book Page lagruder, Calvert See Appointments and Resignations Manchukuo For marking of goods, see Mar Conditions orgenthau, llenry, Jr. Upham reports on high esteem in which investment bankers in New York City hold HAJr - 4/10/39 177 86 pd I I Mevenue Revision Nagill-Shoup draft of tax statement to be made by HMJr before Committee on Tays and Means - 4/10/39 1 Blough draft 24 llagill-Shoup-llough draft 30 Conference regarding tax statement; present: DWr, Gaston, Blough, Duffield, Magill, Shoup - 4/10/39 46,93 Viner asked to come to Treasury to discuss statement - 4/11/39 251 Conforence; present: HAJr, E. III, Gaston, Shoup, Flough, Duffield, McReynolds - 4/11/39 308 liefler, Winfield See also War Conditions Returns from meeting of Finance Committee at Geneva; memorandum on medium-term credit in United States attached: White comment - 4/10/39 118 - S - Skidmore Case See Tax Evasion Smith, Tom I, See War Conditions Statements by HAJr Magill-Shoup draft of tax statement to be made by C&Jr before Committee on Ways and lieans - 4/10/39 1 Blough draft 24 llagill-Shottp-llough draft 30 Stettinius, E. R. See War Conditions Stewart, Walter See War Conditions Regraded Unclassified Book Page Tax Evasion Annenberg, Moe Commissioner of Internal Revenue's memorandum recommending criminal proceedings - 4/10/39 177 192 HWr's letter of transmittal to personal attention of Attorney General - 4/10/39 191 Conference; present: HIAJr, Foley, Graves, Klaus, Helvering, Wenchel, Gaston, and Meleynolds - 4/11/39 213 Foley memorandum on advisability of discussion between HMr and Gifford - 4/11/39 362 Skidmore Case Discussed at conference - 4/11/39 228 Taxation See Revenue Revision Taylor, Wayne C. HiJr again reiterates Welles' assurance that he will prevent any appointment - 4/11/39 359 Transamerica See Bank of America Tugwell, Rexford See Annenberg, Moe, 214 - 0 - United States Savings Bonds Bryan gives resume' of attitude toward - 4/10/39 87 - y - Viner, Jacob See War Conditions - n - War Conditions White memorandum: "Proposed steps that can be taken by Administration in present acute international situation" - 4/10/39 157 White memorandum: "Preliminary report on the possibilities of depriving theaggressor countries of needed strategic war materials" 167 Smith, Harris, Bailie, and Stettinius: Possibility of bringing to Treasury discussed by HMr and White - 4/10/39 159 Regraded Unclassified - W - Book Page Tar Conditions - (Continued) Viner, Stewart, and Riefler: Possibility of bringing to Treasury discussed by HMJr with Viner - 4/11/39. 177 252 a) Flexner consulted concerning Stewart and Riefler - 4/11/39 261 Gold, Transportation of: Postmaster General informs Treasury of issuance of regulation***** prohibiting transportation ****** from any foreign country into United States of gold having a value in excess of 050 - 4/10/39 207 Order transmitted to Butterworth - 4/11/39 235 Mediterranean situation report daily requested of Navy Department - 4/11/39 255 FDR wants Douglas, Sccles, Wallace to discuss situation in case of world war - 4/11/39 258 Stabilizing markets in event of war in Surope (conference referred to above) discussed by Treasury, Securities Exchan e Commission, State Department, Agriculture, and Federal leserve - 4/11/39 267 a) 70H informed - See Book 178, page 81 Manchukuo: Marking of Goods: Discussed at conference with Customs officials - 4/11/39 303 Tripartite Countries: Lochhead and White asked to work on plan by which these countries will not dump American stocks - 4/11/39 359 Germany: United States exports to - 4/11/39 373 Iceland: State Department propares informal memorandum regarding - 4/11/39 375 Albania: Bullitt reports on effects of Italy's move against - 4/11/39 414 Regraded Unclassified 1 April 10,1939 (Magill-Shoup) TABLE OF CONTENTS The Opportunity for Basic Reforms 1 Developments of the Past Decade 2 Aims of Tax Revision 4 Simplicity 5 Regional Agencies 5 The Four Kinds of Corporation Tax 6 Fairness 6 Net Loss Carryover 7 Capital Losses of Corporations 6 Dividends Received by Individuals 8 Consolidated Returns 9 Intercorporate Dividends 9 Surtax Rate Structure 11 Tax-exempt Securities 11 Capital Gains and Losses 12 Depletion 13 Estate Tax and Gift Tax Coordination 13 Latate Tax Insurance Exemption 14 Coordination with State and Local Taxes 14 Growth of Conflict 15 Results of Conflict 15 The Next Step 16 Adequacy of Revenue 18 The Prospects for a Balanced Budget 18 The Necessity for a Commitment Toward a Balanced Budget 19 Sources of Added Revenue 20 Regraded Unclassified 2 I should like first to say that I appreciate this opportunity to prosent to your Committee my views on necessary revenue legislation. You have heard the saying that "no year is a good year to suggest a tax bill". Certainly this remark would seem to je an accurate forecast of 1940, a year in which a national election will command the attention of the country. Therefore, my appearance here today may well be my last before this Committee on the broad subject of tax legislation. For that reason, may I digross a moment to thank this Committee and especially its Chairman, Representative Doughton, for the cooperation and consideration which have been extended to me throughout my term in office. Representative Doughton, your Committee, Schator Harrison and the Senate Finance Committee have loyally served the welfare of this country in a manner of which we may all be proud. working with this Committee and with the Senate Finance Committee has been an experience which I shall always remember with pleasure. The Opportunity for Basic Reforms When I appeared before this Committee on March 24th, I said that the Treasury was ready to supply the appropriate Con- gressional committees with ita recommendations for changes in Regraded Unclassified 3 - 2 - the tax system. The chairmen of the two Congressional con- mittees have expressed their interest, and their desire to receive the recommendations as promptly as possible, for action at this session. Some revenue legislation during this session is a recognized necessity, since the income taxes on corporations expire at the end of the year, and excise and sales taxes yielding about $500 millions expire during the summer, I hope that Congress will take this opportunity, not simply to extend the expiring levies nor simply to adopt the usual series of technical changes to meet particular hardships, but to adopt those few basic reforms that we badly need to put the revenue system on a just foundation. The fundamental reforms that I want to suggest can be adopted, as a practical matter, much better this year than next year; and the encourage- ment to the taxpayers of the country by their adoption at this time is a factor of real importance under present business conditions. Developments of the Past Decade In order to achieve lasting reforms in taxation it is essential to get a proper perspective, a perspective that we are in danger of losing through the close attention necessarily given to tax developments day by day. Before considering specific Regraded Unclassified 4 - 3 - measures I therefore suggest that we look at the development of the tax system during the last ten years. During the period 1926-1930 the Federal tax system was producing about three and a half billion dollars a year. The Great Depression drove the yield down to two billions in 1932 and government ex enditures increased. The result was the Revenue Act of 1932, the first of B. series of revenue acts all designed to strengthen the tax system in one way or another. The 1932 Act put the income tax rates back to the levels prevailing: shortly after the Rar, It also doubled, roughly, the estate tax rates, and imposed a gift tax and a series of manufacturers' excise taxes. Nevertheless, so powerful were the forces of depression that the tax revenue did not rise above two billions in 1933. But for the next five years it increased to an extent practically unprecedented in the recent history of national governments, reaching an all-time record for this country of six billions in 1938. Among the measures passed since 1932, about equal shares in achieving this result can be assigned, first, to the taxation of liquor following repeal of prohibition; second, to the social security payroll taxes; third, to the further increases in the incone taxes, the estate tax, and the gift tax in 1934 and 1935; Regraded Unclassified 5 - 4 - and to the processing taxes while they were in existence, Some revenue was also obtained, in the pressure of emergency, by disallowing certain well-grounded deductions, that are recommended below for reinstatement. Finally, the great recovery in revenue has of course been achieved in large part through the recovery in business from the depths of 1932 and 1933. Despite the great increases in income tax and estate tax rates and the introduction of a gift tax, these taxes produced only 50 percent of the Federal tax revenue in 1930. This compares with 68 percent in 1929 to 1931. The fact seems to be that, important as have been the developments in direct taxation in the past decade, they have been in large part but the necessary structural work, with much of the content yet to be added if direct taxation is to play the part it should. This point is especially important because, after all, the Federal government collects less than half the country's tax revenue. The State and local tax systems depend on the property tax for two-thirds of their tax revenue and on the gasoline and motor vehicle taxes for 13 percent. Thus they make very restricted use of direct taxes graded to take account of net differences in taxpayers' power to support government. Aims of Tax Revision Among the aims of tax reform, encouragement of business must of course rank high. This is partly a matter of specific Regraded Unclassified Б - 5 - measures designed to lighten the tax load at strategic points. It is also, however, a matter of formulating a definite fiscal policy. This policy, as I explain later, calls for a strengthening of the tax system. The system cannot be strengthened with much assurance unless it is first improved with respect to simplicity, justice, and Federal-State-local coordination -- points that therefore have direct bearing on business recovery. Simplicity Among the desirable goals of the tax policy, simplicity is one of the most important. The cost of administration should be kegt within reason, and the collection of taxes should be as little burdensome to the taxpayer as possible. Regional Agencies. The Treasury has considerably simplified tax administration by establishing regional agencies to settle controversies locally, and to speed up the work. It is no longer necessary to come to Washington in order to settle an income tax or an estate tax or a gift tax case. I have no illusions about the possibilities of eliminating completely such complexities as the elaborate provisions on corporate reorganizations, or the even more detailed sections added in 1938 to permit utility companies to reorganize in conformity to the holding company act without unduly heavy tax liabilities. Tax laws cannot be wholly simple in a complex society. Moreover, the sections I have mentioned apply to the few cases, not to the many. Regraded Unclassified 7 - 6 - The Four Kinds of Corporation Tax. There is at least one complexity, however, of general application that can be removed. We now have four different taxes applicable to ordinary business corporations: an income tax, an undistributed profits tax, a capital stock tax, and an excess-profits tax. The income tax is of course an excellent fiscal instrument. The undistributed profits tax, on the other hand, has been reduced to a point where it possesses little significance in either obtaining revenue or increasing the fairness of the tax system; it seems mainly to serve as a business irritant. The capital stock tax is not a tax on the actual value of corporate property or even corporate stock, and the excess profits tax is not really a tax on excessive profits. 30th taxes are in practice based on the guesses of corporate officials as to future corporate income. The corporation tax system would be greatly simplified, and its justice measurably increased, especially in lightening the tax load on deficit corporations, if all four taxes were consolidated into a single flat tax on corporate net incomes, with some concession in rate to corporations having less than perhaps $25,000 net income. Fairness Another essential goal of tax policy is fairness in the distribution of the tax burden. Agreement with the broad objective, however, has not always been followed by the specific Regraded Unclassified 8 - 7 - stops necessary to accomplish it. The imperative budgetary necessities of the present decade have been allowed to override a number of allowances to the taxpayer that experience has shown are essential to a fair system of taxation. On the other hand, in some cases undue concessions have been made to certain groups of taxpayers; these concessions necessitate extra burdens on other taxpayers and should be removed. Net Loss Carryover. Among the allowances that in my opinion should be reinstated for purposes of the corporation normal tax and the individual tax is that whereby a net business loss of any one year can be carried forward and be used to reduce the taxable net profit of a later year. At present, a business which has lost $50,000 a year for three years and has then made $150,000 in the fourth year must pay tax on the full $150,000 without any allowance at all for the losses of the first three years, although the plain fact is that the business has made no profit at all over the four year period. No income tax should be payable where there have been no profits. If the Government wants investment in new businesses - businesses which cannot guarantee a profit every year - the least the Government can do is to provide that only net profits over a term of years will be taxed. The same remarks apply to the heavy industries producing durable goods - industries that are partic- ularly sensitive to the business cycle and in which unemployment is most pronounced. Under the present system of allowing no carryover of business losses, the tax system is loaded both Regraded Unclassified 9 - 8 - against new investment and the durable goods industries. Unfairness here, as so often, acts as a deterrent to the business enterprise. Capital Losses of Corporations. Another example of such loading is the present restriction on a corporation that incurs a loss when it sells a capital asset. This capital loss can be deducted only against the capital gains, if any, that the corporation has made in the same year (plus $2,000). In many cases, therefore, the corporation does not in practice get an allowance for its capital loss. Thus again the risk-taking type of business is discriminated against, compared to the safe and stable business. Dividends Received by Individuals. Another allowance that should be reinstated concerns dividends received by individuals. At present a corporation's income is taxed, and then when it is paid out in dividends the stockholder pays the full individual income tax on the dividends with no allowance at all for the fact that the corporation has also paid an income tax. Thus, an extra burden is imposed on all income from corporations, large and small. More serious, perhaps, is the fact that this arrangement gives corporations a strong inducement to raise money by selling bonds or borrowing at a bank rather than by selling stock. This is 50 because the interest that the corporation pays out on this borrowed money can be deducted from its gross income in computing its net income; but it cannot deduct dividends paid out; and both Regraded Unclassified 10 - 9 - dividends and interest are taxed in full to the individual. A remedy is to give the individual taxpayer some relief from full taxation on the dividends he receives, in acknowledgment of the fact that the corporation has already paid tax on the profits whence those dividends come. The relief need not be so large 25 to equal the corporation tax, but it should, in my opinion, be substantial. Before the relief was eliminated in 1936, it took the form of exempting dividends from the normal tax (leaving them subject to the surtax). Whether this device would be adequate now must be considered in the light of the fact that while the normal tax is only 4 percent, the corporation tax, except for small corporations, has been raised to 161 percent at a minimum and will be even more if the rate is increased upon elimination of the capital stock and excess-profits tax, as suggested above. Consolidated Returns. Two provisions in the income tax law are aimed directly at corporation subsidiaries. One is the provision forbidding two or more corporations to file a joint, or consolidated, return even though they comprise a group con- sisting of a parent corporation and 100 percent-owned subsidiaries. Thus a loss incurred by one of the group cannot be used to reduce the profit of another in the group, though 30 far as the shareholders are concerned they are simply one large corporation. Intercorporate Dividends. The other provision makes a corporation include in its taxable income 15 percent of the Regraded Unclassified 11 - 10 - dividends it receives, although these dividends come from profits that have already paid the full corporation income tax. This measure has nothing to do with tax evasion through personal holding companies, a problem solved for the present at least by the series of prohibitive taxes worked out in 1937 on the "incorporated pocketbook", whether foreign or domestic. Instead, this partial taxation of intercorporate dividends penalizes parent corporations, ordinary holding companies, and the ordinary type of investment trust. There are undoubtedly reasons for controlling the growth of such types of corporate structure, but it is also true that there are many cases where those types are legitimate and even desirable from the public point of view. The tax penalties strike the deserving and undeserving alike, making no distinction of either motive or results. It is therefore pertinent to ask whether we are not wielding too blunt an instrument in these cases, harming some unintentionally and unwittingly allowing others to escape too lightly. of course, any system of tax laws is bound to affect business practices, and it is not sensible to say that taxation should in no circumstances be used as an instrument of social control; but tax laws are complex enough and hard enough to nake fair as revenue producers without being asked to take on the task of social control. It remains a good general working rule that whatever governmental regulation is necessary should be attempted, in the first instance at least, by other means. Regraded Unclassified 12 - 11 - Surtax Rate Structure. The present rate scale of the individual income tax reaches a peak of 79 percent in the top bracket, with several percents added by State income taxes in many cases. From the viewpoint of an equitable distribution of the tax burden I do not believe this rate scale is too severe; but to run it up to such high levels in the top brackets is to make scarcely worthwhile for the wealthiest taxpayers any risking of their capital in hazardous ventures. I therefore suggest that the following combination of measures be considered as a means of preserving the fairness of the tax system while leaving more encouragement for risk-taking enterprise: let the rates in the top brackets of the income tax be substantially reduced and, as noted below, let the capital gains provisions be tightened, the estate and gift tax rates increased, and future issues of tax exempt securities prohibited. Tax-exempt Securities. It is obvious that the progressive- rate feature of the individual income tax - the keystone of our fiscal policy - is distorted and in many cases completely nullified by the existence of a large amount of tax-free securities. Now that recent Supreme Court decisions indicate a change in attitude toward the problem of intergovernmental immunity, it seems to me that the inclusion of all future governmental bond interest in taxable income is one of the most obvious next steps toward tax justice. More than that, it should tend to push into new enterprises the kind of private capital that can afford to take risks. Regraded Unclassified 13 - 12 - I have discussed five types of allowance that, if granted to taxpayers, would, in my opinion, increase the fairness of the tax system, and encourage investment, especially investment that is willing to take risks. I now come to the other aspect of business: undue concessions that have been made to certain types of taxpayer. Removal of these concessions will serve the double purpose of improving the equity of the system and counterbalancing to some extent the decrease in revenue that would result from the allowances discussed above. Capital Gains and Losses, A gain from a sale of a stock or a bond or a piece of real estate or any other capital asset is, if the asset has been held more than two years, taxed at a maximum rate of 15 percent. In the vast majority of cases the tax rate is even much less than this. Alongside of the ordinary incone tax rates that apply to salaries, interest, dividends, and rents, the rates on these long-term capital gains are absurdly low. One reason given for setting them so low is that the deduction of capital losses is somewhat restricted. A fair tax system cannot be achieved, however, simply through matching an unjustified concession by a harsh restriction. A more sensible procedure is to remove both the concession and the restriction. Hence 1 suggest for consideration an increase in the tax rates on long-term capital gains, and possibly also on intermediate gains (now taxed at a maximum of 30 percent), coupled with more liberal allowance of capital losses, possibly by letting them be carried forward several years to be offset against future capital gains. The net result should be no deterrent to genuine long-term investment Regraded Unclassified 14 - 13 - (especially in view of the suggestion above concerning surtax rates) and a great increase in fairness among individuals. Depletion. The present law allows excessive depletion deductions to oil and gas wells and certain types of mine. As the Treasury has often pointed out, a large amount of revenue can be recovered by closing this loophole. Estate Tax and Gift Tax Coordination. The estate and gift taxes together contributed only 6.9 percent of the Federal revenues in 1938, and only 3.9 percent of total Federal, State, and local revenues. One of the reasons why these taxes do not play a larger role is that wealthy persons can split their giving between life and death in such a way that the transfers fell only in the lower brackets of each of the two taxes. Moreover, there are two exemptions, one for each tax. The remedy for this situation is not merely to increase the rates, nor even merely to eliminate one of the exemptions. The aim, it seems to me, should be to coordinate the ift tax and the estate tax so that, from the transfer tax point of view, it makes practically no difference to the donor whether he gives during life or at death. of course if some tax incentive to give during life is deemed desirable, it can be given, even under the coordination suggested below. At present such incentive as exists may fairly be called erratic and far too costly in revenue. This coordination would in effect consider gifts and the final distribution at death as a unified series of transfers. At the present time successive gifts are cumulated for tax purposes. It remains merely to cumulate the estate as if it were a final gift. Regraded Unclassified 15 - 14 - There then would be one exemption and one rate scale. If it were desired to give new inducement to gifts it could be accomplished through special credits. Furthermore, any undue hardships at death could be eliminated through special provisions. With this loophole of avoidance closed, it would probably be desirable to increase the yield of the estate tax still further through somewhat lower exemptions and higher rates in the lower and middle brackets. The Federal estate tax at the present time applies to a very small proportion of estates and the tax on all but the top portions of very large estates is rela- tively small. In my opinion the rates on the highest brackets of the largest estates are already sufficiently high and should not be increased, although the total tax on those large estates would, of course, increase as the middle and lower bracket rates were increased. Estate Tax Insurance Exemption. The exemption granted to life insurance (up to $40,000) under the estate tax gives a preference to those fortunate enough to be able to save in this manner over all other savers and other forms of saving. Removal of this discrimination is in my opinion highly advisable. Coordination with State and Local Taxes In a federal system such as ours, coordination of federal, state, and local taxes becomes one of the major goals of fiscal policy. Regraded Unclassified 18 - 15 - Growth of Conflict. While the national government has been obliged to strengthen its revenue system, the States have been faced with a similar problem. They too have experienced drastic declines in revenue and increasing demands for expenditure. To meet their revenue needs they have reached out for new tax sources. Taxes on incomes, retail sales, alcoholic beverages, tobacco, and chain stores, and a variety of business taxes have been newly imposed in many States, As a result, there has been an enlargement of the [roup of taxes that are imposed by both Federal and State govern- ments, Transfers of property at death are taxed both by the Toderal Covernment and 47 of the States. Individual income is subject to the Federal income tax and 34 State income taxes. Kotor fuel is taxed by the Federal Government and all the States; the Sederal Government and 44 States derive revenue from alcoholic beverages; and in 31 States the Federal and State Governments tax tobacco. Similar duplications exist in many other taxes. Results of Conflict. The simultaneous expansion in the revenue systems of both the States and the Federal Government has greatly increased the conflicts between national and State taxes and between the taxes of the various States, The results are increasingly unsatisfactory to everyone. The various units of government find their revenues adversely affected by competing taxes of other governments. The costs of collection are higher in proportion to the revenue than if this competition did not exist. The types of taxes that States have felt obliged to impose often give rise to smuggling Regraded Unclassif 17 - 16 - across the State lines, necessitating practically the setting up of customs offices by the States. The taxpayer is also adversely affected. He is often subject to two or more taxes on the same income or the same transaction. These taxes are frequently imposed without regard to each other so that the levies are unequal and onerous. For example, in some States combined Federal, State and local gasoline tax levies reach 10 cents per gallon. The taxpayer must prepare numerous reports which must often be compiled in different ways to matisfy the many requirements of the different taxing authorities. Even the salaried individual must fill out several forms for income tax (including duplicates) in many States. The Next Step. Although in a Federal system of government the tax structure will inevitably be complex, the existing confusion and conflict can be diminished. A variety of suggestions have been made from different sources. Thus, it has been proposed that uniform returns be used by different States and the Federal Government in collecting the same tax and that uniform apportion- ment formulas be adopted to avoid taxing the same income or transaction twice by different states. In the case of some taxes it has been suggested that the Federal Government administer the tax and distribute its proceeds among the States whence the revenue comes, Another suggestion is that the Federal Government leave some of the revenue sources to the States and that the States leave other sources to the Federal Government.. Federal Regraded Unclassified 18 - 17 - collection of taxes accompanied by grants-in-aid to States has also been suggested. It is high time to consider seriously how the national and State Governments can coordinate their taxes in such a manner as to minimize duplications and conflicts, to reduce the taxpayer's cost in complying with the tax laws and to assure adequate revenues to all governments. The existence and seriousness of the problem have been widely recognized and there has been a good deal of talk about it. To date, however, little has been accomplished. In my opinion, the most fruitful approach to this difficult and complicated problem is through the appoint- ment of a national comission made up of nen having the highest possible level of ability and public confidence. They should represent not the Federal, State or local Covernments as such, but the national interest at large. They should have at least one year, more probably two or three, in which to hold hearings and prepare a report, and amplo funds should be provided for staff work. The function of the Commission would be to study the inter- governmental fiscal problem in its many ramifications and report to Congress. I suggest that Congress consider the creation of such a Commission. Regraded Unclassified 19 - 18 - Adequacy of Revenue It is trite to say that a tax system should yield ade- quate revenue. The real question is, what is "adequate" in any given year and place. Yet this question is at the root of our tax problem. Unless we answer it, all our specific recommendations for changes in the tax system assume at best an air of temporary structures resting on foundations apt to be shifted at a moment's notice. Here it becomes necessary to complement the backward glance over the past decade given at the beginning of my statement with a look into the future of the next five years or SO, As we look, certain probabilities take form. To what policy they should lead may not be entirely self-ovident, but it is clear that we must resolutely face the problems that they raise. The Prospects for a Balanced Budget.- The present tax system is powerful; but it is not so powerful that it will stop all in- crease in the public debt over the next five years or so, even given some measure of business improvement and some reduction in expenditures. In a year of great prosperity, with a national income of some 80 billions of dollars, the current revenues might rise to 8 billions; and, depending on the course of expenditures, a moderate amount of debt reduction, perhaps not more than a billion dollars and conceivably less, could result in such a year. 3ut over a longer period, good years and bad, the present revenue system will result in Da substantial increase in the public dobt, Regraded Unclassified 20 - 19 - assuming no radical change in expenditures. The crux of our expenditure problem lies in relief and national defense. Together these items are accounting for of our total national expenditures for the current year. Even with the lowest expenditures on relief and defense that can reasonably be expected, it is in my opinion unreal to talk of balancing the budget next year or even the year after next; but, unless we are to commit ourselves to a philosophy of continuing increase in debt, it will be neces- sary to enact this year measures that will, within three or four years, bring in added revenue. These measures are indicated in detail below. It is not 50 much the exact date of budget equilibrium that matters, or even the precision of the balancing, as it is the adoption of a program that commits us to a trend in this direction during the next five years. The Necessity for a Commitment Toward a Balanced Budget.- Such a program seems to me to play a vital part in increasing the national income. The healthy functioning of the country as a whole dependa in the last analysis upon the healthy functioning of the wage- earners and the businesses of the country. ile must rely upon business to provide employment for at least the great bulk of our men of working age. I have suggested some measures of Regraded Unclassified 21 - 20 - tax fairness that will remove specific obstacles to business recovery; but the problem is much broader than that. When the uncertainty of conditions abroad are coupled with the un- certainties of an unbalanced national budget, and when measures to produce a balance are hopes, not realities, it is not sur- prising that the man who has saved money, whether a few dollars or a million, refuses to take a chance on an investment in anything save the soundest, best established, most stable securities. He knows that business must sometime face new taxes heavy enough to bring the budget into balance, perhaps even heavy enough to retire some part of the debt, and he cannot know where they will fall. Since he cannot forecast the future, he marks time. The result is business stagnation, not the steady business advance which has been characteristic of the country. Sources of Added Revenue.- A definite policy looking toward the balancing of the budget sometime within the next five years or 30 seems to me to imply the following steps: First, a declaration of the policy in unmistakable terms. Second, the continuation of the sales and excise taxes that otherwise expire this year, Third, a program of readjustment within the several taxes as suggested in the sections above. The net effect of these re- adjustments will probably be a loss of revenue, but they are essential because of the very fact that the system as a whole Regraded Unclassified 22 - 21 - must raise more revenue. When the tax burden becomes severe in the aggregate, injustices within the system that might otherwise as a practical matter be ignored may become intolerable. Fourth, an increase in rates and a decrease in exemptions, in a manner calculated to cause the least immediate disturbance to consumer purchasing power and to capital's willingness to invest. Here the most promising points of attack seem to be: (a) The rates of the estate tax and gift tax (coordinated as suggested above) in the middle and lower brackets. The full revenue from increases in these brackets will not come in until three or four years have passed, but when it does arrive it will be a powerful factor operating to balance the budget. (b) The exemption of 740,000 under the estate tax-gift tax. This could, in ay opinion, be substantially lowered. (c) The middle brackets in the individual income tax, especially those between 5,000 and $50,000. An increase here rather than elsewhere seems indicated by the manner in which the weight of the tax system as a whole is at present distributed. It must be remembered than even the wealthiest man has part of his income in the middle brackets, so an increase there would in part directly recoup the loss incurred by reducing the rates where they are most restrictive economically, that is, on the top parts of his income. Regraded Unclassified 23 - 22 - (d) The exemptions under the individual income tax. By lowering the single exemption from $1,000 to #800 or thereabouts, and the married exemption from $2,500 to $2,000 or thereabouts, not only will a new class of taxpayers be awakened into con- sciousness of the needs of the government, but all existing tax- payers will be required to contribute something more. This program recognizes the desirability of increasing the role of direct taxation in the system of the national government. Whether it would prove adequate to balance the budget at the proper time would of course depend on many factors, some of them adduced above, that cannot be examined in detail here. At the very least, however, it would be a program, not a policy of drifting that is in itself a sort of choice by default; and the achievement of a carefully formulated program must, in my opinion, be the cornerstone of our fiscal policy. Regraded Unclassifi street DRAFT-12:00 noon-4-10-39 24 The merits of the estate tax entitle it to an important role in the Foderal tax eyatem. It permits the application of the principle of ability to pay although on 8. somewhat less exact basis than the individual income tex. It is the best available means for preventing the perpetuation and increasing concentration of grent fortunes. As compared to other taxes it has relatively little effect in discouraging enterprise. The contemplation of the distant future is of less importance in determining one's business decisions than the realities of the immediate present. Such effects as there are tend to offect each other. The prospect of estate taxes may discourage some persons from trying to accumulate fortunes while it may encourage others to accumulate more than they otherwise would in order that they may leave 2 competence to their dependents. Changes in the law during the past few years have gone a 10mg way to male the estate tax the factor it should be in the revenue system. The exemption has been decreased to $40,000 and tax rates have been increased to a maximum of 70 percent on amounts transferred in excess of $50,000,000. The place of the estate tax in the tax eystem, however, is still not as 1.8 lorge as it should be. In 1928 the tax accounted for percent of the Federal revenues while in 1938 it accounted 6.9 for percent. As a proportion of total Federal, State Regraded Unclassified, 25 - 2 - and local revenues, estate end inhoritence taxes amounted to 2.0 percent in 1928 and 3.9 percent in 1938. One of the reasons why the estate tax does not yet fill the position it should in the tex system is that it is widely evoided by making gifts before death. In nn attempt to end this avoidance, a gift tax vas imposed in 1932. Mile the gift tax has reduced the incentive to evoid the entate tex, a large incentive remains. There are two exemptions, one for the gift tex and one for the estate tax. Likewise, there are two rate scales, each beginning at very low rates. A person with c. large fortune can reduce his tax morkedly by taking advantage of the two exemptions and the two rate scales. The avoidance cannot be offset merely by eliminating the ift tax exemption end increasing the rates of estate and gift taxes. Inequities among taxpayers would be increased if only these steps were taken. Many persons are not able to dispose of large amounts of their wealth by gift. Some need to retain their venlth to maintain control over their businesses. Others feel that they cannot (ive away their property because of the uncertainties of the future and the desire for protection in old age. In my opinion the solution lies in considering gifts and the final distribution at death as a unified series of transfers. At the present time successive gifts are cumulated. Regraded Unclassified 26 - 3 - It merely remains to cumulate the estate ea if it were e final ift. There then would be one exemption and one rate scale. If it vere desired to give new inducement to gifts it could be accomplished through special credits. Furthermore, any undue hardshine at death could be eliminated through special provisions. With this loophole of avoidance closed, it would probably be desirable to increase the yield of the estate tax still further through somewhat lower exemptions end higher rates in the lover and middle byockets, The Federal entate tax at the weart time nuplies to D very small proportion of estates and the tox on all out very large estates is relatively small. In my oninion the rates on the largest estates are already sufficiently high and should not be increased. Regraded Unclassified Blough DRAFT-12:30 P.M.-4-10-39 27 While the national @overnment has been obliged to strengthen its revenue system, the States have been faced with a similar problem. They too have experienced drastic declines in revenue and increasing demands for expenditure. To meet their revenue needs they have reached out for new tax sources. Taxes on incomes, retail solos, alcoholic beverages, tobacco, end chain stores, and a variety of business taxes have been newly imposed in many States. As E result, there has been en enlargement of the (roup of taxes that are imposed by both Federal and State governments. Transfers of property at death are taxed both by the Tederal Government and 117 of the States. Individual income is subject to the Federal income tax and 34 State income taxes. Motor fuel and alcoholic beverages are taxed by the Federal Government and 31 States. Similar duplications exist in many other taxes. The simultaneous expansion in the revenue systems of both the States and the Federal Government has greatly increased the conflicts between national and State taxes and between the taxes of the various States. The results are incressingly unsetisfactory to everyone. The various units of government find their revenues adversely affected by competing taxes of other governments. The costs of collection are higher in proportion to the revenue than if this competition did not exist. The types of taxes that States have felt obliged to impose often give rise to smuggling across State lines, Regraded Unclassified 28 - 2 - necessitating practically the setting up of customs offices by the States. The taxpayer 1a also adversely affected. He is often subject to two or more taxes on the same income or the same transaction. These taxes are frequently imposed without regard to each other so that the levies are unequal and onerous. For example, in some States combined Federal, State and local gasoline tax levies exceed 116 per gallon. The taxpayer mist prepare numerous reports which must often be compiled in different ways to entisfy the many requirements of the different taxing authorities. Although in a Federal system of government the tax structure vill inevitably be complex, the existing confusion and conflict can be diminished. A variety of suggestions have been made from different sources. Thus, it has been proposed that uniform returns be used by different States end the Federal Government in collecting the same tax end that uniform apportionment formulas be adopted to avoid taxing the same income or transaction twice by different States. In the case of some taxes it has been suggested that the Federal Government collect the revenue and distribute it among the States. Another suggestion is that the Federal Government leave some of the revenue sources to the States and that the States leave other sources to the Federal Government. Federal collection of taxes accomanied by grants-in-aid to States has also been suggested. Regraded Unclassified 29 - 3 - It is high time to consider seriously how the national and State governments can coordinate their taxes in such a manner as to minimize duplications and conflicts, to reduce the tax- payer's cost in complying with the tex laws and to assure adequate revenues to all governments. The existence and seriousness of the problem have been widely recognized and there has been a good deal of talk about it. To date, however, little has been accomplished. In my opinion, the most fruitful approach to this difficult and complicated problem is through the appointment of a national commission made up of men having the highest possible level of ability and public confidence. They should represent not the Federal, State or local governments as such, but the national interest at large. Their function would be to study the inter- @overnmental fiscal problem in its many remifications and report to Congress. I recommend that Congress provide for such a commission. Regraded Unclassified 30 Magill-Shoup-Blough Regraded Unclassified 21 4/10/39 In my statement of I said that the , Treasury was ready to supply to the appropriate Congressional committees its recommendations for changes in the tax system, to improve its fairness, to encourage business to go forward, and to meet present budgetary requirements on a better basis. The chairmen of the two Congressional committees have expressed their interest in these objectives, and their desire to receive the recommendations B.B promptly as possible, for action at this session. Some revenue legislation during this session 1s a recognized necessity, since the income taxes on cor- porations expire at the end of the year, and excise and sales taxes yielding about $500 millions during the summer, I hope that Congress will take this opportunity, not simply to extend the expiring levies, nor simply to adopt the usual series of technical changes to meet particular hardships, but to adopt those few basic reforms which we badly need to put the revenue system on a just foundation. The fundamental reforms which I want to suggest can much better be adopted B.B a practical matter this year rather than next year; and the encouragement to the taxpayers of the country by their adoption at this time is a factor of real importance under present busi- ness conditions. Regraded Unclassified 2 1 I 32 I wish to divide this statement into two parts: First, B. short summary of the fundamental tenets by which a tax system may be Judged; and second, a list of the major changes which I recommend for Congressional consideration at this time. First, Simplicity. The collection of taxes should be as little burdensome to the taxpayer 88 possible. The Treasury has considerably simplified tax administration by establishing regional agencies to settle controversies locally, and to speed up the work. It is no longer necessary to come to Washington in order to settle an income tax or an estate tax or & gift tax case. I have no illusions about the possibilities of eliminat- ing completely such complexities, as the elaborate provisions dealing with corporate reorganizations, or the even more detailed sections added in 1938 to permit utility companies to reorganize in conformity to the holding company act without undully heavy tax liabilities. Tax laws cannot be wholly simple in a complex society, and the sections I have mentioned apply to the few cases, not to the many. The complexities I would like to see eliminated are those in the taxing provisions of general application. We now have four different taxes applicable to ordinary business corporations: an income tax, an undistributed profits tax, a capital stock tax, and an excess profits tax. The income tax is by all odds the most productive as well as the fairest. The undistributed profits tax has been reduced to a point where it no longer Regraded Unclassified - 2 (a) - 33 possesses much revenue significance; it mainly serves as a business irritant. The capital stock tax 1a not a tax on the actual value of corporate property, nor 1s the excess profits tax really a tax on excessive profits. Both taxes are really based on the guesses of corporate officials 88 to future corporate income. The corporate tax system would be greatly simplified, and its justice measurably increased, if all four taxes were consolidated into a single flat tax on corpo- rate incomes, with some concession in rate to corporations having less than perhaps $25,000 net income. We should not mix taxation and the regulation of the business of the country. Tax laws are complex enough and it 16 hard to make them fair 88 revenue producers without giving them the added freight of social control. Of course, any system of tax laws 18 bound to have important incidental effects upon our economy; and the laws must be BO drawn as to prevent evasion, But it 18 fundamental that the prime purpose of tax legislation should be the raising of the needed revenue with the least possible dislocation of the ordinary business and social life of the country. Whatever governmental regulation 1s necessary should, as a general working rule, be accomplished by other means. Regraded Unclassified 31 - 2 (b) - Our present tax provisions have been 80 framed as to encourage corporations to acquire capital through borrowing, rather than through the issuance of stock. Corporations are allowed a deduction for interest paid, but not for dividends paid. Interest and dividends are taxed alike to their recipients. A corporation which has $500,000 of bonds and $500,000 of capital stock and surplus will pay much less income taxes than one with the same income and assets which has no bonded indebtedness, and $1,000,000 of capital stock and surplus, I do not think that the tax laws should act as an incentive to the increase in corporate indebtedness. We can improve the situation by giving stockholders a credit against their normal taxes for the tax the corporation has already paid on the profits distributed to them as dividends -- a credit which existed all through the history of the income tax until 1936. We have sought to discourage holding companies by a tax of about 21 percent on dividends received by one business cor- poration from another. The problem here 18 not one of tax evasion through personal holding companies, e problem solved for the present at least by the whole series of special prohibi- tive taxes worked out in 1937 on the "incorporated pocketbook", whether foreign or domestic. The question is whether the revenue laws should be founded on the policy of discouraging business men from organizing subsidiary corporations to exploit Regraded Unclassified 35 - 2 (c) - new patents or to develop risky enterprises. In my judgment, it is wiser for the tax laws simply to hold the scales even, to withhold any judgment upon the merits or demerits of dif- ferent kinds of business organization, to leave these matters to legislation which is openly and avowedly regulative. By the adoption of such a policy, issues are kept clear-cut, and we do not run the risk of muddling tax objectives with regulatory policies, to the disadvantage of both. Regraded Unclassified 36 - 3 - Second, Fairness. Everyone agrees as a matter of course that the tax system should be fair, that taxation should be levied in accordance with capacity to pay, Agreement with the broad objective, however, has not always been followed by the specific steps necessary to accomplish 1t. The imperative budgetary necessities of the present decade have been allowed to override 8. number of allowances to the taxpayer which were cost- ing money, but which experience has shown are essential to a fair system of taxation. Thus, corporations are allowed de- ductions for capital losses only to the extent of capital gaine in the same year, plus $2,000 -- an entirely inadequate provi- sion for any corporation which has been forced to sell consider- able amounts of its capital assets at a loss. We would like to see more capital invested in new indus- tries, to put more men to work. It 18 certainly the part of wisdom to encourage such investment, for we have immense amounts of idle funds, and we have all too many idle men. Yet the income tax law as unfortunately loaded against new investment and risky businesses, not only by the capital loss provisions I have referred to, but by the elimination of provision for offsetting the current operating losses of one year against the operating profits of a later year. A stable business, reporting annual profits, 18 in no difficulties in this respect; on the other hand a business which has lost $50,000 B. year for two years and has then made $100,000 in the third year. must pay Just as high taxes on the $100,000 8.8 if every Regraded Unclassified 27 year had shown a profit, the plain fact 18 that the business has made no profits at all over the three-year period, and no income tax should be payable where there have been no profite. If the Government wants investment in new businesses -- businesses which cannot guarantee a profit every year -- the least the Government can do 16 to provide that only net profits will be taxed, Third, Adequacy. Over the five-year period ending in 1940, for which budgets have been presented, expenditures have exceeded revenues by an average of over $3 billions 8. year. In 1938, the Government received the largest total of receipts for any year since 1920; and the expenditures still exceeded receipts by $1,384 millions. The anticipated budget deficite for the fiscal years ending in 1939 and 1940 are $4,072 millions and $3,426 millions respectively. It may be that expenditures can be reduced. It may be that tax rates and provisions are oppressive in some instances, or that the tax system should rest on a broader base. It may be that ways and means can be adopted for a market increase in the national income, and that then the present tax system will produce revenues to balance disburse- ments, The first essential in my judgment 1s the formulation of a dependable plan for dealing with our budgetary problems over the period of the next five years. There 18 little, if any, possibility of balancing the budget for two or three years, but if action to increase revenues and curtail expenditures 1s Regraded Unclassified 38 - B - not taken at this session, the possibility is pushed ahead by one and probably two years more. Mere inaction at this time constitutes a choice of one form of fiscal policy rather than another. The healthy functioning of the country 8.8 a whole depends in the last analysis upon the healthy functioning of the wage- earners and the businesses of the country. We must rely upon business to provide employment for at least the great bulk of our men of working age. We ought therefore to remove any specific obstacles to business recovery which remain in the tax structure, but the problem is much broader than that. When the uncertainty of conditions abroad are coupled with the uncertainties of an unbalanced national budget, and when measures to produce a balance are hopes, not realities, it is not surprising that the man who has saved money, whether a few dollars or B. million, refused to take a chance on an investment in anything save the soundest, best established, most stable securities. He knows that business must sometime face new taxes to bring the budget into balance, and he cannot know where they will fall. Since he cannot forecast the future, he marks time. The result 18 business stagnation, not the steady business advance which has been characteristic of the country. Becond, the maintenance of the Federal budget in its present condition makes tax reform difficult or impossible. Regraded Unclassified - 6 - Most of the essential reforms will cause losses of revenue. I believe that the adoption of some of the changes which I want to recommend will promote healthier business conditions, and in the end increased revenue. But changes in the tax system alone will not greatly improve business, and in any event, the effect will not be immediate, It 1e the part of wisdom, therefore, to plan a tax system more adequate as a whole, at the same time that we act to relieve specific inequities. We cannot spare the revenue from the expiring excess and sales taxes at this time. At the same time, we must realize that taxes of this sort are not good measures of ability to pay, that they have been increasingly resorted to by the States and cities as well as by the Federal government, and that therefore further increases in them are undesirable, In 1928, the income tax produced $2,175 millions out of $2,800 millions of total Federal revenue, or 77 percent. In 1938, it produced $2,586 millions out of $5,660 millions of total Federal revenue, or 45.6 percent; in other words, while total Federal receipts were doubled, the income tax increased about 20 percent. Relatively we are depending too heavily upon indirect flat-rate taxes, and not heavily enough upon taxes which are a more accurate measure of ability to pay. The tax system in this respect has moved in the wrong direction. Under these conditions, the conclusion is inevitable that the base of the income tax should be broadened by lowering Regraded Unclassified 40 7 the exemptions. Further, there should be an increase in the surtax rates applicable to incomes in the brackets in the center of the rate soale, roughly those incomes between $20,000 and $100,000. Finally, our studies indicate that the upper surtax rates are too high for the greatest productivity; and that net revenues would be increased by a small reduction therein. The incentives to embark capital in new enterprises is noticeably dampened. When the State and Federal governments together demand 8. participation in profits of a.8 much aa B9 percent, with a much smaller participation in losses (go on Estate and Gift Taxes State-Federal coordination) The merits of the estate tax entitle it to an important role in the Federal tax system. It permits the application of the principle of ability to pay although on a somewhat less exact basis than the individual income tax. It is the best available means for preventing the perpetuation and increasing concentration of great fortunes. As compared to other taxes it has relatively little effect in discouraging enterprise. The contemplation of the distant future is of less importance in determining one's business decisions than the realities of the immediate present. Such effects as there are tend to offset each other. The prospect of estate taxes may discourage Regraded Unclassified 41 8 . # some persons from trying to accumulate fortunes while it may encourage others to accumulate more than they otherwise would in order that they may leave a competence to their dependents. Changes in the law during the past few years have gone 8 long way to make the estate tax the factor it should be in the revenue system, The exemption has been decreased to $40,000 and tax rates have been increased to a maximum of 70 percent on amounts transferred in excess of $50,000,000. The place of the estate tax in the tax system, however, is still not as large as it should be. In 1928 the tax accounted for 1,8 percent of the Federal revenues while in 1938 it accounted for 6,9 percent. As B. proportion of total Federal, State and local revenues, estate and inheritance taxes amounted to 2.0 percent in 1928 and 3.9 percent in 1938. One of the reasons why the estate tax does not yet fill the position it should in the tax system 1s that it is widely avoided by making gifts before death. In an attempt to end this avoidance, a gift tax was 1m- posed in 1932, While the gift tax has reduced the incentive to avoid the estate tax, e large incentive remains. There are two exemptions, one for the gift tax and one for the estate tax. Likewise, there are two rate scales, each beginning at very low rates. A person with a large fortune can reduce his tax markedly by taking advantage of the two exemptions and the two rate scales. Regraded Unclassified 42 - 9 - The avoidance cannot be offset merely by eliminating the gift tax exemption and increasing the rates of estate and gift taxes. Inequities among taxpayers would be increased if only these steps were taken. Many persons are not able to dispose of large amounts of their wealth by gift. Some need to retain their wealth to maintain control over their businesses. Others feel that they cannot give away their property because of the uncertainties of the future and the desire for protection in old age. In my opinion the solution lies in considering gifts and the final distribution at death as & unified series of trans- fers. At the present time successive gifts are cumulated, It remains merely to cumulate the estate as if it were a final gift. There then would be one exemption and one rate scale. If it were desired to give new inducement to gifts it could be accomplished through special credits. Furthermore, any undue hardships at death could be eliminated through special provisions. With this loophole of avoidance closed, it would probably be desirable to increase the yield of the estate tax still further through somewhat lower exemptions and higher rates in the lower and middle brackets. The Federal estate tax at the present time applies to a very small proportion of estatesand the tax on all but very large estates 1s relatively small. In my opinion the rates on the largest estates are already suf- ficiently high and should not be increased. Regraded Unclassified 43 - 10 - While the national government has been obliged to strengthen its revenue system, the States have been faced with 8 similar problem. They too have experienced drastic declines in revenue and increasing demands for expenditure. To meet their revenue needs they have reached out for new tax sources, Taxes on incomes, retail sales, alcoholic beverages, tobacco, and chain stores, and a variety of business taxes have been newly imposed in many States. As a result, there has been an enlargement of the group of taxes that are imposed by both Federal and State governments. Transfers of property at death are taxed both by the Federal Government and 47 of the States. Individual income 1s subject to the Federal income tax and 34 State income taxes. Motor fuel and alcoholic beverages are taxed by the Federal Government and 31 States. Similar dupli- cations exist in many other taxes. The simultaneous expansion in the revenue systems of both the States and the Federal Government has greatly increased the conflicts between national and State taxes and between the taxes of the various States. The results are increasingly unsatisfactory to everyone. The various units of government find their revenues adversely affected by competing taxes of other governments. The costs of collection are higher in pro- portion to the revenue than if this competition did not exist. The types of taxes that States have felt obliged to impose often give rise to smuggling across State lines, necessitating practically the setting up of customs offices by the States. Regraded Unclassified - 11 - The taxpayer is also adversely affected. He is often subject to two or more taxes on the same income or the same trans- action. These taxes are frequently imposed without regard to each other 80 that the levies are unequal and onerous. For example, in some States combined Federal, State and local gasoline tax levies exceed 11% per gallon. The taxpayer must prepare numerous reports which must often be compiled in dif- ferent ways to satisfy the many requirements of the different taxing authorities. Although in a Federal system of government the tax struc- ture will inevitably be complex, the existing confusion and conflict can be diminished. A variety of suggestions have been made from different sources. Thus, it has been proposed that uniform returns be used by different States and the Federal Government in collecting the same tax and that uniform appor- tionment formulas be adopted to avoid taxing the same income or transaction twice by different States. In the case of some taxes it has been suggested that the Federal Government collect the revenue and distribute it among the States. Another sug- gestion 18 that the Federal Government leave some of the revenue sources to the States and that the States leave other sources to the Federal Government. Federal collection of taxes accompanied by grants-in-aid to States has also been suggested, It 18 high time to consider seriously how the national and State governments can coordinate their taxes in such & manner Regraded Unclassified 45 - 12 - ae to minimize duplications and conflicts, to reduce the taxpayer's cost in complying with the tax laws and to assure adequate revenues to all governments, The existence and seriousness of the problem have been widely recognized and there has been a good deal of talk about it. To date, however, little has been accomplished. In my opinion, the most fruitful approach to this difficult and complicated problem 18 through the appointment of a national commission made up of men having the highest possible level of ability and public confidence. They should represent not the Federal, State or local governments as such, but the national interest at large. Their function would be to study the inter- governmental fiscal problem in its many ramifications and report to Congress. I recommend that Congress provide for such & commission. Regraded Unclassified 46 AL T.X STATEMENT april 10, 1939. 2:30 p.m. resent: Mr. Gaston Mr. Blough ár. Duffield mr. Magill Mr. Shoup Mcgill: "net we have done is this. We nod 8 conversation among ourselves as to the general set of topics which we thought should be included In the statement, and I thought it might be somewnit more useful, par- ticularly since the men are going to be working during the course of the week, to outline at least 85 fully as I could my own tneories ES to what should go into this statement, not merely in the form of an outline but in the form of more extended document. And before we 60 into this, I may say this, that so far : 5 I can see we are now in this position: that there fli-s been something written up here on certainly the greater part of the topics which I would suppose you'u ant to include in the statement, and that it Will non be possible for, I should think, primarily ar. shoup end Mr. Duffield to take what's been written here and to molu it Into is completed rough draft. n.s.or; 4:-Ve it ready for you Friday. 486111: -rid nave it reauy for DE Friday. Non, I've got o better idea on tais Friday thing. It just occurred to ne, in view of this delightful day anu all. "ay don't you go no to the farm over this week-end, Enzy from this nullabaloo nere? Nothing would please me more than for me to go up to the farm and gu over tals with you. 1 happen to have El Gridiron Linner this esturday night. Otherwise your suggestion would be perfect. Angill: I see. Now we have nere a document which is still pretty rough. H.M.Jr: out not smutty. Regraded Unclassified 47 -2- Magill: Not smutty enough. we've also got an outline by Brotner Duffield which I think is à pretty good indication of the order in which the major topics should be presented, but which needs to be filled out quite D bit in detail, because we just - we 112 a lunch together and the outline is the latest product. Now, are you willing to listen to me read the Longer document? Jr: AVEC pleasur: which means with pleasure. The esturday evening Lost lines my French pronunciation, 30 I'm going to use it freely. ingill: Now let the say again that I think this is - not 8 very modest thing to say - I taink this will sound worse to you than it is, because it needs quite E lot of connecting language and polishing up and verious things put in. "ell, I'd be overcome if it were perfect, or polisheu. appill: nell, it won't DE perfect. "ell, I'm going to resu - (to Duffield) leave me alone here, boy - I'm going to read this thing more or less 2S I taink it will finally be, but you may want it some other (ay, "In by statement or (blank date), I said that the Treasury was ready to supply to the appropriate wongressional committees its recommencations for cuanges in tne tax system, to improve its fairness, to encourage business to go forward, and to meet present buigetary requirements on a better basis. +ne chairmen of the two Congressional committees NEVE expressed their interest in these objectives, und their desire to receive the recommendations as promptly 89 possible, for action at this session. Jame revenue legislation during this session is a recognized necessity, since the income taxes on corporations expire at the end of the year, and excise and sales taxes ,ielding about $500 millions during the summer. I hope that wongress will take this opportunity, not simply to extend the expiring levies, nor sim,1; to adopt the usual series of Regraded Unclassified 48 -)- technical enanges to meet particular hereships, but to suopt those few basic reforms which we badly need to put the revenue system on B just foundation. +ne fundamental reforms which 1 want to suggest can much better be adopted as à practicel matter this year rather the n next year; and the encouragement to the texpayers of the country by their suoption at tais time is is factor of real Importance under present business conditions. If Then this would go in - something like this: "I should 11ke first to suy that I appreciate this opportunity to present to your committee my views on necessary revenue legislation. You have heard the sajing that no year is : good year to suggest 8 tax bill. Certainly this remark sould seem to be in accurate forecast or 1940, is year in which e national election will command the sttention of the country. inerefore, my ppearance here today may vell be any last before this committee on the broad subject of tex legislation. For that reason my I digress E moment to thank this committee and especially its Unsirman, "e: resentative Doughton, for the cooperation and consideration which has been extended to me throughout AV term In office. nepresenti Live woughton, your committee, Senator Aprison, the the penate Finance committee nave loyally serveu the welfere of this country in a of which We may all DE prouo. "orking with this committee one with the Senate #inance Committee nas beer. OR experience which I shall 1mays remember with pleasure." (Vociferous applouse/ "In order to " - no., i don't know whether A.d.Jr: -du you write that? shat's wonderful. puffield. (Hearty laughter) AO, -uffield: Sast time I did something like that, ne said it sounded like DE New York Times editorial. Regraded Unclassified 19 -4- angill: Notning in here, I think, is wonderful. Now, this next block I read you is the historical block. we've got some question whether this should come next or the next thing after it should come next. I'll read it in this order. It's the his- torical d.M.Jr: Incidentally - may I interrupt you - you don't like to fly, do you? legill: No, but if you give me S Coast Guard plane I'll fly, H.M.Jr: "ell, find out where you're going to be. angill: + con be nere Friday morning, if you want. I'll be cown at Columbus *hursday, but I can take a night train. H.L.Jr: Columbus - they run in here in three hours, don't they? Magill: on yes, on is plane. 4.1.Jr: What? I mein you could come in here and spend a night in bed - fly nere. Think about it. magill: ALL right. H.M.Jr: What? I mean you could get in here - I think it's two nours, sometning like that. Magill: I could use one of these nights in bed. H.1.Jp: You could get in here and sleep. seriously. Augill: All right, I'll think about it. "In order to schieve lasting reforms = H.M.Jr: If you want to do it, just let Wuffield - call up Duffield. I'll send Purke out for you. **6111: "In order to achieve lasting reforms in taxation it is essential to get E proper perspective, E perapective that we are in danger of losing through the close attention necessarily given to tax devel- opments day by day. before considering specific Regraded Unclassified 50 -5- measures I therefore suggest that we look t the development of the tax system during the last ten years and even try to see what possibilities lie ahead in the next five years or so. "During the period 1920-1930 the Federal tex sys- tea WAS producing about three and a half billion dollars a year. The Great Depression drove the yieid cown to two billions in 1932 and government expenditures increased. The result was the Aevenue Act of 1932, the first of z series of revenue acts all designed to strengthen the tax system in one way or another. "The 1932 Act put the income tax rates back to the Levels prevailing shortly after the War. It also doubled, roughly, the estate tax rates, and imposed E Gift tax ind of series of mendfacturers excise taxes. nevertheless, so powerful were the forces of depres- sion that the tax revenue did not rise about two billions in 1933. but for the next l'ive years it increased to an extent practically unprecedented in the recent Distory of national governments, reaching an all-time record for tais country of six billions in 1938. smore the measures passed since 1932, about equal shares in schieving this result can be assigned, first, to the taxation of liquor following repeal of prohibition; second, to the social security payroll taxes; third, to the further increases in the income taxes, the estate tax, and the gift tax in 1934 and 1935; and to the processing taxes while they were in existence. Some revenue was also obtained, in the pressure of emergency, by disallowing certain well-grounded deductions, that are recommended below for reinstatement. Finally, the great recovery in revenue OFS of course been achieved in large part through the recovery in business from the depths of 1932 and 1933. "Curiously enough, this powerful fiscal engine, built op piece by piece in that past seven years, looks, on the mole, somewhat different from what ne might expect it to, in view of tne king of pieces tast nave gone into it. Despite the great increases in income tax and estate tax rates ano the introduc- tion of & Elft tax, these taxes produced only 50 percent of the Federal tax revenue in 1938. This Regraded Unclassified 51 -6- compares with 68 percent in 1929 to 1931. The fact seems to be tast, important ¿S have been the developments in direct taxation In the past decade, they have been in lorge purt but the necessary structural work, with much of the content yet to be 20000 if direct taxation is to play the part it should. This point is especially important because after ELL the Federal government collects less tain noir the country's tax revenue, and the state Who 10211 tin systems make very restricted use DI direct taxes graded to take account of net differences in taxpsyers' dower to support govern- ment. "As i.t Look furnera, certain probibilities take form. To That policy these probabilities should 196d may not be entirely self-evident, but it is clear that Se must resolutely face the problems tast tuey raise. "Ine present too system is powerful; but it is not 30 owerful that It will sto, 111 increase in the public debt over the next five years or so, even siven come metsure 02 business improvement and some reunstion im expenditures. 4n a year of prosperity, situ L national income of some 30 billions of dollars, the current revenues might rise to 3 billions; and, depending on the course of enditures, C moderate :mount of debt reduc- tions, permats not more tarn Hillion dollars and conceivally less, could result in such - year. out over E longer periou, good years and bea, the resent revenue system will result in E substantial increase in the public debt, assuming no redical change In expenditures. in my opinion, it is unreal to telk of balancing the budget next year or even the year after next; but, unless we are to counit ourselves to a philosophy of continuing increase in debt, it will be necessary to enect this year NER- sures that will, itain three or four years, bring in buded revenue. +nese measures are indicated in detril below. It is not SJ much the exact date of budget Allibrium that matters, or even the pre- cision of the balancing, ES it is the edoption of 8 program that commits us to L trend in this direction curing the next rive years." Regraded Unclassified 52 -7- H.M.Jr: Excellent. Is that yours? Magill: That's Shoup's. H.M.Jr: This is very funny. Honestly, 1 поре I strike something that's Magill's. Blough: The first page was his. lagill. I'm just an executive nere. H.J.Jr: On, golly. Magill: won't you think I'm a pretty inspirational figure, taough? Look what these boys can turn out when I'm around. I don't evenget credit for that. H.N.Jr: NO, because 1 think I blew the inspiration into them. I've had B. lot of documents sround here, but this is beginning to look like something. Abgill: You like that. H.A.Jr: I think what you did is wonderful, Ros. Mugill: The first page. Blough: Now we'll get the second page. magill: NON, I don't know mether 1 better tell him this is mine or not. Shoup: Petter weit and see. Magill: +his is not going to be mine unless you like 1t. H.L.J.: I like tast lest jage a lot. angill: This next paragraph is not right; it will have to be changed. But we needed some kind of introduction nere. "I wish to divide this statement into two parts: First, a snort summary of the fundamental tenets by which a tax system may be judged; and second, & list of the major changes which I recommend for Congressional consideration at this time." Regraded Unclassified 53 -8- D.M.Jp: Qty 1 just stop D moment? I taink + ought to Just say - "I recommend for your consideration" - is that what I say? I wouldn't use the word "recom- and" at all. I'd say, "I bring to your attention," if you don't mind. I woulon't in any way say "I recommend." I mean if you can paraphrase Mozill: Inst's une thing you'll need to cut out. d.s.Jr: 100 can para phrase the word - "I bring to your attention. I think you're right. "First, Simplicity. The collection of taxes should be 13 Little burdensome to the taxpayer 85 possible. +ne Treasury nas considerably simplified tax adminis- tration by establishing regional agencies to settle controversies lucilly, and to speeu up the work. It Ls no longer necessary to come to "ashington in order to settle on Insure tex or an estite tax 32° 2 gift tax Ch3e. 1 have no Illusions about the possibili- tied _f ella.cating coquistely such complexities LS the emborate provisions dealing with corporate reurganiebtins, or the even more detailed sections aqued in 1933 to ,ermit utility companies to reor- in conformity to the notaing company act without unuuly uervy tax liabilities. Tax laws dehirt te ensily simple In à complex society, and the sections 1 nave mentioned apply to the fen cases, not to the many. "Ine complexities I would like to see eliminated are those in the texing provisions of general application. "E DOW have four different taxes applicable to ordi- nary business corporations: en income tax, an undis- tributed profits tax, is capital stock tax, and an EACESS ,rofits tex. The income tax is b. all oada tue most productive ES well as the fairest. The undistributed profits tax has been reduced to E point where it no longer possesses much revenue significance; it mainly serves 85 is business irri- tant. +ne cepital stock tax is not a tax on the : ctuel value of corporate property, nor is the excess profits tax really à tax on excessive pro- fits. Both taxes are really based on the juesses of corporate officials 88 to future corporate income. they are particularly burdensome to young and devel- Regraded Unclassified 54 -9- oping businesses. The corporate tax system would be greatly simplified, and its justice measurably increased, if all four taxes were consolidated into & single flat tax on corporate incomes, with some concession in rate to corporations having less than perhaps $25,000 net income." H.M.Jr: excuse me - could somebody make e note - you're going to talk about the deficit corporations, aren't you? magilli 165, got that nere in just E little while. "It is fundamental that the prime purpose of tax legislation should be the raising of the needed revenue with the least possible dislocation of the ordinary business and social life of the country. whatever governmental regulation is necessary should, as L general working rule, be accom, lished by other means. ISX laws are complex enough and it is hard to make them fair F8 revenue producers without giv- ing them the added freight of social control. Vf course, any system of tax laws is bound to have important incidental effects upon our economy; :nd the laws must be so drawn 65 to prevent evasion. but tax Laws are ordinarily not the best means for the accomplishment of social and economic objectives. "Our present tax provisions have been so framed as to encourage corporations to sequire capital through borrowing, retner than through the issuance of stock. vorporations are allowed E. deduction for interest 2810, but not for dividends paid. Interest and dividends are taxed alike to their recipients. Thus corporate profits paid out in dividends are taxed twice; interest is taxed only once. A corporation which has $500,000 of bonds and 4500, 000 of capital stock and surplus will pay much less income taxes taen one with the same income and assets which has no bonded indebtedness, and $1,000,000 of capital stock and surplus. I do not tnink that the tax laws should act ¿S en incentive to the increase in corporate indebtedness. We can improve the situation by giving stockholders a credit against their normal taxes for the tex the corporation has already yalu on the profits distributed to them as dividends -- a credit which existed all through the Regraded Unclassified 55 -10- history of the income tax until 1936. "We m.ve sought to discourage holding companies by & tex of about 22 percent on dividends received by one business corporation from another. 4he problem here is not one of tax evasion through personal notwing companies, a problem solved for the present it least by the whole series of special prohibitive taxes worked out in 1937 on the 'incorporated pucketbook,' whether foreign or domestic. The question is whether the revenue laws should be founded on the policy of discouraging business men from organizing subsidiary corporations which frequently are used for such legitimate ends BS to exploit new potents or to develop risky enterprises. In my Juagment, it is wiser for the tax laws simply to hold the scales even, to withhold any juigment upon the merits or demerits of different kinds of business organization, to leave these matters to legislation which is openly na avowedly regulative. by the adoption of such a policy, issues are kept clear-cut, end we do not run the risk of muddling tax objectives with regular pulicies, to the dis- advantage of both, 11 H.Z.Jr; 48 that you? Uh-huh. "Seesns, = this art through here is all mine. "Beenna, Fairness. " Agy + 803 it's very good. "Iveryone agrees as 10 matter of course that the tax system should be fair, tast texation should be Levied in accordance with capacity to PAY. Agreement with the brown objective, however, has not always been followed by the specific steps necessary to accomplish it. AS I nave already indicated, the imperative budgetary necessities of the present decade have been allowed to override & number of allowances to the texpayer which were costing money, but which experience has shown are essential to : fair system of taxation. I think the time AES come for the restoration of these legiti- mete allowances. Thus, corporations are allowed Regraded Unclassified 56 -11- deductions for capital losses only to the extent of capital gains in the same year, plus $2,000 -- an entirely inadeQuate provision for any corpora- tion which has been forced to sell considerable amounts of its capital assets at E loss. "We would like to see more capital invested in new Industries, to put more sen to work. It is certainly the part of wisdom to encourage such investment, for we have immense amounts of idle funds, and we have Ell too many idle men. Yet the income tax lew is unfortunately loaded against new investment and risk) businesses, not only by the capital loss provisions 1 have referred to, but by the elimination of provision for offsetting the current operating losses of ne year against the operating profits of E later year. t stable business, reporting annual profits, is in no dif- ficulties in this respect. un the other hand a business Which has lost "50,000 :- year for two yerrs and nas then made $100,000 In the third jear, must pay just 25 algn taxes or. the v100, JJJ as 1f every year no snown E profit. +ne plain fact is that the business has made no profits et all over the three-year period, and no Income tox snould be payable where there have been no profits. if the Government wants investment in new businesses -- businesses which cannot guarantee E profit every year -- the least the Government can do is to pro- vide tast only net profits will be taxed. "Third, Adequacy." d. . Jr: iou wenn "net profits over E term of years.' VEGILL: ".. over term of years. If Inst's got to be polished up. weston: Speaking bout corporate taxes only? -agill: I would do it for incividuals, too, ES fer as that's concerned. Gaston: 1 was wondering about that. wagill: Plan't make that clear. "Over the five-year period ending in 1940, for which Regraded Unclassified 57 -12- Duugets have been presented, expenditures have exceeded revenues by an average of over 3 billions i year. In 1938, the wovernment received the largest total of receipts for any year since 1920; and the expenditures still exceeded receipts by $1,334 millions. The anticipated budget deficits for the fiscal years ending in 1939 end 1940 are 24,372 millions and 83,426 millions respectively. It any be that enditures can be reduced. it may be tast tax rites and provisions are oppressive in SAME instruces, or that the tax system should rest a ¿ Droguer buse. +t may be that ways and means SAN Le Edupted for a marked increase in the national incose, and that then the present tax system will produce revenues to balance disbursements. +ne first excential in - jusgment is the formulation of : dependable plan for dealing with our budgetary problems over the period of the next five years. *nere is Little, 1f any, possibility of balancing the Dought for two or three years, but if action to Increase revenues sna curtail expenditures is not taken at this session, the possibility is pushed quesa La une one probably two years more. "ere insction SD this time constitutes El cavice of one form of fiscal policy rather than snother. "The healthy functioning of the country LS E whole depends in the last analysis uson the healthy functioning of the Wege-evrners and the businesses of the country. I.E must rely upon business to provide employment for at least the great bulk of our wen of working LEE. HE ought therefore to remove any specific obstacles to business recovery snicn remain in the tax structure, but the problem is much brooder tuan that. "nen the uncertainty of conditions : broad la coupled with the uncertainties of in unbalanced national budget, end when measures to produce a bilance are hopes, not realities, it is not surprising that the man who n:-2 saved money, mether 2 few dollars or 21 million, refuses to take : chance in in investment in anything save the sound- est, Dest estoblished, most stable securities. de dnows that business must sometime face new taxes to bring the budget into belance, eno he cannot mere they will foll. wince de cannot fore- cast tae future, ne make time. *De result is business stagnation, not the steady Business suvance which nas been charicteristic of the country. Regraded Unclassified 58 -13- "Second, the maintenance of the Federal budget in its present condition makes tax reform difficult or impossible. Most of the essential reforms will cause losses of revenue. I believe that the adoption of some of the changes which I want to bring to your attention will promote healthier business conditions, and in the end increased revenue. but changes in the tax system alone will not greatly improve business, and in any event, the effect will not be immediate. It is tae art of wisdom, therefore, to plan a tax system more adequate às LI whole, at the same time that ve act to relief specific inequities. THE cannot spare the revenue from the expiring excise And sales taxés at this time. st the same time, we must realize that taxes of this sort are not good messures of bility to pay, that they have been increasingly resortedto by the Ptates and cities as well 65 by the Federal government, End that therefore further increases in them are undesirable. In 1928, the income tax reduced $2,175 millions out of 92,800 millions of total Federal revenue, or 77 percent. in 1938, it produced RA, 586 millions out of 5,660 millions of total federal revenue, or 45.6 percent. in other words, while total Federal receipts were doubled, the Income tax increased bout 20 percent. Relatively we :re depending too ueavily uson indirect flat-rate taxes, and not neavily enough opon taxes which are E more securate measure of bility to pay. -he tax system in this respect nos moved in the wrong direction. "Under these conditions, the conclusion is inevitable tast the base of the income tax snoula be broadened by Lowering the exemptions. Further, there should be in increase in the surtax rates applicable to incomes in the brackets in the center of the rate scale, roughly tuose incomes between $20, and $100, 000. Finally, our studies indicate that the upper surtax rates are too high for the greatest productivity; ano that net revenues would be increased by i small reduction therein. The incen- tive to embark capital in new enterprises is noticeably dompened, when the state and Federal governments together demand a participation in profits of 85 much as 87 percent, with D much smaller participation in losses. Regraded Unclassified 59 -14- H.4.Jr: May 1 interrupt you? I'á get the figures from S.1.0. or some place as to new capital - I mean the flotations, you SEE. I mean I'd throw in some figures there. magill: Now, that's the end of mine. H.A.Jr: Well Angill: would we've gut two other pieces that should 60 in here, at least: one as to the estate tax and one 13 to tais state-Federal coordination. Snall I read those? A.m.Jr: "ill you please? wegill: Blough fixed up these, presented these two. Who did? atgilli Blough. "walle the national government nas been obliged to strengthen its revenue system, the States nave been inced with : similar problem. They too have exper- lenced drastle declines in revenue and increasing demands for expenditure. 40 meet their revenue needs they have reached out for Item tax sources. Taxes on incomes, retail sales, alconolic beverages, tobacco, and chain stores, and -variety of business taxes have been newly imposed in many states. AS D result, there des been an enlargement of the group of taxes that are imposed by both Federal and tate governments. Transfers of property at death are taxed both by the Pederal wovernment and 47 of the States. Inuivi- doal income is subject to the Federal income tax and 34 State income taxes. Motor fuel Ano a looholic beverages are taxed by the Federal Dovernment and 31 states. Similar duplications exist in many other taxes. "Ine simultaneous expansion in the revenue systems of bota the states and the Federal Government nas greatly increased the conflicts between national and state taxes and between the taxes of the various States. The results are incressingly unsatisfactory Regraded Unclassified CO -15- to everyone. The verious units of government find their revenues coversely affected by com- weting taxes of other governments. The costs of collection are nigher in proportion to the revenue tash ii tals competition die not exist. The types of texes that States have felt obliged to impose often LIVE rise to smuggling across State lines, necessitating practically the setting up of customs offices by tue States. The texpayer is also ocversely affecter. At is often subject to two sr more taxes on the same income or the same transaction. These taxes are frequently imposed without regaru to each other so that the levies are unequbl tão onergus. for example, in some States wombined rederal, otste and local gasoline tax Levies exceed 11.: per gollon. The texpayer must prepare numerous reports which must often be codpiled in different ways to satisfy the many requirements or the different tixing authorities.' I'd pretty nearly like you to (ut in that thing I've Shid to you. I've prepared ay on and my nice's tax returns; they are the only returns I prepare. Ind between NEW lors and the Federal Government I prepare ten returns for my wife and myself. No trusts or anything else. Blouga: You metn ten sneets of sper. weill: Yes, I had to make out ten return forms, ten sweets of paper, because 004 people vant two of each, and that ... S four, I kept - co., 0. ecen, "nich A:S six; and I u-ve to TAKE two each wut for the state government. that MAKES ten. Claim: no carbon paper? curricia; No carbon super? Inat's what I was going to say. Tugill: Dan! bau! Blough: us course, 1f you noun't wented to make à separate return, you could nave out it in half. 4.1.Jr' I diun't set it. I'm gltd you mentioned the carbon Regraded Unclassified B1 -16- Magill: Had a lot or trouble with the carbon paper. "Although in a Federal system of government the tax structure will inevitably be complex, the existing confusion and conflict can be diminished. é variety of suggestions have been made from Gif- ferent sources. Thus, 1: nas been proposed that uniform returns be useo by different States and the Feueral Movernment in collecting the same tax and taat unlform apportionment formulas be adopted to tvoia texing the SAME income or transaction twice by different States. In the case of some taxes it nas been suggested that the Federal Government col- lect the revenue and distribute it among the States. Another suggestion is tuat the Federal Government leave some of the revenue sources to the States one that the States leave other sources to the Federal Government. Federal collection of taxes accompanied by grante-in-ald to otates nas also been suggested. "It Is nigh time to consider seriously how the national and State governments can coordinate tueir taxes in such E manner LS to minimize qupli- cations and conflicts, to reduce the texpsyer's cost in complying with tne tax laws and to assure adequate revenues to all governments. +he existence and serlousness of the problem have been widely recognized and there nas been è good deal of talk about it. 10 date, nowever, little nas been accon- plished. "In my opinion, the most fruitful a prosen to this difficult and complicated problem is through the appointment of a national commission made up of mer. having the nignest possible level of ability and public confidence. They should represent not the rederal, State or local governments as such, but the national interest at large. Their function would be to study the inter-governmental fiscal problem in its many remifications and report to Congress. I recommend that Congress provide for such B commission." NOW, nere's the estate and gift, which should go in, I think, probably before this. This probably would come at the end. You ready? 8.2.Jr; on yes. Regraded Unclassified C2 -17- degill: "The merits of the estate tax entitle it to en important role in the Federal tax system. It permits the application of the principle of ability to pay although on L somewnat less exact basis then the individual Income tex. It is the best available means for preventing the perpetuation and Increasing concentration of great fortunes. 4.S com- area to staer taxes it AES relatively Little effect in discouraging enterprise. The contemplation of the distant future is of less in ortance in deter- mining one's business decisions than the reslities of the immediate ,resent. such effects 65 there are tend to offset each other. +de prospect of estate taxes any discourage some persons from trying to secumulate fortunes while it may encourage others to sccumulate more than they otherwise would in order t...t taes aay let ve 11 competence to their dependents. "Changes in the during the plat few years have E-me : long Neg to state the estate tax the factor it Subaic be in the revenue system. *he exemption has been accreased to 440,000 use tex rates have been increased to a maximum of 7J percent on emounts tronsferred in excess of +50,000, JJJ. The place of the estate tax in the tax system, nowever, is still not LS large 25 it snaulo be. in 1928 the tax Accounted for " Plangu: Jhe FING eight-tentas. 468111: " 1.8 percent or the Federal revenues while in 1736 it accounted for " Alough: -1x The nine-tenths. " 0.9 percent. is 2 proportion of total Federal, state sna local revenues, estate and inneritance taxes amounted to 2 percent in 1928 and 3.7 percent in 1938. one of the reasons way the estate tax does not ynt fill the position it should in the tax system is that it is #iuely evoided by making gifts before death. In an sttempt to end this avoidance, & gift tax MES imposed in 1932. "nile the gift tax has reduced the incentive to avoid the estate tax, 8 large incentive remains. There are two exemptions, one for the gift tax and one for the estate tax. Likewise, there are two rate scales, each beginning Regraded Unclassified 03 -18- it very low rates. - person with E large fortune can reduce his tax markedly by taking advantage of the two exemptions end the two rate scales. " The voluance cannot be offset merely by eliminating the sift tax exemption and increasing the rates of estate and gift taxes. inequities among taxpayers rould be increased if only these steps were taken. dony persons are not : ble to oispose of large amounts of their wealth by gift. Some need to retain their wetlth to maintain control over their businesses. others feel that they cannot give away their property because or the uncertaintles of the future and the desire for protection in old age. "In my opinion the solution lier in considering gifts ina the final distribution at deata as a uni- flea series or tronsfers. st the present time suc- cessive gifts are cumulate.. it remains merely to cumplete tue estate ES in it were I final gift, There then would be one exemption and one rate scale. 11 it were desired to Give dev Inducement to gifts it could be recomplished through special credits. "urthermore, any unque naruships it death coulo be eliminated through special provisions. "With this Looynole 01° avoidance closed, It would probably DE desirable to increase the yield of the estate tax still further through somewhat lower exemptions And higher rates in the lower and middle brackets. *de rederal estate tax at the present time applies to L very small proportion of estates and the tax on All but ver, large estates is rela- tively smill. In my opinion the rates on the largest estates are rirecus sufficiently nich and should not be increased." AS I've selu to Ros, + think there's D little too much evoluance in that last part. H. .2r: Inst last one Is : little rough, anyway. mogill: Now, 18 you've noticed there, I originally designed this, when I was tuinking out now I'a put it together, is i general tement followed by È series of com- ments on perticular provisions. AS It's actually worked out, we've gotten in, I think, most of the things on mien you should comment In mere, and I Regraded Unclassified 64 -19- think in the course of Shoup's work on it tomorrow ne'll probably put in most of the rest. H.W.Jr: You going to have him work this evening? magill: Might ES well. Shoup: First time 1 nearu of that. appill: 1 daven't seun what there is over at Keith's tonight. a.m.dr: de's got you (Nãoup) working tonight. Now, I didn't ask you. degill: Now, you've still got depletion and community property. 1 think you might as well say E few things about tex-exempt salaries and securities. H...Jp: 16S, 1 think you ought to say there is this big ,001 of sixty billion Dollars of totally tax- exempts, constantly growing. Magill: les, And consolidated returns ought to be stuck in here somewhere, nd capital gains - that's the other thing, big thing, that should go in. H.M.J.: But that's .... Angill: that's it. H.M.Jr: I think it's a corking good start for one day. inere are some things in there that I don't know whether I can yet 38y that I'd want to sit com and argue about; and when the thing is in smoother form. + don't whow mether I'm prepared to accept every- thing there, and I don't want to take the time now to go Into it. But there are § number of things there that - now, for instance, for me to say that I don't believe tast the tax route is the way for reform would be something new. angill: ch-huh. n.A.Jr: Because certainly we've followed tast extensively up to now. vaston: we depart from that in one particular. I notice in Regraded Unclassified E5 -2)- our discussion of estate taxes we stress the social principle of greventing the large accumulations. dogill: ies, that's une that - I find that one difficulty there. Email: I think - I mesn 1 think what you St, is this. I sean on that - just to use this 18 2 measure - that this is philosophy CING not - I don't think there is any question tust if, for instance, 2 an believes tast bigness is something WE should do CHEJ with, the way to do it is to pass legislation Anion will moke it difficult for large corporations to 00 business, and do It boveboard and not neces- serily 40 it through the tax field. willing 4111 t's really the point. M..Jr: Anu I thica that - I know tast warner 088 been talk- ing Flout fifty people controlling this country ever since t've been HEDE. of course, there is - the enti-trust une -1° tals Auministration is just zero. Now, Uncrefore, people like Ulipmant, getting impa- tient, ent it it through the the route, the inter- corporate divideno nos one or the methods to attack bijness, but 1 mean it men't the way to do it. Non, tuot's something 1 wint time to think about, you sev, because 1 think thit that is very, very important and tast, if I say it, would be news. Inc rest of the stuff - I mean there's 5. lot of themse in there tile t + want to 80 into very care- fully after the thing is more Jolisned, and that's what I'o line to do. "E were joking before. But if it N&S possible to come back Briday and the thing M&S ready inc pallshed, then I'd Like to mark the things mich I neVe - uestion mark about VIN sit 10.n and trgue tuose from E hilosophical stand- voint, not from tae strudgoint of - tell, sn) other stanupoint. - g111: "Ell, that's what - would like to do, if this thing can Le saapeu 45/- H.M.Jr. +nere are definite things there which I nave never stiu before, and US werbert said, not all the things "gee" either. Regraded Unclassified 36 -21- Blough: We don't all agree. n.E.Jr: What? Duffield: we don't all agree. H.M.Jr: Excuse me 2 second. I don't by any means say that 1 agree. I aven't and time. There are too many ... mugill: "ell, I think it should be said. n.d.Jr: Are you taking a four o'clock? No, it's all right. "agill: Just as you will. 1 can take the five. Doesn't make any difference. B.M.Jr: (10 Rieley) ar. Magill will be leaving here about 3:30. nold : car for nim for about 3:30, please. Magill: I won't go unless we Handri No, no, It will be all rignt for this day. out there 13 no use today, for instance, or tomorrow getting down - it's much better to have too much in there and throw out some of the things, and all the things aren't in yet. magill! That's right. H.M.Jr: I tnink tne most in, ortant thing from my standpoint which would be new ano I'a like to say, is that we do - >fter 211, I ao believe that we should balance the budget and tast it's e question of a flve-year plan to balance the budget, and it's at least two or three years off, and the longer the delay the fur- ther off it is. Now, I think tais, and I'd like you to get this into the thing - that one of the deterrents that I belleve 2 small business man is worried about is, ne doesn't think we're doing any planning here to eventually balance the budget, and I think the fellow is perfectly right. I mean where are we neaded to on this deficit question? I mean is there any plan? And if we could show nim that we are Regraded Unclassified 67 -22- planning in terms of five years to gradually bring our expenses together, I think that's removing one of the business deterrents, and I'd say so; and I don't think that's plain enough. I know that isn't taxes, but that's fiscal policy, and I want to weave that thing into it. I think that's very important. I don't think there would be any disagreement amongst the five of you on that, would there? waston: Just one point I wanted to raise about that. You can't commit anybody. You talk about planning for budget balancing in the future, and indicate you need more revenue, but of course, you can't commit anybody over & period of five years. And will that be encouraging to business men, to know that you have an idea which is sound and logical and that they know the direction you're thinking, as to where this new revenue should come from, and if you had the power to put your plans into effect it wouldn't hit them badly and it would be reassuring; but there is complete uncertainty ES to who is going to do the future planning, and is that reassuring? Doesn't it rather disconcert them, giving them the idea that more revenue has got to be raised and no assurance as to where it's going to be raised? Angill: No, I think you've got two or three answers. -ne first one I'd make is this: that whatever you did, for example, on either income or estate tax is really planning for the future, because you don't get the money right away. waston: +f it were done now, yes. Magill: You could do it this minute and you're not going to get the money for several years. Secondly, if what the secretary says here is correct, 6.S I strongly believe it is, I wouldn't worry too much about the next Administration keeping it in effect, because I swear I don't know what else they're going to do, for one thing. And then, in the third place, I wanted to say to the Pecretary that I'm very anxious to see him say some- Regraded Unclassified E8 -23- thing of that sort, because I don't want to see this appeasement to business program run away with you. Now, that can easily become a program, as we all know, where this tex rate is reduced and that deduction is put in and this exemption is included and the net result is you've got a tax system like a sleve. Now, I taink it's important to drive home that "tast Isn't what I want; I want to see E tax system tast will yield more money, but because I went it to yield more money I've got to take out these rough spots; that the way to make it yield more money is to give È decent deduction and a secent exemption one increase the rates if you HLVE to." A.P.J.: Now, in I may say something - I am in complète secord, and what I want to say on this question of :Isncing the budget is this: I haven't said thing on this thing since November 137, Magill: that's right. 8.0.Jm: +he people of this country are entitled to know where I stand. I went to say something. and I certainly don't think that it WUS construc- tive when Mr. ecoles dared Congress to economize because that nappens to be the sentiment. NOT, I think when you're talking along as brond a basis as I'm talking, that this is the time for me - certainly if I say it once in a year and a half, tast isn't saying it too often - what is the outcome, where is this thing? I want to know. Now, the fact that I can't and usven't got the authority to enforce this thing - I don't think that tast should worry people. but I think people will 383, "mell, tasnk God, Morgenthau at least is pointing the way, and that's all I can do and tast's Ell I want to do In this whole thing: simply point the route. Now, if they don't want to take the Morgentheu route and tney want to take the -cules route or the X route or the Y route, that's tneir business. at least I have fulfilled what I feel is my obligation, I've pointed the way as to wast I nonestly believe, after sitting nere for five and » half years, is the route that this country Regraded Unclassified 89 -24- snould take. And I want to say it, right or wrong. ADW, I know - I mean if - I'm worrled; I want to anow - Herbert Waston seys this morning that we'll reach 5J billion dollars and never go below it in sur lifetime. "ell now, that scares me to death; that mikes me went to say this thing more than ever. maybe ne's right. But at least I could point the was to Saow tust through bulances of receipts and expenditures "no I'd say something about the cost of armaments. Waston: would you? "no the cost of rellef. exaton: "ould you be willing to advocate ... A.M.Jr: Just E minute, please. I mean I'm say something - I mean tast these two - I don't mow wast the proportions are of ornaments one relief - you can get them from Panny Bell - but I think we must use bout & third of our expenditures for taose two Items. Blough: lore than tast. "E figured it the other day at more than that. H.M.Jr: "ell, that much more. "nu what we uave in this country is only - is duplicated mary times in Purope. "E have figures now tast show last year vermany spent between BJ and 7J percent of ner budget for her purposes. I've got All the figures, incidentally, 01 the principal countries in the world on armaments. I taink we can point out in passing the that Ls waere we have the bulk of our expenditures and that if we get : sener world and if this armament race stops, way, overnight one of the biggust expenditures will disappear. out I think what you (Magill) said - I mean that this is the time to prepare for the thing, and it takes five years to prepare for it. Ano I think it's time for me to say it, and if I said nothing else I'd consider it worth while going up on the alll Just to say that. Regraded Unclassified 70 -25- Magill: 40 my mind that's the most importent thing in all this business, as I've had anything to do with it. n.M.Jr: I'm willing to go up on the H111 and say that one thing and march down again, and I'd consider I'd done a year's work. vestont I ;gree to your saying it. I just wanted to show what might be the point of attack there. I wonder if you would be willing to .... NOW, nos speaks a bout putting into effect immediately those estate gift tax rates, which will mean revenue not immediately, but in a year or two. "ould you be willing to open up the question of further middle brocket income taxes, to make E start on it new? Hededn: in yes. Gaston: + mean would you be willing to advocate that some- thing be done in that direction now? B.M.Jr. I mean tast's stuff se can go into. Put 1 mean I Like tais riscal approach to it. The A. F. of L.'s SE10 practically this, but daven't said it ES well, at their convention. May I sty one or two specific things which will nelp guide these boys? There are two things we've tried to do that are nerd to do; that is to weave this philosophy anu some of the specific recommendations together. How do you think - want do you think of the balance of it? 20 you like more specific stuff, more philosophy, or are you pretty well satisfied? 4...Jr: I got it too fast. mail: Yes, you did. P.M.Jr: +ney can get at me again tomorrow afternoon. + mean you're shooting awful fast. Magill: tes. H.M.Jr: And there's some terrifically important things there. I've got - from three o'clock on tomorrow 4'11 save. Regraded Unclassified 71 -26- Shoup: Fine. H.M.Jr: Three o'clock tomorrow. Shoup: Come in at three o'clock. H.M.Jr: I'll save from three o'clock on. But I mean you're shooting too fast, and I can't - end a lot of things, Herbert, I don't know, but BS to this fis- cal thing, yes. I mean I can't answer that question, nos; I don't know. I've got to live with it more, you know. Angill: +1 you went these men to do it and if they can do it, they might send me up whatever rough draft tney have tomorrow afternoon. H.M.Jr: ne'll (Shoup) bring it with nim. Mogill: And I'll 80 over it wednesday. well, all right. 4.4.Jp: or put it in the sir mail. want it it your home or office? wagill: "oulan't make any difference. -ither one. H.M.Jp: "ell, Blough, See that it gets there. 20g111: Gene, I'll leave this stuff with you, I guess. Puffield: All right. H...Jp: I can't enswer. All I can say is that for one day's work we've made wonderful progress - I'm delighted - for one day. For one day, I think it's wonderful. This is wast I want and this is what I think will contribute to sanity - financial senity. I mean nobody nas to agree to anything for today, but I do think for one day that's wonderful. Regraded Unclassified. 72 In my statement of 1 I said that the Treasury was ready to supply to the appropriate Congressionel committees its recommendations for changes in the tex system, to improve its fairness, to encourage business to go forward, and to meet present budgetary requirements on e better basis. The chairmen of the two Congressional committees have expressed their interest in these objectives, and their desire to receive the recommendations 98 promptly as possible, for action at this session. Some revenue legislation during this session is a recognized necessity, since the income taxes on cor- porations expire at the end of the year, and excise and sales taxes yielding about 500 millions during the summer. I hope that Congress will take this opportunity, not simply to extend the expiring levies, nor simply to edopt the usual series of technical changes to meet particular hordships, but to adopt those few basic reforms which we badly need to out the revenue system on a just foundation. The fundamental reforms which I want to suggest cen much better be adopted as e practical matter this yeer rather than next year; and the encouragement to the taxpayers of the country by their edoption et this time is B factor of real importance under present busi- neas conditions. Regraded Unclassified 73 In order to achieve lasting reforms in taxation it 10 essential to got a proper perspective, & perspective that NO are in danger of losing through the close attention necessarily given to tax developments day by day. Before considering specific measures I therefore suggest that we look at the development of the tax system during the last ten years and even try to see what possibilities lie ahoad in the next five years or so, During the period 1926-1930 the Federal tax system THE producing about three and a half billion dollars a year. The Great Depression drove the yield down to two billions in 1932 and government expenditures increased. The result WELB the Revenue Act of 1932, the first of 8. series of revenue acts all designed to strengthen the tax system in one way or another. The 1932 Act put the income tax rates baok to the levels prevailing shortly after the Mar. It also doubled, roughly, the estate tax rates, and imposed a. gift tax and 1. series of manufacturers excise taxes. Nevertheless, so powerful were the forces of depression that the tax revenue did not rise above two billions in 1933. But for the next five years it increased to an extent practically unprecedented in the recent history of national governments, reaching an all-time record for this country of six billions in 1938. Regraded Unclassified 74 cs (a) Among the measures passed since 1932, about equal shares in achieving this result can be assigned, first, to the taxation of liquor following ropeal of prohibition; second, to the social security payroll taxes; third, to the further increases in the income taxes, the estate tax, and the gift tax in 1934 and 1935; and to the processing taxes while they were in existence. Some revenue was also obtained, in the pressure of emergency, by disallowing certain well-grounded deductions, that are recommended below for reinstatement, Finally, the great recovery in revenue has of course been achieved in large part through the recovery in business from the depths of 1932 and 1933. Curiously enough, this powerful fiscal engine, built 40 piece by piece in that past seven years looks, on the whole, somewaht different from what NO mi ht expect it to, in view of the kind of pieces that have gone into it. Qeiple Seside the great increases in income tax and estate tax rates and the introduction of E. gift tax, these taxes produced only 50 percent of the Federal tax revenue in 1938. This compares with 88 percent in 1929 to 1931. The fact seems to be that, important as have been the developments in direct taxation in the past decade, they have been in large part but the necessary structural work, with much Regraded Unclassified CS 75 (b) of thecontent yet to be added if direct taxation is to play the part it should. This point is especially important because after all the Federal government collects less than half the country's tax revenue, and the state and local tax systems make very restricted use of direct taxes graded to take account of net differences in taxpayers' power to support government. As we look forward, certain probabilities take form. To what policy these probabilities should lead may not be entirely self-evident, but it is clear that we must resolutely face the problems that they raise. The present tax system is powerful; but it is not BO powerful that it will stop all increase in the public debt over the next five years or so, even given some measure of business improvement and some reduction"in expenditures. naturnal In a year of prosperity, with a natural income of some 80 billions of dollars, the ourrent revenues might rise to B billions; and, depending on the course of expenditures, a moderate amount of debt reductions, perhaps not more than a billion dollars and conceivably less, could result in such n. year. But over a longer period, good years and bad, the present revenue system will result in a substantial increase in the public debt, assuming no radical change in expenditures. In my opinion, it is unreal to talk of Regraded Unclassified CF 76 (a) balancing the budget next year or even the year after next; but, unless We are to commit ourselves to B. philosophy of continuing increase in debt, it will be necessary to enaot this year measures that will, within three or four years, bring in added revenue. These measures are indicated in detail below. It is not no much the exact date of budget equilibrium that matters, or even the precision of the balancing, as it is the adoption of e. program that commits us to B. trend in this direction during the next five years. Regraded Unclassified - 2 - I wish to divide this statement into two parts: First, a short summary of the fundamental tenets by which a tax system may be judged; and second, 8. list of the major changes sugalture which I recommend for Congressional consideration at this time. First, Simplicity. The collection of taxes should be as little burdensome to the taxpayer as possible. The Treasury has considerably simplified tax administration by establishing regional agencies to settle controversies locally, and to speed up the work. It is no longer necessary to come to Washington in order to settle an income tax or an estate tax or a gift tax case. I have no illusions about the possibilities of eliminating completely such complexities as the elaborate provisions dealing with corporate reorganizations, or the even more detailed sections added in 1938 to permit utility companies to reorganize in conformity to the holding company act without unduly heavy tnx liabilities. Tax laws cannot be wholly simple in a complex society, and the sections I have mentioned apply to the few cases, not to the many. The complexities I would like to see eliminated are those in the taxing provisions of general application. We now have four different taxes applicable to ordinary business corporations: an income tax, an undistributed profits tax, a capital stock tax, and an excess profits tax. The income tax is by all odds the most productive as well as the fairest. The undistributed profits tax has been reduced to a point where it to no longer possesses Regraded Unclassified 78 - 2 (a) - much revenue significance; it mainly serves as a business irritant. The capital stock tax is not a tax on the actual value of corporate property, nor is the excess profits tax really a tax on excessive profite. Both taxes are really based on the guesses of corporate officials as to future Tradiane patherlarly burdware to youngand descloping humand corporate income. A The corporate tax system would be greatly simplified, and its justice measurably increased, if all four taxes were consolidated into A. single flat tax on corpo- rate incomes, with some concession in rate to corporations having less than perhaps $25,000 net income. %e should not aix texation and the regulation of the lusiness of the country.A Tax laws are complex enough and it is hard to make them fair as revenue producers without giving them the added freight of social control. Of course, any system of tax laws is bound to have important incidental effects upon our economy; and the laws must be so drawn as to prevent evasion. But It is fundamental that the prime purpose of tax legislation should be the raising of the needed revenue with the least possible dislocation of the ordinary business and social life of the country. Whatever governmental regulation is necessary should, as 8. general working rule, be accomplished by other means. Butlar laws are ordinarily not the best means for the accomplishment of social and removie objectives Regraded Unclassified 79 -2(b)- Our present tar provisions have been so framed as to encourage corporations to acquire capital through borrowing, rather than through the issuance of stock. Corporations are allowed a deduction for interest paid, but not for dividends paid. Interest and dividends are taxed alike to their recipients. There corporte propies paid ant we Burdends are taxed theice A corporation which has $500,000 of bonds and $500,000 of capital stock and surplus will pay much less income taxes than one with the same income and assets which has no bonded indebtedness, s and $1,000,000 of capital stock and surplus. I do not think mm that the tax laws should act as an incentive to the increase in corporate indebtedness. We can improve the situation by giving stockholders a credit against their normal taxes for the tax the corporation has already paid on the profits distributed to them as dividends -- a credit which eristed all through the history of the income tax until 1936. We have sought to discourage holding companies by a tax of about 2% percent on dividends received by one business cor- poration from another. The problem here is not one of tax evasion through personal holding companies, a problem solved for the present at least by the whole series of special prohibitive taxes worked out in 1937 on the "incorporated pocketbook", whether foreign or domestic. The question is whether the revenue lawa Regraded Unclassified 80 -2(c)- should be founded on the policy of discouraging business men from organizing subsidiary corporations to exploit new patents Rudo which requently are week for such light as or to develop risky enterprises. In my judgment, it is wiser for the tax laws simply to hold the scales even, to withhold any judgment upon the merits or demerits of different kinds of business organization, to leave these matters to legislation which 18 openly and avowedly regulative. By the adoption of such a policy, issues are kept clear-cut, and we do not run the risk of muddling tax objectives with regulatory policies, to the disadvantage of both. Regraded Unclassified 81 - 3 - Second, Fairness. Everyone agrees us B matter of course that the tax system should be fair, that taxation should be levied in accordance with capacity to pay. Agreement with the broad objective, however, has not always been followed by the specific as have already indicated steps necessary to accomplish it. ^ The imperative budgetary pecessities of the present decade have been allowed to override ") number of allowances to the texpayer which were costing money, but which experience heR shown sre essential to a fair system of Lixation. Thus, corporations are ellowed deductions for capital elhink the time has came per the restoration of there legitimale allowance losses only to the extent 0.° cepital gnins in the same year, plus 32,000 -- en entirely inadequate provision for any corporation which has been forced to sell considerable amounts of its capital -ssets at B loss. We would like to see more canital invested in new industries, to put more men to work. It is certainly the part of wisdom to accourage such investment, for we have innense amounts of ille Funds, and we have all too many idle men. Yet the income tex 1009 15 unfortunately louded against new investment end risky Dusinesses, not only by the cepital loss provisions I have referred so, but by the elimination of provision for offsetting the current perating losses of one year egainst the operating profits of a later year. A stable business, reporting annuel profits, is in no difficulties in this respect, On the other hand a business which has lost $50,000 of year for two years and has then made 100,000 in Regraded Unclassified 82 - 4 - the third year, must pay just as high taxes on the $100,000 as if every year had shown e profit, the plain fact is that the business has made no profits at all over the three-year period, and no income tax should be payable where there have been no profits. If the Government wants investment in new businesses -- businesses which cannot guarantee e profit every year -- the least the Government can do is to provide that only net profits will be taxed. Third, Adequacy. Over the five-year period ending in 1940, for which budgets have been presented, expenditures have exceeded revenues by an average of over 33 billions a year. In 1938, the Government received the largest total of receipts for any year since 1920; and the expenditures still exceeded receipts by $1,384 millions. The anticipated budget deficits for the fiscal years ending in 1939 end 1940 are 34,072 millions and 33,426 millions respectively. It may be that expenditures can be reduced. It may be that tax rates and provisions are oppressive in some instances, or that the tax system should rest on B broader base. It may be that ways and means can be adopted for B market increase in the national income, and that then the present tex system will produce revenues to balance disbursements. The first essential in my judgment is the formulation of a dependable plan for dealing with our budgetary problems over the Regraded Unclassified 83 - 5 - period of the next five years. There is little, if any, possibility of balancing the budget for two or three years, but if action to increase revenues end curtail expenditures is not taken et this session, the possibility is pushed chead by one and probably two years more. Mere inaction et this time constitutes a choice of one form of fiscel policy rather than another. The healthy functioning of the country 08 a whole depends in the last analysis upon the healthy functioning of the wage- earners and the businesses of the country. We must rely upon business to provide employment for at least the great bulk of our men of working age. We ought therefore to remove any specific obstacles to business recovery which remain in the tex structure, but the problem is much broader than that. When the uncertainty of conditions abroad are coupled with the uncertainties of an unbalunced national budget, and when measures to produce a bulance are hopes, not realities, it is not surprising that the MAD yho has saved money, whether g few dollars or 9. million, refused to take B. chance on an investment in anything seve the soundest, best established, most stable securities. He knows that business must sometime face new taxes to bring the budget into belance, end he cannot know where they will fall. Since he cennot forecast the future, he marks time. The result is business stagnation, not the steady business advence which has been characteristic of the country. Regraded Unclassified 84 - 6 - Second, the maintenance of the Federal budget in its present condition makes tax reform difficult or impossible. lost of the essential reforms will cause losses of revenue. I believe that the adoption of some of the changes which I want to recommend will promote healthier business conditions, and in the end incressed revenue. But changes in the tax system elone will not greatly improve business, and in any event, the effect will not be immediate. It is the part of wisdom, therefore, to plan P: tax system more adequate 28 a whole, at the same time that we not to relieve specific inequities. We cannot spare the revenue from the expiring excese and sales taxes at this time. At the seme time, we must realize that taxes of this sort are not good measures of ability to pay, that they have been increasingly resorted to by the States and cities as well as by the Federal government, and that therefore further increases in them are undesirable. In 1928, the income tax produced $2,175 millions out of $2,800 millions of totel Federal revenue, or 77 percent. In 1936, it produced $2,586 millions out of $5,660 millions of total Federal revenue, or 45.6 percenty In other words, while tótel Federal receipts were doubled, the income tnx increased about 20 percent. Relatively we are depending too heavily upon indirect flot-rate taxes, and not heavily Regraded Unclassified 35 - 7 - enough upon texes which are a more accurate measure of ability to pay. The tax system in this respect has moved in the wrong direction. Under these conditions, the conclusion is inevitable that the base of the income tax should be broadened by lowering the exemptions. Further, there should be an increase in the surtex rates applicable to incomes in the brackets in the center of the rate scale, roughly those incomes between $20,000 and $100,000. Finally, our studies indicate that the upper surtex rates are too high for the greatest productivity; and that net revenues would be increased by a small reduction therein. The incentives to enbark cepital in new enterprises is noticeably dampened. When the State and Federal governments together demand El participation in profits of as much 88 89 percent, with a much smaller perticipation in losses. (go on Estate and Gift Taxes State-Federal coordination) Regraded Unclassified 86 April 10, 1939 For the Secretary Murray Hansen, Washington representative of the Investment Bankers Conference, Inc., spent a week in New York City recently, mostly in touch with invest- ment bankers and other financial people. At breakfast B. day or two ago he volunteered the information that he had been surprised at the number of people who commented with a high degree of favor on Secretary Morgenthau. He reports that they seem to be uniformly of the opinion that the Secretary knows what he is doing and that he 1s doing the right thing, and is proving to have very real ability in the Treasury field. Upm Regraded Unclassified 87 DIVISION OF SAVINGS BONDS April 10, 1939. To: The Secretary From: Mr. Bryan Literally, in many millions of letters mailed to date, and in approximately 150,000 letters now going out from this Division every business day, the Secretary, over his personal signature, has asked for "your criticism and eny constructive suggestion you may desire to make". These personally addressed letters reach into every religious, racial and political group and fraternity, and answers are received from every part of this Nation and some 30 foreign countries. Generally when you ask for it you get it, and this Division has viewed criticisms ranging from mild admonition to violent vituoeration of many of the officials, acts and policies of the Administration. Also, numberless sug- gestions have been made--many of them of actual value, and some of them adopted. While serious concern--yes, genuine anxiety--ie shown over Government spending and the increasing public debt, there 18 scarcely 8 word criticizing Savings Bonds, and, almost without exception, our mail reveals only friendship and admiration for the Secretary. This continuous approval and response from one of the greatest of modern audiences can mean out one thing--a Nation-wide vote of confidence seldom given to any public official. Obviously, the public feele that the Secretary has a single purpose, "to aid recovery, and to that end to do the best that can be done in his Job". "No presidential aspira- tion 18 suspected of controlling the act or coloring the purpose". "Henry Morgenthau 1s an able and sincere servant of the people". AND FURTHER: "You occupy such a high and important vost in our Government and have handled your duties with such outstanding success that it must be B. metter of extreme satisfaction to you to see your department Regraded Unclassified 88 - 2 - moving along to greater and greater accomplishment, - Howerd B. Bishop, Treasurer, Calvary Church, Summit, New Jersey. If permit me to say that I greatly appreciate the efforts of the Treasury to distribute U. 8. bonds among the citizens, and I rejoice to learn that your efforts are crowned with a good measure of success." - Rev. Oluf Tandberg, Dover, New Hampshire. "Thank you for your nice friendly letter telling me of the benefits of Savings Bonds. - Mrs. Clara B. Sage, Delavan, Wisconsin. If I think your plan is the only one for the average individual who wants to buy Governments." - J. H. Ellis, Lincoln, Nebraska. - Broker. "I read in the Reporter with a great deal of interest your report of the results of your Direct Mailing Campaign on behalf of the sale of United States Savings Bonds. It is a great report and I want to congratulate you on the results you have sccomplished," - R. E. Fort, Jr., Nashville, Tennessee. Il I think your personal letters calling attention to the desirability of this kind of investment have been a very fine thing, both for the Government and for the individual." - E. L. Keenan, Lanedowne, Pennsylvania. JUG Regraded Unclassified 1939 THE GRAPHIC STORY ARVARY - 1938 OF D 1937 - 1936 who 1935 IIIIII UUI UNITED STATES X SAVINGS BONDS Regraded Unclassified Why More Than One Million People Reasons Given By Individual Owners Have Invested More Than One Billion For Systematic Saving Through Savings Dollars In United States Savings Bonds. » Bonds - And Amounts Invested. 20 Retirement $ Salely of photocipal ned in Increasing in value every termit: desire to own a gov year adds 33½ percent to Emergency eroment bond (nvestment in 10 years Cash Estate Education No place liucruation because Two may own a United Sictes Service Bonds are indeem Savings Bond which eilber able for liked mah values co-owner may redeem Home Building Dependents Seneticiary may be nomed Each disc represents Bonds are registered and $50.000.000 maturity e whom bond is pold in duplicates DIE issued il lost, INVRET ni death of owner Travel, Recreation value of Savings Bonds stolen or destroyed U NITED STATES SAVINGS BONDS have made investment hi- S AVINGS BONDS are treasured possessions in a million American tory. lo America no other single security is held by as many homes. They are primarily intended for citizens desiring to owners. Since March 1, 1935, and through February 1, 1939, more than lay aside funds in small amounts for the future. To safeguard them 1,500,000 people have bought more than 8,150,000 Savings Bonds. for this use, no one owner may hold more than $10,000, maturity with a maturity value in excess of $2,260,000,000. A questionnaire value, as issued in one calendar year. Savings Bonds have five wast to all owners of Savings Bonds has provided the information upon denominations (maturity values) : $25, $50, $100, $500, and $1,000. which the pictorial statistics on this and following pages are based. Their respective purchase prices are $18.75, $37.50, $75, $375, $750. (*** Regraded Unclassified Why More Than One Million People Reasons Given By Individual Owners Have Invested More Than One Billion For Systematic Saving Through Savings Dollars In United States Savings Bonds. Bonds - And Amounts Invested. Retirement Salery of principal and in- Increasing in value every lurest (lasize to own er gov- year adds 033/1 percent to Emergency bond investment in 10 years Cash Estate Education No price becouse Two may own a United Sincere Savings Bonds are redeem- Savings Bond which either oble for Bard cost co-owner may redeem Home Building Dependents Securiciary may be named Each disc represents Bonds ure registered and $50,000,000 maturity NS when bond is poid LO duplicates are issued il losi, evens al death of owner Travel, Recreation value of Savings Bonds stolen or destroyed U NITED STATES SAVINGS BONDS have made investment his- S AVINGS BONDS are treasured possessions in a million American tory. In America no other single security is held by as many homes. They are primarily intended for citizens desiring to owners. Since March 1, 1935, and through February 1, 1939, more than lay aside funds in small amounts for the future. To safeguard them 1,500,000 people have bought more than 8,150,000 Savings Bonds, for this use, no one owner may hold more than $10,000, maturity with a maturity value in excess of $2,260,000,000. A questionnaire value, as issued in one calendar year. Savings Bonds have five wint to all owners of Savings Bonds has provided the information upon denominations (maturity values) : $25, $50, $100, $500, and $1,000. which the pictorial statistics on this and following pages are based. Their respective purchase prices are $18.75, $37.50, $75, $375, $750. Regraded Unclassified The Nationwide Distribution Of Savings How Savings Bonds Are Registered On Bonds Is Made Through 16,000 Post The Records Of The United States Treas- Offices And Direct By Mail. ury At Washington, D. C. - SAME 20 Co-owners Savings Bonds Bought et Post Offices and Direct by Mail o - - Men experience - Women Larger Cities - CAME Banks and Trust Cos number Smaller Cities With Beneficiaries 5 Htt Fiduciories Rural America meyo person Corporations Each disc represents como Each character repre- Towns and Villages $50,000,000 maturity Associations value of Savings Bonds M sents $50,000,000 maturity value of Savings Bonds U NITED STATES SAVINGS BONDS are sold on a discount basis. For example, instead of paying $25 for a $25 bond and receiving A SAVINGS BOND may be owned and registered in the name value interest at stated intervals, you pay $18.75 for a bond of $25 face of a man, woman, child, corporation, fiduciary, or any other you will Held for 10 years the bond matures, and, due surrender, legal entity. Normally no distinction is made in bond ownership increase receive of Government check for $25-a upon 33-1/3 cent between an adult and a minor. Two individuals, but not more than 40 annual on your original investment of $18.75 which is per to two, may own a Savings Bond as co-owners, and either may redeem interest yield of 2.9 per cent compounded semiannually. equivalent the bond: or, a beneficiary may be designated to whom the bond will be paid or reissued in the event of the death of the owner. Regraded Unclassified FEDERAL RE E DISTRICTS BOSTON 115 NEW YORK PHILADELPHIA CHICAGO CLEVELAND SAN FRANCISCO HICHMOND ST. LOUIS ATLANTA NEW ORLEANS (Branch) agents for the United States, the Fed- issue Savings Bonds purchased by S AVINGS BONDS are direct obligations of the United mail in their respective districts. Likewise, they will hold States Government. They may be purchased at any Savings Bonds presented for safekeeping and, nor- all of the larger and many of the smaller post officer mally, will redeem Savings Bonds presented for payment or direct by mail from any Federal Reserve Bank or the Treasurer of the United States at Washington, D.C. H MYM Regraded Unclassified The Smaller Income Groups Own The Great Majority Of All United States Savings Bonds. ******* Executives o o R ЛАХАЯА Skilled Workers Studenta & o 0 ***** Each figure represents ownership of 100,000 Farmers Clerks bonds ########## S AVINGS BONDS are intended for the small investor, and the emall investors own them. Men and women from the small salaried groups, with their children, hold the big majority of Savings At Home Bonds. Most of these are buying Savings Bonda out of current in- come, and the bonds are the nucleus of funde for the education of children, the purchase of homes, emergencies, and for old age security. ********* Savings Bonds bought systematically under the Regular Purchase Plan, more fully explained in the enclosed order form, can be made Salesmen to meet many of the uses of an annuity. Neither age nor condition of health need be considered to enroll under this plan; also, without obligation or penalty, you may continue as long se you like and ******** discontinue whenever you please. You may increase or decrease the amount of Savings Bonds you regularly buy, change the intervals of purchase, or you may cease purchases altogether and begin again Teachers whenever you desire. Whatever you may do under the Regular Purchase Plan, the bonds АЛЛАЛЛА bought are the individual property of the registered owners and may he redeemed for cash at any time after 60 days from respective imaue Each figure represents Professional ownership of 100.000 dates. The cash redemption values are never less than the purchase bonds price and increase at the end of the first year and each six months thereafter until each bond matures in 10 years for 33-1/3 per cent more than you paid for it. have Regraded Unclassified The Cumulative Sales And Redemption The Great Majority Of United States Of Savings Bonds Since First Offered On Savings Bond Owners Are Systematic March 1, 1935 - To January 1, 1939. Investors In These Securities. DEPARTMENT / " UNITED STATES SAVINGS BONDS E DOLLARS BILION " 72.3% 27.7% 133 are repeat are new customers investors F SALES AND REDEMPTIONS 1936 T THE la redemption of " Savings Boml is not difficult, and country maile. lon a Savings Bond to the majority of owner may M ORE than 72% of the investors in United States Savings Bonds records To lie para aside mid is matures and brings fundr are making repeat purchases. The Regular Purchase Plan - delineo meed, Taxa There DI per vont of the total cash valur offered by the Treasury permits you to select the investing program solit have been redeemed offer name than 4 sale. suited hi your needs. You may purchase Savings Bonds each week. warmer Valuey of Surving Bonds 1. purchased each business das of the million seven Instruct acul fifty thousand yours' dollars. cach month, OF at other regular intervals of your choice, and you may plan with confidence for days of leisure ahead-for the enjoy- (unn) of sunny days without concern of immediate tomorrows. PAGE Regraded Unclassified TABLE OF REDEMPTION VALUES OF UNITED STATES SAVINGS BONDS ISSUE PRICE $18.75 $37.50 $75.00 $375.00 $750.00 Redemption values after the issue date: First year $18.75 $37.50 $75.00 $375.00 $750.00 1 to 1½ years. 19.00 38.00 76.00 380.00 760.00 1½ to 2 years. 19.25 38.50 77.00 385.00 770.00 2 to 2½ years. 19.50 39.00 78.00 390.00 780.00 2½ to 3 years - 19.75 39.50 79,00 395.00 790.00 3 to 3½ years - 20.00 40.00 80.00 400.00 800.00 3½ to 4 years - 20.25 40.50 81.00 405.00 810.00 4 to 4½ years - 20,50 41.00 82.00 410.00 820.00 41/2 to 5 years - 20.75 41.50 83.00 415.00 830.00 5 to 5 ¹/₂ years . 21.00 42.00 84,00 420.00 840.00 5½ to 6 years. . 21.25 42.50 85,00 425.00 850.00 6 to 6½ years - 21.50 43.00 86.00 430.00 860.00 6½ to 7 years . 21.75 43.50 87.00 435.00 870.00 7 to 7 1/2 years - 22.00 44.00 88.00 440.00 880.00 7½ to 8 years. - 22.50 45,00 90.00 450,00 900.00 Il to 8½ years . 23.00 46.00 92.00 460.00 920.00 8½ to 9 years . 23.50 47.00 94.00 470.00 940,00 9 to 9½ years - 24.00 48.00 96.00 480.00 960.00 9½ to 10 years. 24.50 49.00 98.00 490.00 980.00 Maturity value. 25.00 50.00 100.00 500.00 1,000.00 rded TREASURY DEPARTMENT 90 INTER OFFICE COMMUNICATION DATE April 10, 1939 TO Secretary Morgentham HA FROM W. H. Hadley Review of the Government Market For the 3-week Period Inding April 8, 1939 During the three weeks just completed, the government market has been influenced by two divergent forces. Although the piling up of excess bank funds has acted to force prices upward, several European developments have tended to force prices down. The net result was that governments closed Saturday, April 8th, about 1/4 point above March 18th. The latter date, however, was the recent low following the German absorption of Csechoslovakia, Every time the European picture tends to clear, government prices bound quickly upward. Ae a result, the underlying tone of the market, considering only local factors, is firm. During the past week, Treasury bonds were off about 1/4 point, guaranteed issues were down about the same, while Treasury notes were 1/8th point lower. Dealers' Portfolion During the three weeks, dealers' holdings moved through a narrow range. Although at one time Treasury bond holdings were up as much as $18 million above present figures, they closed the period only $3.6 million below the holdings of March 18. Regraded Unclassified 91 - 2 - Dealers' Portfolios (in millions) Week ended Week ended March 18 April 8 Not Change Treasury bonds 36.0 32.4 - 3.6 Treasury notes (1 year) 32.3 29,6 - 3.7 Treasury notes (1-5 years) 9.9 14,0 + 4.1 Treasury bills 10,7 5,1 - 5.6 H. O. L. C. bonds 9.9 6,3 - 3.6 3. 7. M. C. bonds 4,2 11.2 9 7.0 103.0 97.6 - 5,4 Dealers' volume figures indicate only moderate activity. During the last week, Treasury bond volume has averaged about $90 million daily. low Security Issues The only new corporate bonds of any consequence offered in the market were issues of $22.5 million National Distillers and $17.5 million Northern States Power on March 21 and 22 respectively, both of which were well received. Since then there has been only one other large offering, a $24 million issue of convertible debentures by Commonwealth Edison. These latter, however, were offered to stockholders and, therefore, did not come into the market directly. The only large offering expected in the near future is a $40 million 3% issue of 1959 by Terms Corporation. which may be offered during the coming week, Corporate Bond Market The general trend of the corporate bond market over the period has been downward, M a result of general uncertainty and of & sympathetic movement with the stock market, Although highest grade bonds lost about 1 point and medium grade bonds about 3 1/2 points, the averages remain slightly above the lows of January 26. which date marked the beginning of Regraded Unclassified + 82 the recent upward movement. The principal losses during the three weeks were in medium and speculative grade rails. Treasury Investment Accounts The only transaction in the market for Treasury account during the three weeks ending April 8th was the sale of $2.5 million Treasury bonds of 1941 for Postal Savings, This leaves a balance of $7.5 million to be sold of an original $10 million soll order placed with the Federal Reserve of New York. Other transactions included $13 million investment in Special 2's for Postal Savings, bringing the total Special 2's held by this account to $88 million. There were also purchases of $4 million Special 2's for account of Government Life which now holds $15.3 million of these notes. Federal Reserve System Account Transactions by the Federal Reserve System account was limited almost entirely to replacement of maturing Treasury bills. of the $124,720,000 bills maturing in the three week period, $30,840,000 were replaced by various Treasury notes and the balance of $93,880,000 by new and other Treasury bills. In addition, there was a $10,120,000 switch between two Treasury bill issues. Regraded Unclassified 93 RS TAX STATEMENT April 10, 1939. 9:30 a.m. Present: Mr. Gaston dr. Duffield Mr. Blough Mr. Magill Mr. Shoup H.M.Jp: Well, what I asked you gentlemen down for was to assist me, in strictest of confidence, to prepare a statement for me to make before "ays and Weans. I don't know how much time I have. mr. Gaston or Mr. Moneynolds said they thought I might have two or three weeks, which would be very good. But I thought + might try to do this this week. Now, I thought I'd talk at you people and tell you what I have in mind, you see. Aagill: Good. H.M.Jr: I don't know whetner we hed & tax bill which the Administration was responsible for in '33 or not. I'm not familiar with it. Magill: There wasn't any, no. +he N.I.R.A. had some taxing provisions in it, but that's all. H.M.Jp: But the way I thought we'd approach it was some- thing like this: Mr. noosevelt's been resident for six years. Now let's take a look at what we've accomplished during the last six years through taxes. "hat was the problem? in 33 our revenue was two billion dollars. we had the necessity of increasing it to six billion dollars. How did we accomplish this? And then list the various ways that we accomplished the increasing of the revenue from two billion to six billion. +hen I'd go on to talk about what we've done to stop the various loopholes. 94 -2- In other words, I'd like to make a - oh, if you want to call it - a statement of accomplishment from 133 to date of what we've done, you see, the things that we've - the various steps that we've taken and 110W we've accomplished them, etc., etc. And then, for instance - then I'd say - I don't know when those darn nuisance taxes were put on, I mean Gaston: In 132. H.M.Jr: - and what we've done to remove those, see? I'd forgotten they were done in 132. -nen I say, "This is what we've done." WON, this will undoubtedly be my last opportunity to address this new Congress, because no one would be 30 foolish to think we could do it next year - to review the tax program. "And as I said in No- vember '37..." - then I'd like to bring in at that point what I said in November '37, where I end up and say, "If we have made any mistakes, I am ready to sty so publicly." And I say, "I stand just where I stood in '37. "Let's take a look at - in this vast accomplishment, where we have unquestionably tripled our revenue, you can't nelp but do certain things which are un- fair and which are deterrents." And then go down the .ist and SE, one thing after another that we think are deterrents. Now, there are two ways of doing this thing. We could, for instance, say that "I think that when you tax a men 79 percent that that's too much and you should only tax him 60 percent. Or you can say that "the present tax rate on the higher incomes, in my opinion, discourages a man of wealth from taking any risks, and therefore I recommend that the Congress re-examine that and study at what level they, in their opinion, think it should be set to encourage a men who is in the higher brackets to put his money to work." lagill: I like that better, don't you? Unclassifi 95 -3- H.M.Jr: "hat? I do too. I like the tone of the article which has been done for Fortune; there were 8 number of things in it which I'd like to crib - not as to their specific recommendations, but as to their tone. PO far so good? Magill: Uh-huh. H.M.Jr: "hat? Shoup? Shoup: Yes. Later, when there is a lot more discussion, I'd have something to say about the nistorical part of it. H.M.Jr: well, let me just take a look at what I underlined that I like here. 1 take it you gentlemen have seen this Fortune article. Mugill: NO, I haven't. Have you (shoup)? Shoup: I've not seen it yet. Gaston: I haven't. Mr. Blough has. E.V.Jr: dere it is. Fifty pages. You can boil it down to three. Magill: who did that - buell? Gaston: It's a symposium. Lot of different people submitted memoranda; then he synthesizes the various memoranda. Yes, Buell. H.M.Jr: "ell, tais isn't the tone, but this is the sort of thing. "Moreover, corporate profits are taxed twice if paid out in dividends. The corporation pays the tax on the profits BS part of the corporate income, and the stockholder pays & tax on such profits in the form of dividends. in contrast, bond interest is taxed only once." 1 mean that isn't the thing, but - here, I underlined this. "Moreover, the capital stock and excess Regraded Unclassified 96 -4- profits taxes are burdensome to young and developing enterprises. These texes yield comperatively little revenue; and some of us believe they are not only inequitable but carelessly administered. Young enterprise and business generally would be helped by the repeal of these two taxes." are they make the statement, for instance - "The first Fortune dound lable reached the conclusion that long-term recovery is being held back, partly because the prospects of profit are much less than during the pre-depression." Then here's the whole program. "1. The suoption of the carryover of losses, and the study of the principle of everaging income. "2. The adoption of the consolidated return in SQ far as closely related enterprise under common parent companies is concerned. "3, experiment with more reasonable allowances for depreciation. "4. Elimination of any unfair the thods of tax accounting.' They say that Sweden abandoned its experiment with the undistributed profits tax i. number of years ago. Shoup: 1 don't now whether bweden Mugill: Then it's Norway that still nas me. Geston: Diun't they adopt the Dritish scheme, which is an undistributed profits scheme in reverse? Magill: I don't know wast britein has. Gaston: Britain has that 272 normal and then give you credit on the individual tax, don't they? Shoup: Yes. H.M.Jr: I thought this statement NES interesting. "We wish to reiterate that excessive taxation upon the rich Regraded Unclassifie 97 -5- levied in the name of social justice may have the effect of continuing unemployment. If so, such taxes are paid for not by the rich but by the poor." Nice statement. Well, what I want to git over is this. I think, looking at it in 2. broad way, that this whole thing - ay approach wants to be from the stand- point of recovery; that here we've got this vest, backed-up, pent-uo, money - banks loaded with money. I don't believe we've ever given private enterprise E chance to go to work. I nonestly believe tast one of the reasons Any they haven't gone to work is on account of the present tex structure; there are certain tuings which are deterrents. ne're feced, + think, "ith two clternatives. -ither we're going to fix the taxes so tast - as best we can to encourage the people to risk tueir money and let them finance: or the only other alternative is more deficit financing. And while I cm here I want to make one last effort to encourage private capital to go to work, because it will be my last chance. It's the last chance of this Administration to do it - now. "no this vhole unemployment thing - unless ve do encourage private capital to go to work, the only other way is bigger end bigger appropriations by the Government. Now, that's my whole philosophy. 1 could talk bout it to week; it wouldn't change any. And I'm responsible for the tax structure and I want to put it squarely in the lap of wongress and I want to point out what I think the deterrents are, suggest possible remedies. I'd like to keep it as general us possible, without being too specific, but still do it It was the President who suggested giving them four alternatives on the Social security, and I knew beforenand the one they'd take: the one with no tax rise. Well, if we coulo be as clever about it as S8 -6- we were in Social Security, why, I'd be very happy. Having had fifteen people work on the Social Security statement, I can say it was damn good, and I'd like to have this one as good. But I mean when you get through and done - I mean that was the way - you have four alternatives, but sort of point to the one that you think. But the reason that I am 80 determined and so anxious and want to do this SO much is that - I mean I can't see anything else but either make it worth these fellows' while And ES I've told the President, I'm willing to go just as far as it's honorable to go. lie asked me point blank whether I was willing to let the Baruchs and those people make more money, and so forth and 50 on, and I said yes, but I also pointed out that I had never broken bread with Mr. Baruch, which is more than anybody in the white House can say, because they've all accepted his hospitality or invited nim. «na if this is 2 capitalistic system, why, I want to try and make the thing work. And the thing that 1 always seid to you - tne thing I was afraid of was that I had one foot on a horse called "Capitalistic System" and the other one on a horse called "State Socialism," ano LS the two norses diverge I fall between them and am trampled down by both. I think that's the thing we face today - neither one thing nor the other. and, believing in the capitalistic system and having been here now since the fall of '33, I am certainly going to put the combined knowl- edge and research - not only Treasury, but people like yourself (Magill) - at the disposel of the Ways and leans Committee. Now I'm ready to be questioned. Regill: "ell, the main thing the t I would like to get from you 1 taink you've given us, and that is, you might say, now you want this statement formulated and what you want in it. So far as the particular matters in the tax system which we would regard as business deterrents, I don't think that there are any great differences of opinion among any of us. I'm sure there Isn't among any of us here in this room. S9 -7- Now, Mr. Hanes's office gave me when I was here on Friday a set of memoranda from the Dusiness Advisory Council and the N.A.M. and the Chamber of wommerce. "ell, they sound just like that Fortune business, and they also sound like the Magill-6noup report, as far 85 that's concerned. 1 mean the boys - I'll put in this qualification: that each time the boys work in something special of their own tast's going to do somebody a parti- cular piece of good; but the general equitable objectives I don't think there's very much question about. H.W.Jr: everybody seems to be - but what's happened is that we find ourselves in the position where we've been ut-truded and we've gotten down to about one thing, and that is that Ell of the taxes on corpora- tions should be combined into one and we should have D tax of 21 or 22 percent, graduated. dagill: You Hun't need that much. H.d.Jr: And corryover on corporate taxes. That's about what it's boiled down to. Blough: E few other things of the same general character. B.N.Jr: well, with that .... blough: That's right. H.W.Jr: 2107, for me to go up on the Hill and talk for that would be just plain nonsense. magili: Now, some of the things you have mentioned on your history proposition - I taink you want some history; I'm not sure that I would advise you ES sn individual to at In very much nistory, for this reason: I don't think tast your history is going to be particularly attractive, and I don't think it's going to do you any particular good. H.M.Jr: may I interrupt you there? Magill: I think you're going to be admitting a whole lot or blunders; that's about all it may amount to. Regraded 100 -8- day I interrupt you there? Magill: surely. M.S.dr: The reason that this statement on Social Security was such E great success - I said, "1 sald in 1935 that I recommended that Ne should have this reserve, and so forth and so on. I said this in 1935 and I was wrong.' Now, when I SE10 that and put that in, tast specifically I was resp nsible, I just cut the ground right from under everybody ind nobody could come back after reading the statement and say, "Well, why didn't Morgentasu say he did it?" And there nash't been & single criticism because I took It right out from under ... - "I did it." Now, I'd much rather get up there and say, "Yes, 1 did recommend the " - let's take the worst one from the standpoint of the Chamber of Commerce and the rest of them. -agill: Unifstributed profits. *Ge unuistributed profits. myes, 1 did. Way? Because WE felt that - what AES it, 3- ... - was it 5307 "hat W&S the section? wagill: 220 and 104. 8.2.dr: Anstever it WUS - TT the olo ones woulon't work and here WES the situation we were faced with: pri- vate nolding companies, etc., etc., and re felt that this was tue way to get this distribution, get this money in circulation. Well, It didn't work that way. inerefore, in 1938 we got the following legislation through which will take care of that situation." You tell me there is something WE got through. Mogill: '37. B.M.Jr: "natever it is - ... which will take care of that situation. But, Ros, 1 think it is such better to say, "Yes, during my time I made that mistake, I made that mistake, I made that mistake." 101 -9- Gaston: wf course, there is this to be said in your favor: they didn't adopt your recommendations on undistributed profits tax; what was passed was wholly different. H.M.Jr: I think it's much better to say, "I did this; I did this that W&S wrong." Blough: excuse me - may I d.V.Jr: No, I mean because the fact I was responsible for putting it in - we were faced with the thing. "Well, I'm the fellow that recommended the big reserve." I'm trying to find out who sold it to me. "But I did it; I'm the head of the Treasury." 11 Gaston: I still think it was right. H.M.Jr: What? Gaston: I still think it was right. H.d.Jr: Well, that's over the dam. Blough: But in tast Social Security speech - in that state- ment you pointed out that there was some knowledge you couldn't have had at that time d.M.Jr: Right. Blough: which you have now, so that it wasn't something that was a mistake at that time, but something that you cidn't have information on on which to make E different decision. H.M.Jr: Well, if you can fina that, all right, but I'm telling you gentlemen I'm not afraid to get up and say that during my tenure of office certain things were passed that I recommended end I now say they' re wrong. I'm not afraid to say it. I'd much rather say it than have somebody else say it. I mean it doesn't bother me, nos. Dea? I mean the purpose is this - I mean if at that time - I mean if we can say, "Well, this is the information we had, it's very much nicer; but if I made E blunder I think it's much better tactics to say SO. 102 -10- Ingill: "ell now, do you want a kind of £ complete history? d.B.Jr: I thought so, agill: as a dotter of fact, you've done : good many things in the way of tax revisions that I think all of us nere would still taink are right. H...Jr: 1 tains SO. Roa, I don't care Anether it's five thousand words or Magill: + think the '34 net is pretty good. -S or matter of fact, I doubt if you'd recent much in the '37; it least, + don't think 1 would. H.M.Jr: For instance, I forgot that the 132 - the nuisance taxes were phasec under Mr. Hoover. 1 don't think it's generally realized that we've tripled the revenue. In that process tox deterrents have trisen. I want to sty something which - Doughton nos been Gnairash now long? Zagill: He wasn't Untirmen in '32. I don't know just when he diù EO in. Chrisman wes Chairman at the time the nuisance taxes were passed. Jr: I want to pay is tribute when I first get 42 to Doughton and fat merrison - splendid cooper: tion, SO forth and so on. Gaston: Doughton, Pat merrison, and warner were principally responsible, I think, for tast 132 Act. Hou.Jr: Inc ones I've worked with. I want to get up and sty, "Now gentlemen, nere I've worked with the ways and Means Committee under Chairman Doughton and the Senate Finance under ret darrison, and during those times, in combination wita the Treasury, in combination with these Committees, we have accomplished the following." You see? Angill. Are you willing to say another thing on your history? I think, speaking broadly, one of the 103 -11- worst features of the tax system is this: You collected in 1928 pretty nearly as much from the income tax ¿S WES collected in 1938. Notwithstand- ing all the increases in rates and exemptions and everything else, in 1938 there was collected - I think it N&S about 20 percent more from the income tax than was collected in 1928 - very much the same, in the meantime tue nuisance taxes were more than doubleu - the amount of collections. In other words, the reason why sut another way, in 1928 77 percent of the Federal revenue collections were income taxes; in 1933 it got down to 40 percent. So it's just another way of saying that in the meentime the nuisence and sales End what not taxes have gone up About three billion and nad doubled Graton: Two-thires of it lconol and Cobacco. Magile: Well, not vuite. U.S.Jr: That's very interesting. Tigill: while the income tax ASS stayed the same. In other Worus, the tax system has gone in the vrong direction in ten years. dec.dr: 1 think WE sught to sey tust. wigill: i taink SU too. Just dow much that's going to appelse business, I don't know, because wast it looks forward to is more Income texation. H.2.Jr: well, look, we've got 4) combination job to do. On the bib broad front that I'm talking sbout, this sta tement will not one should not please everybouy. Everybody should find some objections to it. But, on the other hand, vverybody should find something good in it. Atgill: On yes, no question about it. wee what I mean? And on this broad front, I should think the President would be pleased with it. Regraded Unclassifie 104 -12- I feel this way. I'm going to talk in the greatest of confidence. I'll come back to business appease- ment in B minute. I have E responsibility and sfter five years what I've learned here through the assistance of the staff and the Under secre- taries, and so forth - I should put it at the disposal of Congress. and this saying "It's never t good year to have E: tex bill" - you (Magill) and I desperately tried to do it year after year and we weren't permitted to do it. I'm not going to end after seven years in the Treasury and not have taken this accumulation of knowledge and put it at the disposal of the Congress. I'm just going to do it. Magill: Sure, I think you should. 0.2.Jr: Now, out of this thing - it may not in the short run, for the next month or two, start off the wheels of the factories turning at a hundred percent, but if it's F good statement it aught to over a period of four 02 flve years nelp. Agill: well, tuat's really what 1 wanted you to see. In staer words n...Jr: bee? Vogalz: I don't want you to be misled into thinking, is I've seen SOME documents around here indicate, that you make this statement and suggest that this and this una this be done Lnd immediately business is going to burst into flame. I think that isn't going to occur. d. . Jr: "ell, it can't. there are too many other things. Angill: I'm not arguing for E minute that these things should not be advocated, should not be done. But I don't want you to be put in the position of saying, "Well, boys, If you just do this, every- thing will be all right." 0.9.Jr: Well, that would be silly. dogill; Yes. 105 -13- H.M.Jr: I mean I'm tickled to death to look back after ten years and look forward for five years. That's the best you can do, isn't it? Magill: that's what you should do. H.M.Jr: Take 8 look at the last ten years and take a look at the next five. "Gentlemen, let's take a look et the last ten years and let's take E look at the next five.' It would be & very good way to start, wouldn't it? Now, the disagreesble things, certainly, like the depletion on the oil wells that you say loses us a hundred million dollars & year, ought to be in. The fact that eight states permit community property certainly ought to be in. The estate and gift tax should be consoliusted. See? I've been doing more work since you've left than when you were here on this thing - because you did it so ably I didn't have to do it. Magill: Thank you. d.N.Jr: So Magill: Not 8 very good teacher, is what it looks like to me. d.l.Jr: You left your material. You left your mark benind you - you and Shoup. No question we should point to the middle brackets AS the only place the fat is left. No uestion We should try, if possible, to double the number of people that pay income tax and make them Federally tax conscious. You can't overlook the fact that, if the figures are correct, less than 50 percent of the taxes collected are collected by the Federal vovernment, and when we're talking about something we're only talking about less than 50 percent of the taxes that the Federal, state and county and city must get together, and magill: Are you willing to advocate definitely legislation by Congress at this time to set up a commission to do this state and Federal job? Jr: Definitely. Regraded Unclassifie 106 -14- Angill: I think you should do it. Caston: les. Definitely. No, I think wait you're saying "Det's take E look at the last ten years and let's take E look et the next five." Guston: Jr course, there is one trouble. come Question CODES up there; If you're going to take & look at the next five, this thing is going to be prospec- tive. 1 think most of us would say that you ougat to look forward to an increase in the yield of the taxes; that is, more taxes on the basis of any particular year's earnings. That is, the trength of the tax structure ougut to be increased, will HaVe to be Increased. I don't know wnether you went to take that subject or not. 1 think what you might say is this. lou could Leave U paragraph - lift it out if necessary - "If, for instance, wongress is going to consider Increasing the agricultural oppropriation by four or five nundred million dollars, I feel sure that they .111 want to consult the Ways and weans Committee is to now to offset this by increased taxes." i mean something If 1 may say so, I'd rether do it in what I gather 1s Merbert's way. now, you recall that last year I fought all through the year on tais line: that we must not decrease the Federal revenues End, on the other hend, we mustn't increase them any; Re must come out just exactly even with what the present tax system produces. well, that's El nighly theoretical objective, if 1 may say SO. I don't talak that we're ever in the world going to gt the Federal expenditures cown below something like seven billions of dollars. + slso don't think that you can dependably consider tust you're going to have 75 or 80 billion dollars of national Income year after year, Su that you can depend on the present system to produce year after year the amount of money which you're going to have to have if you're going to balance the budget. 107 -15- OON, personally, feel just AS I know you did when I first came down here, that this balancing the buuget ought to be much more nearly & reality than it is now. H.l.Jr: True. ingill: And tn: the one big thing which can be done to increase business confidence is not to balance it next year - you can't balance it in the next two or three years, but you can now take measures which will lead to & balance. And the great trou- ble, I think, at the present time is that nobody sees any such measures on the horizon. Now, that's the sort of thing, it seems to me, that you ought to say. This business of believing that somenow or other you're going to get an 80 billion dollar national Income and, furthermore, that it's going to continue year DE fter year at 3J billion dollars, is just believing in fairies, if you're talking in terms of the present price level. A...dr: Would you get that statement I SEW in the Sunday Times - evidently National Industrial worrd, WES it, that seid that only 67 percent of the dollars spent - something - just E little box. suffleld: 1'11 look for it. H.M.Jr: "hat was it, National Industrial Guston: National Industrial conference Board. It came out about Friday or Saturday morning. We ougnt to nave that full report, because that box isn't very intelligible. 1 think 1 have that here. 4...Jr: What day is it, Shoup? Shoup: it's - Let's see - got everything except the day. Seston: wet's Look et the date on one of these dispatches. Phone: april 6 and April 7. Regraded Unclassifie 108 -16- Waston: it came out on the seventh; the date of the report was the sixth. Magill: You want us to get to work. H.M.Jr: Before you do, I want to let Shoup talk a little bit. "hat do you think, Shoup? Shoup: About the ... H.M.Jr: I mean what we're talking about - what are your ideas how I should approach this? Shoup: Yes. well, I just have one or two specific com- ments first, and that's with respect to the history. The facts, as I recall, seem to be that as far as the trebling of the revenue H.M.Jr: The what? Shoup: as far as the trebling of the revenue is concerned, that the major part of that was due to the 1932 Act, which not only imposed the nuisance taxes but also made the biggest single increase in income tax rates that any Act in our history has ever made and formed the basis for the big revenue yields from the income tax in later years. is considerable part of the trebling was, of course, due to business recovery that occurred; and then, 8 part, but I think perhaps on the whole a minor part, of the increase in yield WBS due to laws passed after March 4, 1933. Now, by minor I don't mean negligible; I just mean per- naps less than half. And the biggest things were the liquor tax, Gaston: *hree big things: your increased rates of 132, your business recovery, and your liquor taxes; and those were the three big things. Shoup: Yes. So I merely put out a comment that perhaps the trebling of the revenue would not be as good & point to start with as possibly some other things. Then on the other points I don't think that at the moment I have anything to add to what's already been said. I feel strongly that we shouldn't try to give the impression, as Mr. Magill warns against, that 109 -17- there would be any big upturn in business merely because net loss carryover WES allowed or something like that. Geston: *here is = business mirage that prevents that. That is to this effect: that there is going to be a onange of suministration; a new administration will be very kind to business, and everybody can go pnead. The reason that Ls a mirage is, first, that there any not be E change of administration and, second, that any administrati n is going to have to, if they're going to accomplish the two things +hey're conflicting things: balanced budget, decreased taxes; they just don't go together one with the other. -nuage And, moreover, I'd like to reemphasize the point aade tast even assuming TE get this 80 billion dollar Income now and then, which we presumebly won't get unless there's a feverlsh speculative activity, which the Government is more or less committed to oppose, I presume - even if we get it it is not likely that in such a year there will be more than t modest umount of debt reduc- tion, if any, so that over the years, under the present system, with tne present expenditure trenas is they now appear, the debt runs like - well, 11ke this: up, end then level for year, up and then maybe Guwn, inv then up; tutt kind of C cycle. That, I think, is something the public doesn't realize. I don't think people generally taink of it that way. *ney tend to think of the possibility of an 30 billion dollar Income and they somenow have the 1dea tast with that we then get & reduction and that cancels the uebt increase 10 other years. 1 think pussibly talt is the wan un the street's reaction. R.L.Jr: 1 don't think they've ever thought of it that NAY that you enjure: well, Lf not the man in the street, the business MAD. U.W.Jp: I don't know about the business non or the man in the street, but most of the people here in Washington have uone D lot of wishful thinking, and they just Regraded Unclassifie 110 -18- hope and pray that this thing will work out all right. How we're going to get 80 billion dollars or how we're going to reduce the debt, nobody knows, and I haven't made my contribution. Gaston: The fact is the debt .... H.M.Jr: 1 haven't made my contribution, and that's why I want to do this thing. This is to be my contribu- tion as far as this whole thing. I don't care how many words it is or how broad it is, or now pleasant or unpleasent, you see. Gaston: A realistic prophecy is that the debt will go above 50 billion dollars before it stops and it will never get below 50 billions in our lifetimes. H.M.Jr: well, I don't know, but Shoup: 'nat's all I have to say at the moment. H.M.Jr: Well, do you think from the very brief talk here that this is the way to approach it? shoug: Yes, I think so, H.M.Jr: Blough? Blough: I'm immensely encouraged by this general approach. I'm very happy to see you take it. I have only one point. We tried to write the history the other day, and it looked so ghastly when we got done that we thought it was a Republican campaign document; so we put it in a footnote of that little prel iminary statement, just for that reason. And Magill: Don't Republicans read footnotes? Blough: Well, for the Secretary. And I just put out a little word of warning: that it may be difficult to write the history in an attractive form. H.M.Jr: "ell Blough: I think Vagill: "ell, I don't think this Regraded Unclassifie 111 -19- 1.1.Jr: I mean I - the way I feel is, it my be E bitter pill for me, but I'm here and I ought - I said in 137 I would somit my mistekes. I don't see may that should make it Look like à Republican document. Diough: I con't mean the mistakes - I taink that's E minor sayeet of it - but the increases In rates, the successive increases in the tax rates, and the extension of the taxes to other sources, wakes 8 little ulscouraging resuing. It's much pleasanter to talk shout the increased strength of the revenue system than It 13 about increasing the rates from 3 to 32 percent. will: I talex you can meet part of tast, Roy, in à WAY that I believe the Secretary probably has in sind. That is, if you - I woulun't suppose that for pur- Joses JÍ his statement the best way to present the history - waybe DE ulsagrees with we - would be to present it as one block, 23 one unit, but, rather, If you were talking - it came time to talk about corporation taxes, you'd say, "In 1936 I recommended the undistributed profits tax in such and such a fashion sna Congress toopted such and such en undistributed profits tax. -ne results were not nast we expected in tals and this WAY, and there- fore I think such and such ougnt to be done." H.4.dp: "But as to what we here getting at, wast we were trying to accomplish NBS to avoiu the no: roing of this money under tue form of / corporation." wegill: AELL, your objective aus even better than tast. Your objective, &S you started out with it, was the same objective tast you've gut today, and that was the simplification of tue corporate taxes. Tast's where we storted on this tuins, 69 you may recell. Gaston: Treating tues as withholding taxes, watch they originelly started to be, Bluuch: I taink If you put tae emphasis on that sort of thing, you wouldn't be Involved in the trouble I suggested, but LP we get to tracing the increases In rates and things like tast, that tast makes a Regraded Unclassifie 112 -20- rather unsttractive pill for the Gaston: I think the real defense - dr. Plough has brought out a real point - we have increased the burden of taxes tremendously, and there is E defense to that. Way have we done it? 10 support and make possible the broad humanitarian program of this edministration. It gets down to E point of, was the program of this Administration justifiable, is it : worthy thing, the things for which we have raised tais great amount of revenue? And our answer must be, "Yes, it was." H.M.Jr: On yes. "ell, I'll say that. Shoup: lou're egain outside the liquor tax. Magill: I don't think you n.d.Jp: Look, if this thing was easy, I wouldn't ask you gentlemen to come down nere. -ne fact remains I've never attempted to do something like this - nobody for Mr. Adosevelt nas, I mean. Asgill: Well, you have attempted to do it. d.2.Jr: Well, let's put it this way. "e've attempted to do it, but I never W&S permitted Magill: daven't been able to do it. H.m.Jr: I'm going to do it now. And you people were nere for 2 couple of years; tais is your life's work. It Just leads me to one other thing. Is there anybouy else around the country that we ought to bring into this thing who could contribute anything? 15 this men WE não downfrom nerverd - would he be at all helpful? wagill: who's that? Gaston: McGuire. H.M.Jr: McGuire? Megill: NO, I don't taink - he's & lawyer, primarily a law- yer. He nasn't got any I don't think of anyone. 113 -21- H.M.Jr: now about whst's-his-name over on the Board of Tax Appeals? magill: Traynor? H.M.Jr: NO, I wasn't .... Baston: Upper? ....Jr: Opper. Magill: Opper. H.R.Jr: would Clarence be helpful? Magill: Well, I doubt it; I don't know. Blough: I don't know him. h.4.Jr: well, of course, ne went all through this at Oliphent's elbow. Traynor? No, I don't taink SO. Do you think of enybody, Shoug? easur: 104 mean someone to sort of nelp on the details of the thing? 4.M.Jr: NO, on the question of the philosophy. not enough people here in the Treasury on details. Shoup: or course, I've always drawn a good deal of ideas and guidance from Professor Haig at Polumbia. angill: I don't think 401g is available for this purpose, do you? Shoup: i think perhaps not. But I didn't want to let the thing go by without mentioning him. 4.2.Jr: How about the man from "isconsin that I didn't take? Shoup: Groves? Blough: I know Groves very well. ne'd certainly do no harm Regraded Unclassified 114 -22- in E meeting of this kind, and 1 think he'd be very valuable. At the same time, nis philosophy might not be quite in harmony with that at present in this room. H.N.Jr: Have you (magill) worked with Groves closely? Magill: I don't know aim; I never met him. Wuffield: de tsught me school. H.W.Jr: 1 don't think - maybe it woul be better not to. asgill: My own feeling 13 that what WE need is more people on the order of Gaston and Puffielo than anyone else. AS I have sold, I don't think there is much Lisagreement 85 to the concrete tax ideas; that part is not herd; but the job of casting this in B broad form which can be understood by the intelligent layman, which really clicks - that's a real job. 8.4.Jp: well, Defore - perbert, you want to say anything as to how we should approach this, other than what we nave said? Gaston: No, I think I've said a good deal. I've got general idea of what we want to do. H.S.Jr: Gene? suffield: The only thing I would say is, 1 think it's the right approach, ind in support of that I don't think you need to worry too much bout em hasizing the point dr. Gaston makes, of needing to raise the revenue. I frankly W&S surgrised, on this trip of mine, at the atter lack of objection to the level of taxation end the repeated statement: "Taxes are nigh; we know they've got to be high; ye're Willing to pay them. bet's just iron out some of these things." I mean tast was just universal, and it surprised me to deatn. I must have seen the wrong people; I don't know. siough: well, I'm surprised ... H.M.Jr: 10u were in minneapolis and wes moines? Duffield: I was in Minneapolis; Madison, wisconsin; Boodstock, Illinois; Newton, IOWE, - you told are to stay out of Regraded Unclassifie 115 -23- big cities - St. Louis and alempnis. Waglll: + don't know was anybody should object to the level of taxes. -uffield: The level of taxes NBS just something that wesn't à5 such objected to. h...Jr: well Now - I see - well, now au you like this approsch? uffield: I think it's fine. I agree with Ar. Magill that the sort of things that you near everywnere - + mean the sort of things that are suggested you hear every- where. cort of general agreement. H.a.Jr: Well now, that doesn't bother me. It's the method. Now, 68 I understand, today you're (Magill) mine; and when are J all coming back again? legill: (Laughs) Just B traveling man. 8.W.Jr: NOW, just 100k it the accommodations; and you were to come down every Wednesday after the 15th of September. apgill: I never agreed to that, you know; I commuted for twelve months. A.C.Jr: No, you 8814 you'd come down - what was it, every week or every other week? Magill: 1 never ssia it et all. "dat? will: Wever said it at all. 11.1.Jr: Diun't you? I thought you aid. agill: un, let's tilk this siternoon. H.w.Jr: well, I understand that you (choup) can stay & couple of days. Shoup: I can stay until tomorrow night, ar. Morgenthau. Regraded Unclassifie 116 -24- I have to be back on the job during "ednesday end at least Thursday morning. Put I can be nere tomorrow. Agill: I want to see you get this out. I'll give you time one way or another. H...Jr: not I was thinking - ES I say, if we could get this thing started nicely, then you could take a look at it Friday. But I mean this is E hard thing and 1 should think that you'r be vitally interested In this; you have big stake in this. Magill: I would nk so too. -...Jr: 1 think you'd be almost ES much interested 68 I am. AND when would you be entlemen like to meet with me again this afternoon? Ine only appointment I can't break is, I nave press from 4 to 4:15. would you want to come in **gill: for 4y part, I'd be glrd to see you at 2:30 or 3. 4.4.Jr; dun? You would? Puffield: "Bet are it to bring back? H.M.Jr: Well, an outline. cuffleid: en outline? Not 21 full statement. Yes. Do you want to get the four d'clock? is that what you have in mind? agill: 1 think so, if that's possible. we'll see now it works. I've got classes tomorrow nd next day, too. H...Jr: Well, let me just - you say when you would like to come in. I'll have to change the day around. when would you like to come in? Magill: Well, I don't know. I can give you on outline at 2 o'clock, 2.8 for LS that's concerned. u.n.Jr: well **gill: NO you want to make it 2.30? 117 -25- H.M.Jr: All right. Now I'll nave to change this. 2:30: Magill. Well, I'll take care of the rest. O.K. Magill: Now, this is mechanics, but for my part + would much prefer to work on this thing alone; I think I can do it better. Now, that would seem to indi- cate tast what we might try to do is either two OF three of us write something that we think will be suitable for you, 30 else "C divide it 12/1 in some kind of D wey. d.m.Jr: Way won't you, when you get to that - what room are you using? agill: 4168 Cosuncey suggested + use Ar. Taylor's old office. A...Jr: "ho is down there to delp you? I think his girls are still there. They've typed out 2 thing for ae this morning. n.w.Jr: Do you want this stuff: atgill: I've got the same thing. I daven't got the Fortune thing. n...Jr: 1 don't t.ink you have want danes wrote de and what Blough wrote me. Blough: I have D copy of tast here. Regraded Unclassifie 118 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 10, 1939 TO Secretary Morgenthau FROM Mr. White Subject: Kr. Riefler's memorandum on financing (An abstract of the article 1s appended.) There 18 a real need in the United States for medium- term credits to small and medium sized business concerns, The solution to this problem probably will require a type of financial mechanism which 1s different from any which has yet operated in this country. This new financial institution ry be modeled in part on features of the following: The Installment Finance Companies, which have developed methods of handling a large volume of notes without intensive investig tion, have an approprie te financial and administrative structure, and have successfully reconciled centralized control with local responsibility. In addition, the experience of group banking systems may provide a clue to the type of organization needed, since it combined local responsibility and management with centralized ownership and access to outside funds. Comment: Mr. Riefler believes that the problem of providing 98- cilities to finance small business can be solved by private banking institutions, and without direct partic pation by the overnment. This 1s a much debated point. However, it is clear from Mr. Riefler's memorandum that the result of private "inancing would be the further subordination of smoll industry to non-local large private financial companies. There are two bills now before Congress which are designed to provide financing facilities to small concerns which may be of interest. 1, The Yead Bill (S.1482) T is is 8. simple and very effective plan. It provides for the insurance, by R.F.C., of a designated type of industrial loan, in much the same manner that F.H.A. now insures mor tgagee An new homes. Regraded Unclassified 119 Secretary Morgenthau - 2 2. The Voorhis Bill (H.R.4857) and Logan Bill (8.1743) This bill envisages the creation of a new government agency which will provide facilities for the extension of medium term loans to small concerns, and provide credit in- surance to the newly-created organizations of a semi-private nature which would actually grant the loans. Regraded Unclassified 120 Abstract or Paper by Professor Riefler on Medium-Term Credite in the United States (1) History The problem of agricultu al medium-term credits which DATE been chronic ever eince the post-war agricultural depres- sion PAG finally more or less solved by the organization of we Form Credit Administration in 1933 to coordinate agricul- turel lending institutions. The small industrial and commer- 01/1 entrepreneurs whose need for medium-term credite is most difficult to satisfy used to obtain them before the depression from small local unit banks. With the weakening or failure of tiese banks the problem has again become acute. The con- rervetive local be ke which are those which have served are unwilling to lend. Neither non-local private lending insti- intions nor the R.F.O. and Federal Reserve benks have been NORE edequately to meet the genuine demands of small industry. In Riefler's opinion the core of the financial problem pt medium-term credit has now been approached but has not yet been reached. (2) The mein lessons of our experience are: (a) The term "medium-term credit" 18 much too vague and must be broken down by categories of borrowers and types of AIR required. For instance, agriculture is 8. separate prob- Lem which requires separate handling. Medium-term credit, Derefore, should easily cover only the financial needs of Dir small and local industri and commercial entrepreneur. (b) These needs have long existed and hed access to funde in the past, though not openly, but in the form of nortgages and short-term industrial and commercial Loans. I is practice 18 undesirable both for the borrower and the ender. (c) There 18 genuine economic and social justification for creating medium-term credit facilities. The need for e entinuence of small industry 1s universally agreed upon. (a) But the problem has unusuel difficulties because the works required are essentially loans of capital and not credit and the ne ed is really for the provision of equity cepital. The avera e size of the loan 18 too small to justify meti- culous investigation and too lerge to apply routinized pro- cedure. In the past the local unit bank was in the best cosition to cope with the problem and non-local banks have Deen unable to fill the gap. Regraded Unclassifie 121 - 2 - (e) The fact that the real need is for advances of capital re ther than of oredit leads to the following con- clusions: (1) It 18 an extremely difficult field for direct Governmental advances because of the inefficacy of routinized procedures such as those used by the Federal Reserve Banks and the R.F.C. (2) A financial institution specializing in ad- vances of this character should not be confined to the loan of funds. (3) A lending institution should have a capital ratio higher than customarily prevails among anking institutions (about 10 ercent) a.s the risks involved are too high. Therefore, the ratio of capital to de- posits should be about 25 to 40 percent. (4) They sho ld have access for at least part of their resources to non-local sources of funds. (3) Riefler's Conclusion The problem has not yet been solved. Public agencies and private non-local agencies have been unable to fill the gap left by the retirement of the local unit bank from thie field, The real solution demands a new financial mechanism to which the large installment finance companies approach most closely, though 80 far their procedures and standards are too highly routinized. Also the revival of forms sim- 1lar to those of the group banking system might help. Regraded Unclassified 121-A MR. MORGENTHAU'S OFFICE TO-- " Hanos Mr. Ollphant Mr. Othbons Mr. Gaston Ur. Taylor Mr. McRaynolds Mr. Alexander Mr. Harper Mr. Allen Mr. Halvering Mr. Bartelt Vr. Iroy Mr. Batchelder Mr. Julian Mr. Bell Mr. Kilby Mr. Berkshire Mr. Lochhead Mr. Bernard Miss Lonigan Mr. Birgfeld Mr. Maxwell Mr. Blough Adm. Peoples Mr. Broughton Miss Reynolde Mr. Bryan Mr. Rose Ur. Cannon Mrs. Roes Mr. Davis Mr. Sloat Mr. Delano Mr. Spangle: Miss Diamond Miss Switzer Miss Planagan Mr. Tarleau Mr. Graves Mr. Thompson Mr. Haas Mr. Upham dr. Hall Mr. White Mr. llanna Mr. Wilson Dr. White: The Secretary asked that Dr. Riefler's letter be sent to you with the request that you let him know if there is anything in it he should know about. Thanks. H. $. Klotz C Regraded Unclassified 122 THE INSTITUTE FOR ADVANCED STUDY SCHOOL OF ECONOMICS AND POLITICS PRINCETON, NEW JERSEY January 9. 1939 The Honorable Henry W. Morgenthau, Jr. The Secretary of the Treasury Washington, D, C. Dear Secretary Morgenthau: I have returned from the meeting of the Finance Committee at Geneva and will be glad to come to Washington to tell you about it at your convenience. One of the main topics on the agenda WAS the problem of intermediate or medium term credits to industry. Mr. Royall Tyler of the League Secretariat had written to each member of the Committee prior to the meeting for their thoughts on the subject. As this oroblem has been acute with us in this country for A long time, I undertook to vrite n long memorandum giving my experience rith the subject. At the meeting this memorandum proved to be the most comprehensive one which they had received. Other members in general checked with my observations, particularly Sir Frederick Phillips. He said that the British experience subse- quent to 1921 in providing for advances to small industries proyed the necessity of providing equity capital as well as loans. In view of the discussion the Lengue Secretariat was authorized to make a specific investigation in various countries on the subject of intermediate credits and to report on these investigations during the next meeting in June. In subsequent conversation with Tyler I learned that you had expressed 8 personal interest in this subject of intermediate term credits when he saw you here last Spring. I am accordingly enclos- Ing 8. copy of my memorandum to him for your information. I had a rather interesting time during the few days that I nas in London and Paris, but missed greatly Butterworth and Cochrane who were here at that time. With all good wishes for the New Year. I am, Very sincerely yours, Winfield T. Riefler Enclosures Regraded Unclassified 523 COPI October 29, 1935 Wr. Royall Tyler The League of Nations Geneva, SWITZERLAND My dear Tyler: Thank you for your good letter of October 6th. I have written Vr. Loveday that I ram planning to be present at the meeting of the Delegation on Depressions on December 5th. I Am also very elnd to five you my oughts with respect to the problem of intermediate or medium term credits as it has ap- enred in this country. It is A subject to which we have had to devote considerable thought in r-cent years. Although I Am not too familiar with its historical aspects, I suspect that in reality it has been with us for a long time, and that the need and desire for medium term credits, particularly on the part of the small entre- preneur and farmer, constituted an important motivating factor in the early movement for the prohibition of branch banking in the United States. At any rate, the emergence of R. unitary banking structure did have the effect for a long period of submerging the problem of providing specifically for intermediate or medium term predit needs as such. Up to the war these needs were on the whole fairly adequately met by our existing financial machinery, either through the open capital market, the mortgage market, or the unit bark. In recent years, however, largely AS a result of the banking crisis, the problem has emerged in striking form, particularly with respect to the farmer and the smaller industrial entrepreneur. At first I thought I could say that I had to say on the sub- lect in the body of this letter, but my remarks have required so much space that I have finally decided to convey them in the en- elosed memorandum. Sincerely, Winfield F. Riefler 124 EDIT TERM CREDIT IN THE UNITED STATES The adequacy or inadequacy of existing financial arrangements for meeting the medium term credit needs of large industrial borrowers has never arisen in the United States in acute form. These borrowers are sufficiently import- ent to have access to the large private banking houses, to the open security markets, and to the large commercial banks in the financial centers. They are in a position, therefore, to finance their medium term credit needs either on direct loans from the large private banks or the large commercial banks, or by selling notes in the capital market, (provided the issue 1s of suffi- cient size to justify the expense of underwriting). As such firms also frequently maintain regular banking connections with a considerable number of the larger banka in the smaller financial centers, they are also in & position to shift short term loans from bank to bank and thus meet their medium term credit needs without any individual commitment running longer than the customary credit term. Except for periods of genuine credit strin- gency, therefore, or periods when the capital markets have been relatively closed to new financing, these lorger industrial borrowers have not been particularly conscious of a need for more adequate facilities for the finan- cing of medium term credit needs. The farmer and smaller industrial entrepreneur, on the other hand, are not in a position to use the open capital market and have historically relied mainly on their local unit bank for financing of their medium term credit needs, the loan sometimes being secured by a short term mortgage on their real property assete, (a demand mortgage or a mortgage running for 1, 3, or 5 years), and sometimes taking the form of & short term promisory note (90 Regraded Unclassified 25 -2- days to 6 months). These notes were frequently unsecured, but it was not up- usual in the case of small incorporated industrial concerns for securities of toe firm to be hypothecated as collateral. Frequently the notes also sere 86- cured by the personal endorsement of local individuals of wealth who were per- sonally interested in the borrowing enterprise. Although the term of toese notes WAS short - 90 days to 6 months - it was the expectation of both bor yower and leader that they would be renewed on maturity. Tuese arrangements left much to be desired from the point of view of sound credit procedures, but, during periods characterized by relative sconomic secur- ity, they did have the effect of providing an efficient and flexible mechanism for intermediate or medium term credit adVances to borrowers of moderate means, The local unit bank was thoroughly integrated in the life of its community both as to management and ownership, and the operations of potential borrowers for intermediate term credit were intimately known to the directorate, which in fact W&S frequently directly interested in the ventures being financed. Assum- ing honest management, the local unit bank, therefore, was uniquel, situated to pass judgment on the legitimate aedium term credit needs of these types of borrowers. The glaring inadequacy of these prodecures secame equally apparant with the advent of the serious credit strains watch have accompanied recent depressions. Tue most publicized defect, of course, was the appearance, in a fairly large number of cases, of situations where the local bank W&B weakened by ONI-NA- tensions of credit to borrowers directly or indirectly affiliated with the management of the bank. Eliminating these situations, the almost complete at- sence of liquidity in medium term credits of this type proved to be highly Regraded Unclassified 126 embarrassing elements in bank portfolios during periods of drain. After banks subject to drains through the clearings had exhausted their liquid open mar- ket sspets, they found their medium term local loans completely unsuited either for hypothecation or realisation. From the point of view of hypothecation they found that potential outside lenders, unfamiliar with local conditions, were usually unable to form any considered judgment on the worth of local loans to local concerns, the value of which depended neither on the ability of the concern to finance payrolls and purchase materials to meet orders on hand, nor on the orderly liquidation of stocks of merchandise, but rather on such intangible fac- tore as potential opportunities for expansion, management, and the ability of that management to adjust to changing future conditions. When hypothecated, therefore, even the better of these loans were marked down at extremely heavy discounts. It was equally found that realisation on these loans, in times of crisis, was difficult if not impossible. Their value, irrespective of whether they were secured or unsecured, rested essentially upon the operations of the borrowers as going concerns. In case attempt was made to take possession and to realise on the security, they were found to have little immediate value. In the cases of farm mortgages this was due to the general agricultural depression; in toe case of mortgages upon small industrial properties, because of the special purpose value of the physical assets underlying the mortgage; and in the case of pledged securities, because these securities, representing stock in small local concerns, were essentially unmarketable. The attempt to realize on small industrial medium term loans, moreover, had other repercussions which, though less publicised, exerted strong ten- dencies toward accentuating the depression. Although essentially medium term loans, contracted to finance medium term operations, they were written, as notei above, in the form of short term loans with the expectation on the part Regraded Unclassified 127 of both borrower and lender that they would be renewed at maturity. During perious of stability this practice appears to have operated in the direction of conservative finance, in that the lending bank, though expected to renew the loan, WED not legally obligated to do so and was in a. position in consequence to axert continued pressure on the borrower in the interest of conservative f1- náncial operations. During the crisis, on the other hand, this practice proved definitely deleterious. Banks in straitened circumstances and particularly closed banks in the hands of receivers, were reluctant to renew these loans and brought heavy pressure to bear looking toward their repayment as they fell legally due. The result was that small entrepeneurial borrowers found themselves pressed for repayment of commitments long before the industrial operations, which had originally constituted the occasion for borrowing, were natured. They were forced, in consequence, to make heavy sacrifices at à most inopportune time, A pousomenon which has had persistent after effects in as dempening of the spirit of enterprise and an accentuation of the tendency toward the maintenance of an exceptionally high degree of liquidity among industrial firms. These phenomena constitute the background for the problem of medium term credit facilities for agricultural and small entrepreneurial borrowers as it appears in the United States today. The problem, itself, first became acute In the case of agricultural borrowers during the agricultural crisis of 1920- 1923. At that time the sudden collapse of prices for farm products, coming at a time when farmers 88 a group auro heavily overextended, resulted in a wave of failures among small unit banks in predominantly agricultural com- munities. Lax standards in extending credits and overchartering of banks, free quently on insufficient capital, constituted is Mjor factors in this collapse, 128 -5- but 0.8 the debris was cleared away three things became apparent, one, that agri- cultural producers could thake relatively little use of genuine short term loans, - their production cycle was longer than industry and required correspondingly longer loan commitments; two, that much of the short term paper in banks spec- 1011zing in loans to agricultural producers was in reality intermediate credit paper in that it was expected as a matter of course by both borrower and lender that the loan would be renewed on anturity; and three, that failures were ex- ceptionally hign among those banks which specialized in these loans. Recogni- tion of this situation led to the first organ_zed attempt in tale country to met directly the legitimate needs of agricultural borrowers for intermediate credit in e form which would not collapse during & crisis and leave both the local unit bank and the borrowing farmer in an impossibly weakened position. In the plan adopted at that time, the banking laws were amended to permit banks openly to make, and the Federal reserve banks to rediscount, agricultural paper of longer than 90 days maturity. Provision was also made by the Federal govern- ment for the organization of intermediate credit banks to serve agricultural borrowers, such banks to have access to the open market for the sale of debentures to obtain funds with which to finance their operations. These measures were enacted into law in 1923. Admirable as W&G the iagnosia of the problem facing both farmers and unit banks located in agricultural communities at that time, the intermediate credit banks provided for found little opportunity to function Guring the in- mediately ensuing years. This was due largely to simultaneous developments in the form mortgage field which had the effect, temporarily, of diverting the most pressing needs for intermediate agricultural loans into the mortgage market. Regraded Unclassifie 29 -6- Prior to the crisis of 1920-23, the Federal government had mude provision for # more adequato system of long term agricultural mortgage credit through the organization of the Federal land banks and joint stock land banks, out due to certain impediments, largely legal in character, these institutions had not been in & position to function effectively until after the post-war crisis had made its appearance. At that time, however, they entered into operation and made available non-local funds for long-term agricultural mortgage loans at interest rates end on terms more favorable than ned previously prevailed. At the same time, the larger insurance companies in dearch of outlet. for an ex- panded volume of investment funds adopted the policy of increasing their farm mortgage loans. Under the impetus of toese forces farmers mage littie use of the new system of intermediate credit banks. They preferred, on the whole, to consolidate their debts into long term mortgages contracted with non-local lenders. AS a result they were able to pay off their local banke out of non- local funds without recourse to the new intermediate credit facilities. Specific requirements for agriculture_ medium term credit played & smaller part in the more recent crisis of 1930-34. That crisis was so severe and reduced the net Income of 50 many farmers to negative figures that all forms of agricul- tural credit provided by private lenders collapsed under the strain. The situa- tion was so serious that it required direct intervention on the part of the Federal government armed with direct access to the Federal credit to restore an orderly functioning to the market. As early as 1930, fuilures were winespread among banks located in agricultural regions and credit curtailment in force in many banks which remained open. By 1931, all types of institutions dealing with farm mortgages were having difficulty and newmortgage money WAS difficult to obtain. Under these circumstances, the Federal government through the Farm Board, the Regraded Unclassified 13 -7- Farm Loan Board, and the Reconstruction Finance Corporation at first organized a variety of emergency institutions to alleviate different types of agricultural credit stringency, and later, in 1933, organized the Farm Credit Administration to make & fundamental attack upon the whole problem of agricultural credit. This organization backed by direct access to Federal funds took direction over all of the different federally sponsored institutions dealing with agricultural credit and reorganized them into A coordinated system of agricultural lending institutions capable of meeting all types of needs for agricultural loans. Since 1933, therefore, the problem of medium term loans in the United States has narrowed down largely to loans for small industrial entrepreneurs. Coincident with the financial and industrial crisis of 1930-34, local banks, GB noted above, found themselves embarrassed by their possession of such loans and small industrial borrowers on their part found renewals of loans of this charac- ter more difficult to negotiate and new loans much more difficult to obtain. Since the crisis of 1933, this situation has been alleviated somewhat by à return on the part of many individual banks to their traditional lending practices with respect to credit demands originating in the medium term loan neeas of small in- dustrial borrowers. By and large, however, a void has been created in our 11- nancial facilities which has not as yet been successfully filled. It has been created, first, because the more conservative local banking institutions, 1.0., those which were most liquid during the crisis and were least involved in loans of medium term character, have on the whole shown by far the greater tendency to survive, and second, because bankers in general are loathe to recommit then selves heavily in types of loans which brought them the greatest difficulties during the crisis. A further factor of considerable magnituje has also operated Regraded Unclassified 231 -8- during recent years, namely, a breakdown in the whole network of local financial relationship upon which the successful advance of medium term funds to local entre- preseurial borrowers was formerly based. The small local entrepreneurial borrower is not likely to be in a position to meet readily objective standards for medium term lending. If be is to represent a good credit risk over a medium term period, it 1s preferable that he should be expanding. If he 18 expanding, however, he is probably short of capital, his equity in the enterprises 18 somewhat extended, and his tangible assets are more likely than not to consist of special-purpose plant and equipment that would be of negligible value on an auction basis. The real basis of medium term credit in such cases rests on the personal financial strength of the backers of the enterprise as well as on the lender's judgment of its potential possibilities and the quality of its management. Prior to the crisis, when the bank was owned and operated by the most substantial citizens of the community, it was more than likely that the bank would have amono its OWN stockholders the responsible backers of those local industrial enterprises that were most in need of medium term credit for expansion. To a certain ex- tent, therefore, the ultimate cushion of risk both for the bank and the local industrial enterprises went back to the same group of leading local interests, During the crisis this cushion of risk became seriously impaired for bank stockholders and directors in general were compelled by circumstances to draw ve.y heavily on their private resources, first, to make good assessmente on their bank stock in desperate efforts to maintain the solvency of their banks, and later to make good on the double liability which at that time W&B attached to holders of bank stocks. After the crisis, therefore, the losses which these local intereste had sustained as stockholders and responsible directors in the Regraded Unclassifil 22 -9- various local bank- were frequently sufficiently large to impair the value of their endorsement on the notes of the local enterprises in which they were 1n- torested. In other words, the community of interest and of financial responsi- bility that nud previously given great strength to the local unitury banking system that prevalled in this country WGL- completely wrecked in many communities by the banking crisis itself. As a result, the banking crisis in and of itself, seriously impaired the financial standing o" those groups in ench local community upon whose credit the ourness of local medium term industrial advence. last formerly been based, and local enterprises that and once represented fuvorable redium term redit risks were no longer in D position to for such - vandes. Several attempts have been maco to narrow the void in previously existing credit facilities thus created. Large n tional monufacturing concerns, such AD the automobile companies, have in 600H CABOE organized themselves to make oveil- sble medium term credit facilities to their local realers. The installment 1- names companies niso, in some Cases, NAVE entered the business of financing purchase of Industrial equipment on en installment besis. The most amoitious attempte to fill the void, however, have usen dade by the Federal government. As early as 1932, the appearance of credit stri in vorious localities at a time when the national money not et who juite liquid led the Federal reserve bunks to seek and to obtain permission to make commercial loans directly to 1n- dustrial and commercial borrowers. They were able to conclude only - Small volume of these loans, however, since very Cow of the applicants were able to meet the high standards for commercial or industrial advances that had been written into the law. By 1934, it was becoming generally recognized two such credit Regraded Unclassified 133 -10- stringency as existed was not due to the unavailability of credit for needs that met acknowledged credit standards, but rather to the unwillinguess of banks to continue to make borderline loans. In that year, consequently, the law was amended to permit both the Federal reserve banks and the Reconstruction F1- nance Corporation to make industrial loans on quite liberal terms as to maturity, interest charges and collateral, provided that they conformed to the test 08 possessing full and adequate security. Both institutions received a relatively large number of applications as a result of these amendments to the law, but again found only a relatively small number that could meet the standards ed- tablished. Recently the Reconstruction Finance Corporation has been able to make a somewhat larger volume of advances of this kind by adopting the defini- tion that such advances need have only ressonable security. Meanwhile, several attempte have been made to encourage the commercial baside to relax the more rigid credit procedure which they had adopted as A result of tue crisis. In 1935, the banking laws were amended to permit the Federal reserve banks to rediscount, under certain conditions, all types of paper presented by their members provided this paper met the test of soundness. More recently examination procedures have been revised to distinguish more sharply between "slow" assets and "doubtful" assets in the portfolios of banks. AB a result & bank can now make a medium torm credit loan as such and still meet examination requirements and also be in - position to rediscount this paper with its Federal reserve bank, provided always that the paper qualifies with respect to assurances for its ultimate repayment. 1/ In 1935 and 1936 the Federal Housing Administration in its efforts to re- store activity to the construction trades, undertook to insure lenders against losses on installment loans contracted for the purpose of modern- 18ing real properties. Certai categories of these loans, i.e., those made VALIADIO to combercial and indu trial concerns for the modernisation of their real property, met needs that might ordinarily have been classed as medium term credit demands. Regraded Unclassi 134 -11- Although it 18 too early to atote what the ultimate effects of these noo- sures any be, it 10 my personal judgment that they have approached, but have not yet reached, the core of the financial problem posed by demands for medium term credits. I do believe, on the other hand, that we are now in a pesition to define much more definitely what we mean by the problem of medium term credite and to state some, at least, of the requirements which a solution of that pro- b1-m must neet. Tue main lessons which we have learned from our experience can be itemized 82 follows: A. The term "medium term credit" is much too 75,00. It must be broken down by categories of borrower and by types of financial aid required. From the point of view of categories of borrowers, there is likely to be no problem of medium term credit as such with respect to large borroners. If JUCA borrow- are have access to open capital markets where they can seil their securities and to large banking institutions for financing their ordinary credit needs, these 50 roes of funds taken togeth I' nabitually afford sufficiently flexible finan- vial facilities to most all needs for medium term credit as such. If large potential borrowers do not have Access to open capital markets or to large banking institutions, they are faced with & general problem of lack of finan- cial facilities, of which the need for specific medium term credit Facilities would constitute only a minor part. It 1s likewise confusing to deal with agricultural neede for medium term credit separately from general agricultural credit requirements. The basic conditions under which agriculture functions vary so tesically from those characteristic of comperce and industry, toat they require & completely separate approach with respect to sound and adequate financial facilities. For example, Regraded Unclassifie 135 -12- institutions specializing in industrial lending, either on short term, medium term, or long term, do not gain from that experience wisdom in the granting or witholding of their respective types of credit to agricultural producers. In- stitutions specializing in agricultural credit 48 such, on the other hand, are much better situated to deal with all types of credit needed by agricultural producers. Finally, the phrase "medium term credit" as customarily used does not refer to Los medium term credit needs of individuals or consumers, though these needs are widely existent, e.g., installment credit needs, and needs for credit to re- pair and modernize homes. The real area covered by the general phrase medium term credit, when tala phrase 1s used to define B. current problem, usually nar- rowe down to the provision of facilities for medium term financing to small and local industrial and commercial entrepreneurs. B. These needs have long existed and have DAD access to funds in the past. They have not, however, been recognized openly nor have they had access to sources of funds organized for the purpose of meeting the specific and peculiar require- ments of medium term financing. Instead, these loans have been concealed in the form of mortgage loans or in the form of short term industrial and commercial loans. Such practices are definitely deleterious from the point of view of economic stability, deleterious both to the lender and the borrower: to the lender because loans of this character do not conform to :he standards of, nor afford the security expected in, mortgage loans or short term commercial and industrial loans; to the borrower because at times of economic pressure, when in any case the hazards of successful management are high, there may be added to these hasards pressure to repay outstanding financial debte at a time and in Regraded Unclassified 136 -13- & period that bears no relation to the original purpose of the commitment. If AD advance of medium term credit to & small industrial borrower 15 justified, it is justified by the fact that he proposes to use the funds productively in an operation which will require & medium torm period - 2 years, 5 years, possibly 8 years - to justify its extension, i.e., to liquify the original loan with interest and with profit. There 1s ordinarily no time within that period when the loan C&: be called without embarrassment to the borrower nor without under- mining the original operation upon which the advance of the funds was justified. It is a matter of prime importance, therefore, that when credits for medium term purposes are advanced, they should openly take the form of medium term credits with terms for amortization or repayment conforming to the expected liquidation of the operation which the funds were originally advanced to finance. By this means the portfolio of the lending institution is made to reflect the genuine character of the assets upon which its solvency 1e bused, and the economic system as a whole is protected against wholly unnecessary accentuation of the strains that are inherent in the cyclical fluctuations of business move- ments. C. There is a genuine economic and social justification for creating facilities to make medium term funds available to small entrepreneurial appli- cants. Current opinion is undertain and in & state of flux with respect to many of the problems of large 68 compared with small industry. It is weighing the advantages of mass production against the growth of practices that appear monopolistic; the advantages of highly specialised, centralized controls as compared with the flexibility of decentralised operations; the effects on our population of the crowth of large, highly congested urban areas. It 18 signifi- cant that in the heat of this debate there is no important body of opinion that Regraded Unclassified 137 -14- advocates the dissolution of small industries. It is generally recognized, ratest, that the continued existence of a fair proportion of small industrial organizations is necessary to the economic health of a free economy. There are, for example, distinct social advantages in maintaining open the spirit of individualism and enterprise that are characteristically associated with small antrepreneurial concerns; there are also many localities and areas in the modern economic world tha can only be organized efficiently by the small entrepreneur, 1.e., areas of resources and demand that require for their successful organiza- tion the detailed and intimate knowledge of local conditions which only the small entrepreneur can furnish. We cannot forget, finally, that the industry which 16 outstanding above all others in the world today in the officiency with which it has adapted productive resources to human needs, too automobile indus- try, was developed entirely by small entrepreneurs. It la important, therefore, from the point of view of public policy, to make sure that the evolution of our financial mechanism in the direction of more specialized procedures and more soundly organized mechanisms does not also have as an unforeseen by-product t.a result of withdrawing from the small entrepreneur a source of financial accomodation which is necessary to his survival. D. The establishment of credit procedures calculated to minimize risk in medium term loans to small entrepreneurs 19 attended by unusual difficulties. In fact, the specific relevant considerations attending each loan application are 30 various and differ DO widely from one applicant to another as to make any rostinized procedure basardous and essentially inapplicable. For example, these loans are not comparable to commercial loans to finance receivables or goods in transit, or tocks of merchandise awaiting sale, nor to industrial loans to f1- nance payrolls and purchases of raw materials needed to make up goods to meet Regraded Unclassified 138 -15- orders already on hand. They do not, in general, therefore, fall into categories where their validity can be justified by quick reference to easily ascertainable facts and their repayment more or less guaranteed by insistence upon definite documentary assignments, On the contrary, in the majority of cases, these ap- plications are for loans that are essentially loans of capital. Very often in fact it would be improper to grant these applications in the form of loans at all, in as much es the need of the enterprise 1s rather for equity capital, or at the least for an increase in its equity capital coincident with and supple- sentary to the borrowing of medium term funds. This means that the institutions advancing medium term funda must be in & position to make & balanced judgment concerning all of the imponderable factors that in the end will determine the profitability to the borrower of the proposed advance. In other words, the in- stitution advancing medium term funds to small borrowers should actually be as careful and meticulous in its procedures 68 the investment banker who under- takes to underwrite an issue of securities for flotation in the capital markets, It should also be in a position to form a judgment on the same range of elements of risk. Unfortunately, however, the average size of medium term credit loans is simply too small to justify the expense of this type of meticulous investigation. At the same time these loans are too large, and the loss involved in any one default would be too great, to justify the lender in resorting to more routinized procedures such as are successfully used to minimize risk in the case of personal loans, installment loans, and mortgage loans on homes. It is for these reasons that in American experience the local unit bank has been in & better position to pase judgment on medium term advances to small industries than other petentially competing financial institutions. The local Regraded Unclassified 139 -16- unit bank simply did not have to make an extended investigation of a local ap- plicant for a medium term advance because it was already, as a matter of course, in intimate touch with his business. It is for this reason also that non-local lenders have been relatively unsuccessful in filling the void left in recent years by the partial withdrawal of the local bank from this field. Outside pri- vate lenders who have experimented with these loans report that the expenses of preliminary investigation and also of following up the loan after it has been made are frequently pronibitive, unless, as in the case of automobile companies that finance their local dealers, the outside lender is already in a position because of other contacts to be intimately in touch with the borrowing enter- prise. E. The fact that the real needs for medium term advances on the part of small entrepreneurial borrowers usually correspond more closely to needa for ad- vances of capital than advances of credit and frequently border on a need for equity capital, leads to four further major conclusions with respect to the type of financial organization which could most properly specialize in advancing funds to meet this need. First, it is an extremely difficult field for direct governmental advances. Experience has shown that governmental financial institutions can supplant pri- vate lending agencies with a considerable degree of success in the case of ad- vances which are adapted to routinized credit procedures. In these cases the government can protect itself and its operating personnel against corruption and undue pressure for advances by applicants possessing political influence through the adoption of centralized controls and the promulgation of definite credit standards which all applications must meet. In the case of advances of Regraded Unclassified 140 -17- a capital nature, however, 1.0., advances which frequently border on equity funds, the adoption of definite credit standards centrally established frequently hee the effect of eliminating automatically & great portion of those applications which constitute the main need for this type of advance. The experience of the Federal reserve banks and the instruction Finance Corporation with indus- trial loans in this country has amply demonstrated this point. Both institutions found that the great majority of the applications simply did not provide that type of security or the relative certainty of favorable outcome which & conscien- tious civil servant desires and needs if ne is to be in a position to justify the impersonal nature of hie decision to advance funds. The great majority of the applications, rather, were of a type which ideally needed consideration by a private lending institution that would be risking its own funds and its own capital on the outcome of the advances which it granted. Second, a financial institution specializing in advances of this character should not be confined to the loan of funds. Provision should nlso be frankly made for the advancing of equity capital, that 16, the purchase of common tock in the enterprise desiring additional financing. Such purchase might be made as an alternative to a loan, or 88 supplementary to it. In this way, the borrow- ing enterprise would be protected against over-extension of its equity and tue institution advancing medium term funds would be in e better position to aver- age its gains against its losses. Third, the lending institution edvancing medium term funds should have a capital ratio higher than customarily prevails among banking institutions in the United States. At present in tais country, commercial banks endeavor to main- tain a ratio of capital equal to at least 10 per cent of their deposit liabilities. Regraded Unclassified 141 -18- Ratios as low as these are safe when the assets of the lending institution are closely guarded against risk. A moderately high degree of risk, however, is almost inevitable in the case of institutions advancing medium term funds, if these institutions are really to erve the need that exists among small enter- prices. To make such lending sound, therefore, the lending institution should protect itself by maintaining a higher capital ratio, say, between 25 to 40 per cent. Finally, any mechanism created to meet the need for medium term advances to small enterprises should have access for part of its resources at least to non- local sources of funds. It should be able to obtain funde to finance its opera- tions by, for example, the sale of its debentures either to outside banks or in the capital markets. This is necessary for & variety of reasons, (a) to avoid the necessity of relying upon funds as unsuited to medium term advances as those represented by local deposit accounts, (b) to have access to cheaper sources of redium term funds than is customery in expanding communities that are rela- tively deficient in savings, and (c) to avoid & general freezing of credit in periods of industrial stagnation when & particular locality as a whole may be under severe pressure and subject to serious drains through the exchanges. Conclusion These five main heads summarize most of our experience with this problem to date. As I have indicated above, 1 do not believe that we have solved it as yet in the United States. Our traditional approach, through the use of the local unit bank, had the advantage that that bank was in a. prime position to judge quickly and without undue investigation the legitimacy of & given credit applica- tion. It could also follow the subsequent fortunes of the borrowing enterprise Regraded Unclassified 142 -19- without undue effort. Because of the fact that its own tockholders, with their double liability, were also likely to be personally interested in the fortunes of the borrowing concern, it conformed in an indirect and concealed fashion to san) of the equity requirements noted above, i.o., losses on these capital loans many of which bordered on equity commitments, were balanced in a senee by equity gains on successful loans, not gains openly and legally to the banks as such, but effective none the less because they accrued to the stockholders back of the bank. The weaknesses of this system, however, were equally apparent, (a) in the writing of medium term commitments in the form of short term notes, (b) in the exclusive reliance upon local funds to meet capital requirements in an expanding community, (c) in the tying up of deposit money in non-liquid medium term commitments, (d) in the low capital ratio characteristics of banks of de- posit, and (e) in the ever present possibility that unjustified advances would be made to enterprises in which the ownership of the bank W&S personally inter- ested. The attempts, on the other hand, to fill the void Left by the withdraw- al of the local unit bank From this field have been only partially effective (ecause public & encies have not been in & position to advance equity funds di- rectly nor to make capital loans which border on equity advances, and because most non-local private agencies have found that the costs involved in the inves- tigation and control of these advences is too great, A real solution of the problem therefore, requires 8. type of financial mechanism different from any that has yet operated in this field in this country. Among our existing financial institutions the large installment finance compan- les approach more generally than any other to the type of organization that Regraded Unclassified 143 -20- aight be expected to specialize successfully in this field in that they are capitalized at a much higher ratio than banks, their financial standing in high, and in deriving their investment funds they are able to supplement their own capital by the ale of debentures carrying very low rates to a wide variety of banks and also in the open market. Of All financial organizations C srating on a national scale in the country, furtuermole, the large instaliment finance companies come nearer than any other to hav 4 that kind of intimate local con- tact and intinate knowledge of local conditions that 18 & prime prerequisite of success in the field of small medium term credits. These same companies, however, have achieved their present high credit standing and success in large part be- cause the installment finance business lends itself to highly routinized procedures and standards ander which & central office management is in a position to keep Highly decentralized Lending outlets under effective centralized control. They have not, therefore, met management tests as .ifferent LS those which would be posed were organized financial institutions to undertake to specialize in medium term credit loans. The group banking systems which flourished in this country in the decade prior to 1929 may also carry & clue to the answer to this problem. In time sys- ten which, from the point of organization, fell halfway between E unit banking system And & branch banking system, there was combined through is variety of de- vices a certain degree of local responsibility and local management on the part of the local component banks with centralized ownership and the possibility of centralized access to outside funds. As commercial banking systems, these or- genizations had a bad record during the crisis and have properly been subjected to heavy criticism. It may be, however, that their experience G&B more positive contributions to make toward the problem of organising a financial mechanism reall INAL pable of meeting the needa that exist for medium term advances. Regraded Unclassified 144 January 12, 1939. Dear Mr. Riefler: On behalf of the Secretary I am as- knowledging your letter of January 98h. Mr. Morgenthau is away from Washington on a brief vacation, but we expect him back in the office the first part of next week, and I as sure he will be most interested in reading your letter and the material you enclosed. Sincerely yours, H. S. Klets, Private Secretary. Mr. Winfield V. Riefler, The Institute for Advanced Study, School of Moonomics and Politics, Princetom, New Jersey. : GEF/dbs Regraded Unclassified 245 April 10, 1939 9:01 a.m. HMJr: Hello. Ronald Ransom: Good morning, Mr. Secretary. HMJr: How are you? R: Fine. Glad you're back in town. HMJr: Well, I'm back; I'm not glad. R: Well, I don't blame you. You 800 -- you 808 I didn't go to Europe. HMJr: No. I called up Chairman Eccles at his home and he didn't answer. R: He's out of town. HMJr: Are you acting? R: Yes. HMJr: Well, I just want to ask him three questions, and if you're acting I'd like to ask them of you, if I may. R: Certainly, sir. HMJr: In this morning's paper for the first time I see this communication from the Board R: Yes. HMJr: to the two committees. R: Yes, HMJr: One to the Senate and one to the House. R: Yes, HMJr: And inasmuch as I have a press conference this after- noon, I wanted to ask whether during my absence the Board informed anybody in the Treasury that this was going to be done. R: Well, not to my own knowledge. Regraded Unclassified 146 - 2 - HMJr: I see. Well, I didn't know anything about it. I thought that the Board might have extended that courtesy to us. And might I ask another question -- did this -- did this statement that went up on the Hill -- did this -- I mean, clear through the White House? R: Now that I don't know. I would guess that it did not. If it did, it cleared through Mr. Eccles, and I would be quite definitely sure that it did not do that. HMJr: And the third thing that I was going to tell Eccles WBB that the President has a Fiscal and Monetary Committee. R: Yes. HMJr: And inasmuch ae most of this le devote -- devoted to fiscal and monetary matters, I don't understand why he didn't take it up at 8. meeting of the Fiscal and Monetary Committee. R: Well now, that I can't anewer because of course you know I've never attended any of those meetings, nor do I know exactly what the scope of their authority may be. HMJr: But, frankly, I just can't understand how the Board could send a communication like that without at least doing the Treasury the courtesy of telling them it W86 going up. I feel very badly about it. I mean, that 18, not about the statement, but the discourtesy. R: Well, I regret that, of course, as you know, very much indeed. But may I an explanation of it; that it 1e a combination -- a repetition of two things which the Board has already said. In its annual re- port, as you know, it surveyed the whole field of banking legislation and of banking problems as the Board saw them at the present time. In the second place, in answer to one of the innumerable bills about which we are constantly receiving inquiry, we sent out a statement on price stabilization which I don't know whether you saw or not; I don't recall whether that was issued before you left town. HMJr: I read it in the paper. Regraded Unclassifie 347 3 R: Yes. Well now, those two things are, in effect, combined in this statement, the principle purpose of which 1a to say that we do not think that we can very intelligently continue to answer these innumer- able requests for reports on bills, a very sweeping effect, unless we are enabled to answer them some- what as & whole, and that while we very definitely believe that our statement on price stabilization is sound and 18 correct, that, at the same time, while it has received considerable favorable press comment, just between you and me, it bas received some quite unfavorable comment in other quarters. And what we are attempting to say in this latest statement 18 that our own views are Just as much subject to review in our opinion as the views of anyone else on these ques- tions, but we don't want them reviewed piecemeal. Now, I will tell you this, If I may, that the thing which precipitated this 18 the Brown Bill, about which you may or may not know. I don't know whether you do. HMJr: I -- I'm familiar with 1t. R: The Brown Bill apparently has, what I would say, was very substantial and influential backing in the Senate. It doesn't appear to us, any of us, at the moment to be anything like B. fair solution of the problem. Speaking for myself, as I've said to you repeatedly, I don't want to come to final conclusions unless forced to do 80, until the whole matter has been very ob- jectedly and Judiciously discussed. I don't think the Brown Bill does anything more than to destroy the Comptroller's office, and I have a feeling that the long record of that office 18 something which should not be lightly disposed of by 8 bill, the final and point of which seeme to me to not only destroy the continuity of that office, but to begin working on the Federal Reserve System like Mr. Hitler worked on Czechoslovakia. If you take Sudetenland, it won't be long before you take the rest of it. Now, faced with the - - not the Brown Bill in of itself, because bills being introduced don't necessarily disturb anybody's peace of mind, but -- but what appears to be the feeling in Congress that it's time to act pretty quickly on this. We were told a week ago that hearings would be had within two weeks and it was expected that the Senate would act on the Brown Bill at this session. We thought it well to again remind Congress that that isn't the way we think these things should be approached. Regraded Unclassified 4 HMJr: Well you 600, I may be all wrong, but the President, besides the Fiscal and Monetary Committee, he has & committee on banking BE Yes. HMJr: And we are working like hell on it, and last year we didn't succeed in revising the examination report. R: Yes, HMJr: And made a very, I think, a constructive R: Good job. HMJr: good job in spite of Mr. Eccles. But we did do it all inside. R: Yes, HVJr: And today the thing 16 working along and it -- it's helpful, Now, you people make these moves R: May be what? HMJr: You make theee different moves R: Yes. HMJr: I'm treated B.S though I WAB Secretary of the Treasury of -- of another country -- I -- I don't think that the Board can point to any important move that I've made where you are vitally interested that you are not informed. R: I could not myself. HMJr: I consulted the Chairman on all --several times on the Social Security thing. He wrote me a letter congratulating me on it. Rt Yes. HMJr: Any move that I make, I make here with the cards up. I -- I don't think I've made any without letting you people know. We certainly haven't made any on the Brown Bill, and I've got nothing to do with it, and nobody in the Treasury has got anything to do with it I think you know that. Regraded Unclassified 149 - 5 R: Oh, certainly. HMJr: Now R: I don't think it would be any more your choice than it would be mine. HMJr: Now, in this morning'e Wall Street Journal, which may be just another story: It says -- I Just read it -- it says that Senator Wagner was talked to last night and he knows all about this and 1s going to introduce 6. resolution along these lines. R: That I -- that I don't know. The only thing I know about Senator Wagner 18 that some two months or more ago HMJr: Well let me Just R: Surely. HMJr: Read one paragraph which has nothing to do with bank examinations, which is strictly a Federal Reserve, Treasury question. R: Yes, sir. HMJr: The answer 1s "That powers over the supply of currency and banks reserves are divided be- tween the U.S. Treasury and the Federal Reserve. 'While it appears to have been the intent of Congress that the Federal Reserve System have the responsibility for regulating the supply and cost of money, including currency and bank deposits, the powers over this supply -- the powers over this supply possessed by the Trea- sury now outweigh those of the System.' Now that's got nothing to do, and -- it's just -- it 4a well, I just like to feel that I'm here working for Mr. Roosevelt and I'm a member of the team; and this Just makes me feel as though I was & rank outsider. And after all, this 18 a Board matter and I take it that you people have individual opinions, and I'm sorry that you treat me like an outsider, that's all. R: Well, I'm terribly sorry that that 18 your deduction from that. HMJr: Well, that's the way I feel. 150 - B - R: And it may be a perfectly ressonable deduction. HMJr: And you think -- no reference le made to what this committee did last year on getting these bank reports more uniform, and it looks as though -- I may be wrong-- ae though this wae all a prearrangement with Senator Wagner. R: But that - that's wrong, Mr. Secretary. HMJT: I don't know. You read the Wall Street Journal then. R: Well -- well HMJr: And, as I say, I have to get my information -- like the time you people increased the reserves, I had to road it in the newspapers the first time. R: Well, 8.6 far as any confidence with Senator Wagner -- I have had none whatever, and many months ago he had lunch with us and MMJr; Well, R8 far as I'm concerned R: In B. most general way. HMJr: no matter how shabbily you people treat me, I'm not going to wash the Administration with a Republican and -- but I called up Mr. Ecolee first to tell him and -- you're not -- he's not there, I'm telling you. R: Well now, I'm not going to HMJr: I mean, there's plenty of things that I could say. It isn't the Federal -- it isn't the duty, or necessity, or obligation, 88 Secretary of the Treasury, to bring it to the Federal Reserve's attention that they ought to remove the President of the Federal Reserve of San Francisco and things like that, and there are all kinds of things that I could say. And R; You mean the Chairman, not the President. HMJr: The Chairman of the Federal Reserve at San Francisco, Why the hell did the Secretary of the Treasury have to do that? And when all the information 16 available to the Board Regraded Unclassified 251 - ? - H: That information that you gave us on that particular gentleman was not available to us until you gave It to us, HMJr: You didn't know that he R: No. HMJr: ..... owed eight or ten or twelve million dollare? R: Oh, we knew what he owed but we were assured that it was amply secured. That he was a stockholder was infor- mation which was wholly new, HMJr: Well, you had the same bank reports that I -- bank examinations that I did. R: Well, we didn't get - that information -- in some way that didn't reach ua. Perhaps it should have but it didn't, and when it did, I think you'll agree with me, that you got pretty quick action on that. HMJr: That -- well, anyway, I'm going to -- at my press conference, all I'm going to say, unless I change my mind, and if I do I'll let you know, that -- I'm simply going to say that the Federal Reserve Board -- that the first I knew about it was when I read about it in the newspapers. They didn't do me the courtesy of showing it to me in advance; and that's all. It's too bad, Ronald, I've tried my best, and after all, Eccles has won, Now, if Eccles doesn't like me and doesn't want to cooperate, you fellows over there ought to -- I -- I've never thought that that went Yor the whole Board. R: Well, it doesn't -- I don't think it goes for him, Mr. Secretary, frankly. HMJr: I mean, I never thought it went for you R: It doesn't -- it doesn't go for any member of the Board, HMJr: And -- but I don't Bee why the Board, as individuals, can't assert their own individual authority and why they' ve got to do things like this to me. R: Well, I HMJr: There are 80 many important things at home and abroad that need help, and this just -- all this does 1s Just 252 - 8 - completely upset me, and it doesn't put anybody to work; it doesn't help recovery one bit. R: No, nor do I think the Brown B111 does either. HMJr: No. R: Now -- now we are confronted with B. HMJr: No, if, for instance, supposing we together didn't like the Brown B111. R: Yeah. HMJr: Supposing Mr. Jesse Jones didn't like the Brown Bill, R: Yeah. HMJr: or anybody else. R; Yeah. HMJr: And we went to the President and say, "We think the Brown Bill is wrong." I think we could kill it. But we can't do it by cutting each others' throats. R: Well, I don't think that statement 18 designed for any remote sense to HMJr: Well, I wish you'd repeat this conversation to the Board members for me. R: Oh, surely. HMJr: And I want you to tell them just how I feel. R: I certainly wouldn't attempt to answer you in specifics until I reported it to them, because that is Board action and no individual HMJr: Yeah. R: Man's action. HMJr: Yeah. R: And I will certainly do that this morning, and if you would like me to after doing that I'll call you back, Regraded Unclassified 153 - 9 - HMJr: I'd appreciate it. R: 0. K. HMJr: Thank you. Regraded Unclassified 154 April 10, 1939 10:40 a.m. HMJr: This is Henry Morgenthau. Preston Delano: I'm glad you're back, Bir, HMJr: Thank you. D: Did you have a pleasant trip? HMJr: Yes. D: The particular reason I'm bothering you is that in regard to this letter that was drafted to be signed by Mr. Giannini and presented to us here HMJr: Yes. D: in relation to -- you remember that April 8th letter. HMJr: Yes. ( D: I want to explain that I -- I've tried to clear it with Eccles and with Leo Crowley. HMJr: Yes. D; But they are both out of town. HMJr: Yes. D: And have been since that date. and I have dates with both of them in the morning. HMJr: Yes. D: when they return. HMJr: Yee. D: And I thought I'd tell you that BO that you would understand why I haven't done it up to the present time. HMJr: I 800. D: And the other thing, the letter of criticism -- you asked for 8. copy of our latest letter of criticism to banks. Regraded Unclassified 155 - 2 - HMJr: Yes. D: We are laboring with that, and I think we'll have it out by tonight. HMJr: Good. D: It 1sn't just a question of copying the letter that we've written; we haven't got the letter out yet. HMJr: I see, D: We've been sort of laboring in the vineyard with it because we want it to be very cerefully drawn. HMJr: Fine. Well, then when you're ready tomorrow why don't you give me a ring and I'll go over/with it you personally. D: All right, eir. I'll have that letter and -- and Just 88 soon as I clear with Eccles and Leo on this other matter, why I'll -- I'll call you. HMJr: What did you think of the Federal Reserve Board's statement that they sent up on the Hill this morning? D: I didn't see it, Mr. Secretary. HMJr: Well, I didn't either until I read it in the Times -- in the Times. D: oh, I -- I must get that. I...... HMJr: Yeah, D; They -- they sent it up this morning? HMJr: A statement, yes -- on -- covering fiscal and monetary and bank examination. D: Oh, 18 that BO? Well, that whole question 18 very much up now at the moment, and when Mr. Hanes comes back I'd very much like to have a little conference with you on that. HMJr: Yeah. I'd like to have -- I'd like to know where you stand yourself, and how you feel about it. D: Yes. Well, I -- I'm -- I'll be glad to discuss it any time, Mr. Secretary, that you want. Regraded Unclassified 156 - 3 - HMJr: Fine. Well, when Mr. Hanes gets back let's talk about it. D: I thought it would be -- that would be preferable. HMJr: That's right. O. K. D: Good bye. HMJr: Thank you. D: Good bye. Regraded Unclassified BK177 157 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 10, 1939 TO Secretary Morgenthau FROM Mr. White Subject: Proposed Steps that can be Taken by the Administration in the Present Acute Inter- national Situation r. Without additional legislation 1. Imposition of countervailing duties Against numerous invorts from Italy. There already exists enough evidence of (H) bounty on Italian imports to justify an immediate announce- ment of countervailing duties. 2, Requirement that goods from Manchuria and the 00- Aggied areas of China be marked "Chinese areas under Japanese military occupation" or some shorter variant. (This is per- mitted under Section 2 of the Customs Administrative Act of 1938.) The feasibility of the step has not been discussed. 3. The application of Section 338 against imports from Janan. (Revival of Mr. Oliphant's memorandum of October 12, 1936.) 42 Application of Section 338 against all imports from Oprany. (T is 18 a more drastic step. The factual basis for such action exists.) 5. Preparation of steps to be taken against imports from Albania, (Not important quantitatively, but important 18 gesture, We are second to Italy in Albania's export agreet. Our total imports from Albania in 1938 were $150,000.) II. Measures which could be taken which require additional levisIstion. 1. Your suggestion of acquisition of strategic materials through international cooperation end for international pro- licition of export of those materials to aggressor nations. (The preliminary report on these proposals is ready.) Regraded Unclassified 158 Secretary Morgenthau - 2 2. Accumulation of stocks of vital raw materials, calling for an expenditure of several hundred million dollars which could be acquired without additional bor- rowing. (We have a memorandum on this proposal.) 3. Embargo on the export of scrap iron as 8. defence measure. 4. Program outlined in my memorandum to you of March 31, 1939. XN ogr sam 1 Regraded Unclassified 159 April 10, 1939 11:55 &. m. Present: Dr. White Mrs. Klots HM,Jr: This is ultra-confidential. I am going to ask the President whether I can bring down four people to the Treasury: Tom Smith, Basil Harris, Mr. Earle Bailie and Mr. E..R. Stettinius. The purpose is I have got a Job for each one of them in case there is a world war -- Mr. Smith, to look after banking for me; Harrie, to look after shipping and Customs; Earle Bailie, foreign exchange and the stock exchange, and Stettinius, the purchasing. My thought is each one will come down and have his desk and have his whole organization set up, BO if there should be a war the organization 18 there and all he has to do is dome down here. I am going to get the Presi- dent's O. K. BO I can begin to function. They would be able men in the Treasury and two are entirely familiar with the Treasury and Stettinius has worked in the Govern- ment. But each one come down and they will be here long enough to get the thing running 80 if, for instance you may not know it -- the Treasury takes over the running of the Panama Canal. We run the Panama Canal. Things like that are Just unbelievable. of course, we take care of foreign shipping and it's Just enormous. These men will discover fields that I have not. Dr. White: And one other man. As long 88 you are asking, you might aa well .... HM,Jr: I went over this last night with Gaston and McReynolds and they thought it covered the field, but you can't tell. Regraded Unclassified 180 -2- The pretty part of the idea 18 to have them come down and make what I call "a trial run" and get them- selves BO they would know what would flow to them and not just have it at the last minute. I know there 1s no such preparation anywhere. But I thought it was 8. pretty good idea. of course, I have not talked to these people, but the complexity of the thing, when you get In- to 1t, is enormous. Dr. White: Would Harris take Coast Guard? HM Jr: No, that goes ordinarily to the Navy. It's transferred. It's largely Customs and shipping and seizing of the boats and handling of the ports, and that whole busi- ness and that whole business, which 18 enormous. And each one of these people will eay 'I want this one to help me' and they will be building up people they know in their field to come down. Gives them time to turn around. Have you some reports for me? (To Mrs. Klotz) I want to apend enough money to buy the necessities of war to make it impossible for Germany to go to war. I thought with the spending of not too much money we could control supplies 80 they can't buy. (Dr. White handed the Secretary a memo entitled "Preliminary report on the possibilities of depriving the aggressor countries of needed strategic war materials. Copy 18 attached hereto.) Dr. White: The summary is on the first page. In short, I don't thinkyour first idea, by itself, will be sufficient. HM,Jr: Let's take oil. Dr. White: Each one 18 treated separately toward the end. The idea 18 very excellent If you can do both together, Regraded Unclassified 181 -3- but If you just attempt to buy up any one of these ma- terials or several of them -- take oil, for example. It's very doubtful if you could buy enough to accomplish your purpose. It would have to be accompanied by your second idea. The two together, I think, would be very effective. You would have to have Russia, United States and Great Britain, those three countries, to do the trick. HM,Jr: What countries: Dr. White: Great Britain, the United States and Russia. HM,Jr: And you need Holland. Dr. White: Holland, I am assuming, would follow. I am assuming Holland would follow Great Britain, Just as Venezuela would follow the United States, and 80 on. On the oil situation, the United States, Russia and Venesuela produce 75% of the oil, and then if you get HM,Jr: What page are you on? Dr. White: Page 6. Bottom of page 6. HM,Jr: (Reading) "The United States, Russia, Vene- zuela, together produce 75 percent of total oil output." For Heaven's sake! Dr. White: And then each one of the small countries could be taken care of. They produce an additional 10%. And that would leave too little for the other countries, although some of the other prospects are even better than 011. HM.Jr: You say other things are easier? Dr. White: To give you some idea: Germany needs 95% of your natural petroleum. She 18 supposed to pro- duoe about two-thirds of her requirements synthetically. 30 the War Department told me. From other evidence, I think that 18 somewhat exaggerated, but she needa a sub- stantial amount. She needs 75% copper, neede 50% lead, 25% sulphur, 100% cotton, 95% bauxite, 10% zinc, 100% Regraded Unclassified 162 rubber, 95% manganese, 100% nickel, 100% chromite, 95% tungsten, 75% wool, 70% phosphates, 100% tin, 100% antimony, 100% mercury, 100% mica. Those are now 1m- portant commodities and it's easy to control some of them. HM,Jr: You are on page 5? Dr. White: Yes. I was reading that list on page 5. HM,Jr: Where does chromite come from? Dr. White: Chromite? We did not go into ohromite yet. Tungsten, they are supposed to have a big supply. 60% war stock, according to the War Department. HM,Jr: In Germany? Dr. White: In Germany. HM,Jr: Nickel? Dr. White: Nickel, they haven't got, and very easy to prevent them from getting it. You see, the British Empire produces 95% The only other spot 1s New Cale- donia, where Japan has mines. HM,Jr: I think I Am right that my thought -- of course, they call these sanctions. Dr. White: Economic sanctions, equivalent to what they attempted with Italy. HM,Jr: And didn't! I got the whole record. Look up how many times the sub-committee of the League of Nations on 011 was going to meet and how many times England called it off. Twice they were to meet on oil sanctions. They could have done it, and each time England backed down and this thing -- if England means business now, this 18 the way to find out. Put it right in her doorstep and say, All right, if you mean business, let's go after it. We would have to make a deal with Mexico. Dr. White: 80 much the better. Clean that situa- tion up. Regraded Unclassified 183 -5- HM,Jr: But this thing could be done. How much do you say? Dr. White: $150,000,000 a month. That's Just for buying. HM,Jr: You don't need any money. You could do it with an agreement. I said if it would cost & billion dollars, it 1a cheap. If I am right that if -- right now I am not convinced that England and France mean business -- but if we went to them and started on oil (because I would only have to do business with about three people in the United States on oil, Standard 011, Texas Oil and I don't know who the other 1s; they control; they are in the Roumanian fields, wherever England 1s) and right from here, in two weeks, I could find out whether England meant busi- ness on oil and if the President says he wants to do some- thing other than Just words and it W&B known that England and the United States "in case of war you don't get the stuff; if you don't stop this monkey business you don't get it" -- then what? Dr. White: Well, I think you have got hold of some- thing good here. HM,Jr: Good? Come on! Raise it a little bit! Raise your ante! Dr. White: Well, we did. We did in the paper and then out it down and understated it bécause we did not want to be too enthusiastic. HM,Jr: Do you know anybody who has got a better idea to stop war? Dr. White: I don't know of anybody who has as good. HM,Jr: I didn't do & thing while I was down South: Dr. White: It's feasible. The only problem is & political one. HM.Jr: This 18 just 100% opposite from Barney Baruch. Dr. White: I think he's just crazy. HM,Jr: I don't think he's crazy. Regraded Unclassified 284 -6- Dr. White: What I mean, he's Just dead wrong, and dead wrong in such an important way -- it could not function. HM,Jr: Is this in shape to give the President, as 8. preliminary. Dr. White: I would prefer to have it re-written. HM,Jr: Well, let's Just see how much time he givee to me. Dr. White: If you say it is just a preliminary survey. HM.Jr: I don't know anybody that has anything else and I don't know whether England means business. Mrs. Klotz: Then you will acamplish at least one thing: you will know where they stand. Dr. White: We have gone over the field to know it is feasible; that the only problem is whether the Presi- dent wants to push it and whether England and Russia can be drawn in, but go far as sources of supply are concerned, so far as Germany, Japan and Italy's needs are concerned, 80 far as expense that would be involved, BO far as machin- ery that would have to be set in operation, it's feasible. Don't mean to say it's easy. It's difficult. But it's feasible. The rest is question of policy. The President does not for & moment in making hie decision have to know whether It's feasible. HM,Jr: Phil La Follette told me, in great confidence yesterday that Oumansky told him since Munich or whenever it was that Litvinof made the statement -- at Geneva it was -- they wanted to do something with England and that from that day to this they have not heard a thing. Phil La Follette was at the house yesterday. Dr. White: I think there are BO few people around, in important places, who appreciate what it means if Hitler has another victory or two. What it will mean to us, to America. HM,Jr: But the point I got is - I listened to Hull Regraded Unclassified 165 -7- and the President today. I could see evidently the President said something yesterday about trade that upset Hull. And when I call up and say I want to do something in the Argentine, Feis answers me, "I don't think you can bring pressure in now because on the meat situation it might be the last straw to break Mr. Hull's trade treaty," and I felt like saying "Thank God for that! Dr. White: They are bungling this Latin-American thing. They are not doing anything in the Latin-American situation. HM,Jr: I know that. Dr. White: Just got a cable about Chile about two days ago. Did you read it? HM,Jr: No. But the Argentine thing, the President has had that in his own hand for two years. Just a question of a little frozen meat. That's all. And I spoke to the President and he said, "I will take care of it" and I said -- I could not say, You have said that for two years -- 80 I said, Why don't you invite them up Itere? Harry, I just have not gone stale. And now 18 the time to do the thing, because we got this neutrality thing, but the trouble 18 nobody has a neutrality policy and here's a policy. Dr. White: Which would make the neutrality policy un- necessary. HM,Jr: Here's a policy. Dr. White: The biggest argument against it and one you will have to meet will be the one they will say it will precipitate war. HM,Jr: My attitude, as always, on all of this stuff, that we have taken the other angle for five years and we are out. Dr. White: I agree with you. And here's a brief memo -- I don't know whether you would be interested in that for the moment. (Memo entitled "Proposed steps that can be taken by the Administration in the Present Acute Regraded Unclassified 166 -8- International Situation, copy attached.) Various things that we could do. HM,Jr: Is this separate? Dr. White: Yes. That's countervailing duties and other things. Those are minor. HM,Jr: Harry, I will be seeing you, but .... Dr. White: I am awfully glad you are pushing this, but you are going to meet with a lot of opposition, but you are right. HM Jr: I won't fight the President on it because I can't fight him on it any more on this sort of thing be- cause this is & Presidential matter, but I will fight any- body else if he says this is O. K. Dr. White: He is on your side? HM,Jr: He's on my side and business conditions in this country are on my side. How do the Leon Hendersonites and the rest of those boys feel these days? Dr. White: They feel the New Deal 1s on the way out, pretty generally and pretty rapidly. General consensus. And that a strong foreign policy could snap them back. Regraded Unclassified 267 April 8, 1939 Secretary Morgenthau Mr. White Subject: Preliminary report on the possibilities of depriving the aggressor countries of needed strategic was materials. Susmary that are the possible neasures short of complete military blockade which could prevent the countries from obtaining necessary strategio materials? You have suggested two possibilities for preliminary examination: 1. Purchase and accumulation by leading non-aggressor nations of strategic materials. 2. rohibition by international agreement of exports of certain of these strategic materials to aggressor nations. The aggressor countries and their allies (Germany, Austria, Czechoslovakia, Italy, Albania, Japan, Spain, Hungary, Manchoukuo, parts of China) would, in the event of major conflict, need imports of roughly $100 million per month of the following strategic materials: Manganess Rubber Manila fiber Copper Petroleum Tungsten Tin Nickel Cotton (There are several other items important strategically but not important quantitatively. Some of them will be taken up later.) None of these commodities could be obtained in adequate amounts for the group as a whole except from countries out- side those enumerated above. relatively inexpensive. The real issue if whether it 1s yet ciple of the first proposal -- is effective, practicable, In our opinion the measure - if combined with the prin- and politically feasible. Regraded Unclassified 188 Secretary Morgenthau - 2 - 4/8/39 1. The first proposal is for the United States, either alone or together with Great Britain and France, and possibly some smaller countries, to accumulate large stocks of these materials and thereby reduce the world supply evailable to the aggressor nations. A survey of the consequence of such a stop leads us to the tertative conclusion that if taken alone its efficacy 11+p for more in its political implications than in its 800- nomic or military effects. It does not appear that this method will either prevent the aggressor countries from ob- teining adequate sterials to o nduet a var nor will 18 raise the cost of the materials to the aggressor countries enough to emborrass them seriously. The politicel importance of such & step 10 that the United States would be toking common messures with the demo- oracies of Restern Europe s,ainst agreession. Germany fears grostly the industrial and economic might of the United States actively placed on the vide of the Suropean democracies. The proposal taken by itself hav the following diead- vantages: (a) The aggressor countries would still be Able to obtain enough of the most important strategic materials to carry on 8 war. The increased demand for those commodities would before long 0/11 forth increased supplies and 05 the BADE time curtail naumption for industrial uses. The price of those a terials, would, it 10 true, increase substantially, yet not enough to reduce toeir foreign exchange resources sufficiently to interfere seriously with their purchases. (b) Several of the aggressor countries doubtless have outstanding contracts which would provide additional stocks at current prices. (c) The program would be expensive to democratic coun- tries. In order to leave inadequate supplies for the aggressor n tions they would probably have to nurchase and *1thhold from the market at lenst $100 million of unterial a month and possibly twice that Amount. (d) It would disrupt markets for peacetime consumption of these commodities. In allof these arterials the industrial unes are far more important quantitatively than military uses. 259 Secretary Morgenthau - 3 - 4/6/39 Though these disadvaninges weigh heavily against the proposal solely 08 8 device to deprive aggressor nations of needed materials serious consideration should be given to the accumulation of strategic materials by the United "tates on other grounds. In the event of war abroad, 01- ports to the United States of certain vital PAY motorials from sero my either be stopped or made subject to the *111 of Japan. Accumulation of certain vital FAV materials should be undertaken not only to insure the amount of mater- isle necessary for adequate defense, but to prevent our 200- nomy from being disorgenized of the outting off of the source of supply of needed can materials 40 n consequence of a asjor war. The noterials which " aust have and which ve must obtain from areas vulnerable to foreign neval interference include tin, rubber, manganess, tungeten, manila sisal, -toa eno rew silk. A one or two year supply of these daterials could be obtained with an expenditure of about several hundred 011- lion dollars. Incidentally, increased purchases of that amgnitude would help stimulate our exports. These purchases could be financed in any of several ways which would not involve on increase in the deficit. 2. The second proposal you wished to have examined is an attent to secure on sgreement among as eny of the non- gagressor n. tions as possible to prohibit the exports to "8" gressor nations either directly or indirectly of as many of the important strategic asterials 58 would be fensible. A preliminary survey indicates that this proposal is fearible. (a) The sources of supply of at least eight of the vital strategic materials which the secressor countries (taken together) must import are almost completely under the control of the United States, the Aritish Empira, France, Resia, Netherlands and Belgium. For several additional major items the inclusion of one or too more countries would make the control coaplete. (b) The value of the imports by the sggressor nations of those moteriain is not so large AD to make it 1a- practicable for the leading non-angressor countries to beer time expense or burden incident to such a program. 270 Secretary Morgenthau - is - 4/8/39 Methods of compensation or purchase can be devised which will eliminate opposition by small countries and private corporations based on fears of economic loss. (e) The aggressor nations would be extremely vulnerable to what would virtually amount to an sebargo of vital unterials. Those countries must import substantial quantities of those materials not only to maintain their military strength but to prevent a sharp deterioration in their economy. (a) In the case of nickel, tin and oil (if Russian and Mexican 011 could be taken care of) relatively a few corporations control the internetional market and of- fective cooperation could be easily obtained. The difficulties of the plan are: (a) It would be essential to have the enthusiastic support of the British Empire and of Russia. (b) England, France and Russia must be willing to give military guarantees to the smaller countries cooperat- ing. This is perticularly true of the Netherlands and Rumania. (o) The great majority of the people of the United States must be in favor of that degree of American participation in foreign affairs involved in the plan. (d) The principal argument that will be used against this measure 1s that its adoption would presipitate var. (e) To be effective, the stops taken must be such AS will prevent shipments of strategic materials from non- cooperating countries from reaching the aggressor nations. (f) The period of negotistions should not be long enough to permit the segressor nations to accumulate such larger stocks. Conclusion: In our opinion the measure -- if combined with the prin- ciple of the first propesal -- is effective, prasticable, and relatively inexpensive. It is a. measure which comes under the "quarantine-the-sggressor" principleer the President's Chieago speech. The real issue is whether it is yet pelitically feasible. 171 Becretary Morgenthau - 5 - 4/8/39 Any step in the direction of this proposal will have A powerful political effect in raising the morale and encouraging the democratic countries to make fire stand against further aggression. Even discussion -- if official - of the proposal would be a help in that direction. The following briefly outlines the situation with N. speet to the more important commodities: A preliminary survey of the resources and needs of the **gressor nations indicates that none of them produces ade- quate amounts of many of the important strategic materials. Germany, when fully organized for war, must either import, have substitutes for, OF have stocks of the follow- ing essential raw materials: 95% of natural petroleum 10% of zine 75% of wool 75% of copper 100% of rubber 70% of phosphases 50% of lead 95% of manganese 1001 of tin 258 of sulphur 100% of nickel 200$ of antimony 100% of cotton 100% of chromite 100% of meroury 95% of bauxite 95% of tungeten 100{ of mice Italy, Japan (and their allies) can supply Germany only with sulphur, zino, lead, meroury and come copper. The situation with respect to Italy 18 even worse and with Japan, equally bad. Japan must import: 35% of her iron 1001 of her bauxite 1001 of her wool 55% of her 011 50% of her sine 75% of her potesh 5% of her copper 100% of her rubber 75% of her phosphates 801 of her lead 50% of her manganess 90% of her entimony 80% of her cotton 100% of her niekel 75% of her tin 90% of her seroury or these items her allies could supply Japan with nitrate, potash, sins, lead and mercury. These figures indicate that ressures which would be in- effective against the British Expire, the United States or Russia are feasible against the present aggressor bloe. Before any conclusions DAY be finally drawn with respect to the efficacy of any proposal, we need aore information with respect to the stocks on hand in the **Eressor nations and their needs during the conduct of a major war. We have some information on these points, but not enough. 172 secretary Morgenthau - 6 - 4/8/39 (a) Nickel The British Empire produces 95 percent of the total. Japan owns niskel ore mines in New Caledonia, but New Caledonia is under French control. Therefore, it rould ---- to be relatively easy to prevent the direct export of this netal to the aggressors. (b) Manganess ore This (according to the men in the Nevy Department with whom I spoke) is one of the three most important of all the strategic materials. The chief sources of aanganese are Russia (along the Black Sea), the British Empire, Brazil and Cuba. The best quality manganese comes from Russia. Numerous countries (nee Appendix) produce small quantities. of these maller countries, Rumania, Hungary, Bulgaria, produce approximately 50,000 tons, and Japan produces 70,000. Italy 25,000, saking 4 total of approx- imately 200,000 tons that would be available so the ag- gressor countries from within their own group. Whether 200,000 tone a year would be enough to keep the aggressor powers adeque tely supplied is doubtful but we need more information on this point. Judging from the fact that the stock pile recommended for the United States by our military authorities is 1 million tons of ore, and that Geraan imports were around 400,000 tone in 1938, an an- nual supply of 200,000 tons for ell the aggressor nations seens inadequate. (e) Copper Leading copper producers are United States, the British Empire, Chile, Belgion Congo, Russia. These five groups together produce 90 persent of total world output. Japan, Yugoslavia, Spain and Germany together produce roughly 200,000 tone 9. year. Togo ther, Japan, Italy and Germany imported double that amount in 1937. (d) 011 The United States, Russie) Venezuela, together pro- duee 75 persent of total to oil output. The British Empire, Iran, the Netherlands East Indies, Mexico, Colombia, pro- duee an additional 10 persent. Italy produces virtually none: Germany and Japan together, about 8 million barrels, or less than 1/2 persent of the world output, Poland, is mil- lion borrels and Argentisa, 17 million barrels. HDW:lrs 4/10/39 173 Secretary Morgenthau - 7 - 4/8/39 Germany, however, produces - high grade synthetis fuel which is reported (by the war Department) to sup- ply two-thirds of her current needs. To Judge from the continued increase in petroleum imports from 1935 thru 1938 this is doubtful. Japan and Italy, however, so far produce only negligible quantities of synthetic fuel, though they are increasing their capacities. It appears that Germany cannot supply herself and certainly not the other aggressor countries. Germany is reported to have large stooks on hand. In order to bar enough exports to the aggressors, the 011 from Rumania, Mexico, Venezuels, Colombia and Ruesia would have to be included in the agreement. In the case of 011 there is another possibility that presents itself. It any be possible to operate through o ntrolling companies. It would probably be found that 6 for large oil companies control the supply of 011 even outside the United States, British Empire and Mussia. Therefore the approach might be through the companies in those countries outside of the three mentioned. (e) Tungeten ore The bulk of tungsten ore is produced by China, ritish Empire and the United Atates. But Portugal produces 2 million tone (almost as such no the United States) and Germany 1s reported (by the war Department) to have accumulated an enormous stock pile equivalent to 60 persent of the world stock of tungsten ore which she obtained from China. More information would be neces- sary before you oan accoude whether anything can be no- complished by the prohibition of tungsten from export. (r) Tin The aggressor nations produce very little tim. The British Empire, Bolivia, and the Dutch Enst Indies, Siam, China, produce 95 percent of the total tin output. Germany, Italy and Japan imported 20 persent of the 1938 output, and almost that in rlier years. If they do not have adequate stocks on hand and if the enumersted coun- tries would agree to prohibit exporte of tin 10 have here a commodity which eight well Lend Itself to such agreement. According to the war Department it 10 of first rent 18- portance for numerous uses in military purposes. Regraded Unclassified 174 Regretary Morgenthau - 8 - 4/8/39 (g) Rubber dermany, Italy and Japan produce no natural rubber. Their imports in 1937 constituted boot 18 persent of the total world output of natural rubber. The British Empire, the French Empire and the Netherlands Empire together secount for 94 persent of the total world out- put. The only two countries outside of these three empires that produce substantial quantities of rubber are stom, which produces 4 persent, and Brazil, which produces 1 persent. It 1a reported that Cermany will be 25 percent self-aufficient by means of synthetic rubber at the end of 1939 and 50 persent self-aufficient at the end of 1941. (n) Cotton Cotton linters are essential in the manuracture of powder. For Japan, Germany and Italy cotton would also be essential for their export industries and home consumption. The se three countries imported 40 persent of the total world imports in 1937. The United States, the British Empire and Russia produce three-fourthe of the world raw cotton. China did produce about 10 per- cent and R. portion of that output is in areas under Japanese control. Brazil produces about 7 percent. It 1s very doubtful whether Japan or Italy have large stocks of cotton on hand, though it is reported that there vare substantial stocks in Germany. There are numerous other strategic war materials but either they are produced in adequate quantity among the RE- gressor nations (0.8., pas silk, sulphur, bauxite, optical glass) or they are very unimportant in total value (e.g., quarts orystol, molybdenum, sto.). In 8 more comprehensive report it vould be necessary to study numerous of these minor commodities (for example, quarti crystal, is essential in radio equi ment and is found only in Brazil: manils fiber has no substitute, is accolutely essential in merchant mrine and is found only in the Philippines and Sumatra; sios has no satisfactory substitute for important electrical uses: only known sources India and Madagascar: hides and vool are ***ential important and costly items which the *Egresor countries import in large amounts. (Appended are some tables of source of supply and of imports of leading strategic war materials.) HDW:lrs 4/10/39 175 Rubber Present Production Present Stocks Apparent Con- sumption or (Long tons) importe in 1937 Germany - 115,008 Italy - 24,520 Japan - 62,182 Leading producers of rubber in 1937 Netherland Indies 431,646 British Empire 596,463 Malaya 469,960 French Indo China 43,399 Ceylon 70,359 Sarivak 25,922 Siam 35,551 North Borneo 13,213 Brasil 15,576 India 9,777 Burma 7,232 JSH:lrs 4/10/39 Regraded Unclassified 176 Copper ore Present Production Apparent Consumption or (In metric tone) Net Imports in 1937 Germany 28,000 263,000 Italy 417 50,000 Japan 100,000 210,000 Leading producers of copper ore in 1937 United States 760,000 British Empire 489,000 Chile 413,000 Canada 249,000 Beigian Congo 150,000 Northern Rhodesia 180,000 U.A.S.R. 93,000 Australia 20,000 Sexico 46,000 Yugoalavia 42,000 Cuprus 17,000 Union of S Africa 12,000 Peru 36,000 British India 11,000 Spain 30,000 Norway 23,000 Cube 13,000 Finland 12,000 Sweden 5,000 JSH:lrs 4/10/39 Regraded Unclassified 177 Tin Present Production Apparent Consumption OF (In long tons) Imports in 1937 Germany 100 15,800 Italy 443 4,618 Japan 2,210 11,000 Leading producers of tin in 1936 Bolivia 25,371 British Empire 61,773 Netherlands Walaya 43,247 E. Indies 21,001 Nigeria 7,305 Siam 13,616 Burma 3,990 China 11,250 Australia 3,600 Belgian Congo 7,316 United Kingdom 2,000 Poland 1,819 Union of S.Africa 558 French Inde Uganda 374 China 1,575 Southern Rhodesia 267 Argentina 1,335 Tanganiyika 263 Portugal 800 B.W.Africa 169 1948358 Unclassi 178 Nickel Present Production Apparent Consumption or (in metrio tons) Importe in 1937 Germany 300 14,000 Italy - 2,500 Japan - 8,000 Leading producers of nickel in 1937: New Caledomia 6,830 British Empire 103,183 U.S.S.R. 2,000 Canada 101,963 Norway 1,505 British India 1,220 Greece 1,255 JSH:lrs 4/10/39 Regraded Unclassified 179 Tungsten ore Present Apparent consumption Production or importe (In metric tons) Germany - Italy - Japan 2,000 Leading producers of tungsten ore in 1937 China 17,805 British Empire 7,675 United States 3,175 British India 5,300 Portugal 1,948 Malay States 1,200 Bolivia 1,802 Australia 900 Argentina 702 Southern Rhodesia 275 JSH:mh 4/10/39 Regraded 280 Manganges ore Present Apparent consumption Production or imports in 1937 (In metrie tons) Germany 242 Italy 25,000 Japan 70,000 Leading producers of mangeness ore in 1937 (In metric tone) U.S.S.R. 3,000,000 Chile 5,000 Brazil 253,661 Bulgaria 3,000 Cube 131,299 British Empire 2,132,841 French Moroso 79,113 China 51,545 British India 826,498 Rumania 50,749 Union of South Africa 631,194 United States 43,000 Gold Coast 535,838 Hungary 25,000 Philippines 12,206 Egypt 134,972 Northern Netherland Indies 8,600 Rhodesia 2,379 Sweden 6,000 Australia 2,000 Turkey 5,200 JSH:mh 4/10/39 181 Crude petroleum Present Apparent consumption, Production OF imports in 1937 (In thousand barrels) Germany 4,300 40,000 Italy 109 17,500 Japan 3,614 35,000 Leading producers of crude netroleum in 1938 (In thousand barrels) United States 1,212,530 U.S.S.R. 217,535 Venezuela 191,593 Iran 74,154 Netherland East Indies 60,165 Rumania 48,800 Mexico 38,861 Colombia 21,315 Argentina 16,900 Peru 16,045 Peland 3,790 British Empire 43,809 Trinidad 17,750 British India 9,648 Bahrein Island 8,361 Canada 7,450 JSHish 4/10/39 182 Raw cotton Present Apparent consumption Production or net importe is 1937 (In thousand bales) Germany - 1,500 Italy 20 500 Japan 216 4,200 Leading producers of ootton in 1938 United States 18,746 China 3,600 U.S.S.R. 3,482 Brasil 2,205 Peru 424 Nexico 326 Argentina 281 Turkey 157 Iran 156 Belgian Conge 142 British Empire 7.697 British India 4,867 Egypt 2,282 Uganda 314 Egyptian Sudan 234 JSH:mh 4/10/39 Regraded Unclassified 183 April 10, 1939 Secretary Morgenthau Mr. White Subject: Proposed Steps that can be Taken by the Administration in the Present Acute Inter- national Situation I. without additional legislation 1. Imposition of countervailing duties against numerous importe from Italy. There already exists enough evidence of & bounty on Italian imports to Justify an immediate announce- ment of countervailing duties. 2. Requirement that goods from Manehuris and the 00- cupied aress of China DE marked *Chinese areas under Japanese allitary occupation' or some shorter variant. (This 10 per- altted under Section 2 of the Customs Administrative Act of 1938.) The feasibility of the etep has not been discussed. 3. The application of Section 338 against imports from Japan. 1938.) (Revival of Vr. Olighant's memorandus of October 12, 4. Application of Section 338 against all imports from Gereany. (T is 1s a more drastic step. The factual basis for such action exists.) 5. Preparetion of stope to be taken against imports from Albenia. (Not important cuentitatively, but important 18 D gesture. sa are amoond to Italy in Albania's export market. Our total imports from Albania in 1938 vere $150,000.) II. Heasures which could be taken which require additional legislation. 1. Your suggestion of acquisition of strategic materials through international cooperation and for international pro- hibition of export of those materials to **gressor nations. (The preliminary report on these proposals 10 ready.) 2/10/39 - Original to Secretary Regraded Unclassified 184 feeretary Morgenthau - 2 2. Accumulation of stocks of vital raw materials, calling for on expenditure of several hundred million dollars which could be acquired without additional hor- rowing. (xo have a memorandum on this proposal.) 3. Embargo on the export of scrap iron as a defence masure. 4, Program outlined in my memorandum to you of Warch 31, 1939. HDW:lrs 4/10/39 Unclass 185 April 10, 1939 I got an O.K. from the President today to talk to Calvert Magruder about the General Counselship position. Regraded Unclassifie 186 April 10, 1939 12:02 p.m. HMJr: Hello. Operator: Go ahead. HMJr: Hello, James Farley: How do you feel? HMJr: Mentally, all right; physically, a little bit below par. F: That's too bad. HMJr: How are you? F: Fine, thanks. I had a bad cold. I stayed up here, and I have to go to Albany to a dinner tomorrow night. HMJr: Oh. F: So I won't be down there until Wednesday, I'll be there Wednesday and Thursday. HMJr: That'll F: We got some replies and I'm going to get Bray to send them over to you. HMJr; Yes. F: So with -- as fast 88 we get them in we'll get them in your possession. HMJr: How do they look? F: Well, now to be truthful with you, Henry, I haven't even read them. HMJr: I see. P: To be honest with you, I told Mrs. Duffey to get them right down..... HMJr: Right. F: to Bray, BO that we could get them over to you. You see? HMJr: Good. 187 - 2 - P: Now, I'm honest with you. I haven't read them; I told them to make copies for me, HMJr: Right. F: But I'll get them right over to you. HMJr: Well, that's -- I'm going to see you when you're down here? F: Yes, positively. You're all right, are you, outside of that? HMJr: oh, yes. F: Has the boss arrived? HMJr: He got in this morning. F: I see. HMJr: I'm having lunch with him. F: Well that's fine. The state of the nation 18 apparently all right. HMJr: So far. F: By the way, Henry, it's rather an interesting thing -- despite supposedly falling off of business, which you and I have discussed, the doggone postal receipts keep coming up all over. HMJr: Well, I'll be darned. F: It's an amazing thing. of course, you -- If you haven't got on your desk yet you will be getting from me those weekly reports, see? HMJr: Uh-huh. F: It's quite amazing. Now, last week they were up five per cent in the twelve large cities. HMJr: Well, I'll be darned. F: It's an amazing thing. Now, they've held up right along during this last month or six weeks -- during this rather bad period, if you want to put it that way. Regraded Unclassified - 3 - 188 HMJr: Yes, that 16 interesting. F: It's an amazing thing, and it's rather general, Henry, too. It isn't sectional in character. HMJr: Well, when you're down I'd like to see you. F: Well, I'll be delighted to Bee you. Meanwhile, you hold the lines. I was delighted to Bee you out with the colored folke yesterday. HMJr: (Laughter) Well, it was a great speech. There was a great show yesterday. F: I imagined it was. Harold was right in his element, I suppose. HMJr: Yeah. It really was a great show. F: Yeah. I would imagine BO, I saw the pictures of them. HMJr: Yeah. F: Well, I'll see you when I get back, Henry. HMJr: 0. K. F: When I get down there. HMJr: Good bye. : All right, Henry. Regraded Unclassified 189 April 10, 1939 3:57 p.m. HMJr: Hello, Operator: Yes, sir. HMJr: Well, on this Ronald Ransom thing, I'll be in B. press conference at sharp four. 0: All right. (Pause) HMJr: Hello. 0: Governor Ransom. Go ahead. HMJr: Hello. Ronald Ransom: I'm sorry I missed you when I called you back. HMJr: That's all right. Hello, Ronald, how are you? R: Fine, thank you. I reported our conversation as near verbatim as I could to the Board this morning. Both Marriner and John McKee are out of town for the Easter holiday. HMJr: Oh, yes. R: They had a feeling that as we were having a regular Board meeting tomorrow morning, they would like me to make the report -- they thought at thetime they would have a full Board meeting. I'm not sure about McKee -- I doubt if he's here -- Marriner will be here. HMJr: Yeah. R: And then we would like to call you back after I do that. HMJr: All right. R: Now, may I make one suggestion for your consideration? HMJr: Please. R: I would like very much to feel that I could bring the other five members of this Board together with you -- Regraded Unclassified 190 - 2 - Just the six of us -- in an entirely informal and friendly conference 80 that we can discuss out the questions of -- the question that will repeatedly come up A8 to matters which should be discussed between these two agencies 80 that we can, as nearly as possible, always avoid any possible misunderstanding in the future. HMJr: Well, that suits me down to the ground, R: You'd do that, wouldn't you? HMJr: Oh, of course. R: All right. Now HMJR: Now when you say, the six others, you mean that's the whole Board. R: I mean the whole Board, yee. HMJr: Yeah. Why, of course. R: All right. Now, when they get back, I'm going to propose that and I think we can get a procedure where this wouldn't occur again. HMJr: Well, there's nothing that would please me more. R: Thanks. All right. HMJr: Good bye. Regraded Unclassified 191 April 10, 1959. The Honorable, The \ttorney General, Washington, D. C. My dear Mr. Attorney General: I transmit herewith a letter. in the usual form, addressed by the Commissioner of Internal Revenue to Assistant Attorney General Morris, recommending that criminal proceedings be instituted against 1. L. Annemberg for stated violations of the internal revenue laws. I of course concur in the Commissioner's recommendation, and in view of the grave character of the violations and in accordance with my conversations with you on the subject, I as taking the liberty to bring it to your personal attention. The Treasury Department is prepared to cooperate with the officers of the Department of Justice in any steps necessary to the success of the prosecution recomended, and its facilities will at all times be at your disposel to that end. Sincerely, 4 Secretary of the Treasury. HNG/mff Place Delivered leg The of 39 Regraded Unclassified 192 TREASURY DEPARTMENT WASHINGTON April 10. 1939. BRICEOP OF INTERNAL REVENUE - - - afveral TO MEMORANDUM FOR THE SECRETARY: In re: Voses L Annenberg. There is attached a letter to the Department of Justice in which I am recommending that the above-named individual be prosecuted for attempted income tax evasion for the years 1933 to 1936, inclusive. The letter contains a detailed statement of the manner in which the attempted evasions were accomplished. The principal items of evasion, as enumerated in attached letter, are as follows: (a) Profits of over $200,000 a year from the sale of gambling paraphermalia, known as "well sheets", were omitted and their receipt was concealed by 8 complicated series of manipulations. This item is discussed in detail under heading No. 1 in the attached letter. (b) Income from Canadian business received by Annenberg in a clandestine manner and totaling over $30,000 & year was omitted. This item is discussed under heading No. 2 in the attached letter. (e) When Annenberg bought the stock of the General News Bureau his corporation paid $750,000 for such stock. However, the item was entered on the books of the purchasing corporation at a cost of $850,000 and the $100,000 overstatement wes received in currency by Annenberg. This item 1a discussed under heading No. 3 in the attached letter. (d) Personal and non-deductible expenses of Annenberg, such as the cost of settling B criminal prosecution against him and his son, the cost of a wedding party for his daughter, etc., were charged to expense accounts of various corporations controlled by him. Improper withdrewels were also made from such corporations by Annenberg for his personal use and charged to expenses. These items are discussed under heading No. 5 in the attached letter. (e) Under the guise of advances from one of his corporations to another, Annenberg received in excess of $8,000,000 in 6 manner which ordinarily would conceal the fact that be in reality had 16- ceived income of this amount. This item is discussed under head- lags No. 8 and No. 9 of the attached letter. Regraded Unclassified 193 (f) To conceal the true ownership of the stock of his top hold- ing corporation, The Cecelie Company, Annenberg caused one-sixth of the stock to be issued in the name of B. confidential employee who denies that he ever owned any stock in that corporation and whose name was dropped from the list of stockholders when the name of the corporation was changed. One-sixth of the stock of this corporation wes worth almost $1,000,000, which will indicate the magnitude of the manipulation. This had the effect of cutting down Annenberg's sur- taxes. In addition, if it can be shown in the Grand Jury investige- tion that the remaining stock standing in the names of Annenberg's children was really his, more than $500,000 of surtaxes will be found to have been evaded on this item alone. I an of the opinion that EL criminal case has been made out for deliberate concealment of taxable income and planned eyasion of sur- taxes, and that the reference of the case to the Department of Justice at this time for the institution of criminal prosecution 1a fully war- ranted. Commissioner. - 8 Regraded Unclassified TREASURY DEPARTMENT 194 INTER OFFICE COMMUNICATION CONFIDENTIAL DATE April 10, 1939 TO Secretary Morgenthau FROM Mr. Haae RR Subject: The Business Outlook. The situation in brief A marked slump in business sentiment has occurred during the past three weeks. Trade analyste blame it chiefly on the orisis in Europe, and cite as B. contributing factor a relapse, or failure to carry through, of an Adminietration accord with business. The change in sentiment has been reflected in, and affected by, B severe drop in stock prices on the domestic markets to levels below the Munich lowe. Stock markets abroad have also been affected, but have held relatively steady in comparison with New York, and foreign selling has not been an appreciable factor in the decline in our markets. The European orisis 60 far has had little measurable effect rn actual business activity, though it has apparently been a fector in preventing a seasonal improvement in new orders. Its chief effect has probably been on the buying policies of those who see in the stock market decline 8, forecest of a decline in business. The current situation has been complicated by 8 somewhat vulnerable position of the automobile industry, combined with an unusually cold and rainy spring which has restricted sales of new care. This has had repercussions on operations in the steel industry. Resulting downturns in automobile output and steel production have given the impression that business is getting worse, adding to the general unsettlement. In more recent weeke, however, a marked improvement in new car salee has made an important change in the automobile picture. We think that much of the current pessimism over the busi- ness outlook 16 unjustified. There 18 little doubt, however, that the serious turn in European affaire initiated by Germany's violation of the Munich agreement has in some degree postponed the 1939 recovery. It has had B deflationary effect on commodity prices, and has set in motion various influences discouraging private business expansion. Regraded Unclassified 195 Secretary Morgenthau - 2 The outcome of the European crisis 1a, of course, impossible to predict, Unless developments abroad become definitely more serious, however, our analysis of the situation shows little beels for expecting any serious business decline. The present position of business The spring improvement in business which many had expected her acperently been held back, and recovery has been postponed, by B. tendency to withhold new orders and reduce commitments in verious lines of industry, owing to developments arising from the serious turn in European affairs. Among these developmente, the severe stock market decline has probably had most effect on buying policies. In one respect the war scare came at an unfortunate time. In B. period of rising business activity it might have caused serely 8 few weeks' interruption of the upward trend, as was the case last September. With production about in balance with demand, 86 in the present situation, it is likely to delay the regaining of momentum on the up-side and may result in some prolonging of the recent setback in industrial production. The FRE index stood at 98 in February, and apparently held at about that level during March. Nevertheless, we believe that current feare of a business setback, as reflected in the severe stock market break, are exeggerated. The present position of business does not justify fears of a serious decline, barring the unpredictable possi- bility of more serious developments in Europe. The cautious inventory policy which moet businessmen and most lines of indus- try have followed during the past six months serves as protection against 8. general liquidating movement and against a prolonged postponement of new buying. The absence of excessive specule- tion in stocks or commodities in recent months 18 likewise a fevorable factor. Our basic indices (See Chart 1) confirm the absence of serious maladjustments. Of particular significance 1s 8 strong upward trend in consumer buying (center graph) which, according to our estimates, continues to exceed the level of industrial production. This has apparently not, 88 yet, been fully trans- lated into new orders, since these have not shown a seasonal *pring upturn. Our estimates indicate that the level of basic demand has been reduced alightly in recent months, accompanying the setback in industrial production, but it remaine at approxi- sitely the current level of production. Regraded Inclassified Secretary Morgenthau - 3 196 New orders effected by war fears New orders in recent weeks have failed to show a seasonal increase sufficient to indicate a nearby improvement in indus- triel activity. Our combined weekly index (See Chart 2) has tended downward during March owing to a marked decline in textile orders, which was accompanied by 8. disappointingly emell imcrovement in steel orders. The trend of orders for products other than steel and textiles, on the other hand, has shown an uptrend similar to that in March last year. It 1e possible that the effect of war scares in general on industriel buying has been somewhat exaggerated by business writers. As will be noted in Chart 2, our new orders index showed no acparent effect of the Munich crisis last September nor of the French-Italian crisis last January. The current decline in textile orders, upon analyeis, has apparently been due in considerable degree to uncertsinty over the proposed Government subsidy on cotton exports, and the market undertone remains steady. The smallness of the rise in steel orders likewise has been due in part to influences other then the foreign crisis, notably to the failure of automobile steel buying to show B. normal spring increase. On the other hand, trade writers mention that in recent weeks a decline in new orders end inouiries, and requests for deferment of deliveries have been noted in various industries. Decline in sentiment rather than business Our enalysis of factors in the current situation leads to E: belief that the present slump 1e one of sentiment rather than actual business. In recent interViews, I have found businessmen at a loss to explain the decline in the stock market, in view of trends in their own sales. It remains an open question whether this slump in sentiment will be trans- lated into 8 further business setback, though it will undoubtedly tend to postpone the beginning of 8 renewed upturn. An important contributing factor to the bearish sentiment has been the break of 30 points in the Dow-Jones industrial stock average in less than 8 month, carrying it below the Munich lows, and indicating to the many followers of the "Dow theory" that the major trend of the stook market 1s downward. We are impressed, however, by the relative steadiness of stock prices in London and Paris recently, in comparison with New York, and by the fact that foreign selling has not been e noticeable factor in our stock market decline, which suggest that our market may have been over-discounting war fears. (See Chart A attached.) Regraded Unclassified 197 Secretary Morgenthau - 4 On the other hand, according to various business writers, domestic confidence has also been affected by a lose of faith in the permanence of the move toward a closer accord between Government and business, which early in March had been credited by the press with an important share in the revival of confidence then developing. Corporation officials recently interviewed place emphasis on this factor. A dealine in commodity prices eccompanying the European prisis hes carried some sensitive prices sharply lower. Spot price indices for farm products and industrial raw materials (See Chart 3) have turned downward, but the declines 80 far have not been extensive. The automobile situation The failure of steel orders to show B. sessonal increase has been due principally to & lack of the usual spring buying from the automobile industry, where the outlook has been clouded by an accumulation of new car inventories in factory and dealer bonde. Retail automobile sales during the first two-thirds of March were held back by unsessonably cold and rainy weather, leading to 8 fear in some quarters that a general curtailment of sutomobile production would be necessary, with its unfavor- shle reperoussions on other industries. A decline in output Aveing the week ending April 1 seemed to confirm these fears. During the last ten-day period of March, however, new car sales turned sharply upward despite continued cold weather, scoording to confidential data just received from General Motors Corroration, 65,000 units being sold in that period versus 39,000 and 36,000 in the two preceding periods. This raises The total seles of the Corcoration for March to 68 per cent over February, the third largest February-March increase eince 1929, according to preliminary figures. The sales upturn places the automobile outlook in 8. definitely more favorable 11ght. Current business trend steady The New York Times adjusted business index has remained generally steady over the past several weeks, with the week ended April 8 showing B. gain of .9 point to 89.4. Substantial increases in the indices of electric power production and lumber production were largely responsible for the upturn, offeetting & sharp decline in the automobile production index. Regraded Unclassified 198 Secretary Morgenthau - 5 In Chart 4 the New York Times index (dotted line), in comperison with our weekly index of new orders, shows business activity to be in a relatively firm position on the basis of past relationships, unless new orders decline further. A marked improvement in residential contract awards during March (See Chart 5) suggests that the construction industry will offer continued support to business activity this spring. In Great Britain, the trend of business activity has levelled out during March, according to the weekly index of the Financial Times of London, following its steep February upturn. (See Chart 6.) Regraded Unclassified INDICES OF BASIC BUSINESS TRENDS COMPAREO WITH INDUSTRIAL PRODUCTION 1923 - 125 - 100L SEASONALLY AGRESTED* NO del ⑉ LEAT 120 120 PRODUCTION, F.R.B: 110 110 100 ESTIMATED BASIC DEMAND) 100 90 90 ua 80 70 1935 1936 1937 70 1938 1939 PCA CENT PER CENT 120 120 INDUSTRIAL PRODUCTION, F.R.B. 110 110 100 INSURE Buring) 100 20 90 80 80 70 1935 1936 70 1977 1936 1939 PER CENT (NEW ORDERS) PER CENT IND. PROD.) 100 135 New ORDERS 1936 = 100, UNADJUSTED HO 125 120 115 100 (d) BO 56 INDUSTRIAL PRODUCTION, F.R.B. 3 as 40 75 1935 1936 1937 1938 1939 . EACEPT NEW ORDERS I 14940 Office of the Secretary of the Transity Division of - - - C-245 199 PA Regraded Unclassified ORDERS Combined Index of New Orders and Selected Components 1836 1939 MAY JULY SEPT. NOV, JAIL MAR. MAY PERCENTAME POINTS 100 (UN à 90 90 TOTAL (COMBINED INDEX) 1936 . 100 80 80 70 70 3 60 50 50 TOTAL EXCLUDING STELL AND TEXTILES 40 40 30 30 STEEL ORDERS 20 20 10 10 TEXTILL ORDERS o o JAN. MAR. MAY JULY SEPT. NOV. JAN, MAR, MAY 1939 CONFIDENTIAL 200 Chart 2 1936 Office of the Secretary of the Transary - of - - Selation 1-85-A Regraded Unclass PRICES OF INDUSTRIAL MATERIALS AND FARM PRODUCTS 1926 = 100 1938 1939 M A A o D A...D PER PER CENT CENT 80 60 75 75 Fare Products 70 70 65 65 60 60 55 55 Industrial Materials 50 50 45 45 J F M A MJJASONDJFHAMJJ A $ o M D 1938 1939 201CONFIDENTIAL Chart 3 SOURCE: BUREAU OF LABOR STATISTICS Office of the Secretary of the Transury Givision of - and Statistics P - - 171 - A Regraded Unclassified WEEKLY NEW ORDERS AND BUSINESS ACTIVITY JAN MAX MAY JULY SEPT. NOV. JAN MAR. MAY JULY SEPT. NOV. PERCENTAGE PERCENT POINTS (N.% TIMES (NEW ORDERS) 120 105 105 100 NCW ORDERS 90 95 75 90 60 85 BUSINESS ACTIVITY NEW YORK TIMES (EST. NORMAL . 100) 45 80 30 75 202 15 70 JAN. MAR, MAY JULY SEPT. NOV. JAN. MAR. MAY JULY SEPT. NOV. 1938 1939 CONFIDENTIAL Chart 4 Office of the Secretary al the Treasury [ of Beard - I-96 Regraded Unclassified RESIDENTIAL CONTRACTS AWARDED Daily Average DOLLARS MILLIONS Residential- - F. W. Dodge 8 6 '39 '38 4 '37 2 203 0 JAN. MAR. MAY JULY SEPT. NOV. Chart 5 Office of the Secretary of the Treasury Division of Research and Statistics C-233 Regraded Unclass INDICES OF UNITED KINGDOM BUSINESS ACTIVITY. LONDON TIMES 19.18 1939 1938 1939 J M M J 5 No J M - J S N OCT. LEC. Its. APR. PER PER PCR PCR CENT CENT CENT CENT Monthly 125 125 Weekly 120 120 120 120 116 116 UNAIJUSTED 115 115 112 112 ADJUSTED 110 110 108 108 UNADJUSTED 105 105 ADJUSTED 104 104 100 100 100 100 95 95 90 90 96 96 J as M of 5 No J M M J $ N OCT. DEC. FCB. APR. 1938 1939 1938 1939 204 Chart 6 Office of the Secretary et the Transury Division of - - 0 - 261 Regraded Unclassified INDICES OF FORSTON AND DONESTIC SECURITY PRICES August 1000 - 100° any Vasibly 1933 A 44 FER PER DENT - - 2 - - 4 U.S. ADVERTION 100 M a THERE - N * 100 - . as - M u or - - - = as - - NO = a 76 M = # - 72 il - M a E M - - 100 78 U.K. a LONDON 56. INSURERIAL E = STOCKS o 92 72 - . a as - Presce so - e - - 2 » - N 72 - I.M. M a IM 172 III w\` 148 M France T&A Here advise LM - is 140 (48 IN is - & Oursenty 1D son, 18, expira 152 (INDALY) - FOR 116 INSURTRIAL in OTHER INSUSTRIAL 112 1M HDA FOR . IDA - - - Germany asic, states (DO HEART - giving - # - - = HEAVY INDUSTRIAL - MINISM 42 N as en . NO us Italy . - stages 124 - Haly (MM/) 40.46, criess LM VIII 120 130 120 116 , 110 IM 10 E 112 IT Japan - - - I - , (ecom) - - - - Japen THE INDISTRIAL as - . states 64 - at - WESELTA a - . - MONTHLY so B . . /6 = will (2 19 R 2 , if - - no. - $ BAT 1 - Regraded Unclass fied - I - MET. FEE, - 1 ANY - SAFT. - 1931 1035 106 Chart "B" COMMODITY PRICE INDEXES IN U.B. AND U.K. 9eekly (AVERAGE or DRILY) 1938 Delly 1939 - 1939 NOV. JAN, MAN, MY PER WAY SEPT. Nov. FEDERAL JAN. I MAIL WAY, PLR 5 12 = 26 à e 12 el 26 2 , CONT IS 23 30 CENT PER will - SUM-JONES CCIT DENT NEUTER, MODEY 000-JONES (40 B) 192 3 IM 70 100 43 in 76 196 as NI 74 183 as 215 T2 180 60 210 70 177 SP AM 68 174 50 - MODDY'S INDES IM V.S. DEC. 31, (93) : 100 60 171 57 IN 3. - 56 : Be 165 58 - 60 è 54 I/M 58 5 a i 36 156 a 4b/ COMMODITY FUTURES (DOB-JONES) 34 iss 51 1924 - 26 . 100 - INDEX 18 V.S. the a 150 DEC, 31. 1931 . 100 50 % X 147 - E 144 $ 1.00 MINTER'S INDEX 14 0,00 4/i (+) 47 COMMUNITY FUTURES SEPT. 18, (93) . 100 1924 12% . 100 5 $ 138 $ 45 1.00 42 LM address INDER IN M.S. - SUPT. 18. (93) . 100 # N $ 1M 129 as 14 3d X- 126 à in . 41 IN M 125 $ a 120 SEPT. i JAN. - 5 12 e of 5 12 19 & 2 9 16 23 30 MPG NOV. JAM. M.I. WAY JULY 1935 COMMARY MARIOR - 1939 APRIL 1337 IF Miss / - - the Treasury - Regraded Unclassified